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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ending May 31, 1996
Commission File Number 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 68-0280528
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
2495 Natomas Park Drive, Suite 600 Sacramento, CA 95833
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 648-3500
</TABLE>
None
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(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
Number of shares of common stock outstanding as of June 30, 1996 was 6,051,087.
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INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
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Condensed Balance Sheets as of May 31, 1996 and February 29, 1996 3
Condensed Statements of Operations for the three months ended May 31, 1996 4
and 1995
Condensed Statements of Cash Flows for the three months ended May 31, 1996 5
and 1995
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of 13
Operations for the three months ended May 31, 1996 and 1995
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Defaults on Senior Securities 21
Item 3. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED BALANCE SHEETS
AS OF MAY 31, 1996 AND FEBRUARY 26, 1996
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MAY 31, FEBRUARY 29,
ASSETS 1996 1996
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(Unaudited)
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CURRENT ASSETS
Cash $ 77,015 $ 391,815
Accounts receivable, net 15,700,653 13,793,604
Notes receivable 350,000 350,000
Supplies inventory 1,376,288 1,370,742
Other current assets 464,482 618,287
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Total current assets 17,968,438 16,524,448
EQUIPMENT AND IMPROVEMENTS, NET 15,718,383 16,929,581
INTANGIBLE ASSETS, NET 56,308,857 57,470,061
OTHER ASSETS 486,194 488,289
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$ 90,481,872 $ 91,412,379
============ ============
Total assets
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Current installments of long-term debt $123,800,372 $123,880,031
Accounts payable 13,211,890 12,185,439
Accrued payroll & other 19,645,582 16,389,563
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Total current liabilities 156,657,844 152,455,033
LONG-TERM DEBT 866,133 955,393
OTHER LONG TERM LIABILITIES 2,549,181 2,614,537
Total liabilities 160,073,158 156,024,963
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock 60,511 60,331
Paid-in capital 15,555,842 15,536,906
Retained earnings (deficit) (85,207,639) (80,209,821)
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Total stockholders' equity
(deficit) (69,591,286) (64,612,584)
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Total liabilities and stockholders' equity
(deficit) $ 90,481,872 $ 91,412,379
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND 1995
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<CAPTION>
THREE MONTHS ENDED
MAY 31,
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1996 1995
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NET REVENUE $19,735,539 $25,091,440
DIRECT LABORATORY COSTS 6,401,713 8,510,147
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Gross profit 13,333,826 16,581,293
LABORATORY SUPPORT COSTS 5,209,312 6,360,111
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Laboratory profit 8,124,514 10,221,182
OVERHEAD EXPENSE 9,370,017 10,290,187
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Operating Loss (1,245,503) (69,005)
INTEREST EXPENSE AND OTHER, NET 3,752,317 2,947,291
INCOME TAXES 0 0
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Net Loss $(4,997,820) $(3,016,296)
=========== ===========
EARNINGS PER SHARE:
Primary $ (0.83) $ (0.50)
Fully Diluted N/A N/A
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary
6,050,000 6,088,000
Fully Diluted N/A N/A
</TABLE>
The accompanying notes are an integral part of these condensed statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 1996 AND 1995
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<CAPTION>
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,997,820) $(3,016,296)
Adjustments to reconcile net loss to net cash provided
by operating activities
Deferred Taxes -- (187,967)
Depreciation and amortization 2,481,449 2,760,113
Provision for doubtful accounts 1,390,009 932,651
Changes in operating assets and liabilities
Increase in accounts receivable (3,297,058) (2,169,093)
Net decrease (increase) in
inventories, prepaid costs and other
assets 150,355 (274,413)
(Decrease) increase in accounts
payable and accrued expenses 4,282,472 1,480,091
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Net cash provided by (used in) operating activities 9,407 (474,914)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of intangible assets in connection with
acquisitions -- (17,318)
Acquisition of equipment and leasehold improvements (109,047) (307,243)
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Net cash provided by investing activities (109,047) (324,561)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long-term debt -- 3,959,476
Payments of principal on long-term debt (234,275) (2,099,950)
Proceeds from sale of Capital Stock 19,115 --
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Net cash provided by financing activities (215,160) 1,859,526
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Net increase (decrease) in cash and cash
equivalents (314,800) 1,060,051
CASH AND CASH EQUIVALENTS,
beginning of period 391,815 181,896
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CASH AND CASH EQUIVALENTS,
end of period $ 77,015 $ 1,241,947
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 0 $ 1,408,711
=========== ===========
Cash paid for income taxes $ 0 $ 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) SIGNIFICANT RISKS AND UNCERTAINTIES
RECENT DEVELOPMENTS
Liquidity and Operating Results.
The liquidity and results of operations of Physicians Clinical
Laboratory, Inc. ("PCL" or the "Company") were affected significantly during
the fiscal quarter ended May 31, 1996, and continue to be adversely affected to
the date of this Quarterly Report, by downward pressure on reimbursement
revenues, billing system/process challenges and accounts receivable collection
problems. The Company has been in default since September of 1995 with respect
to principal and interest payments and certain covenants under its credit
agreement (the "Credit Agreement") with respect to approximately $80.9 million
of secured indebtedness. The Company has also been in default since September
of 1995 with respect to interest payments related to its $40 million 7.5%
Convertible Subordinated Debentures due 2000 (the "Debentures") and the Note
issued by the Company in connection with the acquisition of Medical Group
Pathology Laboratory. See "Negotiations Regarding Glendale and MGPL Agreements"
below. The Company does not have available cash or other cash resources to cure
the defaults under the Credit Agreement or the Indenture covering the
Debentures, or otherwise to make interest or principal payments with respect to
its debt obligations. The Company continues to experience severe cash flow
problems, reductions in third party payor reimbursement rates, billing and
collection problems and effects and changes in the health care industry. In
addition, the Company has engaged investment bankers to assist and advise the
Company with respect to a possible restructuring of the Company's indebtedness.
No assurance can be given that the Company will become a party to any such
restructuring. Any such restructuring, if successful, would eliminate or
substantially dilute the value of existing stockholders' interests and would
significantly dilute or otherwise impair the recovery (if any) of the Company's
Debentureholders. As of May 31, 1996, the Company had a negative shareholder
equity position of $69.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
During the second quarter of fiscal year 1996, the Company entered
into negotiations for the restructuring of its bank debt. The negotiations
resulted in the third and fourth amendment to its Credit Agreement with a group
of banks led by Wells Fargo Bank National Association (the holders of the
Company's debt obligations pursuant to the Credit Agreement hereinafter are
referred to as the "Bank Group"). As a result of insufficient cash flows
caused by, among other things, reductions in third party payor reimbursement
rates, billing and collection problems and effects and changes in the health
care industry, the Company was unable to make interest payments under its
Credit Agreement due monthly since September 1995, each in the amount of
approximately $660,000 (excluding penalties on unpaid amounts), principal
amortization payments due on September 13, 1995 and October 6, 1995, each in
the amount of $600,000, principal amortization payments due on November 3,
1995, December 29, 1995 and March 31, 1996, each in the amount of $1,200,000,
and principal amortization payments due on February 7, 1996 and June 30, 1996,
each in the amount of $3.6 million. In addition, the
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Company failed to make two interest payments each in the amount of $1.5 million
in respect of its Debentures due on August 15, 1995 and February 15, 1996,
respectively. Failure to pay the interest with respect to the Debentures, as
well as failure to timely pay principal and interest with respect to the loans
under the Credit Agreement, constitute defaults under the Credit Agreement and
the Indenture governing the Debentures. Thus, all amounts owed under the
Credit Agreement and the Debentures have been classified as current liabilities
in the balance sheet since November 30, 1995. The deferred financing costs
related to the Credit Agreement and the Debentures of $1,450,140 and
$1,668,466, respectively, were written off as of August 31, 1995 and February
29, 1996, respectively.
On October 13, 1995, the Company was notified by the Nasdaq Stock
Market Listing Qualification Committee (the "Listing Committee") that the
Company's common stock would be removed from listing on the Nasdaq National
Market but would be listed on the Nasdaq SmallCap Market due to the Company's
inability to satisfy the Nasdaq National Market's net tangible assets
requirement. The Company was granted a temporary exception to the Nasdaq
National Market's net tangible asset requirement, which exception expired on
October 12, 1995. The Company's common stock began to trade on the Nasdaq
SmallCap Market on Monday October 16, 1995. On October 25, 1995, the Listing
Committee determined not to extend certain exceptions to the applicable listing
requirements, and the Company's common stock was removed from trading on the
Nasdaq SmallCap Market. The Company's common stock currently trades in the
over-the-counter market.
The removal of the Company's common stock from listing on the Nasdaq
National Market System constituted a Redemption Event under the Company's
Indenture governing its Debentures. Such Redemption Event required the Company
to offer to repurchase the Debentures from the holders thereof at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any. Written notice of the occurrence of such Redemption Event
was given to the registered holders of the Debentures on November 2, 1995, and
no such holder perfected its right to redeem such Debentures within the period
provided under the Indenture. In addition, under the terms of the Registration
Rights Agreement between the Company and holders of the Debentures, the Company
is obligated to maintain an effective registration statement covering the
Debentures and the Company's common stock with respect to which the Debentures
are convertible. The Company has not maintained such an effective registration
statement since June of 1995 and therefore, under the Registration Rights
Agreement, the Company may be liable to certain holders of the Debentures for
Liquidated Damages.
Approximately 64% of the Company's net revenue for the three months
ended May 31, 1996, was received from third-party payors that determine
themselves the rate at which they will reimburse the Company for services
provided to individuals insured by them. As a result of declining
reimbursement rates and other industry changes, the Company's operating income
as a percentage of net revenue has decreased substantially. The Company's
operating income (loss) as a percentage of net revenue was (0.3%) for the three
months ended on May 31, 1995, and (6.3%) for the three months ended May 31,
1996.
The Company continues to experience severe cash flow problems,
reductions in third-party payor reimbursement rates, billing and collection
problems and effects of significant
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changes in the health care industry to the date of this Quarterly Report. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." These problems raise
substantial doubt about the Company's ability to continue to exist as a going
concern.
Management has taken a number of actions in an effort to reduce
operating costs, improve cash collections, streamline the billing process and
increase revenue flows. These actions include:
- Elimination of 254 (approximately 21%) full time equivalent
employee positions.
- Consolidation of facilities. The Company's Fresno hub
laboratory was closed in June 1995 and consolidated into the
Sacramento laboratory. The Company's Southern California hub
laboratory was consolidated into the Sacramento laboratory in
June 1996. Both locations maintain expanded STAT
capabilities.
- Use of dedicated internal teams for concentrated accounts
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
- Completion of centralized billing capabilities.
- Data processing system changes to improve billing and
collection efforts.
- Increased focus and human resource additions in sales and
marketing to increase net revenues through internal growth.
- Increased use of state of the art technology associated with
field operations.
- Reductions in overhead by, among other things, closing
unprofitable locations.
- Nonprofitable capitated contracts in Southern California were
terminated in December 1995 and support services eliminated.
During and subsequent to the third quarter of fiscal year 1996, the company has
reduced expenses and consolidated a significant portion of the testing done at
its South Hub Lab into the Sacramento facility. As of June 1996, these efforts
have resulted in labor and infrastructure eliminations yielding approximately
$900,000 per month in expense reductions. In addition to 254 full time
employee equivalent reductions, some salaries have been reduced, unprofitable
patient service centers have been closed, unprofitable capitated contracts have
been eliminated and courier routes have been restructured.
Third Amendment to Credit Agreement and Issuance of Warrants.
On May 10, 1995, the Company and Wells Fargo Bank, National
Association, as Agent for the Bank Group, executed a third amendment (the
"Third Amendment") to the Credit Agreement, to increase aggregate availability
of funds under the Credit Agreement from $80 million to approximately $85
million. The Company had defaulted on certain obligations under
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the Credit Agreement, which defaults the Bank Group agreed to waive, as
discussed below. On the same date, the Company entered into an agreement with
Sutter Health (a California non-profit benefit corporation and the parent
company of Sutter Ambulatory Care Corporation ("SACC"), a principal stockholder
of the Company), whereby Sutter Health guaranteed $3.5 million of the Company's
indebtedness to the Bank Group (pursuant to the "Guaranty") in exchange for the
issuance by the Company of warrants (the "Warrants") to purchase up to 1.5
million shares of the Company's common stock (the "Common Stock"). Immediately
prior to these transactions, SACC owned approximately 23.1% of the outstanding
Common Stock.
The Third Amendment provided for deferral to December 31, 1995 of
principal payments scheduled under the Credit Agreement to be made March 31,
1995, and June 30, 1995. In addition, the Third Amendment provided for
increased principal amortization payments commencing March 31, 1996. The Third
Amendment also provided that the Company will pay all past-due interest, as
well as all current interest as it becomes due under the terms of the Credit
Agreement. The Third Amendment further provided for payment by the Company of
a $250,000 restructuring fee on December 31, 1995. Finally, the Third
Amendment modified certain financial covenants of the Credit Agreement through
December 31, 1995, at which point such covenants were to return to previously
existing levels set under the Credit Agreement. As of the effective date of
the Third Amendment, the Company was out of compliance with several of the
revised financial covenants.
In consideration for the Guaranty by Sutter Health, the Company agreed
to issue to Sutter Health the Warrants, providing for the right to purchase
Common Stock prior to the Expiration Date (as defined below). Upon execution
of the Guaranty, the Company issued a Warrant for the right to purchase up to
1.2 million shares (or approximately 19.9% of the Common Stock outstanding) in
three tranches. The first tranche consists of the right to purchase 125,000
shares of Common Stock, which became exercisable upon execution of the Guaranty
(May 10, 1995) at $4.2219 per share. The second tranche consists of the right
to purchase 687,500 additional shares of Common Stock, which also became
exercisable on May 10, 1995, at $5.1266 per share. The third tranche consists
of the right to purchase 387,500 additional shares of Common Stock, which
became exercisable on June 10, 1995, at $5.1266 per share.
The Expiration Date is defined as the ninetieth day following the date
that the Guaranty expires pursuant to its terms, which is the date on which all
indebtedness and payment obligations under the Credit Agreement are satisfied.
The Company issued a second Warrant to Sutter Health as of June 10,
1995. The second Warrant provides for the exercise, on terms identical to
those of the third tranche of the first Warrant, of up to 300,000 additional
shares of Common Stock (or approximately 5% of the Common Stock outstanding).
In order to issue the second Warrant on an expedited basis, it was
necessary for the Company to apply for an exemption from certain stockholder
approval requirements of the Nasdaq National Market, which is granted when
delay would "seriously jeopardize the financial viability of the enterprise."
The Company obtained such exemption, and, pursuant to Nasdaq requirements,
mailed a notice to the Company's shareholders in late May informing them of the
issuance of the Warrants.
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All shares of Common Stock that may be issued pursuant to the terms of
the Warrants carry registration rights, pursuant to which Sutter Health or its
registered assigns (each a "Warrant Holder") may: (i) prior to the Expiration
Date, require the Company to take actions necessary to permit the Warrant
Holder to sell shares of Common Stock issued pursuant to the Warrants (but may
not require the Company to file more than two registration statements relating
thereto); and (ii) prior to the date that is three years following the
Expiration Date, require the Company to include shares of Common Stock held by
the Warrant Holder in any registration, subject to certain exceptions, to be
effected by the Company. Other than fees of the Warrant Holder's counsel and
applicable filing fees and underwriting discounts, the Company is obligated to
pay all fees and expenses in connection with any registration effected pursuant
to these provisions.
The Company agreed to pay reasonable fees and expenses of Sutter
Health's outside advisors in connection with the Guaranty, up to $50,000. The
Company and Sutter Health further agreed that each would make its own filings,
and pay its own fees relating thereto, required as a result of issuance or
potential issuance of Common Stock pursuant to the Warrants, including filings
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Fourth Amendment to Credit Agreement.
On July 31, 1995, the Company entered into a Fourth Amendment to the
Credit Agreement (the "Fourth Amendment"). Under the Fourth Amendment, all
then existing defaults under the Credit Agreement were waived by the Bank
Group, and certain payment terms and covenants were modified as described
below.
Pursuant to the Fourth Amendment, the Company's obligations to make
principal amortization payments were amended to provide for payments of (i)
$1.2 million on each of July 31, 1995, November 3, 1995, December 29, 1995 and
March 31, 1996, (ii) $600,000 on September 13, 1995 and October 6, 1995, and
(iii) $3.6 million on February 7, 1996 and June 30, 1996 and each quarter
thereafter. Prior to the Fourth Amendment, the Company was obligated to make
principal amortization payments of $1.2 million on September 30, 1995, $3.6
million on December 31, 1995, and $3.6 million each quarter thereafter.
In addition, the Company agreed to make monthly interest payments, and
agreed to make the interest payment that would otherwise be due on August 31,
1995, due on August 14, 1995. Previously, interest was payable quarterly.
LIBOR rate interest options were eliminated. Interest rates for the periods of
January 1, 1996 through March 31, 1996, April 1, 1996 through June 30, 1996 and
July 1, 1996 through the term of the Credit Agreement, were increased to an
annual rate of prime plus 2%, prime plus 2.5% and prime plus 3%, respectively.
The Company failed to make interest payments due monthly since September, 1995,
each in the amount of approximately $660,000, (excluding penalties on unpaid
amounts) and also failed to make the principal amortization payments under the
Credit Agreement due on September 13, 1995 and October 6, 1995 (each in the
amount of $600,000), the principal amortization payments due on November 3,
1995, December 29, 1995 and March 31, 1996 (each in the amount of $1.2
million), and principal amortization payments due on February 7, 1996 and June
30, 1996 (each in the amount of $3.6 million).
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The Fourth Amendment also provided for certain adjustments to various
financial covenants to reflect the actual financial results for the fiscal year
ended February 28, 1995 and anticipated future results. Also, on July 31,
1995, the Company paid $100,000 of the $250,000 restructuring fee due to the
Bank Group on December 31, 1995 under the Third Amendment to the Credit
Agreement. The Company did not make the remaining payment of $150,000 due on
December 31, 1995 as related to the restructure fee.
As of the date hereof, all original members of the Bank Group have
assigned to third parties their interests in the Company's debt obligations
under the Credit Agreement. These third parties are Oaktree Capital
Management, L.L.C., Belmont Capital Partners II, L.P., Belmont Fund, L.P.,
Fidelity Copernicus Corp., Fidelity Overseas Corporation and Merrill Lynch,
Pierce, Fenner & Smith, Inc. These assignments were made pursuant to terms and
conditions that do not impact the nature of the Company's obligations arising
out of the Credit Agreement or the existing defaults thereunder.
Negotiations Regarding Glendale and MGPL Agreements.
The Company is negotiating with Pathologists' Clinical Laboratories of
Glendale, Inc. to amend its Agreement of Purchase and Sale of Assets relating
to the purchase of the Company's Glendale facility, and that the Company is
currently in default in the payment of its obligations under that agreement.
As of June 30, 1996, the outstanding principal amount of the Note issued by the
Company to Pathologists Clinical Laboratory of Glendale in connection with such
purchase was approximately $1,485,000.
The Company was in negotiations with Medical Group Pathology
Laboratory, Inc. to amend its Agreement of Purchase and Sale of Assets to
resolve disputes relating to the purchase of the Company's Santa Barbara
facility (the "MGPL Agreement"); however, the Company was unable to negotiate a
successful resolution of such dispute, and the Company is currently in default
in the payment of its obligations under the MGPL Agreement and the Note issued
to Medical Group Pathology Laboratory, Inc. by the Company in connection
therewith. On November 7, 1995, Medical Group Pathology Laboratory, Inc. filed
suit against the Company with respect to the Company's breach of its
obligations under such Note, in connection with which a default was entered in
favor of Medical Group Pathology Laboratory, Inc. See "Item 3. Legal
Proceedings." The Company was able to have the default set aside before a
judgement was entered in connection therewith, and on May 27, 1996, the Company
entered into a 30-day standstill agreement with Medical Group Pathology
Laboratory, Inc. pursuant to which the parties agreed to attempt in good faith
to determine the precise amount owed to Medical Group Pathology Laboratory,
Inc. by the Company under the MGPL Agreement. While the standstill agreement
has expired, the Company believes that it is likely that a permanent settlement
will be entered into between the parties in the near future. However, the
Company has no substantive defenses to this lawsuit. As of June 30, 1996, the
outstanding principal amount of the Note issued by the Company to Medical Group
Pathology Laboratory, Inc. in connection with the MGPL Agreement was $890,000.
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GENERAL
The Company was incorporated in Delaware in April 1992 to succeed to
the business of California Regional Reference Laboratory, a California limited
partnership (the "Predecessor Partnership"), which was formed in 1986. The
Company completed an initial public offering of 1,725,000 shares of its Common
Stock in October 1992, the net proceeds to the Company of which were
approximately $12.6 million. The Company operates in one industry segment,
clinical laboratory testing.
The Company provides clinical laboratory services in the State of
California. As of June 30, 1996, the Company operated one full-service
clinical laboratory in Sacramento, 20 "STAT" laboratories, and more than 200
patient service centers ("PSCs") located in close proximity to referral sources
throughout the Company's service areas. The Company has a full service
laboratory and more than 70 patient service centers in the Sacramento area.
The Company is a "hybrid" among clinical laboratory companies in that it serves
both as a traditional reference laboratory for approximately 8500 office-based
physician-clients and as an independent clinical laboratory to acute care
hospital customers.
(2) RATIO OF EARNINGS TO FIXED CHARGES:
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
consists of income before income taxes, interest on indebtedness and imputed
interest on capital lease obligations; "fixed charges" consists of interest on
indebtedness and imputed interest on capital lease obligations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
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1996 1995
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Ratio of Earnings to Fixed Charges N/A(A) N/A(A)
</TABLE>
(A) Earnings are inadequate to cover fixed charges. The amount of the
deficiency is $4,998,000 and $3,016,000 for the three months ended May
31, 1996 and 1995, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FISCAL QUARTER ENDED MAY 31, 1996 COMPARED TO FISCAL QUARTER MAY 31, 1995 ENDED
Net revenue fell from $25.1 million in the three months ended May 31,
1995 to $19.7 million in the three months ended May 31, 1996, a decrease of
21.3%. This decrease is the result of reduced reimbursement from third party
payors and the elimination of some unprofitable capitated contracts and the
loss of some of the associated business related to those capitated contracts.
Direct laboratory expense fell from $8.5 million for the three months
ended May 31, 1995 to $6.4 million for the three months ended May 31, 1996, a
decrease of 24.7%. As a percent of net revenue, direct laboratory expense
decreased from 33.9% to 32.3%. This decrease is the result of reduced volumes
and cost cutting measures taken in the last 12 months.
Laboratory support expense declined from $6.4 million to $5.2 million
for the fiscal quarter ended May 31, 1995 and May 31, 1996, respectively, a
decrease of 18.8%. As a percent of net revenue laboratory support grew from
25.4% for the three months ended May 31, 1995 to 26.3% for the three months
ended May 31, 1996. The percentage of net revenue increase is a function of
lower revenues while the expense decrease is the result of cost cutting
measures taken over the last 12 months to include full service laboratory
processing consolidation into the Sacramento hub laboratory.
Overhead expense, which includes selling, general and administrative
expense, provision for doubtful accounts, depreciation and amortization, was
reduced from $10.3 million in the fiscal quarter ended May 31, 1995 to $9.4
million for the fiscal quarter ended May 31, 1996, a decrease of 8.9%. As a
percent of net revenue, overhead expense grew from 41.0% to 47.5%, again a
function of declining revenue.
Selling, general and administrative expense fell from $6.6 million for
the three months ended May 31, 1995 to $5.4 million for the three months ended
May 31, 1996, a decrease of 18.2%. This expense reduction is the result of
cost cutting measures taken by the company in response to reduced reimbursement
from third party payors.
Provision for doubtful accounts was increased from $933,000 to $1.4
million for the first fiscal quarters ended May 31, 1995, and May 31, 1996,
respectively. As a percent of net revenue, provision for doubtful accounts was
increased from 3.7% for the fiscal quarter ended May 31, 1995 to 7.0% for the
fiscal quarter ended May 31, 1996. The provision for doubtful accounts is
adjusted based upon actual collection history and management's assessment of
the health of the California market and the economy as a whole.
Depreciation and amortization expense fell from $2.8 million for the
fiscal quarter ended May 31, 1995 to $2.5 million for the fiscal quarter ended
May 31, 1996. This reduction is the result of lower amortization expense due
to the $25.0 million write down of intangibles at fiscal year end February 29,
1996.
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Operating loss grew from a loss of $69,000 for the fiscal quarter
ended May 31, 1995 to a loss of $1.2 million for the fiscal quarter ended May
31, 1996. As a percent of net revenue, operating loss grew from (0.3%) to
(6.3%) for the three months ended May 31, 1995, and May 31, 1996, respectively.
This increase resulted from the downward reimbursement pressure on revenue.
Expense reductions and laboratory consolidation reduced the potential loss in
operating income.
Interest expense increased from $2.9 million for the three months
ended May 31, 1995 to $3.8 million for the three months ended May 31, 1996.
The increase in interest expense is the result of penalties incurred during the
first fiscal quarter ended May 31, 1996, due to loans in default.
Net loss increased from a loss of $3.0 million for the fiscal quarter
ended May 31, 1995 to a loss of $5.0 million for the fiscal quarter ended May
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and results of operations of the Company were affected
significantly during the fiscal quarter ended May 31, 1996, and continue to be
adversely affected to the date of this Quarterly Report, by downward pressure
on reimbursement revenues, billing system/process challenges and accounts
receivable collection problems. The Company continues to experience severe
cash flow problems, reductions in third- party payor reimbursement rates,
billing and collection problems and effects of significant changes in the
health care industry. These problems continue to raise substantial doubt about
the Company's ability to continue to exist as a going concern. As of June 30,
1996, the Company had no available borrowing capacity under the Credit
Agreement or otherwise and no excess cash. In addition, the Company has
engaged investment bankers to assist and advise the Company with respect to a
possible restructuring of the Company's indebtedness. No assurance can be
given that the Company will become a party to any such restructuring. Any such
restructuring, if successful, would eliminate or substantially dilute the value
of existing stockholders' interests and would significantly dilute or otherwise
impair the recovery (if any) of the Company's Debentureholders.
During the second quarter of fiscal 1996, the Company entered into
negotiations for the restructuring of its bank debt. The negotiations resulted
in the third and fourth amendment to its Credit Agreement with its Bank Group
led by Wells Fargo Bank National Association. Bank fees, legal fees,
professional advisor fees and related costs of $1,062,073 were incurred. As a
result of insufficient cash flows caused by, among other things, reductions in
third-party payor reimbursement rates, billing and collection problems and
effects and changes in the health care industry, the Company was unable to make
interest payments due monthly since September, 1995, each in the amount of
approximately $660,000 (excluding penalties on unpaid amounts), principal
amortization payments due on September 13, 1995 and October 6, 1995, each in
the amount of $600,000, principal amortization payments due on November 3, 1995
and December 29, 1995, each in the amount of $1.2 million, and principal
amortization payments due on February 7, 1996 and June 30, 1996, each in the
amount of $3.6 million. In addition, the Company failed to make two interest
payments each in the amount of $1.5 million in respect of its Debentures due on
August 15, 1995 and February 16, 1996, respectively. Failure to pay the
interest with respect to the Debentures, as well as failure to timely pay
principal and interest
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with respect to the loans under the Credit Agreement, constitute defaults under
the Credit Agreement and the Indenture governing the Debentures. Thus, all
amounts owed under the Credit Agreement and the Debentures have been classified
as current liabilities in the balance sheet since November 30, 1995.
On October 13, 1995, the Company was notified by the Nasdaq Stock
Market Listing Qualification Committee (the "Listing Committee") that the
Company's common stock would be removed from listing on the Nasdaq National
Market but would be listed on the Nasdaq SmallCap Market due to the Company's
inability to satisfy the Nasdaq National Market's net tangible assets
requirement. The Company had been granted a temporary exception to the Nasdaq
National Market's net tangible asset requirement, which exception expired on
October 12, 1995. The Company's common stock began to trade on the Nasdaq
SmallCap Market on Monday, October 16, 1995. On October 25, 1995, the Listing
Committee determined not to extend certain exceptions to the applicable listing
requirements, and the Company's common stock was removed from trading on the
Nasdaq SmallCap Market. The Company's common stock currently trades in the
over-the-counter market.
The removal of the Company's common stock from listing on the Nasdaq
National Market System constituted a Redemption Event under the Company's
Indenture governing its Debentures. Such Redemption Event required the Company
to offer to repurchase the Debentures from the holders thereof at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any. Written notice of the occurrence of such Redemption Event
was given to the registered holders of the Debentures on November 2, 1995, and
no such holder perfected its right to redeem such Debentures within the period
provided under the Indenture. In addition, under the terms of the Registration
Rights Agreement between the Company and the holders of the Debentures, the
Company is obligated to maintain an effective registration statement covering
the Debentures and the Company's common stock with respect to which the
Debentures are convertible. The Company has not maintained such an effective
registration statement since June of 1995 and therefore, under the Registration
Rights Agreement, the Company may be liable to certain holders of the
Debentures for liquidated damages.
Management has taken a number of actions in an effort to reduce
operating costs, improve cash collections, streamline the billing process and
increase revenue flows. These actions include:
- Elimination of 254 (approximately 21%) full time equivalent
employee positions.
- Consolidation of facilities. The Fresno hub laboratory was
closed in June 1995 and consolidated into the Sacramento
laboratory. The Company's Southern California hub laboratory
was downsized in June 1996 and consolidated into the
Sacramento laboratory. Both locations maintain expanded STAT
facilities.
- Use of dedicated internal teams for concentrated account
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
- Completion of centralized billing capabilities.
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- Data processing system changes to improve billing and
collection efforts.
- Increased focus and human resource additions in sales and
marketing to increase net revenues through internal growth.
- Increased use of state of the art technology associated with
field operations.
- Reductions in overhead by, among other things, closing
unprofitable locations.
- Non-profitable capitated contracts in Southern California were
terminated in December 1995 and support services eliminated.
During and subsequent to the third quarter of fiscal year 1996, the Company has
reduced expenses and consolidated a significant portion of the testing done at
its South Hub Lab into the Sacramento facility. As of June 1996, these efforts
have resulted in labor and infrastructure eliminations yielding approximately
$900,000 per month in expense reductions. In addition to 254 full time
employee equivalent reductions, some salaries have been reduced, unprofitable
patient service centers have been closed, unprofitable capitated contracts have
been eliminated and courier routes have been restructured.
Net cash flows from operating activities increased from ($475,000) in
the first fiscal quarter 1996 to $9,000 from the same period in fiscal 1997 as
a result of increasing accounts payable and other accrued expenses.
Cash flows from investing activities generally have been negative
through the periods prior to and including the first quarter of fiscal 1997,
due almost wholly to the Company's laboratory acquisitions and purchases of
equipment and leasehold improvements. Uses of cash from investing activities
decreased from $325,000 for the quarter ended May 31, 1995, to $109,000 for
same period in fiscal 1997. The decrease in cash used in investing activities
in fiscal 1997 is due to reduced equipment and leasehold purchases.
Cash flows from financing activities have reflected borrowings and
repayments of long-term debt. Cash used for financing activities for the
fiscal quarter ended May 31, 1996 was $215,000 as contrasted with cash provided
by financing activities of $1.9 million for the first quarter of fiscal 1995.
Cash provided by financing activities reflected borrowings to finance various
capital projects.
As of May 31, 1996, the Company had approximately $124.8 million of
indebtedness of which $40 million represents the Debentures; approximately
$80.9 million represents bank borrowings under certain term loans and lines of
credit; approximately $2.4 million is owed to the former owners of acquired
laboratories; approximately $150,000 is owed to the City of Burbank as a
redevelopment loan (the amount is forgiven ratably over 10 years if the Company
continues to occupy the building); and approximately $1.3 million is owed under
capital lease obligations. Of such indebtedness, $40 million bears interest at
7.5% and is due by its terms in August 2000; $47.4 million in bank borrowings
bears interest at prime plus 1.125% and is due by its terms in March 2000;
$33.5 million in bank borrowings bears interest at prime plus 1.125% and is due
by its terms in March 1997; $2.4 million bears rates ranging from 6.0% to
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6.7% and is due by its terms in July 1996; $150,000 is non-interest bearing and
is due by its terms in September 2005. All of such indebtedness (other than
the $150,000 scheduled to mature in September 2005) is currently in default.
The Company currently has no resources to repay such indebtedness.
For the quarter ended May 31, 1996, the Company's revenue from third
party payors who determine the level of reimbursement to submit to the Company
represented approximately 64% of the Company's net revenue. This is
represented by Medicare 20%, MediCal 13% and insurance providers 31%. In
addition, approximately 4% of the Company's net revenue for the quarter ended
May 31, 1996 was from managed care providers on a capitated basis. As a result
of reimbursement pressures and other industry changes, the Company's operating
income as a percentage of net revenue has decreased substantially in the period
from March 1, 1992 through May 31, 1996. The Company's operating income as a
percentage of net revenue, excluding unusual nonrecurring items, was 18.5%,
11.8%, 9.2% and (13.5%) for the years ended February 28 (29), 1993, 1994, 1995
and 1996, respectively, and (6.3%) for the three months ended May 31, 1996.
As a result of the challenges in the integration of certain of the
Damon operations, declining reimbursement from insurance payors, Medicare and
MediCal, and billing and collection problems, the Company began to experience
severe cash flow problems in the second half of fiscal 1995. The Company
failed to make a required principal and interest payment in March 1995 and
entered into a Third Amendment to the Credit Agreement with the Bank Group.
Due to noncompliance with certain financial covenants under the Third
Amendment to the Credit Agreement, the Company entered into a Fourth Amendment
to the Credit Agreement on July 31, 1995. Pursuant to the Fourth Amendment,
the Company's obligations to make principal amortization payments were amended
to provide for payments of (i) $1.2 million on each of July 31, 1995, November
3, 1995, December 29, 1995 and March 31, 1996, (ii) $600,000 on September 13,
1995 and October 6, 1995 and (iii) $3.6 million on February 7, 1996 and June
30, 1996 and each quarter thereafter. Prior to the Fourth Amendment, the
Company was obligated to make principal amortization payments of $1.2 million
on September 30, 1995, $3.6 million on December 31, 1995, and $3.6 million each
quarter thereafter.
In addition, the Company agreed to make monthly interest payments, and
agreed to make the interest payment that would otherwise be due on August 31,
1995, due on August 14, 1995. Previously, interest was payable quarterly.
LIBOR rate interest options were eliminated. Interest rates for the periods of
January 1, 1996 through March 31, 1996, April 1, 1996 through June 30, 1996 and
July 1, 1996 through the term of the Credit Agreement, were increased to an
annual rate of prime plus 2%, prime plus 2.5% and prime plus 3%, respectively.
The Company failed to make the interest payments due monthly since September,
1995, each in the amount of approximately $660,000, (excluding penalties on
unpaid amounts), and also failed to make the principal amortization payments
under the Credit Agreement due on September 13, 1995 and October 6, 1995 (each
in the amount of $600,000), the principal amortization payments due on November
3, 1995, December 29, 1995 and March 31, 1996 (each in the amount of $1.2
million), and principal amortization payments due on February 7, 1996 and June
30, 1996 (each in the amount of $3.6 million). The Company has been in default
since September of 1995 with respect to approximately $83 million of secured
indebtedness under the Credit Agreement.
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The Fourth Amendment also provides for certain adjustments to various
financial covenants to reflect the actual financial results for the fiscal year
ended February 28, 1995 and anticipated future results. Also, on July 31,
1995, the Company paid $100,000 of the $250,000 restructuring fee due to the
Bank Group on December 31, 1995 under the Third Amendment to the Credit
Agreement. The Company did not make the remaining payment of $150,000 due on
December 31, 1995 as related to the Restructuring Fee.
In connection with the Third Amendment of the Credit Agreement, the
Company engaged outside advisors to assist it with bank discussions, improving
cash flow and billing process enhancements. The Company also engaged an
investment banking firm to assist and advise the Company regarding a proposed
restructuring of the Company's indebtedness.
As of the date hereof, all original members of the Bank Group have
assigned to third parties their interests in the Company's debt obligations
under the Credit Agreement. These third parties are Oaktree Capital
Management, L.L.C., Belmont Capital Partners II, L.P., Belmont Fund, L.P.,
Fidelity Copernicus Corp., Fidelity Overseas Corporation and Merrill Lynch,
Pierce, Fenner & Smith, Inc. These assignments were made pursuant to terms and
conditions that do not impact the nature of the Company's obligations arising
out of the Credit Agreement or the existing defaults thereunder.
The Company continues to experience severe cash flow problems,
reductions in third-party payor reimbursement rates, billing and collection
problems and effects of significant changes in the health care industry. These
problems raise substantial doubt about the Company's ability to continue to
exist as a going concern.
At May 31, 1996, the Company had approximately $77,000 in cash. The
Company's business does not generally require significant expenditures for
property, plant, and equipment. Expenditures related to such capital items
were approximately 0.5% of net revenues for fiscal quarter ended May 31, 1996.
As of May 31, 1996, the Company had no material commitments for capital
expenditures.
The Company anticipates that its operating cash needs for the near
term will be met by accounts receivable collection. The foregoing statement
constitutes forward-looking information, and no assurance can be given that
such collections will be sufficient to satisfy the Company's operating cash
needs for the near term. Among the factors that could cause actual results to
differ materially from such expectations are that the Company continues to
experience severe cash flow problems, reductions in third-party payor
reimbursement rates, billing and collection problems and effects of significant
changes in the health care industry. These problems continue to raise
substantial doubt about the Company's ability to continue to exist as a going
concern. The Company currently has no sources of cash other than the
collection of its accounts receivable, and has no sources of cash to cure the
defaults under the Credit Agreement or the Indenture covering the Debentures or
otherwise to make interest or principal payments with respect to its debt
obligations. As of May 31, 1996, the Company had no borrowing capacity
available under the Credit Agreement. Should the Company's collections of its
accounts receivable not be sufficient to meet its operating cash needs it would
be necessary for the Company to seek additional borrowing capacity from its
Bank Group or to seek protection from its creditors under the United States
Bankruptcy Code. No assurance can be given that the
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Company's Bank Group would favorably consider or act upon such a request by the
Company if made.
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PHYSICIANS CLINICAL LABORATORY, INC.
PART II -- OTHER INFORMATION
MAY 31, 1996
Item 1. Legal Proceedings
As previously disclosed in the Company's Annual Report on Form 10-K
for the fiscal year ended February 29, 1996, there are several material pending
legal proceedings against the Company. As previously disclosed in the
Company's Form 10-Q Reports for the quarters ended August 31, 1995 and November
30, 1995, a dispute has arisen between the Company and Medical Group Pathology
Laboratory, Inc. ("MGPL"), the seller of the Santa Barbara facility which the
Company acquired in 1992 (the "Acquisition"), relating to the payment
obligations under the Agreement of Purchase and Sale of Assets between the
Company and MGPL. The Company and MGPL have been unable to reach successful
negotiations with respect to this matter. On November 8, 1995, MGPL commenced
an action (the "Litigation") against the Company in the Superior Court of the
State of California, Santa Barbara County, captioned Medical Group Pathology
Laboratory, Inc. v. Physicians Clinical Laboratory, Inc. (Case No. 210318).
The complaint alleges breach of the promissory note executed by the Company in
connection with the Acquisition and failure to pay amounts due thereunder
equalling $1,169,505 plus interest and late fees, and seeks compensatory
damages in the amount of sums allegedly due, in addition to unspecified general
damages and attorney's fees. In December, 1995, a default was entered against
the Company in the Litigation. The Company was able to have the default set
aside before a judgment was entered in connection therewith, and on May 27,
1996, the Company has entered into a 30-day standstill agreement with MGPL
pursuant to which the parties agreed to attempt in good faith to determine the
precise amount owed to MGPL by the Company under the Agreement of Purchase and
Sale of Assets between the Company and MGPL in connection with the Acquisition.
While the standstill agreement has expired, the Company believes that it is
likely that a permanent settlement will be entered into between the parties in
the near future. However, the Company has no substantive defenses to the
Litigation.
On June 20, 1996, suit was filed against the Company in the Superior
Court of Sacramento under the caption Maintenance Management Corporation v.
Physicians Clinical Laboratory, Inc., Case No. 96AS03171. This lawsuit relates
to a management contract entered into among the Company and the plaintiff
therein, and alleges breach of contract and fraudulent and negligent
misrepresentation. The complaint seeks compensatory damages in excess of $3.0
million, interest and expenses, as well as exemplary damages. However, based
upon the facts presently known to the Company, it does not believe that the
merits of these claims, if any, justify the amount of damages sought, and the
Company does not believe that this lawsuit, if adversely determined, would have
a material adverse effect on the financial condition of the Company.
A number of separate lawsuits have been filed against the Company by
former employees alleging mainly discriminatory and/or wrongful discharge
related to the termination of their
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employment by the Company. These lawsuits are in various stages of litigation.
The Company intends to defend vigorously against these actions, and does not
expect these matters, either individually or in the aggregate, to have a
material adverse effect on the financial condition of the Company.
In addition, the Company is in default with respect to several of its
other outstanding obligations and is generally having difficulty meeting its
obligations to various creditors, as a result of which several of such
creditors have filed lawsuits against the Company. The Company has no
substantive defenses to most of such matters.
The lessor of the Company's Burbank facility currently contends that
the Company is in default with respect to approximately $135,000 under the lease
of the Burbank facility, which amounts represent previously deferred rent
accrued during 1994. The Company disputes the lessor's contention that such
amount is currently due. On July 10, 1996, the lessor threatened to file a
lawsuit against the Company if the Company failed to pay such amount. The
Company is currently negotiating with the lessor to reach a settlement with
respect to this issue, and the Company expects to reach such a settlement in the
near future.
To date, the Company has not experienced any significant liability
with respect to such claims.
The Company maintains property, casualty, liability and other types of
insurance on various aspects of its business and properties. The Company
believes, based on its past experience, that its insurance coverage is adequate
for its business.
Item 2. Defaults on Senior Securities
The Company has been in default since September of 1995 with respect
to principal and interest payments and certain covenants under its credit
agreement (the "Credit Agreement") with respect to approximately $80.9 million
of secured indebtedness. The Company has also been in default since September
of 1995 with respect to interest payments related to its $40 million 7.5%
Convertible Subordinated Debentures due 2000 (the "Debentures") and the Note
issued by the Company in connection with the acquisition of Medical Group
Pathology Laboratory. See "Other Indebtedness" below. The Company does not
have available cash or other cash resources to cure the defaults under the
Credit Agreement or the Indenture covering the Debentures, or otherwise to make
interest or principal payments with respect to its debt obligations.
Credit Agreement Defaults. As a result of delays in the integration
of certain of the Damon operations, declining reimbursements from insurance
payors, Medicare and MediCal and billing and collection problems, the Company
began to experience severe cash flow problems in the second half of fiscal
1995. The Company failed to make the March 31, 1995 principal and interest
payment under the Company's Credit Agreement and the due date was extended by
the Bank Group to April 24, 1995. When the April 24, 1995 due date was not
met, the Bank Group notified the Company that it was in default of the Credit
Agreement. The Company and the Bank Group entered into the Third Amendment to
the Credit Agreement on May 10, 1995. In connection with the Third Amendment
to the Credit Agreement, the Bank Group required Sutter Health to provide a
guarantee of the Company's borrowings under the Credit Agreement in the amount
of $3,500,000. Sutter Health provided that guarantee on May 10, 1995 (the
effective date). In exchange for the guarantee, Sutter Health received
warrants to purchase up to 1,500,000 shares of the Company's stock at prices
ranging from $4.2219 to $5.1266 per share. The Third Amendment to the Credit
Agreement provided a waiver of the conditions of default and revised certain
financial covenants. Upon the announcement of the Company's fiscal year 1995
results of operations, the Company was out of compliance with several of the
revised financial covenants. The Third Amendment provided for automatic
acceleration of payments in
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the event of default without notice of any kind by the Bank Group. As such,
all loans under the Credit Agreement were due and payable immediately.
On July 31, 1995, the Company entered into another amendment to the
Credit Agreement, which modified the schedule under which principal
amortization payments and interest payments are to be made by the Company, and
provided adjustments to various financial covenants, among other things. The
Company has been in default since September of 1995 with respect to payments of
principal and interest and certain covenants under the Credit Agreement with
respect to approximately $80.9 million of secured indebtedness.
The Company failed to make interest payments due monthly since
September 1995 under the Credit Agreement, each in the amount of approximately
$660,000 (excluding penalties on unpaid amounts), and also failed to make the
principal amortization payments under the Credit Agreement due on September 13,
1995 and October 6, 1995 (each in the amount of $600,000), the principal
amortization payments due on November 3, 1995, December 29, 1995 and March 31,
1996 (each in the amount of $1.2 million), principal amortization payments due
on February 7, 1996 and June 30, 1996 (each in the amount of $3.6 million).
The Fourth Amendment also provides for certain adjustments to various
financial covenants to reflect the actual financial results for the fiscal year
ended February 28, 1995 and anticipated future results. Also, on July 31,
1995, the Company paid $100,000 of the $250,000 restructuring fee due to the
Bank Group on December 31, 1995 under the Third Amendment to the Credit
Agreement. The Company did not make the remaining payment of $150,000 due on
December 31, 1995 as related to the restructure fee.
As of the date hereof, all original members of the Bank Group have
assigned to third parties their interests in the Company's debt obligations
under the Credit Agreement. These third parties are Oaktree Capital
Management, L.L.C., Belmont Capital Partners II, L.P., Belmont Fund, L.P.,
Fidelity Copernicus Corp., Fidelity Overseas Corporation and Merrill Lynch,
Pierce, Fenner & Smith, Inc. These assignments were made pursuant to terms and
conditions that do not impact the nature of the Company's obligations arising
out of the Credit Agreement or the existing defaults thereunder.
Subordinated Debentures. The Company failed to make two interest
payments each in the amount of $1.5 million due on August 15, 1995 and February
15, 1996, respectively, in respect of its Debentures. Even though the
Debentures have not been accelerated, the Trustee under the Indenture governing
the Debentures or holders of at least 25% of the aggregate principal amount of
Debentures may accelerate the Debentures as a result of such default.
The Company requested waivers of the interest payment default under
the Debentures in exchange for two shares of Common Stock of the Company per
$1,000 principal amount of Debentures held by each debentureholder consenting
to such waiver. Such agreements to be entered into between the Company and
individual debentureholders were not effective unless the Company received
executed waivers from at least holders of 50% of the aggregate principal amount
of Debentures. The 50% acceptance condition was not met, and therefore no such
waivers became effective.
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On October 13, 1995, the Company was notified by the Nasdaq Stock
Market Listing Qualification Committee (the "Listing Committee") that the
Company's common stock would be removed from listing on the Nasdaq National
Market but would be listed on the Nasdaq SmallCap Market due to the Company's
inability to satisfy the Nasdaq National Market's net tangible assets
requirement. The Company was granted a temporary exception to the Nasdaq
National Market's net tangible asset requirement, which exception expired on
October 12, 1995. The Company's common stock began to trade on the Nasdaq
SmallCap Market on Monday October 16, 1995. On October 25, 1995, the Listing
Committee determined not to extend certain exceptions to the applicable listing
requirements, and the Company's common stock was removed from trading on the
Nasdaq SmallCap Market. The Company's common stock currently trades in the
over-the-counter market.
The removal of the Company's common stock from listing on the Nasdaq
National Market System constituted a Redemption Event under the Company's
Indenture governing its Debentures. Such Redemption Event required the Company
to offer to repurchase the Debentures from the holders thereof at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any. Written notice of the occurrence of such Redemption Event
was given to the registered holders of the Debentures on November 2, 1995, and
no such holder perfected its right to redeem such Debentures within the period
provided under the Indenture. In addition, under the terms of the Registration
Rights Agreement between the Company and holders of the Debentures, the Company
is obligated to maintain an effective registration statement covering the
Debentures and the Company's common stock with respect to which the Debentures
are convertible. The Company has not maintained such an effective registration
statement since June of 1995 and therefore, under the Registration Rights
Agreement, the Company may be liable to certain holders of the Debentures for
Liquidated Damages. Redemption will be at the option of the individual holders
of the Debentures who meet the procedural requirements specified in the
Indenture.
Other Indebtedness. The Company is negotiating with Pathologists'
Clinical Laboratories of Glendale, Inc. to amend its Agreement of Purchase and
Sale of Assets relating to the purchase of the Company's Glendale facility, and
that the Company is currently in default in the payment of its obligations
under that agreement. As of June 30, 1996, the outstanding principal amount of
the Note issued by the Company to Pathologists Clinical Laboratory of Glendale
in connection with such purchase was approximately $1,485,000.
The Company was in negotiations with Medical Group Pathology
Laboratory, Inc. to amend its Agreement of Purchase and Sale of Assets to
resolve disputes relating to the purchase of the Company's Santa Barbara
facility (the "MGPL Agreement"); however, the Company was unable to negotiate a
successful resolution of such dispute, and the Company is currently in default
in the payment of its obligations under the MGPL Agreement and the Note issued
to Medical Group Pathology Laboratory, Inc. by the Company in connection
therewith. On November 7, 1995, Medical Group Pathology Laboratory, Inc. filed
suit against the Company with respect to the Company's breach of its
obligations under such Note, in connection with which a default was entered in
favor of Medical Group Pathology Laboratory, Inc. See "Item 3. Legal
Proceedings." The Company was able to have the default set aside before a
judgement was entered in connection therewith, and on May 27, 1996, the Company
entered into a 30-day standstill agreement with Medical Group Pathology
Laboratory, Inc. pursuant to which the
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parties agreed to attempt in good faith to determine the precise amount owed to
Medical Group Pathology Laboratory, Inc. by the Company under the MGPL
Agreement. While the standstill agreement has expired, the Company believes
that it is likely that a permanent settlement will be entered into between the
parties in the near future. However, the Company has no substantive defenses
to this lawsuit. As of June 30, 1996, the outstanding principal amount of the
Note issued by the Company to Medical Group Pathology Laboratory, Inc. in
connection with the MGPL Agreement was $890,000.
<TABLE>
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Page
Item 3. Exhibits and Reports on Form 8-K Number
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<S> <C> <C>
a. Exhibits
4.1 First Amendment to Credit Agreement, dated as of July 28, 1994 (incorporated by reference to Exhibit 4.2 of
the Company's Current Report on Form 8-K for May 8, 1995) (without exhibits and schedules).
4.2 Second Amendment to Credit Agreement, dated as of September 27, 1994 (incorporated by reference to Exhibit
4.3 of the Company's Current Report on Form 8-K for May 8, 1995) (without exhibits and schedules).
4.3 Third Amendment to Credit Agreement, dated as of May 10, 1995 (incorporated by reference to Exhibit 4.4 of
the Company's Current Report on Form 8-K for May 8, 1995) (without exhibits and schedules).
4.4 Form of Fourth Amendment to Credit Agreement, dated as of July 31, 1995 (incorporated by reference to Exhibit
4.13 of the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1995) (without
exhibits and schedules).
.
4.5 Guaranty, dated as of May 10, 1995, granted by Sutter Health to the Banks (incorporated by reference to
Exhibit 4.5 of the Company's Current Report on Form 8-K for May 8, 1995).
4.6 Form of Guaranty executed by Diagnostic Laboratories, Inc., Regional Reference Laboratory Governing
Corporation, and Quantum Clinical Laboratories, Inc., each a subsidiary corporation of the Company, and
California Regional Reference Laboratory, a limited partnership of which the Company is, indirectly, the sole
general partner and limited partner (incorporated by reference to Exhibit 4.6 of the Company's Current Report
on Form 8-K for May 8, 1995).
</TABLE>
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<TABLE>
<S> <C> <C>
4.7 Agreement, dated as of May 10, 1995, between the Company and Sutter Health (incorporated by reference to
Exhibit 4.7 of the Company's Current Report on Form 8-K for May 8, 1995).
4.17 Warrant W-001, dated as of May 10, 1995 (incorporated by reference to Exhibit 4.8 of the Company's Current
Report on Form 8-K for May 8, 1995).
12.1 Statement regarding calculation of ratios of earnings to fixed charges. 27
</TABLE>
b. Reports on Form 8-K filed during the quarter ended May 31,
1996:
None.
-25-
<PAGE> 26
PHYSICIANS CLINICAL LABORATORY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIANS CLINICAL LABORATORY, INC.
(Registrant)
August 5, 1996 /s/ Nathan L. Headley
-------------------------------------
Nathan L. Headley
President and Chief Executive Officer
/s/ Richard M. Brooks
-------------------------------------
Richard M. Brooks
Senior Vice President
Chief Financial Officer
/s/ Wayne E. Cottrell
-------------------------------------
Wayne E. Cottrell
Vice President, Finance
(Chief Accounting Officer)
-26-
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands and dollars, except ratio information)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C> <C>
1. Earnings
Pre-tax income (4,998) (3,016)
Interest expense(1) 3,752 2,947
------ ------
(1,246) (69)
====== ======
2. Fixed Charges
Interest expense(1) 3,752 2,947
====== ======
3. Ratio (1 divided by 2) N/A(A) N/A(A)
====== ======
</TABLE>
(A) Earnings are inadequate to cover fixed charges. The amount of the
deficiency is $4,998, and $3,016 for the three months ended March 31,
1996 and 1995, respectively.
________________________
(1) Consists of interest on debt and imputed interest on capital leases.
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 77,015
<SECURITIES> 0
<RECEIVABLES> 21,735,653
<ALLOWANCES> 5,685,000
<INVENTORY> 1,376,288
<CURRENT-ASSETS> 17,968,438
<PP&E> 36,234,785
<DEPRECIATION> 20,516,420
<TOTAL-ASSETS> 90,481,872
<CURRENT-LIABILITIES> 156,657,844
<BONDS> 0
0
0
<COMMON> 60,511
<OTHER-SE> 69,651,797
<TOTAL-LIABILITY-AND-EQUITY> 90,481,872
<SALES> 19,735,539
<TOTAL-REVENUES> 19,735,539
<CGS> 20,981,042
<TOTAL-COSTS> 24,733,359
<OTHER-EXPENSES> 21,348
<LOSS-PROVISION> 1,390,009
<INTEREST-EXPENSE> 3,732,217
<INCOME-PRETAX> (4,997,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,997,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,997,820)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> 0
</TABLE>
