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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-11772
UNITED DIAGNOSTIC, INC.
(Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 25-1411971
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
476 MAIN STREET, SUITE 3-DFL, WAKEFIELD, RHODE ISLAND 02879
(Address of Principal Executive Offices)
(401) 789-9995
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in any amendment to this Form 10-K. [ ]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
On August 25, 1999, the aggregate market value of the voting stock of
United Diagnostic, Inc. held by nonaffiliates of the registrant was
approximately $241,238 based on the average of the high bid and low asked prices
of such stock as reported by the "pink sheets" maintained by the National
Quotation Bureau, Inc. on December 22, 1998, the last date on which an actual
transaction was reported.
The registrant had 682,622 shares of common stock, $.01 par value per
share, outstanding at August 25, 1999.
Documents Incorporated by Reference: None.
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UNITED DIAGNOSTIC, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART I ................................................................................. 1
ITEM 1. DESCRIPTION OF BUSINESS ..................................... 1
ITEM 2. DESCRIPTION OF PROPERTIES ................................... 17
ITEM 3. LEGAL PROCEEDINGS ........................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 19
PART II ................................................................................ 20
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS ................................. 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 21
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ...................... 33
PART III ............................................................................... 34
ITEM 9. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT ............ 34
ITEM 10. EXECUTIVE COMPENSATION ...................................... 38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT .............................................. 44
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 45
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ................................................. 46
SIGNATURES ............................................................................. 48
EXHIBIT INDEX .......................................................................... 49
</TABLE>
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PART I
SPECIAL NOTE REGARDING LATE FILING OF ANNUAL AND QUARTERLY REPORTS
Due to the Registrant's delay in retaining new independent auditors,
compounded by the Registrant's acquisition of a majority interest in a
significant subsidiary in October 1997 which required audited financial
statements of such acquired subsidiary, the Registrant was unable to complete
certain financial and textual information required to be included in its annual
report on Form 10-KSB for the years ended December 31, 1997 and December 31,
1998, or its quarterly reports on Form 10-QSB for the periods ended March 31,
1998, June 30, 1998, September 30, 1998, March 31, 1999, and June 30, 1999,
within the time which such reports were otherwise required to be filed.
Accordingly, this annual report on Form 10-KSB for the year ended December 31,
1997 is being filed late. The Company has determined that the inclusion of
certain events and transactions subsequent to December 31, 1997 is necessary to
make a fair presentation of the business of the Company and to enable the reader
to have a fair understanding of the events and transactions that have
transpired. Unless otherwise indicated, as used herein, all references to shares
of the Company's Common Stock and to prices with respect to shares of the
Company's Common Stock give effect to a 1 for 70 reverse stock split effective
December 23, 1998.
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION
United Diagnostic, Inc. (hereinafter referred to as "United" or the
"Company"), was originally organized under the laws of the State of Delaware in
September 1981 under the name "Applied DNA Systems, Inc." On November 16, 1994,
the Company changed its name to Nu-Tech Bio-Med, Inc. Effective December 23,
1998, the Company changed its name to its present name. One of the Company's
wholly-owned subsidiaries, Analytical Biosystems Corp. ("ABC") (inactive since
November 3, 1997), was organized under the laws of the State of Delaware in
August, 1985. On October 21, 1996, the Company acquired substantially all of the
medical billing service assets of Prompt Medical Billing, Inc. through the
Company's wholly-owned subsidiary NTBM Billing Services Inc. (inactive since
April, 1998), organized under the laws of the State of Delaware on September 10,
1996. Physicians Clinical Laboratory, Inc. ("PCL"), originally a 52.6%-owned
subsidiary of the Company (as of October 3, 1997) and now a 49.9%-owned
subsidiary (as of June 16, 1998) (inactive since May 10, 1999 when substantially
all of the assets of PCL were sold), was organized under the laws of the State
of Delaware in April, 1992. Medical Science Institute, Inc. ("MSI"), organized
under the laws of the State of California on January 9, 1985, was a wholly owned
subsidiary of United from November 18, 1996 until February 26, 1997, when United
sold equity interests in MSI to PCL. Effective December 15, 1997, the Company's
executive offices are located at 476 Main Street, Suite 3-DFL, Wakefield, Rhode
Island 02879, telephone number (401) 789-9995.
CERTAIN BUSINESS, OPERATIONAL AND BACKGROUND INFORMATION
From 1990 until 1997, the Company operated, through its ABC subsidiary,
principally as a specialized clinical oncology laboratory service and research
company. Its principal business was the development, marketing and performance
of an in vitro chemosensitivity assay known as the Fluorescent Cytoprint Assay
("FCA"). During that period, however, revenues attributable to sales of the FCA
did not reach a material level. The inability of the Company to increase sales
of the FCA was, in the opinion of management, principally attributable to the
refusal of most insurance carriers to reimburse patients and
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hospitals for performance of the FCA by the Company. In large part as a
consequence of the Company's lack of success in marketing the FCA, the Company
experienced significant losses during this period. Ultimately, in the fall of
1997, the Company suspended marketing the FCA, and closed its laboratory
facilities, which were then located in Rhode Island. Shortly prior to the
closing of its laboratory facility, the Company changed its focus from operating
a clinical laboratory marketing chemosensitivity assay services to maintaining a
presence as a full service licensed clinical laboratory through its ownership of
a majority interest in PCL and, indirectly, a majority interest in Medical
Science Institute, Inc. ("MSI").
ACQUISITION OF MSI; SALE OF MSI TO PCL
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California (the "Court") approved the reorganization plan of MSI, a
California corporation, which had been jointly submitted to the Court by the
Company and MSI. MSI had been operating as a debtor-in-possession under chapter
11 of the Bankruptcy Code, 11 U.S.C. Sections 101-1330 ("Chapter 11") since
October 26, 1995. Pursuant to the plan, the Company acquired all of the capital
stock of MSI and MSI became a wholly-owned subsidiary of the Company. MSI was a
full service medical laboratory facility. Its primary executive offices were
located in Burbank, California, and MSI operated throughout the State of
California. The completion of the acquisition of MSI was with the intent to
resell and pass through its ownership in MSI to PCL so as to result in the
Company indirectly owning a majority interest in MSI through its majority
interest in PCL.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to PCL for approximately $7.6 million. The Company received
approximately $2.6 million in cash and a secured promissory note of PCL in the
principal amount of $5 million 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 accordance with the approval of the United States
Bankruptcy Court having jurisdiction over PCL (as further described below), the
Company became the owner of 52.6% of the outstanding capital stock of PCL, and
the MSI Acquisition Note was cancelled in satisfaction of the Company's
obligation to contribute $5 million to the capital of PCL.
ACQUISITION OF MAJORITY INTEREST IN PCL AND PCL'S CHAPTER 11 BANKRUPTCY
PROCEEDING
In connection with its efforts to expand its operations through
acquisitions, during 1996 the Company commenced negotiations with the management
of Physicians Clinical Laboratory, Inc., a Delaware corporation, ("PCL"), and
certain of its institutional debtholders concerning the possible acquisition by
the Company of a controlling interest in PCL. Pursuant to the agreement reached
with the Debtors (as defined below), the Company and the holders of
approximately $80 million of PCL's senior secured debt ("PCL Senior Debt") and
approximately $40 million of PCL's subordinated debt (collectively, the
"Proponents"), the Company purchased approximately $13.3 million of PCL Senior
Debt for $10 million on November 7, 1996, in advance of the commencement of the
bankruptcy proceeding by PCL. On November 8, 1996 (the "Petition Date"), 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. On December 2, 1996, the Proponents submitted a plan of
reorganization under Chapter 11 (as modified and amended, the "Plan"), which
became effective on October 3, 1997 (the "Effective Date"). In accordance with
the Plan, the PCL Senior Debt purchased by the Company was exchanged for 35.6%
of the common stock of PCL as of the Effective Date. Also in accordance with
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the Plan, the Company acquired an additional 17.0% of the common stock of PCL
as of the Effective Date in exchange for cancellation of the MSI Acquisition
Note (see "Acquisition of MSI"). As a result, the Company acquired, in the
aggregate, 52.6% of the outstanding common stock of PCL on the Effective Date.
The principal business of PCL was to provide clinical laboratory
services in the State of California. PCL was a "hybrid" among clinical
laboratory companies in that it served both as a traditional reference
laboratory for office-based physicians/clients and as an independent clinical
laboratory to acute hospital customers. PCL operated throughout the State of
California and its executive offices were located in Sacramento, California. For
its fiscal year ended February 28, 1997, PCL reported revenues of $90,392,000
and incurred a net loss of $73,184,000. For the seven month fiscal period ended
September 30, 1997, PCL reported revenues of $40,322,835 and incurred a net
loss before extraordinary gain of $17,925,180 (unaudited).
Effectiveness of Chapter 11 Reorganization
The Plan embodied the terms of a prepetition termsheet agreed to among
the Company and the Proponents, which provided for a new investment into PCL and
an overall restructuring of PCL's balance sheet. 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 the Debtors with the Court, which contained certain amendments
to the plan of reorganization filed on January 17, 1997.
By order dated April 23, 1997, 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 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.
Pursuant to the Plan, prior to the Effective Date, all of the Debtors
were merged with and into PCL. On October 3, 1997, all conditions to the
Effective Date that were set forth in the Plan were satisfied, the Effective
Date occurred, and the following actions occurred:
The old common stock of each Debtor, the old stock options and the old
warrants, the original credit agreements, guarantees, letters of credit,
reimbursement agreements and other documents executed and/or agreements entered
into by each Debtor relating to the certain Claims (collectively, 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, and the $40 million 7.5% Convertible
Subordinated Debenture due 2000 were deemed canceled and of no further force and
effect. PCL amended and restated its Certificate of Incorporation in the State
of Delaware (the "PCL Certificate of Incorporation"), which authorized the
issuance of 50 million shares of common stock, par value $0.01 per share (the
"PCL Common Stock"). PCL issued, inter alia, (i) 2.5 million shares of PCL
Common Stock, (ii) senior secured notes in the principal amount of $55 million
and (iii) warrants, exercisable within five years of the Effective Date, to
purchase approximately 131,579 shares of PCL Common Stock to be issued and
outstanding on the Effective Date, at an exercise price of $13.30 per share. In
addition, PCL adopted Amended and Restated Bylaws effective as of September 30,
1997 (the "PCL Bylaws").
PCL satisfied its obligations to its impaired creditors as follows: (A)
the Company received 1,315,000 shares of PCL Common Stock, or approximately
52.6% of the authorized shares of the PCL
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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 of PCL Common Stock were in exchange for approximately $13.0
million in senior secured debt (which debt the Company purchased from Oaktree
Capital Management LLC ("Oaktree"), The Copernicus Fund, L.P., DDJ Overseas
Corp., Belmont Fund, L.P., Belmont Capital Partners, II, L.P. and Cereberus
Partners, L.P. (collectively, the "Senior Lenders") just prior to the Petition
Date); the Company also received an additional 425,000 shares of PCL Common
Stock in exchange for the Company'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 PCL Common Stock, which constituted 38.1% of
the amount of issued and outstanding PCL 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 PCL Common
Stock, which constituted 9.3% of the amount of issued and outstanding PCL Common
Stock, constituting an estimated percentage recovery of 5.9% of their aggregate
allowed claims; (D) PCL's former shareholders received warrants to purchase
131,579 shares of the PCL Common Stock for a period of up to five years, at a
purchase price of $13.30 per share, which price was based upon an implied
enterprise value for PCL of $90.0 million; and (E) each of PCL'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, PCL entered into the following agreements: (A) the new
Indenture, dated as of September 30, 1997, by and between PCL and First Trust
National Association ("FTNA") (the "Indenture"); (B) the Security Agreement,
dated as of September 30, 1997, by and between PCL and FTNA (the "Security
Agreement"); (C) the Pledge Agreement, dated as of September 30, 1997, by and
between PCL and FTNA (the "Pledge Agreement"); (D) the Stockholders Agreement,
dated as of September 30, 1997, between and among PCL, J. Marvin Feigenbaum, the
Company and Oaktree (the "Stockholders Agreement"); (E) the Employment
Agreement, dated as of September 30, 1997, by and between PCL and J. Marvin
Feigenbaum; (F) the Noncompetition Agreement, dated as of September 30, 1997, by
and between PCL and the Company; (G) the Warrant Agreement, dated as of
September 30, 1997, by and between PCL and U.S. Trust Company of California,
N.A., as warrant agent; (H) the Healthcare Receivables Purchase and Transfer
Agreement, dated as of September 30, 1997; (I) the Assignment of Healthcare
Receivables Purchase and Transfer Agreement as Collateral Security, dated
September 30, 1997; (J) the Loan and Security Agreement, dated as of September
30, 1997, between Bio-Cypher Funding Corp, a Delaware corporation ("the Funding
Corp."), and Daiwa Healthco-3LLC (f/k/a Daiwa Healthco-2 LLC), a Delaware LLC
("Daiwa"); and (K) the Depositary Agreement, dated as of September 30, 1997,
among PCL, the Funding Corp., Daiwa, and Union Bank of California, N.A.
The Indenture
The Indenture was entered into between PCL and FTNA in connection with
the issuance of PCL's $55 million Senior Secured Notes Due 2004 (the "Senior
Notes"). The original principal amount is $55 million and the Notes bear
interest at the rate of either 10% per annum in cash or 12% per annum in kind,
at the option of PCL, for the first two years after issuance. PCL may not make
any interest payments in kind once a cash interest payment has been made
pursuant to the Indenture. After two years, the Senior Notes bore interest at
the rate of 11% per annum in cash, which rate was to increase by 1% per annum
through maturity. Interest was payable semi-annually. To the extent lawful, PCL
agreed to pay interest on overdue
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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 Senior Notes were
to mature seven years after issuance.
The Senior Notes provided that they may be redeemed, at PCL'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, PCL was not be obligated to make
mandatory redemption or sinking fund payments with respect to the Senior Notes.
Upon the occurrence of a Change of Control (as defined in the Indenture), each
noteholder had the right to require PCL to repurchase such holder's Senior Notes
at an offer price in cash equal to 101% of the aggregate principal amount of
such Senior Note, plus accrued and unpaid interest through the date of
repurchase. In the event the aggregate amount of Excess Proceeds (as defined
below) from any asset sale exceeded $5.0 million, PCL was obligated to make an
offer to repurchase the maximum principal amount of Senior Notes that could have
been 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. "Excess Proceeds" was defined as the net proceeds from any asset sale
that were not applied, at PCL's option, (a) to permanently reduce amounts
outstanding under a credit facility, issued by Daiwa, 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 PCL of an underwritten public offering of its capital stock, PCL
was obligated to offer to purchase the maximum principal amount of Notes
possible from the Equity Net Proceeds (as defined below) 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" was defined as 35% of the net
proceeds received by PCL from any such public offering of its capital stock.
Payment of the Senior Notes was secured by a first priority security
interest in all existing and future assets of PCL 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 Senior
Notes, PCL pledged all of the capital stock of its then owned, or thereafter
acquired, subsidiaries, for the benefit of the noteholders. Each of the Security
Agreement and Pledge Agreement contained 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 (as defined below) (on behalf of the noteholders)
and Daiwa, the security interests granted to the Trustee in PCL's receivables
were subordinated to Daiwa, as the lender providing the Credit Facility (as
defined below).
Until the first two cash interest payments were made by PCL, the
Indenture contained covenants regarding minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"), minimum tangible net worth, minimum
EBITDA/interest expense coverage and certain restrictions on capital
expenditures. The Indenture contained customary covenants, representations and
warranties, as well as customary provisions regarding defaults, remedies and
modifications.
The Warrant Agreement
PCL had issued warrants (subject to adjustment as set forth below) for
the purchase by warrant holders of an aggregate of 131,579 shares of PCL Common
Stock, which amount constituted approximately 5% of the shares of the PCL Common
Stock to be issued and outstanding immediately after the Effective Date of the
Plan. Each warrant entitled the holder thereof to acquire one share of PCL
Common Stock at
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a price of $13.30 per share. The exercise price was derived based upon an
assumed total enterprise value for PCL of $90 million. The warrants were
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, until 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 would become void.
The number and kind of securities purchasable upon the exercise of
warrants and the exercise price therefor was subject to adjustment upon the
occurrence of certain events, including the issuance of PCL Common Stock or
other shares of capital stock as a dividend or distribution on the PCL Common
Stock; subdivisions, reclassifications and combinations of the PCL Common Stock;
the issuance to all holders of PCL Common Stock of certain rights, options or
warrants entitling them to subscribe for or purchase PCL Common Stock; the
distribution to holders of PCL Common Stock of evidences of indebtedness or
assets of PCL or any entity controlled by PCL (excluding cash dividends or cash
distributions from consolidated earnings or surplus legally available for such
dividends or distributions); the distribution to holders of PCL Common Stock of
shares of capital stock of any entity controlled by PCL; the issuance of shares
of PCL Common Stock for less consideration than the then-current market price of
the PCL Common Stock; and the issuance of securities convertible into or
exchangeable or exercisable for shares of PCL Common Stock or rights to
subscribe for such securities, for a consolidation per share of PCL Common Stock
deliverable on such conversion, exchange or exercise less than the then-current
market price thereof (although no adjustment in such shares or exercise price
would be required in connection with the issuance of the PCL Common Stock,
options, rights, warrants or other securities pursuant to the Plan, any plan
adopted by PCL or any entity controlled by PCL for the benefit of employees or
directors, or any share purchase rights plan adopted by PCL; the issuance of
shares of PCL Common Stock or securities convertible into or exchangeable for
shares of PCL Common Stock pursuant to an underwritten public offering
satisfying specified criteria; sales of PCL Common Stock pursuant to a plan
adopted by PCL for the reinvestment of dividends or interest; the issuance of
shares of PCL Common Stock to shareholders of any corporation which is acquired
by, merged into or made a part or subsidiary of PCL in an arm's-length
transaction; or a change in the par value of the PCL Common Stock).
Additionally, no adjustment would be required if in connection with any of the
events otherwise giving rise to an adjustment the holders of the warrants
received 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 would be required unless such adjustment would require a change in
the aggregate number of shares of PCL Common Stock issuable upon the
hypothetical exercise of a warrant of at least 1% (but any adjustment requiring
a change of less than 1% was to be carried forward and taken into account in any
subsequent adjustment).
PCL and the warrant agent were permitted from time to time to 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 would require the approval of
the holders of a majority of the then outstanding warrants; provided, however,
that any such amendment or supplement that (i) increased the exercise price;
(ii) decreased the number of shares of PCL Common Stock issuable upon exercise
of warrants; or (iii) shortened the Exercise Period would require the consent of
each holder of a warrant affected thereby.
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The PCL Common Stock Registration Rights Agreement
After the earlier of: (a) thirty months from the date of the PCL Common
Stock Registration Rights Agreement, or (b) six months after the date that the
first registration statement filed by PCL with respect to shares of the PCL
Common Stock in connection with an underwritten public offering was declared
effective by the Securities and Exchange Commission (the "Commission"), and
continuing throughout the term of the PCL Common Stock Registration Rights
Agreement, those shareholders (including the Company) holding at least a
majority of the Registrable Securities (as defined below) issued to the Senior
Lenders and the Company under the Plan would have the right to request the
registration of such Registrable Securities (a "Demand"). PCL would then have
been 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 was then
available to cover resales of Registrable Securities. Such holders thereof would
have been required to satisfy certain conditions relating to the provision of
information in connection with any Stock Registration Statement. PCL agreed to
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 PCL defaulted under its obligations with respect to
the registration of the PCL Common Stock, under certain circumstances, PCL would
be liable for liquidated damages for the period that such default continued. No
liquidated damages would be payable with respect to any week commencing two
years or more after PCL consummated a registered public offering of its equity
securities.
Under the PCL Common Stock Registration Rights Agreement, "Registrable
Securities" meant the PCL 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 PCL Common Stock who are a party to the PCL Common
Stock Registration Rights Agreement had the right to make one Demand for the
filing of a Stock Registration Statement.
The PCL Common Stock Registration Rights Agreement contained a variety
of other provisions applicable to a demand registration and included certain
limited provisions pertaining to a shelf registration. However, the provisions
of the PCL Common Stock Registration Rights Agreement were for the exclusive
benefit of the parties thereto. PCL was required to pay specified expenses in
connection with such registration and was required to indemnify the selling
stockholders against certain liabilities, including liabilities under the Act.
The registration rights provided for in the PCL Common Stock Registration Rights
Agreement were transferable to permitted transferees of PCL Common Stock that
complied with specified procedures.
The Senior Notes Registration Rights Agreement
After a period of 15 months from the date of the Senior Notes
Registration Rights Agreement, and continuing throughout the term of the 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 had the right to make a demand for the filing of a
registration statement. PCL would then have been 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 was then
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available to cover resales of Registrable Securities. Such holders would have
been required to satisfy certain conditions relating to the provision of
information in connection with any Note Registration Statement. PCL agreed to
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 PCL defaulted under its obligations with respect to
the registration of the Senior Notes, under certain circumstances, PCL would be
liable for liquidated damages for the period of such default. No liquidated
damages would be payable with respect to any week commencing two years or more
after PCL consummated a registered public offering of its equity securities.
Under the Senior Notes Registration Rights Agreement, "Registrable
Securities" meant 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 Senior Notes who were a party to the Senior Notes
Registration Rights Agreement would have the right to make one demand for the
filing of a Note Registration Statement.
The Senior Notes Registration Rights Agreement contained a variety of
other provisions applicable to a demand registration and included certain
limited provisions pertaining to a shelf registration. However, the provisions
of the Senior Notes Registration Rights Agreement were for the exclusive benefit
of the parties thereto. PCL would be required to pay specified expenses in
connection with such registration and would be required to indemnify the selling
stockholders against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The registration
rights provided for the Senior Notes Registration Rights Agreement were
transferable to permitted transferees of Senior Notes that complied with
specified procedures.
The Stockholders Agreement
J. Marvin Feigenbaum, the Company and Oaktree Capital Management, LLC,
as agent on behalf of certain funds and accounts ("Oaktree") (collectively, the
"Stockholders"), and PCL entered into the Stockholders Agreement as of September
30, 1997. Following the completion of the reorganization of PCL under Chapter
11, the Company owned approximately 52.6% of the issued and outstanding capital
stock of PCL. In June 1998, PCL's business required $4 million for working
capital purposes. The Company, however, did not have sufficient monies available
to independently lend or participate in new lending to PCL. Oaktree, the holder
of approximately 44% of the issued and outstanding capital stock of PCL and
approximately 96% of the outstanding principal amount of PCL's Senior Secured
Notes due 2004, agreed to loan PCL additional working capital. As consideration
for such loan, Oaktree required and received certain promissory notes from PCL,
the right to purchase 67,500 shares of common stock of PCL from the Company
(representing 2.7% of PCL's issued and outstanding shares of common stock), and
the right to elect a majority of the Board of Directors of PCL. On June 16,
1998, the Company sold the 67,500 shares of the common stock of PCL to Oaktree,
acting as agent on behalf of certain funds and accounts, for the aggregate
purchase price of $750,000. The proceeds from the sale of the shares were used
by the Company for working capital. As a result of the sale of the 67,500
shares, the ownership of the outstanding and issued common stock of PCL by the
Company and Oaktree was 49.9% and 46.8% respectively. On June 16, 1998, the
Stockholders Agreement was amended and restated in connection with the sale by
the Company of the 67,500 shares of PCL Common Stock to Oaktree and the issuance
by PCL of certain secured promissory notes in the aggregate principal amount of
$4 million. On October 29, 1998, the Stockholders Agreement was further amended
and restated in connection with additional borrowings of PCL from Oaktree, and
PCL
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issued an additional secured promissory note in the aggregate principal amount
of $2 million. See "Business - Description of the Secured Loan and Related
Documents." Following is a brief description of the substantive provisions of
the Stockholders Agreement as amended and restated:
(i) Transfer Restrictions. None of the shares of PCL Common Stock or
any securities exercisable for or convertible into the PCL Common Stock (the
"Securities") held by the Stockholders may be transferred unless (A) the
transferee shall deliver to PCL 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; (D) such transfer is made by the Company in a pro rata
distribution of Securities to its stockholders; or (E) such transfer is made by
Oaktree in a distribution to its partners. In addition, the Stockholders agreed
that they would not, without the prior written consent of PCL, transfer any
shares of PCL Common Stock to Cerberus Partners, L.P. or any entity which owned,
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 PCL desires in good faith
to issue or transfer the securities, PCL shall deliver a written notice of the
proposed transfer to each Stockholder (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 PCL 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 Stockholders Agreement), the Company
shall make the offer to sell to each Stockholder a pro rata portion of the
Securities based upon such Stockholder's holdings of PCL Common Stock. Any
Stockholder may, by written notice, accept such offer, in whole or in part,
within thirty (30) days after receipt of the offer.
(iii) Composition of Board of Directors. On May 10, 1999, the date of
the sale of substantially all of the assets of PCL to Unilab Corporation, the
Board of Directors of PCL was comprised of Dr. Nathan Rubin, Mr. J. Marvin
Feigenbaum, Mr. Matthew S. Barrett, Mr. David Sterling and Mr. Kenneth Liang. On
May 12, 1999, Dr. Rubin and Messrs. Feigenbaum and Sterling resigned from the
Board of Directors of PCL. See "Business - Sale by PCL of Substantially All of
its Assets to Unilab".
(iv) Voting Agreement. The Company and Oaktree are to designate two
and three members, respectively, out of the five members of the Board of
Directors to be designated by the Stockholders at the next annual or special
meeting called for the purpose of electing directors, pursuant to the June 16,
1998 amendment to the Stockholders Agreement arising out of the sale by the
Company to Oaktree of the 67,500 shares of PCL Common Stock in connection with
the loan by Oaktree to PCL in the aggregate principal amount of $4 million.
Prior to the June 16, 1998 amendment, the Company and Oaktree were to designate
three and two members of the Board of directors, respectively. If a director
designated by Oaktree or the Company vacated such position for any reason prior
to the expiration of his or her term, then Oaktree or the Company would have the
right to nominate a replacement so long as it continued to beneficially own the
percentage of outstanding Securities specified in the Stockholders Agreement.
(v) Corporate Governance. During such time as the Company had the
right to designate Directors under the Stockholders Agreement, an affirmative
vote of at least one Director who was appointed by the Company was required to:
(A) authorize or propose to authorize any agreement of PCL other than issuances
of securities pursuant to warrants, employee benefit plans, management incentive
plans or
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employment agreements with officers of PCL; (B) issue, or propose to issue any
capital stock; (C) modify or propose to modify the Certificate of Incorporation
or Bylaws of PCL; (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) incur, or cause any subsidiary of
PCL 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 exceeded $1 million when aggregated with all other
outstanding indebtedness of PCL and its subsidiary; (F) make any capital
expenditure that exceeded $1 million when aggregated with all other capital
expenditures in the immediately preceding twelve month period; or (G) modify the
employment agreement or otherwise approve any compensation arrangement or other
transaction for the benefit of Mr. Feigenbaum other than as provided in the
employment agreement.
(vi) Option. Pursuant to terms of the Stockholders Agreement, the
Company granted to Oaktree an exclusive option (the "Option") to purchase all of
the shares of PCL Common Stock or any securities exercisable for or convertible
into the common stock of PCL (the "Securities") held by the Company at the time
of exercise of such Option (the "Option Shares") for aggregate consideration of
$10 million (the "Option Price"). The Option was exercisable by Oaktree on or
prior to the earlier of (x) December 31, 2000 or (y) in the event that
shareholder approval of the Option was required by the stockholders of the
Company and such approval was not obtained prior to December 31, 1998 (the
"Stockholder Termination Date"), then December 31, 1998. The Option was
exercisable for a period of ninety (90) days following each date on which (i)
one or more directors nominated by the Company failed to affirmatively vote for
any action described in section (v) above that would require the approval of a
director nominated by the Company and (ii) such action was approved by a
majority of the members of the Board of Directors (each such date, a "Triggering
Event").
Oaktree could have exercised the Option by delivering written notice to
the Company of its intent to so exercise the Option and specifying the date on
which the closing of such exercise of the Option would occur, which in no event
could be later than ninety (90) days following the Triggering Event (the "Option
Closing"). In the event that Oaktree exercised the Option prior to the
Stockholder Termination Date and, as of such date, United Stockholder Approval
was not obtained, the Option Closing was to have occurred as soon as practicable
following the date on which United Stockholder Approval was obtained. In the
event United Stockholder Approval was not obtained prior to the Stockholder
Termination Date, the exercise of the Option would have been deemed to have not
occurred and Oaktree would have no obligation to deliver the Option Price to the
Company.
(vii) Buy-Sell Agreement. Either Oaktree or the Company (the
"Initiating Stockholder") could have provided written notice (the "Buy/Sell
Offering Notice") to the other party (the "Responding Stockholder") of the
Initiating Stockholder's intent to purchase all (but not less than all) of the
Securities that the Responding Stockholder owned, subject to receipt of United
Stockholder Approval, if necessary, from and after December 31, 2000 until the
date five years following the date that United Stockholder Approval was
obtained.
The Stockholders Agreement required the Initiating Stockholder to
specify in the Buy/Sell Offering Notice the cash purchase price per share at
which the Initiating Stockholder would be willing to purchase all of the
Securities that the Responding Shareholder owned, which consideration could not
be less than $0.81 per share (subject to adjustment to reflect any and all stock
splits, stock dividends and other combinations and reclassifications of
Securities occurring following the date of the Stockholders Agreement) and the
date on which such transaction would be consummated (which such date could not
be more than
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ninety (90) nor less than fifteen (15) days after the date of receipt by the
Responding Stockholder of the Buy/Sell Offering Notice (the "Buy/Sell
Closing")).
Upon receipt of the Buy/Sell Offering Notice, the Responding Stockholder
was obligated either:
(i) To sell to the Initiating Stockholder for cash all of its
Securities on the date, at the price per share and on the terms set forth in the
Buy/Sell Offering Notice; or
(ii) To purchase all of the Securities owned by the Initiating
Stockholder for cash on the date, at the price per share and on the terms set
forth in the Buy/Sell Offering Notice. If the Responding Stockholder elected to
purchase the shares of the Initiating Stockholder, the offer of the Initiating
Stockholder to purchase the Responding Stockholder's shares would be deemed to
be null and void and the Initiating Stockholder would be deemed to have accepted
an offer by the Responding Stockholder to purchase the Initiating Stockholder's
shares at the per share purchase price proposed by the Initiating Stockholder.
The PCL Certificate of Incorporation and the PCL By-Laws
The PCL Certificate of Incorporation provides that the number of
directors shall be five, the directors may be elected only at an annual meeting
of stockholders of PCL, and said election need not be by written ballot unless
requested by the chairman or by the majority stockholders of PCL. Vacancies on
the PCL 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 PCL Certificate of
Incorporation provides that each director, officer, employee or agent of PCL
shall be indemnified by PCL to the full extent permitted by law, and will be
entitled to advancement of expenses in connection therewith.
The PCL Bylaws provide, in general, that (i) subject to the PCL
Certificate of Incorporation, the number of directors will be fixed within a
specified range by a majority of the total number of PCL 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 PCL's voting stock; (iv) special
meetings of stockholders may be called only by the Chairman of the board of the
directors of PCL or the Secretary of PCL within ten days of receipt of the
written request of a majority of the total number of directors of PCL that PCL
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 (v) subject to certain exceptions, the board may
postpone and reschedule any previously scheduled annual or special meeting of
stockholders.
The PCL Bylaws also require that stockholders desiring to bring any
business before an annual meeting of stockholders deliver written notice thereof
to the Secretary of PCL 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 PCL more than 60 days prior to the meeting, notice
by the stockholder to be timely must be delivered to the Secretary of PCL 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 PCL Bylaws
further require that the notice by the stockholder set forth a description of
the business to be brought
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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 PCL
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 PCL Bylaws also provide that the terms of any director who is also
an officer of PCL 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 PCL.
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, PCL's Certificate of Incorporation 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. PCL's Certificate of Incorporation authorizes the
board to approve amendments to the PCL Bylaws. Any amendment to the PCL 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.
The PCL Daiwa Facility
On September 30, 1997, PCL and its wholly owned subsidiary, Bio-Cypher
Funding Corp. (the "Funding Corp."), entered into a credit facility (the "Credit
Facility") with Daiwa Healthco-3-LLC ("Daiwa"). Under the Credit Facility, PCL
sold and contributed all of its healthcare accounts receivables to the Funding
Corp., which in turn pledged such accounts receivable to Daiwa as collateral for
revolving loans. The proceeds of such revolving loans were used to purchase the
eligible accounts receivable from PCL. PCL then used 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 between
PCL and the Funding Corp. dated as of September 30, 1997 (the "Receivables
Agreement"), PCL sold and contributed 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 met certain eligibility
requirements. PCL also acted as the servicer of such accounts receivable,
continuing to conduct all billing and collection responsibilities. The Funding
Corp. could have replaced PCL with a third-party servicer upon the occurrence of
certain termination events.
Under a Loan and Security Agreement between the Funding Corp. and Daiwa
dated as of September 30, 1997 (the "Loan Agreement"), the Funding Corp. pledged
the accounts receivable received from PCL to Daiwa as collateral for revolving
loans. Daiwa made 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. was required to pay interest on the outstanding balance of these
revolving loans at an interest rate per annum equal to three percent in excess
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of the LIBOR Rate (as defined and calculated under the Loan Agreement), which
interest rate would increase by two percent (the "Default Rate") after an event
of default under the Loan Agreement. The Funding Corp. was also required to pay
to Daiwa a monthly non-utilization fee equal to one-half of a percent on the
amount by which $10 million exceeded the outstanding balance of all revolving
loans during the prior month.
PCL's Failure to Observe Certain Covenants Made in Connection with the Daiwa
Facility
Both the Receivables Agreement and the Loan Agreement contained
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. PCL and the Funding Corp. were not in
compliance with certain covenants under the Receivables Agreement and the Loan
Agreement, respectively, which constituted an event of default. In addition, the
Funding Corp.'s default under the Loan Agreement and PCL's defaults under the
Receivables Agreement constituted events of default under other agreements to
which PCL was a party including the Indenture (as defined below) relating to the
issuance of PCL's Senior Secured Notes due 2004 in the aggregate principal
amount of $55 million and the Note Purchase Agreement relating to the issuance
of PCL's Senior Secured Notes due 2001 in the aggregate principal amount of $6
million. See "Business - Effectiveness of Chapter 11 Reorganization" and
"Business - Description of the Secured Loan and Related Documents." As a result
of the Funding Corp.'s default under the Loan Agreement, Daiwa was charging the
Default Rate with respect to the outstanding balance under the Credit Facility.
Under the Loan Agreement, Daiwa was also permitted to accelerate the payment of
debt as a result of the failure to observe certain covenants under the Loan
Agreement and the Receivables Agreement; however, Daiwa did not pursue this
remedy. Oaktree, the holder of the Senior Secured Notes due 2004 and the Senior
Secured Notes due 2001, was also permitted to accelerate the repayment of such
notes; however, Oaktree did not pursue this remedy. Upon the sale by PCL of its
business and assets on May 10, 1999, all amounts due under the Daiwa credit
facility were paid in full.
FINANCING OF PURCHASE OF INTEREST IN PCL - PRIVATE PLACEMENT OF SERIES A
CONVERTIBLE PREFERRED STOCK
In order for the Company to acquire the PCL Senior Debt which was
converted into 52.6% of the common stock of PCL as part of the Plan, in October
1996, the Company commenced a private placement of 14,000 shares of its Series A
Convertible Preferred Stock (the "Preferred Stock") at a price of $1,000 per
share, from which it realized aggregate gross proceeds of $14 million. On
November 5, 1996, the Company completed the first closing of the offering, from
which the Company realized gross proceeds of $10 million from the sale of 10,000
shares of Series A Preferred Stock. On December 2, 1996, the Company completed
the offering and received additional gross proceeds of $4 million. The Company
received net proceeds of $12,849,000 in connection with the offering. Each share
of Preferred Stock, by its terms, is convertible into such number of shares of
Common Stock as shall equal $1,000 divided by a conversion rate equal to the
lesser of (i) 75% of the average closing price of a share of Common Stock
reported by the Nasdaq SmallCap Stock Market for the five trading days prior to
the date of the holder's notice of conversion or (ii) $1,225, subject to
adjustment. Through August 25, 1999, an aggregate of 644,276 shares of Common
Stock were issued upon conversion of 11,174 shares of Preferred Stock. All of
the shares were converted based on the "floating" Conversion Rate referenced in
(i) above.
The Company filed a registration statement relating to the shares of
Common Stock issuable upon conversion of the Preferred Stock (the "Conversion
Shares") in December 1996, but withdrew the registration statement in February
1997. The Company subsequently filed a new registration statement in April 1997
relating to the Conversion Shares, which was declared effective by the
Commission on July 23, 1997. The selling stockholders under such registration
statement each represented to the Company that they were not part of any "group"
as defined in Rule 13d-5 under the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, and each represented that
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<PAGE> 16
he or it was the sole beneficial owner of Common Stock of the Company registered
in his or its name or issuable upon conversion of additional shares of Preferred
Stock. As a result of the Company's acquisition of a 52.6% interest in PCL in
October 1997, the Company suspended further sales of Conversion Shares pursuant
to the registration statement pending stockholder authorization of additional
shares of Common Stock to be issued upon conversion of the Preferred Stock, the
preparation and filing by the Company of additional reports with the Commission
relating to the completion of the acquisition of its majority interest in PCL,
and the Company amending its registration statement to reflect the completion of
the PCL transaction. On October 20, 1997, the Company filed an initial Current
Report on Form 8-K relating to its acquisition of such majority interest in PCL
and, under the applicable rules for such form, had 60 days therefrom to file the
requisite financial statements of PCL. Sales under the registration statement
remained suspended pending the preparation and filing of such additional
reports, principally relating to the requisite PCL financial statements, which
additional reports have not been completed to date. As of the date hereof, no
post-effective amendment to the registration statement has been filed and sales
under that registration statement remain suspended.
For information regarding certain litigation concerning conversion of
the Preferred Stock into Common Stock and ability to sell under the Selling
Shareholder Registration Statements, see "Legal Proceedings".
DESCRIPTION OF THE SALE OF THE SHARES OF THE COMMON STOCK OF PCL BY THE COMPANY
TO OAKTREE
On June 16, 1998, the Company sold 67,500 shares of common stock of PCL
to Oaktree. Following the reorganization of PCL under Chapter 11, the Company
owned approximately 52.6% of the issued and outstanding capital stock of PCL. In
June 1998, PCL's business required $4 million for working capital purposes. The
Company, however, did not have sufficient monies available to independently lend
or participate in a new lending to PCL. Oaktree, the holder of approximately 44%
of the issued and outstanding capital stock of PCL and approximately 96% of the
outstanding principal amount of the Senior Notes, agreed to loan PCL the
additional working capital. As consideration for the loan, Oaktree required and
received certain promissory notes from PCL in the aggregate principal amount of
$4 million, the right to purchase the 67,500 shares of PCL Common Stock from the
Company (representing approximately 2.7% of the issued and outstanding capital
stock of PCL), and the right to elect a majority of PCL's Board of Directors. As
a result of this sale Oaktree and the Company now own approximately 46.8% and
49.9%, respectively, of the issued and outstanding capital stock of PCL. In
connection with the sale of the 67,500 shares of PCL Common Stock, the Company
and Oaktree entered into the Stock Purchase Agreement, dated as of June 12,
1998, and the Company, PCL, Oaktree and J. Marvin Feigenbaum (the
"Stockholders") entered into an Amended and Restated Stockholders Agreement
which amended and restated an Initial Stockholders Agreement by and among the
Stockholders dated September 30, 1997. The Amended and Restated Stockholders
Agreement was further amended on October 29, 1998 in connection with the
issuance by PCL of an additional promissory note to Oaktree in the principal
amount of $2 million, upon the same terms and conditions as those notes issued
by PCL in June, 1998. For a description of such Stockholders Agreement, see
"Business - The Stockholders Agreement."
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Description of the Secured Loan and Related Documents
On June 16, 1998 (the "Initial Closing Date") and November 2, 1998,
Oaktree loaned $4 million (the "Initial Loan") and $2 million, respectively (the
"Second Loan" and collectively with the Initial Loan, the "Loans"), to PCL. The
Loans were evidenced by certain secured promissory notes (the "Oaktree Notes")
bearing interest at the rate of 15% per annum and maturing on June 12, 2001.
Interest on the Oaktree Notes was payable semi-annually on April 1 and October 1
of each year. The Oaktree Notes provided that PCL could elect, in its sole
discretion, to pay interest by either of (a) payment of cash or (b) delivery of
additional Notes (valued at 100% of the principal amount thereof). The Oaktree
Notes by their terms were subordinated to the $10 million secured credit
facility of Daiwa and senior to the $55 million outstanding principal amount of
the Senior Notes. The proceeds of the Loans were used by PCL for working
capital.
In connection with the issuance of the Oaktree Notes in the aggregate
principal amount of $6 million, PCL and Oaktree entered into a Note Purchase
Agreement dated as of June 12, 1998 and as amended as of October 29, 1998 (the
"Note Purchase Agreement"), a Security Agreement dated as of June 12, 1998 and
as confirmed on November 2, 1998, between PCL and Oaktree (the "Security
Agreement") and a Pledge Agreement dated as of June 12, 1998 and as confirmed as
of October 29, 1998 (the "Pledge Agreement"). In addition, an Intercreditor and
Subordination Agreement dated as of June 12, 1998 and as of October 29, 1998 was
entered into by and between Oaktree and U.S. Bank Trust National Association (as
trustee (the "Trustee") under the Indenture), and acknowledged by PCL (the
"Trustee Intercreditor Agreement"), and an Intercreditor and Subordination
Agreement dated as of June 12, 1998 was entered into by and between Oaktree and
Daiwa and acknowledged by PCL (the "Daiwa Intercreditor Agreement").
The Oaktree Notes were redeemable, at PCL's option, in whole or in part,
upon 10 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. PCL was not obligated to make mandatory redemption or sinking
fund payments with respect to the Oaktree Notes.
Other than with respect to the account receivables of PCL as to which
Daiwa had a first lien, payment of the Oaktree Notes was secured by a first
priority lien in all existing and future assets of PCL including, without
limitation, equipment, inventory, intellectual property (including patents,
copyrights and trademarks), documents and instruments. As additional collateral
for payment of the Oaktree Notes, PCL pledged 100 shares of common stock of
Bio-Cypher Funding Corp., an accounts receivable funding subsidiary of PCL. With
respect to the accounts receivables of PCL, Oaktree had a second priority lien.
Each of the Security Agreement and Pledge Agreement contained customary
provisions regarding the preservation of collateral, defaults and remedies, as
well as customary covenants, representations and warranties. Pursuant to the
terms of the Trustee Intercreditor Agreement, the security interests granted to
the Trustee to secure the Notes with respect to certain collateral were
subordinated to Oaktree. Pursuant to the terms of the Daiwa Intercreditor
Agreement, the security interest granted to Oaktree in the account receivables
of PCL was subordinated to the security interests granted to Daiwa in such
account receivables. In addition, in connection with the transactions, the
Trustee, a majority of the holders of the Senior Notes and Daiwa, to the extent
necessary, executed documents consenting to PCL entering into and consummating
the transactions and waiving any breach or default that may have occurred as a
result of PCL entering into and consummating the Transactions; provided, however
that none of the Trustee, Daiwa or a majority of the holders of the Senior Notes
waived any existing, if any, or future defaults by PCL under any documents
executed by such parties and PCL.
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SALE BY PCL OF SUBSTANTIALLY ALL OF ITS ASSETS TO UNILAB
On May 10, 1999, PCL disposed of substantially all of its assets to
Unilab Corporation ("Unilab") in exchange for a combination of cash, a
convertible promissory note of Unilab and Unilab common stock. The sale
consideration was valued in the aggregate at approximately $40 million. The
proceeds of sale were principally used by PCL to satisfy a portion of PCL's
secured indebtedness, which aggregated approximately $70 million at the time of
sale. PCL was in default under all of this indebtedness at the time of the sale.
No proceeds of the sale of PCL assets were available for distribution to
the PCL shareholders. However, in connection with the sale, the Company received
a payment of $3,250,000 in cash from certain holders of PCL's secured
indebtedness.
CERTAIN COMPANY CORPORATE MATTERS - INCREASE OF AUTHORIZED CAPITAL, DELISTING
FROM THE NASDAQ SMALLCAP MARKET, AND REVERSE STOCK SPLIT
As a result of the decline in the market price of the Common Stock
following the closing of the private placement in November and December, 1996,
the number of shares of Common Stock issuable upon conversion of Series A
Preferred Stock was far in excess of the number that would have been required to
be issued based on the market price of the Common Stock at the time of the
consummation of the private placement, and was in excess of the amount of
authorized and unissued shares of Common Stock under the Company's charter. As
of October 15, 1997, a majority of the Company's stockholders as of August 8,
1997 approved an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the total number of shares of all classes of capital
stock which the Company may issue to fifty-two million shares; such increase
having been effected by increasing the number of shares of Common Stock from
twelve million shares to fifty million shares and by increasing the number of
shares of preferred stock from one million shares to two million shares. This
proposal was made via a consent solicitation proxy statement on behalf of the
Company's Board of Directors. The amendment was declared effective by the
Secretary of the State of Delaware on October 21, 1997. By reason of such
amendment, the Company was able to legally issue shares of its Common Stock from
time to time as future conversions of Preferred Stock occurred.
By letter dated April 17, 1998, from The Nasdaq Stock Market, the
Company was advised that Nasdaq had commenced proceedings to delist the
Company's Common Stock from inclusion in the Nasdaq SmallCap Market ("NSCM") by
reason of the inability of the Company to file its Annual Report on Form 10-KSB
for the year ended December 31, 1997. The inability of the Company to file its
Annual Report on Form 10-KSB was occasioned because the audit of the Company's
financial statements for the year ended December 31, 1997 was delayed by reason
of a pending change in the Company's independent auditors. The Company requested
a hearing with respect to the delisting proceedings. On June 1, 1998, the
Company was notified by The Nasdaq Stock Market that the Company's Common Stock
would be delisted from the NSCM, effective as of the close of business on June
1, 1998. The notification resulted from a determination by a Nasdaq Listing
Qualifications Panel, following a hearing held on May 14, 1998, to reject the
Company's request for continued inclusion on the NSCM. The Company's Common
Stock was quoted on the NSCM through May 15, 1998. The Company believes that the
delisting of the Common Stock has had a depressive effect upon the market price
of the Common Stock and adversely affected the liquidity of the Common Stock
because, subsequent to May 15, 1998, the Common Stock has been quoted in the
"pink sheets" maintained by National Quotation Bureau, Inc., which is not an
established trading market.
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<PAGE> 19
Pursuant to prior stockholder authorization, the Company filed a
Certificate of Amendment to its Certificate of Incorporation effective December
23, 1998, (i) effecting a 1-for-70 reverse stock split of its issued and
outstanding Common Stock, resulting in each 70 issued and outstanding shares of
the Common Stock being changed into one share, and (ii) changing the name of the
Company to United Diagnostic, Inc.
EMPLOYEES
As of August 25, 1999, the Company had three employees, including its
one executive officer. None of the Company's employees are represented by a
labor union, and the Company considers its relationship with its employees to be
good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive offices, located at 476 Main Street,
Suite 3-DFL, Wakefield, Rhode Island 02879, consist of approximately 500 square
feet of office space under a lease with a term of one year commencing January 1,
1999, which lease may be renewed by the Company, at a monthly rental of $925 per
month. The Company believes that its present facilities are adequate for its
present needs.
ITEM 3. LEGAL PROCEEDINGS
On February 4, 1998, a complaint was filed against the Company and
others in an action in the United States District Court for the Southern
District of New York captioned Gorra Holding and Barras Investment v. Nu-Tech
Bio-Med, Inc., J. Marvin Feigenbaum and Robert B. Fagenson (Docket No. 98 Civ.
764 (JMP)). The complaint alleged that the Company and the other defendants
violated Section 10(b) and Section 20 of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 promulgated thereunder. The complaint also
alleged common law fraud, conversion and breach of contract. These claims
against the Company were purportedly based on allegations that the Company
participated in a scheme to deprive its Series A Convertible Preferred
Shareholders of their conversion and registration rights. The complaint sought
compensatory damages of at least $1.25 million and punitive damages of at least
$3 million or, in the alternative, an order for the Company to allow the
plaintiffs to exercise certain conversion and registration rights, together with
reasonable costs and attorneys' fees. On March 3, 1999, following dismissal of
all claims other than breach of contract, plaintiffs stipulated to a dismissal
of the action without prejudice.
In a Current Report on Form 8-K, dated May 29, 1997, the Company
reported a complaint against the Company captioned Mordechai Gurary v. Isaac
Winehouse, Isaac Winehouse d/b/a Wall & Broad Equities and Nu-Tech Bio-Med, Inc.
(Docket No. 97 Civ. 3803 (LBS)) filed on May 23, 1997 in the United States
District Court for the Southern District of New York. The complaint alleged that
the Company and the other defendants violated Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Section 349 of the General
Business Law of the State of New York (the "GBL"). The claims against the
Company under the Exchange Act and the GBL were purportedly based on allegations
that the Company knew of and failed to disclose, among other things, unlawful
trading activity in the Company's securities by the other defendants named in
the action. The complaint sought compensatory damages in an unstated amount,
sought to enjoin the Company from registering certain Series A Convertible
Preferred Stock until the determination of the action, and sought reasonable
attorneys' and expert fees as well as treble and punitive damages. On February
9, 1998, the court dismissed with prejudice the federal claims of violations
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<PAGE> 20
of Section 10(b) of the Exchange Act for failure to state a claim and dismissed
the state claims of violations of Section 349 of the GBL. The dismissal of this
action was appealed by the plaintiff. On August 24, 1999, the United States
Court of Appeals for the Second Circuit issued its opinion affirming the
district court's granting of summary judgment dismissing the complaint.
On July 6, 1999, an action was commenced in the Superior Court of the
State of Delaware in and for New Castle County entitled J & B Associates Profit
Sharing Plan & Trust v. United Diagnostic, Inc., although it was not served upon
the defendant until July 20, 1999. The plaintiff, which purports to be an
Illinois corporation, alleges that it purchased 300 shares of Series A
Convertible Preferred Stock from the Company for $300,000 pursuant to a
Preferred Stock Securities Purchase Agreement dated November 19, 1996 (the
"Agreement"). While the plaintiff converted a portion of the Preferred Stock it
held into Common Stock, it alleges that it was unable to convert additional
shares of Preferred Stock because the Company's Common Stock was delisted from
the Nasdaq SmallCap Market ("NSCM"). The complaint alleges that in the
Agreement, the Company warranted that the Common Stock would remain listed on
the NSCM and, therefore, that it breached the terms of the Agreement. The
complaint alleges claims for breach of contract and unjust enrichment against
the Company, and seeks $200,000 in compensatory damages plus attorneys' fees and
costs. The Company has moved to dismiss the complaint.
On July 8, 1998 an arbitration was commenced before the AAA in Miami,
Florida entitled Judith Prussin and Health Systems Development Corporation
against NTBM Billing Services, Inc and Nu-Tech Bio Med, Inc. (Case No. 32 160
00219 98). The case concerned employment and consulting agreements between the
Company and claimants, which agreements were executed in conjunction with the
purchase by the Company of the claimants' business, Prompt Medical Billing, Inc.
("PMBI"), in October of 1996. Specifically in dispute were the amounts owed to
claimants in light of the cessation of PMBI's business operations. Claimants
sought damages in the amount of $44,187.28 along with interest, costs and
attorneys fees associated with the arbitration. The matter was settled by
confidential agreement of the parties, dated on or about May 28, 1999 and
formally dismissed on June 17, 1999. The settlement provided, among other items,
that the Company pay $35,000 to claimants and the claimants assign the right to
collect an outstanding account payable to PMBI in the amount of $70,000. The
first $10,000 collected from the outstanding account is to be paid to the
Company, with any additional amounts collected to be split 50/50 amongst
claimants and the Company. The right to collect the $70,000 reverts to the
Company if at least $10,000 has not been collected by November 1, 1999 and a
payment plan for the remainder is not in place.
On July 22, 1998 an arbitration was commenced before the AAA in New
York, New York entitled Nu-Tech Bio Med, Inc. and NTBM Billing Services, Inc v.
Judith Prussin, Jeffrey Prussin and Prompt Medical Billing, Inc. (Case No. 13
180 00703 98). The case arose from the purchase by the Company of the
respondents' business, PMBI, in October of 1996. Subsequent to the purchase, the
business lost its principal customer and ceased operations. In the arbitration,
the Company sought from the former owners of PMBI, inter alia, a judgment which
constituted the return of the purchase price of PMBI (i.e., the return of
approximately $100,000 in cash and the right to certain stock held in escrow
pursuant to the Purchase Agreement). In an Award originally dated April 9, 1999
(and affirmed by the arbitrator on May 27, 1999), the arbitrator denied the
relief sought by the Company and refused to grant the relief sought by
respondents. On April 19, 1999, the Company initiated a Special Proceeding in
the Supreme Court of the State of New York, County of New York captioned In re
the Arbitration of Certain Controversies between Nu-Tech Bio Med, Inc. and NTBM
Billing Services, Inc v. Judith Prussin, Jeffrey Prussin and Prompt Medical
Billing, Inc. (Index No. 108158/99) to affirm the Award. The Special Proceeding
is currently at the initial pleadings stage.
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<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Increase of Capital Stock
As of October 15, 1997, a majority of the stockholders of the Company as
of August 8, 1997 approved an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the total number of shares of all
classes of capital stock which the Company may issue to fifty-two million shares
(without giving consideration to the 1 for 70 reverse stock split effected on
December 23, 1998). Such increase was effected by increasing the number of
shares of common stock from twelve million shares to fifty million shares (prior
to the 1 for 70 reverse stock split); and by increasing the number of shares of
preferred stock from one million shares to two million shares. This proposal was
made via a consent solicitation proxy statement on behalf of the Company's Board
of Directors. The amendment was declared effective by the Secretary of the State
of Delaware on October 21, 1997. As of November 14, 1997, the tabulation of the
votes cast on this proposal is as follows: (i) 96,810 shares (64.2%) were cast
for the proposal; (ii) 25,279 shares (16.8%) were cast against the proposal; and
(iii) 516 shares (0.3%) abstained from voting.
Reverse Stock Split; Change of Name
In accordance with stockholder authorization obtained pursuant to a
consent solicitation statement mailed on or about June 12, 1998 to holders of
record of Common Stock as of the close of business on June 9, 1998, the Company
filed a Certificate of Amendment to its Certificate of Incorporation, (i)
effecting a 1-for-70 reverse stock split of its issued and outstanding Common
Stock, par value $.01 per share ("Common Stock"), resulting in each 70 issued
and outstanding shares of the Common Stock being changed into one share, and
(ii) changing the name of the Company to "United Diagnostic, Inc." The effective
date of each amendment is December 23, 1998. As of July 29, 1998, the tabulation
of the votes cast on the proposal to effect the reverse stock split is as
follows: (i) 350,142 shares (51.3%) were cast for the proposal; (ii) 24,690
shares (3.6%) were cast against the proposal; and (iii) 2,063 shares (0.3%)
abstained from voting. As of July 29, 1998, the tabulation of the votes cast on
the proposal to change the name of the Company is as follows: (i) 368,344 shares
(54.0%) were cast for the proposal; (ii) 6,788 shares (.01%) were cast against
the proposal; and (iii) 1,763 shares (.003%) abstained from voting.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company believes that there is currently no established public
trading market for the Common Stock. From December 20, 1994 until May 15, 1998,
the Company's Common Stock was listed on the Nasdaq SmallCap Market. On June 1,
1998, The Nasdaq Stock Market advised the Company that it was delisting the
Common Stock from the SmallCap Market effective at the close of business on that
date. Nasdaq had commenced delisting proceedings in April 1998 following the
failure of the Company to file with the Commission and Nasdaq its Annual Report
on Form 10-KSB for the year ended December 31, 1997 (the "1997 Form 10-KSB"),
which was required to be filed by April 15, 1998. Nasdaq also cited as a reason
for delisting the fact that the bid price of the Common Stock had failed to
equal or exceed $1.00 since February 23, 1998, the date on which new Nasdaq
rules went into effect requiring, as a condition to continued listing of
securities on the SmallCap Market, that the minimum bid price of the security
equal or exceed $1.00. Subsequent to May 15, 1998, the last date that the Common
Stock was quoted on Nasdaq, the Common Stock was quoted on the "pink sheets"
maintained by the National Quotation Bureau, Inc. under the symbol "UNDI." The
Company believes if the Common Stock is currently being traded, it is being
traded on the "pink sheets".
The inability of the Company to file the 1997 Form 10-KSB had been
caused by a combination of the delay in the Company engaging new independent
accountants to audit the Company's financial statements for the year ended
December 31, 1997, arising out of the Company's limited financial resources, and
the necessity to include audited consolidated financial information for PCL in
the Company's financial statements. The Company is hereby filing 1997 Form
10-KSB, but it has yet to file its Annual Report on Form 10-KSB for the year
ended December 31, 1998, or its Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1998, June 30, 1998, September 30, 1998, March 31, 1999 and June
30, 1999.
The following table sets forth the range of high and low reported bid
prices for the years ended December 31, 1996 and 1997. In order to fairly
present the price of the Common Stock, the information is also included for the
year ended December 31, 1998, and has not been adjusted to give effect to the 1
for 70 reverse stock split effective December 23, 1998. Quotations represent
prices between dealers and do not reflect retail markups, mark-downs or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices of Common Stock
------------------------------
Low High
---------- --------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter(1) 1/16 1/8
Second Quarter(2) 1/100 1/8
Third Quarter(3) 1/1000 1/10
Fourth Quarter(3) 1/10000 1/16
</TABLE>
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<PAGE> 23
<TABLE>
<CAPTION>
Bid Prices of Common Stock
------------------------------
Low High
---------- --------
<S> <C> <C>
Year Ended December 31, 1997(4):
First Quarter 2 11/16 13 1/4
Second Quarter 1 1/2 4 1/4
Third Quarter 5/32 1 15/16
Fourth Quarter 1/16 11/16
Year Ended December 31, 1996(4):
First Quarter 14 15 3/4
Second Quarter 14 17/32 16 7/8
Third Quarter 13 5/8 15 7/8
Fourth Quarter 10 3/4 16 5/8
</TABLE>
- ----------
(1) As reported by the Nasdaq SmallCap Market ("NSCM").
(2) As reported by NSCM from April 1, 1998 through May 15, 1998 and as
quoted on the "pink sheets" maintained by the National Quotation Bureau,
Inc. from May 16, 1998 through June 30, 1998.
(3) As quoted on the pink sheets.
(4) As reported by NSCM for all quarterly periods.
HOLDERS
The number of holders of record of the Company's Common Stock as of
August 25, 1999 was 802.
DIVIDENDS
The Company has never paid a dividend, whether in cash or property, on
its shares of Common Stock, and has no present expectation of doing so in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements of the Company and related notes included elsewhere in this
Report. All statements contained herein (other than historical facts) including,
but not limited to, statements regarding the Company's future development plans,
the Company's ability to generate cash from its operations and any losses
related thereto, are based upon current expectations. These statements are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. Generally,
the words "anticipate," "believe," "estimate," "expects," and similar
expressions as they relate to the Company and/or its management, are intended to
identify forward looking statements. Among the factors that could cause actual
results to differ materially are the following: the inability of the Company to
obtain additional financing to meet its capital needs; competition within the
clinical laboratory testing industry; and general business and economic
conditions.
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<PAGE> 24
PRELIMINARY NOTES TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1. ACQUISITION AND DISPOSITION OF MEDICAL SCIENCE INSTITUTE, INC.
On November 18, 1996, United Diagnostic, Inc. ("United") acquired all of
the capital stock of Medical Science Institute, Inc. ("MSI") with the intent to
ultimately sell MSI to Physicians Clinical Laboratory, Inc. ("PCL"). United had
acquired MSI upon approval by the United States Bankruptcy Court of the Central
District of California (the "Court") (Case No. LA 95-37790 TD) of the First
Amended Plan of Reorganization (the "MSI Plan") of Medical Science Institute,
Inc. MSI was engaged in the medical laboratory business primarily in the State
of California and had been operating under Chapter 11 of the U.S. Bankruptcy
Code since October 26, 1995. MSI provided clinical laboratory testing services,
including testing of human tissue and fluid specimens to physicians,
managed-care organizations, hospitals and other health care providers. MSI was a
California corporation with its principal executive offices located in Burbank,
California.
Pursuant to the MSI Plan, the holders of all of the MSI capital stock
(including any and all options, warrants and other convertible securities)
received 1,917 shares of Common Stock of United with an aggregate value of
$2,000,000. The number of shares of Common Stock to be issued under the MSI Plan
was based upon the average closing price of a share of Common Stock for the 15
day period preceding November 18, 1996. The recipient of United's Common Stock
is entitled to "piggyback" registration rights with respect to such shares. The
sole holder of all capital stock of MSI was Fausto Mendez, Jr., the former
President of MSI. Mr. Mendez had the option to receive $275,000 in cash with a
concurrent reduction in the number of shares of United's Common Stock, which he
chose to exercise on April 30, 1997.
In addition, United agreed to make certain other payments to creditors
and assume certain obligations under the MSI Plan. These payments included: (i)
approximately $750,000 to pay administrative claims of professionals, (ii) an
additional $425,000 for professional administrative claims payable over 12
months, (iii) approximately $572,000 payable for federal and state payroll
taxes, (iv) approximately $2,500,000 to Austin Financial Services, Inc., a
secured creditor of MSI, (v) trade payables in the amount of approximately
$738,000, (vi) $75,000 payable to the federal government in satisfaction of
certain claims, and (viii) $750,000 payable to general unsecured creditors. At
the hearing confirming the MSI Plan held on November 18, 1996, United tendered
$2,250,000 to the Court with respect to such payments.
With respect to the sums payable under the Plan to Austin Financial
Services, Inc., United obtained a loan in the principal amount of $2,500,000
from a third party lender on December 2, 1996. The loan bore interest at 15% per
annum. All principal and interest on the loan was payable on January 31, 1997.
On January 23, 1997, United obtained a new loan in the principal amount of
$2,000,000 from a private lender, the proceeds of which were used to repay the
$2,500,000 loan. The new loan bore interest at 7.5% per annum and was due and
payable 60 days from the date of the loan. The lender also received five year
common stock purchase warrants to purchase 1,428 shares of common stock at
$805.00 per share. On February 24, 1997, the new loan for $2,000,000 was repaid.
In connection with this transaction, United recorded a $494,000 interest charge
representing the fair value of warrants issued in the quarter ended March 31,
1997.
On February 26, 1997, United completed the sale of its ownership
interest in MSI to PCL (Note 4). PCL was operating as a debtor-in-possession
under Chapter 11 of the United States Bankruptcy Code (United
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<PAGE> 25
States Bankruptcy Court, Central District of California, Case No.
SV96-23185-GM). United sold its interests in MSI to PCL for its costs and
certain expenses of the acquisition aggregating approximately $7,643,000. United
received approximately $2,643,000 in cash and a secured promissory note of PCL
in the principal amount of $5,000,000. The note was secured by all of the assets
of PCL, but was subordinate to certain other claims and administrative expenses.
United used approximately $2,013,000 of the sale proceeds to repay the principal
and interest on the $2,000,000 loan which United had incurred to acquire MSI. In
the event the PCL Plan was consummated, which plan provided that United was to
become the owner of 52.6% of the outstanding capital stock of PCL, the note
(including all principal and interest) was to be forgiven. On October 3, 1997,
all conditions to the Effective Date set forth in the Plan were satisfied, the
Effective Date occurred and the note was forgiven in exchange for the PCL common
stock.
As a result of the above transactions, during the first quarter of 1997,
United owned MSI for the 57 day period beginning January 1, 1997 and ending
February 26, 1997, and during the fourth quarter of 1996, United owned MSI for
the 44 day period ending December 31, 1996. Therefore, Management's Discussion
and Analysis of Financial Condition and Results of Operations relating to the
twelve months ended December 31, 1997, is presented on the basis of United's
temporary ownership of MSI.
2. ACQUISITION OF MAJORITY INTEREST IN PHYSICIANS CLINICAL LABORATORY, INC.
United Diagnostic, Inc. ("United") had acquired certain debt securities
of Physicians Clinical Laboratory, Inc., a Delaware corporation ("PCL"), a
full-service clinical laboratory capable of providing a comprehensive battery of
testing services. PCL and its subsidiaries, Quantum Clinical Laboratories, Inc.,
Regional Reference Laboratory Governing Corporation, Diagnostic Laboratories,
Inc., and California Regional Reference Laboratory (collectively with PCL, the
"Debtors") had been operating as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code from November 8, 1996, until October 3, 1997. PCL did file its
Form 10-K for its most recent fiscal year, which ended February 28, 1997, as
well as its quarterly reports on Form 10-Q for the quarters ended May 31, 1997,
August 30, 1997, and November 30, 1997.
United had reached an agreement (the "PCL Plan") (Note 4) with the
holders of the Senior Debt, Subordinated Debt and the management of PCL whereby
United would acquire a 52.6% interest in PCL. The terms of the agreement
provided that PCL would file a plan to effectuate the agreement. As required by
the aforementioned agreement, United purchased approximately $13,300,000 of
Senior Debt for $10,000,000 on November 7, 1996. In accordance with the PCL
Plan, certain holders of Senior Debt contributed $10,000,000 in
debtor-in-possession ("DIP") financing to PCL, which under the terms of the
reorganization, would be forgiven.
The PCL Plan also required that United purchase an additional 17% of
capital stock of PCL for $5,000,000 upon the approval of the PCL Plan. Pursuant
to the PCL Plan, the debt purchased by United would be converted into 35.6% of
the common stock of PCL, which together with the 17% purchased for $5,000,000,
would result in United owning 52.6% of the outstanding common stock of PCL. The
PCL Plan was confirmed by the United States Bankruptcy Court, Central District
of California (Case No. SV96-23185-GM) on April 23, 1997. The PCL Plan as
confirmed required that certain conditions be satisfied or waived by July 22,
1997.
On February 26, 1997, United completed the sale of its ownership
interest in Medical Science Institute, Inc. ("MSI") (Note 3a) and received,
among other things, a $5,000,000 secured note receivable
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<PAGE> 26
which was used to satisfy its remaining $5,000,000 commitment to PCL. United
recognized a deferred gain upon the sale of MSI to PCL, which was offset against
United's investment in PCL.
In April and June of 1997, PCL received separate subpoenas to furnish
certain documents to the United States Department of Defense ("DOD") and the
United States Department of Health and Human Services with respect to the
Company's Civilian Health and Medical Program of Uniformed Services billing
practices. PCL had been advised that its billing practices were the subject of
these investigations. Due to PCL's continued cooperation and negotiations with
these government agencies, on July 24, 1997, the Bankruptcy Court, on
stipulation of PCL, United and the creditors of PCL, extended the date that
certain conditions be satisfied or waived pursuant to the PCL Plan for 60 days
to September 19, 1997, (from July 22, 1997), and stated that the terms and
conditions of the PCL Plan shall continue in full force and effect.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle such billing practices claims. 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").
On September 19, 1997, the Court granted the Debtors' motion to approve
the Federal and State Agreements. The Court's order became final on December 31,
1997. Pursuant to the Plan, prior to the Effective Date, all of the Debtors were
merged with and into PCL. On October 3, 1997, all conditions to the Effective
Date set forth in the Plan were satisfied and the Effective Date occurred.
On June 16, 1998, United sold 67,500 shares, representing approximately
2.7% of the issued and outstanding capital stock of PCL, of Common Stock of PCL
for the aggregate purchase price of $750,000 to Oaktree Capital Management, LLC,
acting as agent on behalf of certain funds and accounts. As a result of the sale
of the 67,500 shares, United owned 49.9% of the outstanding and issued capital
stock shares of Common Stock of PCL (Note 4).
On April 5, 1999, PCL entered into an Asset Purchase Agreement for the
sale of the business and substantially all assets to Unilab Corp. for a total
purchase price of approximately $40 million. The sale closed on May 10, 1999. As
a result of the agreement, the Company reevaluated the recoverability of PCL's
excess reorganization value based upon an estimated loss on the sale, including
costs of disposal. PCL recorded an additional write-down of $10.6 million,
resulting in a total write-down of excess reorganization value of approximately
$45.3 million. PCL began liquidation after the sale. The proceeds were
principally used to satisfy a portion of PCL's secured indebtedness. No proceeds
of the sale were available to the PCL shareholders. Concurrent with the sale,
the Stockholder Agreement was amended to provide payment to the Company of $3.25
million in cash upon satisfaction of certain conditions. The Company received
this payment in May 1999 (Note 16).
As a result of the above transactions, during the fourth quarter of
1997, United owned PCL for the 90 day period beginning October 3, 1997, through
December 31, 1997. Therefore, the Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to the twelve months
ended December 31, 1997, is presented on the basis of United's ownership of PCL
for the 90 day period ending December 31, 1997.
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<PAGE> 27
3. SUSPENSION OF ANALYTICAL BIOSYSTEMS CORPORATION'S LABORATORY
OPERATIONS
Effective November 3, 1997, ABC temporarily suspended the marketing of
its Fluorescent Cytoprint Assay ("FCA"), which is a specialized clinical
laboratory assay used in assisting in the selection of chemotherapeutic drugs
most likely to be effective in treating a cancer patient's solid mass tumor.
With the suspension of current direct marketing efforts of the FCA, United and
ABC intend to investigate the feasibility of resuming such marketing efforts
through an alliance or joint venture whereby the FCA would be marketed and sold
through an entity having national sales capability, and the assay performed by
either ABC or an entity to whom technology has been licensed by ABC. At the
present time, United has not entered into any discussions with any entity
relating to the marketing and sale of the FCA or the licensing of ABC's FCA
technology, and no assurance may be given that United will be able to market and
sell its FCA through alternate means. ABC has ceased processing specimens for
assay and suspended its laboratory operations in Rhode Island as of November 3,
1997.
Twelve months ended December 31, 1997, compared with twelve months ended
December 31, 1996
Results of Operations
Total revenues for the twelve months ended December 31, 1997, were
$18,457,540 compared to $1,065,472 for the twelve months ended December 31,
1996. The increase in total revenues of $17,392,068 is primarily due to the
inclusion of Physician Clinical Laboratory, Inc.'s ("PCL") total revenues for
the 90 day period beginning October 3, 1997, and ending December 31, 1997, of
$16,039,517 as well as Medical Science Institute, Inc.'s ("MSI") total revenues
for the 57 day period beginning January 1, 1997, and ending February 26, 1997,
of $1,798,361. MSI's total revenues for the 44 day period ending December 31,
1996, were $836,143.
Assay sales, net of billing adjustments, from the processing of
Analytical Biosystems Corporation's ("ABC") assay, the Fluorescent Cytoprint
Assay ("FCA"), were $71,985 and $115,397 for the twelve months ended December
31, 1997, and 1996, respectively. Assay sales are through November 3, 1997, at
which time ABC suspended the performance and marketing of the FCA (Note 3c). The
amount of billing adjustments relating to assay sales during the twelve months
ended December 31, 1997, and 1996, were approximately $60,280 and $25,558,
respectively.
Laboratory revenues, net of billing adjustments, for the twelve months
ended December 31, 1997, were $17,837,878 compared to $836,143 for the twelve
months ended December 31, 1996. The increase of $17,001,735 is primarily due to
the inclusion of PCL's laboratory revenues, net of billing adjustments, for the
90 day period of October 3, 1997, through December 31, 1997, of $16,039,517. The
amount of billing adjustments relating to PCL's laboratory revenues for the 90
day period ended December 31, 1997, were approximately $22,032,256. MSI's
laboratory revenues, net of billing adjustments, for the 57 day period of
January 1, 1997, through February 26, 1997, were $1,798,361 as compared to the
44 day period of November 18, 1996, through December 31, 1996 of $836,143. The
amount of billing adjustments relating to MSI's laboratory revenues for the 57
day period of January 1, 1997, through February 26, 1997, were $2,198,233 as
compared to the 44 day period of November 18, 1996, through December 31, 1996 of
$1,428,171.
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<PAGE> 28
Medical billing services revenues for NTBM Billing Services, Inc.
("NTBM") were $542,137 for the twelve months ended December 31, 1997, compared
to $113,932 for the 72 day period ending December 31, 1996, (Note 3b). For the
72 day period ended December 31, 1997, medical billing services revenues for
NTBM , were $92,562.
Total operating costs for the twelve months ended December 31, 1997,
were $70,628,998 compared to $7,313,233 for the twelve months ended December 31,
1996. The increase in total operating costs of $63,315,765 is primarily due to
the inclusion of PCL's total operating costs for the 90 day period beginning
October 3, 1997, and ending December 31, 1997, of $63,383,784. Additionally,
MSI's total operating costs for the 57 day period beginning January 1, 1997, and
ending February 26, 1997, were $2,092,447 compared to $1,453,007 for the 44 day
period ending December 31, 1996, resulting in an increase of $639,440, offset by
a net decrease in total operating costs of $707,459 by United Diagnostic, Inc.
("United"), NTBM and ABC. The decrease of $707,459 is primarily due to decreases
in selling, general and administrative expenses of $1,391,846, laboratory
expenses generated from the processing of the FCA of $38,993 and public
relations expense of $1,882,000, offset by increases in write down of
intangibles of $2,106,136, depreciation and amortization of $75,565 and medical
billing services expenses of $418,757.
Laboratory expenses for the twelve months ended December 31, 1997, were
$11,969,893 compared to $1,188,564 for the twelve months ended December 31,
1996. The increase of $10,781,329 is primarily due to the inclusion of PCL's
laboratory expenses for the 90 day period beginning October 3, 1997, and ending
December 31, 1997, of $10,440,752. Additionally, MSI's laboratory expenses for
the 57 day period beginning January 1, 1997, and ending February 26, 1997, were
$1,374,422 compared to $994,852 for the 44 day period ending December 31, 1996,
resulting in an increase of $379,570, offset by a decrease in the laboratory
expenses associated with the processing of the FCA of $38,993.
Medical billing services expenses for NTBM were $508,071 for the twelve
months ended December 31, 1997, compared to $89,314 for the 72 day period ending
December 31, 1996. The increase of $418,757 is primarily due to the reporting of
a full year compared to the 72 day period ending December 31, 1996 (Note 3b).
For the 72 day period ending December 31, 1997, medical billing services
expenses for NTBM were $101,400.
Selling, general and administrative expenses for the twelve months ended
December 31, 1997, were $6,786,675 compared to $3,334,152 for the twelve months
ended December 31, 1996. The increase of $3,452,523 is primarily due to the
inclusion of PCL's selling, general and administrative for the 90 day period
beginning October 3, 1997, and ending December 31, 1997, of $4,632,946.
Additionally, MSI's selling, general and administrative expenses for the 57 day
period beginning January 1, 1997, and ending February 26, 1997, were $573,025
compared to $361,602 for the 44 day period ending December 31, 1996, resulting
in an increase of $211,423, offset by a decrease in selling, general and
administrative expenses for United, NTBM and ABC of $1,391,846. This decrease is
primarily due to a decrease in compensation expense. During the twelve months
ended December 31, 1996, the Company incurred one-time non-recurring charges
associated with the severance package of a former officer of the Company and
compensation expenses relating to the 1995 grant of 1,428 restricted common
stock shares granted to an executive officer. In 1996, the Company exchanged
1,357 unrestricted common stock shares which were remaining under the 1995 grant
of restricted common shares for 4,285 warrants (Note 9d).
The Company did not incur public relations expenses for the twelve
months ended December 31, 1997. For the twelve months ended December 31 1996,
public relations expenses were $1,882,000. In
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<PAGE> 29
September 1996, the Company entered into an agreement with certain financial
public relations firms for which firms have been paid $1,355,000 in cash and
warrants with a fair value of $527,000 (Note 13).
Research and development expenses for the twelve months ended December
31, 1997, were $62,462 compared to $90,903 for the twelve months ended December
31, 1996. Research and development expenses were incurred by ABC, which has
suspended operations effective November 3, 1997.
Provision for bad debts for the twelve months ended December 31, 1997,
was $1,526,007 compared to $56,799 for the twelve months ended December 31,
1996. The increase of $1,469,208 is primarily due to the inclusion of PCL's
provision for bad debts for the 90 day period beginning October 3, 1997, and
ending December 31, 1997, of $1,434,364. Additionally, MSI's provision for bad
debts for the 57 day period beginning January 1, 1997, and ending February 26,
1997, was $91,643 compared to $56,799 for the 44 day period ending December 31,
1996, resulting in an increase of $34,844.
Depreciation and amortization expense for the twelve months ended
December 31, 1997, was $1,969,890 compared to $298,637 for the twelve months
ended December 31, 1996. The increase of $1,671,253 is primarily due to the
inclusion of PCL's depreciation and amortization expense for the 90 day period
beginning October 3, 1997, and ending December 31, 1997, of $1,548,722.
Additionally, MSI's depreciation and amortization expense for the 57 day period
beginning January 1, 1997, and ending February 26, 1997, was $53,357 compared to
$39,754 for the 44 day period ending December 31, 1996, resulting in an increase
of $13,603. Additionally, United's amortization expense increased, primarily due
to its purchase of 52.6% of PCL on October 3, 1997 (Note 4), as well as a full
year's amortization of NTBM (Note 3b).
Write down of intangibles for the twelve months ended December 31, 1997,
was $47,806,000 compared to $372,864 for the twelve months ended December 31,
1996. The increase of $47,433,136 is primarily due to a write down of
intangibles primarily by PCL of $45,327,000 as well as a write down of
intangibles by United Diagnostic, Inc. of $2,479,000. PCL accounted for its
reorganization using the principles of fresh start accounting, where PCL's total
assets were recorded at their assumed reorganization value allocated to
identifiable assets on the basis of their estimated fair value. Any excess over
the value of identifiable assets is considered excess reorganization value and
is being amortized over 15 years. PCL's management reevaluated the
recoverability of the excess reorganization value based upon assumptions which
included operating results, cash flows and other indicators of value. As a
result of this valuation, PCL recorded a write down of excess reorganization
value. In addition, as a result of this process, United Diagnostic charged off
the balance of the remaining goodwill relating to PCL (Note 4).
Operating loss for the twelve months ended December 31, 1997, was
$52,171,458 compared to $6,247,761 for the twelve months ended December 31,
1996. The increase in operating loss of $45,923,697 is primarily due to the
inclusion of PCL's operating loss for the 90 day period beginning October 3,
1997, and ending December 31, 1997, of $47,344,267. Additionally, MSI's
operating loss for the 57 day period beginning January 1, 1997, and ending
February 26, 1997, was $294,086 compared to $616,864 for the 44 day period
ending December 31, 1996, resulting in a decrease of $322,778, as well as
decreases in operating loss of $1,090,104 by United Diagnostic and Analytical
Biosystems of $437,897 and $652,207, respectively.
The Company did not incur a finance expense for the twelve months ended
December 31, 1997. For the twelve months ended December 31 1996, finance expense
was $1,422,500. This charge was incurred in settlement of certain alleged claims
by the investors in the Company's April 1996 private placement of
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<PAGE> 30
securities that the Company had failed to timely register the shares owned by
such investors. The Company agreed to issue one-half share to the investors for
each share purchased in the April 1996 offering (Note 9b).
The Company did not incur deferred acquisition assets charged off for
the twelve months ended December 31, 1997. For the twelve months ended December
31, 1996, deferred acquisition assets charged off were $218,914. This charge was
incurred as a result of management's due diligence review of the business and
operations of a potential acquisition. As a result of this review, management
determined not to pursue the acquisition and terminated further negotiations
resulting in a charge off of the related expenses incurred in those efforts
(Note 12).
Impairment and loss on equipment for the twelve months ended December
31, 1997, was $251,676. This charge is primarily a result of the closing of
Analytical Biosystem's Rhode Island laboratory operations (Note 3c).
Investment and interest income for the twelve months ended December 31,
1997, was $27,340 compared to $161,871 for the twelve months ended December 31,
1996. The decrease of $134,531 is primarily due to a decrease in cash and cash
equivalents upon which interest is earned.
Interest expense for the twelve months ended December 31, 1997, was
$2,691,805 compared to $60,351 for the twelve months ended December 31, 1996.
The increase in interest expenses of $2,631,454 is primarily due to the
inclusion of PCL's interest expense for the 90 day period beginning October 3,
1997, and ending December 31, 1997, of $2,149,694 as well as a net increase in
United Diagnostic, Inc.'s interest expense of approximately $495,853. This
increase is primarily due to the interest recorded for the fair value of
warrants issued in connection with debt as well as interest related to a loan in
the principal amount of $2,000,000 obtained by the Company to repay the
outstanding balance on a loan in the principal amount of $2,500,000. In
conjunction with the issuance of the $2,000,000 note payable, the lenders were
issued warrants to purchase 1,428 shares of common stock at an exercise price of
$805.00 per share (Note 7).
Net loss before minority interest for the twelve months ended December
31, 1997, was $55,087,599 compared to $7,787,655 for the twelve months ended
December 31, 1996. The increase in net loss before minority interest of
$47,299,944 is primarily due to the inclusion of PCL's net loss before minority
interest for the 90 day period beginning October 3, 1997, and ending December
31, 1997, of $49,492,788. Additionally, MSI's net loss before minority interest
for the 57 day period beginning January 1, 1997, and ending February 26, 1997,
was $290,824 compared to $616,864 for the 44 day period ending December 31,
1996, resulting in a decrease of $326,040, as well as decreases in net loss
before minority interest of $1,861,699 by United and ABC of $1,560,339 and
$301,360, respectively. The decrease of $1,861,699 is primarily due to decreases
in operating loss of approximately $1,090,104 for United and ABC, finance
expense of $1,422,500 for United and deferred acquisition assets charged off of
$218,914 for United, offset by increases in interest expense of $495,853 for
United, impairment and loss on equipment of $251,676 for ABC, and a decrease in
investment and interest income of approximately $134,531 for United.
At December 31, 1997, a minority interest in PCL was recorded against
net loss before minority interest of $23,461,513. The minority interest in
losses of PCL has been recognized in excess of the minority interest in the
equity capital of PCL since the minority stockholders have advances to PCL in
the form of senior secured notes (Note 4a).
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<PAGE> 31
Net loss for the twelve months ended December 31, 1997, was $31,626,086
compared to $7,787,655 for the twelve months ended December 31, 1996. The
increase in net loss of $23,838,431 is primarily due to the inclusion of PCL's
net loss for the 90 day period beginning October 3, 1997, and ending December
31, 1997, of $49,492,788 less a minority interest of $23,461,513. Additionally,
MSI's net loss for the 57 day period beginning January 1, 1997, and ending
February 26, 1997, was $290,824 compared to $616,864 for the 44 day period
ending December 31, 1996, resulting in a decrease of $326,040, as well as
decreases in net loss of $1,861,699 by United and ABC of $1,560,339 and
$301,360, respectively. The decrease is primarily due to decreases in operating
loss of approximately $1,090,104 for United and ABC, finance expense of
$1,422,500 for United and deferred acquisition assets charged off of $218,914
for United, offset by increases in interest expense of $495,853 for United and
impairment and loss on equipment of $251,676 for ABC, and a decrease in
investment and interest income of $134,531 for United.
Net loss per share of Common Stock for the twelve months ended December
31, 1997, was $210.72 compared to $396.46 for the twelve months ended December
31, 1996. This decrease of $185.74 is primarily due to an increase in weighted
average common shares outstanding, offset by an increase in net loss. Weighted
average shares were 157,934 and 28,015 for the twelve months ended December 31,
1997, and 1996, respectively. The weighted average shares increase is primarily
due to the issuance of Common Stock based upon conversions received for Series A
Convertible Preferred Stock (Note 9a) as well as Common Stock issued for
warrants exercised at a temporarily reduced price of $123.20 during the period
April 30, 1997, through June 13, 1997 (Note 9g).
Liquidity and Capital Resources
The Company had approximately $1,524,942 in cash and cash equivalents at
December 31, 1997.
Total current assets at December 31, 1997, and December 31, 1996, were
$13,998,036 and $3,743,997, respectively. The increase in total current assets
of $10,254,039 is primarily due to the inclusion of PCL's total current assets
of $13,848,942, offset by the exclusion of MSI's balance sheet as a result of
the sale of MSI to PCL on February 26, 1997, which total current assets were
$2,107,186, as well as a decrease in cash and cash equivalents of $1,453,419 for
United, ABC and NTBM. This decrease is primarily due to the utilization of cash
during the period to support operating activities and the payment and reduction
of current liabilities, offset by an increase in cash of approximately $619,000
as a result of the exercise of 5,024 warrants during the second quarter of 1997
(Note 9g).
Accounts receivable, net of allowance for doubtful accounts, at December
31, 1997, and December 31, 1996, were $11,000,608 and $1,751,230, respectively.
This increase of $9,249,378 is primarily due to the inclusion of PCL's net
accounts receivable of $10,948,508, offset by the exclusion of MSI's balance
sheet as a result of the sale of MSI to PCL on February 26, 1997, which net
accounts receivable were $1,674,384.
Inventory at December 31, 1997, and December 31, 1996, was $1,139,232
and $219,428, respectively. This increase of $919,804 is primarily due to the
inclusion of PCL's inventory of $1,138,932, offset by the exclusion of MSI's
balance sheet as a result of the sale of MSI to PCL on February 26, 1997, which
inventory was $209,173.
Prepaid expenses and other current assets at December 31, 1997, and
December 31, 1996, were $333,254 and $82,801, respectively. This increase of
$250,453 is primarily due to the inclusion of PCL's
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<PAGE> 32
prepaid expenses and other current assets of $298,678, offset by the exclusion
of MSI's balance sheet as a result of the sale of MSI to PCL on February 26,
1997, which prepaid expenses and other current assets were $48,628.
At December 31, 1996, the Company had a net investment in senior debt of
PCL of $9,424,439. On October 3, 1997, the Company completed the acquisition of
PCL and the Company's investment in senior debt was converted into 35.6% of the
common stock of PCL (Note 4). United acquired an additional 17% of the common
stock in exchange for the $5,000,000 MSI note (Note 3a), resulting in United
owning 52.6% of the outstanding common stock of PCL as of December 31, 1997.
Subsequently, United sold 67,500 shares of common stock of PCL bringing its
ownership to 49.9% (Note 4). Thereafter, PCL sold substantially all of its
assets (Note 4a).
A note receivable of $100,000 was outstanding at December 31, 1997. On
February 10, 1997, a $100,000 loan was issued to the former sole stockholder and
president of MSI, as part of the employment agreement between the Company and
the stockholder. The loan is secured by the shares of Common Stock issued to the
stockholder under the MSI Plan (Note 3a).
Equipment and leasehold improvements, net of accumulated depreciation
and amortization, at December 31, 1997, and December 31, 1996, were $2,758,476
and $1,766,842, respectively. This increase of $991,634 is primarily due to the
inclusion of PCL's net equipment and leasehold improvements of $2,739,484,
offset by the exclusion of MSI's balance sheet as a result of the sale of MSI to
PCL on February 26, 1997, which net equipment and leasehold improvements were
$1,387,145, as well as a decrease in net equipment and leasehold improvements of
$373,402 primarily a result of the closing of Analytical Biosystem's Rhode
Island laboratory operations (Note 3c).
Goodwill, net of accumulated amortization, at December 31, 1997, and
December 31, 1996, was $664,336 and $6,352,860, respectively. This decrease of
$5,688,524 is primarily due to the sale of MSI to PCL on February 26, 1997,
eliminating the Company's investment in MSI (Note 3a).
At December 31, 1996, the Company had deferred acquisition costs of
$1,028,524. These costs were related to the potential acquisition of PCL. On
October 3, 1997, the Company completed the acquisition of PCL and the Company's
investment in senior debt was converted into 35.6% of the common stock of PCL
(Note 4). United acquired an additional 17% of the common stock in exchange for
the $5,000,000 MSI note (Note 3a), resulting in United owning 52.6% of the
outstanding common stock of PCL. Subsequently, United sold 67,500 shares of
common stock of PCL bringing its ownership to 49.9% (Note 4). Thereafter, PCL
sold substantially all of its assets (Note 16).
Deposits at December 31, 1997, and December 31, 1996, were $436,287 and
$89,104, respectively. This increase of $347,183 is primarily due to the
inclusion of PCL's deposits of $417,132, offset by the exclusion of MSI's
balance sheet as a result of the sale of MSI to PCL on February 26, 1997, which
deposits were $70,140.
Reorganization value in excess of other identifiable net assets at
December 31, 1997, was $24,401,605. PCL accounted for its reorganization using
the principles of fresh start accounting, where PCL's total assets were recorded
at their assumed reorganization value allocated to identifiable assets on the
basis of their estimated fair value. Any excess over the value of identifiable
assets is considered excess
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<PAGE> 33
reorganization value and is being amortized over 15 years (Note 4). Thereafter,
PCL sold substantially all of its assets (Note 16).
Total assets at December 31, 1997, and December 31, 1996, were
$42,358,740 and $22,405,766, respectively. The increase in total assets of
$19,952,974 is primarily due to the inclusion of PCL's total assets of
$41,407,163, offset by the exclusion of MSI's balance sheet as a result of the
sale of MSI to PCL on February 26, 1997, which total assets were $3,564,471. On
October 3, 1997, the Company completed the acquisition of PCL and the Company's
investment in senior debt was converted into 35.6% of the common stock of PCL
(Note 4). United acquired an additional 17% of the common stock in exchange for
the $5,000,000 MSI note (Note 3a), resulting in United owning 52.6% of the
outstanding common stock of PCL and eliminating United's investment in MSI
through the sale of MSI to PCL on February 26, 1997 (Note 3a). Subsequently,
United sold 67,500 shares of common stock of PCL bringing its ownership to 49.9%
(Note 4). Thereafter, PCL sold substantially all of its assets (Note 16).
Total current liabilities at December 31, 1997, and December 31, 1996,
was $66,546,284 and $5,410,663, respectively. This increase of $61,135,621 is
primarily due to the inclusion of PCL's total current liabilities of
$65,619,254, offset by the exclusion of MSI's balance sheet as a result of the
sale of MSI to PCL on February 26, 1997, which total current liabilities were
$2,279,726. Additionally, United repaid the $2,000,000 loan obtained by United
to repay the outstanding balance on a loan in the principal amount of
$2,500,000, and ABC decreased its principal outstanding to the State of Rhode
Island by $172,688 (Note 7).
Current portion of long-term debt at December 31, 1997, and December 31,
1996, was $48,251,081 and $2,263,990, respectively. This increase of $45,987,091
is primarily due to the inclusion of PCL's current portion of long-term debt of
$48,104,250, offset by the exclusion of MSI's balance sheet as a result of the
sale of MSI to PCL on February 26, 1997, which current portion of long-term debt
was $102,220. Additionally, the Company repaid the $2,000,000 loan obtained by
the Company to repay the outstanding balance on a loan in the principal amount
of $2,500,000, and ABC decreased its principal outstanding to the State of Rhode
Island by $172,688 (Note 7).
Current portion of capitalized lease obligations at December 31, 1997,
and December 31, 1996, was $520,055 and $214,270, respectively. This increase of
$305,785 is primarily due to the inclusion of PCL's current portion of
capitalized lease obligations of $501,851, offset by the exclusion of MSI's
balance sheet as a result of the sale of MSI to PCL on February 26, 1997, which
current portion of capitalized lease obligations was $198,851.
Line of credit at December 31, 1997, was $4,835,959. On September 30,
1997, PCL and its wholly-owned subsidiary, the Bio-Cypher Funding Corp., entered
into a credit facility with Daiwa Healthco-2 LLC. Under the credit facility, PCL
sells and contributes all its healthcare accounts receivable to Bio-Cypher
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 PCL (see Note 7).
Accounts payable at December 31, 1997, and December 31, 1996, were
$5,057,184 and $1,580,797, respectively. This increase of $3,476,387 is
primarily due to the inclusion of PCL's accounts payable of $4,564,295, offset
by the exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
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<PAGE> 34
February 26, 1997, which accounts payable was $883,332, as well as a decrease in
United's accounts payable of $204,804.
Accrued expenses at December 31, 1997, and December 31, 1996, were
$7,826,434 and $1,286,035, respectively. This increase of $6,540,399 is
primarily due to the inclusion of PCL's accrued expenses of $7,371,747, offset
by the exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
February 26, 1997, which accrued expenses were $688,983, as well as a decrease
in United and ABC's accrued expenses of $95,508 and $57,045, respectively.
Contract payable at December 31, 1997, and December 31, 1996, was
$55,571 and $65,571, respectively (Note 10b).
Long-term debt at December 31, 1997, and December 31, 1996, was
$1,904,723 and $338,672, respectively. This increase of $1,566,051 is primarily
due to the inclusion of PCL's long-term debt of $1,904,723, offset by the
exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
February 26, 1997, which long-term debt was $227,318, as well as a reduction in
long-term debt by ABC on its principal outstanding to the State of Rhode Island
of $111,354 (Note 7).
Capitalized lease obligations at December 31, 1997, and December 31,
1996, were $575,974 and $471,984, respectively.
The Company did not incur liabilities to be paid with common stock for
the twelve months ended December 31, 1997. For the twelve months ended December
31, 1996, liabilities to be paid with common stock were $3,422,500, which shares
were issued during the first quarter of 1997.
Total liabilities at December 31, 1997, and December 31, 1996, were
$56,372,981 and $9,643,819, respectively. The increase of $46,729,162 is
primarily due to the inclusion of PCL's total liabilities of $68,099,951, offset
by the exclusion of MSI's balance sheet as a result of the sale of MSI to PCL on
February 26, 1997, which total liabilities were $2,960,824. Additionally, United
repaid the $2,000,000 loan obtained by United to repay the outstanding balance
on a loan in the principal amount of $2,500,000 and reduced its liabilities to
be paid with common stock for $3,422,500 (Note 7).
At December 31, 1997, the Company had approximately $19,000,000 in tax
net operating loss carryforwards excluding PCL and no tax benefits were
recorded. Approximately $3,000,000 of these losses are limited in usage.
Utilization of the net operating loss carryforwards may be subject to
limitations pursuant to Section 382 of the Tax Code (Note 11).
Year 2000 Compliance
The Company has no existing products and no material internal systems
which may be impacted by the Company's failure to effect Year 2000 ("Y2K")
compliance. The Company believes that no material expenditures will be required
to address Y2K compliance of the Company's internal computer systems. In the
event the Company acquires any assets or commences any operations which would
require it to address Y2K compliance, it will do so at such time. At this time,
the Company has not encountered any Y2K issues which would have a material
adverse effect on its business.
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<PAGE> 35
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported by the Company on a current report on Form 8-K/A
filed with the Commission on May 19, 1998, by letter dated May 5, 1998, the
Company was notified by Ernst & Young LLP ("E&Y") that E&Y's relationship as
independent auditors for the Company had ceased. The Company believes that
termination of the auditing relationship was due to the inability of the Company
to pay to that firm fees previously incurred and past due and owing, and that
such decision did not result from any disagreement or dispute concerning
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.
For the year ended December 31, 1996, the report of E&Y on the Company's
financial statements for such year included a qualification concerning the
ability of the Company to continue as a going concern and that the financial
statements of the Company did not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of that uncertainty. For the years ended December 31, 1995 and 1994, no
qualification or other disclaimer was included in the reports of E&Y on the
financial statements of the Company for such years.
During the years ended December 31, 1996 and December 31, 1997 and for
the interim period from January 1, 1998 through May 5, 1998, (i) there were no
disagreements between the Company and E&Y on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of E&Y, would have
caused it to make a reference to the subject matters of such disagreements in
connection with their report and (ii) there were no "reportable events" (as that
term is described in Item 304(a)(1)(v) of Regulation S-K) involving E&Y and the
Company.
The notification from E&Y that its relationship as independent auditors
for the Company has ceased also included a similar notification for PCL, in
which, at the time of the notification, the Company owned 52.6% of the
outstanding common stock.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 36
PART III
ITEM 9. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Directors and Executive Officers of the Company as of August 25,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Marvin Feigenbaum 49 Chairman of the Board of Directors,
President and Chief Executive Officer of
the Company; Chairman of the Board of
Directors, Chief Executive and Chief
Financial Officer of ABC; Chairman of
the Board of Directors, President and
Chief Executive Officer of PCL from
October 3, 1997 until May 12, 1999;
Chief Operating Officer of PCL from the
fourth quarter of the year ended
December 31, 1996 until October 3, 1997.
David A. Sterling 42 Secretary and Director of the Company;
Director of PCL from October 3, 1997
until May 12, 1999.
Robert B. Fagenson 49 Director of the Company.
</TABLE>
Set forth below is certain information relating to the members of the
Board of Directors of the Company as of December 31, 1997. Where appropriate,
such information has been supplemented to reflect events that occurred during
the year ended December 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Marvin Feigenbaum 49 Chairman of the Board of Directors,
President and Chief Executive Officer of
the Company; Chairman of the Board of
Directors, Chief Executive and Chief
Financial Officer of ABC; Chairman of
the Board of Directors, President and
Chief Executive Officer of PCL from
October 3, 1997 until May 12, 1999;
Chief Operating Officer of PCL from the
fourth quarter of the year ended
December 31, 1996 until October 3, 1997.
Edmond E. Charrette, M.D. 63 Director of the Company until November 20, 1997.
Leonard Green 72 Director of the Company until November 20, 1997.
David A. Sterling 42 Secretary and Director of the Company;
Director of PCL from October 3, 1997
until May 12, 1999.
Chriss W. Street 48 Director of the Company until March 1, 1999.
Robert B. Fagenson 49 Director of the Company.
Patricia A. Meitner, Ph.D 57 Vice President of Science and Laboratory
Director of ABC from April 1, 1988 until
November 3, 1997.
</TABLE>
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<PAGE> 37
The number of directors comprising the entire Board of Directors is
such number as determined in accordance with the By-Laws of the Company. The
Company's By-Laws provide for the number of directors to be not less than three
or more than eleven in number. The Company's Certificate of Incorporation
provides for a classified or "staggered" Board of Directors. The classified or
"staggered" Board of Directors is comprised of three classes of directors
elected for three (3) year terms. By reason of the classified Board of
Directors, one class of the Board comes up for re-election each year. Any
further amendment to the Company's Certificate of Incorporation affecting the
classified Board may only be adopted upon the affirmative vote of not less than
75% of the issued and outstanding shares entitled to vote thereon.
At the Annual Meeting of Stockholders held in June, 1997, Messrs.
Feigenbaum and Fagenson were elected Class 1 Directors to serve until the 2000
Annual Meeting of Stockholders. At the Annual Meeting of Stockholders held on
August 27, 1996, Mr. Sterling was elected Class 2 Director until the 1999 Annual
Meeting of Stockholders, which meeting has not been held to date. However, due
to the financial position of the Company, the Company has been unable to attract
and retain any directors other than Messrs. Feigenbaum, Sterling and Fagenson.
The Company's remaining directors resigned on the dates indicated below.
The following sets forth certain biographical information for the
current Directors and Officers:
J. Marvin Feigenbaum. Mr. J. Marvin Feigenbaum was first elected to
the Board of Directors in June 1994, at which time he was also elected to the
Board of Directors of ABC and appointed Chief Executive Officer of the Company
and Chief Executive and Chief Financial Officer of ABC. Mr. Feigenbaum has
served as President of the Company since June 1, 1994, and as Chairman of the
Board, President and Chief Executive Officer of PCL from October 3, 1997 until
May 12, 1999. From August 1993 to June 1994, Mr. Feigenbaum served as a
consultant to the Company, primarily with respect to the Company's business
development and plans and programs relating to the marketing of the Company's
laboratory and medical testing services. From 1987 to June 1994, Mr. Feigenbaum
acted as an independent consultant in the medical and health care industry. He
has over 25 years of experience in the health care industry. Prior to being an
independent consultant, Mr. Feigenbaum, from 1982 to mid-1987, served as
Chairman, President and Chief Executive Officer of Temco Home Health Care
Products, Inc., a durable medical equipment manufacturer. For a period of four
years until he voluntarily resigned in May, 1999, Mr. Feigenbaum served as a
member of the Board of Directors and Vice-Chairman of Comprehensive Care
Corporation ("CompCare"), a publicly owned company engaged in the health care
business, previously listed on the New York Stock Exchange. On February 24,
1995, a group of holders of CompCare 7 1/2% Convertible Subordinated Debentures
filed an involuntary petition against CompCare under Chapter 7 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Texas, Fort Worth Division. This petition was dismissed by the Court
on March 7, 1995 upon the joint motion of CompCare and petitioners.
David A. Sterling. Mr. David A. Sterling was elected to the Board of
Directors on December 6, 1994. Mr. Sterling, for in excess of seven years, has
been President of Sterling & Sterling, Inc., a general insurance agency. Mr.
Sterling holds a BBA Degree from Hofstra University, New York.
Robert B. Fagenson. Mr. Robert B. Fagenson is a Class 1 Director as
the nominee of Starr Securities, Inc., the Corporation's investment banking
firm. Under the terms of its underwriting agreement with Starr Securities
entered into in December 1994 in connection with the Corporation's public
offering, the Corporation agreed to use its best efforts for a period of five
years to nominate and have elected to its
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<PAGE> 38
Board of Directors one nominee of Starr Securities. Mr. Fagenson has, for more
than the past five years, been President and a Director of Fagenson & Co., Inc.,
a registered broker-dealer, and Vice-President and Director of Starr Securities
Inc., a registered broker-dealer. Mr. Fagenson is a Director of the New York
Stock Exchange. He is also a Director of The Microtel Franchise and Development
Company, a developer of economy lodging facilities; Autoinfo, Inc., a dealer in
computerized products and services for after-market motor vehicle parts; and
Rent-Way, Inc., a multi store retail chain in the rent-to-own industry.
The following sets forth certain biographical information for the
additional Directors and Officers of the Company during the period covered by
this Report:
Edmond E. Charrette, M.D. Dr. Edmond Charrette, was elected a Director
on May 4, 1993, and served until his resignation on November 20, 1997. Dr.
Charrette is board certified in Internal Medicine and Medical Oncology. From
1981 to 1985, Dr. Charrette served as Senior Vice President of AdvantageHEALTH
Corporation in Woburn, Massachusetts, a publicly traded corporation. To the
Company's knowledge, during the year ended December 31, 1997, Dr. Charrette
served as the Executive Vice President and Chief Medical Officer of
AdvantageHEALTH Corporation. Dr. Charrette is a past Chairman of the American
Congress of Rehabilitation Medicine -- Task Force for Cancer Rehabilitation. He
is cofounder and member of the Board of Directors of Health Resources.
Leonard Green. Mr. Leonard Green was elected to the Board of Directors
in September 1994, and served until his resignation effective November 20, 1997.
To the Company's knowledge, Mr. Green has been the President and Chief Executive
Officer of Green Management and Investment Co., a New York private investment
firm, since 1985. From 1980 to 1985, Mr. Green was President and Chief Executive
Officer of Yuma Management Corp. Prior to such time, from 1972 to 1980, Mr.
Green served as Chairman and Chief Executive Officer of Quality Care, Inc. Mr.
Green received his Bachelor of Science degree from George Washington University.
Mr. Green also serves on the Board of Directors of Apria Healthcare, Inc. and
OrNda Health Corp.
Chriss W. Street. Mr. Chriss W. Street was elected a Class 3 Director of
the Corporation at the Company's 1995 Annual Meeting and served until his
resignation on March 1, 1999. Mr. Street is the President of Chriss Street and
Company, Inc., a financial advisory firm which provides a wide variety of
financial advisory and research services. Mr. Street founded the firm in 1992.
Prior thereto, and from 1987 to 1992, Mr. Street was a Managing Director of
Seidler Amdec Securities, Inc. Mr. Street has, since 1993, served as Chairman
and, since 1994, has additionally served as President and Chief Executive
Officer of CompCare. On February 24, 1995, a group of holders of CompCare 7 1/2%
Convertible Subordinated Debentures filed an involuntary petition against
CompCare under Chapter 7 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Northern District of Texas, Fort Worth Division.
This petition was dismissed by the Court on March 7, 1995 upon the joint motion
of CompCare and petitioners. Mr. Street is Chief Financial Officer of Hacienda
Village Modernization Corp., which is a joint venture construction firm founded
by Mr. Street in 1994 to bid for federally funded construction contracts
rehabilitating housing projects in Los Angeles, California inner city
neighborhoods. In addition, in March 1995, he was elected as a Director of
Micropolis Corporation, a company traded on the Nasdaq Stock Market.
Patricia A. Meitner, Ph.D. Dr. Patricia A. Meitner joined ABC in April
1988 as Product Manager and Laboratory Director. In December 1991, she was
elected as Vice President of Science. Dr. Meitner has
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<PAGE> 39
a Ph.D. in Physiological Chemistry from the University of Birmingham, England,
and has been involved in the cancer research field for over 20 years. ABC ceased
operations on November 3, 1997.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature,
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, in a proceeding not by or in the right of the corporation, judgments, fines
and amounts paid in settlement, actually and reasonably incurred by him in
connection with such suit or proceeding, if he acted in good faith and in a
manner believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reason to believe his conduct was unlawful. Delaware law further provides that a
corporation will not indemnify any person against expenses incurred in
connection with an action by or in the right of the corporation if such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for the expenses
which such court shall deem proper.
The By-Laws of the Company provide for indemnification of officers and
directors of the Company to the greatest extent permitted by Delaware law for
any and all fees, costs and expenses incurred in connection with any action or
proceeding, civil or criminal, commenced or threatened, arising out of services
by or on behalf of the Company, providing such officer's or director's acts were
not committed in bad faith. The By-Laws also provide for advancing funds to pay
for anticipated costs and authorizes the Board to enter into an indemnification
agreement with each officer or director.
In accordance with Delaware law, the Company's Certificate of
Incorporation contains provisions eliminating the personal liability of
directors, except for (i) breaches of a director's fiduciary duty of loyalty to
the Company or to its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, and
(iii) any transaction in which a director receives an improper personal benefit.
These provisions only pertain to breaches of duty by directors as such, and not
in any other corporate capacity, e.g., as an officer. As a result of the
inclusion of such provisions, neither the Company nor its stockholders may be
able to recover monetary damages against directors for actions taken by them
which are ultimately found to have constituted negligence or gross negligence,
or which are ultimately found to have been in violation of their fiduciary
duties, although it may be possible to obtain injunctive or equitable relief
with respect to such actions. If equitable remedies are found not to be
available to stockholders in any particular case, stockholders may not have an
effective remedy against the challenged conduct.
The Company has entered into Indemnification Agreements with each of its
directors and officers (the "Indemnitees") pursuant to which it has agreed to
provide for indemnification, to the fullest extent permitted by law and the
Company's By-Laws, against any and all expenses, judgments, fines, penalties and
amounts paid in settlement arising out of any claim in connection with any
event, occurrence or circumstance related to such individual serving as a
director or officer of the Company. Such indemnification includes the
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<PAGE> 40
advance of expenses to the Indemnitees (including the payment of funds in trust
therefor under certain circumstances) and is subject to there not having been
determined that the Indemnitee would not be permitted to be indemnified under
applicable law. The rights of indemnification are in addition to any other
rights which the Indemnitees may have under the Company's Certificate of
Incorporation, By-Laws, the Delaware General Corporation Law or otherwise.
SECTION 16 REPORTING
No person who, during the year ended December 31, 1997, was a director,
officer or beneficial owner of more than ten percent of the Company's Common
Stock (which is the only class of securities of the Company registered under
Section 12 of the Securities Exchange Act of 1934 (the "Act") (a "Reporting
Person") failed to file on a timely basis, reports required by Section 16 of the
Act during the most recent fiscal year or prior years. The foregoing is based
solely upon a review by the Company of Forms 3 and 4 during such fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to such fiscal year,
and any representation received by the Company from any reporting person that no
Form 5 is required.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
Executive Compensation.
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid or accrued by the Company during the years ended December
31, 1997, 1996 and 1995, to the Chief Executive Officer and each of the named
executive officers of the Company. In addition, to provide the reader with
current information so that the reader may develop an understanding of the
current position of the Company, such information is also provided for the year
ended December 31, 1998.
Summary Compensation Table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES PAYOUTS
---------------------------- ----------------------------- ------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) STOCK AWARD(S) OPTIONS ($)
- ------------------ ---- ----------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Marvin Feigenbaum 1998 $381,333(3) -- -- -- $11,784(4)
President and Chief 1997 $299,000(5) $ 30,154(6) -- -- $15,163(4)
Executive Officer(1)(2) 1996 $186,917 $205,686(7) -- 7,143(8)(9) $11,952(4)
1995 $182,000 $108,000(10) $943,750(8) -- $ 6,000(11)
</TABLE>
- ---------------------
(1) President and Chief Executive Officer commencing June 1, 1994. Chief
Financial Officer from June 1, 1994 until present. President and Chief
Executive Officer of PCL from October 3, 1997 until May 12, 1999. PCL
was a majority-owned subsidiary of the Company from October 3, 1997
until June 12, 1998. Prior to October 3, 1997 and until PCL emerged from
its Chapter 11 proceeding, Mr. Feigenbaum served as Chief Operating
Officer of PCL.
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<PAGE> 41
(2) The Company was a majority stockholder of PCL for the period commencing
October 3, 1997 continuing through June 12, 1998. During this period,
Mr. Feigenbaum received a base salary of $104,000 through October 31,
1997 and $208,000 per annum thereafter as compensation from PCL for
serving as PCL's Chairman, President and Chief Executive Officer.
(3) Includes approximately (i) $208,000 earned by Mr. Feigenbaum pursuant to
his employment agreement with the Company, (ii) $208,000 paid to Mr.
Feigenbaum by PCL during the 12 month period ended December 31, 1998,
and (iii) $13,000 of his salary voluntarily deferred by Mr. Feigenbaum
during 1997 and paid during 1998 (see note 5); excludes approximately
$47,667 that should have been paid to Mr. Feigenbaum during 1998 but,
due to the financial condition of the Company, was voluntarily deferred
by Mr. Feigenbaum as a convenience to the Company and paid to Mr.
Feigenbaum in 1999.
(4) Represents automobile allowance, automobile insurance premiums and life
insurance premiums.
(5) Includes approximately (i) $208,000 earned by Mr. Feigenbaum pursuant to
his employment agreement with the Company, and (ii) $104,000 paid to Mr.
Feigenbaum in connection with his services as Chief Operating Officer of
PCL; excludes approximately $13,000 that should have been paid to Mr.
Feigenbaum during 1997 but, due to the financial condition of the
Company, was voluntarily deferred by Mr. Feigenbaum as a convenience to
the Company and paid to Mr. Feigenbaum in 1998.
(6) Represents accrued vacation paid in cash.
(7) Includes (i) $25,000 paid to Mr. Feigenbaum for issuing an accommodation
guaranty in the amount of $2.5 million for the benefit of the Company;
(ii) approximately $50,000 tax reimbursement paid to Mr. Feigenbaum for
tax on the value of 71 restricted shares of Common Stock which vested on
December 31, 1995, and which amount was paid in 1996; (iii)
approximately $68,000 reimbursement for taxes on taxes associated with
the grant of 714 shares of Common Stock during fiscal 1994; and (iv)
$62,686 withheld and paid by the Company for taxes on taxes associated
with the value of 71 restricted shares of Common Stock which vested on
December 31, 1995.
(8) On June 8, 1995, the Company granted Mr. Feigenbaum 1,429 restricted
shares of Common Stock. Represents the fair market value of the 1,429
shares based upon the market value of the Common Stock of $660.10 per
share on June 8, 1995. The restricted shares vest at the rate of 71 per
year over a twenty year period commencing December 31, 1995, subject to
certain performance based acceleration provisions. Under the
acceleration provisions, full vesting was scheduled to occur at December
31, 1996. On December 2, 1996, the Company agreed to exchange the 1,357
shares that would have otherwise become fully vested, for warrants to
acquire 4,286 shares of Common Stock at $490.00 per share.
(9) On December 6, 1996, the Company granted Mr. Feigenbaum warrants to
acquire 2,857 shares of Common Stock at $761.25 per share. Such warrants
are fully vested and exercisable through December 5, 2001.
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<PAGE> 42
(10) Represents a bonus accrued for 1994 and paid during fiscal year 1995
representing the approximate combined federal and state tax associated
with the grant of 714 shares of Common Stock during fiscal 1994.
(11) Represents automobile allowance paid by the Company.
Options/SAR Grants in Fiscal Years Ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(B) (C)
NUMBER OF SECURITIES % OF TOTAL (D)
UNDERLYING OPTIONS/SARS GRANTED EXERCISE (E)
(A) OPTIONS/SARS TO EMPLOYEES IN OR BASE EXPIRATION
YEAR NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) DATE
- ---- ---- -------------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998 J. Marvin Feigenbaum -- -- -- --
1997 J. Marvin Feigenbaum -- -- -- --
</TABLE>
Aggregated Options/SAR Exercises in Two Most Recent Fiscal Years and
Fiscal Year-End Options/SAR Values.
The following table summarizes options exercised by the named executive
officers during the years ended December 31, 1998 and 1997, and the number and
value of options held by all executive officers named in the Summary
Compensation Table at the respective year end. The Company does not have any
outstanding stock appreciation rights granted to executive officers.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS OPTIONS/WARRANTS
AT FY-END AT FY-END ($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
YEAR NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
---- ---- --------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1998 J. Marvin Feigenbaum -- -- -- --
1997 J. Marvin Feigenbaum(2) -- -- 9,286/0 0/0
</TABLE>
- ---------------
(1) The average of the closing bid and closing ask prices for the Company's
Common Stock as reported on the Nasdaq SmallCap Market on December 31,
1997 was $5.46875. The options/warrants are exercisable at exercise
prices ranging from $490 to $761.25/share. The value of such
options/warrants is negative.
(2) Mr. Feigenbaum holds options and warrants to purchase 6,429 shares of
Common Stock with an exercise price of $490.00 per share, and warrants
to purchase 2,857 shares at $761.25.
Employment Agreements.
Subsequent to the year ended December 31, 1997, the Company entered into
an Amended and Restated Employment Agreement (the "Restated Agreement") with Mr.
Feigenbaum, the Company's Chairman, President and Chief Executive Officer, dated
May 19, 1999. The Restated Agreement amends and extends Mr. Feigenbaum's
original employment agreement with the Company, dated June 1, 1994, as amended.
The Restated Agreement is effective as of May 1, 1999 and expires April 30,
2002. The Restated Agreement provides for Mr. Feigenbaum's continued employment
as Chairman of the Board, President and Chief Executive Officer of the Company,
as well as Mr. Feigenbaum's continued employment as Chief Executive and Chief
Financial Officer of ABC and contemporaneous employment as Chairman, President
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<PAGE> 43
and Chief Executive Officer of PCL. Pursuant to the Restated Agreement, the
Company has agreed to pay Mr. Feigenbaum a base salary of $208,000 per year
(such amount does not include any compensation from PCL). The Company further
agreed to (a) make a lump sum payment to Mr. Feigenbaum in an amount equal to
that portion of his salary deferred by Mr. Feigenbaum, as a convenience to the
Company, since June, 1998, with simple interest at a rate of 12%, and (b) pay to
Mr. Feigenbaum a one-time bonus in the amount of $50,000 upon execution of the
Restated Agreement. In addition, the Restated Agreement provides for vacation
benefits, life insurance, an automobile allowance, relocation expenses, and
cellular telephone and travel and entertainment expenses. The Restated Agreement
further contains provisions for termination of the Restated Agreement by mutual
consent, for cause, without cause by the Company, for death or disability of Mr.
Feigenbaum and for good reason by Mr. Feigenbaum, as well as provisions
regarding the failure of the parties to renew the Restated Agreement for an
additional term. In addition, the Restated Agreement provides that in the event
of a change in control of the Company (as defined), Mr. Feigenbaum will be paid
for the remainder of the unexpired term of the Restated Agreement plus an
additional sum of $208,000.
Mr. Feigenbaum received a salary in the amount of $208,000 during each
of the years ended December 31, 1997 and 1998, pursuant to the then current
Employment Agreement, as amended. Due to the financial condition of the Company,
during the year ended December 31, 1998, approximately $47,667 of cash
compensation which should have been paid to Mr. Feigenbaum in 1998 was
voluntarily deferred by Mr. Feigenbaum until 1999 as a convenience to the
Company, and, during the year ended December 31, 1997, approximately $13,000 of
cash compensation which should have been paid to Mr. Feigenbaum in 1997 was
voluntarily deferred by Mr. Feigenbaum until 1998 as a convenience to the
Company. During the year ended December 31, 1994, in connection with his then
current Employment Agreement, Mr. Feigenbaum was issued, in lieu of a cash bonus
for past services rendered to the Corporation, while acting as a consultant to
the Corporation, 714 shares of Common Stock of the Corporation which has been
valued at $245 per share. All of said shares were immediately vested, and the
Corporation paid Mr. Feigenbaum, on April 14, 1995, a one time cash bonus equal
to $108,000 representing the amount of the combined federal and applicable state
and city income tax associated with such stock grant. In addition, Mr.
Feigenbaum was granted, directly or indirectly, options to purchase 2,143 shares
of the Corporation's Common Stock exercisable commencing in June, 1995 through
December 31, 2002 at an option exercise price equal to the $490 per share. On
June 8, 1995, the Company granted and issued to Mr. Feigenbaum 1,429 restricted
shares of its Common Stock, $.01 par value (the "Restricted Shares"). On
December 2, 1996, Mr. Feigenbaum agreed to terminate this grant of Restricted
Shares by exchanging 1,357 Restricted Shares for warrants to purchase 4,286
shares of common stock of the Company at $490 per share.
Mr. Feigenbaum also devoted substantial amounts of time to PCL as its
Chairman, President and Chief Executive Officer during the years ended December
31, 1998 and 1997, including serving as Chief Operating Officer of PCL from the
fourth quarter of the year ended December 31, 1996 until October 3, 1997, for
which Mr. Feigenbaum received a base salary at the rate of $104,000 for the
period commencing in the fourth quarter of the year ended December 31, 1996
through October 31, 1997 and $208,000 per annum thereafter. Mr. Feigenbaum
resigned as Chairman, President and Chief Executive Officer on May 12, 1999. In
connection with his employment by PCL, PCL granted to Mr. Feigenbaum options to
purchase 100,000 shares of PCL's common stock at an exercise price of $.25 per
share and granted options to purchase an additional 100,000 shares of PCL's
common stock at an exercise price of $5 per share, which latter options were
scheduled to vest and become exercisable based on PCL's performance for each of
the years ended December 31, 1997, 1998 and 1999. In October, 1997 the exercise
price of the latter 100,000 options was reduced to $.25 per share and the
options were immediately vested.
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<PAGE> 44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Feigenbaum, the Corporation's Chairman, Chief Executive Officer and
a Class 1 Director, served as a member of the Board of Directors and
Vice-Chairman of Comprehensive Care Corporation ("CompCare") for approximately 4
years until his resignation on April 23, 1999. Mr. Chriss W. Street, a Class 3
Director of the Corporation from September, 1994 until his resignation on March
1, 1999, has served as President and Chief Executive Officer of CompCare.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive any fee in
addition to their regular salary for serving on the Board of Directors.
Directors who are not employees of the Company receive a directors fee of $6,000
per annum, paid quarterly, and an attendance fee of $500 per meeting attended.
In addition, Directors are reimbursed for travel expenses for attendance at
board meetings. Non-Employee Directors are also eligible for an initial and
annual grant of stock options under the Company's Non-Employee Director Stock
Option Plan (see "Non-Employee Director Stock Option Plan" below).
1994 INCENTIVE STOCK OPTION PLAN
In August, 1994, the Board of Directors adopted a 1994 Incentive Stock
Option Plan (the "Plan") which Plan was approved and adopted by the stockholders
of the Company on November 16, 1994. The Plan provides for the issuance of up to
5,000 shares of the Company's Common Stock upon the exercise of options granted
to officers, directors, full time employees and consultants rendering services
to the Company. Under the terms of the Plan, options granted thereunder will be
designated as options which qualify for incentive stock option treatment
("ISO's") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options which do not so qualify ("Non-ISO's"). Unless sooner
terminated, the Plan will expire on August 1, 2004 and options may be granted at
any time or from time to time through such date. The purpose of the Plan is to
promote the interests of the Company and its stockholders by strengthening the
ability of the Company to attract and retain officers, employees and consultants
by furnishing suitable recognition of their ability to contribute to the success
of the Company and to align their interests and efforts with the long term
interest of the Company. The Plan succeeds the Company's 1992 Incentive Stock
Option Plan, which has been terminated except for options to acquire 167 shares
thereunder.
The Plan is administered by the Board of Directors or by a Stock Option
Committee designated by the Board of Directors (the "Plan Administrator"). The
Plan Administrator has the discretion to determine the eligible employees and
consultants to whom, and the times and the prices at which, options will be
granted; whether such options shall be ISO's or Non-ISO's; the periods during
which each option will be granted; and the number of shares subject to each
option. The Plan Administrator shall have full authority to interpret the plan
and to establish and amend rules and regulations relating thereto.
Under the Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISO's may not be less than 85% of such fair market value. The aggregate fair
market value of shares subject to an option designated as an ISO for which any
participant may be granted such an option in any calendar year, shall not exceed
$100,000 plus any unused carryovers (as defined in Section 422 of the Code) from
a prior year. The "fair market value" will
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<PAGE> 45
be the closing Nasdaq bid price or, if the Company's Common Stock is not quoted
by Nasdaq, the low bid as reported by the National Quotation Bureau, Inc. or a
market maker of the Company's Common Stock or, if the Common Stock is not quoted
by any of the above, by the Board of Directors acting in good faith.
Options may be granted under the Plan for such periods as determined by
the Plan Administrator; provided however that no option designated as an ISO
granted under the Plan shall be exercisable over a period in excess of ten
years, or in the case of a ten percent stockholder, five years. Options may be
exercised in whole at any time or in part from time to time. Options are not
transferable except to the estate of an option holder; provided, however, in the
case of a Non-ISO, and subject to Rule 16b-3 promulgated under Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act") and prevailing
interpretations thereunder by the staff of the Commission, a recipient of a
Non-ISO may, with the consent of the Plan Administrator, designate a named
beneficiary of the Non-ISO in the event of the death of such recipient, or
assign such Non-ISO.
Except as described below, the Plan Administrator may from time to time
amend the Plan as it deems proper and in the best interests of the Company
without further approval of the stockholders.
The Board of Directors and the Plan Administrator may not amend certain
features of the Plan without the approval of the Company's stockholders to the
extent such approval is required for compliance with Section 422 of the Code
with respect to ISO's, Section 162(m) of the Code with respect to Non-ISO's or
Rule 16b-3 promulgated under Section 16 of the Exchange Act with respect to
awards made to individuals subject to Section 16 of the Exchange Act. Such
amendments would include (a) increasing the maximum number of shares of Common
Stock that may be issued under the Plan, (b) materially modifying the
requirements as to eligibility for participation in the Plan, or (c) otherwise
materially increasing the benefits accruing to participants under the Plan.
Options for a total of 2,502 Shares have been granted under the Plan,
including options for 2,143 shares granted directly or indirectly to Mr.
Feigenbaum.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In August, 1994, the Board of Directors adopted the Non-Employee
Director Stock Option Plan (the "Director Plan") which Director Plan was
approved and adopted by the stockholders of the Company on November 16, 1994 and
amended by the stockholders of the Company on August 27, 1996. The Director Plan
provides for issuance of a maximum of 2,857 shares of Common Stock upon the
exercise of stock options granted under the Director Plan. Options may be
granted under the Director Plan until August 1, 2004 to the Company's
non-employee directors (as defined). The Director Plan provides that each
non-employee director will automatically be granted an option to purchase 71
shares upon joining the Board of Directors (or, for those persons who are
directors on the date of approval of the Director Plan by the stockholders, on
such date), and options to purchase 114 shares on each anniversary of the
initial date of service or date of approval, as the case may be.
Under the terms of the Director Plan, the sum of the number of shares to
be received upon any grant multiplied by the fair market value of each share at
the time of grant may not exceed $75,000. All awards shall be reduced to the
extent they exceed such amount. The exercise price for options granted under the
Director Plan shall be 100% of the fair market value of the Common Stock on the
date of grant. Until
-43-
<PAGE> 46
otherwise provided in the Director Plan, the exercise price of options granted
under the Director Plan must be paid at the time of exercise, either in cash, by
delivery of shares of Common Stock of the Company or by a combination of each.
The term of each option is five years from the date of grant, unless terminated
sooner as provided in the Director Plan. The Director Plan is administered by a
committee of the Board of Directors composed of not fewer than two persons who
are officers of the Company (the "Committee"). The Committee has no discretion
to determine which non-employee director will receive options or the number of
shares subject to the option, the term of the option or the exercisability of
the option. However, the Committee will make all determinations of the
interpretation of the Director Plan. Options granted under the Director Plan do
not qualify for incentive stock option treatment.
Options for a total of 484 shares have been granted under the Director
Plan, including options for 114 shares to Dr. Charrette, Mr. Green and Mr.
Sterling, and 71 shares to Mr. Fagenson and to Mr. Street.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 25, 1999
with respect to the ownership of Common Stock by (i) the persons (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended), known by the Company to be the beneficial owner of more
than five percent of any class of the Company's voting securities, (ii) each
director and each officer identified in the Summary Compensation Table, and
(iii) directors and executive officers as a group. The most current information
available to the Company is set forth below.
The Company believes that relevant to an understanding of the ownership
of the Common Stock is the fact that from December 1996 to December 19, 1997,
the most recent date on which Preferred Stock was converted, the Company issued
an aggregate of 644,276 shares of Common Stock upon the conversion of 11,174
shares of Preferred Stock. In the event that the remaining 2,826 shares of
Preferred Stock are converted, the Company is presently unable to determine the
number of shares issuable upon such conversion. In July, 1997, the holders of
the Preferred Stock represented to the Company that they are not part of any
"group" as defined in Rule 13d-5 under the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, and each represented that he or
it is the sole beneficial owner of Common Stock of the Company registered in his
or its name or issuable upon conversion of additional shares of Preferred Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF AND NATURE PERCENTAGE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- ----------
<S> <C> <C>
J. Marvin Feigenbaum 10,075(1) *
476 Main Street, Suite 3-DFL
Wakefield, RI 02879
David A. Sterling 71(2) *
476 Main Street, Suite 3-DFL
Wakefield, RI 02879
Robert B. Fagenson 114(3) *
476 Main Street, Suite 3-DFL
Wakefield, RI 02879
Craig Osborne(4) 89,963 19%
10351 Santa Monica Boulevard, Suite 101A
Los Angeles, CA 90025
All Officers and Directors as a Group (5 *
persons in number) 10,260(1)(2)(3)
</TABLE>
-44-
<PAGE> 47
- ----------
* Less than one percent.
(1) Includes (i) 142 shares of Common Stock owned by Mr. Feigenbaum; (ii)
647 shares of Common Stock held in a trust for the benefit of a minor
child of Mr. Feigenbaum, as to which shares Mr. Feigenbaum disclaims
beneficial ownership; (iii) 779 options owned by the Feigenbaum
Foundation, a charitable foundation, as to which options Mr. Feigenbaum
disclaims a beneficial interest in, and (iv) options and warrants to
purchase an aggregate of 8,507 shares of Common Stock.
(2) Includes options to purchase 71 shares of Common Stock under the
Company's Non-Employee Director Stock Option Plan.
(3) Includes options to purchase 114 shares of Common Stock under the
Company's Non-Employee Director Stock Option Plan.
(4) Based upon a Schedule 13D filed with the Commission by Mr. Osborne on
May 26, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding Mr. Feigenbaum's employment agreement and his
relationship with the Company and PCL, see "Executive Compensation - Employment
Agreements".
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-45-
<PAGE> 48
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Financial Statements.
See Index to Financial Statements Attached hereto.
2. Financial Statement Schedules.
Not Applicable.
3. Exhibits.
Incorporated by reference to the Exhibit Index at the end of this
Report.
(B) Reports on Form 8-K.
During the period commencing last quarter of the period covered by this
Report to date, the following reports on Form 8-K were filed by the Registrant:
<TABLE>
<CAPTION>
DATE OF REPORT ITEM REPORTED DESCRIPTION OF ITEM
- -------------- ------------- -------------------
<S> <C> <C>
June 23, 1999 Item 5. Other Events The Company entered into an Amended and Restated
Item 7. Exhibits Employment Agreement with J. Marvin Feigenbaum.
May 20, 1999 Item 5. Other Items The Company reported the sale of substantially all
of the assets of PCL to Unilab Corporation
("Unilab") for cash, a convertible promissory note
of Unilab and Unilab common stock.
March 12, 1999 Item 5. Other Items The Company reported Mr. Chriss W. Street's
resignation as a director of the Company on March
1, 1999.
December 29, 1998 Item 5. Other Events The Company reported an amendment to the
Certificate of Incorporation to effectuate a
1-for-70 reverse stock split.
June 22, 1998 Item 5. Other Events The Company reported the sale of 2.7% of its
Item 7. Financial Statements, Pro Forma holdings in Physicians Clinical Laboratory, Inc.
Financial Information ("PCL") to Oaktree Capital Management LLC, as
and Exhibits agent ("Oaktree") and the loan in the amount of $4
million from Oaktree to PCL.
June 5, 1998 Item 5. Other Events The Company reported the delisting of its Common
Stock from the Nasdaq SmallCap Market effective as
of the close of business on June 1, 1998.
May 19, 1998 (Form 8-K/A Item 4. Changes in Registrant's The Company reported the termination of Ernst & Young
Amending Form 8-K dated Certifying Accountants LLP as the Company's independent auditors.
May 11, 1998) Item 7. Financial Statements
April 20, 1998 Item 5. Other Events The Company reported proceedings to delist the
Company from the Nasdaq Stock Market due to its
failure to file its Form 10-KSB for the period
ending December 31, 1997.
March 24, 1998 Item 5. Other Events The Company reported a $250,000 loan from
Erica Jesselson, secured by shares of PCL.
March 5, 1998 Item 5. Other Events The Company reported notification from Nasdaq
Stock Market of a reprieve to meet the minimum bid
price requirement for listing on Nasdaq SmallCap
Market.
</TABLE>
-46-
<PAGE> 49
<TABLE>
<CAPTION>
DATE OF REPORT ITEM REPORTED DESCRIPTION OF ITEM
- -------------- ------------- -------------------
<S> <C> <C>
February 23, 1998 Item 5. Other Events The Company reported a complaint filed against it
Item 7. Financial Statements and and others on February 4, 1998 alleging common law
Exhibits fraud, conversion and breach of contract.
January 22, 1998 Item 5. Other Events The Company reported notification that it was not
in compliance with the minimum closing bid
requirements of Nasdaq Stock Market.
December 18, 1997 Item 5. Other Events The Company reported a relocation of its executive
offices.
November 4, 1997 Item 5. Other Events The Company announced that its subsidiary,
Analytical Biosystems Corporation ("ABC"), had
temporarily suspended the marketing of a clinical
lab assay used to select chemotherapy drugs, but
that the Company would continue as a full service
clinical lab through its acquisition of PCL.
October 23, 1997 Item 5. Other Events The Company reported an amendment to the Amended
Item 7. Exhibits and Restated Certificate of Incorporation to
increase total number of shares of all classes of
stock to fifty-two million shares (pre-reverse
stock split).
October 20, 1997 Item 2. Acquisition or Disposition of The Company reported its acquisition of PCL and the
Assets sale of Medical Science Institute, Inc. to PCL.
Item 7. Financial Statements, Pro Forma
Financial Information
and Exhibits
October 7, 1997 Item 5. Other Events The Company reported that on October 1, 1997, the
acquisition of PCL was completed and PCL emerged
from Chapter 11.
</TABLE>
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-47-
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August , 1999.
UNITED DIAGNOSTIC, INC.
By: /s/ J. MARVIN FEIGENBAUM
-------------------------------------
J. Marvin Feigenbaum
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
September 2, 1999
/s/ J. MARVIN FEIGENBAUM
----------------------------------------
J. Marvin Feigenbaum
Chairman of the Board of Directors,
President and Chief Executive Officer
September 2, 1999
/s/ DAVID STERLING
----------------------------------------
David Sterling
Director
September 2, 1999
----------------------------------------
Robert B. Fagenson
Director
-48-
<PAGE> 51
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
UNITED DIAGNOSTIC, INC.
(FORMERLY KNOWN AS NU-TECH BIO-MED, INC.)
AND SUBSIDIARIES
December 31, 1997 and 1996
F-1
<PAGE> 52
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 5
CONSOLIDATED STATEMENTS OF OPERATIONS 6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
</TABLE>
F-2
<PAGE> 53
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
United Diagnostic, Inc.
We have audited the accompanying consolidated balance sheet of United
Diagnostic, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 consolidated financial position of United Diagnostic,
Inc. and Subsidiaries as of December 31, 1997 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that United Diagnostic, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has expended cash in excess of cash generated
from operations, has not achieved sufficient revenues to support future
operations, has a working capital deficiency and is in default of loan
covenants. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are discussed in Note 1. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Sacramento, California
August 31, 1998, except for Note 4 as to which the date is October 29, 1998,
except for Notes 1 and 9b as to which the date is December 23, 1998, and except
for Note 16 as to which the date is May 10, 1999.
F-3
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
United Diagnostic, Inc.
We have audited the accompanying consolidated balance sheet of United
Diagnostic, Inc. (formerly Nu-Tech Bio-Med, Inc.) as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows, for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Diagnostic, Inc. at December 31, 1996, and the consolidated results of their
operations, stockholders' equity and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that United Diagnostic, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has expended cash in excess of cash generated
from operations and has not achieved sufficient revenues to support future
operations and has a working capital deficiency. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to those matters are discussed in Note 1. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island
March 12, 1997
F-4
<PAGE> 55
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,524,942 $ 1,690,538
Accounts receivable (net of allowance for
doubtful accounts of $1,434,900 and $2,823,400
at December 31, 1997 and 1996, respectively) 11,000,608 1,751,230
Inventory 1,139,232 219,428
Prepaid expenses and other current assets 333,254 82,801
------------ ------------
Total current assets 13,998,036 3,743,997
Investment in senior debt of Physicians Clinical
Laboratory, Inc. -- 10,000,000
Less distribution received -- (575,561)
------------ ------------
Net investment in Physicians Clinical
Laboratory, Inc. -- 9,424,439
Note receivable 100,000 --
Equipment and leasehold improvements, net 2,758,476 1,766,842
Goodwill (net of accumulated amortization of
$90,255 and $833,200 at December 3l, 1997
and 1996, respectively) 664,336 6,352,860
Deferred acquisition costs -- 1,028,524
Deposits 436,287 89,104
Reorganization value in excess of other identifiable
net assets 24,401,605 --
------------ ------------
Total assets $ 42,358,740 $ 22,405,766
============ ============
</TABLE>
F-5
<PAGE> 56
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 48,251,081 $ 2,263,990
Current portion of capitalized lease obligations 520,055 214,270
Line of credit 4,835,959 --
Accounts payable 5,057,184 1,580,797
Accrued expenses 7,826,434 1,286,035
Contract payable 55,571 65,571
------------ ------------
Total current liabilities 66,546,284 5,410,663
Long-term debt 1,904,723 338,672
Capitalized lease obligations 575,974 471,984
Liabilities to be paid with common stock -- 3,422,500
Minority interest (12,654,000) --
------------ ------------
Total liabilities 56,372,981 9,643,819
Commitments and contingencies -- --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.0l par value;
2,000,000 and 1,000,000 shares authorized, 2,826 and
14,000 shares issued and outstanding at December 31,
1997 and 1996, respectively; (liquidation preference
of $2,826,000 at December 31, 1997) 28 140
Common stock, $.0l par value; 50,000,000 and 12,000,000
shares authorized, 682,622 and 29,852 shares
issued and outstanding at December 31, 1997 and 1996,
respectively 6,826 299
Capital in excess of par value 39,310,422 34,521,935
Deferred consulting expense (41,254) (96,250)
Accumulated deficit (53,290,263) (21,664,177)
------------ ------------
Total stockholders' equity (deficit) (14,014,241) 12,761,947
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 42,358,740 $ 22,405,766
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 57
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Assay sales, net $ 71,985 $ 115,397
Laboratory revenues, net 17,837,878 836,143
Medical billing services revenues 542,137 113,932
Other 5,540 --
------------ ------------
Total revenues, net 18,457,540 1,065,472
Operating costs:
Laboratory expenses 11,969,893 1,188,564
Medical billing services expenses 508,071 89,314
Selling, general and administrative expenses 6,786,675 3,334,152
Public relations expenses -- 1,882,000
Research and development expenses 62,462 90,903
Provision for bad debts 1,526,007 56,799
Depreciation and amortization 1,969,890 298,637
Write down of intangibles 47,806,000 372,864
------------ ------------
Total operating costs 70,628,998 7,313,233
------------ ------------
Operating loss (52,171,458) (6,247,761)
------------ ------------
Other income (expense):
Finance expense -- (1,422,500)
Deferred acquisition assets charged off -- (218,914)
Impairment and loss on equipment (251,676) --
Investment and interest income 27,340 161,871
Interest expense (2,691,805) (60,351)
------------ ------------
Total other expense (2,916,141) (1,539,894)
------------ ------------
Net loss before minority interest (55,087,599) (7,787,655)
Minority interest 23,461,513 --
------------ ------------
NET LOSS (31,626,086) (7,787,655)
Deemed preferred stock dividends (1,653,432) (3,319,045)
------------ ------------
Loss attributable to common stockholders $(33,279,518) $(11,106,700)
============ ============
Net loss per common share - basic and diluted $ (210.72) $ (396.46)
============ ============
Weighted average common shares outstanding 157,934 28,015
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 58
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Two years ended December 31, 1997
<TABLE>
<CAPTION>
Number of Series A
Shares of Convertible
Series A Preferred Number of
Convertible Stock at Shares of Common Capital in Unvested
Preferred $.01 Par Common Stock at $.01 Excess of Common
Stock Value Stock Par Value Par Value Stock Grant)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995
as previously reported -- $ -- 1,742,148 $ 17,422 $ 17,544,715 $ (946,107)
Seventy to one common stock
reverse split -- -- (1,717,260) (17,173) 17,173 --
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995,
as adjusted -- -- 24,888 249 17,561,888 (946,107)
Issuance of unregistered common
stock to investors at $805.00 per
share (net of cash issuance costs
of $278,834) -- -- 3,571 36 2,596,130 --
Grant of warrants to consultants -- -- -- -- 1,243,550 --
Amortization and adjustment to
unvested common stock grant -- -- -- -- (112,765) 876,849
Exchange of unvested common
stock grant for warrants -- -- -- -- 523,286 69,258
Amortization of deferred
consulting expense -- -- -- -- -- --
Issuance of unregistered Series A
convertible preferred stock to
investors at $1,000 per share
(net of cash issuance costs of
$1,865,000) 14,000 140 -- -- 12,134,860 --
Issuance of common stock to
placement agent -- -- 857 9 (9) --
Issuance of common stock for
purchase of Prompt Medical -- -- 536 5 574,995 --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 14,000 $ 140 29,852 $ 299 $ 34,521,935 $ --
<CAPTION>
Deferred Total
Consulting Accumulated Stockholders'
Expense Deficit Equity (Deficit)
------------ ------------ ------------
<S> <C> <C> <C>
Balances at December 31, 1995
as previously reported $ (151,250) $(13,876,522) $ 2,588,258
Seventy to one common stock
reverse split -- -- --
------------ ------------ ------------
Balances at December 31, 1995,
as adjusted (151,250) (13,876,522) 2,588,258
Issuance of unregistered common
stock to investors at $805.00 per
share (net of cash issuance costs
of $278,834) -- -- 2,596,166
Grant of warrants to consultants -- -- 1,243,550
Amortization and adjustment to
unvested common stock grant -- -- 764,084
Exchange of unvested common
stock grant for warrants -- -- 592,544
Amortization of deferred
consulting expense 55,000 -- 55,000
Issuance of unregistered Series A
convertible preferred stock to
investors at $1,000 per share
(net of cash issuance costs of
$1,865,000) -- -- 12,135,000
Issuance of common stock to
placement agent -- -- --
Issuance of common stock for
purchase of Prompt Medical -- -- 575,000
Net loss -- (7,787,655) (7,787,655)
------------ ------------ ------------
Balances at December 31, 1996 $ (96,250) $(21,664,177) $ 12,761,947
</TABLE>
F-8
<PAGE> 59
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - (Continued)
Two years ended December 31, 1997
<TABLE>
<CAPTION>
Number of Series A
Shares of Convertible
Series A Preferred Number of
Convertible Stock at Shares of Common Capital in Unvested
Preferred $.01 Par Common Stock at $.01 Excess of Common
Stock Value Stock Par Value Par Value Stock Grant)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
conversion of Series A Convertible
Preferred Stock (11,174) (112) 644,277 6,443 (6,331) -
Issuance of common stock upon
exercise of warrants at $123.20 - - 5,025 50 618,991 -
Issuance of common stock upon
exercise of warrants and options
at $305.90 - $490.00 - - 1,082 11 524,350 -
Amortization of deferred consulting
expense - - - - - -
Common stock warrants issued to
lender - - - - 504,000 -
Issuance of common stock for 1996
liabilities - - 3,703 37 3,147,463 -
Common stock shares returned - - (1,358) (14) 14 -
Issuance of common stock upon
exercise of option - - 41 - - -
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 2,826 $ 28 682,622 $ 6,826 $ 39,310,422 $ -
============ ============ ============ ============ ============ ============
<CAPTION>
Deferred Total
Consulting Accumulated Stockholders'
Expense Deficit Equity (Deficit)
------------ ------------ ------------
<S> <C> <C> <C>
Issuance of common stock upon
conversion of Series A Convertible
Preferred Stock - - -
Issuance of common stock upon
exercise of warrants at $123.20 - - 619,041
Issuance of common stock upon
exercise of warrants and options
at $305.90 - $490.00 - - 524,361
Amortization of deferred consulting
expense 54,996 - 54,996
Common stock warrants issued to
lender - - 504,000
Issuance of common stock for 1996
liabilities - - 3,147,500
Common stock shares returned - - -
Issuance of common stock upon
exercise of option - - -
Net loss - (31,626,086) (31,626,086)
------------ ------------ ------------
Balances at December 31, 1997 $ (41,254) $(53,290,263) $(14,014,241)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 60
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $(31,626,086) $ (7,787,655)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and write down of intangibles 49,775,890 776,063
Provision for bad debts 1,526,007 56,799
Finance expense relating to issuance of
common stock -- 1,422,500
Common stock and warrants charged to compensation -- 1,265,124
Warrants issued to consultants as
compensation, net 54,996 700,800
Interest expense from issuance of warrants 494,000 --
Amortization of debt discount 353,000 --
Impairment and loss on equipment 251,676 --
Deferred acquisition costs charged off -- 218,914
Minority interest (23,461,513) --
Changes in operating assets and liabilities:
Accounts receivable (3,678,561) 337,565
Prepaids and other current assets 262,796 141,861
Inventory 308,185 (56,292)
Accounts payable and accrued expenses 458,950 765,228
------------ ------------
Net cash used in operating activities (5,280,660) (2,159,093)
Investing activities:
Capital expenditures (71,890) (19,403)
Sale proceeds (acquisition) of Medical Sciences Institute 2,597,106 (4,951,948)
Acquisition of assets of Prompt Medical -- (179,891)
Investment in senior debt of Physicians Clinical
Laboratory, Inc. -- (10,000,000)
Cash distribution received on investment in senior
debt of Physicians Clinical Laboratory, Inc. -- 575,561
Deferred acquisition costs (36,350) (519,842)
Issuance of note receivable (100,000) --
Cash acquired on purchase of Physicians Clinical
Laboratory, Inc. 2,098,104 --
------------ ------------
Net cash provided by (used in) investing activities 4,486,970 (15,095,523)
</TABLE>
F-10
<PAGE> 61
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Financing activities:
Proceeds from issuance of debt 6,835,959 2,500,000
Repayment of notes payable (7,095,989) (755,239)
Repayment of contract payable (10,000) (40,000)
Repayment of capitalized lease obligations (255,278) (28,775)
Proceeds from sale of common stock 1,153,402 2,596,166
Proceeds from sale of Series A Convertible
preferred stock -- 12,135,000
------------ ------------
Net cash provided by financing activities 628,094 16,407,152
------------ ------------
Net decrease in cash and cash equivalents (165,596) (847,464)
Cash and cash equivalents at beginning of year 1,690,538 2,538,002
------------ ------------
Cash and cash equivalents at end of year $ 1,524,942 $ 1,690,538
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 181,244 $ 59,537
============ ============
</TABLE>
Noncash investing and financing activities:
1997
United received a note receivable of $5 million in the sale of MSI to PCL
(Note 3a). The MSI note receivable and PCL senior debt of $10 million held
by United was exchanged for stock in PCL (Note 4).
1996
United issued stock in the acquisition of assets for NTBM. (Note 3b).
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 62
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
1. - BASIS OF PRESENTATION
United Diagnostic, Inc. (United or the Company), was originally organized
under the laws of Delaware in September 1981 under the name of "Applied DNA
Systems, Inc." On November 16, 1994, the Company changed its name to Nu-Tech
Bio-Med, Inc. On December 23, 1998, the Company changed its name to United
Diagnostic, Inc.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Analytical Biosystems Corporation
("ABC"), NTBM Billing Services, Inc. ("NTBM") and Medical Science Institute,
Inc. ("MSI") through February 26, 1997 (see Note 3). The 1997 consolidated
financial statements also include the accounts of Physicians Clinical
Laboratory, Inc. ("PCL") of which the Company acquired 52.6% on October 3,
1997 (see Note 4). All material intercompany transactions and balances have
been eliminated. Where appropriate, prior year amounts have been
reclassified to permit comparison.
ABC is a clinical oncology laboratory service and research company located
in Rhode Island. As of November 3, 1997, ABC ceased processing specimens for
assay and has suspended its laboratory operations (see Note 3c). NTBM is a
medical billing service business located in Florida. MSI was a full service
medical laboratory facility which operated throughout the state of
California. (see note 16 for subsequent sale.) PCL is a full service medical
laboratory facility which operates throughout the state of California. 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.
The consolidated financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has expended cash
in excess of cash generated from operations, has not achieved sufficient
revenues to support future operations and has a working capital deficiency.
In addition, the Company's subsidiary is in default under a substantial
portion of its debt agreements, which allows its lenders the right to
accelerate the debt repayment. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities or any other adjustments that
might be necessary should the Company be unable to continue as a going
concern.
F-12
<PAGE> 63
UNITED DIAGNOSTIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
1. - BASIS OF PRESENTATION - CONTINUED
The Company obtained a new loan in March 1998 for $250,000, which matures in
1999, and management anticipates obtaining additional equity financing. In
addition, in connection with the sale of assets by PCL, the Company received
a payment of $3.25 million from certain holders of PCL's secured
indebtedness (Note 16). However, no assurances can be given that these
actions will result in achieving profitability or positive cash flows.
Due to the acquisition of MSI and NTBM and their resulting revenues, the
Company ceased reporting as a development stage enterprise in 1996.
On December 23, 1998, the Company effected a seventy to one common stock
reverse split. An amount equal to the par value of the common shares
relinquished was transferred from the common stock account to capital in
excess of par value. This transfer has been reflected in the Consolidated
Statement of Stockholders' Equity at December 31, 1995. All references to
number of common shares and to per share information in the consolidated
financial statements have been adjusted to reflect the stock reverse split
on a retroactive basis. The shares authorized and par value per share did
not change.
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
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.
b. Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
c. Accounts Receivable and 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.
F-13
<PAGE> 64
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Medicare 27.8% 22.7%
Medi-Cal 27.2% 15.5%
Other negotiated contracts 23.6% 20.9%
Self-pay and commercial 21.4% 40.9%
--------- ---------
100.0% 100.0%
========= =========
</TABLE>
d. Inventory
Inventory, primarily laboratory supplies, is stated at cost, which
approximates market value, on a first-in, first-out (FIFO) basis.
e. Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation has
been provided using the straight-line method over the estimated useful lives
of the assets ranging from 3-20 years for financial reporting purposes,
except for leasehold improvements which are being amortized over the life of
the lease.
f. Investment in Physicians Clinical Laboratory, Inc. Debt
In 1996, the Company recorded its investment in senior debt of Physicians
Clinical Laboratory, Inc. at cost reduced by distributions received. In
anticipation of the exchange of senior debt in 1997 (see Note 4), interest
accrued on the debt was not recorded in 1996.
F-14
<PAGE> 65
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
g. Fair Values of Financial Instruments
For cash, accounts receivable and accounts payable the carrying amounts
approximate fair value. It was not practicable to estimate the fair value of
the Company's investment in senior debt in Physicians Clinical Laboratory,
Inc. (Note 4). The carrying amount of the Company's debt approximates fair
value based on similar debt instruments available.
h. Other Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement 121 in the first quarter of 1996. The adoption of this statement
had no impact on the financial position or results of operations of the
Company.
The Company accounts for goodwill at the lower of amortized cost or fair
value. On an ongoing basis, management reviews to determine if "impairment
indicators" are present. If impairment indicators are present, the Company
performs a periodic assessment of assets for impairment. This review
consists of the Company reevaluating significant assumptions used in
determining the original cost of the acquired business and related goodwill.
These assumptions include operating results, cash flows and other indicators
of value. Based upon this periodic assessment, management determines whether
there has been a permanent impairment of the value of goodwill and adjusts
the carrying value accordingly. The Company determines fair value based upon
independent appraisals or cash flows discounted at a risk adjusted rate, as
appropriate in the circumstances. As a result of this process, during the
fourth quarter of 1996, the Company charged off the balance of the remaining
goodwill and capitalized patents relating to ABC totaling $372,900.
Amortization of goodwill is provided using the straight-line method over the
estimated useful lives of the assets (10 years).
i. Excess Reorganization Value
Excess reorganization value of a subsidiary (Note 4) is being amortized on a
straight line basis over 15 years. Amortization expense for the three months
ended December 31, 1997 was $1,182,000.
F-15
<PAGE> 66
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
j. Stock Based Compensation
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for
qualified stock option grants.
For certain non-qualified stock options, restricted stock and warrants
granted to employees, the Company recognizes as compensation expense the
excess of the market value of the common stock issuable upon exercise of
such options over the aggregate exercise price of such options. For warrants
granted to non-employees, the Company recognizes as a charge the deemed fair
value of the warrants or the value of the services provided, whichever is
more reliably measurable. Such charges are amortized over the vesting period
of each option or warrant or the recipient's service period, if shorter.
k. Income Taxes
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates
and laws that will be in effect when the differences reverse. Deferred tax
assets are reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
l. Net Loss Per Common Share
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Statement No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires companies to change the method previously used to compute earnings
per share and to restate all prior periods for comparability. Basic loss per
common share is computed using the weighted average number of common shares
outstanding during the year. Preferred stock dividend is the amount
attributed to the beneficial conversion feature. Diluted loss per share
excludes potential common stock since the effect would be antidilutive. The
potential common stock excluded from the diluted loss per share consists of:
outstanding warrants (Notes 7 and 9f), outstanding options (Note 9f) and
convertible preferred stock (Note 9h).
F-16
<PAGE> 67
2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
<TABLE>
<CAPTION>
Loss Shares
(Numerator) (Denominator) Per Share
------------ ------------ ----------
<S> <C> <C> <C>
Year ending December 31, 1997:
Consolidated net loss$ (31,626,086)
Less preferred stock dividends (1,653,432)
LOSS PER SHARE-BASIC AND DILUTED
Loss attributable to common stockholders $(33,279,518) 157,934 $ (210.72)
============ ============ ==========
Year ending December 31, 1996:
Consolidated net loss$ (7,787,655)
Less preferred stock dividends (3,319,045)
LOSS PER SHARE-BASIC AND DILUTED
Loss attributable to common stockholders $(11,106,700) 28,015 $ (396.46)
============ ============ ==========
</TABLE>
m. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This statement, effective for fiscal years beginning after December
15, 1997, would require the Company to report components of comprehensive
income in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income is defined by Concepts
Statement No. 5, Elements of Financial Statements, as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The Company has determined this pronouncement will
have no effect.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information. This statement, effective for financial statements for periods
beginning after December 15, 1997, requires that a public business
enterprise reports financial and descriptive information about its
reportable operating segments. Generally, financial information is required
to be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
has determined it operates substantially in one segment.
F-17
<PAGE> 68
3. - ACQUISITIONS AND DISPOSITION
a. Acquisition and Sale of Medical Science Institute
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California approved the First Amended Plan of Reorganization
(the "MSI Plan") of Medical Science Institute ("MSI") pursuant to which the
Company acquired all of the capital stock of MSI for a total purchase price
of approximately $6,952,000. The acquisition was in the form of a purchase.
MSI was engaged in the medical laboratory business primarily in the State of
California and had been operating under Chapter 11 of the U.S. Bankruptcy
Code since October 26, 1995. MSI was a California corporation with its
principal executive offices located in Burbank, California.
Pursuant to the MSI Plan, the holders of all of the MSI capital stock
(including any and all options, warrants, and other convertible securities)
were to receive 1,917 shares of common stock of United with an aggregate
value of $2 million. At December 31, 1996, the stock had not been
distributed and was recorded as a liability in the accompanying consolidated
financial statements. The number of shares of common stock issued under the
MSI Plan was based on the average closing price of a share of common stock
on the NASDAQ SmallCap Market for the 15 day period preceding November 18,
1996. The recipients of United common stock are entitled to "piggyback"
registration rights with respect to such shares. Pursuant to the plan, in
1997, the sole holder of all capital stock of MSI elected to receive
$275,000 in cash from United with a concurrent reduction in the number of
shares of United's common stock. In addition, $225,000 value of United's
common shares was permitted to be transferred by the former shareholder in
consideration of a settlement agreement entered into with such creditor and
a general release in favor of MSI.
In addition, United agreed to make certain other payments to creditors and
assume certain liabilities under the MSI Plan. These payments include: (a)
approximately $750,000 to pay administrative claims of professionals, (b) an
additional $425,000 for professional administrative claims payable over 12
months, (c) approximately $572,000 payable for federal and state payroll
taxes, (d) approximately $2,500,000 to Austin Financial Services, Inc.
("Austin Financial"), a secured creditor of MSI, (e) trade payables in the
amount of approximately $738,000, (f) $75,000 payable to the federal
government in satisfaction of certain claims and (g) $750,000 payable to
general unsecured creditors. At the hearing confirming the MSI Plan held on
November 18, 1996, the Company tendered $2,250,000 to the Court with respect
to such payments.
F-18
<PAGE> 69
3. - ACQUISITIONS AND DISPOSITION - CONTINUED
With respect to sums payable under the MSI Plan to Austin Financial, United
obtained a loan in the principal amount of $2,500,000 from a third-party
lender on December 2, 1996, and utilized the loan proceeds to pay off Austin
Financial (see Note 7).
In connection with this acquisition, the Company recorded $5,681,437 of
excess cost over the fair market value of net assets acquired ("goodwill")
related to this transaction and the remainder was allocated to the net
assets of MSI acquired based on their estimated fair value. The 1996
statement of operations includes the operations of MSI for the period from
November 18, 1996 (the date of acquisition) through December 31, 1996.
The former sole stockholder and president of MSI has entered into an
employment agreement with MSI. As part of the employment agreement, the
employee borrowed $100,000 from the Company, secured by the shares of common
stock issued to him under the MSI Plan. He also received options to purchase
142 shares of United common stock for every $1,000,000 of annual collectible
revenues obtained by MSI through the acquisition of other businesses by MSI
in which he acted as the procuring cause. The options to be granted, if any,
will bear an exercise price equal to the fair market value of United's
common stock at the time of the grant. At December 31, 1997, no options have
been granted.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (see Note
4). The Company sold its interests in MSI to PCL for its original costs
aggregating approximately $7.6 million. The Company received approximately
$2.6 million in cash and a secured promissory note of PCL in the principal
amount of $5,000,000. The note was secured by all the assets of PCL but
subordinate to certain other claims and administrative expenses. The Company
used approximately $2 million of the sale proceeds to repay in full an
outstanding secured loan which the Company had incurred to acquire MSI (see
Note 7).
The Company realized a gain on the sale of MSI to PCL of approximately $1.1
million. The gain recognition was deferred and recorded as a reduction in
the Company's stock investment in PCL. The 1997 statement of operations
includes the operations of MSI for the period from January 1, 1997 through
February 26, 1997, the date of the sale. Pursuant to the PCL Plan (see Note
4), in 1997, the note was exchanged for 17% of the common stock of PCL.
PCL assumed all other obligations incurred by United in connection with the
MSI acquisition, including United's guarantee of certain remaining
obligations under the MSI Plan.
F-19
<PAGE> 70
3. - ACQUISITIONS AND DISPOSITION - CONTINUED
b. Acquisition of Business Assets of Prompt Medical Billing Company, Inc.
On October 21, 1996, the Company, through a newly formed wholly-owned
subsidiary, NTBM Billing Services, Inc. ("NTBM"), acquired all of the
medical billing service assets of Prompt Medical Billing Services, Inc., a
privately owned Florida corporation engaged in the medical billing service
business. The acquisition was in the form of a purchase. The Company
acquired the assets for a total consideration of $675,000 consisting of
$100,000 in cash and 535 shares of restricted common stock of the Company.
The number of shares may be subject to increase in the event the fair market
value of the shares at the termination of the two year period is less than
$500,000 or in the event the holders are unable to sell the shares. All
consideration paid by the Company has been placed into escrow for a period
of up to two years, to be released upon the attainment of certain
performance levels. In 1998, the cash consideration was released from
escrow.
In connection with this acquisition, the Company recorded $754,591 of excess
cost over the fair market value of net assets acquired ("goodwill") related
to this transaction. The 1996 statement of operations includes the
operations of NTBM for the period from October 21, 1996 (the date of
acquisition) through December 31, 1996.
In connection with this acquisition, the Company entered into employment and
consulting agreements with the former owners of Prompt Medical Billing. In
March 1998, the former owners ceased performing their duties. NTBM
subsequently lost its principal customer and ceased operations. With the
loss of the principal customer, the Company believes that it has claims
against the former owner sounding in fraud and breach of representations and
warranties. The Company has ceased paying the former owners under the
employment and consulting agreements. The former owners have recently
commenced an arbitration against the Company in the state of Florida for
breach of these agreements. The Company has commenced an arbitration
proceeding against the former owners in the City of New York under the asset
purchase agreement for damages which the Company alleges to have sustained
by reason of the breach of the representations and warranties and covenants
of the former owners. These arbitrations are in the formative stages of
their respective proceedings.
F-20
<PAGE> 71
3. - ACQUISITIONS AND DISPOSITION - CONTINUED
c. Suspension of Analytical Biosystems Corporation's Laboratory
Operations
ABC has temporarily suspended the marketing of its Fluorescent Cytoprint
Assay ("FCA"), which is a specialized clinical laboratory assay used in
assisting in the selection of chemotherapeutic drugs most likely to be
effective in treating a cancer patient's solid mass tumor. With the
suspension of current direct marketing efforts of the FCA, the Company and
ABC intend to investigate the feasibility of resuming such marketing efforts
through an alliance or joint venture or licensing the technology to others.
At the present time, the Company has not entered into any discussions with
any entity relating to the marketing and sale of the FCA or the licensing of
ABC's FCA technology, and no assurance may be given that the Company will be
able to market and sell its FCA through alternate means. ABC has ceased
processing specimens for the assay and has suspended its laboratory
operations in Rhode Island in November, 1997.
d. Pro Forma Disclosures - Unaudited
Pro forma selected financial data, assuming the assets of Prompt Medical and
the stock of Medical Science Institute and Physicians Clinical Laboratory,
Inc. had been acquired at the beginning of 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 67,115,910 $ 76,031,204
============ ============
Net loss $(33,654,830) $(24,540,605)
============ ============
Net loss per common share $ (223.56) $ (176.40)
============ ============
</TABLE>
The above pro forma information does not purport to represent what the
Company's results of operations would actually have been had the acquisition
of the assets of Prompt and the stock of MSI and PCL in fact occurred at the
beginning of the periods indicated or to project the Company's results for
any future periods.
F-21
<PAGE> 72
4. - INVESTMENT IN PHYSICIANS CLINICAL LABORATORY, INC.
a. Acquisition of Physicians Clinical Laboratory, Inc.
In 1996, the Company acquired certain debt securities of Physicians Clinical
Laboratory, Inc., a Delaware corporation ("PCL"). United reached an
agreement (the "PCL Plan") with the holders of the Senior Debt, Subordinated
Debt and the management of PCL whereby United would acquire a 52.6% interest
in PCL. The terms of the agreement provided that PCL file a plan to
effectuate the agreement. As required by the aforementioned agreement, the
Company purchased approximately $13,300,000 of Senior Debt for $10,000,000
on November 7, 1996. On November 8, 1996, PCL and its then subsidiaries
filed a petition for relief under Chapter 11 of the Federal Bankruptcy Laws
in the United States Bankruptcy Court. In December 1996, the Company
received a distribution totaling $575,561 which was applied against the
Company's investment in the senior debt of PCL.
During the period from November 8, 1996 through October 3, 1997, PCL
operated as debtor-in-possession. In accordance with the PCL Plan, certain
holders of Senior Debt contributed $10,000,000 in debtor-in-possession
financing to PCL, which was forgiven under the terms of the reorganization.
The Bankruptcy court confirmed PCL's Second Amended Plan of Reorganization
on April 18, 1997 and PCL emerged from bankruptcy on October 3, 1997, the
effective date of the plan. Pursuant to the reorganization plan, all
subsidiaries of PCL, including MSI, were merged with and into PCL.
On the effective date, as required under the PCL Plan, the debt purchased by
United was converted into 35.6% of the common stock of PCL. United acquired
an additional 17% of the common stock in exchange for the $5,000,000 MSI
note (Note 3a), resulting in United owning 52.6% of the outstanding common
stock of PCL. United accounted for the acquisition under the purchase
method. The Company's acquisition cost consisted of the $15 million
investment above, plus deferred acquisition costs (Note 12), less the
deferred gain on the sale of MSI (Note 3a). The Company recorded
approximately $2 million in excess cost over the fair market value of net
assets acquired ("goodwill"). The 1997 statement of operations includes the
operations of PCL for the period from October 3, 1997 (the date of
acquisition) through December 31, 1997.
Minority interest in losses of PCL has been recognized in excess of the
minority interest in the equity capital of PCL since the minority
shareholders have advances to PCL in the form of senior secured notes.
Accordingly, the minority interest excess has been recorded as a reduction
of liabilities in the accompanying balance sheet.
F-22
<PAGE> 73
4. - INVESTMENT IN PHYSICIANS CLINICAL LABORATORY, INC. - CONTINUED
PCL accounted for the reorganization using the principles of fresh start
accounting, as required by Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", issued by the American Institute of Certified Public Accountants.
Under the principles of fresh start accounting, as of September 30, 1997,
PCL's total assets were recorded at their assumed reorganization value, with
the reorganization value allocated to identifiable assets on the basis of
their estimated fair value and PCL's prior accumulated deficit was
eliminated. The excess of the reorganization value over the value of
identifiable assets is reported as "reorganization value in excess of
amounts allocable to identifiable assets".
The total reorganization value was determined in consideration of several
factors. The methodology employed involved estimation of PCL's enterprise
value (the market value of its stockholders' equity and its debt), taking
into account the new investment by United and market rates for similar debt
instruments. This resulted in an estimated reorganization value of
approximately $87 million, of which the reorganization value in excess of
amounts allocable to identifiable assets was approximately $71 million. The
excess reorganization value is being amortized over 15 years.
After the reorganization, PCL continued to experience customer losses and
reduction in third party reimbursements, and has been unable to completely
achieve the operating performance anticipated in the reorganization plan.
These factors resulted in cash flow deficits and continued operating losses.
As a result, management has reevaluated the recoverability of the excess
reorganization value using a valuation methodology based on revised
discounted cash flow projections and PCL recorded a write-down of excess
reorganization value of approximately $34.7 million. In addition, as a
result of this process, the Company charged off the balance of the remaining
goodwill relating to PCL of approximately $2 million. See Note 16.
Effective with PCL's Plan of Reorganization, United entered into a
Stockholders Agreement with certain of the other PCL stockholders who
received Senior Secured Notes issued by PCL. The agreement provides for
restrictions on transfers of PCL stock and rights to acquire additional
shares pro rata to their holdings if additional shares are issued or
transferred by PCL. The agreement also provides rights to United to
designate 3 members of PCL's 5 member board of directors and the other
stockholders to designate 2 members, as long as certain ownership percentage
is maintained. The agreement includes corporate governance provisions
relating to PCL, including limitations on certain issuance of securities,
merger or sale, capital expenditures, issuance of debt, or modifications to
the certificate of incorporation, bylaws or the president's employment
agreement without at least one vote of a director designated by the other
stockholder group.
F-23
<PAGE> 74
4. - INVESTMENT IN PHYSICIANS CLINICAL LABORATORY, INC. - CONTINUED
PCL's Certificate of Incorporation provides the same purchase rights as
under the Stockholders Agreement to all stockholders who received Senior
Secured Notes (Note 7). PCL shall reserve shares of its common stock for
issuance under the rights. The purchase rights terminate upon an initial
public offering by PCL.
In connection with the acquisition of PCL, United entered into a
Noncompetition Agreement with PCL, under which United will not directly or
indirectly engage in any business involved in the provision of clinical
laboratory services in the United States as long as United or affiliates own
at least 25% of the common stock of PCL, subject to defined exceptions.
Pursuant to its Plan of Reorganization and a Warrant Agreement, PCL issued
warrants for the purchase of an aggregate of 131,579 shares of its common
stock. The exercise price under the warrants is $13.30 per share and the
warrants expire October 3, 2002. The agreement includes anti-dilution
provisions for the adjustment of number of shares and exercise price upon
the occurrence of certain events.
In June, 1998, the Company sold 67,500 shares of PCL common stock to a
senior lender and significant stockholder of PCL for $750,000, in
conjunction with a loan by that stockholder of $4 million to PCL (Note 7).
After the sale, United owns 49.9% of the issued and outstanding shares of
PCL. The transaction also resulted in amendment of the Stockholder
Agreement. The agreement as amended provides the lender stockholder with the
right to elect the majority of the board and provides United the rights
under the corporate governance provisions above. In addition, United has
granted to the lender stockholder an exclusive option to purchase United's
shares of the Company for a price of $10 million. The option is exercisable
upon certain actions of the PCL board, subject to United stockholder
approval. The amended agreement also has a buy-sell provision at defined
prices.
On October 29, 1998, the same stockholder loaned PCL an additional $2
million for working capital. This loan has the same terms and provisions as
the $4 million loan discussed above. In connection with the loan, the
Stockholder's Agreement was amended to modify certain corporate governance
rights previously granted to the Company.
See Note 16 for the subsequent sale of PCL's business.
F-24
<PAGE> 75
5. - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Laboratory equipment $ 1,005,641 $ 953,830
Computer equipment 855,173 397,551
Office equipment 309,463 271,459
Leasehold improvements 954,437 499,414
----------- -----------
3,124,714 2,122,254
Less accumulated depreciation 366,238 355,412
----------- -----------
$ 2,758,476 $ 1,766,842
=========== ===========
</TABLE>
Depreciation expense was approximately $398,517 and $140,500 for the years
ended December 31, 1997 and 1996, respectively.
6. - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accrued acquisition fees $ 183,450 $ 117,000
Employee compensation 1,358,367 246,134
Accrued paid time off 979,446 172,058
Accrued interest 1,663,562 -
Consulting and professional fees 1,274,812 275,000
Other 2,366,797 475,843
----------- -----------
$ 7,826,434 $ 1,286,035
=========== ===========
</TABLE>
F-25
<PAGE> 76
7. - DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Notes payable due to a third party, interest at
15%, all principal and interest due on January
31, 1997; collateralized by the Company's
investment in Senior Debt of PCL. The loan was
further collateralized by a personal guaranty of
United's president (see below) $ - $1,953,605
Notes payable to State of Rhode Island's Small
Business Loan Fund Corporation (SBLFC), currently
in default; modified in March 1998 to 9.5%
interest, principal due on demand; collateralized
by virtually all of the assets of United and ABC 146,831 319,519
Other long-term liabilities related to MSI
acquisition (see Note 3) - 329,538
Note payable to the Internal Revenue Service,
bearing interest at 9%, principal due in monthly
installments of $5,301 through May 2002 237,915 -
Note payable bearing interest at 10%, principal due
in monthly installments of $11,886 through May
1997 37,386 -
Note payable to the Internal Revenue Service,
bearing interest at 8%, principal due in
quarterly installments of $18,418 through
December 2003 255,672 -
Senior secured notes due 2004, face amount
$55,000,000, net of unamortized discount of
$7,647,000, currently in default 47,353,000 -
</TABLE>
F-26
<PAGE> 77
7. - DEBT - CONTINUED
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Note payable to the United States government,
bearing interest monthly at the 30 day Treasury
Bill rate (5.6% at 1997), principal due in
monthly installments of $25,000 through July 2003
(Note 13) 1,725,000 -
Note payable to unsecured creditors under the PCL
Plan, non-interest bearing, due October 1998 400,000 -
50,155,804 2,602,662
Current maturities of long-term debt 48,251,081 2,263,990
----------- ---------
Long-term debt, less current maturities $ 1,904,723 $ 338,672
=========== =========
</TABLE>
On January 23, 1997, the Company obtained a new loan from a private lender
in the principal amount of $2,000,000, which funds were used to repay the
outstanding balance of the notes payable due to a third party (see above).
The new loan was paid in full in February 1997 in connection with the sale
of MSI to PCL (Note 3). In conjunction with the issuance of this note
payable, the lenders were issued warrants to purchase 1,428 shares of common
stock at an exercise price of $805.00 per share. The new third party lender
is a significant stockholder of the Company. The Company recognized $494,000
in interest expense attributable to the value of these warrants.
In March 1998, the Company obtained a new loan from this same
lender/stockholder in the principal amount of $250,000. Principal and
interest at 10% are due on the earlier of April 1999 or consummation of a
private placement with defined proceeds. The new loan is secured by a pledge
of 125,000 shares of PCL stock. As a condition to making the loan, the
lender required, and the board approved, issuing the lender warrants to
purchase 44,000 shares of common stock stated on a presumed post-reverse
split basis. The exercise price will be equal to the closing bid of the
common stock on the first business day following the effective date of the
reverse split, subject to reduction if a private placement is made following
the reverse split at a lower price. The warrants are exercisable until the
fifth anniversary of the reverse split. As further consideration for the
loan, the Company agreed to adjust the exercise price of the warrants to
purchase 1,428 shares above, to the same price as the new warrants.
F-27
<PAGE> 78
7. - DEBT - CONTINUED
In September, 1997, as provided by its Plan of Reorganization, PCL issued
$55,000,000 principal amount Senior Secured Notes, due in September 2004, to
a group of senior lenders who are also significant stockholders in PCL. The
Notes have been recorded at their present value of $47,000,000 based upon an
estimated discount rate of 15%. The difference between the present value and
the aggregate principal amount will be amortized into interest expense over
the term of the debt. For the first two years after issuance, the Notes bear
interest at the rate of either 10% in cash or 12% in kind (increase to
principal), at the option of the PCL. PCL may not elect interest payments in
kind once a cash interest payment has been made. After two years, the Notes
will bear interest at the rate of 11% in cash, which rate will be increased
by 1% per annum through maturity. Interest is payable semi-annually.
Interest on overdue payments will be at 1% over the then applicable interest
rate.
The Notes may be redeemed at PCL's option upon certain notice. PCL is
obligated to offer to repurchase the Notes upon the occurrence of a change
of control, upon certain defined asset sales or upon consummation of an
underwritten public offering of its capital stock. All redemptions are at
100% of principal plus accrued interest, except upon a change of control at
101% of principal plus accrued interest. Under a registration rights
agreement, at any time after December 31, 1998, the holders of a majority of
then outstanding Notes have one right to request the Company to effect the
registration of these Notes under the Securities Act, subject to certain
exceptions.
The Notes are collateralized by a first priority security interest in all
assets of PCL including capital stock of its subsidiary, under a Security
Agreement and Pledge Agreement Under an intercreditor and subordination
agreement, the security interests in PCL's receivables are subordinated to
Daiwa Healthco-3 LLC under the line of credit discussed below.
Each of the agreements contains certain financial covenants and
restrictions. PCL was in violation of certain covenants in 1997 and does not
expect to be compliance in 1998, which constitutes an event of default. The
lender has the right to accelerate payment of the debt and, accordingly, the
debt has been classified as current portion of long-term debt.
In June, 1998, a significant stockholder of PCL, which is also a significant
holder of Senior Secured Notes, loaned PCL $4 million for working capital.
The loan bears interest at 15% per annum, payable semi-annually, and matures
in June, 2001. PCL has the option to pay interest in cash or by addition to
principal. The loan is senior to the $55 million Senior Secured Notes and is
subordinated to the Daiwa credit facility. In connection with, and as
additional consideration for, the loan, United sold a portion of its shares
to the lender and amended the Stockholders' Agreement (Note 4).
F-28
<PAGE> 79
7. - DEBT - CONTINUED
Future principal payments on long-term debt due in each of the next five
years are as follows:
<TABLE>
<S> <C>
1998 $ 48,251,081
1999 409,820
2000 418,867
2001 428,719
2002 389,094
Thereafter 258,223
------------
$ 50,155,804
============
</TABLE>
LINE OF CREDIT
On September 30, 1997, PCL and its wholly owned subsidiary, the Bio-Cypher
Funding Corp. (the "Funding Corp."), entered into a credit facility with
Daiwa Healthco-3 LLC. Under the credit facility, PCL 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 PCL. The credit facility expires September
30, 1999. The debt is classified as a current liability under accounting
literature for revolving credit agreements that contain both a subjective
acceleration clause and a lockbox arrangement.
Under the Healthcare Receivables Purchase and Transfer Agreement, PCL 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. PCL acts as the servicer of such accounts receivable. The
agreement requires the use of lockboxes which are restricted to withdrawal
by Daiwa. The Funding Corp. may replace PCL with a third-party servicer upon
the occurrence of certain termination events.
Under the Loan and Security Agreement with Daiwa, the maximum available to
the Funding Corp. is $10 million, subject to a borrowing base equal to 85%
of the value of eligible accounts receivable, and subject to certain
adjustments. At December 31, 1997, there was $0 available to be drawn.
Interest is payable monthly at LIBOR Rate plus 3%, which interest rate will
increase by 2% after an event of default. The effective interest rate was
9.5625% on December 31, 1997. The Agreement also provides for a monthly
non-utilization fee equal to 1/2 % on the unused maximum available and upon
early termination, a fee of $200,000. The loan is collateralized by a first
priority lien on all healthcare receivables and certain bank accounts.
F-29
<PAGE> 80
7. - DEBT - CONTINUED
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.
PCL and the Funding Corp. are not in compliance with certain covenants,
which constitutes an event of default. The lender has the right to
accelerate payment of the debt.
8. - LEASE COMMITMENTS
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 $482,073 and $396,700, and related
accumulated amortization was $77,167 and $26,700 as of December 31, 1997 and
1996, respectively.
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.
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 6 years. Many of the draw station leases have renewal options
and monthly lease payment subject to annual increases.
F-30
<PAGE> 81
8. - LEASE COMMITMENTS - CONTINUED
The Company's future minimum lease payments under capital and operating
leases are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- ----------
<S> <C> <C>
1998 $ 551,606 $2,835,750
1999 432,879 1,794,068
2000 50,312 1,073,070
2001 50,000 740,771
2002 50,000 311,003
Thereafter -- 31,075
---------- ----------
Total minimum lease payments 1,134,797 $6,785,737
==========
Less amounts representing interest 38,768
----------
Present value of net minimum lease payments 1,096,029
Less capital lease obligations due within one year 520,055
----------
Capital lease obligations - long-term portion $ 575,974
==========
</TABLE>
Rental expense was $1,142,930 and $168,500 for the years ended December 31,
1997 and 1996, respectively.
9. - STOCKHOLDERS' EQUITY
a. Series A Convertible Preferred Stock
On December 2, 1996, the Company completed a private placement offering for
a total of 14,000 shares of Series A Convertible Preferred Stock for a total
aggregate purchase price of $14,000,000. The Company realized net proceeds
of approximately $12,135,000 after deducting expenses totaling $1,865,000.
In connection with this offering, the Company issued 857 shares of common
stock and warrants to purchase 1,224 shares of common stock exercisable at
$1,050.00 per share.
F-31
<PAGE> 82
9. - STOCKHOLDERS' EQUITY - CONTINUED
The Series A Convertible Preferred Stock is convertible, by its terms, into
shares of common stock at the option of the holder commencing on the 45th
day after the issue date. Up to one third of the shares of the Series A
Convertible Preferred Stock may be converted into common stock on each of
the 45th day, 75th day and 105th day after the issue date. Commencing upon
the 270th day following completion of the private placement, the Company has
the right, upon 30 days' prior notice, to cause the Series A Convertible
Preferred Stock to be converted into common stock at the then applicable
conversion price. The shares will be convertible into such number of shares
of common stock as shall equal $1,000 divided by a conversion rate equal to
the lesser of (i) 75% of the average closing price of the common stock for
the 5 days immediately preceding the date of the holder's notice of
conversion or (ii) $1,225.00, subject to certain adjustments.
The holders of a majority of the Series A Convertible Preferred Stock were
granted one "demand" registration right with respect to the common stock
underlying the Series A Convertible Preferred Stock. In the event that the
Company does not file with, and have declared effective by, the Commission,
a registration statement under the Act within 120 days of receipt of the
demand notice of the investors holding the shares of the Series A
Convertible Preferred Stock, the then applicable conversion price of the
Series A Convertible Preferred Stock will be reduced by 10%. Further, for
each 30 day period after the 120 day period that the registration statement
has not been declared effective, the conversion price will be reduced by an
additional 2%, up to an aggregate of 12%.
The Company had heretofore filed, and withdrew, a registration statement
relating to the shares of its Common Stock issuable upon conversion of the
Preferred Stock. At the time of such filing, the Company believed that it
had not received valid written demand by a majority of the holders of the
Preferred Stock to require it to proceed with such registration statement.
The Company further believes that, at the time such registration statement
was withdrawn, and through and as of the date hereof, it likewise did not
receive a written demand by the holders of a majority of Preferred Stock to
file a registration statement. Subsequently, the Company did file a
Registration Statement relating to the shares of its Common Stock to be
issued upon conversion of the Company's 14,000 shares of Preferred Stock
with the Securities and Exchange Commission on July 21, 1997.
F-32
<PAGE> 83
9. - STOCKHOLDERS' EQUITY - CONTINUED
Several Preferred Shareholders have indicated that they intend to commence
an action against the Company arising out of the failure of the Company to
cause the conversion shares to be registered prior to July 21, 1997, seeking
unspecified damages and/or seeking to rescind their purchase of the
Preferred Stock. The Company believes that, if any such action is commenced
against it, it has good and meritorious defenses. In the event any such
action is brought against the Company, and the Company does not prevail
thereon, and is found to be responsible for the damages or losses, such
circumstances would have a material adverse effect upon the Company's
consolidated results of operations and financial position. The Company filed
a Registration Statement relating to the shares of its Common Stock to be
issued upon conversion the Company's 14,000 shares of Preferred Stock with
the Securities and Exchange Commission on July 21, 1997, which was declared
effective on July 23, 1997. Subsequent to July 23, 1997, the Company
suspended further conversions of the preferred stock due to the fact that it
no longer had sufficient available authorized but unissued common stock, and
the Company additionally suspended further sales under the registration
statement until such time as its registration statement could be amended to
include the financial statements of Physicians Clinical Laboratory, Inc. The
filing of such registration statement may not, however, resolve the dispute
to the satisfaction of the Preferred Shareholders, and no assurance may be
given that the Preferred Shareholders may not thereafter commence an action
against the Company.
On May 23, 1997, a complaint was filed against United and others in an
action in the United States District Court. The complaint alleges that the
Company and the other defendants violated Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Section 349 of the General
Business Law of the State of New York (the "GBL"). The claims against the
Company under the Exchange Act and the GBL are purportedly based on
allegations that the Company knew of and failed to disclose, among other
things, unlawful trading activity in the Company's securities by the other
defendants named in the action. The complaint seeks compensatory damages in
an unstated amount, seeks to enjoin the Company from registering certain
Series A Convertible Preferred Stock until the determination of the action,
and seeks reasonable attorneys' and expert fees as well as treble and
punitive damages. On February 9, 1998, the complaint was dismissed. The
dismissal of the complaint is under appeal before the United States Court of
Appeals for the Second Circuit. The Company believes that the claims are
without merit, and that it has good defenses.
F-33
<PAGE> 84
9. - STOCKHOLDERS' EQUITY - CONTINUED
On February 4, 1998, a complaint was filed against United and others in an
action in the United States District Court. The complaint alleges that the
Company and the other defendants (directors of the Company) violated Section
10(b) and Section 20 of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The complaint also alleges common law fraud,
conversion and breach of contract. These claims against the Company are
purportedly based on allegations that the Company participated in a scheme
to deprive its Series A Convertible Preferred Shareholders of their
conversion and registration rights. The complaint seeks compensatory damages
of at least $1.25 million and punitive damages of at least $3 million or, in
the alternative, an order for the Company to allow the plaintiffs to
exercise certain conversion and registration rights. The complaint also
seeks reasonable costs and attorneys' fees. The Company believes that the
claims are without merit, and that it has good defenses which it will assert
at the appropriate time. The Company and the other defendants have moved to
dismiss the complaint, and that motion is under consideration.
Holders of shares of the Series A Convertible Preferred Stock are not
entitled to receive dividends in cash or otherwise. The holders of shares of
the Series A Convertible Preferred Stock are not entitled to voting rights.
In addition, effective June 1, 1998 the Company's common stock was delisted
from the Nasdaq SmallCap Market. Since the conversion price of the preferred
stock is related to the Nasdaq bid price for the common stock, it would
appear that the preferred stock cannot be converted until the Company is
relisted on Nasdaq.
The Company has not timely filed its annual report on form 10-KSB for the
year ended December 31, 1997. Such failure was due to the inability of the
Company to obtain audited financial statements for both itself and
Physicians Clinical Laboratory, Inc. Subsequent filings are also delinquent.
The Company is unable to determine what remedial action, if any, may be
sought by the Securities and Exchange Commission.
b. Common Stock
In April 1996, the Company completed a private offering of 3,571 shares of
its common stock for an aggregate of $2,875,000. The Company realized net
proceeds of approximately $2,596,000 from the private placement. In
connection with this offering, the Company incurred expenses totaling
$278,800 and issued warrants to purchase 1,071 shares of common stock
exercisable at $1,015.00 per share.
F-34
<PAGE> 85
9. - STOCKHOLDERS' EQUITY - CONTINUED
Investors in the April offering were granted certain "demand and piggyback"
registration rights for the shares sold in the April offering. In settlement
of certain alleged claims by the investors in the April offering that the
Company had failed to timely register the shares owned by such investors,
the Company agreed to issue one-half share (on a pre-reverse split basis) to
the investors for each share purchased in the April offering. In 1996, the
Company expensed the fair value of the shares of common stock issued in
February 1997 to settle the matter resulting in a non-cash charge of
$1,422,500 in 1996 and recognized a liability in the accompanying
consolidated financial statements at December 31, 1996.
Effective June 1, 1998, the Company's common stock was delisted from the
Nasdaq SmallCap Market, due to failure to file reports with the Securities
and Exchange Commission and the failure of the Company to meet new Nasdaq
minimum financial requirements.
On December 23, 1998, the Company effected a seventy to one common stock
reverse split. An amount equal to the par value of the common shares
relinquished was transferred from the common stock account to capital in
excess of par value. This transfer has been reflected in the Consolidated
Statement of Stockholders' Equity at December 31, 1995. All references to
number of common shares, except shares authorized, and to per share
information in the consolidated financial statements have been adjusted to
reflect the stock reverse split on a retroactive basis.
c. Authorized Shares
On October 21, 1997, the stockholders of the Company approved an amendment
to the Company's Amended and Restated Certificate of Incorporation to
increase the total number of shares of all classes of capital stock which
the Company may issue to 52,000,000 shares. Such increase has been effected
by increasing the number of shares of common stock from 12,000,000 shares to
50,000,000 shares and by increasing the number of shares of preferred stock
from 1,000,000 shares to 2,000,000 shares.
F-35
<PAGE> 86
9. - STOCKHOLDERS' EQUITY - CONTINUED
d. Grant of Restricted Stock
In June 1995, the Company granted 1,428 restricted shares to the Company's
chairman that vested periodically at a rate of 71 shares per year subject to
certain conditions and certain accelerated provisions. The grant has been
accounted for as an increase in common stock and capital in excess of par
value at the fair value of the shares at the date of the grant (and modified
periodically to reflect current valuations) offset by an equal charge to
equity recorded as an Unvested Common Stock Grant. At December 31, 1995,
conditions for acceleration were achieved, subject to one year continued
employment. The Unvested Common Stock Grant was to be amortized over an
eighteen-month vesting period and has been included in selling, general and
administrative expenses. In addition, the Company had agreed to reimburse
the officer for income taxes associated with the grant. Such reimbursements
were accrued in accordance with the vesting schedule.
On December 2, 1996, the Company agreed to exchange 1,357 unvested shares
under the 1995 grant for 4,285 warrants with an exercise price of $490.00
per share. In connection with the exchange, the Company recognized the
excess of the value ($26,200) of the old grant at the exchange rate (valued
at $2,013,700) over the value of the new grant (valued at $1,987,500) as a
reversal of an expense in 1996.
e. Stock Option Plans
At December 31, 1997, the Company has stock option plans as follows:
i. 1994 Plan
The Company has reserved 5,000 shares of common stock under the 1994
Employee Stock Option Plan (the 1994 Plan). Options granted under the
1994 Plan may be incentive options or nonqualified stock options, and
shall be designated as such at the time of grant. The 1994 Plan permits
the granting of incentive options only to officers and full-time
employees of the Company, at no less than 100% of the fair market value
of the Company's common stock at the date of the grant. Nonqualified
stock options may be granted to officers, employees, consultants, and
advisors of the Company, as well as to members of the Board of
Directors, at a price determined by the Plan administrator but in no
case less than 85% of the fair market value of the Company's common
stock at the date of the grant. To the extent that any option intended
to be an incentive option shall fail to qualify as such under Section
422 of the Internal Revenue Code of 1986, such options shall be deemed
to be nonqualified options. The 1994 Plan is administered by the Option
Committee of the Board of Directors, which has full power to determine
the specific terms of each option granted, subject to the provisions of
the 1994 Plan. As of December 31, 1997, the Company has granted options
for a total of 2,502 shares under this Plan.
F-36
<PAGE> 87
9. - STOCKHOLDERS' EQUITY - CONTINUED
ii. Director's Plan
The Company has reserved 2,857 shares of common stock under the
Non-Employee Director Stock Option Plan (the Director Plan). Each
non-employee director, upon election of the Company's Board of
Directors, shall be granted options for 71 shares of common stock, and
each shall be granted on subsequent annual anniversary dates of the
initial grant, additional options for 114 shares of common stock. Under
the terms of the agreement, the sum of the number of shares to be
received upon any grant multiplied by the fair market value of each
share at the time of the grant may not exceed $75,000. As of December
31, 1997, the Company has granted options for a total of 484 shares
under this Plan.
The exercise price of each option shall be 100% of the fair market
value of the Company's common stock at the date of the grant. The
Director Plan is administered by the Director Plan Committee, which is
comprised of not less than two directors of the Company who are not
entitled to participate in the Director Plan.
iii. 1992 Plan
The Company has reserved 167 shares of common stock under a 1992 Stock
Option Plan (1992 Plan). In August 1994, the 1992 Plan was terminated
except for then outstanding options and replaced by the 1994 Plan.
iv. Other Stock Options
The Company also has 102 stock options outstanding that were not issued
under any specific plan.
F-37
<PAGE> 88
9. - STOCKHOLDERS' EQUITY - CONTINUED
v. Subsidiary's Stock Options
Effective with its Plan of reorganization, the Company's subsidiary,
PCL, adopted a stock option plan with respect to PCL common stock.
Under an employment agreement effective September 30, 1997, PCL granted
its president a 10 year option to purchase 200,000 shares of common
stock at an exercise price of $.25, which option is fully vested and
exercisable immediately. The option provides for payment of the option
price in cash or pursuant to a cashless exercise, and is subject to
defined anti-dilution provisions. The option is not transferable except
in limited circumstances and will terminate one year after termination
of the optionee's employment, except where such shares have not been
registered. PCL is obligated to register the shares upon any
appropriate filing and the expiration date will extend to the date of
such registration. Management estimated the market value of the stock
to be less than the exercise price, and accordingly, no compensation
cost has been recognized.
f. FAS 123 Disclosures
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123") and will continue to account for its stock option
plans in accordance with the provisions of APB 25, Accounting for Stock
Issued to Employees.
The following table presents the combined activity of United's stock option
plans for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1 3,800 $565.60 3,423 $518.70
Granted -- -- 379 989.10
Exercised (112) 403.90 -- --
Canceled (431) 750.40 (2) 519.40
-------- --------- -------- ---------
Outstanding at December 31 3,257 $546.70 3,800 $565.60
======== ========= ======== =========
Options exercisable at
December 31 3,257 $546.70 3,421 $519.40
======== ========= ======== =========
</TABLE>
F-38
<PAGE> 89
9. - STOCKHOLDERS' EQUITY - CONTINUED
The Company grants warrants in connection with financing activities, merger
and acquisitions activity, and as a form of compensation to both employees
and consultants. Expiration dates vary on outstanding warrants ranging from
February 1998 through October 2002.
The following table presents the combined activity for all United warrants
issued for the years ended December 31, as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1 21,099 $765.80 5,875 $ 675.50
Granted 2,254 753.90 15,224 800.10
Exercised (6,075) 186.90 -- --
Cancelled (2,071) 980.00 -- --
--------- --------- --------- -----------
Outstanding at December 31 15,207 $ 767.20 21,099 $ 765.80
========= ========= ========= ===========
Warrants exercisable at
December 31 15,207 $ 767.20 21,099 $ 765.80
========= ========= ========= ===========
</TABLE>
The following table presents weighted average price and life information
about significant United option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $525.00 2,783 4.7 $ 487.20 2,783 $ 487.20
$525.00 - $1,050.00 474 3.0 $ 896.70 474 $ 896.70
------------ ---------
3,257 3,257
============ =========
</TABLE>
F-39
<PAGE> 90
9. - STOCKHOLDERS' EQUITY - CONTINUED
The following table presents weighted average price and life information
about significant United warrant groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $525.00 5,437 3.8 $ 489.30 5,437 $ 489.30
$525.00 - $1,050.00 7,689 4.0 $ 788.90 7,689 $ 788.90
Greater than $1,050.00 2,081 .6 $1,412.60 2,081 $1,412.60
------------ ---------
15,207 15,207
============ =========
</TABLE>
The weighted average fair value per share and exercise price of United
options and warrants granted during 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
WEIGHTED AVERAGE Weighted Average
FAIR VALUE EXERCISE PRICE Fair Value Exercise Price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Share price = Exercise price N/A N/A $ 205.10 $ 877.10
Share price > Exercise price $ - $ 665.00 $ 563.50 $ 546.00
Share price < Exercise price $ 345.80 $ 805.00 $ 115.50 $ 1,176.00
</TABLE>
The fair value of United warrants and options at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Options Warrants
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Expected life (years) N/A 5 5 1-5
Interest rate N/A 6.09% 6 % 6.09%
Volatility N/A 25.7% 17% 25.7%
</TABLE>
The fair value of PCL's option grant is estimated on the date of grant using
the Black-Scholes options - pricing model with the following assumptions
used: expected volatility 80%, risk-free interest rate 6%, no dividend yield
and expected life of 5 years.
F-40
<PAGE> 91
9. - STOCKHOLDERS' EQUITY - CONTINUED
The following are the pro forma net loss and net loss per share for 1997 and
1996, as if the compensation cost for options and warrants granted had been
determined based on the fair value at the grant date for grants in 1997 and
1996, consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ----------------------------
AS REPORTED PRO FORMA As Reported Pro Forma
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net loss $(31,626,086) $(31,656,086) $ (7,787,655) $(9,199,485)
Net loss per share -
basic and diluted $ (210.72) $ (210.91) $ (396.46) $ (446.85)
</TABLE>
g. Reduction in Exercise Price of Warrants
On April 29, 1997, United reduced the exercise price for all outstanding
warrants and options to $123.20 per share, which price was equal to 75% of
the average closing price for the Company's common stock for the ten (10)
days prior to such reduction. Such reduction was effective for a 45 day
period through June 13, 1997. As of June 13, 1997, the Company received an
aggregate of approximately $619,000 as a result of the exercise of 5,024
warrants.
h. Common Stock Reserved
The Company has reserved 23,372 shares of common stock for the exercise of
options and warrants. The Company was not able to reserve a sufficient
number of common shares to provide for the conversion of the Series A
Convertible Preferred Stock as of December 31, 1997 (approximately 574,000
shares required).
10. - CONTRACT RESEARCH
a. Research Funding Agreement
On December 14, 1990, the Company entered into an agreement with the Rhode
Island Partnership for Science and Technology (RIPSAT) to fund research,
development, testing and validation of an in vitro assay to predict the
outcome of x-ray mediated chemotherapy enhancement anticancer therapy (the
project) or radiation mediated chemotherapy enhancement (RMCE; the product).
F-41
<PAGE> 92
10. - CONTRACT RESEARCH - CONTINUED
The project consists of two phases as follows:
Applied research--RIPSAT will fund operating and capital costs incurred in
the performance of the Applied Research Phase up to a maximum of $320,338.
RIPSAT will not fund more than 60% of the total project cost. Such research
is paid for by the Company and reimbursed by RIPSAT. Through December 31,
1993, approximately $531,500 of total operating costs have been expended on
this project. These operating costs included $362,255 in reimbursable costs
expended by Brown University of which $320,338 of these reimbursable costs
(the total grant) were reimbursed by RIPSAT. RIPSAT has been informed and
has acknowledged that the Applied Research Phase will not be completed for
an indeterminate period of time.
Commercialization--During the Commercialization Phase, the Company will pay
amounts to RIPSAT equal to the funds received during the Applied Research
Phase. Payment will begin at the end of the first calendar quarter in which
sales of the product are recorded. Payments will be calculated as follows
(i) 3% of quarterly net sales of the FCA, but not exceeding an aggregate of
$107,000, and (ii) 5% of quarterly net sales of the RMCE. The 3% and 5%,
under certain circumstances, may be increased to 6% and 10%, respectively.
At December 31, 1997, the Commercialization Phase has not commenced.
b. Research and License Agreement
In May 1991, the Company entered into a Research Agreement with Brown
University (Brown). Under the agreement, the Company will fund Brown for all
direct and indirect costs incurred in the performance of the research which
shall not exceed $375,604 without written authorization from the Company.
The total reimbursable costs expended by Brown University under this
agreement through December 31, 1993, were $362,255, of which $320,338 was
reimbursed to the Company by RIPSAT. Of the $362,255, the Company has paid
$306,684 to Brown leaving a balance of $55,571 at December 31, 1997.
Under the provisions of the agreement, the Company has an option to license
intellectual property developed in the performance of the agreement. The
Company will pay royalties to Brown at a rate of 2% of sales which shall
commence two years from issuance of a patent and extend for the life of the
license.
F-42
<PAGE> 93
10. - CONTRACT RESEARCH - CONTINUED
c. Clinical Trial Agreement
On August 14, 1995, the Company entered into an Agreement with a research
institution to conduct a clinical trial. The cost of this clinical trial was
not to exceed $568,000. In 1996, the Agreement was terminated by the Company
as a result of the institution's inability to obtain the requisite number of
accruals. For the year ended December 31, 1996, the Company recorded
expenses totaling $56,800 under the Agreement. The Company has commenced an
action to recover the recorded expenses.
11. - INCOME TAXES
The Company files consolidated tax returns with its wholly-owned
subsidiaries. At December 31, 1997, the Company and its wholly-owned
subsidiaries have net operating loss carryforwards of approximately $19
million for income tax purposes that expire at various times from 2001 to
2012; including approximately $3 million of these losses that are limited in
usage. PCL has approximately $9 million in net operating loss carryforwards
expiring between 1998 and 2012. Utilization of the net operating loss
carryforwards may be subject to limitations pursuant to Section 382. No
income tax benefit has been recorded during the years ended December 31,
1997 and 1996.
The principal components of the Company's deferred tax assets were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,744,000 $ 9,829,000
Allowance for bad debts 3,680,000 --
Intangibles 25,420,000 --
Equipment 1,204,000 --
Federal general business tax credits 150,000 150,000
Other 154,000 175,000
------------ ------------
41,352,000 10,154,000
Valuation allowance (41,352,000) (10,154,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
F-43
<PAGE> 94
11. - INCOME TAXES - CONTINUED
Net deferred tax assets are reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization. The valuation
allowance increased $4,247,000 in 1996, due primarily to the increases in
net operating loss carryforwards and tax credits. The valuation allowance
increased $31,198,000 in 1997 primarily from the increases in operating loss
carryforwards of Physicians Clinical Laboratory, Inc. (Note 4).
12. - ACQUISITION COSTS
On December 14, 1995, the Company signed a letter of intent to acquire a
majority interest in American Cytogenetics, Inc. (ACI). In the 3rd quarter
of 1996, the Company expensed $218,914 of deferred acquisition costs for
expenses incurred as a result of management's due diligence review of the
business and operations of ACI which management has determined not to pursue
and has terminated further negotiations.
At December 31, 1996, the Company had $1,028,524 of deferred acquisition
costs. The costs primarily related to expenses incurred in conjunction with
the Company's acquisition of PCL. Included in the deferred costs is
investment banking expenses totaling $597,750 relating to the issuance of
1,071 warrants with an exercise price of $665.00 per share to an investment
banker for work performed relating to the acquisition of PCL (Note 13). In
1997, the Company incurred additional acquisition costs totaling $219,800
(Note 13). All acquisition costs were recorded as purchase cost of the PCL
acquisition (Note 4).
13. - OTHER AGREEMENTS
In 1995, the Company entered into an agreement with an investment banker
whereby the investment banker can earn cash commissions and up to 2,857
warrants with an exercise price of $665.00 if certain events, as defined,
occur. The agreement expires in June 2000. In 1996, the investment banker
earned a cash transaction fee totaling $300,000 and was granted 1,071
warrants. In 1997, the investment banker earned $183,450 in cash commissions
and earned 826 warrants with an exercise price of $665.00 per share. (See
Note 12).
F-44
<PAGE> 95
13. - OTHER AGREEMENTS - CONTINUED
In May 1996, the Company entered into agreements with a consultant whereby
the consultant would assist the Company in identifying potential investors
and negotiating and structuring a transaction to provide equity financing,
and, following such financing, providing financial public relations for a
period of two years. No financing was arranged by the consultant and the
agreements were terminated in the 3rd quarter of 1996 resulting in a $40,000
charge in the statement of operations.
In September 1996, the Company entered into an agreement with certain
financial public relations firms for which the firms have been paid an
aggregate of $1,355,000 in cash and 4,285 warrants with exercise prices
ranging from $980.00 to $1,176.00 per share. In connection with the warrants
issued, the Company recorded an expense totaling $527,000. All such
consideration has been expensed in the year ended December 31, 1996.
On March 6, 1997, the Company adopted an Indemnification Trust (the "Trust")
for the benefit of the current officers and directors of the Company. The
Trust is in furtherance of the Company's indemnification obligations to its
officers and directors and is intended to establish a mechanism to assure a
source of funding for any payments the Company may be required to make under
such Indemnification Agreements. The board of directors authorized to fund
the Trust in the amount of $250,000. The Trust has not been funded to date.
Effective with its Plan of Reorganization, PCL entered into a Common Stock
Registration Rights Agreement with the stockholders who received Senior
Secured Notes. The agreement provides these holders with the right for one
demand upon PCL, after the earlier of 30 months from the date of the
agreement or six months after a registration statement for an underwritten
public offering becomes effective, for the filing of a stock registration
statement with respect to their shares. PCL is liable for liquidated damages
in the event of a default.
The note payable to the United States government (Note 7) was issued in
conjunction with a settlement with the Department of Health and Human
Services ("HHS") resulting from its review of PCL's Medicare and MediCal
billing practices. The Company also entered into a 5 year corporate
integrity agreement with HHS to provide for an internal corporate compliance
plan. The settlement releases the Company and its president from civil and
criminal liability. Should the Company default on any provisions under the
agreement, the government may offset any remaining unpaid balance against
monies due the Company under any government program and may exclude the
Company from participation in the Medicare and State health care programs. A
similar agreement exists with the State of California under its MediCal
program.
F-45
<PAGE> 96
14. - EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its president and CEO with a
term of three years at a base salary of $208,000 through May 2000. Other
benefits typical of such agreements are also provided. The Company may
terminate the agreement before the end of its term for cause. The Company
may also terminate the agreement without any cause by providing severance
pay equal to the base salary for the unexpired portion of the agreement plus
one year. The Company is obligated to pay the base salary for the unexpired
portion of the agreement upon the death or disability of the executive. If
the agreement is not renewed at the end of its term, the Company is
obligated to pay severance equal to one year's base salary. Upon termination
for other than cause or upon resignation during a one year period from a
change in control, as defined, severance pay will be provided equal to the
base salary for the unexpired portion of the agreement plus one year.
Effective September 30, 1997, PCL entered into an employment agreement with
its new president and CEO with a term of three years at a base salary of
$104,000 annually through October 31, 1997 and $208,000 annually thereafter
through September 30, 2000. The president is also the president of United.
Other benefits typical of such agreements are also provided. PCL may
terminate the agreement before the end of its term for cause. PCL may also
terminate the agreement without any cause by providing severance pay equal
to the base salary for the unexpired portion of the agreement plus one year.
PCL is obligated to pay the base salary for the unexpired portion of the
agreement upon the death, disability or reduction in title or duties of the
executive.
15. - LITIGATION
On June 9, 1998, Richard M. Brooks, PCL's former Senior Vice-President and
Chief Financial Officer, filed an Amended Proof of Administrative Claim and
Request for Payment Based Upon Post-Petition Torts seeking in excess of
$3,000,000 in damages for (a) the allegedly tortious termination of Brook's
employment with PCL and (b) allegedly defamatory statements made by PCL's
chief executive officer about Brooks. PCL filed its Debtors' Objection to
and Motion for Summary Judgment of Mr. Brooks' Amended Proof of Claim. On
August 12, 1998, the Court denied the motion. The matter is currently in
discovery stages. The Company believes the claim has no merit and intends to
defend vigorously against the matter; however, the outcome cannot be
predicted. If Mr. Brooks were to prevail on either part of this Claim, PCL
would incur an administrative expense claim against its Chapter 11 estate in
an amount which would be fixed by the Bankruptcy Court. It is reasonably
possible the outcome could have a material financial impact on the Company.
F-46
<PAGE> 97
15. - LITIGATION - CONTINUED
In the ordinary course of business, two related complaints have been filed
against PCL with the Department of Fair Employment and Housing (DFEH) and
the Equal Employment Opportunity Commission by former employees alleging
wrongful termination and discrimination. The Company has denied all
allegations. One complaint has been closed by the DFEH for lack of probable
cause. It is not possible to estimate the outcome of these complaints.
In the ordinary course of business, several lawsuits have been filed against
employees of PCL, and PCL has filed suit against former employees of PCL
which resulted in countersuits against PCL, relating to alleged violations
of employee agreements not to compete. In the opinion of management, based
upon advice of counsel, the ultimate outcome of these lawsuits will not have
a material impact on the Company.
16. - SUBSEQUENT EVENT - SALE OF BUSINESS
On April 5, 1999, PCL entered into an Asset Purchase Agreement for the sale
of the business and substantially all assets to Unilab Corp for a total
purchase price of approximately $40 million. The sale closed on May 10,
1999. The purchase price includes approximately $9 million cash, one million
shares common stock of Unilab, assumption of approximately $3 million in
liabilities, and a convertible note for $25 million. The note has a 7.5%
interest rate, with $10 million annual principal payments, which may be paid
in cash or in shares of Unilab common stock, at Unilab's option, at a $3.00
per share conversion price for 75% of the note, with the balance converting
at then-current market price. The stock is subject to a registration rights
agreement. The agreement also provides for the merger of Bio-Cypher Funding
Corp. into PCL prior to closing, and repayment of the credit facility with
Daiwa.
As a result of the agreement, the Company reevaluated the recoverability of
PCL's excess reorganization value based upon an estimated loss on the sale,
including costs of disposal. PCL recorded an additional write-down of $10.6
million, resulting in a total write-down of excess reorganization value of
approximately $45.3 million.
PCL intends to begin liquidation after the sale. The proceeds were
principally used to satisfy a portion of PCL's secured indebtedness. No
proceeds of the sale were available to the PCL shareholders. Concurrent with
the sale, the Stockholder Agreement was amended to provide payment to the
Company of $3.25 million in cash upon satisfaction of certain conditions.
The Company received this payment in May 1999.
F-47
<PAGE> 98
16. - SUBSEQUENT EVENT - SALE OF BUSINESS - CONTINUED
The following unaudited pro forma condensed consolidated statements of
operations present the estimated effects of the sale of stock (note 4) and
the subsequent deconsolidation of PCL, the sale of PCL assets, the payments
received from Oaktree, and the cessation of business by ABC and NTBM, as if
these transactions had occurred on January 1, 1997. The unaudited pro forma
condensed consolidated balance sheet at December 31, 1997 reflects the
estimated effects of the sale of stock (note 4) and the subsequent
deconsolidation of PCL, the sale of PCL assets, the payments received from
Oaktree, and the cessation of business by ABC and NTBM on a pro forma basis
as if these transactions had occurred on December 31, 1997.
Unaudited Pro Forma Condensed Consolidated Statements of Operations for year
ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
PCL/MSI NTBM/ABC
Historical (A) (B) Adjustments Pro Forma
----------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 18,458 $ (17,839) $ (619) $ - $ -
Operating costs 70,629 (65,497) (932) (2,543)(D) 1,657
Other expense 2,916 (2,126) (233) - 557
----------- ---------- ---------- ------------ -------------
Net loss before minority (55,087) 49,784 546 2,543 (2,214)
Minority interest 23,461 (23,461) - - -
----------- ---------- ---------- ------------ -------------
Net loss $ (31,626) $ 26,323 $ 546 $ 2,543 $ (2,214)
=========== ========== ========== ============ =============
</TABLE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31,
1997 (in thousands):
<TABLE>
<CAPTION>
PCL/MSI NTBM/ABC
Historical (A) (B) Adjustments Pro Forma
----------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash $ 1,525 $ (1,463) $ - $ 3,950(C) $ 4,012
Other current assets 12,473 (12,387) - - 86
Property and equipment 2,759 (2,739) - - 20
Other assets 25,602 (24,817) - (665)(E) 120
----------- ---------- ---------- ------------ ----
Total assets $ 42,359 $ (41,406) $ - $ 3,285 $ 4,238
=========== ========== ========== ============ =============
Current liabilities $ 66,546 $ (65,620) $ - $ - $ 926
Long-term debt 2,481 (2,481) - - -
Minority interest (12,654) 12,654 - - -
Common stock and
paid-in capital 39,276 - - 14,041(G) 53,317
Accumulated deficit (53,290) - - 3,285(F) (50,005)
----------- ---------- ---------- ------------ -------------
Total liabilities and equity $ 42,359 $ (55,447) $ - $ 17,326 $ 4,238
=========== ========== ========== ============ =============
</TABLE>
F-48
<PAGE> 99
16. - SUBSEQUENT EVENT - SALE OF BUSINESS - CONTINUED
(A) Eliminates the results of operations of PCL for the three months ended
December 31, 1997 and the results of operations of MSI for the two months
ended February 26, 1997, and the assets and liabilities of PCL as of
December 31, 1997.
(B) Eliminates the results of operations of NTBM and ABC for the year ended
December 31, 1997. The assets and liabilities of NTBM and ABC were not
significant as of December 31, 1997.
(C) Reflects the proceeds on the sale of PCL stock of $750 and the receipt of
$3,250 pursuant to the amended stockholders agreement.
(D) Eliminates United's amortization and write-off of goodwill relating to
PCL.
(E) Reflects the write-off of goodwill relating to NTBM.
(F) Reflects the estimated gain on sale of PCL stock and income from the
receipt of $3,250, net of the write-off of goodwill relating to NTBM.
(G) Reflects the deconsolidation of PCL. Losses recognized in consolidation
in excess of investment are credited to paid in capital.
The unaudited pro forma condensed consolidated financial information is
not necessarily indicative of the results that actually would have
occurred had these transactions occurred on the date indicated or of
results of operations which may be obtained in the future.
F-49
<PAGE> 100
EXHIBIT INDEX
Exhibits designated with an asterisk (*) have previously been filed with
the Commission and are incorporated herein by reference to the document
referenced in parentheticals following the descriptions of such exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------------
<S> <C>
2.1* Asset Purchase Agreement dated September 13, 1996, among Nu-Tech
Bio-Med, Inc., NTBM Billing Services, Inc., Prompt Medical Services,
Inc., Judith Prussin and Jeffrey Prussin (filed without exhibits or
schedules) (filed as Exhibit 2.1 to Current Report on Form 8-K filed
September 25, 1996).
2.2* Order Confirming Medical Science Institute's First Amended Plan of
Reorganization dated November 18, 1996 (US Central District of
California Case No. LA 95-37790 ID) together with First Amended
Disclosure Statement and Plan of Reorganization for Medical Science
Institute (filed as Exhibit 2.2 to Current Report on Form 8-K filed on
December 3, 1996).
2.3* Disclosure Statement of Physicians Clinical Laboratory as filed with
the U.S. Bankruptcy Court (Central District of California Case No.
SV96-23185-GM) (filed as Exhibit 2.3 to Form S-3 File No. 333-17859).
2.4* Joint Plan of Reorganization of Physicians Clinical Laboratory as
filed with the U.S. Bankruptcy Court (Central District of California
Case No. SV96-23185-GM) (filed as Exhibit 2.4 to Form S-3 File No.
333-17859).
2.5* Motion of PCL for Entry of Order authorizing PCL to acquire all of the
Issued and Outstanding Stock of Medical Science Institute (filed as
Exhibit 2.5 to Current Report on Form 8-K filed January 29, 1997).
3.1* Amended and Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on November 16, 1994 (filed as Exhibit
3.1.5 to Amendment No. 1 to Registration Statement on Form SB-2, File
No. 33-84622).
3.2* Amended Certificate of Designations, Preferences and Rights and Number
of Shares of Series A Preferred Stock as filed with the Secretary of
State of Delaware on October 23, 1996 (filed as Exhibit 3.3 to Report
on Form 10QSB for the fiscal quarter ended September 30, 1996).
3.3* Certificate of Amendment of Amended Certificate of Designations,
Preferences and Rights and Number of Shares of Series A Convertible
Preferred Stock as filed with the Secretary of State of Delaware on
November 20, 1996.
3.4* Amendment to the Registrant's Certificate of Incorporation (filed as
Exhibit 3 to Current Report on Form 8-K for October 23, 1997).
3.5* Amended and Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on October 21, 1997 (filed as Exhibit 3
to Current Report on Form 8-K for November 4, 1997).
</TABLE>
<PAGE> 101
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------------
3.6 Amendment to the Registrant's Certificate of Incorporation filed with
the Secretary of State of Delaware on December 23, 1998.
3.7* Amendment and Restated By-Laws effective November 16, 1994 (filed as
Exhibit 3.2.2 to Registration Statement on Form SB-2, File No.
33-84622).
3.8* Amended and Restated By-Laws effective November 16, 1996 (filed as
Exhibit 3.2.2 to Registration Statement on Form SB-2, File No.
33-846221).
4.1* Form of Common Stock Certificate (filed as Exhibit 4.1 to
Registration Statement on Form SB-2, File No. 33-84622).
4.2* Form of Warrant and Warrant Agreement relating to Warrants to
purchase an aggregate of 114,286 shares of Common Stock issued to
certain individuals on August 9, 1994 in connection with a Bridge
Financing (filed as Exhibit 4.2 to Registration Statement on Form
SB-2, File No. 33-84622).
4.3* Form of Warrant Agreement issued to Starr Securities, Inc. and Stein,
Shore Securities, Inc. (filed as Exhibit 4.4 to Registration
Statement on Form SB-2, File No. 33-84622).
4.4* Form of Registration Rights Agreement dated August 9, 1994 between
the Registrant and certain individuals in connection with completed
Bridge Financing (filed as Exhibit 4.5 to Registration Statement on
Form SB-2, File No. 33-84622).
10.1* Amended and Restated Employment Agreement with J. Marvin Feigenbaum
(filed as Exhibit 10.2 to Registration Statement on Form SB-2, File
No. 33-84622).
10.2* Employment Agreement with Dr. Kenneth E. Blackman as of July 1, 1994
(filed as Exhibit 10.3 to Registration Statement on Form SB-2, File
No. 33-84622).
10.3* Patent No. 4,559,299 dated December 17, 1985 (filed as Exhibit 10.4 to
Registration Statement on Form SB-2, File No. 33-84622).
10.4* Patent No. 4,734,372 dated March 29, 1988 (filed as Exhibit 10.5 to
Registration Statement on Form SB-2, File No. 33-84622).
10.5* Patent No. 4,937,298 dated June 26, 1990 (filed as Exhibit 10.6 to
Registration Statement on Form SB-2, File No. 33-84622).
10.6* Assignment of Patent No. 4,559,299, recorded on March 29, 1993, by
Brown University Research Foundation, in favor of Analytical
Biosystems Corporation (filed as Exhibit 10.7 to Registration
Statement on Form SB-2, File No. 33-84622).
10.7* Assignment of Patent No. 4,734,372, recorded on March 29, 1993, by
Brown University Research Foundation, Inc., in favor of Analytical
Biosystems Corporation (filed as Exhibit 10.8 to Registration
Statement on Form SB-2, File No. 33-84622).
<PAGE> 102
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------------
<S> <C>
10.8* Assignment of Patent No. 4,937,187, recorded on March 29, 1993, by
Brown University Research Foundation, Inc. in favor of Analytical
Biosystems Corporation (filed as Exhibit 10.9 to Registration
Statement on Form SB-2, File No. 33-84622).
10.9* Consulting Agreement with Starr Securities, Inc. (filed as Exhibit
10.10 to Amendment No. 1 to Registration Statement on Form SB-2,
File No. 33-84622).
10.10* Funding Agreement dated December 14, 1990 between Rhode Island
Partnership for Science and Technology and Analytical Biosystems
Corporation (filed as Exhibit 10.11 to Registration Statement on
Form SB-2, File No. 33-84622).
10.11* Loan Agreement dated February 11, 1993 between State of Rhode
Island Economic Development Small Business Loan Fund Corporation
("SBLFC") and Analytical Biosystems Corporation in the amount of
$150,000 (filed as Exhibit 10(iii) to Report on Form 10-KSB for the
fiscal year ended December 31, 1992).
10.12* Loan Agreement dated February 25, 1993 between SBLFC and Analytical
Biosystems Corporation in the amount of $100,000 (filed as Exhibit
10(iii) to Report on Form 10-KSB for the fiscal year ended December
31, 1992).
10.13* Loan Agreement dated April 19, 1993 between SBLFC and Analytical
Biosystems Corporation in the amount of $250,000 (filed as Exhibit
10(i)(a) to Current Report on Form 8-K dated April 30, 1993).
10.14* Loan Agreement dated October 22, 1993 between SBLFC and Analytical
Biosystems Corporation in the amount of $166,666 (filed as Exhibit
10(iii)(d) to Report on Form 10-KSB for the fiscal year ended
December 31, 1993).
10.15* Loan Agreement dated February 17, 1994 between SBLFC and Analytical
Biosystems Corporation in the amount of $125,000 (filed as Exhibit
10(iii)(e) to Report on Form 10-KSB for the fiscal year ended
December 31, 1993).
10.16* Security Agreement dated October 22, 1993 between SBLFC and
Analytical Biosystems Corporation (filed as Exhibit 10.17 to
Registration Statement on Form SB-2, File No. 33-84622).
10.17* Patent Security Agreement dated April 19, 1993 between SBLFC and
Analytical Biosystems Corporation (filed as Exhibit 10.18 to
Registration Statement on Form SB-2, File No. 33-84622).
10.18* Patent Security Agreement dated October 22, 1993 between SBLFC and
Analytical Biosystems Corporation (filed as Exhibit 10.19 to
Registration Statement on Form SB-2, File No. 33-84622).
10.19* Form of Indemnification Agreements between Registrant and
Registrant's Directors and Officers (filed as Exhibit 10.20 to
Registration Statement on Form SB-2, File No. 33-84622).
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
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NO. DESCRIPTION PAGE
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10.20* Lease Agreement as of November 1, 1994 for facility located at 55
Access Road, Warwick, Rhode Island 02886 (filed as Exhibit 10.21 to
Amendment No. 1 to Registration Statement on Form SB-2, File No.
33-84622).
10.21* Consulting Agreement and Warrant with Dr. Elliot Fishkin (filed as
Exhibit 10.22 to Amendment No. 1 to Registration Statement on Form
SB-2, File No. 33-84622).
10.22* Redacted copy of Clinical Trials Agreement dated August 14, 1995
between Analytical Biosystems Corporation and research institution
and certain individuals (filed as Exhibit 10.1 to Current Report on
Form 8-K dated August 11, 1995).
10.23* Agreement dated April 10, 1995 between Analytical Biosystems
Corporation and Loats Associates (filed as Exhibit 10.1 to Current
Report on Form 8-K dated April 20, 1995).
10.24* Form of Registration Rights Agreement entered into among the Company
and the holders of the Company's Series A Preferred Stock entered
into on December 2, 1996 (filed as Exhibit 10.24 to Registration
Statement on Form S-3 File 333-17857).
10.25* Form of Registration Rights Agreement entered into among the Company
and certain holders of the Company's Common Stock entered into on
April 12, 1996 in connection with private placement offering
completed on April 12, 1996 (filed as Exhibit 10.25 to Registration
Statement on Form S-3 File 333-17857).
10.26* Form of Promissory Note of Nu-Tech Bio-Med, Inc. in the principal
amount of $2,000,000 dated January 23, 1997 in favor of The Michael
Jesselson Trust (filed as Exhibit 10.29 to Current Report on
Form 8-K filed January 29, 1997).
10.27* Security Agreement dated January 23, 1997 between Nu-Tech Bio-Med,
Inc. and The Michael Jesselson Trust (filed as Exhibit 10.30 to
Current Report on Form 8-K filed January 29, 1997).
10.28* Form of Common Stock Purchase Warrant dated January 23, 1997 to
purchase 100,000 shares of Common Stock at an exercise price of
$11.50 per share (filed as Exhibit 10.31 to Current Report on
Form 8-K filed January 29, 1997).
10.29* Amended and Restated Employment Agreement by and between the Company
and J. Marvin Feigenbaum, dated June 6, 1997 (filed as Exhibit 10
to Current Report on Form 8-K filed June 9, 1997).
10.30* Amended and Restated Employment Agreement by and between the Company
and J. Marvin Feigenbaum, dated May 19, 1999 (filed as Exhibit 10 to
Current Report on Form 8-K for June 23, 1999).
16.1* Letter from Ernst & Young LLP required pursuant to Rule 304(a)3 of
Regulation S-B (filed as Exhibit 1 to Amended Current Report on
Form 8-K for May 19, 1998).
</TABLE>
<PAGE> 104
<TABLE>
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27 Financial Data Schedule
99.1* 1992 Stock Option Plan (filed as Exhibit 28 to the Company's
Report on Form 10-Q for the quarter ended March 31, 1992).
99.2* 1994 Incentive Stock Option (filed as Exhibit 99.2 to
Registration Statement on Form SB-2, File No. 33-84622).
99.3* Non Employee Director Stock Option Plan (filed as Exhibit 99.3
to Registration Statement on Form SB-2, File No. 33-84622).
99.4* Amended and Restated Non-Employee Director Stock Option Plan
(filed as Exhibit A to the Company's Proxy Statement for the
Annual Meeting held August 27, 1996).
99.5* Summons and Complaint in the action "Mordechai Gurary v. Isaac
Winehouse, Isaac Winehouse d/b/a Wall & Broad Equities and
Nu-Tech Bio-Med, Inc." Case No. 97 Civ.3803 (LBS) in the United
States District Court, Southern District of New York (filed as
Exhibit 99 to Current Report on Form 8-K filed May 30, 1997).
99.6* Indenture, dated as of September 30, 1997, among PCL and First
Trust National Association ("FTNA") (filed as Exhibit 99.1 to
Current Report on Form 8-K for October 20, 1997).
99.7* Security Agreement, dated as of September 30, 1997, by and among
PCL and FTNA (filed as Exhibit 99.2 to Current Report on Form
8-K for October 20, 1997).
99.8* Stockholders Agreement, dated as of September 30, 1997, by and
among PCL, Nu-Tech and Oaktree (filed as Exhibit 99.3 to Current
Report on Form 8-K for October 20, 1997).
99.9* Pledge Agreement, dated as of September 30, 1997, between PCL
and FTNA (filed as Exhibit 99.4 to Current Report on Form 8-K
for October 20, 1997).
99.10* Employment Agreement, made as of September 30, 1997, by and
among PCL and J. Marvin Feigenbaum (filed as Exhibit 99.5 to
Current Report on Form 8-K for October 20, 1997).
99.11* Noncompetition Agreement, made as of September 30, 1997, by and
among PCL and Nu-Tech (filed as Exhibit 99.6 to Current Report
on Form 8-K for October 20, 1997).
99.12* Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997 (filed as Exhibit 99.7 to Current Report
on Form 8-K for October 20, 1997).
99.13* Summons and Complaint in the action "Gorra Holding and Barras
Investment v. Nu-Tech Bio-Med, Inc." Case No. 98 Civ. 764 (JMP)
in the United States District Court, Southern District of New
York (filed as Exhibit 99 to Current Report on Form 8-K for
February 23, 1998).
99.14* Stock Purchase Agreement, dated as of June 12, 1998 between the
Registrant and Oaktree, acting as agent on behalf of certain
funds and accounts (filed as Exhibit 99.1 to Current Report on
Form 8-K for June 22, 1998).
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
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NO. DESCRIPTION PAGE
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<S> <C>
99.15* Amended and Restated Stockholders Agreement, dated as of June
12, 1998, by and among the Registrant, PCL, Oaktree and J.
Marvin Feigenbaum (filed as Exhibit 99.2 to Current Report on
Form 8-K for June 22, 1998).
</TABLE>
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NU-TECH BIO-MED, INC.
Nu-Tech Bio-Med, Inc., in order to amend its Amended and Restated
Certificate of Incorporation (the "Restated Certificate"), hereby certifies as
follows:
FIRST: The name of the corporation is NU-TECH BIO-MED, INC.
SECOND: The corporation hereby amends its Certificate of Incorporation as
follows:
1. Article FIRST of the Corporation's Restated Certificate is
amended to read in its entirety as follow:
"FIRST: The name of the corporation is United Diagnostic, Inc."
B. Article FOURTH of the Corporation's Restated Certificate is
hereby amended to provide for deletion of existing Paragraph 2 and replacing it
with a new paragraph 2, which provides for a 1-for-70 reverse split of the
Corporation's Common Stock, par value $.01 per share, that will read in its
entirety as follows:
"2. Reverse Stock Split. Upon the filing of this Amendment with
the Secretary of State of Delaware, and effective as of 5:00 p.m.
on the date of filing (referred to herein as the "Effective
Time"), every 70 shares of Common Stock issued and outstanding as
of the Effective Time shall automatically, and without any action
on the part of the stockholders, be converted and combined into
one share of validly issued, fully payable and non-assessable
share of Common Stock, par value $.01 (the "Reverse Split"). In
the case of a holder of shares not evenly divisible by 70, such
holder shall receive, in lieu of any fraction of a share, a cash
payment equal to the average of the last sale price of the Common
Stock, as obtained by the Company from a national quotation
service or such other source as the Company deems reasonable, on
the five trading days ending on the day of the Effective Time
multiplied by that number of shares of Common Stock that would
otherwise have been converted into such fraction of a share. As
of the Effective Time and thereafter, a certificate(s)
representing shares of Common Stock prior to the Reverse Split
shall be deemed to represent the number of new shares into which
the old shares are convertible and the right to recover a cash
payment in lieu of fractional shares."
THIRD: The amendments effected hereby were authorized by the written
consent of the holders of a majority of all of the outstanding shares entitled
to consent thereto pursuant to Sections 228 and 242 of the General Corporation
Law of the State of Delaware.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned hereby execute this document and
affirm the facts set forth herein are true under penalties of perjury this
_____ day of December 1998.
/s/ J. Marvin Feigenbaum
------------------------------------
J. Marvin Feigenbaum, President
/s/ David Sterling
------------------------------------
David Sterling, Secretary
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,524,942
<SECURITIES> 0
<RECEIVABLES> 11,000,608
<ALLOWANCES> 1,434,900
<INVENTORY> 1,139,232
<CURRENT-ASSETS> 13,998,036
<PP&E> 2,758,476
<DEPRECIATION> 366,238
<TOTAL-ASSETS> 42,358,740
<CURRENT-LIABILITIES> 66,546,284
<BONDS> 1,904,723
6,826
28
<COMMON> 0
<OTHER-SE> (14,021,095)
<TOTAL-LIABILITY-AND-EQUITY> 42,358,740
<SALES> 18,457,540
<TOTAL-REVENUES> 18,457,540
<CGS> 0
<TOTAL-COSTS> 70,628,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,526,007
<INTEREST-EXPENSE> 2,691,805
<INCOME-PRETAX> (31,626,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,626,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,626,086)
<EPS-BASIC> (210.72)
<EPS-DILUTED> (210.72)
</TABLE>
