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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0280528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2495 NATOMAS PARK DRIVE, SACRAMENTO, CA 95833
(Address of principal executive offices)
(916) 648-3500
(Registrant'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
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 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 [ ]
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. [x]
The aggregate market value of the registrant's voting common stock
held by non-affiliates of the registrant at June 28, 1996 based on the bid and
asked prices in the over-the-counter market average that date was approximately
$ 2,233,744.
The registrant had 6,051,087 shares of common stock, $.01 par value
per share, outstanding at June 30, 1996.
Documents Incorporated by Reference:
None.
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PHYSICIANS CLINICAL LABORATORY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PART I PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . I-23
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . I-24
Item 4. Submission Of Matters To a Vote of Security Holders . . . . . I-25
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . II-3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . II-5
Item 8. Financial Statements and Supplementary Data . . . . . . . . II-18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . II-46
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
Item 10. Directors of the Registrant . . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . III-5
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . III-10
Item 13. Certain Relationships and Related Transactions . . . . . . III-15
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . IV-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2
FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . IV-4
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5
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PART I
ITEM 1. BUSINESS
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 year ended February 29, 1996, and continue to be adversely affected
to the date of this Annual 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 $83 million of
secured indebtedness. The Company has also been in default since September of
1995 with respect to interest payments with respect to its $40 million 7.5%
Convertible Subordinated Debentures due 2000 (the "Debentures"), and the holder
of the Note issued by the Company in connection with the acquisition of Medical
Group Pathology Laboratory has brought suit with respect to such Note. See
"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 February
29, 1996, the Company had a negative shareholder equity position of $64.6
million. The net loss of $79.2 million included the write- off of uncollected
accounts receivable of $25.4 million, credit restructuring costs of $4.9
million and the write-down of intangible assets of $25.0 million. The
write-off of uncollected accounts receivable and write-down of intangible
assets result from the billing system/process challenges, accounts receivable
collection problems and the significant downward pressure on reimbursement
revenues. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
During the second quarter of fiscal 1996, the Company entered into
negotiations for the restructuring of its bank debt. The negotiations resulted
in the third and fourth amendment to its Credit Agreement with a group of banks
led by Wells Fargo Bank National Association (the holders of the Company's debt
obligations pursuant to the Credit Agreement hereinafter are referred to as the
"Bank Group"). Bank fees, legal fees, professional advisor fees and related
costs of $1,062,073 were incurred in the second fiscal quarter and $498,990 in
the third fiscal quarter, and $223,767 in the fourth fiscal quarter. 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
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health care industry, the Company was unable to make interest payments under its
Credit Agreement due monthly since September 1995, each in the amount of
approximately $660,000 (excluding penalties on unpaid amounts), principal
amortization payments due on September 13, 1995 and October 6, 1995, each in the
amount of $600,000, principal amortization payments due on November 3, 1995,
December 29, 1995 and March 31, 1996, each in the amount of $1,200,000,
principal amortization payments due on February 7, 1996 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 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. The costs
associated with the Credit Agreement restructuring and write off of the deferred
financing costs has been reflected in the statement of operations as Credit
Restructuring costs.
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.
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Approximately 55% of the Company's net revenue for the fiscal year
ended February 29, 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, excluding nonrecurring items, was 11.8%,
9.2% and (13.5%) for the years ended February 28 (29), 1994, 1995 and 1996,
respectively.
For the year ended February 29, 1996, the Company incurred a net loss
of $79.2 million. In addition, as of February 29, 1996, the Company had a
negative shareholder equity position of $64.6 million. The net loss of $79.2
million included the write-off of uncollected accounts receivable of $25.4
million, write-off of deferred financing costs of $4.9 million and the
write-down of goodwill of $25.0 million.
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 to the
date of this Annual Report. See "Item 7. 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:
o Consolidation of facilities and reductions in work force. 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.
o Use of dedicated internal teams for concentrated accounts
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
o Engagement of consultants to streamline and improve the
billing and collection processes.
o Engagement of third-party accounts receivable collection
parties.
o Data processing system changes to improve billing and
collection efforts.
o Increased focus and human resource additions in sales and
marketing to increase net revenues through internal growth.
o Reductions in overhead by, among other things, closing
unprofitable locations.
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o Nonprofitable capitated contracts in Southern California were
terminated in December 1995 and support services eliminated.
During and subsequent to the third quarter, 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 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
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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.
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.
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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 monthly interest payments due since September
1995 under the Credit Agreement 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 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.
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
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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.
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. See "--Clients and Payors."
See "Item 6. Selected Financial Data" for the Company's net revenue
and operating income (loss) and total assets for each of the last three years.
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THE CLINICAL LABORATORY TESTING INDUSTRY
Laboratory tests are used generally by physicians and other health
care providers to diagnose and monitor diseases and other medical conditions
through the detection of substances in blood, tissue and other specimens.
Laboratory testing is generally categorized as either clinical testing, which
is performed on bodily fluids including blood and urine, or anatomical
pathology testing, which is performed on tissue and other samples. Clinical
and anatomical pathology tests are frequently performed as part of regular
physical examinations and hospital admissions in connection with the diagnosis
and treatment of illnesses. The most frequently requested tests include blood
chemistry analyses, blood cholesterol level tests, urinalyses, blood cell
counts, PAP smears, AIDS tests and alcohol and other substance-abuse tests.
OPERATING STRATEGY
The Company's operating strategy is to be a leading regional provider
of high quality, cost-efficient clinical laboratory testing services to a
diversified group of customers and payor sources. To implement this strategy,
the Company's key operating objectives are as follows:
o Provide Full Range of Services. The Company currently performs over
900 different tests internally, with special expertise in microbiology,
virology and immunology, as well as a wide range of "esoteric" testing
services. Approximately 97% of the Company's tests are performed internally,
which the Company believes is above industry norms.
o Provide High Level of Responsiveness. The Company is committed to
providing its customers with the highest level of responsiveness in the
reporting of testing results. The industry standard is for test results to be
communicated to the requesting physician by the next business day. The Company
currently reports or makes available greater than 97% of all test results by
9:00 a.m. the next day. The Company maintains the laboratory information
systems for two Sacramento acute-care hospitals. For these two hospitals, the
Company currently reports 98% of routine test results within three hours from
arrival of the specimen at the Company's laboratory. A key element of the
Company's business strategy is to continue to develop innovative service
techniques, such as the Company's Lab Line(TM) direct access telephone service.
See "--Reporting of Test Results."
o Produce Services at Low Cost. The Company provides quality testing
services in a cost-effective manner through the high volume of testing services
it performs, its automated testing equipment, its significant investment in
management information systems and its experienced sales and service staff.
o Maintain Commitment to Quality. The Company has invested extensively
in equipment, training and quality control programs to ensure the accuracy of
its testing services. The Company's emphasis on quality includes an automated
quality control program, a full-time quality control director, and a program
which continually compares testing results with benchmark indicators. In
addition, the Company believes its reputation for quality is enhanced with its
physician customers due to the Company's relationship with its hospital
customers. The Company is fully accredited by the College of American
Pathologists.
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o Maintain Diversified Customer Base and Payor Services. Independent
clinical laboratories often focus on service to only one customer segment:
office-based physicians, hospitals or HMOs. This strategy is typically
utilized because each customer type requires specialized services. The
Company's strategy is to diversify its customer and payor services across all
customer types. This strategy offers several key advantages. For example, the
Company's contracts with HMOs allows the Company to provide a wide range of
services to physicians in the service areas and to gain access to physicians
who are members of the HMOs' network for the purpose of "cross-selling" those
physicians for their non- HMO business. See "--Clients and Payors--HMOs."
LABORATORY TESTING SERVICES
The Company's clinical laboratory tests measure the levels of chemical
and cellular components in human body fluids and tissue. They include
procedures in the areas of blood chemistry, hematology, urine chemistry,
immunology, virology, serology, histology, microbiology, endocrinology and
cytology. Commonly ordered individual tests include red and white blood cell
counts, PAP smears and procedures to measure blood glucose levels and to
determine pregnancy. As of fiscal year-end, the Company's laboratories handled
more than 55,000 patient specimens per week and performed approximately 120,000
tests per week. Approximately 97% of the Company's revenues are derived from
tests performed by the Company internally. The remainder of the Company's
revenues is derived from other infrequently requested tests, which are often
labor- intensive or require specialized testing equipment and are referred by
the Company to more specialized reference laboratories.
The Company performs both routine clinical tests and so-called
"esoteric" tests at its Sacramento laboratory. Routine tests generally include
clinical tests capable of being performed and reported within a 24-hour period,
whereas esoteric tests include more complex and labor- intensive tests,
generally requiring more sophisticated technology and a higher degree of
technical skill and knowledge. The Company believes that there are
approximately 1,250 tests available in the industry today, of which the Company
considers approximately 50% to be routine. Routine tests include, among
others, tests to determine the function of the kidney, heart, liver and
thyroid, as well as other organs, and a general health screen that measures
several important body health parameters. Of the approximately 120,000 tests
the Company performed weekly, as of year end, the Company considered
approximately 70% to be routine. Many of the routine tests offered are
performed by sophisticated, computerized laboratory testing equipment.
Physicians order esoteric tests when the information provided by routine tests
is not specific enough or is not conclusive as to the existence or absence of
disease or when a physician requires additional information. Esoteric tests,
which often require manual techniques and more sophisticated equipment, can be
quite complex and generally are carried out by a highly trained technician. As
a consequence, esoteric tests are relatively higher priced. The number of
esoteric tests continually increases as new medical discoveries are made
although improved technology can also automate esoteric tests and, depending
upon the volume of test requests, convert esoteric tests to routine procedures.
Some examples of esoteric tests are immunoelectrophoresis, used for the
diagnosis of auto immune disorders and myelomas, and hepatitis markers, used
for the diagnosis of acute hepatitis A and B and for identification of chronic
carriers of these diseases.
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The Company is a "hybrid" provider, in that it provides testing
services to both office-based physicians and acute-care hospitals. Generally,
service requirements and expectations of hospitals greatly exceed those of
office-based physicians, since hospitals ordinarily treat patients who are
unquestionably ill whereas office-based physicians often see patients for
routine examinations and for less serious illnesses. Clinical testing on
behalf of acute-care hospitals requires extremely high levels of quality and
service. The Company's standard turnaround time is three hours for most
hospital tests, and the results of these tests generally reveal a much higher
percentage of abnormalities than is encountered in other sectors of the
clinical testing business. The Company believes that its office-based
physician customers benefit from the hybrid nature of the Company's business,
since they generally receive services that have been disciplined by the more
stringent timing and quality requirements demanded by hospitals.
LABORATORY OPERATIONS
As of February 29, 1996, the Company conducted its operations through
two full-service laboratories in Sacramento and Burbank, 20 STAT laboratories
and more than 200 patient service centers. Effective June 1996, the Company
discontinued full-service operations in its Burbank laboratory and consolidated
its operations with those of its Sacramento full-service laboratory, while
maintaining expanded STAT capabilities at the Burbank facility. Patient
service centers (which are often referred to as "draw stations") are facilities
maintained by the Company, often in or adjacent to a medical professional
building, staffed with phlebotomists and other personnel and at which patient
specimens are drawn and stored pending pickup and delivery to the central
laboratory. Samples for tests ordered by office-based physicians are generally
drawn by phlebotomists at one of the Company's patient service centers, to
which the patient is referred by the attending physician. Samples for tests
ordered by the Company's hospital customers are drawn by hospital personnel.
The Company maintains a fleet of service vehicles which collect specimens from
each draw station at least twice daily, from five Sacramento hospitals
approximately every 90 minutes, and from certain of the Company's office-based
physician customers and hospitals periodically during the day. Although
specimens arrive at the full-service laboratories throughout the day, the vast
majority are received in the early evening.
Upon arrival at the full-service laboratories, each specimen is logged
for testing and billing purposes into the Company's computer system. Each
specimen is labeled and is verified to be the correct type and quantity
required for the requested tests. The tests are then performed on the
specimens by the Company's technologists, and the results are entered into the
Company's computer systems, either manually or directly through computer
interface, depending upon the complexity and type of test and the type of
equipment used to perform the test.
Six of the Company's Sacramento-area hospital clients generally
require a maximum three hour turnaround on ordered testing, and to service
these customers the Company is equipped to perform tests on a STAT basis. The
Company performs an average of approximately 225 physician-requested STAT tests
each day at its Sacramento facilities, including blood cell counts and
chemistry tests such as glucose analyses. The Company believes that this
capability provides a competitive advantage in marketing its services to
office-based physicians by enhancing the Company's reputation among such
physicians.
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REPORTING OF TEST RESULTS
Rapid turnaround of test results is critical to the successful
operation of any clinical laboratory. Accordingly, the Company strives to
furnish test results to its customers in the most efficient and expeditious
manner possible. For the fiscal year ended February 29, 1996, the Company
reported or made available to its customers approximately 97% of all test
results by 9:00 a.m. the next morning. The Company reports test results to its
customers in the following ways:
o The Company has furnished electronic printers and telephone modems to
some of the Company's largest (by testing volume) customers, enabling the
Company to transmit test results to such customers by 9:00 a.m. the next day.
o The Company reports results to certain customers by courier, generally
by 9:00 a.m. the next day.
o Results of STAT tests, as well as all testing results that exceed
prescribed thresholds, are telephoned to physician-customers 24 hours a day
immediately upon completion.
o Results of routine tests are incorporated into the Company's
interactive Lab Line(TM) telephone system, which permits customers, using
pre-assigned numerical codes, to access test results 24 hours a day over the
telephone or to direct that test results be sent to a pre-arranged (or any
other) facsimile machine. As of February 29, 1996, approximately 325 of the
Company's physician - clients had enrolled in the program, which was introduced
in 1992. The Company believes that Lab Line(TM) provides a significant
marketing advantage for the Company over its principal competitors.
o Six of the 10 acute-care hospitals served by the Company generally
require a three-hour turnaround on tests ordered by them. For two of these
hospitals, the results of the tests performed by the Company, together with the
results of tests performed by each hospital's own testing laboratory, are
maintained and reported to the respective hospital computers by the Company's
computers through interface software and are recorded directly in the patient
records. For three of these hospitals, the results of the tests performed by
the Company are interfaced directly into the hospital's laboratory information
system thereby allowing for a real-time delivery of test results. For one of
these hospitals, the results are transmitted via modem to a hospital-based
printer.
QUALITY ASSURANCE
The Company believes it has developed high standards for the provision
of its testing services through quality assurance programs implemented at every
level of the Company's operations. The Company has implemented quality
assurance programs that are intended to ensure that specimens are collected and
transported properly, tests are performed accurately, and client, patient and
test information is reported, billed and filed correctly. The quality
assurance programs include testing of specimens of known concentration or
reactivity in order to ensure accuracy and precision of testing results,
routine checks and preventive maintenance of
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laboratory testing equipment and administration of proficiency tests intended
to ensure that only qualified personnel perform testing.
The operations of the Company's Sacramento full-service laboratory and
all of its STAT laboratories are each directed by Medical Directors, each of
whom is a full-time pathologist who is Board-certified in anatomical and
clinical pathology. The primary role of each Medical Director and the
Company's other quality supervisory personnel is to review regularly the
implementation of the Company's quality assurance programs.
The Company participates in several voluntary independent proficiency
testing programs. Under these programs, the testing authority submits
pre-tested samples to a laboratory in order to measure the laboratory's test
results against known proficiency test values. Such proficiency programs are
conducted by groups such as the College of American Pathologists (the "CAP")
and state and federal government regulatory agencies. The Company's Sacramento
Medical Director, who is the former Deputy Director of the Western Region of
the CAP, is responsible for ensuring the Company's continued accreditation
under the CAP program and other voluntary and mandatory accreditation programs.
The CAP accreditation program involves both periodic inspections of the
laboratory and participation in the CAP's proficiency testing program for all
categories in which the laboratory seeks to attain or maintain accreditation.
The CAP accreditation standards are more stringent than licensing standards set
by state and federal regulatory agencies. The Company is also certified by
Medicare and MediCal, holds all required California state licenses and is
licensed by the federal government. See "--Government Regulation."
CLIENTS AND PAYORS
The Company's principal customers are its approximately 8,500
office-based physician-customers, its 10 acute-care hospital customers and
other HMOs and managed care entities. The Company receives payment for its
services from these customers, as well as from patients and third-party payors
such as insurance companies, HMOs, Medicare and MediCal. An important
determinant of the profitability of all clinical laboratory testing companies,
including the Company, is the percentage of its net revenues billed at
wholesale rates. The Company's mix of billings over time will be influenced
by, among other factors, regulatory developments, cost-containment efforts on
the part of payors and the types of businesses conducted by laboratories
acquired by the Company.
Fees for clinical laboratory testing services rendered for physicians
are typically charged on a fee-per-test basis and are billed to the physician,
directly to the patient or to the patient's third-party payor, such as an
insurance company, an HMO, Medicare or MediCal. Billings directly to patients
are made at the Company's patient, or "retail," fee schedule. Billings to
physicians are typically made at discounts from the Company's patient fee
schedule. Third-party payors generally reimburse the Company according to
their own fee schedules, which usually represent a discount from the Company's
client fee schedule. The Company also has agreed to provide testing services
to certain HMOs pursuant to capitated fee arrangements that provide for a fixed
fee per member per month rather than fees for services actually performed. See
"--HMOs."
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The following chart summarizes the percentage of net revenue
contributed by each payor class:
<TABLE>
<CAPTION>
Year Ended February 28 (29),
-------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Medicare . . . . . . . . . . . . 25% 20% 19%
Patient bill . . . . . . . . . . 23 24 25
Insurance . . . . . . . . . . . . 24 27 25
Owner hospitals . . . . . . . . . 5 3 3
Physician-client . . . . . . . . 9 10 10
MediCal . . . . . . . . . . . . . 8 9 11
Managed care . . . . . . . . . . 5 6 6
Computer and courier . . . . . . 1 1 1
Non-owner hospitals . . . . . . . - - -
Total . . . . . 100% 100% 100%
---- ---- ----
</TABLE>
Hospital Customers. Approximately 4% of the Company's net revenue in
fiscal 1996 was derived from clinical laboratory testing and information system
management services provided to hospital clients. Hospitals affiliated with
SACC and Sutter Health, Mercy Healthcare and Methodist Hospital, Sacramento
(the Company's principal stockholders) accounted for approximately 1.5%, 2.0%
and 0.5%, respectively, of such net revenue. While the mix of referrals to the
Company by each hospital is different, the Company generally performs from 15%
to 20% of the total tests required by these hospitals. The Company bills the
hospitals for testing services on a fee-per-test basis in accordance with an
agreed-upon price schedule. The Company also maintains an information system
that interfaces with the hospital's computers and automatically records test
results in patients' hospital records. Services rendered to these hospitals
are provided pursuant to contracts originally entered into in 1986 and which
have been extended to July 1997.
Physicians. The Company currently provides clinical testing services
to approximately 8,500 office-based physician clients. Services rendered as a
result of referrals from physician clients (including those affiliated with
HMOs and managed care entities) represented approximately 96% of the Company's
net revenue in fiscal 1996. Fees for clinical laboratory testing services
rendered for physicians are typically charged on a fee-per-test basis and are
billed to the physician, directly to the patient or to the patient's
third-party payor, such as an insurance company, an HMO, Medicare or MediCal.
Billings directly to patients are made at the Company's patient, or "retail,"
fee schedule. Billings to physicians are typically made at discounts from the
Company's patient fee schedule. Third-party payors generally reimburse the
Company according to their own fee schedules, which usually represent a
discount from the Company's patient fee schedule. Because California law
prohibits physicians from marking up fees for laboratory services performed by
others, the Company believes that California physicians will be inclined to
choose among laboratory companies based on service rather than discounted
prices.
HMOs. The Company has agreements with several HMOs throughout the
state under which the Company has agreed to provide testing services that may
be required by the HMOs'
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members. The Company is compensated for these services on a capitated basis
(i.e., a fixed fee per member per month). The aggregate number of members
covered under such plans is approximately 800,000. Effective April 1, 1996,
The Foundation Health Medical Group contract terminated. This contract covered
55,000 capitated lives in a closed system. The termination of this contract
resulted in a decrease in net revenue of approximately $83,000 per month but an
enhancement of pretax profit of approximately $50,000 per month. The remainder
of the Foundation Health Medical Group contract remains in tact through other
medical groups and IPAs.
SALES AND MARKETING
The Company's full-time sales and marketing staff currently consists
of 47 employees. The Company also employs 21 field service supervisors who
maintain close contact with the Company's client base and who monitor the
Company's physician relationships. The Company also maintains a staff of 43
customer service personnel to assist customers with questions regarding
billing, testing results and related matters.
The Company has developed detailed management information systems that
monitor the performance of each sales person on a monthly basis. The Company's
three regional sales managers receive bonuses only if the entire sales
department for their region meets or exceeds an established quota on a
quarterly basis. Each sales person must achieve a standard based upon actual
new sales added on a monthly basis. Sales employees are paid a modest base
salary, a car allowance, and commission based upon a percentage of new account
revenue production on a twelve- month basis. Sales compensation arrangements
are structured to reward salespersons who bring in new business accounts.
GOVERNMENT REGULATION
The Stark Bill and Other Restrictions on Self-Referral
Section 1877 of the Social Security Act, commonly known as the "Stark
Bill," which became effective January 1, 1992, generally prohibits the Company
from billing for tests covered by Medicare if the physician ordering the test
(or an immediate relative of such physician) has a direct or indirect ownership
or investment interest in, or compensation arrangement with, the Company.
Effective January 1, 1995, this prohibition also applies to preclude the
Company from billing the Medi-Cal program for tests ordered by such physicians.
Congress has considered legislation that would extend this prohibition to
preclude the Company from billing for services rendered to any patient, and not
just to Medicare or Medi-Cal patients, if the services were rendered on
referral from a physician with a financial relationship to the Company, unless
an exception applied. Ownership interests would include ownership of the
Debentures or shares of Common Stock. It does not appear that there is an
exception from the Stark Bill for which the Company qualifies.
The Stark Bill requires the Company to provide the United States
Department of Health and Human Services ("HHS") with the names and unique
physician identification numbers of all physicians who have (or whose immediate
relatives have) a direct or indirect ownership or
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<PAGE> 17
investment interest in, or compensation relationship with, the Company. The
Company is also required to identify the referring physicians on each of its
claims for Medicare payment and to indicate whether the physician or the
physician's relative has an ownership or compensation relationship with the
Company.
On August 14, 1995, the Secretary of HHS issued final regulations to
those provisions of the Stark Bill which were effective January 1, 1992 ("Stark
Regulations"). The Stark Regulations contain provisions which mirror the
statutory reporting requirements described above.
The Company does not bill the Medicare and Medi-Cal programs for
laboratory testing referred by physicians whom the Company knows to be Company
stockholders. However, the Company cannot identify all of the beneficial
owners of its stock, since most beneficial owners prefer to hold their shares
in their brokers' names. As the Debentures were issued in a private offering
to certain institutional investors, the Company does not believe that any of
the Debentures are held by physicians.
The Company has implemented a program to identify referring physicians
who are stockholders of the Company by asking such physicians to indicate
whether they own any Common Stock on Company-provided test requisition forms.
There can be no assurance that any physicians will comply with the Company's
request or accurately represent ownership of any Common Stock. Because the
Company's Common Stock is traded publicly, it may not be possible fully to
comply with the Stark Bill on an ongoing basis.
Individuals or entities who are found to have violated the Stark Bill
may be subject to severe monetary civil penalties and possible exclusion from
the Medicare and Medi-Cal programs. Items or services which are billed and
paid for in violation of the Stark Bill are subject to refund.
In 1993, the California legislature enacted Assembly Bill 919,
generally known as the Speier Bill. The Speier Bill, which took effect on
January 1, 1995, generally prohibits the Company from billing for laboratory
tests if the physicians ordering the test (or an immediate relative of the
physician) has a direct or indirect ownership or investment interest in, or
compensation agreement with, the Company. Unlike the Stark Bill as presently
enacted, the Speier Bill applies regardless of who will pay for the ordered
service. Therefore, the Company is generally not able to bill third-party
payors for service performed on referral from financially related physicians,
even if the service is not to be paid for by Medicare or Medi-Cal.
Prior to certain amendments in 1995, the Speier Bill provided an
exception for a financial relationship which, among other requirements,
consists solely of stock ownership in a publicly traded corporation with more
than $100 million in gross assets. Under that exemption, the Company believed
that the Speier Bill prohibitions would not apply to referrals it received from
physicians whose only financial relationship with the Company is through their
ownership of the Company's Common Stock. In 1995, however, this exception was
amended to parallel the Stark Bill exception for ownership of publicly traded
investments. The amended exception permits ownership of corporate investment
securities by a referring physician, if, among other things,
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<PAGE> 18
the securities are traded on a licensed securities exchange or NASDAQ and the
corporation has at the end of the corporation's most recent fiscal year or on
average during the previous three fiscal years, stockholder equity exceeding
$75 million.
It does not appear that the Company qualifies for this or any other
exemption under the Speier Bill. Thus, the Company has adopted a policy not to
bill for laboratory testing referred by physicians whom the Company knows to be
Company stockholders.
In 1995, the Speier Bill also was amended to provide an exception for
a one-time sale of a practice or property or other financial interest between a
licensee and the recipient of the referral if the sale or transfer is (i) for
commercially reasonable terms and (ii) the consideration is not affected by
either party's referral of any person or the volume of services provided by
either party.
Under the Speier Bill, a physician who received price discounts on
clinical laboratory services the physician purchases from the Company may be
considered to be financially related to the Company. The impact of this
provision requires further clarification, as does the meaning of the term
"discount" in this context. However, this provision may prevent the Company
from billing for services provided to persons who are referred to the Company
by physicians who purchase discounted clinical laboratory services from the
Company. Currently, approximately 10% of the Company's net revenues are
derived from selling laboratory services to physicians at a discount from the
Company's standard prices. Physicians who receive such discounts generally
refer their Medicare patients directly to an independent clinical laboratory
such as the Company for laboratory services, since physicians are generally
prohibited by law from billing the Medicare program for laboratory testing that
is actually provided by an independent clinical laboratory. This feature of
the Speier Bill parallels proposed revisions to the Stark Bill previously
considered by Congress. Under these proposed Stark Bill revisions, the Company
could not bill for services provided to Medicare and Medi-Cal patients on
referral from physicians who purchased laboratory services from the Company at
less than fair market value. To date, the Company is unaware of any guidance
issued by California regulatory or judicial authorities which clarifies the
meaning of the Speier Bill's apparent prohibition on billing for services
rendered on referral from physicians who receive price discounts from the
Company. In a related context, the California Attorney General and the
Laboratory Field Services Division of the California Department of Health
Services have opined that the term "discount" does not include price reductions
which are passed along from physician to consumer. California law currently
requires physicians to extend the benefit of discounted laboratory pricing to
their patients.
Prohibitions on Mark-up of Laboratory Services
Clinical laboratories (including those in hospitals), physicians,
hospitals and certain other health care providers in California are subject to
Section 655.5 of the California Business and Professions Code. This statute,
which became effective January 1, 1993, prohibits those subject to its
provisions from marking up charges for any clinical laboratory services not
actually rendered by the clinical laboratory, physician or other health care
provider, unless the additional charge is for a service actually rendered to
the patient by the person billing for the service and
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<PAGE> 19
is itemized in the bill. Further, this statute requires that if a person
subject to the statute other than a hospital or other health facility bills for
clinical laboratory services actually rendered by another provider, the bill
must clearly indicate the name and address of the laboratory that actually
performed the services, that laboratory's charges to the person billing for the
services, and whether or not the performing laboratory's charges are included
in the bill submitted to the patient or third-party payor.
Effective July 1, 1994, Section 655.5 requires the Company to provide
a fee schedule (a) to referring providers on request, and (b) to referring
physicians or to potential referring providers whenever a list of laboratory
services is furnished to the referring provider or potential provider.
Fraud and Abuse Laws
Clinical laboratories participating in the Medicare and Medicaid
programs (including California's Medi-Cal program), are subject to a wide
variety of laws intended to eliminate the effects of fraud and abuse on these
programs. These laws include prohibitions on: (a) submitting false claims or
false information to the programs; (b) deceptive or fraudulent conduct; (c) the
provision of excessive or unnecessary services, or services at excessive
prices; and (d) inducing the referral of program patients through the offer or
receipt of remuneration, a prohibition often referred to as the "antikickback
statute." Penalties for violation of these federal laws include exclusion from
participation in the Medicare and Medicaid programs, asset forfeitures, civil
monetary penalties and criminal penalties. Civil penalties for a wide range of
offenses may include fines of up to $2,000 for each item or service plus twice
the amount claimed for such service, and exclusion from participation in the
Medicare and Medicaid programs. These provisions have been liberally
interpreted and aggressively enforced by the relevant enforcement authorities.
The detection and punishment of health care fraud and abuse has recently been
elevated to one of the highest priorities of the United States Department of
Justice. In addition, the federal "whistleblower" statute permits private
litigants to bring a "qui tam" action on behalf of the United States government
in connection with the submission of allegedly false claims. The Department of
Justice is required to investigate claims raised by such qui tam litigants, who
are entitled to receive a percentage of any recoveries obtained in the action
they initiate.
The governmental and third-party payor reimbursement system for
clinical laboratory services is complex and subject to variances among payors
and to variances in interpretation of billing regulations and guidelines. In
recognition of this, the Company engages in ongoing review of its billing
practices. In this regard, the Company has engaged counsel to assist the
Company in developing a compliance program meeting the requirements of the
applicable federal guidelines.
The Office of Inspector General ("OIG") of the Department of Health
and Human Services, one of the federal agencies responsible for enforcing the
laws against fraud and abuse, has asserted that the antikickback statute is
violated by various practices which the OIG believes are common in the clinical
laboratory industry. These practices include installment payments and earn-out
provisions under agreements for the acquisition of physician owned
laboratories, inducing the ordering of unnecessary tests through test
requisition form design or test pricing
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<PAGE> 20
to physicians, and "unbundling" a package of generally automated tests to
secure higher reimbursement.
In October 1994, the OIG issued a Special Fraud Alert entitled
"Arrangements for the Provision of Clinical Lab Services." The Fraud Alert
listed a number of practices which may violate the antikickback statute,
including the provision of computers and fax machines to physicians, free
laboratory testing for healthcare providers, their families and employees,
collection of bio-hazardous wastes from physician's offices unrelated to the
collection of specimens by the laboratory, waiver of charges to managed care
patients, and other examples.
California law also prohibits payments being made to physicians by
clinical laboratories as compensation or inducement for referrals of patients
or test specimens, regardless of the source of payment for such testing.
Laboratories which violate the California antikickback laws may be subject to
loss of licensure and substantial fines. In addition, a provider convicted
under such laws would be excluded from participation in the Medicare and
Medicaid programs. The Company believes that it does not violate these
requirements.
The "Health Insurance Reform Act of 1996" is currently in conference
in Congress and contains significant changes in the scope, enforcement and
penalties for violations of the federal fraud and abuse laws, including
programs to combat health care fraud, and increases in penalties for
violations. It is too early to tell whether this legislation will pass and be
signed by the President.
Quality Assurance
CLIA 1967 and 1988. The Clinical Laboratory Improvement Act of 1967
("CLIA 1967") provides for the certification and regulation by HHS of certain
clinical laboratories, including those operated by the Company. The Clinical
Laboratory Improvement Amendments of 1988 ("CLIA 1988") subjects virtually all
clinical laboratories to the jurisdiction of HHS by establishing national
standards for assuring the quality of laboratory performance. The Health Care
Financing Administration within HHS ("HCFA") issued final regulations
applicable to all laboratories certified under CLIA 1967, which became
effective in 1990 and 1991. The regulations also included self-implementing
requirements of CLIA 1988.
HCFA has published several sets of final and proposed regulations to
implement CLIA 1988. Final regulations include those setting national
performance standards and establishing enforcement procedures and penalties.
The Company believes that it is in compliance in all material respects with
CLIA 1967, CLIA 1988 and all final regulations thereunder.
Although the CLIA 1988 requirements are expected to be phased in over
a period of several years, CLIA 1988 could have a substantial effect on the
laboratory testing industry. The recently issued regulations will establish
standards for the day-to-day operation of laboratories, and subject large
numbers of previously exempt facilities to government regulation for the first
time. Among the classes of laboratories that may be most affected by the
implementation of CLIA 1988 are those laboratories located in physicians'
offices. While CLIA 1988 establishes categories of laboratories for which
compliance with the national standards will be waived and
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<PAGE> 21
new regulations except certain microscopy tests performed by physicians for
their own patients from certain provisions of the regulations, the Company
believes that many physician-office laboratories will choose to cease operation
or to be acquired by an independent laboratory rather than assume the expense
and administrative burden of complying with these quality standards. The
Company further believes that compliance with the new law should not pose a
significant burden on the Company because the Company is already subject to
comprehensive regulation.
During the past year, HHS has also proposed or adopted various rules
which will ease some of the administrative burden of complying with CLIA. On
September 13, 1995, HHS proposed new criteria to categorize specific laboratory
tests as waived from certain requirements of CLIA. As a result, it is expected
that more tests will be approved for waiver for use by laboratories. On
September 15, 1995, HHS proposed a new subcategory of moderate procedures to be
called accurate and precise technology ("APT") tests, which would be subject to
less stringent requirements. Under the Alternative Quality Assessment Survey,
HCFA has extended the period between CLIA on-site surveys to four years with
self-assessments in certain situations where the laboratory has received good
results from an on-site survey. These developments would be helpful to
physician office laboratories in reducing the administrative burden of
complying with CLIA.
In April 1995, House Ways and Means Committee Chairman Bill Archer
introduced H.R. 1386, Clinical Laboratory Improvement Act Amendments of 1995,
which would generally exempt physician office laboratories from CLIA 1988.
Similar legislation (S. 877) has been introduced in the Senate. As of May 30,
1996, H.R. 1386 rolled over into the 1996 session. The last action on the bill
was its referral to the Committee on Commerce. It now has 118 cosponsors,
including 10 Representatives from California. S. 877 also rolled over into the
1996 session, and the last action was its referral to the Committee on Labor
and Human Resources on January 24, 1996. If such legislation is passed, it
would be expected that physicians would operate physician office laboratories
and not use independent clinical laboratories for testing, which may adversely
impact the business of the Company.
The American Medical Association supports federal legislation which
would repeal the application of CLIA to physician office laboratories.
CLIA Enforcement
HCFA will enforce its regulations by periodic, often unannounced,
inspections. Laboratories subject to these regulations also have to process
certain proficiency testing samples to ensure that the laboratory properly
performs testing. The Company has passed all such proficiency tests to date.
Currently any failure to pass an inspection or meet the requirements of the
proficiency testing program could result in denial or cancellation of the
laboratory's approval to receive Medicare payments and/or the suspension,
revocation, or limitation of its license to engage in interstate commerce. Any
of these failures could result in the laboratory's losing its right to perform
certain types of testing, cancellation of the laboratory's approval to receive
Medicare payments for its services, or its being subjected to civil money
penalties, on-site monitoring or a plan of correction.
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The OIG Work Plan for 1996 provides that the OIG will determine how
HCFA is enforcing CLIA and any recommendations for improvements. At HCFA's
request, the OIG will assess the extent that cytotech workload records may be
falsified and the reliability of procedures in workload recordkeeping.
Certification and Licenses
The federal government and the State of California impose various
certification and licensure obligations on clinical laboratory companies such
as the Company. The applicable certification and licensure programs establish
standards for the day-to-day operation of a clinical laboratory including,
among other things, the training and skills required of personnel and quality
control. Compliance with such standards is verified by periodic inspections by
inspectors representing the appropriate federal or state regulatory agencies.
In addition, federal and state law mandates proficiency testing, which involves
testing of control and comparison of actual results with established standards.
The Company believes it has all federal and state licenses, certifications and
permits necessary to conduct its business as a clinical laboratory. The
Company's laboratories are certified under the Medicare and Medi-Cal programs.
The Company's laboratories are certified under CLIA 1988. Licensure is also
maintained for the Company's laboratories under the laws of the State of
California.
Other Regulations
Infectious Waste. Certain federal and state laws govern the handling
and disposal of infectious and hazardous wastes. Although the Company believes
that it is currently in compliance in all material respects with such federal
and state laws, failure to comply could subject the Company to fines, criminal
penalties and/or other enforcement actions.
Protection of Workers. Pursuant to the Federal Occupational Safety
and Health Act, laboratories have a general duty to provide a workplace to
their employees that is safe from hazard. Over the past years, the
Occupational Safety and Health Administration ("OSHA") has issued rules
relevant to certain hazards that are found in the laboratory. In addition,
OSHA has adopted regulations applicable to protection of workers from
blood-borne pathogens. Failure to comply with any final standard relating to
blood-borne pathogens, other applicable OSHA rules or with the general duty to
provide a safe workplace could subject an employer, including a laboratory
employer, to substantial fines and penalties. The Company believes that it is
in compliance in all material respects with applicable OSHA requirements.
Health Care Reform
The entire health care industry is undergoing significant change.
While all third party payors are attempting to increase their control over the
cost, utilization and delivery of health care services, budgetary pressure on
the federal and state governments has led to calls for significant cutbacks in
reimbursement under the Medicare and Medicaid programs. Reductions in the
reimbursement rates of other third- party payors are also occurring. The
Company cannot predict the effect health care reform or changes in
reimbursement practices may have on the
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<PAGE> 23
Company's business if enacted or implemented, and there can be no assurance
that such reforms or practice changes would not have a material adverse effect
on the Company.
Cost Containment Programs
Medicare/Medi-Cal Reimbursement
Fees for laboratory testing services to be reimbursed by Medicare or
Medi-Cal are required to be billed to Medicare or Medi-Cal directly and the
provider is required to accept Medicare or Medi-Cal reimbursement as payment in
full. In 1984, Congress established a reimbursement fee schedule for clinical
laboratory testing performed for Medicare beneficiaries (excluding hospital
in-patients). State Medicaid programs are prohibited from paying more than the
amount stipulated by the Medicare fee schedule for testing on behalf of
Medicaid beneficiaries. When initially established, the Medicare fee schedules
were set at 60% of prevailing local charges. Medicare reimbursement rates for
clinical laboratory testing have subsequently been reduced several times
pursuant to Congressional mandate. A ceiling on payments to laboratories,
commonly referred to as the "national cap" amount, became effective in 1986.
The national cap was initially set at 115% of the nationwide median of local
fee schedule rates for each test. Effective April 1, 1988, January 1, 1990,
and January 1, 1991, the national cap was reduced to 100%, 93% and 88%,
respectively, of the local fee schedule medians. The Omnibus Budget
Reconciliation Act of 1993 reduced the national cap for 1994, 1995, 1996 and
thereafter to 84%, 80% and 76%, respectively of the local fee schedule medians.
In addition, for approximately 25 commonly performed tests, the fee schedules
were reduced by 8.3% on April 1, 1988. The reductions in Medicare
reimbursement rates described above have been offset to some extent by
increases in both the national cap and local fee schedules tied to the Consumer
Price Index ("CPI"). Laboratory fee increases tied to the CPI have been
limited to 2% for each of the years 1991, 1992 and 1993, and were eliminated
entirely for fiscal 1994 and 1995 but were reinstated for 1996. The effect of
reduced reimbursement rates on the Company's revenues to date has been
significant.
In November of 1994, the Health Care Financing Administration issued a
proposal to change Medicare policies concerning reimbursement for blood
chemistry profiles. The proposed changes would expand the list of tests that
are considered to be parts of automated panels. If adopted, such a proposal
could have an adverse effect on the Company's revenues. Another proposed change
would require laboratories performing certain automated blood chemistry
profiles to obtain and document the medical necessity of each test included in
each profile test performed for a Medicare beneficiary. If such a requirement
were to be implemented, the Company (and laboratories generally) would incur
significant additional costs associated with compliance. In addition, such a
change could result in more unreimbursed testing, since the necessary
information may not always be available from physicians to permit the Company
to file valid claims with Medicare. The Company cannot predict when or if
these proposals will be adopted. If enacted, such provisions could have a
material adverse effect on the Company.
The California Department of Health Services ("DHS") has in a number
of laboratory audits asserted that the Medi-Cal program is required to pay no
more for testing than the lowest amount which a laboratory charges any of its
physician customers. A California appellate court
I-21
<PAGE> 24
recently upheld this position. The California DHS has not made such a
challenge to the Company to date. Because the Company's payments from the
Medi-Cal program do not substantially exceed its charges to physicians, it does
not expect that its financial results would be adversely affected as a result
of a successful assertion of this position by the California DHS.
Reimbursement received by the Company from the Medi-Cal program represented
approximately 11% of the Company's net revenue during its last fiscal year.
Proposed Changes to Medicare/Medi-Cal Reimbursement
Several proposals have been made in recent years which could reduce
the level of Medicare reimbursement received by the Company.
A recent General Accounting Office Report would seek to equalize
profit rates on laboratory services provided to Medicare beneficiaries and all
other patients. The GAO concluded from its study that Medicare payment
policies overcompensate clinical laboratories because they provide profit rates
from Medicare which substantially exceed the laboratories' overall profit
rates. In January 1990, and again in January of 1995, the OIG called for
legislation that would permit Medicare to receive the benefit of discounts
furnished to physicians and other so-called "wholesale" accounts.
Another set of proposals, if enacted, would reimburse clinical
laboratory testing services as part of a larger "bundle" of healthcare
services. An October 1990 OIG monograph concluded that elimination of separate
Medicare reimbursement for clinical laboratory testing would reduce Medicare
expenditures. Under the OIG's "laboratory roll in" proposal, physicians would
be reimbursed an additional amount for each office visit they had with a
Medicare beneficiary. The physician would be responsible for paying for the
laboratory services out of this sum, and would presumably seek favorable
pricing arrangements. In addition, Congress has directed HHS to study and
report on the advisability of adopting certain "bundled" payment systems for
reimbursement of services provided by hospital outpatient departments. These
payment systems could be applied to other outpatient sites, including
independent clinical laboratories, at some point in the future. Such
proposals, if enacted, could have a material adverse effect on the Company's
net revenue.
The California DHS has discussed negotiated laboratory service
contracting for the Medi-Cal program as a means of reducing Medi-Cal
expenditures for laboratory testing. For many testing procedures, a laboratory
holding such a contract would be the only laboratory in its area which Medi-Cal
would compensate. Non-contracting laboratories could still perform and receive
compensation only for those tests not included within the contracting program.
California currently has the statutory authority to implement such a program,
but has not done so. On April 2, 1993, the California DHS released its revised
Strategic Plan for Medi-Cal Managed Care to expand managed care access to
Medi-Cal beneficiaries. Under this plan, the California DHS would contract
with only two managed care plans for each of specified regions of the state. A
pilot program is currently in place in Sacramento County, and in 13 additional
counties. It is unclear how Medi-Cal managed care will affect the Company.
However, the Company's fee-for-service business has always made a higher
contribution to its operating margins than its managed care business.
I-22
<PAGE> 25
Medicare/Medi-Cal reimbursement accounted for approximately 30% of the
Company's net revenue in fiscal year 1996, and a substantial reduction in
Medicare/Medi-Cal payments to the Company could have a material adverse effect
on its operating results.
Non-Governmental Efforts. In an effort to control costs,
non-governmental health care payors may implement cost containment programs
which could adversely affect the Company's net revenue. For example, persons
enrolled in prepaid health care plans often do not have free choice as to where
they obtain laboratory services. Rather, the health plan may provide
laboratory services directly or contract with laboratories at favorable rates
and require its enrollees to obtain service only from such contracted
laboratories. Some insurance companies and self-insured employers also limit
service to contracted laboratories. To the extent such "closed" payment
systems become more common in the future and payors operate their own
laboratories or the Company is unable to obtain contracts to provide service or
must discount its services to obtain such contracts, the Company's results of
operations could be materially adversely affected. In fiscal 1996, 6% of the
Company's net revenue was derived from closed payment systems.
COMPETITION
The clinical laboratory testing industry in California is
characterized by intense competition. The Company faces competition from
numerous independent clinical laboratories, physician-owned laboratories and
hospital laboratories. Some of the Company's competitors operate on a regional
or nationwide basis and are larger and have substantially greater financial
resources than the Company.
The Company competes primarily on the basis of quality and service,
with a particular emphasis on accurate and rapid reporting of test results and
responsiveness to customers. Some of PCL's competitors compete on the basis of
discounted price and, as the Company has expanded into areas beyond Sacramento,
it increasingly has been exposed to such competition. The Company seeks to be
the most cost-effective producer wherever it competes, and believes that it
will be able to compete in markets where price is an important determinant in
laboratory selection. The Company's growth strategy may take it into markets
where competitive pressures may differ from those in its current service areas.
EMPLOYEES
As of May 31, 1996, the Company employed approximately 1,190 people in
the operation of its business. This total consists of approximately 982 full
time and 208 part time employees. Of such 1,190 employees, 162 were certified
medical technologists.
ITEM 2. PROPERTIES
The Company's executive offices and all of its laboratories are
located in facilities held under operating leases expiring over varying
periods. The Company's patient service centers are also held under leases
expiring in one to ten years, many of which provide for renewal options. See
Note 6 of Notes to Financial Statements.
I-23
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
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 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
I-24
<PAGE> 27
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, except as disclosed in Note 12 of Notes to
Financial Statements.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold its annual meeting and did not submit any
matters to a vote of security holders during the fiscal year 1996.
Accordingly, each Director whose term was to expire in 1995 will continue to
serve until his successor is elected.
I-25
<PAGE> 28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock was traded over-the-counter on the National
Association of Securities Dealers Automated Quotation (Nasdaq) National Market
System under the symbol "PCLI". 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 will 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 following table sets forth the range of high
and low reported sale prices per share for the fiscal periods indicated, and
reported on the Nasdaq National Market System and the Nasdaq SmallCap Market,
as applicable. Quotations represent prices between dealers and do not reflect
retail markups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
LOW HIGH
--- ----
<S> <C> <C>
YEAR ENDED FEBRUARY 28, 1995:
First Quarter . . . . . . . . . . . . . . . . . 7 3/4 11 1/4
Second Quarter . . . . . . . . . . . . . . . . . 8 3/4 12 1/4
Third Quarter . . . . . . . . . . . . . . . . . 9 3/4 13 1/16
Fourth Quarter . . . . . . . . . . . . . . . . . 8 3/4 11 1/2
YEAR ENDED FEBRUARY 29, 1996:
First Quarter . . . . . . . . . . . . . . . . . 5 3/4 10 1/4
Second Quarter . . . . . . . . . . . . . . . . . 2 3/8 6 3/4
Third Quarter . . . . . . . . . . . . . . . . 1/4 3 1/4(1)
Fourth Quarter . . . . . . . . . . . . . . . . 5/16(1) 2 3/8(1)
</TABLE>
On July 15, 1996, the reported closing sale price per share was 11/16.
__________________________________
(1) Reflects high and low reported bid price in the over-the-counter market.
II-1
<PAGE> 29
HOLDERS
The number of holders of record of the Company's Common Stock as of
July 15, 1996 was 185.
DIVIDENDS
The Company has not paid dividends to its shareholders since it became
a public company. The Company is subject to restrictions in the Credit
Agreement, which currently forbid payment of dividends. Based on the Company's
current financial situation, the Company is unable to pay dividends to its
shareholders.
CERTAIN CORPORATE GOVERNANCE MATTERS
Pursuant to Section 2115 of the California General Corporation Law, as
amended to date, certain provisions of California law are applicable to a
corporation not incorporated in California (a "foreign corporations") if such
foreign corporation has more than one-half of its business conducted in
California (determined by certain property, payroll, and sales factors) and
more than one-half of its outstanding voting securities held of record by
persons having addresses in California (excluding "street name" shares except
in certain circumstances). Section 2115 provides that if a foreign
corporation, such as the Company, meets the foregoing criteria, then provisions
of the California law relating primarily to shareholders' voting rights,
corporate distributions, and the election, removal and indemnification of
officers and others, will apply to such corporation "to the exclusion of the
law of the jurisdiction in which it is incorporated." The purpose of this law
is to afford certain protections to California creditors and shareholders of
foreign corporations that have specified minimum contacts in California. The
applicability of Section 2115 to foreign corporations is to be redetermined
annually, and the provisions of Section 2115 will cease to apply if the
specified criteria are not met. In addition, Section 2115 does not apply to a
corporation which has outstanding securities listed on the New York Stock
Exchange or the American Stock Exchange, or to a corporation which has
outstanding securities designated as qualified for trading as a national market
security on the Nasdaq Stock Exchange if such corporation has at least 800
holders of its equity securities as of the record date of its most recent
annual meeting of shareholders.
The Company currently has more than one-half of its business conducted
in the State of California, and, as of July 15, 1996, over 50% of the Company's
common stock is held of record in California. Accordingly, the Company
believes that it presently meets the tests for application of Section 2115. As
the Company's common stock was removed from listing on the Nasdaq National
Market as of October 16, 1995, the Company is no longer exempt from the
provisions of Section 2115. Under the transition provisions of the law as
applied to the Company, the Company believes that it will become subject to
Section 2115 on March 1, 1997. Among the provisions of the California General
Corporation Law that Section 2115 would therefore purport to be applicable to
the Company or Bylaws, is the provision that gives
II-2
<PAGE> 30
stockholders the right to cumulative voting in the election of all Directors
and the provision that provides for the election of Directors at each annual
meeting of stockholders.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected financial data presented below at February 28 or 29,
1992, 1993, 1994, 1995 and 1996, and for each of the five fiscal years in the
period ended February 29, 1996, have been derived from the audited financial
statements of the Company. The financial statements of the Company at February
28 (29), 1995 and 1996 and for each of the three fiscal years in the period
ended February 29, 1996, together with the notes and the Auditors' reports of
Arthur Andersen LLP, are included elsewhere in this Annual Report. The
selected financial data set forth below should be read in conjunction with the
financial statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report.
II-3
<PAGE> 31
<TABLE>
<CAPTION>
Fiscal Year Ended February 28 (29),
---------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue $ 27,472 $ 40,685 $67,795 $ 111,111 $ 90,392
Direct laboratory costs 10,179 13,676 21,821 35,335 31,881
Laboratory support costs 4,482 7,310 13,652 24,741 26,509
-------- -------- ------- --------- ---------
Laboratory profit 12,811 19,699 32,322 51,035 32,002
Selling, general and administrative 5,822 7,970 17,008 26,627 27,739
Provision for doubtful accounts 835 1,586 2,502 4,319 30,539
Depreciation, amortization and write-down
of intangible assets 1,745 2,624 4,797 9,881 36,327
Credit restructuring costs -- -- -- -- 4,904
Non-recurring acquisition
integration expense -- -- -- 9,250 --
-------- -------- ------- --------- ---------
Operating income (loss) 4,409 7,519 8,015 958 (67,507)
Interest expense (874) (1,012) (2,981) (9,013) (12,899)
Non operating income (expense), net 33 (155) 299 270 (322)
Litigation settlement -- -- (792) -- --
-------- -------- ------- --------- ---------
Income (loss) before income taxes 3,568 6,352 4,541 (7,785) (80,728)
Provision (benefit) for income taxes -- 2,800 1,831 (2,189) (1,543)
-------- -------- ------- --------- ---------
Net income (loss) 3,552 2,710 (5,596) (79,185)
======== ======= ========= =========
Pro forma income taxes (1) 1,427
--------
Pro forma net income (1) 2,141
========
Pro forma net income per share (1) $ 0.49
========
Net income (loss) per share $ 0.72 $ 0.44 $ (0.93) $ (13.13)
======== ======= ========= =========
Pro forma weighted average common
shares outstanding 4,383
========
Weighted average common shares
outstanding 4,919 6,220 6,013 6,030
======== ======= ========= =========
Ratio of earnings to fixed charges (2) 5.05x 7.28x 2.52x 0.14x N/A
Dividends declared per share $ 0 $ 0 $ 0 $ 0
BALANCE SHEET DATA:
Working capital $ 1,547 $ (479) $ 9,861 $ 17,243 $(134,491)
Total assets 16,676 42,784 78,813 158,044 92,852
Total long-term indebtedness 6,557 9,381 46,703 114,397 3,570
Stockholders' equity 4,429 17,302 19,992 14,548 (63,173)
</TABLE>
___________________
(1) Pro forma reflects the reorganization of the Company effective August
1, 1992 as if it had occurred on March 1, 1987 with respect to the
related adjustments for income taxes.
(2) 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.
II-4
<PAGE> 32
ITEM 7. 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 Annual Report.
BACKGROUND
The Company was incorporated in April 1992 to succeed to the business
of the Predecessor Partnership, which was formed in 1986 to perform a portion
of the laboratory testing required by three Sacramento-based hospital groups.
Together with a group of individual pathologists, the three hospital groups
formed the Predecessor Partnership which acquired the assets of a reference
laboratory.
The Predecessor Partnership incurred expenses in excess of revenues in
each of its fiscal years through fiscal year 1990. In the fourth quarter of
fiscal year 1990, the Company commenced implementation of a program designed to
increase revenues both through internal growth and acquisitions, and to improve
profitability by enhancing operating efficiencies. Since the fourth quarter of
fiscal year 1990, the Company has restructured its sales and marketing
function, established a field service organization dedicated to supporting
customer relations, and opened or acquired more than 140 new patient service
centers. During this period, the Company also implemented a variety of
measures designed to improve operating efficiencies and completed 27
acquisitions. The Company's net revenue increased from $27.5 million to $111.1
million (approximately 304%) from fiscal 1992 to fiscal 1995, and declined from
$111.1 million to $90.4 million (approximately 23%) from fiscal 1995 to fiscal
1996. Operating margins have declined from 16.1% in fiscal 1992, to 0.9% in
fiscal year 1995, and to (73.1%) in fiscal year 1996.
In April 1994, the Company completed its acquisition of the California
laboratory operations of Damon. This acquisition increased the Company's net
revenue and testing volume by approximately 51% and 71%, respectively. The
Company integrated the Damon operations into the Company's existing business
through the establishment of a regional laboratory in Burbank. The cost of
integration of the acquisition of Damon's California operations was
approximately $9.3 million (primarily for redundant payroll, facility and
outside services costs) for the fiscal year ended February 28, 1995. This
amount is included in the Company's Statements of Operations in nonrecurring
acquisition integration expense.
As a result of delays in the integration of certain of the Damon
operations, declining reimbursements from insurance payers, 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 (see Note 4
of Notes to Financial Statements). 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
II-5
<PAGE> 33
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 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 $83 million of secured indebtedness. See "Item 1.
Business -- Recent Developments -- Fourth Amendment to Credit Agreement."
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.
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.
II-6
<PAGE> 34
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. None of the
holders of Debentures gave timely notice that they wished to exercise their
redemption rights. Redemption will be at the option of the individual holders
of the Debentures who meet the procedural requirements specified in the
Indenture.
II-7
<PAGE> 35
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of net revenue:
<TABLE>
<CAPTION>
Year Ended February 28 (29),
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Direct laboratory costs 37.0 33.6 32.2 31.8 35.3
Laboratory support
costs 16.3 18.0 20.1 22.3 29.3
----- ----- ----- ----- -----
Laboratory profit 46.7 48.4 47.7 45.9 35.4
Selling, general and
administrative 21.2 19.6 25.1 24.0 30.7
Provision for doubtful
accounts 3.0 3.9 3.7 3.9 33.8
Depreciation and amortization 6.4 6.4 7.1 8.9 40.2
Credit restructuring
costs -- -- -- -- 5.4
Non recurring acquisition
integration expense -- -- -- 8.3 --
----- ----- ----- ----- -----
Operating income (loss) 16.1 18.5 11.8 0.9 (74.7)
Interest expense (3.2) (2.5) (4.4) (8.1) (14.3)
Non operating income
(expense), net 0.1 (0.4) 0.4 0.2 (0.4)
Litigation settlement -- -- (1.2) -- --
----- ----- ----- ----- -----
Income (loss) before income
taxes 13.0 15.6 6.6 (7.0) (89.3)
Provision (benefit) for income
taxes N/A 6.9 2.6 (2.0) (1.7)
----- ----- ----- ----- -----
Net income (loss) 8.7 4.0 (5.0) (87.6)
Pro forma income taxes(1) 5.2 N/A N/A N/A N/A
----- ----- ----- ----- -----
Pro forma net income (loss)(1) 7.8% N/A N/A N/A N/A
===== ===== ===== ===== =====
</TABLE>
___________________
(1) Pro forma reflects the reorganization of the Company effective August
1, 1992 as if it had occurred on March 1, 1987 and the related
adjustments for income taxes.
II-8
<PAGE> 36
The Company recognizes revenue based on amounts billed or levels of
reimbursement sustained by third-party payors. For fiscal years 1994, 1995 and
1996, the percentage of the Company's revenues generated from each of its
third-party payor sources was as follows: Medicare, 25%, 20% and 19%; MediCal,
8%, 9% and 11%; private insurance, 24%, 27% and 25%; and Managed Care, 5%, 6%
and 6%.
Direct laboratory costs represents variable costs directly
attributable to the performance of laboratory testing. Laboratory support
costs represents costs indirectly attributable to laboratory testing, including
patient service center expense, courier and vehicle expense, and customer
service expense.
Inflation has had no material impact on the Company's net revenue or
net income. Since insurance companies, HMOs, Medicare and MediCal, and other
third-party payors are the principal source of payments for the Company's
services, the identity of those payors and the prices which such payors have
established or are willing to pay for the Company's services have been the
principal factors for price changes which may affect the Company's net revenue.
Inflation has not had a material impact on the Company's costs of operations.
Due to increased efficiency and volume of testing, the Company's costs per test
declined in the 1991 and 1992 fiscal years as fixed costs were spread over a
greater testing volume. The Company's cost per test did not materially change
from fiscal year 1994 to fiscal year 1995 or from fiscal year 1995 to fiscal
year 1996.
Reform of the U.S. health care delivery system continues to be an
important issue for government, the public and healthcare providers. The
ultimate effect of any such reforms on the industry and the Company is
uncertain at this time. See "Item 1. Business -- Government Regulation --
Health Care Reform."
Effective August 1, 1992, the reorganization of PCL resulted in the
Company becoming a taxable corporation.
FISCAL YEAR ENDED FEBRUARY 29, 1996 COMPARED TO FISCAL YEAR ENDED FEBRUARY 28,
1995
Net revenue fell from $111.1 million in fiscal year 1995 to $90.4
million in fiscal year 1996, a decrease of 18.6%. This decrease is the result
of reduced reimbursement from third party payors, the elimination of some Damon
acquired accounts as a part of the Damon acquisition and inclement weather
experienced in California in the first quarter of fiscal year 1996.
Direct laboratory costs fell from $35.3 million for fiscal year 1995
to $31.9 million in fiscal year 1996. This represents a 9.6% reduction in
expense. As a percent of net revenue, direct laboratory costs increased from
31.8% in fiscal year 1995 to 35.3% in fiscal year 1996. The increase in direct
laboratory expense as a percent of net revenue is the result of reduced
reimbursement from third party payors while volumes were held essentially
constant. Additionally, poor weather in the first fiscal quarter of 1996
resulted in reduced revenue while staffing was maintained.
II-9
<PAGE> 37
Laboratory support expense grew from $24.7 million in fiscal year 1995
to $26.5 million in fiscal year 1996. As a percent of net revenue laboratory
support expense increased from 22.3% in fiscal year 1995 to 29.3% in fiscal
year 1996. The increased laboratory support expense came as a result of
increased expenditures on patient service centers as services were expanded to
cover areas served by the Damon acquisition. Reduced reimbursement also
affected these percentages.
Selling, general and administrative expense increased from $26.6
million to $27.7 million for fiscal years 1995 and 1996, respectively. As a
percent of net revenue, selling, general and administrative expense increased
from 24.0% for fiscal year 1995 to 30.7% for fiscal year 1996. This increase
is an administrative expense related to fees associated with unconsummated
acquisitions, rent liability for abandoned premises and an accrual for
maintenance contracts in dispute.
Provision for doubtful accounts increased from $4.3 million for fiscal
year 1995 to $30.5 million for fiscal year 1996. Due to the significant changes
occurring in the health care industry related to managed care, billing
system/process challenges and accounts receivable collection problems, the
Company has written down its accounts receivable by $25,440,000. During the
year, intensive efforts were put forth to gather billing and eligibility
information in order to process unbilled claims and collect past due accounts.
The Company was able to bill and collect some past due accounts receivable, but
the remainder was considered uncollectible. Because the factors listed above
continue to occur, 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.
Depreciation, amortization and write down of intangible assets
increased from $9.9 million in fiscal year 1995 to $36.3 million in fiscal year
1996. The Company has evaluated the future value of its intangible assets as of
February 29, 1996, considering the significant effects of third party payor
reimbursement declines and the significant changes in the health care industry,
which have caused adverse effects upon cash flow and results of operations. As
of February 29, 1996, the Company recorded a write-down of $25,000,000 to
intangible assets which was allocated to Goodwill. The amount of the write-down
was based upon a Board-approved restructuring plan prepared by investment
bankers engaged to assist and advise the Company on a proposed restructuring of
the Company's indebtedness. Because the restructuring plan is proposed and has
not been accepted by all parties, it is reasonably possible that the Company's
estimate of the recoverable amount of goodwill will change in the near term. No
estimate can be made of a range of amounts of loss that are reasonably possible.
Operating income fell from $958,000 for fiscal year 1995 to a loss of
$67.5 million for fiscal year 1996. As a percent of net revenue, operating
income fell from 0.9% to (74.7%) for fiscal years 1995 and 1996, respectively.
This decrease resulted from the loss of revenue associated with reduced
reimbursement from third party payors and increased laboratory support cost
associated with servicing Damon acquisition associated accounts. Additionally,
$4.9 million of the fiscal year 1996 expense is related to credit restructuring
costs, $24.0 million provided for uncollectible accounts receivable, and $25.4
million related to write down of Goodwill and customer lists.
Interest expense increased from $9.0 million in fiscal year 1995 to
$12.9 million in fiscal year 1996, an increase of 43.3%. This increase is due
to having a full year of interest expense related to the Damon acquisition in
fiscal year 1996 (approximately $3.0 million) and
II-10
<PAGE> 38
included penalties associated with defaults on existing loan balances
(approximately $.09 million).
Net income decreased from a loss of $5.6 million in fiscal year 1995
to a loss of $79.2 million in fiscal year 1996.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (the "Statement") on accounting for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
assets to be held and used. The Statement also establishes accounting standards
for long-lived assets and certain identifiable intangibles to be disposed of.
The Company is required to adopt the Statement no later than March 1, 1996,
although earlier implementation is permitted. The Statement is required to be
applied prospectively for assets to be held and used. The initial application of
the Statement to assets to be held for disposal is required to be reported as
the cumulative effect of a change in accounting principle. The Company plans to
adopt the Statement on March 1, 1996. Based on a preliminary review, the Company
expects the Statement will have no material impact on the Company's financial
position and/or its results of operations.
FISCAL YEAR ENDED FEBRUARY 28, 1995 COMPARED TO FISCAL YEAR ENDED FEBRUARY 28,
1994
Net revenue grew from $67.8 million in fiscal year 1994 to $111.1
million in fiscal year 1995, an increase of 63.9%. This increase was derived
primarily from an approximately $8.8 million increase in 1995 from the
Company's existing client base and from new clients, plus approximately $34.5
million in revenue derived from the acquisitions of laboratories consummated in
fiscal 1995. The Company considers revenue contributed by an acquired
laboratory as revenue from an acquisition until twelve months have elapsed
since the date of the acquisition, then such revenue is considered as revenue
contributed by the Company's existing client base.
Direct laboratory expense grew from $21.8 million for fiscal year 1994
to $35.3 million for fiscal year 1995, an increase of 61.9%. As a percent of
net revenue, direct laboratory expense decreased from 32.2% to 31.8%. The
reduction in direct laboratory expense as a percent of net revenue was achieved
from reduced direct employee labor costs and supply cost as the Company
continues to assimilate the Damon acquisition and utilize employees and
supplies more efficiently. The reduction was also due to reduced outside
reference fees as more testing was performed in-house.
Laboratory support expense grew from $13.7 million for fiscal year
1994 to $24.7 million for fiscal year 1995, an increase of 81.2%. As a percent
of net revenue, laboratory support expense increased from 20.1% to 22.3%. The
increase in laboratory support expense came primarily as a result of increased
expenditures on couriers and patient service centers as internal services were
expanded to cover areas served by the Damon acquisition.
Overhead expense, which includes selling, general and administrative
expense, provision for doubtful accounts, depreciation and amortization
expenses, provision for restructuring of operations and does not include
acquisition integration expense, grew from $24.3 million for fiscal year 1994
to $40.8 million for fiscal year 1995, an increase of 67.9%. As a percent of
net revenue, overhead expense increased from 35.9% for fiscal year 1994 to
36.7% for fiscal year 1995.
Selling, general, and administrative expense grew from $16.3 million
to $26.6 million, an increase of 63.2%. As a percent of net revenue, selling,
general, and administrative expense decreased from 24.1% for fiscal year 1994
to 23.9% for fiscal year 1995.
Provision for doubtful accounts increased from $2.5 million for fiscal
year 1994 to $4.3 million for fiscal year 1995, an increase of 72.6%. As a
percent of net revenue, provision for doubtful accounts increased from 3.7% for
fiscal year 1994 to 3.9% for fiscal year 1995.
II-11
<PAGE> 39
Depreciation and amortization expense increased from $4.8 million to
$9.9 million, an increase of 106.0%. As a percent of net revenue, depreciation
and amortization expense increased from 7.1% for fiscal 1994 to 8.9% for fiscal
1995. This increase was due to the amortization expense associated with the
Damon acquisition and a change in the life of goodwill from 36 years to 19
years (see Note 2 of Notes to Financial Statement).
Operating income fell from $8.0 million for fiscal year 1994 to
$958,000 for fiscal year 1995, a decrease of 88.0%. As a percentage of net
revenue, operating income decreased from 11.8% for fiscal year 1994 to 0.9% for
fiscal year 1995. This decrease resulted primarily from $9.25 million of
non-recurring acquisition integration expense relating to the Damon acquisition
and the change in the life of goodwill (approximately $618,000 increase in
amortization expense) as discussed above. In addition, the increase in
laboratory support expense as a percent of net revenue also contributed to the
decrease in operating income as a percent of net revenue.
Interest expense increased from approximately $3.0 million for fiscal
year 1994 to approximately $9.0 million for fiscal year 1995, an increase of
200.0%. As a percentage of net revenue, interest expense increased from 4.4%
for fiscal year 1994 to 8.1% for fiscal year 1995. The increase in the
interest expense is primarily due to interest incurred on the Company's
Debentures and funds borrowed to finance the Damon acquisition and various
capital projects.
Net income decreased from approximately $2.7 million for fiscal year
1994 to a net loss of approximately $5.6 million for fiscal year 1995. As a
percentage of net revenue, net income decreased from 4.0% for fiscal year 1994
to (5.0)% for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and results of operations of the Company were affected
significantly during the fiscal year ended February 29, 1996, and continue to
be adversely affected to the date of this Annual 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 February
29, 1996 and 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.
II-12
<PAGE> 40
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 amendments 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 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
$1.2 million, 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 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. The costs associated
with the Credit Agreement restructuring and write off of the deferred financing
costs have been reflected in the statement of operations as Credit Restructuring
costs.
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
II-13
<PAGE> 41
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:
o Consolidation of facilities and reductions in work force. 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.
o Use of dedicated internal teams for concentrated account
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
o Engagement of consultants to streamline and improve the
billing and collection processes.
o Engagement of third-party accounts receivable collection
parties.
o Data processing system changes to improve billing and
collection efforts.
o Increased focus and human resource additions in sales and
marketing to increase net revenues through internal growth.
o Reductions in overhead by, among other things, closing
unprofitable locations.
o Non-profitable capitated contracts in Southern California were
terminated in December 1995 and support services eliminated.
During and subsequent to the third quarter, 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 flow from operating activities decreased from $2.8 million in
fiscal year 1993 to ($1.0 million) in fiscal year 1994, and to ($900,000) in
fiscal year 1995, and to ($2.5 million) in fiscal year 1996.
II-14
<PAGE> 42
Cash flows from investing activities generally have been negative
through the periods prior to and including fiscal year 1996, due almost wholly
to the Company's laboratory acquisitions and purchases of equipment and
leasehold improvements. Uses of cash from investing activities increased from
$32.2 million for fiscal year 1994, to $69.8 million for fiscal 1995 and
declined to $2.0 million for fiscal year 1996. The increase in cash used in
investing activities in both fiscal 1994 and 1995 is due to acquisitions and
various capital projects including the build-out of the Burbank laboratory.
The decrease in cash used in investing activities in fiscal 1996 is due to
reduced acquisitions. The cash used in fiscal year 1996 was for equipment and
tenant improvement expenditures.
Cash flows from financing activities have reflected borrowings and
repayments of long-term debt. Cash provided by financing activities was $31.1
million for fiscal 1994, reflecting approximately $37.5 million in proceeds
from the Debenture offering. Cash provided by financing activities increased
to $69.7 million for fiscal 1995 reflecting borrowings to finance the Damon
acquisition and various capital projects. Cash provided by financing
activities decreased to $4.7 million for fiscal year 1996 and was used
primarily for operating activities and to finance costs associated with the
revised bank financing agreements.
As of February 29, 1996, the Company had approximately $124.8 million
of indebtedness of which $40 million represents the issuance of 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
$1.4 million is owed under capital lease obligations. See Notes 4 and 6 of
Notes to Financial Statements. Of such indebtedness, $40 million bears interest
at 7.5% and is due by its terms in August 2000; approximately $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 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 year ended February 29, 1996, the Company's revenue from third
party payors who determine the level of reimbursement to submit to the Company
represented approximately 55% of the Company's net revenue. This is
represented by Medicare 19%, MediCal 11% and insurance providers 25%. In
addition, approximately 6% of the Company's net revenue for the year ended
February 29, 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 February 29, 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.
II-15
<PAGE> 43
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 (See
Note 4 of Notes to Financial Statements).
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 monthly interest payments due since September 1995
under the Credit Agreement 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), the 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.
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. See "Item 8. Financial
Statements and Supplementary Data."
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.
II-16
<PAGE> 44
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 February 29, 1996, the Company had approximately $392,000 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 2% of net revenues for fiscal year 1996. As of February 29,
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 February 29, 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 Company's Bank Group would
favorably consider or act upon such a request by the Company if made.
II-17
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheets of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) as of February 28 (29), 1996 and 1995,
and the related statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
February 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Clinical
Laboratory, Inc. as of February 28 (29), 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
February 29, 1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a significant decline in
operating income margins, a substantial net loss on operations, a negative
operating cash flow, a negative working capital position and is in default under
the terms of substantially all of its loan agreements. As a result, the lenders
have the right to demand immediate payment of approximately $123.2 million of
indebtedness and to foreclose on the Company's assets. The Company does not
have sufficient resources to repay the indebtedness and has engaged an adviser
to seek a proposed restructuring of the Company's indebtedness. All of these
factors and others discussed in Note 1 raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as a whole.
Arthur Andersen LLP
Sacramento, California
June 28, 1996
II-18
<PAGE> 46
PHYSICIANS CLINICAL LABORATORY, INC.
BALANCE SHEETS
AS OF FEBRUARY 28 (29), 1995 AND 1996
<TABLE>
<CAPTION>
February 28, February 29,
Assets 1995 1996
------ ----------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 181,896 $ 391,815
Trade accounts receivable --
Third parties 34,606,830 17,948,681
Related parties 412,072 476,923
----------------- ---------------
Total accounts receivable 35,018,902 18,425,604
Less -- Allowance for doubtful accounts 603,763 4,632,000
----------------- ---------------
Net accounts receivable 34,415,139 13,793,604
Income tax refunds receivable 5,181,785 --
Deferred tax asset, net 363,753 --
Notes receivable -- current 230,550 350,000
Supplies inventory 2,322,226 1,370,742
Prepaid costs and other assets 2,107,292 618,287
----------------- ---------------
Total current assets 44,802,641 16,524,448
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, less accumulated
depreciation and amortization of $14,082,419 and $19,196,157,
respectively 20,165,688 16,929,581
INTANGIBLE ASSETS:
Leasehold interest, less accumulated amortization of $1,194,062
and $1,452,045, respectively 1,783,687 22,278,986
Customer lists, less accumulated amortization of $3,672,854 and
$5,104,303, respectively 23,710,435 15,278,986
Covenants not to compete, less accumulated amortization of
$2,412,521 and $3,482,760, respectively 3,210,470 2,140,231
Goodwill, less accumulated amortization of $3,325,110 and
$6,692,555, respectively 59,892,585 31,525,140
----------------- ---------------
Total net intangible assets 88,597,177 57,470,061
DEBT ISSUANCE COSTS less accumulated amortization of $817,194 as
of February 28, 1995 3,343,498 --
OTHER LONG-TERM ASSETS 1,135,260 488,289
----------------- ---------------
Total assets $ 158,044,264 $ 91,412,379
================= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
II-19
<PAGE> 47
PHYSICIANS CLINICAL LABORATORY, INC.
BALANCE SHEETS
AS OF FEBRUARY 28 (29), 1995 AND 1996
<TABLE>
<CAPTION>
February 28, February 29,
Liabilities and Stockholders' Equity 1995 1996
------------------------------------ ---------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt $ 8,372,711 $ 123,880,031
Accounts payable 13,627,915 12,185,439
Accrued payroll 1,528,957 1,954,271
Accrued paid time-off 985,011 1,255,634
Accrued interest 976,263 8,544,639
Other accrued expenses 2,069,141 4,635,019
---------------- ---------------
Total current liabilities 27,559,998 152,455,033
LONG-TERM DEBT, less current installments 72,975,969 955,393
CONVERTIBLE SUBORDINATED DEBENTURES 40,000,000 --
OTHER LONG-TERM LIABILITIES 1,420,926 2,614,537
DEFERRED INCOME TAXES 1,539,468 --
---------------- ---------------
Total liabilities 143,496,361 156,024,963
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, 6 and 12)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.01 per share -- 20,000,000 shares
authorized; none issued or outstanding -- --
Common stock, par value $0.01 per share -- 30,000,000 shares
authorized; 6,027,709 and 6,033,087 shares issued and
outstanding as of February 28 (29), 1995 and 1996,
respectively 60,277 60,331
Additional paid-in capital 15,512,961 15,536,906
Retained earnings (deficit) (1,025,335) (80,209,821)
---------------- ---------------
Total stockholders' equity (deficit) 14,547,903 (64,612,584)
---------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 158,044,264 $ 91,412,379
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
II-20
<PAGE> 48
PHYSICIANS CLINICAL LABORATORY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended February 28 (29),
---------------------------------------------------
1994 1995 1996
-------------- ------------ -------------
<S> <C> <C> <C>
NET REVENUE
Net revenue from third parties $ 63,798,610 $107,565,433 $ 86,828,901
Net revenue from related parties 3,996,982 3,546,012 3,562,950
-------------- ------------ -------------
Total net revenue 67,795,592 111,111,445 90,391,851
DIRECT LABORATORY COSTS 21,820,850 35,335,270 31,881,339
-------------- ------------ -------------
Gross profit 45,974,742 75,776,175 58,510,512
LABORATORY SUPPORT COSTS 13,652,559 24,741,263 26,509,055
-------------- ------------ -------------
Laboratory profit 32,322,183 51,034,912 32,001,457
SELLING, GENERAL AND ADMINISTRATIVE 17,007,570 26,626,847 27,739,434
PROVISION FOR DOUBTFUL ACCOUNTS (NOTE 2) 2,502,280 4,318,516 30,538,625
DEPRECIATION, AMORTIZATION AND WRITE
DOWN OF INTANGIBLES (NOTE 2) 4,796,930 9,881,687 36,326,689
CREDIT RESTRUCTURING COSTS -- -- 4,903,436
NONRECURRING ACQUISITION INTEGRATION -- 9,250,188 --
EXPENSE -------------- ------------ -------------
Operating income (loss) 8,015,403 957,674 (67,506,727)
-------------- ------------ -------------
INTEREST EXPENSE (2,980,781) (9,012,583) (12,898,919)
INTEREST INCOME 273,596 88,269 61,285
NONOPERATING INCOME (EXPENSE), net 25,479 181,291 (383,375)
LITIGATION SETTLEMENT (Note 12) (792,000) -- --
-------------- ------------ -------------
Income (loss) before provision (benefit) 4,541,697 (7,785,349) (80,727,736)
for income taxes
1,831,387 (2,189,112) (1,543,250)
Provision (benefit) for income taxes -------------- ------------ -------------
NET INCOME (LOSS) 2,710,310 (5,596,237) (79,184,486)
============== ============ =============
NET INCOME (LOSS) PER COMMON SHARE $ 0.44 $ (0.93) $ (13.13)
============== ============ =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,220,000 6,013,000 6,030,000
============== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-21
<PAGE> 49
PHYSICIANS CLINICAL LABORATORY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended February 28 (29),
-----------------------------------------------------------
1994 1995 1996
---------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 2,710,310 $ (5,596,237) $ (79,184,486)
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation, amortization and write down
of intangible assets 4,796,930 9,881,687 36,326,689
Provision for doubtful accounts 2,502,280 4,318,516 30,538,625
Credit Restructuring Costs -- -- 3,118,592
Net change in income tax refund
receivable -- (5,181,785) 5,181,785
Net changes in operating assets and
liabilities (11,036,793) (4,322,761) 1,487,822
---------------- --------------- --------------
Net used in operating activities (1,027,273) ( 900,580) (2,530,973)
---------------- --------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase of intangible assets in
connection with acquisitions (27,201,062) (2,739,413) --
Purchase of Damon net of cash acquired -- (58,111,866) --
Acquisition of equipment and leasehold
improvements (5,032,077) (8,989,249) (1,963,463)
---------------- --------------- --------------
Net cash used in investing activities (32,233,139) (69,840,528) (1,963,463)
---------------- --------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term debt 54,238,811 83,438,587 6,266,763
Payments of principal on long-term debt--
Third parties (21,231,404) (13,934,416) (1,586,407)
Related parties (1,909,093) -- --
Proceeds from exercise of stock options 249,947 41,250 --
Proceeds from sale of capital stock 69,754 111,224 23,999
Distributions to owners (340,614) -- --
---------------- --------------- --------------
Net cash provided by financing
activities 31,077,401 69,656,645 4,704,355
---------------- --------------- --------------
Net increase (decrease) in cash
and cash equivalents (2,183,011) (1,084,463) 209,919
CASH AND CASH EQUIVALENTS,
beginning of year 3,449,370 1,266,359 181,896
---------------- --------------- --------------
CASH AND CASH EQUIVALENTS,
end of year $ 1,266,359 $ 181,896 $ 391,815
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
II-22
<PAGE> 50
PHYSICIANS CLINICAL LABORATORY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 28 (29), 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Retained
Common Common Additional Earnings
Stock Shares Stock Amount Paid-In Capital (Deficit)
---------------- ------------------- --------------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT FEBRUARY 28, 1993 5,954,036 $ 59,540 $ 15,041,529 $ 2,201,206
Net income -- -- -- 2,710,310
Proceeds from exercise of stock
options 45,434 455 249,492 --
Proceeds from sale of stock under
employee stock purchase plan 7,136 71 69,683 --
Deemed distribution to owners -- -- -- (340,614)
--------- ---------- ------------- ------------
BALANCE AT FEBRUARY 28, 1994 6,006,606 60,066 15,360,704 4,570,902
Net loss -- -- -- (5,596,237)
Proceeds from exercise of stock
options 7,500 75 41,175 --
Proceeds from sale of capital stock 13,603 136 111,082 --
--------- ---------- ------------- ------------
BALANCE AT FEBRUARY 28, 1995 6,027,709 60,277 15,512,961 (1,025,335)
Net loss -- -- -- (79,184,486)
Proceeds from sale of capital stock 5,378 54 23,945 --
--------- ---------- ------------- ------------
BALANCE AT FEBRUARY 29, 1996 6,033,087 $ 60,331 $ 15,536,906 $(80,209,821)
========= ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
II-23
<PAGE> 51
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT RISKS AND UNCERTAINTIES:
Physicians Clinical Laboratory, Inc. ("PCL" or the "Company") provides
clinical laboratory services in the State of California. The Company is a
"hybrid" among clinical laboratory companies in that it serves both as a
traditional reference laboratory for office based physician-clients and as an
independent clinical laboratory for regional acute care hospitals. PCL
operates within the health care industry which is undergoing significant
changes such as managed care (including capitated payment arrangements),
proposed federal and state health care reform measures, third party payor
reimbursement decreases (including Medicare, MediCal and private insurance),
industry consolidation and increasing regulation of laboratory operations.
The liquidity and results of operations of the Company were affected
significantly during the fiscal year ended February 29, 1996, and continue to
be adversely affected 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 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
on its $40 million 7.5% Convertible Subordinated Debentures due 2000
("Debentures") and the Note issued by the Company in connection with the
acquisition of Medical Group Pathology Laboratory. The Company does not have
available cash or other cash resources available to cure the defaults under
the Credit Agreement or the Indenture covering the Debentures, or otherwise
to make interest or principal payments with respect to its debt obligations.
For the year ended February 29, 1996, the Company's revenue from third
party payors who determine the level of reimbursement to submit to the Company
represents approximately 55% of the Company's net revenue. This is represented
by Medicare 19%, MediCal 11% and insurance providers 25%. In addition,
approximately 6% of the Company's net revenue for the year ended February 29,
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 percent of net revenue has decreased substantially in the period
from March 1, 1993 through February 29, 1996. The Company's operating income
as a percent of net revenue, excluding nonrecurring items, was 11.8%, 9.2% and
(13.5%) for the years ended February 28 (29), 1994, 1995 and 1996, respectively.
The Company completed a significant acquisition in April 1994 of the
California operations of Damon Corporation, Met Path, Inc. (Damon) (see Note
13). This acquisition increased net revenue by approximately 51% and testing
volume by approximately 72%. In addition, the acquisition required a
significant integration of human resources, facilities, data processing
systems, testing equipment and customer support. The Company substantially
completed the integration efforts in December 1994. In connection with the
integration of Damon, the Company incurred approximately $9.25 million of costs
relating to redundant payroll, facilities and outside services. These costs
have been reflected in the accompanying Statements of Operations as a
nonrecurring acquisition integration expense for the year ended February 28,
1995.
The Company continues to experience severe cash flow problems from
operations, negative working capital, third party payor reimbursement declines,
billing and collection problems and other impacts of the significant changes in
the health care industry and is in default under the terms of substantially all
of its loan agreements. As a result, the lenders have the right to demand
immediate payment of approximately $123.2 million of indebtedness and to
foreclose on the Company's assets. The Company does not have sufficient
resources to repay the indebtedness. At this time, it is not possible to
determine the impact on the Company's business. However, these issues could
have an adverse impact on operating results, cash flows and debt covenants of
the Company in future years. This raises substantial doubt about the Company's
ability to continue to exist as a going concern. The financial statements do
not include any adjustments relating to the
II-24
<PAGE> 52
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
The Company anticipates that its operating cash needs for the near
term will be met by accounts receivable collection. No assurance can be given
however 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 February 29, 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 Company's Bank Group would
favorably consider or act upon such a request by the Company if made.
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:
. Consolidation of facilities and reductions in work force. The
Fresno hub laboratory was closed in June 1995, and the Burbank
hub laboratory was closed in June 1996, and both were
consolidated into the Sacramento laboratory. Both locations
maintain expanded STAT facilities.
. Use of dedicated internal teams for concentrated accounts
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
. Engagement of consultants to streamline and improve the
billing and collection processes.
. Engagement of third party accounts receivable collection
parties.
. 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.
. Reductions in overhead by closing unprofitable locations.
. Non-profitable capitated contracts in Southern California were
terminated in December 1995 and support service eliminated.
In addition, the Company has engaged investment bankers to assist and advise
the Company on a proposed 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.
II-25
<PAGE> 53
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS--
Cash and cash equivalents include cash in bank and on hand and liquid
investments with original maturities of three months or less.
SUPPLIES INVENTORY--
Supplies inventory is stated at cost, which approximates market value, on a
first-in, first-out (FIFO) basis. Supplies inventory consists primarily of
laboratory supplies.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS--
Equipment and leasehold improvements are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, except for leasehold improvements which are being amortized over the
life of the lease. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is recognized in operations for the
period. The cost of maintenance and repairs is charged to income as incurred,
significant renewals and betterments are capitalized.
The estimated useful lives of the equipment and leasehold improvements are as
follows:
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
<S> <C>
Leasehold improvements 5-12 years
Laboratory equipment 5-20 years
Computer equipment 5-12 years
Furniture and fixtures 5-12 years
Automobiles 1-5 years
</TABLE>
INTANGIBLE ASSETS--
In 1986, the Partnership purchased a clinical laboratory business and in
determining the fair value of assets acquired, assigned a value of $1,907,000
to an intangible asset identified as a customer list. Since then, the Company
has acquired an additional 27 laboratories. See Note 13 for a summary of the
allocation of the purchase prices.
II-26
<PAGE> 54
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
All amortization is calculated using the straight-line method over the
following lives:
<TABLE>
<CAPTION>
Life
---------------
<S> <C>
Customer list 19 years
Covenant not to compete Life of Agreement
Goodwill 19 years
Leasehold interest Life of Lease
</TABLE>
Prior to fiscal 1995, the Company used a 36 year amortization life for
goodwill. Effective March 1, 1994, the Company adopted a goodwill life of 19
years due to the rapid changes occurring in the healthcare industry. The 19
years has also been applied on a remaining life basis for goodwill relating to
acquisitions made prior to March 1, 1994. The effect of reducing the life to
19 years was to increase amortization expense for fiscal 1995 by approximately
$1,300,000.
Subsequent to its acquisitions the Company continually evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segment's enterprise value and deducts the fair value of all
tangible and intangible assets to arrive at the recoverable value of goodwill.
The Company has evaluated the future value of its intangible assets as
of February 29, 1996, considering the significant effects of third party payor
reimbursement declines and the significant changes in the health care industry,
which have caused adverse effects upon cash flow and results of operations. As
of February 29, 1996, the Company recorded a write-down of $25,000,000 to
intangible assets which was allocated to Goodwill. The amount of the write-down
was based upon a Board-approved restructuring plan valuation prepared by
investment bankers engaged to assist and advise the Company on a proposed
restructuring of the Company's indebtedness. Because the restructuring plan is
proposed and has not been accepted by all parties, it is reasonably possible
that the Company's estimate of the recoverable amount of goodwill will change in
the near term. No estimate can be made of a range of amounts of loss that are
reasonably possible.
Amortization expense for leasehold interest was $289,039, $277,189 and
$257,983, covenants not to compete, $862,159, $1,114,835 and $1,070,242,
goodwill, $208,905, $2,765,197 and $3,367,445, and customer lists $828,887,
$1,410,399 and $1,431,449 in fiscal 1994, 1995 and 1996, respectively.
DEBT ISSUANCE COSTS--
Costs incurred in connection with the issuance of the convertible subordinated
debentures, notes payable to banks and lines of credit are deferred and
amortized over the life of the related debt using an effective interest rate
method. During fiscal year 1996, the debt issuance costs related to the bank
debt and the Convertible Subordinated Debentures was expensed due to defaults
with covenants in the lending agreement and the Indenture. The amounts were
$1,450,140 and $1,668,466, respectively and are included in credit
restructuring costs in the Statement of Operations.
EARNINGS PER SHARE --
Weighted average shares outstanding include common stock equivalents computed
using the treasury stock method except for periods in which their inclusion
would be anti-dilutive.
II-27
<PAGE> 55
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
DIRECT LABORATORY AND LABORATORY SUPPORT COSTS--
Direct laboratory costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Labor costs $10,819,485 $15,732,279 $14,443,783
Supplies 7,920,938 14,234,787 12,822,471
Reference and Pathology fees:
Third parties 2,150,309 3,825,409 2,916,597
Related parties 290,633 362,851 391,926
Utilities and other 639,485 1,179,944 1,306,562
----------- ----------- -----------
Total direct laboratory costs $21,820,850 $35,335,270 $31,881,339
=========== =========== ===========
</TABLE>
Laboratory support costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Patient service centers $ 7,337,278 $13,497,835 $16,065,083
Couriers 2,614,178 5,494,698 4,798,069
Laboratory administration 1,452,309 3,128,359 3,209,862
Managements service charges from related
parties 1,102,282 876,004 868,338
Customer service 770,822 1,151,824 1,070,650
Materials management 375,690 592,543 497,053
----------- ----------- -----------
Total laboratory support costs $13,652,559 $24,741,263 $26,509,055
=========== =========== ===========
</TABLE>
II-28
<PAGE> 56
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
REPAIRS AND MAINTENANCE EXPENSE--
Repairs and maintenance expense was $598,736, $1,140,424 and $1,174,077 in
fiscal 1994, 1995 and 1996, respectively.
INCOME TAXES--
The provision for income taxes and related tax liabilities have been computed
in accordance with SFAS No. 109.
STATEMENTS OF CASH FLOWS--
Net changes in operating assets and liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29)
------------------------------------------------
1994 1995 1996
------------ ------------- ------------
<S> <C> <C> <C>
Increase in accounts receivable $ (9,639,922) $ (12,402,033) $ (9,917,080)
Net (increase) decrease in supplies inventory, prepaid
costs, deposits and other assets (3,638,337) (1,711,373) 3,192,892
Increase in accounts payable and accrued 1,932,284 9,032,007 9,387,725
expenses
Increase (decrease) in deferred taxes 309,182 758,638 (1,175,715)
------------ ------------- ------------
Net change in operating assets and liabilities $(11,036,793) $ (4,322,761) $ 1,487,822
============ ============= ============
</TABLE>
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29)
-----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest--
Third parties $2,186,876 $8,199,578 $4,400,969
Related parties $ 676,386 $ -- $ --
Cash paid to related parties for operating expenses $ 769,999 $ 688,855 $ 296,105
Cash received from related parties for operating
revenues $3,920,451 $3,713,627 $3,258,996
Cash paid to related parties for acquisition of
laboratory $ 343,000 $ -- $ --
</TABLE>
II-29
<PAGE> 57
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
RECLASSIFICATIONS--
Certain reclassifications to prior years' financial statements have been made
to conform to the 1996 presentation.
REVENUE RECOGNITION--
Revenues are recognized when services are performed. Revenues under capitated
agreements are recognized monthly as earned. Expenses are accrued on a monthly
basis as services are provided.
The following summarizes revenues and accounts receivable by payor class:
<TABLE>
<CAPTION>
REVENUES ACCOUNTS RECEIVABLE
YEAR ENDED FEBRUARY 28 OR 29, FEBRUARY 28 OR 29,
1994 1995 1996 1995 1996
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Medicare $17,009,478 $ 22,119,163 $17,313,618 $ 5,835,607 $ 949,139
MediCal 5,384,845 10,490,429 9,657,341 4,077,512 1,216,961
Managed Care 3,255,411 6,645,217 5,507,181 -- 393,082
Patient 15,929,859 26,617,692 22,665,388 11,033,612 9,645,444
Client 5,859,220 11,292,396 8,913,592 5,805,785 2,571,747
Insurance 16,015,935 29,830,369 23,226,185 7,296,468 2,849,699
Owner hospitals 3,407,690 2,969,103 2,504,362 358,356 386,830
Computer and courier 641,474 601,250 577,212 47,520 0
Other 291,680 545,826 26,972 564,042 412,702
----------- ------------ ----------- ----------- -----------
Total $67,795,592 $111,111,445 $90,391,851 $35,018,902 $18,425,604
=========== ============ =========== =========== ===========
</TABLE>
Due to the significant changes occurring in the health care industry
related to managed care, billing system/process challenges and accounts
receivable collection problems, the Company has written down its accounts
receivable by $25,440,000. During the year, intensive efforts were put forth
to gather billing and eligibility information in order to process unbilled
claims and collect past due accounts. The Company was able to bill and
collect some past due accounts receivable, but the remainder was considered
uncollectible as of February 29, 1996. Because the factors listed above
continue to occur, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value:
CASH, TRADE ACCOUNTS RECEIVABLE, NOTES RECEIVABLE, ACCOUNTS PAYABLE
The carrying amount approximates fair value
It was not practicable to estimate the fair value of the Company's
debt due to the debt being in default. See Note 1 and 4.
USE OF ESTIMATE IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS--
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (the "Statement") on accounting for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
assets to be held and used. The Statement also establishes accounting
standards for long-lived assets and certain identifiable intangibles to be
disposed of. The Company is required to adopt the Statement no later than
March 1, 1996, although earlier implementation is permitted. The Statement is
required to be applied prospectively for assets to be held and used. The
initial application of the Statement to assets to be held for disposal is
required to be reported as the cumulative effect of a change in accounting
principle. The Company plans to adopt the Statement on March 1, 1996. Based
on a preliminary review, the Company expects the Statement will have no
material impact on the Company's financial position and/or its results of
operations.
II-30
<PAGE> 58
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, 1995
-------------------------------------------
ACCUMULATED
DEPRECIATION
AND NET
COST AMORTIZATION BOOK VALUE
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment $ 8,994,173 $ 4,165,069 $ 4,829,104
Computer equipment 12,672,642 5,997,301 6,675,341
Furniture and fixtures 2,505,493 816,960 1,688,533
Autos and trucks 229,313 166,541 62,772
Leasehold improvements 5,981,652 1,463,732 4,517,920
Leased equipment 3,864,834 1,472,816 2,392,018
----------- ----------- -----------
$34,248,107 $14,082,419 $20,165,688
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-------------------------------------------
ACCUMULATED
DEPRECIATION
AND NET
COST AMORTIZATION BOOK VALUE
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment $ 9,009,932 $ 5,731,046 $ 3,278,886
Computer equipment 14,249,578 7,946,458 6,303,120
Furniture and fixtures 2,614,725 1,064,540 1,550,185
Autos and trucks 229,313 202,904 26,409
Leasehold improvements 6,093,835 2,032,372 4,061,463
Leased equipment 3,928,355 2,218,837 1,709,518
----------- ----------- -----------
$36,125,738 $19,196,157 $16,929,581
=========== =========== ===========
</TABLE>
Depreciation and amortization expense relating to equipment and leasehold
improvements charged to operations was $4,796,930, $9,881,687 and $11,326,689
for fiscal years ended 1994, 1995 and 1996, respectively. As of February 29,
1996, the Company recorded a write down of $25,000,000 to intangible assets.
See Note 2.
II-31
<PAGE> 59
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(4) LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28 (29),
---------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Convertible subordinated debentures, currently in default, par
value $1,000 per debenture, bearing interest at 7.5% due 2000.
The debentures are convertible into shares of common stock at
any time before maturity at a conversion price of $12.20 per
share. $ 40,000,000 $ 40,000,000
Variable interest rate notes payable to banks, currently in
default, bearing interest at prime plus 1.125%, principal
due in aggregate monthly and quarterly installments, with
final payments due March 2000, secured by all assets of
the Company. 47,000,000 47,359,476
Various lines of credit, currently in default, which allow
aggregate borrowings up to $33,500,000 bearing interest at
prime plus 1.125%, interest due monthly and quarterly with
principal due through March 1997, secured by all assets
of the Company. 29,300,000 33,500,000
Notes payable to former owners of acquired laboratories,
currently in default, with interest rates ranging from 6.0% to
6.7%, due monthly with principal due through July 1996; secured
by assets acquired from the related laboratories. 2,670,697 2,383,493
Note payable to the City of Burbank, non-interest bearing, due
annually through September 2005 (annual payments forgiven if
building is still occupied). 150,000 150,000
Capital lease obligations (Note 6) 2,227,983 1,442,455
-------------- --------------
121,348,680 124,835,424
Less -- Current installments 8,372,711 123,880,031
-------------- --------------
Long term debt, less current installments $ 112,975,969 $ 955,393
============== ==============
</TABLE>
II-32
<PAGE> 60
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
As of February 29, 1996, the prime rate and the London Interbank Offered Rate
(LIBOR) were 8.25% and 5.297%, respectively. All assets of the Company are
pledged as collateral to secure it borrowings. The loan agreements with the
Bank are conditional upon the Company's ongoing ability to comply with certain
covenants. The covenants include the maintenance of specified working capital
and debt-to-worth ratios.
The Company has been in default since September of 1995 with respect to
principal and interest payments and certain covenants under its credit agreement
with respect to approximately $80.9 million of secured indebtedness. The Company
has also been in default since September of 1995 with respect to interest
payments on its $40 million 7.5% Convertible Subordinated Debentures due 2000
and the Note issued by the Company in connection with the acquisition of
Medical Group Pathology Laboratory. The Company does not have available cash
or other cash resources available to cure the defaults under the Credit
Agreement or the Indenture covering the Debentures, or otherwise to make
interest or principal payments with respect to its debt obligations.
During the second quarter of fiscal 1996, the Company entered into negotiations
for the restructuring of its bank debt. The negotiations resulted in the third
and fourth amendment to its Credit Agreement with a group of banks led by Wells
Fargo Bank National Association (the holders of the Company's debt obligations
pursuant to the Credit Agreement hereinafter are referred to as the "Bank
Group"). As a result of insufficient cash flows caused by, among other things,
reductions in third party payor reimbursement rates, billing and collection
problems and effects and changes in the health care industry, the Company was
unable to make interest payments under its Credit Agreement due monthly since
September 1995, each in the amount of approximately $660,000 (excluding
penalties on unpaid amounts), principal amortization payments due on September
13, 1995 and October 6, 1995, each in the amount of $600,000, principal
amortization payments due on November 3, 1995, December 29, 1995 and March 31,
1996, each in the amount of $1,200,000, principal amortization payments due on
February 7, 1996 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
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 were written off as of August 31, 1995 and February 29, 1996,
respectively. The costs associated with the Credit Agreement restructuring and
write off of the deferred financing costs has been reflected in the statement of
operations as Credit Restructuring costs.
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.
II-33
<PAGE> 61
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
The removal of the Company's common stock from listing on the Nasdaq National
Market System constituted a Redemption Event under the Company's Indenture
governing its Debentures. Such Redemption Event required the Company to offer
to repurchase the Debentures from the holders thereof at a redemption price
equal to 101% of the principal amount thereof plus accrued and unpaid interest,
if any. Written notice of the occurrence of such Redemption Event was given to
the registered holders of the Debentures on November 2, 1995, and no such
holder perfected its right to redeem such Debentures within the period provided
under the Indenture. In addition, under the terms of the Registration Rights
Agreement between the Company and holders of the Debentures, the Company is
obligated to maintain an effective registration statement covering the
Debentures and the Company's common stock with respect to which the Debentures
are convertible. The Company has not maintained such an effective registration
statement since June 1995 and therefore, under the Registration Rights
Agreement, the Company may be liable to certain holders of the Debentures for
Liquidated Damages.
The Company is negotiating with Pathologists' Clinical Laboratories of
Glendale, Inc. ("Glendale") and Medical Group Pathology Laboratory, Inc.
("MGPL") to amend its Agreements of Purchase and Sale of Assets relating to the
purchases of the Company's Glendale and Santa Barbara facilities, respectively,
in order to avoid potential defaults in the payment obligations under these
agreements. See Note 12. As of June 30, 1996 the outstanding principal
amounts owed to Glendale and MGPL were approximately $1,484,710 and $890,107,
respectively.
Maturities of long-term debt, excluding capital lease obligations, in each of
the next five fiscal years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28 (29),
-----------------
<S> <C>
1997 $123,257,969
1998 15,000
1999 15,000
2000 15,000
2001 15,000
Thereafter 75,000
------------
$123,392,969
============
</TABLE>
On November 4, 1993, the Company entered into an interest rate swap with an
investment bank. The swap is for $10,000,000 notional amount with a fixed rate
of 4.5625% received by the Company and a floating rate paid by the Company at
the six-month LIBOR rate. The rate adjustment dates are November 8 and May 8
each year and the payment dates are six months after the rate adjustment date.
The swap contract expires November 8, 1996.
As of February 29, 1996 six month LIBOR was 5.297%. The Company did not make
its May 8, 1995, November 8, 1995 and May 8, 1996 semi-annual payments of
$76,684, $93,750 and $59,375 based upon six month LIBOR of 6.094% as of
November 8, 1994, 6.061% as of May 8, 1995 and 5.75% as of November 8, 1995.
It is currently negotiating with the counterparty as to the amount of the
aggregate liability. As of February 29, 1996 the fair value of this contract
was a liability of the Company in excess of $300,000.
II-34
<PAGE> 62
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
The Company entered into the swap to convert a portion of its fixed rate
subordinated debentures to a variable rate. As such, the Company had been
accruing the net payments to be made on the contract as an adjustment to
interest expense.
(5) INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
--------------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Current--
Federal $ 1,293,327 $ (2,947,750) $ (141,820)
State 386,319 -- (42,842)
------------ ------------- -------------
$ 1,679,646 $ (2,947,750) $ (184,662)
Deferred--
Federal 118,542 531,783 (1,043,396)
State 33,199 226,855 (315,192)
------------ ------------- -------------
151,741 758,638 (1,358,588)
------------ ------------- -------------
$ 1,831,387 $ (2,189,112) $ (1,543,250)
============ ============= =============
</TABLE>
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
--------------------------------------------------
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% (34.0%) (34.0%)
State franchise taxes, net of 5.7% (6.1%) (6.1%)
federal income tax benefit
Change in valuation allowance -- -- 38.3%
Additional provision for -- 5.8% --
intangible assets
Other 0.6% 1.7% (0.2%)
----- ------- ------
40.3% (28.1%) (2.0%)
===== ======= ======
</TABLE>
II-35
<PAGE> 63
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
The Components of the net deferred tax liability as of February 28 (29), 1995
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 (29),
1995 1996
------------ --------------
<S> <C> <C>
DEFERRED TAX (ASSETS)/LIABILITIES
Current
Accrued Expenses $ (725,102) $ (1,114,146)
Bad Debt 620,044 (4,765,504)
California Franchise Tax (575,191) --
Prepaid Expenses 346,496 65,021
Other (30,000) 499,304
--------- -----------
Total Current Deferred (Assets)/Liabilities (363,753) (5,315,325)
Valuation Allowance 5,315,325
-----------
Net Current Deferred (Assets)/Liabilities (363,753) --
Non-Current
Amortization 784,596 (9,598,474)
Depreciation 542,157 (448,365)
Net Operating Loss (454,489) (15,037,165)
Sec. 481(a) Cash to Accrual 212,715 44,032
--------- -----------
Total Non-Current Deferred (Assets)/Liabilities 1,084,979 (25,039,972)
Valuation Allowance 454,489 25,039,972
--------- -----------
Net Non-Current Deferred (Assets)/Liabilities 1,539,468 --
TOTAL NET DEFERRED (ASSETS)/LIABILITIES $ 1,175,715 $ --
========= ============
</TABLE>
(6) LEASES:
The Company is obligated under capital leases for certain computer and
laboratory equipment that expire at various dates during the next five years.
Equipment under capital leases was $3,864,834 and $3,928,355, and related
accumulated amortization was $1,472,816 and $2,218,837 as of February 28, 1995
and February 29, 1996.
The Company also leases its laboratories and patient service centers under
operating leases expiring over various terms. Many of the monthly lease
payments are subject to increases based on the Consumer Price Index from the
base year.
Beginning March 1, 1989, the Company began subletting one of its unoccupied
facilities. The sublease term coincides with that of the remaining primary
lease of eight years with rent for the year ended February 29, 1996 equal to
$217,795 and subject to annual increases based on the Consumer Price Index not
to exceed 10% per year.
II-36
<PAGE> 64
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
The Company also leases remote draw station space, several automobiles and
other equipment, which have been classified as operating leases and expire over
the next 9 years. Many of the draw station leases have renewal options and
monthly lease payment subject to annual increases.
II-37
<PAGE> 65
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of February 29, 1996
are:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
FEBRUARY 28 (29), LEASES LEASES
----------------- ----------- -----------
<S> <C> <C>
1997 $ 689,393 $ 4,593,201
1998 463,870 3,273,716
1999 316,465 2,601,485
2000 108,615 2,143,570
2001 -- 1,640,870
Thereafter -- 2,767,591
----------- -----------
Total minimum lease payments 1,578,343 $17,020,433
===========
Less -- Amount representing
Interest (at rates ranging from
7.2% to 20.7%) 135,888
-----------
Present value of net minimum
capital lease payments $ 1,442,455
===========
</TABLE>
Total rental expense under operating leases was $3,297,446, $7,178,089, and
$10,199,909 for fiscal years 1994, 1995 and 1996, respectively.
(7) RELATED PARTY TRANSACTIONS:
The Company provides laboratory and computer services to certain of its
stockholders (and their affiliated entities). Laboratory and computer service
charges are billed to and paid by the stockholders at negotiated rates. The
following laboratory and computer service revenue was billed by the Company to
stockholders (and their affiliated entities).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 (29),
------------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sutter Community Hospital of Sacramento $ 1,597,133 $ 1,300,267 $ 1,303,046
Valley Health Care Corporation 524,497 459,014 421,071
Mercy Healthcare Sacramento 1,875,352 1,786,731 1,838,833
------------ ------------ ------------
$ 3,996,982 $ 3,546,012 $ 3,562,950
============ ============ ============
</TABLE>
II-38
<PAGE> 66
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
Amounts due from stockholders and included in accounts receivable were as
follows:
<TABLE>
<CAPTION>
AS OF FEBRUARY 28 (29),
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Sutter Community Hospital of Sacramento $ 173,193 $ 239,890
Valley Health Care Corporation 36,230 29,334
--------- ---------
Mercy Healthcare Sacramento 202,649 207,699
--------- ---------
$ 412,072 $ 476,923
========= =========
</TABLE>
The Company received management services from Diagnostic Pathology Medical
Group, Inc. (DPMG), a stockholder of the Company. The services of certain
management personnel were provided to the Company for management fees at a cost
of $479,366, $326,000 and $256,253 for fiscal years 1994, 1995 and 1996,
respectively.
In addition, the Company received professional services from the former owners
of certain of its acquisitions. Professional service fees paid in connection
with the related professional service agreements were $622,916, $550,000 and
$188,000 in fiscal years 1994, 1995 and 1996, respectively.
The Company occasionally uses the specialized laboratory services of one of its
owners and several of its owners' stockholders. Most of these services are
billed to the Company at negotiated discounts from the billing entities'
customary charges. Amounts billed to the Company were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Sutter Community Hospital of Sacramento $ 17,274 $ 70,860 $ 83,187
Valley Health Care Corporation 5,400 1,606 --
Mercy Healthcare Sacramento 50,872 12,107 17,000
Outpatient Pathology Associates 217,087 278,278 280,059
DPMG -- -- 11,680
--------- --------- ---------
$ 290,633 $ 362,851 $ 391,926
========= ========= =========
</TABLE>
The Company has loaned the President and CEO funds at various times as follows:
<TABLE>
<CAPTION>
DATE INTEREST RATE AMOUNT MATURITY DATE
-------------- ------------- ---------- ---------------
<S> <C> <C> <C>
October 1990 10% $ 50,000 October 1996
October 1993 7% 150,000 October 1996
August 1994 7% 150,000 October 1996
----------
</TABLE>
II-39
<PAGE> 67
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Total outstanding as of February 29, 1996 $350,000
==========
</TABLE>
The Company also leases draw station space and purchases other services and
various supplies from several of its owners' stockholders. The total amount
paid by the Company for these items was $197,121, $123,944 and $97,137 for
fiscal years 1994, 1995 and 1996, respectively.
(8) EMPLOYEE BENEFIT PLAN:
As of January 1, 1989, the Company adopted a 401(k) profit sharing plan under
which employees may contribute between 1% and 20% of their annual compensation
to the Plan. A minimum of 90 days of service is required prior to
participation in the Plan by an employee. On April 30, 1990, the plan was
amended to provide that the Company would contribute 50% of employee
contributions up to 6% of their annual gross compensation for those employee
who have at least one full year of service. The Company contribution to the
401(k) plan was discontinued effective December 31, 1995. The Company
contributed $141,301, $398,906 and $288,219 in fiscal years 1994, 1995 and
1996, respectively.
(9) STOCK OPTION PLAN AND WARRANTS:
STOCK OPTION PLAN
In March 1992 and February 1994, the Board of Directors adopted and the
stockholders of the Company subsequently approved two separate stock option
plans (the "1992 Plan" and the "1994 Plan," respectively and together, the
"Plans"). These Plans provide for the granting to employees and directors of
nonqualified stock options to purchase authorized but unissued common stock.
The maximum number of shares that may be sold under the 1992 Plan and the 1994
Plan is 590,649 and 300,000, respectively, subject to anti-dilution adjustments.
The Board of Directors has designated the Compensation Committee to administer
the Plans. The Committee is empowered to designate the employees who will
receive options and to determine the number of shares, vesting schedule, option
price (which may not be less than 85% of the fair market value of the optioned
shares), and option term (which may not exceed ten years except in limited
circumstances). Options may provide for payment of the option price in cash, by
application of vested deferred compensation credits, or by the surrender of
shares owned by the optionee for more than one year. Options are not
transferable except upon death and may be exercised during the lifetime only by
the optionee or his legal representative. Options will terminate 180 days or
270 days after termination of the optionee's employment under the 1992 Plan and
the 1994 Plan, respectively, or two years after permanent disability or death.
The Board of Directors may amend the Stock Option Plan in any respect. The
Committee may modify outstanding options or may accept the cancellation of
existing options in return for the grant of new options (which may be for the
same or a different number of shares and specify the same or a different option
price). No option may be granted under the 1992 Plan or the 1994 Plan after
July 28, 2002 or January 12, 2004, respectively.
II-40
<PAGE> 68
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
In connection with the acquisition of MGPL, PCLG and San Joaquin Diagnostic
Laboratories (SJDL), options were granted under a plan (the "Acquisition Stock
Option Plan") separate from the 1992 Plan and the 1994 Plan.
STOCK OPTIONS OUTSTANDING:
<TABLE>
<CAPTION>
1992 1994 Acquisition Total Option
Plan Plan Plan Options Price
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at March 1, 1993 496,145 50,842 546,987 $ 8.00- 14.25
Granted 130,000 36,667 - 166,667 $10.25-$10.88
Exercised (45,434) - (45,434) $5.50
Forfeited (16,066) - (16,066) $5.50
-----------------------------------------
Outstanding at February 29, 1994 564,645 36,687 50,842 652,154 $ 5.50-$14.25
Granted 188,000 30,000 - 218,000 $ 8.88-$11.50
Exercised (7,500) - (7,500) $5.50
Forfeited (15,000) - (15,000) $10.25-$11.50
Expired (26,035) (26,035) $14.25
-----------------------------------------
Outstanding at February 29, 1995 730,145 66,667 24,807 821,619 $ 5.50-$14.25
Granted 10,000 - 10,000 $4.25
Forfeited (94,845) - (94,845) $ 5.50-$11.50
-----------------------------------------
Outstanding at February 29, 1996 645,300 66,667 24,807 736,774 $ 5.50-$11.50
</TABLE>
ADDITIONAL INFORMATION REGARDING STOCK OPTIONS:
<TABLE>
<CAPTION>
2/28/94 2/28/95 2/29/96
-----------------------------
<S> <C> <C> <C>
Authorized shares 941,491 941,491 941,941
Shares available for granting 289,337 119,872 204,717
Exercisable shares 224,700 293,683 372,787
</TABLE>
In addition to the shares reflected above, 5,000 options each were granted to
each member of the Board of Directors, subject to shareholder approval. The
exercise price of these options will be 85% of the greater of the market price
of the Company's common stock on November 14, 1994 and the price on the date of
shareholder approval.
WARRANTS
In connection with a revision to the Company's Credit Agreement with the Bank
Group (the Third Amendment), two warrants were issued to Sutter Health in
exchange for a guaranty of $3,500,000 of borrowings from the Bank Group.
In exchange for the guaranty, Sutter Health received a warrant to purchase up
to 1,200,000 shares of the Company's common stock (Warrant A) and a second
warrant to purchase up to 300,000 shares of the Company's common stock (Warrant
B). The exercise prices of Warrant A are as follows:
<TABLE>
<S> <C>
Tranche 1: 125,000 shares at $4.2219 per share
Tranche 2: 687,500 shares at $5.1266 per share
Tranche 3: 387,500 shares at $5.1266 per share
</TABLE>
Tranches 1 and 2 became exercisable May 10, 1995. Tranche 3 became exercisable
June 10, 1995.
Warrant B became exercisable as of June 10, 1995. Rights to purchase shares
under Warrant B may be exercised under the same terms as Tranche 3. Both
warrants expire 90 days from the expiration date of the guaranty.
II-41
<PAGE> 69
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(10) EMPLOYEE STOCK PURCHASE PLAN:
In March 1993, the Board of Directors adopted, and the shareholders approved, an
employee stock purchase plan ("ESPP") which provide employees of the Company
with an opportunity to purchase common stock of the Company at 85% of fair
market value through payroll deductions. The maximum number of shares that may
be sold under the ESPP is 225,000 subject to adjustments upon changes in
capitalization of the Company. During fiscal 1994, 1995 and 1996, 7,136, 13,603
and 5,378 shares respectively of Common Stock were purchased through this plan
for $70,231, $111,623 and $24,090 respectively. The Board of Directors has
designated the Compensation Committee to administer the ESPP. On February 29,
1996, 198,883 shares were available to be granted under the plan.
(11) EMPLOYMENT AGREEMENT:
The Company's CEO entered into an employment agreement with the Company with a
term expiring on February 28, 1999, which provides for his employment as Chief
Executive Officer. This agreement provides for a base salary of $375,000
annually and for quarterly bonuses of up to 3% of pre-tax net profits dependent
on the achievement of pre-tax net profit and other performance objectives. The
Company may terminate the agreement before the end of its term if certain
performance objectives have not been achieved. The Company may also terminate
the agreement without any cause by providing severance pay equal to two times
current base salary plus bonus for the four preceding quarterly periods.
The CEO also entered into two compensation agreements with the Company. Under
one of these agreements, the CEO received the sum of $155,000 in cash on March
1, 1992, representing payment of accrued deferred compensation, and an
additional deferred compensation credit of $100,000 that may be applied only to
offset the purchase price of stock options awarded to the CEO which are
described in Note 9.
Under the other agreement, a deferred compensation account in the amount of
$1,855,000 was established for the CEO which vests at the rate of one seventh
on March 1 in each of the years 1993 through 1999. The vested portion, in
general, may be applied only to offset the purchase price of stock options
granted to the CEO. If, on any March 1 vesting date, the fair market value of
the Company is determined to be less than $40 million, the vesting schedule is
delayed by one year.
II-42
<PAGE> 70
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
(12) LEGAL PROCEEDINGS:
A dispute has arisen between the Company and Medical Group Pathology
Laboratory, Inc. ("MGPL"), the seller of the Santa Barbara facility which
the Company acquired in 1992 (Acquisition), relating to the payment
obligations under the Agreement of Purchase and Sale of Assets between the
Company and MGPL. The Company and MGPL have been unable to reach successful
negotiations with respect to this matter. On November 8, 1995, MGPL commenced
an action (Litigation) against the Company in the Superior Court of the
State of California, Santa Barbara County, captioned Medical Group Pathology
Laboratory, Inc. v. Physicians Clinical Laboratory, Inc. (Case No. 210318).
The complaint alleges breach of the promissory note executed by the Company in
connection with the Acquisition and failure to pay amounts due thereunder
equalling $1,169,505 plus interest and late fees, and seeks compensatory
damages in the amount of sums allegedly due, in addition to unspecified general
damages and attorney's fees. In December, 1995, a default was entered against
the Company in the Litigation. The Company 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 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.
The Company settled an employment related lawsuit in fiscal 1994 for $700,000
and approximately $92,000 in related legal fees. Management does not believe
that the Company is involved in any other legal matters the settlement of which
would have a material adverse impact on the Company's financial position or
results of operations.
(13) ACQUISITIONS AND INTANGIBLE ASSETS:
Effective March 24, 1994, the Company purchased from Corning Lab Services Inc.
its California operations formerly known as Damon Corporation, Metpath, Inc.
The purchase included certain assets and the assumption
II-43
<PAGE> 71
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
of certain liabilities of Damon for an aggregate cash purchase price of
$50,270,000 plus direct acquisition costs of $1,589,000. Financing for the
purchase came from new bank borrowings (see Note 4).
The total purchase price of $51,859,000 exceeded the fair value of the net
assets of Damon at the purchase date by $47,979,000. $10,648,000 of the excess
purchase price has been allocated to Customer List based upon a third party
appraisal with the balance of $37,331,000 allocated to Goodwill.
The Company has acquired four (Santa Barbara, Glendale, Fresno and Newbury
Park) full service laboratories. During fiscal 1995, the Company integrated
Glendale, Santa Barbara and Newbury Park into one full service laboratory. The
Company has acquired 23 fold-in laboratories in Northern, Southern and Central
California. The Company's growth strategy for fiscal 1997 will be focused on
internal growth.
<TABLE>
<CAPTION>
PURCHASE PRICE ALLOCATED TO:
(IN THOUSANDS)
----------------------------
NUMBER NON
OF PURCHASE CUSTOMER LEASEHOLD COMPETE TANGIBLE
ACQUISITIONS PRICE LIST INTEREST COVENANT GOODWILL ASSETS
------------ ------------- ------------ --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prior years 12 $ 26,853 $ 9,893 $2,904 $3,335 $ 5,846 $ 4,875
1994 13 30,126 6,443 0 2,153 17,910 3,620
1995 2 63,155 11,047 74 135 39,462 14,050
1996 0 0 0 0 0 0 0
1996 Write down 0 0 0 0 0 (25,000) 0
-- -------- ------- ------ ------ -------- -------
TOTAL 27 $120,134 $27,383 $2,978 $5,623 $ 38,218 $22,545
== ======== ======= ====== ====== ======== =======
</TABLE>
Mercy Medical Foundation Laboratory, Sutter Medical Foundation - North Bay
Region, and Mercy American River Out-Patient Laboratory were all acquired from
related parties. The purchase price in excess of tangible assets acquired has
been treated for financial reporting purposes as deemed distributions to former
partners.
II-44
<PAGE> 72
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-46
<PAGE> 73
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT.
Set forth below is certain information relating to the members of the
Board of Directors of the Company as of February 29, 1996. The Company's
directors are divided into three classes, and serve three-year terms, expiring
in successive years. As discussed below, certain directors have been selected
pursuant to the terms of the Amended and Restated Voting Agreement among SACC,
Mercy and Methodist (the "Voting Agreement"). See "Item 13. Certain
Relationships and Related Transactions -- Voting Agreement."
DIRECTORS
STEPHEN N. BAUER, M.D., 46, has been a pathologist and a director and
the President of Lieb and Paoletti Pathology Medical Group, Inc., Sacramento,
California, since 1990. From 1979 to 1989 he was a pathologist employed by
Diagnostic Pathology Medical Group, Inc. ("DPMG"), Sacramento, California.
Pursuant to an agreement between DPMG and PCL he served as Chief Executive
Officer of the Company in 1987. Dr. Bauer also is a trustee of The Mercy
Foundation. Dr. Bauer was nominated to be a director by Mercy, and was
selected pursuant to the Voting Agreement. Dr. Bauer has served as a director
of the Company since April 1992, and his current term as a director expires in
1996.
NATHAN L. HEADLEY, 60, has been PCL's President and Chief Executive
Officer since 1989. Mr. Headley has 20 years of executive experience in the
clinical laboratory industry. From 1976 until 1985, he held various positions
with National Health Laboratories, serving as Executive Vice President from
1983 to 1985. Mr. Headley served as Senior Vice President for the Western
Region of Roche Biomedical Laboratories from 1986 to 1987 and as Chief
Operating Officer for Meris Laboratories from 1987 to 1989. Mr. Headley has
served as a director of the Company since April 1992, and will continue to
serve until his successor is elected.
TODD A. MURRAY, 44, has been a partner in the law firm of Hefner,
Stark & Marois since 1985 and has been its managing partner since 1994. Mr.
Murray is Chairman of the Board of Trustees of Sutter Community Hospitals. Mr.
Murray was nominated to be a director by SACC, and was selected pursuant to the
Voting Agreement. Mr. Murray has served as a director of the Company since
August 1994, and his current term as a director expires in 1997.
RAYMOND NELSON, 53, is Vice President for Business Development for
Catholic Healthcare West, the sole corporate member of Mercy Healthcare
Sacramento. From 1986 to 1989, he held various positions with Mercy General
Hospital, Sacramento, California, serving as Executive Vice President and Chief
Operating Officer from 1986 to 1987, Acting Chief Executive Officer from 1987
to 1988 and Chief Operating Officer from 1988 to 1990. Mr. Nelson is a
director of the Northern California Regional Positron Emission Tomography
Center. Mr. Nelson was nominated to be director by Mercy, and was selected
pursuant to the Voting
III-1
<PAGE> 74
Agreement. Mr. Nelson has served as a director of the Company since April
1992, and his current term as a director expires in 1997.
NEIL L. PENNINGTON, 73, is self-employed as a technical consultant.
Mr. Pennington served as Vice Chairman-Finance of the Sutter Health Board of
Directors in 1993 and served as its Chairman from 1987 through 1992 and in
1995. He has served fourteen years on the Board of Directors of Vallejo
General Hospital (now Sutter Solano Medical Center), twelve years as an elected
member of the Governing Board of the Vallejo City Unified School District and
three years as Director of the Vallejo City Chamber of Commerce. Mr.
Pennington was Vice President - Refinery Operations of C&H Sugar Company until
February 1986. Mr. Pennington was nominated to be a director by SACC, and was
selected pursuant to the Voting Agreement. Mr. Pennington has served as a
director of the Company since July 1993, and his current term as a director
expires in 1996.
VINCENT H. SCHMITZ, 49, has been Senior Vice President and Chief
Financial Officer of Mercy Healthcare Sacramento since 1987. From 1972 to
1987, he held various positions with Mercy Healthcare Bakersfield, Bakersfield,
California, serving as Chief Financial Officer from 1973 to 1987. Mr. Schmitz
is Chief Financial Officer of Mercy Senior Housing, Chief Financial Officer of
Mercy Medical Foundation and a director and Chief Financial Officer of the
Northern California Regional Positron Emission Tomography Center. Mr. Schmitz
was nominated to be a director by Mercy, and was selected pursuant to the
Voting Agreement. Mr. Schmitz has served as a director of the Company since
April 1992, and will continue to serve until his successor is elected.
DENNIS H. TOOTELIAN, 49, has been a Professor of Marketing at
California State University, Sacramento since 1973 and is a partner in the
University Consulting Group. Mr. Tootelian has been Director of the California
State University, Sacramento Center of Management Services since 1992 and
Director of the California State University, Sacramento Center for Small
Business since 1975. He is also Chairman of the Board of Directors of
Methodist Hospital of Sacramento and a director of Mercy Healthcare Sacramento
and of Methodist. Mr. Tootelian was nominated to be a director by Methodist,
and was selected pursuant to the Voting Agreement. Mr. Tootelian has served as
a director of the Company since August 1994, and his current term as a director
expires in 1997.
JOHN R. WHEATON, 58, has been President of Mariposa Petroleum Company
since 1990 and is also a director of Mariposa. Prior to that, he was Vice
President and Chief Operating Officer of Dowdell Corporation from 1984 to 1989.
Mr. Wheaton is also an Investment Executive for PaineWebber since 1995 and
Member of the Board of Methodist Hospital Foundation of Sacramento. Mr.
Wheaton is an Independent Director. Mr. Wheaton has served as a director of
the Company since January 1993, and will continue to serve until his successor
is elected.
JOHN R. BURGIS, 57, has been Senior Vice President, Financial
Services, and Chief Financial Officer of Catholic Healthcare West, San
Francisco, California (an affiliate of Mercy), since 1987. Mr. Burgis is a
Certified Public Accountant. From 1978 to 1987 he worked in various management
and advisory capacities in the venture capital business. Mr. Burgis was
III-2
<PAGE> 75
nominated to be a director by Mercy, and was selected pursuant to the Voting
Agreement. Mr. Burgis has served as a director of the Company since June 1995,
and his current term as a director expires in 1996.
MICHAEL T. KUTZMAN, 46, has been in private practice as a lawyer in
Auburn, California, since 1980, specializing in tax and corporate law. Mr.
Kutzman is Vice-Chairman of the Board of Trustees of Auburn Faith Community
Hospital (an affiliate of Sutter Health and SACC), and has served on the Board
of Trustees of the Hospital since 1989. He serves on the Sutter/CHS
Center-Placer County Advisory Board and has been its director since June 1,
1996. He has also served as Chairman of the Finance Committee and Governance
Committee, and as a member of the Quality Review Committee and the Executive
Committee, of the Hospital from June 1995 to June 1, 1996. Mr. Kutzman was
nominated to be a director by SACC, and was selected pursuant to the Voting
Agreement. Mr. Kutzman has served as a director of the Company since June
1995, and will continue to serve until his successor is elected.
Following is a list, as of February 29, 1996, of the names and ages of
the executive officers of the Company together with the date of their election
to corporate office. There are no family relationships between the following
officers of the Company, except as set forth below, nor are there any
arrangements or understandings between any officer and any other person
pursuant to which he was selected as an officer.
III-3
<PAGE> 76
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
POSITION WITH THE OFFICER
NAME AGE COMPANY SINCE
- --------------------------- --- ---------------------------------- ------------------------
<S> <C> <C> <C>
Nathan L. Headley 60 President, Chief Executive Officer December 1989
Richard M. Brooks 42 Senior Vice President, January 1995
Chief Financial Officer
Joseph L. Gallagher 55 Senior Vice President, November 1992
General Manager
Wayne E. Cottrell 46 Vice President, April 1987
Finance
Taylor R. McKeeman 44 Vice President, December 1989
Laboratory Operations
David G. Shafer 50 Vice President, October 1987
Information Systems
Robert P. Headley 35 Vice President, September 1993
Sales and Marketing
</TABLE>
Each of the officers listed above has served the Company and its
subsidiaries in various executive capacities for the past five years except for
Messrs. Brooks, Gallagher and R. Headley. Mr. Brooks was formerly a
consultant, providing services to various institutions relating to mergers and
acquisitions, financing, and crisis management and interim management. Mr.
Gallagher was formerly the General Manager of MetWest Laboratories for the
Arizona Region. Mr. R. Headley was formerly a Division Manager of Astro Office
Products, Inc., a subsidiary of Canon U.S.A. Nathan Headley is the father of
Robert Headley.
FILING DISCLOSURE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require the Company's officers and directors and persons who own
more than 10% of the Company's Common Stock to file reports of ownership and
changes in the ownership with the Securities and Exchange Commission and to
furnish the Company with copies.
Based upon its review of the copies of such forms received by it, or
written representation from certain reporting persons, the Company believes
that, during the last fiscal year, all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were complied with,
except that, due to administrative oversights, (i) Mr. Brooks failed to file a
Form 4 required to be filed to report the grant to Mr. Brooks of options to
purchase up to 30,000 shares of the Company's common stock, and (ii) Mr.
Gallagher failed to file a Form 4 required to be filed to report the purchase
by Mr. Gallagher of 10,000 shares of the Company's common stock. Such
transactions were reported on Forms 5 which were filed late.
III-4
<PAGE> 77
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
CASH COMPENSATION
EXECUTIVE COMPENSATION. The following table sets forth compensation received
by the Company's Chief Executive Officer, the four remaining most highly paid
executive officers (collectively, the "Named Executives") for the three fiscal
years ended February 29, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------
Awards Payouts
------------ -------
ANNUAL COMPENSATION Stock Option
Name and Fiscal ------------------------- Awards LTIP All other
Principal Position Year SALARY BONUS (in shares) Payouts Compensation
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nathan L. Headley 1996 $408,260 $ - - - -
President, Chief 1995 410,468 281,456(1) 75,000(2) - -
Executive Officer 1994 285,584 206,180 50,000 - -
Richard Brooks 1996 $181,873 $ - 10,000 - -
Senior Vice 1995 - - 20,000 - -
President 1994 - - - - -
Joseph L. Gallagher 1996 $146,765 $ - - - -
Senior Vice 1995 137,908 15,350 - - -
President 1994 151,419 18,870 40,000 - 434(3)
Robert P. Headley 1996 $180,034 $8,320 - - -
Vice President, 1995 138,925 35,500 20,000(2) - -
Marketing 1994 - - - - -
Taylor R. McKeeman 1996 $175,555 $ - - - -
Vice President 1995 155,888 22,200 - - -
1994 129,550 5,075 - - -
- ----------------------
</TABLE>
(1) Of such amount, $233,000 will be credited against future bonus
payments to Mr. Headley to be paid under the terms of his employment
agreement. See "-- Employment Agreements and Arrangements."
(2) These amounts include options to purchase shares of Common Stock
granted in November 1994, in the following amounts: Mr. N. Headley
(75,000) and Mr. R. Headley (10,000). Such grants remain subject to
Shareholder approval.
(3) This amount consists of matching contributions by the Company to Mr.
Gallagher's 401(k) account for fiscal year 1994.
III-5
<PAGE> 78
OPTION GRANTS TABLE
The following table summarizes pertinent information concerning the
grant of stock options, including the potential realizable dollar value of
grants of options made during the fiscal year ended February 29, 1996, to Mr.
Brooks, assuming that the market value of the underlying security appreciates
in value, from date of grant to the end of the option term, at the rates
indicated in the following table.
OPTION GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------- ----------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES
GRANTED TO OF STOCK PRICE
OPTIONS EMPLOYEES EXERCISE APPRECIATION FOR OPTION
GRANTED IN FISCAL PRICE EXPIRATION TERM (2)
NAME (#) YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Brooks 10,000 100% $ 4.25 7/22/03 $ 26,728 $ 67,734
</TABLE>
- ----------------------
(1) During the 1995 fiscal year, the Company granted Richard M. Brooks options
to purchase 20,000 shares of the Company's Common Stock for an exercise
price of $10.50 per share. The expiration date of these options is January
22, 2003. Assuming an annualized appreciation rate of 5% over the term of
the options, the potential realizable value of the options is $115,779, and
assuming an annualized appreciation rate of 10% over the term of the
options, the potential realizable value of the options is $308,748.
(2) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates which were established by rules adopted by the Securities and
Exchange Commission and therefore are not intended to forecast possible
future appreciation, if any, of the Company's Common Stock price.
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
Shown below is information with respect to the option exercises in
fiscal 1996 and unexercised options to purchase Common Stock of the Company
granted in fiscal 1996 and prior years to the Named Executives.
III-6
<PAGE> 79
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED,
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)
ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE(1) UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-
Nathan L. Headley (2) - 439,389/0 0/0
Joseph L. Gallagher - - 16,000/24,000 0/0
Wayne E. Cottrell - - 19,555/19,703 0/0
Taylor R. McKeeman - - 21,890/14,593 0/0
Robert P. Headley - - 4,000/16,000 0/0
Richard M. Brooks - - 4,000/26,000 0/0
- -----------------
</TABLE>
(1) These amounts include options to purchase shares of Common Stock granted in
November 1994 in the following amounts: Mr. N. Headley (75,000), Mr.
Cottrell (10,000) and Mr. R. Headley (10,000). Such grants remain subject
to shareholder approval.
(2) The Board of Directors recommended Mr. Headley's options vest 100% on
December 31, 1995 subject to shareholder approval.
III-7
<PAGE> 80
LONG-TERM INCENTIVE PLAN AWARD TABLE
Shown below is information with respect to awards made under the
Company's deferred compensation agreement with Nathan L. Headley. See
"--Employment Agreements and Arrangements."
LONG-TERM INCENTIVE PLAN - ESTIMATED PAYOUTS
UNDER DEFERRED COMPENSATION AGREEMENTS
<TABLE>
<CAPTION>
PERFORMANCE ESTIMATED FUTURE PAYOUTS
LTIP PERIOD --------------------------------------------------
NAME PAYOUTS UNTIL PAYOUT THRESHOLD ($) TARGET ($) MAXIMUM ($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nathan L. Headley (1) $0 March 1, 1993- $0 $1,855,000 $1,855,000
March 1, 1999
- -----------------
</TABLE>
(1) Under this agreement the payout consists of $1,855,000 which has
vested or will vest at the rate of one-seventh on March 1 in each of
the years 1993 through 1999. The vested portion in general may be
applied only to offset the exercise price of stock options granted to
Mr. N. Headley. If, on any March 1 vesting date, the fair market
value of the Company is determined to be less than $40 million, the
vesting schedule is delayed by one year for each scheduled vesting
date. See "--Employment Agreements and Arrangements."
COMPENSATION OF DIRECTORS
For the first four months of fiscal year 1996, non-employee directors
received a retainer fee of $10,000 per year together with fees equal to $1,000
for each Board meeting and $500 for each committee meeting attended. Effective
July 1995, non-employee directors receive an annual retainer fee of $16,000.
Directors who are employees of the Company receive no additional compensation
for serving as directors.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Nathan L. Headley entered into an amended and restated employment
agreement with the Company for a term expiring on February 28, 1999, which
provides for his employment as Chief Executive Officer. This agreement, as
amended, provided for an initial base salary of $375,000 annually, subject to
increases at the Company's discretion, and for annual bonuses (paid each fiscal
quarter) as follows: 3% of pre-tax net profit if the pre-tax net profit for a
fiscal year is less than or equal to $7,333,333; $220,000 plus 2% of pre-tax
net profit in excess of $7,333,333 if pre-tax net profit is greater than
$7,333,333 but less than or equal to $22,000,000; $440,000 plus 1% of pre-tax
net profit if pre-tax net profit is greater than $22,000,000 but less than or
equal to $66,000,000; and $660,000 if pre-tax net profit is greater than or
equal to $66,000,000. The annual bonus, and quarterly payments, are reduced in
the event that: (i) the Company fails for any quarter to meet budgeted pre-tax
net profit, as established by the Board
III-8
<PAGE> 81
of Directors; or (ii) the Company fails for any quarter to meet performance
objectives (relating to such areas as general administration, data processing,
operations, etc.) for the quarter, as established by the Board of Directors.
The agreement also provides that the Company will maintain a life insurance
policy on Mr. Headley's life in the face amount of twice his base salary, with
the beneficiaries of such policy to be designated by Mr. Headley. The Company
may terminate the agreement before the end of its term upon occurrence of
certain events which constitute termination "for cause," including if the
pre-tax net profits and net revenues of the Company in each of two consecutive
12-month periods shall have increased less than 85% of the average pre-tax net
profit and net revenue increases of comparable companies (or if the Company's
pre-tax net profit and net revenue in such periods shall have decreased more
than 85% of the average pre-tax net profit and net revenue decreases of
comparable companies). The Company may also terminate the agreement without
cause by providing severance pay equal to two times current base salary plus
bonus for the four preceding quarterly periods. Mr. Headley also entered into
a deferred compensation agreement with the Company effective March 1, 1992,
pursuant to which a deferred compensation account in the amount of $1,855,000
was established for Mr. Headley which has vested or will vest at the rate of
one-seventh on March 1 in each of the years 1993 through 1999. The vested
portion in general may be applied only to offset the purchase price of the
stock options granted to Mr. Headley. If, on any March 1 vesting date, the
fair market value of the Company is determined to be less than $40 million, the
vesting schedule is delayed by one year for each scheduled vesting date. Of
the $281,456 bonus payment paid to Mr. Headley in fiscal year 1995, $233,000
will be credited against future bonus payments to be paid to Mr. Headley.
Mr. Headley entered into a Separation Agreement with the Company on
March 1, 1994. The Separation Agreement provides for certain payments to be
made to Mr. Headley following his termination upon a "Change of Control" of the
Company, subject to certain limitations. A Change of Control is defined to
include: (i) a merger or consolidation when the holders of the Company's voting
stock immediately prior to the merger or consolidation hold less than a
majority of the voting stock, directly or indirectly, of the surviving
corporation immediately after the merger or consolidation; (ii) any sale,
lease, exchange, transfer of all, or substantially all, of the assets of the
Company; and (iii) the approval by the Company's shareholders of a plan or
proposal for the liquidation or dissolution of the Company. In the event of
termination upon a Change of Control, the Separation Agreement provides that
Mr. Headley will receive a separation payment, equal to the difference between
2.99 times Mr. Headley's salary and the amount determined to be "contingent
upon a change of ownership or control," within the meaning of the Internal
Revenue Code, arising from acceleration of stock options granted to Mr.
Headley. Mr. Headley is further entitled to full benefit coverage under the
Company's life insurance and health plans for a period of three years following
a change of control.
Richard M. Brooks entered into an employment agreement with the
Company for a term expiring on January 22, 2000, which provides for his
employment as Senior Vice President and Chief Financial Officer. This
agreement provided for an initial base salary of $175,000 annually, subject to
increases at the Company's discretion, and for quarterly bonuses in an amount
equal to 5% of base salary, 75% of which is payable if the Company meets
certain financial projections approved by the Board of Directors for the
applicable quarter, and 25% of which is payable based upon a performance
evaluation by the Chief Executive Officer. This
III-9
<PAGE> 82
agreement also provided for the grant of options to Mr. Brooks to purchase
20,000 shares of the Company's Common Stock at an exercise price of $10.50 per
share, to vest 20% per year over a five year period, and for the Company to
request the Compensation Committee of the Board of Directors to grant the
additional options to Mr. Brooks to purchase up to 10,000 shares of the
Company's Common Stock upon the sixth and twelfth month anniversaries of his
employment with the Company, pursuant to which Mr. Brooks was granted options
to purchase an additional 10,000 shares of the Company's Common Stock, at an
exercise price of $4.25 per share. The Company may terminate the agreement
before the end of its term upon occurrence of certain events which constitute
termination "for cause." In the event of termination of the agreement, Mr.
Brooks shall be entitled to all accrued and unpaid salary, bonus, vacation and
expenses under the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
The Compensation Committee consists of five nonemployee directors.
Currently, the members of the Compensation Committee are Dr. Bauer and Messrs.
Nelson (Chairman) and Pennington. None of the executive officers of the
Company serves as a director of another corporation in a case where an
executive officer of such other corporation serves as a director of the
Company.
Messrs. Nelson and Schmitz, directors of the Company, are each
executive officers of Mercy and Mr. Tootelian, a director of the Company, is
Chairman of the Board of Methodist, and is a director of Mercy. Mr. Kutzman, a
director of the Company, is a member of the Board of Trustees of Auburn Faith
Community Hospital, an affiliate of Sutter Health. Mr. Murray, a director of
the Company, is a member of the Board of Trustees of Sutter Community
Hospitals, an affiliate of Sutter Health and SACC. Mr. Burgis is an executive
officer of Catholic Healthcare West, an affiliate of Mercy. Sutter Health and
SACC, Mercy, and Methodist, as successor to Valley Health Care Corporation
(collectively, the "Hospital Stockholders") currently own approximately 38.4%,
20.8% and 14.0%, respectively, of the outstanding shares of the Company's
Common Stock. Hospitals affiliated with the Hospital Stockholders have
contracts with the Company for provision of clinical laboratory testing
services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, at June 24, 1996, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than five percent of
the total number of outstanding shares of Common Stock, (ii) each director and
nominee for director of the Company, (iii) each of the Named Executives, and
(iv) all directors and officers of the Company, as a group.
III-10
<PAGE> 83
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT
BENEFICIAL OF
OWNERSHIP (1)(2) CLASS (3)
---------------- ---------
<S> <C> <C>
BENEFICIAL OWNERS OF 5% OR MORE:
- -------------------------------
Sutter Health (4) . . . . . . . . . . . . . . . 2,893,714 47.8%
SACC (4) . . . . . . . . . . . . . . . . . . . 1,393,714 23.0
Mercy Healthcare Sacramento (5) . . . . . . . . 1,258,714 20.8
Methodist Hospital of Sacramento (6) . . . . . 845,809 14.0
Oppenheimer Management Corporation (7) . . . . 737,705 12.2
Mutuelles AXA (8) . . . . . . . . . . . . . . . 682,489 11.3
OppenheimerFunds, Inc. (7) . . . . . . . . . . 655,738 10.8
FMR Corp. (9) . . . . . . . . . . . . . . . . . 508,950 8.4
Oppenheimer Total Return Fund, Inc. (7) . . . . 327,869 5.4
Oppenheimer Discovery Fund (7) . . . . . . . . 327,869 5.4
</TABLE>
III-11
<PAGE> 84
<TABLE>
<CAPTION>
AMOUNT AND
NATURE PERCENT
BENEFICIAL OF
OWNERSHIP (1)(2) CLASS (3)
---------------- ---------
<S> <C> <C>
DIRECTORS:
- ---------
Stephen N. Bauer (10) . . . . . . . . . . . . . 260,687 4.3
John R. Burgis . . . . . . . . . . . . . . . . - -
Nathan L. Headley (11) . . . . . . . . . . . . 439,389 6.8
Michael T. Kutzman . . . . . . . . . . . . . . - -
Todd A. Murray (12) . . . . . . . . . . . . . . 3,333 *
Raymond Nelson (12) . . . . . . . . . . . . . . 6,666 *
Neil L. Pennington (12) . . . . . . . . . . . . 6,667 *
Vincent Schmitz (12) . . . . . . . . . . . . . 6,667 *
Dennis H. Tootelian (12) . . . . . . . . . . . 3,333 *
John R. Wheaton (13) . . . . . . . . . . . . . 7,267 *
NAMED EXECUTIVES OTHER THAN MR. HEADLEY:
- ---------------------------------------
Richard M. Brooks (12) . . . . . . . . . . . . 4,000 *
Joseph L. Gallagher (12) . . . . . . . . . . . 16,000 *
Taylor R. McKeeman (12) . . . . . . . . . . . . 21,890 *
Robert P. Headley (12) . . . . . . . . . . . . 4,000 *
DIRECTORS AND OFFICERS AS GROUP:
- -------------------------------
All directors and officers
as a group (17 persons) (14) . . . . . . . . . 584,681 9.7
</TABLE>
- ---------------------------
* - Less than one percent
(1) As of May 10, 1995 and June 10, 1995, the Company issued warrants
("Warrants") to purchase up to a total of 1,500,000 shares of Common
Stock, which became exercisable for all such shares as of June 10, 1995.
The right to purchase 125,000 of such shares is exercisable at $4.2219 per
share. The right to purchase the remaining 1,375,000 of such shares is
exercisable at $5.1266 per share. On August 24, 1993, the Company issued
its Debentures in the aggregate principal amount of $40,000,000, which are
immediately convertible into the Company's Common Stock at a conversion
price of $12.20 per share. As indicated below and in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), beneficial ownership information with respect to holders of
Warrants and Debentures assumes conversion of Warrants or Debentures,
respectively, into shares of Common Stock.
(2) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares beneficially owned.
All share amounts reflect beneficial ownership determined pursuant to Rule
13d-3 under the Exchange Act.
III-12
<PAGE> 85
(3) Percentage amounts reflect exercise of Warrants, conversion of Debentures,
or exercise of options only as to holders of such Warrants, Debentures, or
options, respectively, in accordance with Rule 13d-3(d)(1)(i) under the
Exchange Act.
(4) As of May 10, 1995 and June 22, 1995, the Company issued the Warrants to
Sutter Health to purchase up to a total of 1,500,000 shares of Common
Stock, which became exercisable for all such shares as of June 10, 1995.
See "Item 13. Certain Relationships and Related Transactions -- Issuance
of Warrants to Sutter Health." Sutter Health filed a Schedule 13D with
the SEC for May 10, 1995 and Sutter Health filed a Schedule 13D with the
SEC for June 22, 1995, both pursuant to the Exchange Act, reporting
issuance of the Warrants and stating that Sutter Health is the sole
corporate member of SACC, which itself owns 1,393,714 shares of Common
Stock. According to these filings, Sutter Health has the right to appoint
all of the directors of SACC. As a result, Sutter Health owns
beneficially a total of 2,893,714 shares of Common Stock, 1,500,000 shares
for which it possesses sole voting power and sole dispositive power, and
1,393,714 shares for which it shares voting power and dispositive power
with SACC. SACC owns beneficially 1,393,714 shares of Common Stock, with
respect to none of which it possesses sole voting power and sole
dispositive power, and with respect to 1,393,714 of which it shares voting
power and dispositive power with Sutter Health. The power to dispose of
and vote the shares of Common Stock held by Sutter Health resides with its
Board of Directors as a group and not with any one individual. The Board
of Directors is composed of Mr. Ralph Anderson, Mr. Paul Feldstein, Mr.
Van Johnson, Mr. Robert Monagan, Dr. Harold Ray, and Ms. Annita Watson.
All such individuals thus may be deemed to have voting and dispositive
power with respect to such shares. Such individuals disclaim beneficial
ownership of such shares. The power to dispose of and to vote the shares
of Common Stock held by SACC resides with its Board of Directors as a
group and not with any one individual. The Board of Directors is
comprised of Mr. Van Johnson, Mr. Robert T. Monagan, Ms. Elizabeth Shih,
and Ms. Annita Watson. All of such individuals thus may be deemed to have
voting and dispositive power with respect to such shares. Such
individuals disclaim beneficial ownership of such shares. The address for
Sutter Health and SACC is One Capitol Mall, Sacramento, California.
(5) The power to dispose of and to vote the shares of Common Stock held by
Mercy Healthcare Sacramento ("Mercy") resides with its Board of Directors
as a group and not with any one individual. The Board of Directors is
comprised of Dr. Jose Abad, Mr. Alvan D. Arthur, Mr. William T. Fike, Dr.
Richard Heater, Sister Kathleen Kearney, Dr. James Kiley, Ms. Eleanor
Langpaap, Dr. Paul Miller, Sister Bridget McCarthy, Sister Patricia
Mulderrig, Dr. Queen Randall, Dr. Dennis Tootelian and Mr. Larry Wilson.
All of such individuals thus may be deemed to have voting and dispositive
power with respect to such shares. Such individuals disclaim beneficial
ownership of such shares. Mercy is the sole corporate member of Methodist
Hospital of Sacramento ("Methodist"). Methodist has the ability to select
3 of the 14 members of the Board of Directors of Mercy and Mercy has the
ability to select 3 of the 16 members of the Board of Directors of
Methodist and has approval rights regarding the remaining 13 directors.
Mercy may be deemed to be the beneficial owner under the federal
securities laws of shares of Common Stock held by Methodist. See note (7)
below. The address for Mercy is 10540 White Rock Road, Sacramento,
California.
(6) The power to dispose of and to vote the shares of Common Stock held by
Methodist resides with its Board of Directors as a group and not with any
one individual. The Board of Directors is comprised of Dr. Jose Abad, Mr.
Gil Albiani, Ms. Doreen T. Chan, Dr. John R. Cox, Dr. Richard DeFelice,
Mr. Eric Gragg, Ms. Goldie Hall, Dr. Richard Heater, Ms. Eleanor Langpaap,
Dr. Leonard Lehr, Sister Bridget McCarthy, Dr. Queen Randall, Mr. Robert
J. Rose, Dr. Dan L. Stewart, Dr. Dennis H. Tootelian and Dr. John Yen.
All of such individuals thus may be deemed to have voting and dispositive
power with respect to such shares. Such individuals disclaim beneficial
ownership of such shares. The address for Methodist is 7500 Timberlake
Way, Sacramento, California.
(7) OppenheimerFunds, Inc. ("OFI") filed a Schedule 13G dated February 8, 1995
with the SEC pursuant to the Exchange Act. The Schedule 13G states that
OFI owns beneficially 655,738 shares, with respect to none of which it has
sole voting power, shared voting power as to no shares, sole dispositive
power as to no shares and shared dispositive power as to 655,738 shares.
Such shares are issuable upon conversion of the Company's Debentures.
Oppenheimer Management Corporation ("OMC"), Oppenheimer Discovery Fund
III-13
<PAGE> 86
("ODF"), and Oppenheimer Total Return Fund, Inc. ("OTR") filed a Schedule
13G dated February 10, 1995 with the SEC pursuant to the Exchange Act.
The Schedule 13G states that OMC owns beneficially 737,705 shares of which
it has sole voting power as to no shares, shared voting power as to no
shares, sole dispositive power as to no shares and shared dispositive
power as to 737,705 shares. Such shares are issuable upon conversion of
the Company's Debentures. OMC disclaims beneficial ownership as to such
shares. The Schedule 13G also states that ODF and OTR each own
beneficially 327,869 shares of which they each have sole voting power as
to 327,869 shares, shared voting power as to no shares, sole dispositive
power as to no shares and shared dispositive power as to 327,869 shares.
Such shares are issuable upon conversion of the Company's Debentures. The
address for OFI, OMC, ODF and OTR is Two World Trade Center, New York, New
York.
(8) AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha
Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, Uni Europe
Assurance Mutuelle (collectively, "Mutuelles AXA"), AXA, and The Equitable
Companies Incorporated jointly filed an Amendment No. 2 to Schedule 13G,
dated February 14, 1996, with the SEC pursuant to the Exchange Act.
Mutuelles AXA, as a group, owns a majority interest in AXA. AXA owns a
majority interest in The Equitable Companies Incorporated. The Amendment
No. 2 to Schedule 13G states that these entities beneficially own 682,489
shares of Common Stock, of which they have sole voting power as to 680,489
shares, shared voting power as to no shares, sole dispositive power as to
680,489 shares, and shared dispositive power as to 2,000 shares. Of such
682,489 shares, 677,047 shares are issuable upon conversion of Debentures
owned beneficially by these entities. Alpha Assurances I.A.R.D. Mutuelle
and Alpha Assurances Vie Mutuelle are located at 101-100 Terrasse
Boieldieu 92042, Paris La Defense, France. AXA Assurances I.A.R.D.
Mutuelle and AXA Assurances Vie Mutuelle are located at La Grande Arche,
Pardi Nord, 92044, Paris La Defense, France. Uni Europe Assurance
Mutuelle is located at 24 Rue Drouot, 75009, Paris, France. AXA is
located at 23, Avenue Matignon, 75008, Paris, France. The Equitable
Companies Incorporated is located at 787 Seventh Avenue, New York, New
York.
(9) FMR Corp. ("FMR") filed a Schedule 13D dated March 12, 1996 with the SEC
pursuant to the Exchange Act. The Schedule 13D states that FMR, Fidelity
Management & Research Company ("Fidelity"), a wholly-owned subsidiary of
FMR, and Fidelity Management Trust Company ("FMTC"), a wholly-owned
subsidiary of FMR, own beneficially 508,950 shares, of which FMR has sole
voting power as to 508,950 shares, shared voting power as to no shares,
sole dispositive power as to 508,950 shares and shared dispositive power
as to no shares. Of such 508,950 shares, 80,360 shares are issuable upon
conversion of Debentures owned beneficially by FMR through Fidelity. The
principal offices of FMR, Fidelity and FMTC are located at 82 Devonshire
Street, Boston, Massachusetts.
(10) Includes 6,667 shares issuable upon exercise of stock options within 60
days of June 15, 1996. Dr. Bauer has sole voting power as to 219,020
shares, shared voting power as to 35,000 shares, sole dispositive power as
to 219,020 shares and shared dispositive power as to 35,000 shares.
(11) Such shares are issuable upon exercise of stock options within 60 days of
June 15, 1996 with approval of the Company's shareholders.
(12) Such shares are issuable upon exercise of stock options within 60 days of
June 15, 1996.
(13) Includes 6,667 shares issuable upon exercise of stock options within 60
days of June 15, 1996.
(14) Includes 354,654 shares issuable upon exercise of stock options within 60
days of June 15, 1996.
III-14
<PAGE> 87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
VOTING AGREEMENT
The Hospital Stockholders have entered into a Voting Agreement which
extends to March 1, 2002 under which they have agreed that the Board of
Directors of the Company shall consist of:
. Its Chief Executive Officer (currently Nathan L. Headley);
. Two directors who are independent under standards
established by the National Association of Securities
Dealers for Nasdaq National Market System companies (which
presently exclude officers and employees as well as
individuals who have relationships that, in the opinion of
the board of directors, would interfere with the exercise of
independent judgment) or by any stock exchange on which the
Common Stock is listed and who are not employed by the
Hospital Stockholders or any of their affiliates
("Independent Directors"); and
. Eight directors agreed upon by the Hospital Stockholders in
the manner described below ("Hospital Representatives").
The Company's directors are divided into three classes. The Voting
Agreement assigns the Independent Directors to Classes I and II and the Chief
Executive Officer to Class III. The Hospital Representatives are assigned two
to Class I, three to Class II and three to Class III.
Sutter and Mercy are each entitled to designate one Hospital
Representative and the Nominating Committee of the Board of Directors is
entitled to nominate an Independent Director to serve in Class I. Sutter,
Mercy and Methodist are each entitled to designate one Hospital Representative
to serve, together with the Chief Executive Officer, in Class III.
Of the Company's current directors, eight are Hospital
Representatives. Dr. Bauer and Messrs. Burgis, Nelson and Schmitz were
designated by Mercy, Mr. Tootelian was designated by Methodist, and Messrs.
Kutzman, Murray and Pennington were designated by SACC. Mr. Wheaton is an
Independent Director, and one Independent Director seat remains vacant.
If any Hospital Stockholder's voting power in the Company should
decline relative to the voting power of the others, its rights to designate
Hospital Representatives within any class of directors may diminish. In Class
I, a Hospital Stockholder which owns shares representing more than 66-2/3% of
the voting power represented by all shares of Common Stock held by all Hospital
Stockholders, or a Hospital Stockholder which owns shares representing at least
33-1/3% of such voting power in a case where no other Hospital Stockholder owns
shares representing at least 29% of such voting power, would be entitled to
designate both Hospital Representatives in that class. In Classes II and III,
a Hospital Stockholder which owns shares representing more than 80% of such
voting power, or a Hospital Stockholder which owns shares representing more
than 60% of such voting power in a case where no other Hospital Stockholder
III-15
<PAGE> 88
owns shares representing at least 20% of such voting power, would be entitled
to designate all three Hospital Representatives in the particular class, and
there are intermediate situations in which a particular Hospital Stockholder
would be able to designate two Hospital Representatives in Class II or III or
where, in the case of deadlock between two Hospital Stockholders having equal
voting power, such designation would be made by coin toss.
A Hospital Stockholder who ceases to own beneficially at least 5% of
the issued and outstanding shares of Common Stock on a fully diluted basis
would cease to have any rights or obligations under the Voting Agreement, and
the rights of the remaining Hospital Stockholders to designate Hospital
Representatives would be adjusted in accordance with a formula.
While the Hospital Stockholders agree to vote their shares of Common
Stock for directors selected as described above, the Voting Agreement would not
apply to elections where a Hospital Stockholder has failed to designate a
Hospital Representative which it is entitled to designate or where the
Nominating Committee has failed to designate an Independent Director.
If Methodist should undergo a change in control (as defined in the
Voting Agreement), neither SACC nor Mercy would be required to vote its shares
of Common Stock for Hospital Representatives designated by Methodist. If the
person assuming control of Methodist is not a party to the Voting Agreement,
Methodist would cease to have any rights of obligations thereunder; if such
person is a party to the Voting Agreement, Methodist's shares would be added to
its own for purposes of designating Hospital Representatives under the
provisions described above in accordance with a formula.
ISSUANCE OF WARRANTS TO SUTTER HEALTH
On May 10, 1995, the Company entered into an agreement with Sutter
Health whereby Sutter Health guaranteed $3.5 million of the Company's
indebtedness to its lending syndicate (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. Immediately prior to these
transactions, SACC owned approximately 23.1% of the outstanding Common Stock.
The Warrants provide 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 (70% of the Reference Value, as defined below). 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 (85%
of the Reference Value). The third tranche consists of the right to purchase
387,500 additional shares of Common Stock, which became exercisable on June 10,
1995, also at $5.1266 per share (85% of the Reference Value).
The Reference Value is defined as the lower of the average closing
price per share of the Common Stock for the five trading days ending on May 9,
1995 ($7.25000) and the average
III-16
<PAGE> 89
closing price per share of the Common Stock for the twenty trading days
beginning May 10, 1995 ($6.03125). 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, covering the
remaining shares, as of June 10, 1995. The second Warrant provides for the
right to exercise, on terms identical to those of the third tranche of the
first Warrant, of up to 300,000 additional shares of Common Stock.
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.
INDEBTEDNESS
On October 31, 1990, the Company loaned Mr. Headley, the President and
Chief Executive Officer of the Company, $50,000. The loan, which matures in
October 1996, bears interest at 10% per annum. On October 4, 1993, the Company
loaned Mr. Headley $150,000. The loan, which matures in October 1996, bears
interest at 7% per annum. On April 28, 1994, the Company loaned Mr. Headley
$150,000. The loan, which matures in October 1996, bears interest at 7% per
annum. As of June 30, 1996, Mr. Headley remained indebted to the Company in
the amount of $350,000.
III-17
<PAGE> 90
MISCELLANEOUS
The Company provides laboratory testing and information services to
hospitals affiliated with the Hospital Stockholders. In addition, these
hospitals occasionally provide specialized laboratory services to the Company
and bill the Company at negotiated rates representing a discount to the
hospitals' customary charge. The Company also leases patient service center
space and purchases other services and supplies from affiliates of the Hospital
Stockholders.
In June 1995, Tiger Creations, Inc. a company in which Cecilia
Gallagher, the wife of Joseph T. Gallagher, a Senior Vice President and General
Manager of the Company, has a financial interest, entered into an arrangement
to purchase certain vehicles from P.H.H. Vehicle Management Services. These
vehicles, which had previously been leased by the Company and were surplus to
the Company's needs, were purchased for the purpose of repairing and restoring
the vehicles for resale. The aggregate purchase price paid by Tiger Creations,
Inc. to P.H.H. Vehicle Management Services was $64,009.00 and the net profit
to Tiger Creations, Inc. from the resale of such vehicles was approximately
$2,750.00.
III-18
<PAGE> 91
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(a) Financial Statements, Schedules and Exhibits.
1. Financial Statements included in Part II of this Annual Report:
Report of Independent Public Accountants II-16
Balance Sheets as of February 28 or 29, 1995 and 1996 II-17, II-18
Statements of Operations for years ended February 28 or 29, 1994, 1995,
and 1996 II-19
Statements of Cash Flows for years ended February 28 or 29, 1994,
1995 and 1996 II-20
Statements of Changes in Shareholders' Equity (Deficit) for years ended
February 28 or 29, 1994, 1995 and 1996. II-21
Notes to Financial Statements II-22 - II-41
2. Financial Statement Schedules as of February 29, 1996 and for
years ended February 28 or 29, 1994, 1995 and 1996, included in Part
IV of this Annual Report:
Schedule VIII -- Valuation and Qualifying Accounts
Financial statement schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is given in the financial
statements including the notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations. Captions and column headings have been omitted where
not applicable.
3. Exhibits:
The exhibits to this Annual Report are listed in the Exhibit Index beginning on page IV-5 of
this Annual Report.
</TABLE>
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed for the quarter ended
February 29, 1996.
IV-1
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 5, 1996.
PHYSICIANS CLINICAL LABORATORY, INC.
By: /s/ NATHAN L. HEADLEY
-------------------------------------
Nathan L. Headley
President and Chief Executive Officer
Pursuant to the requirements of the Securities 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 Title Date
--------- ----- ----
/s/ NATHAN L. HEADLEY President and Chief Executive August 5, 1996
- -------------------------- Officer (Principal Executive
Nathan L. Headley Officer)
/s/ RICHARD M. BROOKS Senior Vice President and August 5, 1996
- --------------------------- Chief Financial Officer
Richard M. Brooks (Principal Financial Officer)
/s/ WAYNE E. COTTRELL Vice President, Finance August 5, 1996
- --------------------------- (Principal Accounting
Wayne E. Cottrell Officer)
* Chairman of the Board of August 5, 1996
- -------------------------- Directors
Stephen N. Bauer
* Director August 5, 1996
- --------------------------
John R. Burgis
* Director August 5, 1996
- --------------------------
Michael T. Kutzman
* Director August 5, 1996
- --------------------------
Todd A. Murray
* Director August 5, 1996
- --------------------------
Raymond Nelson
* Director August 5, 1996
- --------------------------
Neil L. Pennington
IV-2
<PAGE> 93
* Director August 5, 1996
- --------------------------
Vincent Schmitz
* Director August 5, 1996
- --------------------------
Dennis H. Tootelian
* Director August 5, 1996
- --------------------------
John R. Wheaton
* - Nathan L. Headley, by signing his name hereto, does hereby sign this report
on behalf of each of the indicated officers and directors of Physicians
Clinical Laboratory, Inc. on this 5th day of August, 1996, pursuant to
powers of attorney executed on behalf of such officers and directors.
By: /s/ NATHAN L. HEADLEY
---------------------------
Nathan L. Headley
Attorney-in-Fact
IV-3
<PAGE> 94
PHYSICIANS CLINICAL LABORATORY, INC.
FINANCIAL STATEMENT SCHEDULES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
3/1/93 CHARGED 2/28/94
BEGINNING TO ENDING
DESCRIPTION BALANCE EXPENSE (WRITE-OFFS) RECOVERIES BALANCE
----------- ------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $752,098 $2,502,280 $(2,797,126) $150,089 $607,341
</TABLE>
<TABLE>
<CAPTION>
3/1/94 CHARGED 2/28/95
BEGINNING TO ENDING
DESCRIPTION BALANCE EXPENSE (WRITE-OFFS) RECOVERIES BALANCE
----------- ------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $607,341 $4,318,516 $(4,000,000) $322,094 $603,763
</TABLE>
<TABLE>
<CAPTION>
3/1/95 CHARGED 2/29/96
BEGINNING TO ENDING
DESCRIPTION BALANCE EXPENSE (WRITE-OFFS) RECOVERIES BALANCE
----------- ------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $607,763 $29,659,625 $(27,068,323) $1,436,935 $4,632,000
</TABLE>
IV-4
<PAGE> 95
EXHIBIT INDEX
Exhibits marked with an asterisk are filed herewith, the remainder of the
exhibits have heretofore been filed with the Commission and incorporated herein
by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1 Agreement of Purchase and Sale of Assets among the Company, CLSI, MetPath,
Inc., California Regional Reference Laboratory, DCL-CA and Redwood, dated as
of February 28, 1994, (without exhibits and schedules; filed as Exhibit 2.1
to the Company's Current Report on Form 8-K for February 24, 1994 and
incorporated herein by reference).
2.2 Side-Letter, dated April 4, 1994, among the parties set forth in Exhibit 2.1
(without exhibits and schedules and filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K for April 4, 1994 and incorporated herein by
reference).
3(i).1 Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (File No. 33-50812)
and incorporated herein by reference).
3(ii).1 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
4.1 Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (File No. 33-50812)
and incorporated herein by reference).
4.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
4.3 Specimen Common Stock Certificates of the Company (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
4.4 Registration Rights Agreement, dated as of September 10, 1992, between the
Company and Medical Group Pathology Laboratory, Inc. (filed as Exhibit 10.24
to the Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
4.5 Registration Rights Agreement between the Company and Pathologist Clinical
Laboratories of Glendale, Inc. (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K for January 29, 1993 and incorporated herein by
reference).
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4.6 Registration Rights Agreement between the Company and San Joaquin
Diagnostics Inc. (filed as Exhibit 4.2 to the Company's Current Report on
Form 8-K for January 29, 1993 and incorporated herein by reference).
4.7 Indenture, dated as of August 24, 1993 among the Company, Donaldson, Lufkin
& Jenrette Securities Corporation and Smith Barney Shearson Inc. (filed as
Exhibit 4.4 to the Company's Form S-3 Registration Statement (File No.
33-71374) and incorporated herein by reference).
4.8 Registration Rights Agreement, dated as of August 24, 1993, among the
Company, Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Shearson Inc. (filed as Exhibit 4.2 to the Company's Current Report
on Form 8-K dated September 9, 1993 and incorporated herein by reference).
4.9 Credit Agreement, dated as of April 1, 1994, between the Company and the
Banks (incorporated by reference to Exhibit 4.1 of the Company's Current
Report on Form 8-K for April 4, 1994) (without exhibits and schedules).
4.10 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).
4.11 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).
4.12 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).
4.13 Form of Fourth Amendment to Credit Agreement, dated as of July 31, 1995
(filed as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended February 28, 1995 and incorporated herein by reference).
4.14 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).
4.15 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
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(incorporated by reference to Exhibit 4.6 of the Company's Current Report on
Form 8-K for May 8, 1995).
4.16 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).
4.18 Warrant W(A)-001, dated as of June 9, 1995 (incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K for July 14, 1995).
4.19 Collateral and Security Agreement, dated as of April 1, 1994, among the
Company, Wells Fargo Bank, National Association, as Agent, and the Financial
Institutions party thereto (filed as Exhibit 4.2 to the Company's Current
Report on Form 8-K for April 4, 1994 and incorporated herein by reference).
4.20 Guaranty and Security Agreement, dated as of April 1, 1994, among Diagnostic
Laboratories, Inc., a California corporation, Wells Fargo Bank, National
Association, as Agent, and the financial institutions party thereto (filed
as Exhibit 4.3 to the Company's Current Report on Form 8-K for April 4, 1994
and incorporated herein by reference).
4.21 Guaranty and Security Agreement, dated as of April 1, 1994, among Quantum
Clinical Laboratories, Inc., a California corporation, Wells Fargo Bank,
National Association, as Agent, and the financial institutions party thereto
(filed as Exhibit 4.4 to the Company's Current Report on Form 8-K for April
4, 1994 and incorporated herein by reference).
4.22 Guaranty and Security Agreement, dated as of April 1, 1994, among Regional
Reference Laboratory Governing Corporation, a California corporation, Wells
Fargo Bank, National Association, as Agent, and the financial institutions
party thereto (filed as Exhibit 4.5 to the Company's Current Report on Form
8-K for April 4, 1994 and incorporated herein by reference).
4.23 Guaranty and Security Agreement, dated as of April 1, 1994, among California
Regional Reference Laboratory Governing Corporation, a California limited
partnership, Wells Fargo Bank, National Association, as Agent, and the
financial institutions party thereto (filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K for April 4, 1994 and incorporated herein by
reference).
4.24 Leasehold Deed of Trust, Assignment of Rents and Security Agreement, dated
as of April 1, 1994, by and among the
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Company, as trustor, First American Title Insurance Company, as trustee, and
Wells Fargo Bank, National Association, as Agent for the financial
institutions party to the Credit Agreement, as beneficiary related to leased
property located at 1011 Rancho Conejo Boulevard, Newbury Park, California
(filed as Exhibit 4.7 to the Company's Current Report on Form 8-K for
April 4, 1994 and incorporated herein by reference).
4.25 Leasehold Deed of Trust, Assignment of Rents and Security Agreement, dated
as of April 1, 1994, by and among the Company, as trustor, First American
Title Insurance Company, as trustee, and Wells Fargo Bank, National
Association, as Agent for the financial institutions party to the Credit
Agreement, as beneficiary related to leased property located at 2495 Natomas
Park Drive, Suite 600, Sacramento, California (filed as Exhibit 4.25 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended February 28,
1995 and incorporated herein by reference).
10.1 Amended and Restated 1992 Nonqualified Stock Option Plan of the Company
(filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 33-50812) and incorporated herein by reference).
10.2 Hospital Reference Laboratory Agreement, dated as of July 1, 1990, between
the Company and Sutter General Hospital (filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
10.3 Hospital Reference Laboratory Agreement, dated as of July 20, 1990, between
the Company and Methodist Hospital of Sacramento (filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
10.4 Hospital Reference Laboratory Agreement, dated as of July 1, 1990, between
the Company and Sutter Memorial Hospital (filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
10.5 Hospital Reference Laboratory Agreement, dated as of July 1, 1990, between
the Company and Mercy General Hospital (filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
10.6 Hospital Reference Laboratory Agreement, dated as of June 27, 1990, between
the Company and Mercy San Juan Hospital (filed as Exhibit 10.8 to the
Company's Registration Statement on
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Form S-1 (File No. 33-50812) and incorporated herein by reference).
10.7 Regional Laboratory Medical Director Agreement, dated December 1, 1990,
amended pursuant to a letter agreement dated March 15, 1993, between the
Company and Diagnostic Pathology Medical Group, Inc. (filed as Exhibit 10.9
to the Company's Registration Statement on Form S-1 (File No. 33-50812) and
Exhibit 10.23 to the Company's Annual Report on form 10-K for the Fiscal
Year Ended February 28, 1993 respectively, and incorporated herein by
reference).
10.8 Cytology Services Medical Director Agreement, dated March 1, 1989, between
the Company and Outpatient Pathology Associated Medical Group, Inc., as
amended (filed as Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (File No. 33-50812) and incorporated herein by reference).
10.9 Agreement, dated March 12, 1992, between the Company and HAI Financial, Inc.
(filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1
(File No. 33-50812) and incorporated herein by reference).
10.10 Agreement, dated March 20, 1992, between the Company and HAI Financial, Inc.
(filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1
(File No. 33-50812) and incorporated herein by reference).
10.11 Lease, dated March 8, 1994, between the Company, as lessee, and 2495 Natomas
Park Investors as lessors, relating to property located at 2495 Natomas Park
Drive, Sacramento, California (filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended February 28, 1995 and
incorporated herein by reference).
10.12 Amended and Restated Voting Agreement, among Mercy Healthcare Sacramento,
Sutter Ambulatory Care Corporation and Methodist Hospital of Sacramento
(filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended February 28, 1993 and incorporated herein by reference).
10.13 Laboratory Director Agreement (Santa Barbara), dated as of September 10,
1992, between the Company and John P. Blanchard, M.D., Inc. (filed as
Exhibit 10.25 to the Company's Registration Statement on Form S-1 (File No.
33-50812) and incorporated herein by reference).
10.14 Agreement of Purchase and Sale of Assets, dated as of February 28, 1994,
among the Company, CLSI, Metpath, Reference, DCL-CA and Redwood and side
letter dated April 4, 1994, among the parties (filed as Exhibit 2.1 to the
Current Report on
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Form 8-K for February 24, 1994, and Exhibit 2.3 to the Company's Current
Report on Form 8-K for April 4, 1994, respectively, and incorporated here by
reference).
10.15 Agreement for Purchase and Sale of Corporate Stock, dated as of January 28,
1994, among the Company and the shareholders of Diagnostic Laboratories,
Inc. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K for
January 28, 1994 and incorporated herein by reference).
10.16* Technical Equipment Maintenance Management Agreement, dated as of January 12,
1996, among the Company and Maintenance Management Corporation.
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MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT WHICH IS SEPARATELY
IDENTIFIED IN ACCORDANCE WITH ITEM 14(A)(3) OF FORM 10-K.
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10.17 Amended and Restated Employment Agreement, dated March 1, 1994, between the
Company and Nathan L. Headley (filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended February 28, 1995 and
incorporated herein by reference).
10.18 Amended and Restated 1990 Deferred Compensation Agreement dated March 1,
1992, between the Company and Nathan L. Headley (filed as Exhibit 10.12 to
the Company's Registration Statement on Form S-1 (File No. 33-50812) and
incorporated herein by reference).
10.19 Deferred Compensation Agreement, dated March 1, 1992, between the Company
and Nathan L. Headley (filed as Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (File No. 33-50812) and incorporated herein by
reference).
10.20 Separation Agreement, dated March 1, 1994, between the Company and Nathan L.
Headley (filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended February 28, 1995 and incorporated herein by
reference).
10.21* Employment Agreement, dated September 8, 1995, between the Company and Richard M.
Brooks.
12.1* Statement regarding calculation of ratios of earnings to fixed charges.
21.1* Subsidiaries of the Company.
23.1* Consent of Arthur Andersen LLP.
24.1* Powers of Attorney.
27.1* Financial Data Schedule
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IV-10
<PAGE> 1
EXHIBIT 10.16
TEMMS(TM) AGREEMENT NO. 0439
Agreement made as of January 12, 1996, by and between Maintenance
Management Corporation, a Wisconsin for-profit corporation with its principal
offices located at 9880 South Ridgeview Drive, Oak Creek, Wisconsin 53154
("MMC") and Physicians Clinical Lab, a corporation with its principal offices
located at 2495 Natomas Park Drive, Suite 600, Sacramento, California 95833,
(hereinafter, whether one or more, collectively referred to as the "Facility").
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
I. SERVICES
1.1 PURPOSE. The purpose of MMC's Technical Equipment Maintenance
Management Support (TEMM(TM)) Program is to provide, on an economical basis,
services comparable to those provided under manufacturer extended warranty and
time and material maintenance programs for Facility Equipment (as defined in
Section 8.5 below).
1.2 SERVICES. Except as provided otherwise in Section 2.3 and
elsewhere in this Agreement, MMC shall, upon notification from the Facility
during the term of this Agreement, perform, or have performed, Corrective
Maintenance (as defined in Section 8.3 below) for the Equipment described in
Article II below (hereinafter, the "Equipment") within a time frame consistent
with the needs of the Facility. MMC shall also perform Preventive Maintenance
(as defined in Section 8.8 below) in order to reduce downtime and minimize
maintenance costs of the Facility and MMC during the term of this Agreement.
Finally, MMC may perform additional consulting or other services for the
Facility for such compensation and upon such other terms and conditions as may
be mutually agreed upon by both parties. MMC shall not be responsible for any
item of Corrective Maintenance of which it is not notified during the term of
this Agreement.
1.3 OPERATIONS. MMC will provide the Facility with an Operations
Manual, which will set forth the operational objectives and procedures for MMC
and the Facility for implementation of this Agreement. Both the Facility and
MMC will comply with the Operations Manual, as it may be amended or
supplemented with the mutual written consent of both parties from time to time,
in connection with the services to be performed under this Agreement.
1.4 REPORTS. No less often than monthly, MMC will provide the
Facility with a report itemizing the performance and current status of
Corrective Maintenance, Preventive Maintenance and other services performed by
MMC under this Agreement. The services reflected on each such report shall be
deemed to have satisfied MMC's obligations under this Agreement for the period
covered by the report, except to the extent MMC is notified otherwise by the
Facility within ten (10) days of delivery of the report. MMC will also
<PAGE> 2
maintain a current inventory of the Equipment (including, for this purpose
only, equipment under warranty, lease or rental agreements), and provide a copy
of such inventory to the Facility no less often than annually, or more often
upon mutual agreement.
1.5 RECORDS. During the term of this Agreement, MMC will process
work orders, purchase orders, service reports, invoices and other paperwork in
connection with the Equipment. It will also maintain proper records with
respect to the Equipment and respond to requests for information pertaining to
the Equipment from any applicable regulatory agency/group during the term of
this Agreement. In addition, upon written request of the Secretary of Health
and Human Services or the Comptroller General of the United States, or their
duly authorized representatives, within four (4) years of the expiration of any
initial or renewal period during the term of this Agreement, MMC shall make
available this Agreement, and such of its books, documents and records, as are
necessary to certify the nature and extent of the costs under this Agreement
during that period. If MMC delegates any of its duties under this Agreement
pursuant to a subcontract with a related organization and the value provided or
cost charged under that subcontract over any twelve (12) month period is at
least ten thousand dollars ($10,000.00), that subcontract shall contain a
clause comparable to the foregoing provision of this Section.
1.6 HOME OFFICE. MMC will utilize its proprietary management
software, including its home office mainframe computer system and its exclusive
equipment repair data base, in providing services under this Agreement. In
addition, trained MMC home office personnel will be available on a 24-hour
basis to provide technical assistance to MMC's on-site staff with respect to
repairs, purchasing, regulatory standards, inspections, training, documentation
and other matters relating to the services provided by MMC under this
Agreement.
1.7 PURCHASE. Notwithstanding any other provision of this
Agreement, MMC shall purchase, as an agent of the Facility and not on its own
behalf, all goods and services to be provided by outside vendors under this
Agreement as may otherwise be subject to sales or other tax if purchased
through MMC. The Facility, and not MMC, shall be directly liable to such
vendors for the purchase price of such goods and services, title to which shall
pass directly from such vendors to the Facility. The Facility shall provide
MMC with appropriate copies of such documents, including, without limitation,
Facility purchase order forms and tax exemption certificates and information,
and take such other actions as may be reasonably requested by MMC in connection
with the provisions of this Section.
II. EQUIPMENT
2.1 DEFINITION. The term "Equipment," when used in this
Agreement, means all Facility Equipment (as defined in Section 8.5 below)
inventoried in accordance with Section 2.2 below, exclusive of the items
described in Section 2.3 below and as adjusted from time to time for additions
and deletions under Sections 2.4 and 2.5 below, respectively. The Facility
warrants that Exhibit A to this Agreement lists the addresses of all locations
(other than its principal offices, the address for which is shown at the
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beginning of this Agreement), at which the Equipment will be stored or used
during the term of this Agreement unless the parties mutually agree otherwise.
2.2 INVENTORY. Initially, the Equipment covered by this Agreement
will include only the Facility Equipment listed in the Proposal (as defined in
Section 8.7 below), exclusive of the items described in Section 2.3 below. The
Facility warrants that all materials and information provided by or through the
Facility to MMC in connection with the preparation of the Proposal were
accurate and genuine; that, to the best of its knowledge, the information
reflected in the Proposal is accurate and complete; and that all of the
Equipment listed in the Proposal is currently owned by it. Within ninety (90)
days of the date of this Agreement, MMC shall provide the Facility with an
inventory of all Facility Equipment used by the Facility, which shall thereupon
become the Equipment covered by this Agreement, subject to the other provisions
of this Article. The final inventory shall be attached as Exhibit E to this
Agreement.
2.3 EXCLUSIONS. Notwithstanding any other provision of this
Agreement and/or the Proposal, the following items shall not be covered by this
Agreement, and the term "Equipment," as defined in this Article II, and the
provisions of Article I of this Agreement describing the services to be
rendered by MMC hereunder should be interpreted accordingly, unless
specifically otherwise agreed by MMC in writing for such compensation and upon
such other terms and conditions as may be mutually agreed upon by both parties:
(a) Capital Improvements (as defined in Section 8.1
below);
(b) Consumables (as defined in Section 8.2 below);
(c) Gas monitoring and testing, and Radiation Safety
Surveys;
(d) Fiber Optics, including, without limitation, scopes
and bundles;
(e) Fire, security and smoke alarm systems;
(f) Leased items, including, without limitation,
laboratory reagent and lease purchase equipment;
(g) Recovery of lost or damaged data or other
programming;
(h) Software, software programming and maintenance;
(i) Surgical instruments and tools defined as, but not
limited to, those requiring: sterilization,
reconditioning, replacement, surfacing, sharpening
and coatings;
(j) Warranty items, until added under Section 2.4 below;
and
(k) Insurable Risk (as defined in Section 8.6 below).
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The performance by MMC of services excluded under the foregoing provision,
either intentionally or otherwise, shall not cause it to become obligated to
perform any such services in the future, with respect to the same or any other
property, or to assume any responsibility for any of the services so provided.
2.4 ADDITIONS. The Facility will provide MMC with a description
and acquisition date, warranty and other relevant information with respect to
each item of Facility Equipment acquired by the Facility on or after the date
of this Agreement as soon as possible and in no event more than thirty (30)
days after the date of such acquisition. Unless excluded under Section 2.3
above, each such newly-acquired item will become part of the Equipment covered
by this Agreement immediately upon acquisition unless covered by manufacturer
warranty, in which it will become part of the Equipment covered by this
Agreement upon expiration of the applicable warranty. All items of Facility
Equipment used by the Facility on the date of this Agreement which were not
included in the Proposal shall be treated as Facility Equipment acquired by the
Facility on that date for all purposes under this Agreement. MMC shall not
have any responsibility with respect to any item not listed on the inventory
prepared pursuant to Section 2.2 above until it is notified of the item in
accordance with the foregoing provisions of this Section or the item is treated
as an addition for purposes of adjusting compensation under Section 5.2 below.
The Facility warrants that items of Equipment for which MMC becomes responsible
under the foregoing provision shall be owned by the Facility from the inception
of such responsibility until termination of this Agreement, unless the Facility
notifies MMC otherwise in accordance with Section 2.5 below.
2.5 DELETIONS. The Facility shall notify MMC of each item of
Equipment that is disposed of by the Facility during the term of this
Agreement. Such items shall cease to be part of the Equipment covered by this
Agreement immediately upon such notification or, if later, the actual date of
disposition specified in that notice. In the event that continued operation of
an item of Equipment becomes uneconomical because of excessive downtime or
repair costs, the Facility agrees to delete such item pursuant to this Section
upon request by MMC.
III. PERSONNEL
3.1 STAFFING. MMC will provide, at its expense, technical,
support and management personnel to perform the services described in Article I
with respect to the Equipment described in Article II, including an on-site
resident manager and such other personnel as MMC deems appropriate. If the
Facility objects to any member of MMC's on-site staff and the grounds for the
objection are not rectified to the Facility's satisfaction within a reasonable
time thereafter, MMC shall replace that member upon notice from the Facility's
chief operating officer.
3.2 MANAGEMENT. No less often than monthly, the on-site MMC
manager shall meet with Facility administration to review performance under
this Agreement. No less often than quarterly, the on-site manager and a
representative from MMC's home office shall meet with at least two (2)
authorized representatives of Facility administration
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<PAGE> 5
to review their joint achievements under this Agreement during the preceding
quarter and to establish objectives for the upcoming quarter. MMC shall
prepare minutes for all such meetings and provide Facility administration with
copies of such minutes. The MMC on-site manager shall participate in planning
and other meetings and report to Facility administration in the same manner as
other line department managers. MMC may, at its discretion, participate in
orientation and training programs for Facility employees to the extent
necessary or appropriate under this Agreement.
3.3 SUPPORT. The Facility shall provide MMC employees working at
the Facility with suitable workshop, storage and furnished office space
sufficient for the efficient performance of the services to be provided by MMC
under this Agreement. Such space shall be located so as to facilitate proper
service and timely response by MMC and shall include appropriate utilities and
services, including, without limitation, heat, air conditioning, electricity,
security protection and janitorial service. The Facility shall also provide
all MMC employees working at the Facility with use of appropriate support
equipment, including, without limitation, photocopy and telecopier equipment,
local and long distance telephones and service and electronic paging devices,
and such other accommodations, including, without limitation, identification
cards and badges, cafeteria privileges, employee discounts and parking, as are
provided to comparable employees at the Facility. Finally, the Facility shall,
at its expense, ship and receive all equipment, supplies and other materials
necessary or appropriate for the performance of MMC's services under this
Agreement and promptly deliver such items to and from MMC's space at the
Facility in accordance with the Facility's standard policies and procedures.
3.4 TRANSFER. MMC agrees to interview for hire, as of the date of
this Agreement or as soon thereafter as possible, all of the employees of the
Facility listed in Exhibit B to this Agreement. MMC shall offer each such
employee selected by MMC for hire pursuant to such interviews cash compensation
equal to or greater than the compensation shown for that employee in the
Proposal and fringe benefits comparable to those provided to other such MMC
employees. The Facility warrants that none of such employees are subject,
either directly or indirectly, to any collective bargaining agreement or
included within a certified collective bargaining unit with respect to their
employment at the Facility.
3.5 RESTRICTION. Both parties agree not to, during the term of
the Agreement and for a period of eighteen (18) months thereafter, employ or
otherwise allow to be deployed for their benefit, either directly or indirectly
through one (1) or more independent or other contractors or otherwise, any
individuals employed by the other party at the Facility at any time during the
term hereof without the prior written consent of the other party. The parties
agree that breach of the foregoing provision by a party would cause irreparable
injury to the other party which could not be fully measured or compensated by
money damages, and, therefore, hereby agree that, in the event of a breach of
the foregoing provision, the other party shall be entitled to obtain temporary
restraining orders and temporary and permanent injunctions restraining further
violations of that provision and to recover reasonable attorneys' fees and
expenses in connection with its enforcement, in
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addition to such other legal and/or equitable relief as may be appropriate.
This Section shall not apply to employees hired by MMC pursuant to Section 3.4
above.
IV. START-UP
4.1 CONTRACTS. Prior to or during the first calendar month of
this Agreement, the Facility shall cancel the Equipment service contracts
listed on Exhibit C to this Agreement. MMC shall assist in this process if
requested to do so by the Facility. MMC shall be subrogated to the rights of
the Facility under such contracts for any period covered by this Agreement,
whether before, during or after the initial calendar month, as full
consideration for which, the Facility shall be entitled to the credit, if any,
described in the first sentence of Section 5.7 below. Except as provided in
that Section, MMC shall not be liable in any respect for any obligations under
such contracts.
4.2 TEST EQUIPMENT. MMC shall provide the Facility with a list of
the items of Facility test equipment that it intends to use in the performance
of its services under this Agreement. MMC shall be entitled to use the test
equipment so designated in the performance of such services, and shall be
responsible for the maintenance of such equipment as long as it is so used by
MMC during the term of this Agreement.
4.3 PARTS. MMC shall provide the Facility with an inventory of
the Facility's Equipment parts as of the date of this Agreement. MMC shall be
entitled to use such parts in the performance of its services under this
Agreement, and shall maintain the Facility's Equipment parts inventory during
its term. The Facility shall have title to the Equipment parts inventory
throughout the term of this Agreement. If upon termination of this Agreement,
the dollar value of the Equipment parts inventory is not equal to its beginning
dollar value, MMC, in the case of a decrease, or the Facility, in the case of
an increase, shall reimburse the other party in cash for such difference in
value.
V. COMPENSATION
5.1 PAYMENTS. For the services rendered by MMC under this
Agreement, the Facility shall pay to MMC the monthly charge shown in the
proposal and below, as adjusted for inventory changes, inflation and other
changes pursuant to Sections 5.2, 5.3 and 5.4, respectively, below, for each
calendar month during the term of this Agreement. Except as provided below,
the charge for each such calendar month will be billed in advance by MMC, and
shall be due from the Facility prior to the first day of such calendar month.
The invoice for such charges shall show the portion thereof, if any, subject to
sales, excise, value-added or other such taxes, which taxes shall be payable to
MMC by the Facility along with such charges. If the date of this Agreement is
not the first (1st) day of a calendar month, the amount for the first calendar
month during the term of this Agreement shall be adjusted accordingly and shall
be due prior to the date of this Agreement. Moreover, an amount equal to
twenty-five percent (25%) of the monthly charge shown shall be payable in
advance no later than ten (10) days after execution of this Agreement.
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MMC MONTHLY BEGINNING AGREEMENT COST
$ 84,583.00
MMC ANNUAL BEGINNING AGREEMENT COST
$1,014,996.00
5.2 INVENTORY CHANGES. The monthly charge under this Agreement
shall be increased to reflect the addition of new Equipment under Section 2.4
above at MMC's prevailing rates at the time that such Equipment first becomes
subject to this Agreement under that Section. MMC warrants that such rates
shall not exceed ninety percent (90%) of the amount charged by the original
manufacturer for such coverage, if available. The monthly charge shall be
decreased by the amount charged under this Agreement for Equipment deleted
under Section 2.5 above as of the date of the Facility's notification to MMC
under that Section, or, if later, the actual date of disposition of the
Equipment. No less often than quarterly, MMC shall notify the Facility of
adjustments to the monthly charge under this Section, which shall be effective
for all calendar months thereafter, including a one-time adjustment to the
charge for the first such calendar month for adjustments effective prior to the
first day of such month.
5.3 INFLATION. As of each anniversary of the date of this
Agreement, the monthly charge shall be increased by a percentage equal to the
percentage increase, if any, in the Consumer Price Index for the one (1) year
period ending with the most recent quarter for which such statistics are then
available.
5.4 OTHER CHANGES. If there is a change in the condition or usage
of any item of Equipment, the parties agree to negotiate in good faith to
adjust the monthly charge for such item to equitably reflect such change.
5.5 CHARGEBACKS. If an item of Equipment, including
Facility-owned test equipment described in Section 4.2 above, is not in
compliance with manufacturer, federal, state, voluntary agency or other
applicable guidelines or specifications or otherwise not in original
operational condition when it first becomes part of the Equipment covered by
this Agreement, MMC may, at its option, have such item repaired, in whole or in
part, on behalf of the Facility. In addition, MMC may, at its option, during
the term of this Agreement, when necessary or with the consent of the acting
supervisor of the appropriate department of the Facility, order, perform or
supply other services or parts not covered by this Agreement on behalf of the
Facility. The Facility agrees to pay all charges for such repairs, services
and parts, either directly to the appropriate vendor or in reimbursement to MMC
for amounts paid, or for services or parts provided by, MMC promptly upon
request but in no event later than the due date for the first monthly charge
due under this Agreement after such request.
5.6 PAYMENT. All amounts due MMC under this Agreement shall be
payable by the Facility to MMC at the address designated for MMC under Section
10.5 below. Any such amount not so paid when due shall bear interest at the
rate of one and one-half percent (1.5%) per month, or, if less, the maximum
rate permitted by applicable law, and
7
<PAGE> 8
shall be payable along with all costs of collection (including reasonable
attorneys' fees and expenses).
5.7 CREDITS. The Facility shall be entitled to a credit against
the monthly charge under Section 5.1 above for the first calendar month of this
Agreement for the amount of that charge attributable to Equipment still covered
by the Equipment service contracts listed on Exhibit C to this Agreement. The
Facility shall not be entitled to any credit for amounts attributable to other
months, even if one (1) or more of such contracts are not cancelled as provided
in Section 4.1 above. MMC may also, at its option, credit the dollar value of
the Facility's beginning Equipment parts inventory determined under Section 4.3
above against monthly charges becoming payable after that amount is so
determined, in which case the dollar value of such beginning inventory shall be
entitled to a credit for amounts paid for by the Facility for purchases made on
its behalf pursuant to Section 1.7 above.
5.8 INCENTIVE. If MMC's expenses for any initial or renewal
period during the term of this Agreement are less than the compensation paid by
the Facility to MMC under this Article for such period, the Facility shall be
entitled to an incentive credit equal to fifty percent (50%) of such savings,
provided the Facility has timely complied with all of its obligations under
this Agreement and this Agreement is not cancelled by either party during the
period and is renewed for at least one (1) full additional renewal period
thereafter. It is understood that MMC's expenses for this purpose shall
include charges for resources provided by its home office. MMC shall provide
the Facility with an accounting of such savings, if any, on an annual basis,
which accounting shall be conclusive for these purposes in the absence of bad
faith on the part of MMC in connection with its preparation. MMC shall pay any
incentive credit to which the Facility is entitled under this provision
approximately ninety (90) days after the expiration of the initial or renewal
period to which it is attributable, provided the Facility continues to qualify.
This Section 5.8 shall be of no further force and effect after this Agreement
is cancelled or terminated for any reason.
VI. MUTUAL COVENANTS
6.1 COOPERATION. Both parties agree to cooperate in good faith to
accomplish the goals and purposes of this Agreement.
6.2 INSURANCE. In order to avoid misunderstandings, each party
shall provide the other party with a certificate of insurance for the property,
casualty and liability insurance coverage maintained by that party with respect
to the property and activities covered by this Agreement.
6.3 MATERIALS. This Agreement, its Exhibits and all of the
materials provided by MMC in connection with it, including, without limitation,
the Proposal, the Operations Manual prepared pursuant to Section 1.3 above, the
reports provided pursuant to Section 1.4 above, the minutes prepared pursuant
to Section 3.2 above, the lists provided pursuant to Sections 4.2 and 4.3 above
and the accounting provided pursuant to Section 5.2 above, are confidential and
intended to be used solely in connection with the performance of services
8
<PAGE> 9
under this Agreement. Neither party shall otherwise use or disclose, or allow
to be used or disclosed, any of such materials without the prior written
consent of the other party, except solely for internal use within its
operations.
6.4 LIMITATION. Neither party shall be liable for incidental or
consequential damages under this Agreement.
6.5 RESPONSIBILITY. Each party's employees and other agents shall
be subject to that party's sole and exclusive control, and neither party shall
be liable for actions taken or liabilities incurred by the other party's
employees or other agents, except to the extent specifically provided otherwise
in this Agreement.
VII. TERM
7.1 TERM. The term of this Agreement shall consist of the initial
period plus renewal periods, as provided in this Section 7.1, unless terminated
in accordance with Section 7.2 below. The initial period shall commence on the
date of this Agreement and shall be for three (3) calendar years plus the
remaining portion of the final calendar month if the date of this Agreement is
not the first (1st) day of a calendar month. Following a contract cost review
the term shall be renewed for an additional three (3) calendar year renewal
period after the expiration of any initial or renewal period unless either
party notifies the other that it will not be so renewed at least ninety (90)
days prior to the commencement or such renewal period.
7.2 BREACH. Either party may terminate this Agreement upon thirty
(30) days prior written notice to the other party if the other party has failed
to cure a material breach of this Agreement within sixty (60) days of written
notice from the terminating party, or if the breach is not reasonably
susceptible to cure within that period, the other party has failed to take
reasonable steps within such sixty (60) day period to cure the breach as soon
as possible.
7.3 RELEASE. Upon termination of this Agreement for any reason,
each party shall notify the other party of any and all outstanding claims
against that party under this Agreement prior to the effective date of the
termination. Neither party shall be liable for any claim arising out of or
otherwise relating to this Agreement of which they were not so notified
pursuant to the foregoing provision.
VIII. DEFINITIONS
The following terms, when used in this Agreement, shall have the
meanings indicated, and derivatives of the terms should be interpreted
accordingly:
8.1 CAPITAL IMPROVEMENTS. The term "Capital Improvements" shall
mean modifications intended to increase the value or useful life of the
Equipment, including, without limitation, relocation, upgrades, addition of
accessories or devices, retrofits, reconditioning, scheduled or unplanned
overhauls or refurbishments, rigging, cosmetic
9
<PAGE> 10
restoration or adjustments, modifications undertaken because of obsolescence
and universal improvements recommended by vendors or others for any reason.
8.2 CONSUMABLES. The term "Consumables" shall mean supplies and
other materials regularly consumed in the normal operation of the Equipment,
including, without limitation, operating supplies, auxiliary material,
disposables, expendable parts, patient cables and leads, batteries, battery
cells, electrodes, radioactive and other sources, data operating media,
magnetic tapes and discs, developing agents, reagents, typewriter and printer
ribbons, copier drums, copier toner, prepared papers, films, film cassettes and
screens, stylus tips of disc recorders and other sound pick-up systems, screw
plates, type carriers, containers, pipettes, test tubes, testing phantoms,
table cushions, patient restraints, head holders, MRI cryogen and parts,
supplies and other materials commonly excluded by manufacturer or third party
contracts.
8.3 CORRECTIVE MAINTENANCE. The term "Corrective Maintenance"
shall mean repairs necessitated by normal usage of the Equipment, excluding,
without limitation, Capital Improvements (as defined in Section 8.1 above) and
repairs required as a result of Insurable Risks (as defined in Section 8.6
below) or abnormal use.
8.4 GLASSWARE. The term "Glassware" shall mean all components of
the Equipment consisting, in whole or in part, of glass, including, without
limitation, x-ray tubes, electronic tubes, valve tubes, therapy tubes, laser
tubes, light sources, image intensifiers, pick-up tubes, accelerator beam
center lines, wave guides and attachments, electron guns, magnetrons,
klystrons, thyratrons, transducers, gamma camera crystals, (including, without
limitation, repairs necessitated by yellowing, hydrolyzation and separation),
computerized tomography detectors and other parts and components commonly
referred to as glassware by manufacturer or third party contracts.
8.5 FACILITY EQUIPMENT. The term "Facility Equipment" shall mean
mechanical or electronic devices, excluding, without limitation, property
excluded under Section 2.3 above, dietary, laundry and housekeeping equipment,
security, furniture and fixtures, plant equipment (and equipment maintained by
plant, including, without limitation, boilers, chillers, coolers, HVAC and
elevators) and all other equipment listed on Exhibit D, if any, to this
Agreement.
8.6 INSURABLE RISKS. The term "Insurable Risks" shall mean all
perils of loss commonly covered by insurance, including, without limitation,
accident, fire, lightning, water (including, without limitation, flooding,
sprinkler discharge and sewer back-up), tornado, windstorm, hail, earthquake,
explosion, radioactivity, smoke, sludge, aircraft, motor vehicle, collapse of
building, strike, war, insurrection, terrorism, riot, civic commotion,
vandalism, theft, malicious mischief, power failure or fluctuation, air
conditioning failure, contamination by any source, acts of God and intentional
or negligent acts or omissions of the Facility, its employees or other agents.
8.7 PROPOSAL. The term "Proposal" shall mean the proposal
prepared by MMC in connection with this Agreement.
10
<PAGE> 11
8.8 PREVENTIVE MAINTENANCE. The term "Preventive Maintenance"
shall mean planned maintenance and performance an electrical safety testing
required by manufacturer specifications, Joint Commission on Accreditation of
Health Care Organizations standards and applicable governmental regulations and
such other maintenance and testing as MMC may determine to be appropriate.
IX. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement,
or its breach, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. There
shall be only one (1) arbitrator, except that, in controversies or claims
involving more than twenty-five thousand dollars ($25,000.00), either party may
elect to have three (3) arbitrators in its notice of intention to arbitrate or
answering statement. Unless the parties agree otherwise, the arbitrators shall
be selected in accordance with the American Arbitration Association procedures
for that purpose. The arbitrator or arbitrators may award attorneys' fees,
arbitration costs and other expenses to the prevailing party in such
proceedings if he or they determine that the other party was not acting in good
faith or was acting without substantial justification. The award rendered by
the arbitrator or arbitrators shall be final and binding on both parties and
may be entered and enforced by any court of competent jurisdiction. In the
event that either party fails to cooperate with arbitration proceedings
instituted pursuant to this Section, the other party shall be entitled to
recover reasonable attorneys' fees an expenses in connection with enforcing its
rights under this Section, in addition to such other legal and/or equitable
relief as may be appropriate.
X. MISCELLANEOUS
10.1 BENEFICIARIES. This Agreement shall be binding upon, and
inure solely to the benefit of, the parties hereto and their respective
successors and assigns, it being understood that MMC may delegate the
performance of some or all of its obligations under this Agreement, although it
will remain responsible for such performance.
10.2 RELATIONSHIP. All services provided by MMC under this
Agreement shall be as an independent contractor of the Facility, and nothing
contained in this Agreement, or the parties' performance of their respective
obligations under it, should be construed as creating an employment,
partnership or joint venture relationship between MMC and the Facility.
Accordingly, neither party shall be responsible for liabilities incurred by the
other party, except to the extent specifically provided otherwise in this
Agreement.
10.3 FURTHER ASSURANCE. Each of the parties shall execute and
deliver such documents and take such other actions as may be reasonably
requested by the other party to carry out the provisions or purposes of this
Agreement.
10.4 SEVERABILITY. In the event that any provision of this
Agreement, either in all cases or in certain circumstances, is determined to be
invalid or unenforceable, such
11
<PAGE> 12
provision shall be deemed severed from this Agreement in the circumstances for
which it is so determined to be invalid or unenforceable, and such severance
shall not affect the validity or enforceability of any of the other provisions
of this Agreement or of the provision itself in other circumstances, except
that the invalidity or unenforceability of any of the provisions of Section 5.1
through 5.6 above shall cause a corresponding reduction in the obligations of
MMC under this Agreement.
10.5 NOTICES. Notices and other communications required or
permitted to be given under this Agreement shall be in writing and delivered in
person or by registered or certified mail, postage prepaid, to the address
listed for the recipient party at the beginning of this Agreement. Either
party may change the address to which notices to that party should be delivered
by giving notice of such change to the other party pursuant to this provision.
Mailed notices shall be deemed delivered when deposited in the United States
mail.
10.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.7 INTEGRATION. This Agreement, including the attached Exhibits
and the Proposal, constitutes the entire agreement of the parties with respect
to the subject matter covered or contemplated by this Agreement; supersedes all
prior or existing agreements, representations and other understandings, whether
oral or written, relating to such subject matter; and may not be modified or
otherwise supplemented without the prior written consent of both parties.
10.8 INTERPRETATION. The headings in this Agreement are intended
for convenience only and shall not affect its meaning or interpretation. The
rule that agreements are to be construed against the drafting party shall not
apply to this Agreement.
10.9 LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties executed this Agreement No. 0439 as of
the date shown at the beginning of this Agreement.
PHYSICIANS CLINICAL LAB
By: /S/TAYLOR R. MCKEEMAN
--------------------------------
Name: Taylor R. McKeeman
--------------------------------------
Title: Vice President - Laboratory Operations
-----------------------------------------
Date: January 12, 1996
--------------------------------------
MAINTENANCE MANAGEMENT CORPORATION
By: /S/THOMAS L. PAQUIN
-------------------------------
Name: Thomas L. Paquin
--------------------------------------
Title: Executive Vice President/Chief Accounts Officer
--------------------------------------------------
Date: November 14, 1995
--------------------------------------
COMMENCEMENT DATE AGREED UPON: 3/15/96
13
<PAGE> 14
EXHIBIT "A"
PHYSICIANS CLINICAL LAB
ADDITIONAL LOCATIONS INCLUDED
_______________________________________________________________________________
SACRAMENTO MAIN LAB
AUBURN
DAVIS
ROSEVILLE
FOLSOM BLD
LAGUNA
WALNUT CREEK
SAN JOSE
VALLEJO
SUNRISE
MT. VIEW
LOS ALTOS
GREENBRAE
PINOLE
PLEASANTON
NAPA
SAN FRANCISCO
ROHNERT PARK
SANTA ROSA
STOCKTON
FREMONT
PALO ALTO
FRESNO MAIN LAB
BAKERSFIELD
MODESTO
MARCET
OAKHURST
BURBANK MAIN LAB
CENTURY CITY
ONTARIO
SANTA BARBARA
14
<PAGE> 15
EXHIBIT "B"
PHYSICIANS CLINICAL LAB
DESIGNATED MAINTENANCE EMPLOYEES
_______________________________________________________________________________
Schedule of Physicians Clinical Lab designated maintenance employee positions
to be transferred to MMC.
YEARLY BASE
NAME POSITION WAGE AMOUNT
- -----------------------------------------------------------------------------
* * * NONE * * *
15
<PAGE> 16
EXHIBIT "C"
PHYSICIANS CLINICAL LAB
MAINTENANCE CONTRACTS AS SURVEYED
<TABLE>
<CAPTION>
VENDOR EQUIPMENT DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C>
BURBANK
AMERICAN COMP. HARDW. HIGH SPEED PRINTERS, (6)
CANON COPIER, MP 4835
COULTER CHEMISTRY ANALYZER, EPICS XL MCL
COULTER HEMATOLOGY ANALYZER, STKS 807
COULTER CHEMISTRY ANALYZER, EPICS PROFILER
DIGITAL BILLING SYSTEM
HITACHI CHEMISTRY ANALYZER, HITACHI 717
HITACHI HITACHI 737 AUTOMATIC ANALYZER
VITEK AUTO MICRO ANALYZER, VITEK
SUPERIOR MEDICAL SERVICE STERILIZER
VITEK VITEK, 240 AMS
FRESNO
COULTER HEMATOLOGY ANALYZER, STKS
HITACHI CHEMISTRY ANALYZER, HITACHI 717
SACRAMENTO
APPLIED CARDIAC SYSTEMS HOLTER RECORDERS, 8500
BECKMAN CHEMISTRY ANALYZER, ARRAY CE
BECKMAN CHEMISTRY ANALYZER, ARRAY
BIO RAD AUTOSAMPLER, AS-100
BIO RAD CHEMISTRY ANALYZER, VARIANT
CASTLE STERILIZER, 3322, STILL
CIBA-CORNING CHEMISTRY ANALYZER, MSD, 5890A
COHR BLOOD CELL COUNTER, SPLUR IV
COULTER HEMATOLOGY ANALYZER, STKS
COULTER HEMATOLOGY ANALYZER, MAXM
COULTER S-880
DIGITAL EQUIPMENT MAINFRAME
HELENA LABS ELECTROPHORESIS, RAPID EP
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
VENDOR EQUIPMENT DESCRIPTION
- -----------------------------------------------------------------------------------------------
<S> <C>
SACRAMENTO CONTINUED
HEWLETT PACKARD CHROMATOGRAPH, 5890A
INSTRUMENTATION LABS CHEMISTRY ANALYZER, MONARCH +
MILES CT 200+
MITEL/INTER-TEL PHONE SYSTEM, ST-200
OLYMPUS AUTO CHEMISTRY ANALYZER, AU5000
OLYMPUS CHEMISTRY ANALYZER, AU5200
OLYMPUS AUTO CHEMISTRY ANALYZER, AU5000
PERKIN ELMER SPECTRO PHOTOMETER, 4100ZL, AS70
PITNEY BOWES MAIL MACHINE, MODEL 6100
PITNEY BOWES MAIL MACHINES, INSERTER, FEEDERS, FOLDERS
PITNEY BOWES MAILING MACHINE, MODEL 5630
RICOH COPIER, RICOH 5433
ROSCHE COBAS MIRA LABTRONICS (COHR)
SYSMEX HEMATOLOGY ANALYZER, F800, DD100
TAYLOR MADE OFFICE SYS. COPIER, CANON 6650
TAYLOR MADE OFFICE SYS. COPIER, RICOH 6645
TAYLOR MADE OFFICE SYS. COPIER, RICOH 4215
TAYLOR MADE OFFICE SYS. COPIER, RICOH 4215
THERMO SEP. PRODUCTS AUTO SAMPLER, ISOCRATIC PUMP
</TABLE>
17
<PAGE> 18
EXHIBIT "D"
PHYSICIANS CLINICAL LAB
GENERAL (ALL SITES)
EQUIPMENT EXCLUDED UNDER THIS AGREEMENT
In addition to the equipment excluded in Sections 2.3 and 8.5, the following
shall also be excluded:
<TABLE>
<CAPTION>
ITEM REASON
----------------------------------- ------------------------------
<S> <C>
GLASSWARE
EQUIPMENT WHICH IS UNDER MAINTENANCE CONTRACT AND IS NOT LISTED UNKNOWN CONTRACTS, IF ANY, WERE NOT AVAILABLE
WITHIN THIS AGREEMENT
COPIERS EXCEPT THOSE INCLUDED UNDER "MAINTENANCE CONTRACTS AS NO SURVEY DATA AVAILABLE FOR NONCONTRACTED EQUIPMENT
SURVEYED" (SEE NOTE #1)
TELEPHONE SYSTEMS EXCEPT THOSE INCLUDED UNDER "MAINTENANCE NO SURVEY DATA AVAILABLE FOR NONCONTRACTED EQUIPMENT
CONTRACTS AS SURVEYED" (SEE NOTE #1)
WATER PURIFICATION SYSTEMS, REFRIGERATORS AND FREEZERS PLANT RESPONSIBILITIES
</TABLE>
NOTE 1: This equipment can be added to this Agreement upon review of equipment
inventory and repair history.
NOTE 2: Reagent and leased equipment on the following "Exhibit D" pages will
be inventoried and managed so that MMC can profile their repair
histories.
18
<PAGE> 19
EXHIBIT "D"
PHYSICIANS CLINICAL LAB
SACRAMENTO
EQUIPMENT EXCLUDED UNDER THIS AGREEMENT
In addition to the equipment excluded in Sections 2.3 and 8.5, the following
shall also be excluded:
<TABLE>
<CAPTION>
ITEM REASON
-------------------------------------- -------------------------
<S> <C>
GEN PROBE 450 LAB ANALYZERS REAGENT RENTAL
DIAGNOSTIC PRODUCTS IMMULITE REAGENT RENTAL
DUPACO FLUID HANDLER MARK IV REAGENT RENTAL
CORNING ACS 180 CHEMISTRY ANALYZER LEASED
COULTER HEMATOLOGY ANALYZER ATKS LEASED
ROSYS AUTOMATED EIA SYSTEM 3000 WARRANTY
KEN STAR FLUID HANDLER SYSTEM STAR 1 REAGENT RENTAL
TOSOH LAB ANALYZER AIA 1200 REAGENT RENTAL
TOSOH LAB ANALYZER AIA 1200 WARRANTY
TOSOH LAB ANALYZER AIA 600 REAGENT RENTAL
HITACHI CHEMISTRY ANALYZER (3) SUPER UAS WARRANTY
BACTEC MICROBIOLOGY ANALYZER (4) 9240 REAGENT RENTAL
ABBOTT CHEMISTRY ANALYZER (2) IMX REAGENT RENTAL
BECKMAN LAB ANALYZER ARRAY 360 REAGENT RENTAL
BEHRING DIAGNOSTICS NEPHELOMETER REAGENT RENTAL
VITEK AMS 240 (3) MICROBIOLOGY ANALYZER LEASED
ABBOTT MICROBIOLOGY ANALYZERS (2) FPC (2) PPC REAGENT RENTAL
ABBOTT PROCESSING CENTERS (2) COMMANDER REAGENT RENTAL
ABBOTT ANALYZER AXSYM REAGENT RENTAL
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
ITEM REASON
-------------------------------------- -------------------------
<S> <C>
ABBOTT ANALYZERS (2) FLX, TDX REAGENT RENTAL
ABBOTT CHEMISTRY ANALYZERS (8) IMX REAGENT RENTAL
ABBOTT CHEMISTRY ANALYZER QUANTUM REAGENT RENTAL
</TABLE>
20
<PAGE> 21
EXHIBIT "D"
PHYSICIANS CLINICAL LAB
BURBANK
EQUIPMENT EXCLUDED UNDER THIS AGREEMENT
In addition to the equipment excluded in Sections 2.3 and 8.5, the following
shall also be excluded:
<TABLE>
<CAPTION>
ITEM REASON
---------------------------------------- --------------------------
<S> <C>
ABBOTT ANALYZER (5) IMX REAGENT RENTAL
ABBOTT ANALYZER (3) IMX REAGENT RENTAL
ABBOTT ANALYZER TDX REAGENT RENTAL
ABBOTT ANALYZER AXSYM WARRANTY
ABBOTT ANALYZER IMX REAGENT RENTAL
ABBOTT ANALYZER (2) TDX REAGENT RENTAL
OLYMPUS AUTOMATED CHEM ANALYZER (2) AU5200 REAGENT RENTAL
KEN STAR FLUID HANDLER STAR I REAGENT RENTAL
SYVA ANALYZER ETS REAGENT RENTAL
KALLESTAT CHEMISTRY ANALYZER (4) QM 300 REAGENT RENTAL
TOSOH ANALYZER AIA 1200 REAGENT RENTAL
TOSOH ANALYZER AIA 600 REAGENT RENTAL
HITACHI CHEMISTRY ANALYZER (2) SUPER UA WARRANTY
COBAS ANALYZER RESA REAGENT RENTAL
COULTER HEMATOLOGY ANALYZER MAXM WARRANTY
COULTER HEMATOLOGY ANALYZER STKS 807 LEASED
CORNING ANALYZER (2) ACS 180 REAGENT RENTAL
FULJITSU PHONE SYSTEM F9600 WARRANTY
</TABLE>
21
<PAGE> 22
EXHIBIT "D"
PHYSICIANS CLINICAL LAB
REMOTE SITES
EQUIPMENT EXCLUDED UNDER THIS AGREEMENT
In addition to the equipment excluded in Sections 2.3 and 8.5, the following
shall also be excluded:
<TABLE>
<CAPTION>
ITEM REASON
------------------------------------- -------------------------
<S> <C>
PLEASANTON
ABBOTT ANALYZER IMX REAGENT RENTAL
ABBOTT ANALYZER TDX REAGENT RENTAL
STOCKTON
ABBOTT ANALYZER IMX REAGENT RENTAL
VALLEJO
COULTER HEMATOLOGY ANALYZER LEASED
NAPA
ABBOTT ANALYZER TDX REAGENT RENTAL
SAN FRANCISCO
ABBOTT ANALYZER IMX REAGENT RENTAL
SANTA ROSA
ABBOTT ANALYZER COBAS MIRA REAGENT RENTAL
ABBOTT ANALYZER IMX REAGENT RENTAL
ABBOTT ANALYZER TDX REAGENT RENTAL
AUBURN
ABBOTT ANALYZER IMX REAGENT RENTAL
SAN JOSE
ABBOTT ANALYZER IMX REAGENT RENTAL
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
ITEM REASON
------------------------------------- -------------------------
<S> <C>
WALNUT CREEK
ABBOTT ANALYZER IMX REAGENT RENTAL
OAKHURST
ABBOTT HEMATOLOGY ANALYZER VELLDYNE 1600 REAGENT RENTAL
CENTURY CITY
ABBOTT ANALYZER IMX REAGENT RENTAL
SANTA BARBARA
ABBOTT ANALYZER TDX REAGENT RENTAL
ABBOTT ANALYZER IMX REAGENT RENTAL
MODESTO
COULTER HEMATOLOGY ANALYZER JT 3 LEASED
BAKERSFIELD
COULTER HEMATOLOGY ANALYZER JT 3 LEASED
</TABLE>
23
<PAGE> 24
EXHIBIT "E"
PHYSICIANS CLINICAL LAB
EQUIPMENT INVENTORY
Includes all PCL-owned technical equipment in use at the time of the survey,
June 5-7, 1995 to include all equipment on existing service contracts,
schedules included in Support Documents, herein and those items listed on the
Sacramento Company 0 "General Ledger Report" For Fiscal 1995 For Expense Code
2300, Fresno Company 1 "General Ledger Report" For Fiscal 1995 For Expense Code
2300, Burbank Company 2 (Glendale) "General Ledger Report" For Calendar Fiscal
1994 For Expense Code 2300, Burbank Company 2 (Newberry Park) "General Ledger
Report" For Calendar Fiscal 1994 For Expense Code 230, Burbank Company 2 (Santa
Barbara) "General Ledger Report" For Calendar Fiscal 1994 For Expense Code 230,
Corporate Company 10 "General Ledger Report" For Fiscal 19954 For Expense Code
2300 provided to the survey team (please refer to Agreement Section II "2.3
Equipment", Section VIII "8.5 Facility Equipment" and Exhibit "D" for those
items specifically limited or excluded from this Agreement). Approximately
ninety (90) days from the commencement of this Agreement, a detailed inventory
of all INCLUDED EQUIPMENT will be submitted as Exhibit "E" replacing this
temporary schedule. Equipment not on original survey or other material changes
in Physicians Clinical Lab operations is subject to modification in accordance
with this Agreement.
24
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement is made by and between PHYSICIANS CLINICAL
LABORATORY, INC., a Delaware corporation ("Company"), and RICHARD BROOKS, an
individual ("Employee").
Agreements
ARTICLE 1. TERM OF EMPLOYMENT
1.01. Employment. Employee shall be employed by the Company as its
Senior Vice President and Chief Financial Officer under the terms of this
Agreement.
1.02. Term. This Agreement becomes effective on January 23, 1995,
and shall remain in effect until January 22, 2000, unless terminated in
accordance with the terms of this Agreement. If the parties determine that it
is mutually desirable to negotiate an extension to this Agreement, such
negotiations must be completed no later than ninety (90) days prior to the
expiration date.
ARTICLE 2. EMPLOYEE DUTIES AND OBLIGATIONS
2.01. General Duties. As Senior Vice President and Chief Financial
Officer, Employee shall execute the duties and responsibilities customary to
that position, including management of the Finance Division of the Company, and
shall perform such other services normally connected therewith, subject at all
times to policies established by the Company.
2.02. Devotion to the Company's Business. Employee agrees to devote
his full energies, abilities and productive time to the performance of his
duties under this Agreement. Employee shall not engage in or provide the same,
similar or related services for other persons or entities, or engage in any
business activity that would interfere with Employee's performance of duties
hereunder, it being understood that in this Agreement shall preclude Employee
from devoting reasonable periods of time to serving as a director, trustee or
member of any committee or of any organization or business so long as; (a) such
organization or business does not engage in competition with the Company; and
(b) the
<PAGE> 2
activity does not materially interfere with the performance of Employee's
duties under this Agreement.
2.03. Maintenance of Automobile and Automobile Insurance. Employee
shall maintain both automobile for transportation on Company- related business,
and an automobile liability insurance policy covering such automobile. The
policy shall provide coverage in amounts equal to or greater than: (a) ONE
HUNDRED THOUSAND DOLLARS ($100,000) for bodily injury or death to any one
person in one accident; (b) THREE HUNDRED THOUSAND DOLLARS ($300,000) for
bodily injury or death in one accident; and (c) FIFTY THOUSAND DOLLARS
($50,000) for property damage in one accident, or such greater coverage as the
Company may determine from time to time in its sole discretion.
2.04. Physical Examination. To facilitate the Company's purchase of
life insurance, Employee agrees to submit to physical examinations at the
Company's request and at the Company's expense.
ARTICLE 3. COMPANY OBLIGATIONS
The Company shall provide Employee with the compensation and business
expense reimbursements specified below. The Company shall provide employee
with a private office, secretarial assistance, office equipment, supplies and
other facilities and services, suitable to employee's position and adequate for
the performance of his duties.
ARTICLE 4. COMPENSATION OF EMPLOYEE
4.01. Base Salary. The Company shall pay Employee a salary of ONE
HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($175,000) per year ("based salary"),
payable in equal semi-monthly installments and prorated for partial periods in
accordance with the Company's proration policy then in effect. The base salary
shall be increased yearly to reflect the increase, if nay, in the Consumer
Price Index for the Sacramento region. Any other increases in base salary
during the term of this Agreement shall be solely and completely within the
absolute discretion of the Company.
4.02. Quarterly Bonus; Determination and Payments. In addition to
the base salary, the Company shall pay Employee quarterly bonuses. The
quarterly bonuses paid in
2
<PAGE> 3
a fiscal year shall equal five percent (5%) of Employee's annual base salary,
and shall be payable to Employee if the following criteria are satisfied:
A. Seventy-five percent (75%) of Employee's bonus shall be
payable if the Company meets or exceeds the financial projections approved by
its Board of Directors for the quarter.
B. Twenty-five percent (25%) of Employee's bonus shall be
based on the subjective evaluation of Employee's performance by the Company's
President and Chief Executive Officer.
4.03. Performance Bonus. In addition to the base salary and
quarterly bonuses, Employee shall be entitled to a one-time-only bonus of
SEVENTY-FIVE THOUSAND DOLLARS ($75,000) if the Company collections exceed NINE
MILLION FIVE HUNDRED THOUSAND DOLLARS ()$9,500,000) for three successive
months, prior to September 1, 1995, and DSO is reduced to eighty-two (82) days
on that date.
4.04. Monthly Automobile Allowance. The Company shall pay Employee
an automobile allowance of FIVE HUNDRED DOLLARS ($500) per month. Half of the
monthly allowance shall be payable on both of the Company's pay days each
month.
4.05. Sick Leave. The Company shall provide Employee sick leave in
accordance with the Company's sick leave policies in effect as of the effective
date of this Agreement. These policies may be amended, at any time and from
time to time, in the sole and complete discretion of the Company's Board,
without regard to the terms of this Agreement and without Employee's consent or
agreement.
4.06. Vacation Leave. The Company shall provide Employee annual
vacation time in accordance with the Company's vacation policies in effect for
its executives as of the effective date of this Agreement. The Company's
current vacation policy provides for five (5) weeks of vacation per year, with
a maximum of seven and one-half (7-1/2) weeks of vacation time accrued at any
one time. Vacation time may be cashed out upon termination of employment.
These policies may be amended, at any time and from time to time, in the sole
and complete discretion of the Company's Board, without regard to the terms of
this Agreement and without Employee's consent or agreement.
3
<PAGE> 4
4.07. Company Plans. So long as Employee is employed by the
Company, Employee shall be and shall continue to be a full participate in any
and all benefit plans in which executives of the Company can participate,
including, without limitation, any retirement, stock option, stock purchase,
stock appreciation, group insurance, disability, salary continuation, sick
leave or other employee benefits plan, program or arrangement which may be in
effect from time to time. Currently, the Company provides its executive with
paid dependent health coverage (*except for a monthly administrative charge,
which is currently FOURTEEN DOLLARS ($14.00) per month) and a waiver of any
waiting period for commencement of healthcare coverage for the executive and
his or her dependents. Notwithstanding the foregoing, the terms of this
Agreement shall have no effect on any such plan, program or arrangement and the
Company may adopt, amend or terminate any such plan, at any time and from time
to time, in the Company's sole and complete discretion, without regard to the
terms of this Agreement and without Employee's consent or agreement.
4.08. Relocation Expenses. The Company will reimburse Employee for
all costs associated with relocating to Northern California including closing
costs and Realtor fees for sale of Employee's present home and for purchase of
a new home if the purchase occurs within eighteen (18) months of Employee's
employment and moving expenses for the transportation of household goods.
4.09. Grant of Options. In connection with Employee's employment
hereunder, the Company shall grant to employee options to acquire shares of the
Company's common stock under the Nonstatutory Stock Option Agreement attached
hereto as Exhibit A. The exercise price for stock subject to these options is
the current fair market value of the shares on the date of grant.
4.10. Additional Options. In addition, the Company shall request
that the Compensation Committee consider granting, in its discretion,
additional options to Employee to purchase Ten Thousand (10,000) shares of the
Company upon the sixth-month and twelfth-month anniversaries of the
commencement of Employee's employment with the Company.
ARTICLE 5. REIMBURSEMENT OF EXPENSES
4
<PAGE> 5
The Company shall reimburse Employee for those reasonably incurred
business expenses which are covered by the Company's expense reimbursement
policies in effect on the effective date of this Agreement. These policies may
be amended, at any time and from time to time, in the Company's sole and
complete discretion, without regard to the terms of this Agreement and without
Employee's consent or agreement. Notwithstanding any such amendment, employee
shall not retroactively be denied reimbursement for expenses incurred in
accordance with the expense reimbursement policies in effect at the time
Employee incurred the expenses. The Company shall reimburse Employee for
expenses incurred in accordance with this Article 5 within thirty (30) calendar
days of submission of receipts or other documents reasonably required by the
Company as evidence of such expenses.
ARTICLE 6. PROPRIETARY INFORMATION AND WORK PRODUCT
6.01. Proprietary Information. In the course of Employee's
relationship with the Company, Employee will have access to and will learn of
trade secrets, confidential information, proprietary information and the like
owned by the Company or developed and used in the course of the Company's
business (collectively, "Proprietary Information"). Employee agrees that, at
all times, both during and after the term of this Agreement, employee will keep
all Proprietary Information in confidence and trust, and will never directly or
indirectly disclose, appropriate or use the Proprietary Information except to
the extent necessary to fulfill Employee's performance of his duties under this
Agreement.
6.02. Ownership of Work Product. Employee agreed that any and all
intellectual property that Employee develops or produces, either individually
or in collaboration with others, in connection with the services provided by
Employee under this Agreement, shall be the sole property of the Company.
Employee acknowledges that the Company has furnished Employee with a copy of
Sections 2870 through 2872 of the California Code, and that Employee has read
and understood these statutes.
____________________________
(Employee's initials)
ARTICLE 7. TERMINATION OF EMPLOYMENT
5
<PAGE> 6
7.01. Termination For Cause. The Company may terminate employee's
employment for cause upon the happening of any of the following events: (a)
upon Employee's death; (b) upon Employee's habitual or willful breach of any
material provision of this Agreement; (c) if Employee shall fail to perform his
responsibilities under this Agreement in a fashion generally consistent with
the performance of other chief financial officers at businesses comparable to
the Company; (d) upon Employee's commission of a felonious act or an act of
dishonesty, theft, embezzlement, fraud or gross misrepresentation; or (e) upon
a Change in Control of the Company, as defined in the Separation Agreement
attached hereto as Exhibit B.
7.02. Return of Property. Upon any termination of this Agreement,
Employee shall immediately return to the Company all the Company property that
Employee may have in his possession or control.
7.03. Termination Upon Mutual Agreement. The parties to this
Agreement may terminate the Agreement upon mutual agreement set forth in
writing.
7.04. Termination By Employee. This Agreement shall terminate at
Employee's option and without prejudice to any other remedy to which Employee
may be entitled either at law, in equity or under this Agreement, under the
following circumstances:
a. If the Company (i) files a petition in bankruptcy court
or is adjudicated a bankrupt; (ii) institutes or permits to be instituted any
procedure in bankruptcy court for reorganization or rearrangement of its
financial affairs; (iii) has a receiver of its assets or property appointed
because of insolvency; or (iv) makes a general assignment for the benefit of
creditors;
b. As a result of the Company's having materially changed
Employee's compensation, function, duties or responsibilities, without the
express written consent of Employee, which change would cause Employee's
position with the Company to become of less dignity, responsibilities,
importance or scope from the position and attributes that applied to him
immediately period to the change; or
c. Upon the Company's willful or permanent material breach
of its obligations to Employee hereunder.
Termination shall be effective upon the delivery by Employee to the
Company of a Notice of Intended Termination (the "Notice") at least ten (10)
days prior to termination by
6
<PAGE> 7
Employee. The Notice shall state with particularity the basis of such
termination The Company shall have ten (10) days after receipt of such Notice
to remedy the facts and circumstances underlying the termination. Employee
shall make a good faith determination immediately after such ten (10)-day
period whether such facts and circumstances have been remedied and shall
communicate Employee's determination in writing to the Company.
7.05. Notice by Company. At the Company's option and without
prejudice to any other remedy to which the Company may be entitled either at
law, in equity or under this Agreement, the Company may terminate this
Agreement for the reasons stated in this Article 7 by giving thirty (30) days'
written notice of termination to employee. Such notice period shall be
increased by one (1) week for each full year of employee's employment beyond
three (3) years of employment, for the duration of the five (5) year term of
this Agreement. The notice of termination required under this Article shall
specify the grounds for termination. At the request of the Company and in its
sole discretion, Employee may be relieved of his duties as Senior Vice
President and Chief Financial Officer immediately upon receipt of notice of
termination. Notwithstanding the foregoing, Employee shall be entitled to
receive all compensation required to be paid under this Agreement during the
notice period, until final termination of employment.
7.06. Payment Upon Termination. In the event of termination of
this Agreement for any reason under this Article 7, Employee shall be entitled
to (1) all accrued and unpaid salary, bonus and vacation benefits due pursuant
to this Agreement (computed pro rata up to and including the date of
termination); and (2) an amount equal to all incurred but nonreimbursed
expenses reimbursable pursuant to this Agreement. In addition, the Company
shall pay for COBRA health coverage for a period of eighteen (18) months from
the date of termination, or until Employee secures health insurance coverage
through other employment, whichever period is shorter. Employee shall be
entitled to no further compensation as of the date of termination.
ARTICLE 8. MISCELLANEOUS PROVISIONS
8.01. Arbitration. Any controversy or claim arising out of or
relating to this Agreement or & breach of this Agreement shall be settled by
binding arbitration in Sacramento County, California, in accordance with the
Commercial Arbitration Rules of the
7
<PAGE> 8
American Arbitration Association or as otherwise mutually agreed. Judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The parties shall bear their own costs and expenses of
arbitration; however, the arbitrator(s) may award costs and reasonable
attorneys' fees to the prevailing party if it would be equitable to do so.
8.02. Partial Invalidity. The invalidity or unenforceability of any
provision of this Agreement shall in no way affect the validity or
enforceability of any other provision of this Agreement.
8.03. Notices. Notices or other communications given under this
Agreement must be in writing and must be served personally or transmitted by
first class mail, postage prepaid. Notices will be deemed received either at
the time of actual receipt or, if mailed as provided above, on the third (3rd)
business day after mailing, whichever occurs first. Notices must be directed
to the parties at their respective addresses set forth below in the signature
blocks to this Agreement or at such other addresses as the parties may indicate
by notice.
8.04. Waiver. Failure to insist upon strict compliance with any
provision of this Agreement will not be deemed to be a waiver of such provision
or any other provision. No waiver shall be binding unless executed in writing
by the party making the waiver.
8.05. Assignment. The rights and obligations of the Company under
this Agreement shall inure to the benefit of, and shall be binding upon, the
successors and assigns of the Company. The rights and obligations of Employee
are personal and not assignable.
8.06. Entire Agreement. This Agreement constitutes the entire
agreement between the Company and Employee as it relates to the employment
relationship described in this Agreement. This Agreement supersedes all prior
and contemporaneous agreements, understandings and representations between the
parties, whether written or oral. No supplement, modification or amendment of
this agreement will be binding unless executed in writing by both the Company
and Employee.
8.07. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, exclusive of
its laws regarding the conflict of laws.
8
<PAGE> 9
8.08. Ambiguities. This Agreement has been negotiated at arm's
length and between persons sophisticated and knowledgeable in the matters dealt
with in this Agreement. In addition, each party has been represented by
experienced and knowledgeable legal counsel. Accordingly, any rule of law
(including Civil Code Section 1654) or legal decision that would require
interpretation of any ambiguities in this Agreement against the party that has
drafted it is not applicable and is waived. The provisions of this Agreement
shall be interpreted in a reasonable manner to effect the purpose of the
parties.
8.09. Determination by the Board. Any matter to be determined by the
Company's Board shall be binding upon Employee if determined by an appropriate
committee of the Board to which such authority has been delegated by the Board.
Dated: September 8, 1995.
COMPANY:
PHYSICIANS CLINICAL LABORATORY INC.,
a Delaware corporation
/S/NATHAN L. HEADLEY
-----------------------------------
By: Nathan L. Headley
--------------------------------------
Its: President and Chief Financial Officer
-------------------------------------
Address: 2495 Natomas Park Drive,
Suite 600
Sacramento, CA 95833
EMPLOYEE:
/S/RICHARD M. BROOKS
--------------------------------
RICHARD BROOKS
Address: 4717 Vista Cove Place
Loomis, CA 95650
9
<PAGE> 10
EXHIBIT A
OPTION AGREEMENT
1994 NONQUALIFIED STOCK OPTION PLAN
OF PHYSICIANS CLINICAL LABORATORY, INC.:
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of January 23, 1995, between
PHYSICIANS CLINICAL LABORATORY, INC., a Delaware corporation (the "Company"),
and RICHARD M. BROOKS (the "Optionee").
Recitals
A. The Company's Board of Directors established the Plan on
January 13, 1994 in order to provide selected employees and nonemployee
directors of the Company with an opportunity to acquire the Stock of the
Company.
B. The Plan was approved by the Company's shareholders on August
23, 1994.
C. The Plan authorizes the grant of the Option described in this
Agreement by the Committee to the Optionee.
NOW, THEREFORE, it is agreed as follows:
ARTICLE 1. GRANT OF OPTION.
1.01. Option. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase Twenty Thousand (20,000)
Shares. The purchase price for each Share shall be Ten and 50/100 Dollars
($10.50). This Option is not intended to be an incentive stock option
described in section 421 of the Code.
1.02. Stock Plan. This Option is wanted pursuant to the Plan, a
copy of which the Optionee acknowledges having received, read and understood.
The provisions of the Plan are incorporated into this Agreement by this
reference.
ARTICLE 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
This Option and the rights and privileges conferred hereby shall not
be transferred, other than by will, by a beneficiary designation executed by
the Optionee and delivered to the Company, or by the laws of descent and
distribution. This Option may be exercised during the lifetime of the Optionee
only by the Optionee, or by the Optionee's guardian or legal representative.
The term "transfer" shall include assign, dispose, pledge or hypothecate
whether
10
<PAGE> 11
by operation of law or otherwise, or be made subject to sale under execution,
attachment or similar process of this Option or any right or interest in this
Option. Upon any attempt to transfer this Option, or of any right or privilege
conferred hereby, contrary to the provisions hereof, or upon any attempted sale
under any execution, attachment or similar process upon the rights and
privileges conferred hereby, this Option and the rights and privileges
conferred hereby shall immediately become null and void.
ARTICLE 3. RIGHT TO EXERCISE.
3.01 Vesting. The Optionee may exercise this Option only to the
extent that the Optionee's interest in this Option has vested. Subject to the
conditions stated in this Agreement, this Option shall vest in installments as
follows:
<TABLE>
<CAPTION>
Number of Percentage of
Vesting Period Shares Shares Exercisable
- ----------------------- ----------- --------------------
<S> <C> <C>
Date of Grant 0 0%
On January 23, 1996 4,000 20%
On January 23, 1997 8,000 40%
On January 23, 1998 12,000 60%
On January 23, 1999 16,000 80%
On January 23, 2000 20.000 100%
------ ----
Total 20,000 100%
====== ====
</TABLE>
In the case of each vesting period, the number of Shares, if any, previously
purchased under this Option shall be deducted from the amount of Shares the
Optionee is entitled to acquire.
3.02. Change of Control. Notwithstanding the vesting
schedule set forth in Section 3.01 of this Agreement, from and after a Change
of Control, the Optionee shall have the right to exercise this option in whole
or in part without regard to the preceding vesting schedule, within thirty (30)
days of the occurrence of a Change of Control. This option shall continue to be
subject to Section 10.02 of this Agreement in the event of a merger,
consolidation or sale of the Company, if the Optionee does not exercise this
option.
3.03. Periods of Nonexercisability. This Section 3.03 shall
prevail over any other portion of this Agreement. The Committee shall have the
right to designate as many as two (2)
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<PAGE> 12
periods of time, each of which shall not exceed twelve (12) consecutive months
in length, during which this Option shall not be exercisable. The Committee
may only make such designation if it determines (in its sole discretion) that
such a limitation on exercise could in any way facilitate (i) a lessening of
any restriction on transfer pursuant to the Securities Act or any state
securities laws on any issuance of securities by the Company, (ii) the
registration or qualification of any securities by the Company under the
Securities Act or any state securities laws, or (iii) the perfection of any
exemption from the registration or qualification requirements of the Securities
Act or any applicable state securities laws for the issuance or transfer of any
securities. This limitation on exercise shall not alter the vesting schedule
set forth in Section 3.01 or the Change in Control provisions set forth in
Section 3.02 other than to limit the periods during which this Option shall be
exercisable. The Optionee shall be notified in writing in advance of any of
these designations by the Company.
ARTICLE 4. EXERCISE PROCEDURES.
4.01. Notice of Exercise.
A. The Optionee may exercise this Option by
giving notice to the Chief Financial Officer of the Company. In the notice,
the Optionee shall specify (i) the election to exercise this Option; (ii) the
number of Shares to be issued; and (iii) the form of payment for the Shares.
The Optionee shall sign the notice. The Optionee shall deliver the notice to
the Chief Financial Officer; and, at the time of giving the notice, the
Optionee shall make payment in a form permissible under Article 5 for the full
amount of the Purchase Price. The notice shall be in the form attached as
Exhibit 4.01.
B. A representative of the Optionee may
exercise this Option on behalf of the Optionee in accordance with the
procedures of Section 4.01A. In addition to the procedures of Section 4.01A,
the representative shall provide proof satisfactory to the Company of the
representative's authority to act on the Optionee's behalf as a condition of
the representative's right to exercise this Option.
4.02. Issuance of Shares. After receiving a proper notice of
exercise and full payment for the Shares, the Company shall issue a certificate
or certificates for the shares subject to this Option exercised by the
Optionee, registered in the name of the Optionee. If the Optionee specifies in
the notice of option exercise, the Company shall issue such certificates in the
names
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<PAGE> 13
of the Optionee and the Optionee's spouse as community property or as joint
tenants with right of survivorship. The Company shall deliver any certificates
representing the Shares to the Optionee.
ARTICLE 5. PAYMENT FOR STOCK.
5.01. General Rule. The Optionee shall pay for the entire
Purchase Price in lawful money of the United States or the vested portion of
the Optionee's deferred compensation account, if any, at the time when such
Shares are purchased. However, the Committee (at its sole discretion) may
accept payment in the form described in Section 5.02 below.
5.02. Surrender of Stock. To the extent that applicable law
permits, the Optionee may pay for Shares with Shares owned by the Optionee for
more than one (1) year. The Optionee must surrender the Shares to the Company
in good form for transfer. Such Shares shall be valued at their Fair Market
Value on the date when the new Shares are purchased under the Plan.
ARTICLE 6. TERM AND EXPIRATION.
6.01. Basic Term. This Option shall expire on January 22,
2005, unless extended due to a delay as described in Section 3.03 with the
delay occurring after January 22, 2003. If a delay in exercising this Option
(as described in Section 3.03) occurs after January 22, 2003, the term of this
Option shall be extended by one (1) day for each day of such delay occurring
after January 22, 2003.
6.02. Termination of Employment (Except by Death). If the
Optionee's Employment terminates for any reason other than death, then this
Option shall expire on the earliest of the following occasions:
A. The date determined pursuant to Section
6.01, above;
B. The date two hundred seventy (270) days
after the termination of the Optionee's
Employment for any reason other than
Permanent Disability; or
C. The second anniversary of the termination
of the Optionee's Employment by reason of
Permanent Disability.
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<PAGE> 14
The Optionee may exercise all or part of this Option at
any time before its expiration under the preceding sentence, but only to the
extent that this Option had become exercisable before the Optionee's Employment
terminated or became exercisable as a result of the termination. The balance
of this Option shall lapse when the Optionee's Employment terminates. If the
Optionee dies after the termination of the Optionee's Employment but before the
expiration of this Option, all or part of this Option may be exercised (prior
to expiration) by the executors or administrators of the Optionee's estate or
by any person who has acquired this Option directly from the Optionee by
bequest, beneficiary designation or inheritance, but only to the extent that
this Option had become exercisable before the Optionee's employment terminated
or became exercisable as a result of the termination.
6.03. Leaves of Absence. For purposes of this Article 6,
Employment of the Optionee shall be deemed to continue during any period when
the Optionee is on military leave, sick leave or other bona fide leave of
absence (as determined by the Committee, in its sole discretion).
6.04. Death of Optionee. If the Optionee dies during the
Optionee's Employment, then this Option shall expire on the earlier of the
following dates:
A. The expiration date determined pursuant
to Section 6.01, above; or
B. The date twenty-four (24) months after the
Optionee's death.
All or part of this Option may be exercised at any time
before its expiration under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired this
Option directly from the Optionee by bequest, beneficiary designation or
inheritance, but only to the extent that this Option had become exercisable
before the Optionee's death or became exercisable as a result of the Optionee's
death. The balance of this Option shall lapse when the Optionee dies.
ARTICLE 7. LEGALITY OF INITIAL ISSUANCE.
Shares shall be issued upon the exercise of this Option only if the
issuance and delivery of such Shares complies with (or is exempt from) all
applicable requirements of law, including (without limitation) the Securities
Act, the rules and regulations promulgated thereunder, state securities laws
and regulations, and the regulations of any stock exchange on which the
Company's securities may then be listed.
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<PAGE> 15
ARTICLE 8. NO REGISTRATION RIGHTS.
The Company may, but shall not be obligated to, register or qualify
the resale by the Optionee of Shares issued under this Option, under the
Securities Act or any applicable law. The Company shall not be obligated to
take any affirmative action in order to cause a resale of such Shares to comply
with any law.
ARTICLE 9. RESTRICTIONS ON TRANSFER OF SHARES.
9.01. Restrictions. The Committee may impose restrictions
upon the sale, pledge or other transfer of such Shares (including the placement
of appropriate legends on stock certificates) if, in the judgment of the
Committee and its counsel, such restrictions are necessary or desirable in
order to achieve compliance with the Securities Act, the securities laws of any
state or any other law or with restrictions imposed by the Company's
underwriters.
9.02. Administration. Any determination by the Committee and
its counsel in connection with any of the matters set forth in this Article 9
shall be conclusive and binding on the Optionee and all other persons.
ARTICLE 10. ADJUSTMENT OF SHARES.
10.01. General. In the event of a subdivision of the
outstanding Stock, a declaration of a dividend payable in Shares, a declaration
of a dividend payable in a form other than Shares in an amount that has a
material effect on the value of Shares, a combination or consolidation of the
outstanding Stock (by reclassification or otherwise) into a lesser number of
Shares, a recapitalization or a similar occurrence, the Committee shall make
all appropriate adjustments in one or more of (i) the number of Shares
available for future grants under Article 3; (ii) the number of Shares covered
by each outstanding Option; or (iii) the Exercise Price under each outstanding
Option.
10.02. Merger; Consolidation; Sale. If the Company is a party
to a merger or consolidation and the Company is not the surviving corporation
or if there is a sale of all or substantially all of the Company's assets other
than a sale or transfer to a Subsidiary, this Option shall be subject to the
agreement of merger, consolidation or sale. Such agreement may provide as
determined by the Board of Directors (i) for the assumption of this Option by
the surviving
15
<PAGE> 16
corporation or its parent; (ii) for the continuation of this Option by the
Company, if the Company is the surviving corporation; (iii) for payment for a
cash settlement equal to (a) the difference between the amount to be paid for
one (1) Share under such agreement and the Exercise Price multiplied (b) by the
number of Shares subject to the Option, vested or unvested, or both, as
determined by the Company; or (iv) for the acceleration of the vesting of this
Option, followed by the cancellation of this Option if not exercised, in all
other cases other than clause (iii) without the Optionee's consent. (The
Optionee's consent shall be required for a cash settlement.) A cancellation
shall not occur earlier than thirty (30) days after such accelerated purchase
right is effective and the Optionee has been notified of such accelerated
purchase right. If this Option has been outstanding for less than six (6)
months and one (1) day, a cancellation need not be preceded by the granting of
the accelerated purchase right. Upon a Change of Control, the terms of this
section are applicable only if the Optionee chooses not to exercise this Option
in full pursuant to Section 3.02, and shall be applicable only to that portion
of this Option remaining after any partial exercise of this Option under
Section 3.02 or an election not to exercise under Section 3.02.
10.03. Reservation of Rights. Except as provided in this
Article 10, the Optionee shall have no rights by reason of (i) any subdivision
or consolidation of shares of stock of any class; (ii) the payment of any
dividend; or (iii) any other increase or decrease in the number of shares of
stock of any class. Any issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number
or Exercise Price of the Shares subject to this Option. The grant of this
Option shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure, to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
ARTICLE 11. MISCELLANEOUS PROVISIONS.
11.01. Withholding Taxes. If the Committee determines that the
Company is subject to federal, state or local or foreign withholding
obligations as a result of the exercise of this Option, the Optionee, as a
condition to the exercise of this Option, shall make arrangements satisfactory
to the Committee to enable the Company to satisfy all withholding requirements.
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<PAGE> 17
11.02. Rights as a Stockholder. The Optionee, or a transferee
of the Optionee, shall have no rights as a stockholder with respect to any
Shares covered by the Optionee's Option until the date of the issuance of the
stock certificate for such Shares. No adjustments shall be made, except at
provided in Article 10.
11.03. No Employment Rights. No provision of the Plan, nor
any provision in this Agreement, nor any other action taken pursuant to the
Plan shall be construed to give the Optionee a right to continue the Optionee's
Employment with the Company or any of its Subsidiaries for any period of time.
Subject to any written agreement between the Company or any of its Subsidiaries
and the Optionee providing to the contrary, the Company or any of its
Subsidiaries reserves the right to terminate the Optionee's Employment at any
time and for any reason.
11.04. Notice. Any notice required by the terms of this
Agreement shall be given in writing and shall be deemed effective upon personal
delivery or two (2) days after the date of deposit with the United States
Postal Service, by registered or certified mail with postage and fees prepaid
and addressed to the party entitled to such notice at the address shown below
such party's signature on this Agreement, or at such other address as such
party may designate by ten (10) days advance written notice to the other party
to this Agreement.
11.05. Entire Agreement. This Agreement and the Plan constitute the
entire contract between the parties hereto with regard to the subject matter
hereof. The terms of the Plan shall govern to the extent that there is any
conflict between the terms of the Plan and the terms of this Agreement.
11.06. Choice of Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California
(exclusive of its laws regarding the conflict of laws), as such laws are
applied to contracts entered into and performed in such state. The state
courts of California shall have exclusive jurisdiction over any judicial
proceeding relating to any dispute arising out of the interpretations
performance or breach of this Agreement.
ARTICLE 12. DEFINITIONS.
12.01. Agreement. Shall mean this Nonstatutory Stock Option
Agreement.
12.02. Board of Directors. Shall mean the Board of Directors
of the Company, as constituted from time to time.
17
<PAGE> 18
12.03. Change of Control. Shall mean the occurrence of any of
the following events:
A. Any time any Person, other than (a) the
Company, (b) any Subsidiary, (c) any employee benefit plan or stock ownership
plan of the Company or any Subsidiary, (d) the Current Control Group, or (e)
any successor to the Current Control Group, files a Schedule 13D or 14D-1 under
the Exchange Act disclosing that the Person has become the beneficial owner of
fifty percent (50%) or more of the Company's Voting Stock;
B. Any time the Company is a party to a merger
or consolidation where the holders of the Company's Voting Stock Immediately
prior to the merger or consolidation have less than a majority of the Voting
Stock, directly or indirectly, of the surviving corporation immediately after
the merger or consolidation;
C. Any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; and
D. The stockholders of the Company approve a
plan or proposal for the liquidation or dissolution of the Company.
12.04. Code. Shall mean the Internal Revenue Code of 1986, as
amended.
12.05. Committee. Shall mean the committee of the members of
the Board of Directors, as described in Section 3.01 of the Plan.
12.06. Current Control Group. Shall mean the Company, any
Subsidiary, Sutter Ambulatory Care Corporation ("SACC"), Mercy Healthcare
Sacramento ("Mercy"), Methodist Hospital of Sacramento ("Methodist"), or any
successor to any of SACC, Mercy or Methodist by merger, sale or transfer of
substantially all assets or similar transaction. Current Control Group shall
also include any person to whom any of the members of the Current Control Group
transfer their shares of the Company's Voting Stock if the person is as
follows:
A. With respect to SACC: (i) any nonprofit
corporation whose sole corporate member is Sutter Health or SACC; or (ii)
Sutter Health;
B. With respect to Mercy: (i) any nonprofit
corporation whose sole corporate member is Mercy or Catholic Healthcare West;
or (ii) Catholic Healthcare West; and
C. With respect to Methodist: (i) any
nonprofit corporation whose sole corporate member is (x) Methodist, (y) Mercy
or (z) Catholic Healthcare West; or (ii) Catholic
18
<PAGE> 19
Healthcare West; provided, however, that Methodist has not undergone a change
of control as defined in the Amended and Restated Voting Agreement among SACC,
Mercy and Methodist.
12.07. Date of Grant. Shall mean the date as of which this
Agreement is entered into.
12.08. Employment. Shall mean employment by the Company or a
Subsidiary.
12.09. Exchange Act. Shall mean the Securities Exchange Act
of 1934, as amended.
12.10 Exercise Price. Shall mean the amount for which one
(1) Share may be purchased upon exercise of this Option, as specified in
Section 1.01.
12.11. Fair Market Value. Shall mean the fair market value of
a Share, as determined by the Committee in good faith. Such determination
shall be conclusive and binding on all persons.
12.12. Option. Shall mean a nonstatutory stock option granted
under the Plan and entitling the Optionee to purchase any Shares.
12.13. Permanent Disability. Shall mean that the Optionee is
unable to substantially perform the Optionee's duties to the Company by reason
of any medically determinable physical or mental impairment that can be
expected to result in death or which has lasted, or can be expected to last,
for a continuous period of not less than eighteen (18) months.
12.14. Person. Shall mean any person as defined in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
12.15. Plan. Shall mean the 1994 Nonqualified Stock Option
Plan of Physicians Clinical Laboratory, Inc., as in effect of the Date of
Grant.
12.16. Purchase Price. Shall mean the Exercise Price
multiplied by the number of Shares with respect to which this Option is being
exercised.
12.17. Securities Act. Shall mean the Securities Act of
1933, as amended.
12.18. Share. Shall mean one (1) Share of Stock, as adjusted
in accordance with Article 10 (if applicable).
12.19. Stock. Shall mean the common stock of the Company.
12.20. Subsidiary. Shall mean any corporation, if the Company
or one or more other Subsidiaries own, individually or collectively, not less
than fifty percent (50%) of the total combined voting power of all classes of
outstanding stock of such corporation. A Corporation
19
<PAGE> 20
that attains the status of a Subsidiary on a date after the adoption of the
Plan shall be considered a Subsidiary commencing as of such date.
12.20. Voting Stock. Shall mean the capital stock of the
Company having the power to vote in the election of directors under ordinary
circumstances.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its officer duly authorized to act on behalf of the
Committee, and the Optionee has personally executed this Agreement.
OPTIONEE
-------------------------------
RICHARD M. BROOKS
Optionee's Address:
4717 Vista Cove Place
Loomis, CA 95650
COMPANY
PHYSICIANS CLINICAL
LABORATORY, INC., a Delaware
corporation
By:
----------------------------
Its:
--------------------------
Company's Address:
2495 Natomas Park Drive,
Suite 600
Sacramento, CA 95833
20
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands and dollars, except ratio information)
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, (29)
---------------------------------------------------------------
1996 1995
--------------------------------- ------------------------
<S> <C> <C> <C>
1. Earnings
Pre-tax income (77,744) (5,596)
Interest expense(1) 12,899 9,013
------- ------
(64,845) 3,417
======= ======
2. Fixed Charges
Interest Expense(1) 12,899 9,013
======= ======
3. Ratio (1 divided by 2) N/A(A) 0.38x
======= ======
</TABLE>
(A) Earnings are inadequate to cover fixed charges. The amount of the
deficiency is $77,744.
______________________________
(1) Consists of interest on debt and imputed interest on capital leases.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Quantum Clinical Laboratories, Inc., a California corporation (100% owned)
Diagnostic Laboratories, Inc., a California corporation (100% owned)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement File No. 33-62360.
/s/ Arthur Andersen LLP
Sacramento, California
August 1, 1996
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ NATHAN L. HEADLEY
----------------------------
Nathan L. Headley
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ STHPHEN L. BAUER
----------------------------
Stephen N. Bauer
2
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ TODD A. MURRAY
----------------------------
Todd A. Murray
3
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ RAYMOND NELSON
----------------------------
Raymond Nelson
4
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ NEIL L. PENINGTON
----------------------------
Neil L. Pennington
5
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ VINCENT H. SCHMITZ
----------------------------
Vincent H. Schmitz
6
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ DENNIS H. TOOTELIAN
----------------------------
Dennis H. Tootelian
7
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ JOHN R. WHEATON
----------------------------
John R. Wheaton
8
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ JOHN R. BURGIS
----------------------------
John R. Burgis
9
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ MICHAEL T. KUTZMAN
----------------------------
Michael T. Kutzman
10
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints Nathan L. Headley and Richard M. Brooks, and each of
them, the true and lawful attorney and attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf as a director or officer or both, as the case may be, of
Physicians Clinical Laboratory, Inc., a Delaware corporation (the "Company"),
the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 29,
1996, and all amendments thereto, and to deliver and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney or
attorneys-in-fact, and each of them with or without the others, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney or attorneys-in-fact, or any of them or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney this 12th day of July, 1996.
/s/ RICHARD M. BROOKS
----------------------------
Richard M. Brooks
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 391,815
<SECURITIES> 0
<RECEIVABLES> 18,775,604
<ALLOWANCES> 4,632,000
<INVENTORY> 1,370,742
<CURRENT-ASSETS> 16,524,448
<PP&E> 36,125,738
<DEPRECIATION> 19,196,157
<TOTAL-ASSETS> 91,412,379
<CURRENT-LIABILITIES> 152,455,033
<BONDS> 0
0
0
<COMMON> 60,331
<OTHER-SE> (64,672,915)
<TOTAL-LIABILITY-AND-EQUITY> 91,412,379
<SALES> 90,391,851
<TOTAL-REVENUES> 90,391,851
<CGS> 31,881,339
<TOTAL-COSTS> 127,359,953
<OTHER-EXPENSES> 383,375
<LOSS-PROVISION> 30,538,625
<INTEREST-EXPENSE> (12,898,919)
<INCOME-PRETAX> (80,727,736)
<INCOME-TAX> (1,543,250)
<INCOME-CONTINUING> (79,184,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79,184,486)
<EPS-PRIMARY> (13.13)
<EPS-DILUTED> 0
</TABLE>
