<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ending November 30, 1996
Commission File Number 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 68-0280528
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 C Street, Suite 100E, Sacramento, CA 95816
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 325-2024
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None
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(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Number of shares of common stock outstanding as of May 19, 1997 was 6,071,419.
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INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
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<S> <C>
Condensed Consolidated Balance Sheets as of November 30, 1996 and 3
February 29, 1996
Condensed Consolidated Statements of Operations for the three and nine 4
months ended November 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the three and nine 5
months ended November 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of 14
Operations for the three and nine months ended November 30, 1996 and
1995
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 3. Defaults on Senior Securities 27
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 31
</TABLE>
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1996 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 29,
ASSETS 1996 1996
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,172,056 $ 391,815
Accounts receivable, net 12,666,125 13,793,604
Notes receivable 350,000 350,000
Supplies inventory 1,167,041 1,370,742
Other current assets 888,038 618,287
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Total current assets 17,243,260 16,524,448
EQUIPMENT AND IMPROVEMENTS, NET 11,428,054 16,929,581
INTANGIBLE ASSETS, NET 53,952,672 57,470,061
OTHER ASSETS 500,973 488,289
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Total assets $ 83,124,959 $ 91,412,379
============= =============
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Debtor in Possession Borrowings $ 2,000,000 $ 0
Current Portion of Long Term Debt 0 123,880,031
Accounts payable 506,645 12,185,439
Accrued payroll & other 1,468,932 16,389,563
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Total current liabilities 3,975,577 152,455,033
LONG-TERM DEBT 0 3,569,930
LIABILITIES SUBJECT TO COMPROMISE 167,441,386 0
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Total liabilities 171,416,963 156,024,963
STOCKHOLDERS' DEFICIT
Common Stock 60,713 60,331
Paid-in capital 15,570,687 15,536,906
Retained earnings (deficit) (103,923,404) (80,209,821)
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Total stockholders' deficit (88,292,004) (64,612,584)
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Total liabilities and stockholders' deficit $ 83,124,959 $ 91,412,379
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
NET REVENUE $ 15,262,276 $ 21,613,948 $ 49,656,211 $ 70,829,764
DIRECT LABORATORY COST 5,598,350 7,599,302 17,673,173 24,283,892
------------ ------------ ------------ ------------
Gross Profit 9,663,926 14,014,646 31,983,038 46,545,872
LABORATORY SUPPORT COST 4,875,379 6,318,388 15,014,401 18,960,600
------------ ------------ ------------ ------------
Laboratory Profit 4,788,547 7,696,258 16,968,637 27,585,272
OVERHEAD EXPENSE 9,133,214 10,496,512 27,295,122 31,108,328
CREDIT RESTRUCTURING EXPENSE 27,618 498,990 265,922 3,011,203
WRITE DOWN OF ACCOUNTS
RECEIVABLE TO NET REALIZABLE
VALUE 2,056,920 0 5,056,920 0
Operating Loss (4,372,285) (5,356,164) (10,592,407) (11,591,179)
INTEREST EXPENSE AND OTHER, net 3,604,665 3,400,724 13,121,167 9,217,040
INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
Net Income Loss ($ 7,976,950) ($ 8,756,888) ($23,713,574) ($20,808,219)
============ ============ ============ ============
LOSS PER SHARE:
Primary ($1.31) ($1.45) ($3.91) ($3.44)
Fully Diluted N/A N/A N/A N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Primary 6,071,000 6,031,000 6,060,000 6,049,000
Fully Diluted N/A N/A N/A N/A
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR IN POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($23,713,574) ($20,808,219)
adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 7,314,567 8,877,377
Provision for doubtful accounts 3,555,217 3,169,387
Write-down of accounts receivable to net realizable
value 0 5,056,920
Credit restructuring expense 0 1,450,140
Write-down of tenant improvements related to
abandoned Southern California laboratory 1,804,082
Changes in operating assets and liabilities
(increase) decrease in accounts receivable (2,427,736) (7,945,688)
Net decrease (increase) in inventories,
prepaid costs and other assets (78,742) 7,198,334
(Decrease) increase in accounts payable
and accrued expenses 12,889,742 2,833,804
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Net cash provided by (used in) operating activities (656,444) (167,945)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of intangible assets in connection with acquisitions 0 (285,544)
Acquisition of equipment and leasehold improvements (99,732) (1,892,939)
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Net cash provided by (used in) investing activities (99,732) (2,178,483)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long term debt 3,338,423 5,852,239
Payments of principal on long term debt (836,169) (2,636,445)
Proceeds from sale of capital stock 34,163 0
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Net cash provided by financing activities 2,536,417 3,215,794
------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,780,241 869,366
CASH AND CASH EQUIVALENTS, beginning of period 391,815 181,896
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,172,056 $ 1,051,262
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $0 $ 4,361,000
============ ============
Cash paid for income taxes $0 $0
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) REORGANIZATION AND BASIS OF REPORTING
On November 8, 1996 (the "Petition Date"), Physicians Clinical
Laboratory, Inc., a debtor in possession ("PCL") and its subsidiaries, Quantum
Clinical Laboratories, Inc., Regional Reference Laboratory Governing
Corporation, Diagnostic Laboratories, Inc. and California Regional Reference
Laboratory (collectively, the "Debtors") commenced reorganization cases (the
"Bankruptcy Cases") by filing voluntary petitions for relief under chapter 11,
Title 11 of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California, San Fernando Valley
Division (the "Bankruptcy Court"). For purposes of this Report, unless otherwise
referenced, the defined term "Company" shall apply to PCL and its consolidated
group of subsidiaries.
During the fiscal quarter ended November 30, 1996, the liquidity and
operations of PCL continued to be adversely affected by downward pressure on
reimbursement reserves, billing system/process challenges and accounts
receivable collection problems. As previously disclosed, the Company has been in
default since September 1995 with respect to principal and interest judgments
with respect to approximately $80.9 million of secured indebtedness. The Company
has also been in default since September 1995 with respect to interest payments
related to its $40 million 7.5% Convertible Subordinated Debentures due 2000
(the "Debentures") and the Notes issued by the Company in connection with the
acquisition of Medical Group Pathology Laboratory and Pathologists' Clinical
Laboratories of Glendale, Inc.
From September 1995 through the Petition Date, the Company experienced
severe cash flow problems, a reduction in third-party payor reimbursement rates,
billing and collection problems and effects of significant changes in the health
care industry. As a result of their inability to pay their obligations when they
became due, as well as the poor industry conditions referred to above, the
Company began taking steps to seek an infusion of new capital or a strategic
transaction (e.g., a merger or sale of the business). The Company concluded that
absent the provision of new capital or consummation of a strategic transaction,
the Company would not be likely to be able to continue to exist.
Accordingly, in June 1995, the Company retained the investment banking
firm of Donaldson, Lufkin & Jenrette ("DLJ") to seek either a strategic
transaction or a capital infusion for the Company. From June 1995 through the
Petition Date, DLJ and the Company's Board of Directors engaged in discussions
with numerous industry parties as well as financial institutions, with respect
to a potential transaction or transactions that could provide the Company with
sufficient liquidity to survive as a going concern.
As a result of the efforts of the Company and DLJ, only one offer to
make an investment in the Company surfaced that the Company believed was
favorable to its creditors and shareholders. This offer was made by Nu-Tech
Bio-Med, Inc. ("Nu-Tech") in conjunction with the Company's senior lenders,
Oaktree Capital Management, LLC, The Copernicus Fund, L.P., DDJ Overseas Corp.,
Belmont Fund, L.P., Belmont Capital Partners, II, L.P. and Cerberus Partners,
L.P. (collectively, the "Senior Lenders"). After months of negotiations, on
November 7, 1996, the Company, Nu-Tech and the Senior Lenders entered into an
agreement providing for a new investment of approximately $15 million into the
Company and an overall restructuring of the Company's balance sheet (the
"Prepetition Termsheet").
The Prepetition Termsheet formed the basis for the Company's plan of
reorganization (see Note 3 - "Prepetition Termsheet and Plan of Reorganization,"
herein), and paved the way for the Company's chapter 11 filing, the
restructuring of the Company's debt and the acquisition of a majority of the
Company by Nu-Tech, all of which the Company hopes to consummate while in
chapter 11. Representatives of each of the respective Debtors determined that
filing the chapter 11 petitions would best give the Debtors the needed time and
flexibility to consummate the restructuring of the Company contemplated in the
Prepetition Termsheet.
Since the Petition Date, the Debtors have continued in possession of
their properties and, as debtors in possession, are authorized to operate and
manage each of their respective businesses and enter into all transactions,
including obtaining services, supplies and inventories, that each could have
entered into in the ordinary course of business had there been no bankruptcy
filings. As debtors in possession, the Debtors may not engage in transactions
outside of the ordinary course of business without approval of the Bankruptcy
Court, after notice and hearing.
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On November 18, 1996, the United States Trustee appointed an official
committee (the "Committee") of unsecured creditors appointed pursuant to section
1102 of the Bankruptcy Code. The Committee has the right to review and object to
certain business transactions and participated in the negotiation of the
Company's plan of reorganization (see Note 3 - "Prepetition Termsheet and Plan
of Reorganization," herein). Under the Bankruptcy Code, the Company will be
required to pay legal and other advisory fees of the Committee associated with
the Bankruptcy Cases until the effective date of the Company's plan of
reorganization.
Liabilities subject to compromise in the accompanying condensed
consolidated balance sheets represent the Company's estimate of liabilities as
of November 30, 1996, subject to adjustment in the reorganization process. Under
chapter 11, actions to enforce certain claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date. Other liabilities may arise or be subject to compromise as a
result of rejection of executory contracts and unexpired leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. As a general matter, the treatment of these liabilities will be
determined as a part of the formulation and confirmation of a plan of
reorganization. (See Note 4 - "Liabilities Subject to Compromise," herein).
The accompanying condensed consolidated financial statements have been
presented on the basis that the Company is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As a result of the chapter 11 filing and circumstances
relating to this event, realization of assets and satisfaction of liabilities is
subject to uncertainty. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
ordinary course of business. The condensed consolidated financial statements do
not include any of the adjustments to the assets or liabilities that may result
from the outcome of the bankruptcy proceedings. The ability of the Company to
continue as a going concern is dependent on, among other things, future
profitable operations, compliance, until the effective date of the plan of
reorganization, with the debtor in possession financing agreement (see Note 2 -
"Cash Collateral, Debtor in Possession Financing and Exit Financing," herein),
and the ability to generate sufficient cash from operations and obtain financing
sources to meet future obligations.
The principal business of the Company is to provide clinical laboratory
services in the State of California. As of April 30, 1997, the Company operated
one full service clinical laboratory in Sacramento, 13 "STAT" laboratories and
approximately 140 patient service centers located in close proximity to referral
sources throughout the Company's service areas. The Company operates a full
service laboratory and approximately 50 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 office-based
physicians/clients and as an independent clinical laboratory to acute hospital
customers.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The condensed consolidated financial statements
include the accounts of PCL and its consolidated group of Debtor subsidiaries.
All material intercompany balances and transactions have been eliminated in
consolidation. The operating results for the three and nine month periods ended
November 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended February 29, 1997 ("Fiscal 1997"). For further
information, refer to the financial statements and related notes included in the
Company's annual report on Form 10-K for the year ended February 29, 1996
("Fiscal 1996").
(2) CASH COLLATERAL, DEBTOR IN POSSESSION FINANCING AND EXIT
FINANCING
Critical to the Company's ability to restructure its businesses and to
emerge from chapter 11 was its ability to maintain liquidity to meet operating
needs during the Bankruptcy Cases. As a result of filing for chapter 11
protection, cash generated from services rendered prior to the Bankruptcy Cases
is "cash collateral" of the Senior Lenders, pursuant to their security interests
therein. Under the Bankruptcy Code, this cash collateral could not be used by
the Company without the Senior Lenders' consent or Bankruptcy Court approval.
Accordingly, and as contemplated by the Prepetition Termsheet, on November 12,
1996, the Bankruptcy Court
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entered an interim order and on December 3, 1996, the Bankruptcy Court entered a
final order authorizing the Company to use the cash collateral under specified
conditions, as consented to by the Senior Lenders.
Use of cash collateral would not have provided the Company with
sufficient liquidity to sustain their operations during the Bankruptcy Cases.
Thus, to provide additional necessary liquidity, as contemplated by the
Prepetition Termsheet, the Company entered into a Stipulation and Amended
Stipulation: (1) Regarding Terms and Conditions of Use of Cash Collateral
Pursuant to 11 U.S.C. ss. 363; (2) Regarding Terms and Conditions of
Post-Petition Secured Financing from Senior Lenders Pursuant to 11 U.S.C. ss.
364; (3) Validating Pre-Bankruptcy Liens, Security Interests and Claims; (4)
Providing Adequate Protection; (5) Granting Post- Petition Liens and Security
Interests; (6) Granting Claims Pursuant to 11 U.S.C ss.ss. 503 and 507(b); and
(7) Granting Relief from The Automatic Stay (the "DIP Financing Facility") with
the Senior Lenders. The DIP Financing Facility provided the Company with up to
$9.8 million of borrowing capacity during the Bankruptcy Cases, for ordinary
working capital purposes and to fund the a plan of reorganization as
contemplated by the Prepetition Termsheet. (See Note 3 - "Prepetition Termsheet
and Plan of Reorganization" herein). On November 12, 1996, the Bankruptcy Court
entered an interim order approving borrowings of up to $2.0 million under the
DIP Financing Facility. On December 3, 1996, the Bankruptcy Court entered a
final order approving all aspects of the DIP Financing Facility.
Under the DIP Financing Facility, the Senior Lenders agreed to make
loans to the Company in an aggregate principal amount not to exceed $9.8
million. The obligations of the Company under the DIP Financing Facility are
secured by a first priority lien on and security interest in all of the
Company's assets and are also allowed administrative expenses under the
Bankruptcy Code, with priority over most administrative expenses of the kind
specified in sections 503(b) and 507(b) of the Bankruptcy Code.
The DIP Financing Facility provides that interest on advances to the
Company accrues at the rate of 2% above the prime rate and is only payable upon
an event of default described below or at the end of the term of the DIP
Financing Facility if the Company's plan of reorganization is not confirmed.
Upon the effective date of the Company's plan of reorganization, accrued
interest under the DIP Financing Facility will be forgiven.
The DIP Financing Facility imposes an annual commitment fee of 1% on
the unused portion of the $9.8 million limit. This commitment fee is only
payable upon an event of default described below or at the end of the term of
the DIP Financing Facility if the Company's plan of reorganization is not
confirmed. Upon the effective date of the Company's plan of reorganization,
accrued commitment fees will be forgiven.
In addition to other terms and conditions customary for debtor in
possession financings of this type, the DIP Financing Facility required the
Company to obtain Bankruptcy Court approval of the following: (a) provisions
acknowledging the amount and validity of certain senior secured claims and
security interests, the amount and validity of the Debentures, and that such
debt and security interests are not subject to challenge, dispute or avoidance
in the Bankruptcy Cases; (b) provisions waiving and releasing any known or
unknown claims of the chapter 11 estates arising out of (i) the Credit
Agreement, dated as of April 1, 1994, among PCL, Wells Fargo Bank, National
Association, as agent ("Wells Fargo Bank, N.A."), and other financial
institutions party thereto, and the first through fifth amendments to the Credit
Agreement (as amended, the "Credit Agreement"); (ii) the Term Notes by PCL in
favor of the banks party to the Credit Agreement, dated April 4, 1994; (iii) the
Overline Revolving Notes by PCL in favor of the Banks party to the Credit
Agreement, dated May 10, 1995; (iv) the Indenture Regarding $40 Million of 7.5%
Convertible Subordinated Documents Due In 2000, dated as of August 24, 1993, by
and among PCL, Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Shearson, Inc.; (v) the Collateral and Security Agreement, dated as of
April 1, 1994, among PCL, Wells Fargo Bank, N.A., as agent for the other
financial institutions party thereto; (vi) the Trademark and Service Mark
Security Agreement, dated as of April 1, 1994, between Wells Fargo Bank, N.A.,
and California Regional Reference Laboratory; (vii) the Guaranty and Security
Agreement, dated as of April 1, 1994, between Quantum Clinical Laboratories,
Inc. and Wells Fargo Bank, N.A., as agent for the financial institutions party
to the Credit Agreement; (viii) the Guaranty and Security Agreement, dated as of
April 1, 1994, between Regional Reference Laboratory Governing Corporation and
Wells Fargo, Bank, N.A., as agent for the financial institutions party to the
Credit Agreement; and (ix) the Guaranty and Security Agreement, dated as of
April 1, 1994, between California Regional Reference Laboratory and Wells Fargo
Bank, N.A., as agent for the financial institutions party to the Credit
Agreement (the "Existing Lender Agreements"); (c) provisions
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waiving any rights of surcharge under section 506(c) of the Bankruptcy Code and
rights of recovery under section 502(d) of the Bankruptcy Code; and (d)
provisions stating that upon an event of default by the Company under the DIP
Financing Facility, the Senior Lenders will have the right to seek an order from
the Bankruptcy Court, on five days' notice, providing for the termination of all
stays, including the automatic stay of section 362 of the Bankruptcy Code, to
permit the Senior Lenders to exercise their rights and remedies under the DIP
Financing Facility as if no bankruptcy stay were in effect.
Moreover, the DIP Financing Facility contains the following events of
default, designed to ensure that the Company performs its obligations under the
Prepetition Termsheet: (i) failure of the breakup/overbid protections (see Note
5 - "Breakup/Overbid Protections," herein) to be approved by the Bankruptcy
Court; (ii) withdrawal of the Company's plan of reorganization by the Company or
proposal by the Company of a plan of reorganization inconsistent with the terms
of the Prepetition Termsheet; (iii) termination of the Company's exclusive right
to file and solicit acceptances with respect to the Company's plan of
reorganization for the benefit of any party other than the Proponents (as
hereinafter defined); (iv) removal or termination of J. Marvin Feigenbaum as
Chief Operating Officer of the Company other than in accordance with his
employment agreement or modification by the Company of his employment agreement
without the Proponents' written consent; and (v) termination by J. Marvin
Feigenbaum of his employment agreement in accordance with its terms. In
addition, the DIP Financing Facility contains events of default customary for
debtor in possession financings of this type.
The DIP Financing Facility terminates upon an event of default
described above or on the first anniversary of the Petition Date if the
Company's plan of reorganization is not confirmed. Provided no event of default
occurs and is continuing immediately prior to the effective date of the
Company's plan of reorganization, the unused principal availability under the
DIP Financing Facility will be fully drawn. Upon the effective date of the
Company's plan of reorganization, the principal balance of the DIP Financing
Facility, all accrued interest and all fees will be forgiven without any payment
by the Company.
Section 5.2.4 of the Company's plan of reorganization, more fully
discussed below, contemplates that the reorganized Company may enter into an
exit financing facility on or after the Effective Date (as herein defined) of
such plan of reorganization in an aggregate amount up to $10 million to be
secured by accounts receivable of the reorganized Company and the proceeds
thereof. Prior to the confirmation of the Company's plan of reorganization, more
fully discussed below, the Company obtained a commitment for exit financing from
Daiwa Securities America, Inc. ("Daiwa") to provide a working capital credit
facility to the Company. On April 18, 1997, the Bankruptcy Court approved a
commitment letter with Daiwa and authorized the Company to pay a $250,000
advisory fee to Daiwa. The Company has reached an agreement in principle with
Daiwa to provide the reorganized Company with a post-Effective Date working
capital facility, subject to certain conditions, of up to $10 million (the "Exit
Financing Facility"). Negotiations between the Company and Daiwa with respect to
the Exit Financing Facility are continuing.
(3) PREPETITION TERMSHEET AND PLAN OF REORGANIZATION
On November 7, 1996, the Company, the Senior Lenders and Nu-Tech
entered into the Prepetition Termsheet. The willingness of Nu-Tech to invest new
capital into the Company, and the willingness of the Senior Lenders to support a
restructuring that provided value for the Company's unsecured creditors and
shareholders, was subject to numerous conditions which, after lengthy
negotiations, were agreed to by the Company in the Prepetition Termsheet. These
conditions included: (a) the filing of a reorganization plan consistent with the
Prepetition Termsheet by December 2, 1996, (b) the hiring of Nu-Tech's chief
executive officer, J. Marvin Feigenbaum, as Chief Operating Officer of PCL,
effective immediately prior to the Petition Date and (c) obtaining an order
approving certain break-up fee and overbid protections for Nu-Tech within 60
days of the Petition Date. (see Note 5 - "Breakup/Overbid Protections," herein)
To provide the Company with sufficient liquidity to operate its
businesses during the Bankruptcy Cases, the Prepetition Termsheet required the
Senior Lenders to provide the DIP Financing Facility. Funds for the DIP
Financing Facility were obtained by the Senior Lenders from Nu-Tech, which
purchased approximately $13.33 million of the Senior Lenders' claims against the
Company for $10 million in cash, just prior to the Petition Date. Borrowings
under the DIP Financing Facility will be forgiven under the plan of
reorganization without any payment by the Company, provided that no event of
default occurs and continues under the DIP
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Financing Facility. In such case, $10 million of Nu-Tech's $15 million
investment into the Debtors will have been made at the outset of the Bankruptcy
Cases. The Company's plan of reorganization, as more fully discussed below,
provides that on the effective date of the Company's plan of reorganization, the
$5.0 million promissory note issued by PCL to Nu-Tech in connection with the MSI
Stock Purchase will be forgiven, in exchange for which Nu-Tech will receive an
additional 17% of the New Common Stock. (See Part II, Item 5 - "Other
Information," herein).
As set forth in more detail above, the DIP Financing Facility contains
numerous provisions requiring the Company to perform its obligations under the
Prepetition Termsheet. If the Company fails to do so, it will be in default
under the DIP Financing Facility, which will give the Senior Lenders and Nu-Tech
the right to seek to foreclose on their security interests in the Company's
assets. The Company believes that if the Senior Lenders and Nu-Tech foreclose on
their security interests in the Company's assets, no other creditors or
shareholders will receive any recovery on their claims against or interests in
the Company. In addition, even if the Senior Lenders and Nu-Tech do not
foreclose on their security interests, absent the ability to borrow funds under
the DIP Financing Facility, the Company is unlikely to have sufficient working
capital to continue to operate its businesses.
Finally, the Prepetition Termsheet required that the Company's plan of
reorganization provide that holders of general unsecured claims and Debenture
claims and holders of common stock interests will only be entitled to a
distribution under the Plan if a certain voting condition (the "Voting
Condition") was satisfied. The Voting Condition, which has been satisfied (as
discussed below), required the holders of such general unsecured claims and
Debenture claims to accept the plan of reorganization.
On December 2, 1996, the Company, Nu-Tech and the Senior Lenders
(collectively, the "Proponents") filed a joint plan of reorganization with the
Bankruptcy Court. The December 2 plan embodied certain changes to the economic
terms contained in the Prepetition Termsheet, based upon negotiations with the
Committee and certain orders entered by the Bankruptcy Court during the
Bankruptcy Cases. On January 17, 1997, the Proponents filed an amended joint
reorganization plan with the Bankruptcy Court, which contained certain
amendments to the plan filed on December 2, 1996. On February 7, 1997, the
Proponents filed the Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory, Inc. and Its Affiliated Debtors (the "Plan") with the
Bankruptcy Court, which contained certain amendments to the plan filed on
January 17, 1997. The Plan is jointly proposed by the Proponents.
By order of the Bankruptcy Court entered on February 14, 1997, a
Disclosure Statement (the "Disclosure Statement") describing, among other
things, the terms and conditions of the Plan was approved by the Bankruptcy
Court as containing "adequate information" within the meaning of section 1125 of
the Bankruptcy Code. On February 20, 1997, the Company began soliciting its
shareholders and certain creditors to vote on the Plan by providing each with a
solicitation package (each, a "Solicitation Package") containing: (i) written
notice of (a) the Bankruptcy Court's approval of the Disclosure Statement, (b)
the commencement date of the confirmation hearing on the Plan, (c) the deadline
and procedures for filing objections to confirmation of the Plan, and (d) other
related issues; (ii) the Plan; (iii) the Disclosure Statement; (iv) a letter
from the Committee soliciting acceptances of the Plan; and (v) a ballot and a
ballot return envelope. February 11, 1997 was fixed by the Bankruptcy Court as
the voting record date for purposes of determining creditors and equity security
holders entitled to receive a Solicitation Package and to vote on the Plan,
subject to the disallowance of such creditors' claims and equity holders'
interests for voting purposes under certain circumstances.
The Plan was confirmed by the Bankruptcy Court at a hearing on April
18, 1997. Accordingly, on April 23, 1997 (the "Confirmation Date"), the
Bankruptcy Court entered the Findings of Fact, Conclusions of Law and Order
Confirming Second Amended Plan of Reorganization of Physicians Clinical
Laboratory, Inc. and Its Affiliated Debtors (the "Confirmation Order"). The Plan
provides that each of the conditions to the Effective Date, as herein defined,
must be satisfied or waived as provided in the Plan by July 22, 1997, as more
fully described below. The Effective Date shall mean a business day, determined
by the Company, after which all such conditions have been satisfied or waived.
Moreover, the Company's shareholders and creditors voted to approve the Plan,
and accordingly, the Voting Condition was satisfied.
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<PAGE> 11
On the Effective Date, the Company will settle its obligations to its
impaired creditors as follows: (A) Nu-Tech will receive 35.6% of the New Common
Stock in exchange for its holdings of approximately $13.0 million in senior
secured debt (which debt it purchased from the Senior Lenders just prior to the
Petition Date), and 17% of the New Common Stock in exchange for Nu-Tech's
cancellation of a note executed by the Company in the principal amount of $5.0
million (the "Nu-Tech Stock Purchase") (which note comprised part of the
purchase price paid by the Company to Nu-Tech in connection with the MSI Stock
Purchase -- See Part II, Item 5 - "Other Information," herein), (B) the Senior
Lenders, which presently own an aggregate of approximately $80.0 million of
secured debt, will receive $55.0 million in new senior secured debt and 38.1% of
the New Common Stock, (C) the holders of the Debentures will receive 9.3% of the
New Common Stock, (D) the Company's shareholders will receive warrants to
purchase 5% of the New Common Stock for a period of up to five years, at a
purchase price of $13.30 per share, which price is based upon an implied
enterprise value for the Company of $90.0 million, and (E) the Company's
remaining general unsecured creditors will receive a pro rata share of each of
$2.45 million in cash and an unsecured note in the principal amount of $400,000
due on the first anniversary of the Effective Date, without interest. The Plan
also provides that all of the Company's wholly-owned subsidiaries will be merged
with and into the Company immediately prior to the Effective Date.
On April 18, 1997, the Bankruptcy Court granted the Company's request
to substantively consolidate the Bankruptcy Cases into a single chapter 11 case
for purposes of the Plan and the distribution provisions thereunder. Pursuant to
such ruling, on the Confirmation Date, (1) all intercompany claims by and among
the Debtors were deemed eliminated, (2) all assets and liabilities of the
Debtors were merged or treated as though they were merged, (3) any obligations
of any Debtor and all guaranties thereof executed by one or more of the Debtors
were deemed to be one obligation of reorganized PCL, (4) any claims filed or to
be filed in connection with any such obligation and guaranties were deemed one
claim against reorganized PCL, (5) each claim filed in the Bankruptcy Case of
any Debtor were deemed filed against reorganized PCL in the consolidated
Bankruptcy Case on the Confirmation Date, in accordance with the substantive
consolidation of the assets and liabilities of the Debtors and all claims based
on guaranties of payment, collection or performance made by the Debtors as to
obligations of any other Debtor were discharged, released and of no further
force and effect, and (6) all transfers, disbursements and distributions made by
any Debtor were deemed to be made by all of the Debtors.
The Plan provides for the substantive consolidation of the estates, so
that the assets and liabilities of the Debtors are treated as if the assets were
held by, and the liabilities incurred by, a single entity.
The effectiveness of the Plan is subject to certain conditions set
forth in the Plan, including, but not limited to, the execution of a
shareholders agreement between Nu-Tech and certain of the Senior Lenders and
the consummation of the Nu-Tech Stock Purchase by Nu-Tech and the reorganized
Company.
The foregoing description of the principal terms of the Plan is
qualified in its entirety by the full text of such document, which is filed as
Exhibit 2.1, hereto and incorporated herein by this reference. In addition, as
described above, the Disclosure Statement relating to the Plan was mailed to
holders of record of the Company's common stock on or about February 20, 1997.
(4) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise include substantially all of the
current and noncurrent liabilities of the Company as of the Petition Date.
Certain prepetition liabilities have been approved by the Bankruptcy Court for
payment. At November 30, 1996, such amounts to the extent not paid, were
included in accrued expenses and other payables for the period set forth below
(amounts in millions of dollars):
Convertible Subordinated Debentures $40.0
Bank Debt 80.8
Notes Payable 3.7
Accounts Payable 13.1
Accrued Payroll & Other 26.6
Capitalized PSC Leases 3.2
-----
Total Liabilities Subject to Compromise $167.4
======
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<PAGE> 12
Prior to the Petition Date, the Company was party to the Existing
Lender Agreements. Under the Existing Lender Agreements, the Debtors were
indebted to the Senior Lenders and Nu-Tech in the approximate amount of $94.3
million. In connection with the Third Amendment to the Credit Agreement, the
lenders required Sutter Health, one of the Company's largest shareholders, to
provide a guarantee of the Debtors' borrowings under the Credit Agreement in the
amount of $3.5 million (the "Sutter Guaranty"). On December 30, 1996, Sutter
Health paid $3.5 million to Nu-Tech and the Senior Lenders in respect of the
senior secured claims pursuant to the Sutter Guaranty, which thus reduced the
amount of the senior secured claims to approximately $90.8 million. The Senior
Lenders and Nu-Tech assert a security interest in substantially all of the
assets of the Company and its subsidiaries. No payments of principal or interest
were made by the Company under the Existing Loan Agreements from September 1995
to the Petition Date. Accordingly, the Company was in default under the Existing
Lender Agreements beginning in September 1995.
The amounts and terms of these prepetition liabilities will be
materially changed by the Plan on the Effective Date.
Additional bankruptcy claims and prepetition liabilities may arise from
the rejection of executory contracts and unexpired leases, the resolution of
contingent and unliquidated claims and the settlement of disputed claims.
Consequently, the amounts included in the condensed consolidated balance sheets
as liabilities subject to compromise may be subject to future adjustment.
In accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" (SOP 90-7), the Company is not
required to record interest during chapter 11 proceedings on unsecured or
undersecured prepetition debt. Interest expense on certain secured debt will
continue to be accrued but is subject to settlement. No determination has been
made regarding the value of the property interests which secure certain debt
and, consequently, whether interest thereon will be paid. The Company has
continued accruing interest on its unsecured prepetition debt obligations.
(5) BREAKUP/OVERBID PROTECTIONS
The Prepetition Termsheet required the Company to seek entry of an
order from the Bankruptcy Court approving its agreement to transfer its assets
or stock to a third party other than as contemplated by the Plan or confirm any
other plan of reorganization only if: (a) the Bankruptcy Court finds that such a
transfer to a third party or alternative plan has an aggregate present value to
creditors and shareholders of the Company of at least $3.75 million higher than
the present value of the Plan to creditors and shareholders (the "Overbid
Protection") and (b) on the effective date of such third party transfer or
alternative plan of reorganization, Nu-Tech is paid $1.88 million in cash as
compensation for time and expenses incurred in pursuing the Plan and such
compensation is entitled to administrative expense priority (the "Breakup
Protection"). Failure to obtain an order of the Bankruptcy Court approving these
provisions would have been an event of default under the DIP Financing Facility.
On January 6, 1997, the Bankruptcy Court entered an order approving the
Breakup and Overbid Protections, modified in certain respects from the
provisions outlined in the Prepetition Termsheet. These modifications to the
Overbid Protection, approved by Nu-Tech and the Senior Lenders, provide that the
Company may transfer their assets or stock to a third party other than as
contemplated by the Plan if such transfer provides aggregate present value to
creditors and shareholders of the Company of at least $2.5 million (as opposed
to $3.75 million as set forth in the Prepetition Termsheet) higher than the
present value of the Plan to creditors and shareholders. To date, the Debtors
have not received any offers to purchase their stock or assets from any entity
other than as set forth in the Plan.
(6) MANAGEMENT AND BOARD OF DIRECTOR CHANGES
Effective August 18, 1995, Mr. Roger Ramsier resigned as a Director of
PCL. Effective October 8, 1996, Mr. Dennis H. Tootelian resigned as a Director
of PCL. Successors were not selected to fill either of the vacancies created by
Mr. Ramsier's and Mr. Tootelian's resignations.
To assist with the management of the Company during the pendency of the
Bankruptcy Cases, as a condition to the availability of funds under the DIP
Financing Facility and until the Effective Date of the Plan, J. Marvin
Feigenbaum, Chief Executive Officer of Nu-Tech, has
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<PAGE> 13
been appointed as Chief Operating Officer of the Company. The Company and Mr.
Feigenbaum have entered into an employment agreement, dated November 7, 1996,
governing the terms of Mr. Feigenbaum's employment with the Company as Chief
Operating Officer during this period. Mr. Feigenbaum has acted in that capacity,
reporting directly to the Debtors' Board of Directors, from and after the
Petition Date.
From and after the Effective Date, Mr. Feigenbaum will serve as the
President and Chief Executive Officer of the reorganized Company. Additionally,
Richard M. Brooks and Wayne E. Cottrell will serve as Senior Vice President,
Chief Financial Officer and Vice President, Finance, respectively, from and
after the Effective Date. Mr. Brooks and Mr. Cottrell currently hold these
positions.
(7) BAR DATE, DISPUTE RESOLUTION PROCEDURE AND OTHER CLAIM
MATTERS
The Company filed their schedules of assets and liabilities or
statements of financial affairs as required by Bankruptcy Rule 1007 on December
19, 1996.
On December 19, 1996, the Bankruptcy Court entered an order
establishing January 31, 1997 as the deadline for creditors to file proofs of
claim against the Debtors (the "Original Bar Date"). On April 3, 1997, the
Bankruptcy Court entered an order establishing April 30, 1997 (the "Supplemental
Bar Date") as the deadline for plaintiffs in certain lawsuits who did not
receive notice of the Original Bar Date to file proofs of claim. The Company has
begun the process of reviewing claims filed, comparing such claims to the
Company's books and records and objecting to, or seeking to consensually
resolve, disputed claims. It is anticipated that large numbers of claims that
are disputed for various reasons will be objected to by the Company pursuant to
omnibus claims objections.
(8) NEGOTIATIONS WITH THE COMMITTEE
Although Nu-Tech, the Senior Lenders, certain of the holders of the
Debentures and the Company had reached agreement on the terms of a restructuring
plan prior to the Petition Date (as embodied in the Prepetition Termsheet), no
agreement existed with the Committee, the representatives of the holders of
general unsecured claims. Accordingly, after the Bankruptcy Cases were
commenced, the Proponents began negotiations with the Committee. After lengthy
negotiations, the Proponents and the Committee reached agreement on terms and
conditions of a plan of reorganization. The terms of that agreement are embodied
in the Plan, and include changes to certain provisions of the Prepetition
Termsheet.
(9) RATIO OF EARNINGS TO FIXED CHARGES
For purposes of calculating the ratio of earnings to fixed charges,
"earnings" consists of income before income taxes, interest on indebtedness and
imputed interest on capital lease obligations; "fixed charges" consists of
interest on indebtedness and imputed interest on capital lease obligations. The
Company's losses during each of the periods presented provide no coverage of
fixed charges. The amount of the deficiency is $23,705,000 and $20,808,000 for
the nine months ended November 30, 1996 and 1995, respectively.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CHAPTER 11 REORGANIZATION
On November 8, 1996, the Company and its subsidiaries commenced
reorganization cases by filing voluntary petitions for relief under chapter 11
of the Bankruptcy Code in the Bankruptcy Court. (See "Liquidity and Capital
Resources," below).
During the fiscal quarter ended November 30, 1996, the liquidity and
operations of the Company continued to be adversely affected by downward
pressure on reimbursement reserves, billing system/process challenges and
accounts receivable collection problems. As previously disclosed, the Company
has been in default since September 1995 with respect to principal and interest
judgments with respect to approximately $80.9 million of secured indebtedness.
The Company has also been in default since September 1995 with respect to
interest payments related to its $40 million 7.5% Convertible Subordinated
Debentures due 2000 (the "Debentures") and the Notes issued by the Company in
connection with the acquisition of Medical Group Pathology Laboratory and
Pathologists' Clinical Laboratories of Glendale, Inc.
From September 1995 through the Petition Date, the Company experienced
severe cash flow problems, a reduction in third-party payor reimbursement rates,
billing and collection problems and effects of significant changes in the health
care industry. As a result of their inability to pay their obligations when they
became due, as well as the poor industry conditions referred to above, the
Company began taking steps to seek an infusion of new capital or a strategic
transaction (e.g., a merger or sale of the business). The Company concluded that
absent the provision of new capital or consummation of a strategic transaction,
the Company would not be likely to be able to continue to exist.
Accordingly, in June 1995, the Company retained the investment banking
firm of DLJ to seek either a strategic transaction or a capital infusion for the
Company. From June 1995 through the Petition Date, DLJ and the Company's Board
of Directors engaged in discussions with numerous industry parties as well as
financial institutions, with respect to a potential transaction or transactions
that could provide the Company with sufficient liquidity to survive as a going
concern.
As a result of the efforts of the Company and DLJ, only one offer to
make an investment in the Company surfaced that the Company believed was
favorable to its creditors and shareholders. This offer was made by Nu-Tech in
conjunction with the Senior Lenders. After months of negotiations, on November
7, 1996, the Company, Nu-Tech and the Senior Lenders entered into the
Prepetition Termsheet providing for a new investment of approximately $15
million into the Company.
The Prepetition Termsheet formed the basis for the Company's plan of
reorganization (see Note 3 - "Prepetition Termsheet and Plan of Reorganization,"
herein), and paved the way for the Company's chapter 11 filing, the
restructuring of the Company's debt and the acquisition of a majority of the
Company by Nu-Tech. Representatives of each of the respective Debtors determined
that filing the chapter 11 petitions would best give the Debtors the needed time
and flexibility to consummate the restructuring of the Company contemplated in
the Prepetition Termsheet.
CONSOLIDATED RESULTS OF OPERATIONS
The condensed consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the chapter 11 filing and circumstances relating to
this event, realization of assets and satisfaction of liabilities is subject to
uncertainty. The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the ordinary
course of business. The condensed consolidated financial statements do not
include any of the adjustments to the assets or liabilities that may result from
the outcome of the bankruptcy proceedings. The ability of the Company to
continue as a going concern is dependent on, among other things, future
profitable operations, compliance, until the Effective Date, with the DIP
Financing Facility and the ability to generate sufficient cash from operations
and obtain financing sources to meet future obligations.
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<PAGE> 15
THREE AND NINE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO THREE AND NINE MONTHS
ENDED NOVEMBER 30, 1996
Net revenue fell from $21.6 million to $15.3 million for the three
months ended November 30 1995 and 1996, respectively, and from $70.8 million to
$49.7 million for the nine months ended November 30, 1995 and 1996,
respectively. This represents a 29.4% and 29.9% decrease, respectively. The
revenue reduction is the result of decreased reimbursement from third party
payors, the elimination of some unprofitable capitated contracts and the loss of
some of the associated business related to those contracts.
Direct laboratory expense fell from $7.6 million to $5.6 million and
from $24.2 million to $17.7 million for the three and nine months ended November
30, 1995 and 1996, respectively. This represents a 26.3% and 27.2% drop in
expense for the respective periods. As a percent of net revenue, direct
laboratory expense increased as a percent of net revenue from 35.2% to 36.7% and
from 34.3% to 35.6% for the three and nine months ended November 30, 1995 and
November 30, 1996, respectively. The reduction in direct expense is the result
of reduced volumes and cost cutting undertaken by management the last 15 months.
The increase in percent of net revenue for direct laboratory expense results
from reduced reimbursement while related volumes held constant.
Laboratory support expense fell from $6.3 million to $4.9 million for
the three months ended November 30, 1995 and 1996, respectively, and from $19.0
million to $15.0 million for the nine months ended November 30, 1995 and 1996,
respectively. As a percent of net revenue, laboratory support expense increased
from 29.2% to 31.9% and from 26.8% to 30.2% for the three and nine months ended
November 30, 1995 and November 30, 1996, respectively. The Company continues to
reduce these expenses but the reduction in reimbursement outweighs the expense
reduction when viewed as a percent of net revenue.
Overhead expense, which includes selling, general and administrative
expense, provision for doubtful accounts, depreciation and amortization fell
from $10.5 million to $9.1 million for the fiscal quarter ended November 30,
1995, and November 30, 1996, respectively, and from $31.1 million to $27.3
million for the nine months ended November 30, 1995 and 1996, respectively. As a
percent of net revenue, overhead expense grew from 48.6% to 59.8% for the three
months ended November 30, 1995 and November 30, 1996, respectively, and from
43.9% to 55.0% for the nine months ended November 30, 1995 and 1996,
respectively, these increases being a function of declining revenue while a
disproportionate amount of the expense is fixed.
Selling, general and administrative expense fell from $6.0 million to
$5.5 million for the three months ended November 30, 1995 and November 30, 1996,
respectively, and from $19.0 million to $16.4 million for the nine months ended
November 30, 1995 and November 30, 1996, respectively. This represents an 8.3%
and 13.7% decrease, respectively, which is the result of continued expense
reduction in response to declining revenues.
Provision for doubtful accounts decreased from $1.5 million to $1.2
million for the three months ended November 30, 1995 and 1996, respectively, and
increased from $3.2 million to $3.6 million for the nine months ended November
30, 1995 and November 30, 1996, respectively. As a percent of net revenue,
provision for doubtful amounts increased from 6.7% to 7.7% and from 4.5% to 7.2%
for the three and nine months ended November 30, 1995 and 1996, respectively.
The provision for doubtful amounts is adjusted based upon actual collection
history and management's assessment of the health of the California market and
the economy as a whole.
Depreciation and amortization expense fell from $3.0 million and $8.9
million for the three and nine months ended November 30, 1995 to $2.4 million
and $7.3 million for the three and nine months ended November 30, 1996. This
reduction is the result of lower amortization expense due to the $25.0 million
write down of intangibles at fiscal year end February 29, 1996.
During the second quarter of Fiscal 1996, the Company entered into
negotiations for the restructuring of its bank debt. These negotiations resulted
in the third, fourth and fifth amendments to the Credit Agreement. Bank fees,
legal fees, professional advisor fees and related costs of $1,062,073 were
incurred. Subsequently, the Company failed to comply with the terms of the
Credit Agreement, as amended. Thus, all amounts owed under the Credit Agreement
have been classified as current liabilities in the balance sheet as of August
31, 1995. The deferred financing costs related to the Credit Agreement of
$1,450,140 have been written off as of August 31, 1995. During the three and
nine months ended November 30, 1996, the
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<PAGE> 16
Company incurred $28,000 and $266,000, respectively, in legal and consulting
fees related to credit restructuring and preparations for the Chapter 11 filing
and reorganization. The costs associated with the credit agreement restructuring
the Chapter 11 filing and the write off of the deferred financing costs have
been reflected in the statement of operations as Credit Restructuring expense.
During the second and third fiscal quarter of 1996, the Company took a
$3.0 million and $2.1 million, respectively, write down of its accounts
receivable reflecting management's determination of reduced collectability. This
results from continued collection and billing difficulties being experienced by
the Company and the industry as a whole from third party payors and patients.
Operating income fell from a loss of $2.8 million to a loss of $4.4
million before one time charges for the three months ended November 30, 1995 and
1996, respectively, and from a loss of $3.5 million to a loss of $10.6 million
before one time charges for the nine months ended November 30, 1995 and 1996,
respectively. This decrease resulted primarily from the revenue reductions as
outlined above.
Interest expense increased from $3.4 million to $3.6 million and from
$9.2 million to $13.1 million for the three and nine months ended November 30,
1995 and 1996, respectively. The increase in interest expense results from
interest due on unpaid interest and penalties due on the non-payment of
principal. Outstanding borrowings under the DIP Financing Facility bear interest
at a rate per annum equal to the prime rate then in effect plus 2%. The Company
accrued a non-refundable commitment fee on the unfunded portions of the DIP
Financing Facility equal to 100 basis points per annum, which fee is not subject
to any pro rata reductions. The accrued interest on borrowing under the DIP
Financing Facility and the above-described commitment fee are payable only upon
an event of default, as such term is described in the DIP Financing Facility,
unless such event of default is waived by the Senior Lenders or on the first
anniversary of the Petition Date, unless the effective date of the Plan shall
have already occurred.
Net loss increased from $6.2 million to $7.9 million before one time
charges discussed above for the three months and from a loss of $12.7 million to
a loss of $23.4 million before one time charges for the nine months ended
November 30, 1995 and 1996, respectively.
REORGANIZATION COSTS
Reorganization costs includes all costs associated with the Bankruptcy
Cases. Pursuant to the guidance provided in SOP90-7, the Company segregated on
its statement of operations for the three month period ended November 30, 1996 a
one-time non-recurring expense related to the credit restructuring and
preparations for the chapter 11 filing in the amount of: $27,618 for
professional consultants' fees and out-of-pocket expenses.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Filing
As discussed previously, PCL and its subsidiaries filed voluntary
petitions for relief under chapter 11 of the Bankruptcy Code on November 8,
1996. Under chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on, events that occurred on or
before the Petition Date. The ultimate terms of settlement of these claims will
be determined in accordance with the terms of the Plan, which was confirmed by
the Bankruptcy Court on April 18, 1997. (See Note 3 - "Prepetition Termsheet and
Plan of Reorganization", herein).
Until the Effective Date, only such payments on prepetition obligations
that are approved or required by the Bankruptcy Court will be made. Except as
approved by the Bankruptcy Court, principal and interest payments on prepetition
debt have not been made since the Petition Date and will not be made without the
Bankruptcy Court's approval. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts and unexpired leases
or the Bankruptcy Court's resolution of claims for contingencies and other
disputed amounts.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and to fund the current obligations of the
reorganized Company. Under the Bankruptcy Code,
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<PAGE> 17
the rights of and ultimate payment to prepetition creditors may be substantially
altered and, as to some classes, eliminated.
Critical to the Company's ability to restructure its businesses and to
emerge from chapter 11 was its ability to maintain liquidity to meet operating
needs during the Bankruptcy Cases. As a result of filing for chapter 11
protection, cash generated from services rendered prior to the Bankruptcy Cases
is "cash collateral" of the Senior Lenders, pursuant to their security interests
therein. Under the Bankruptcy Code, this cash collateral could not be used by
the Company without the Senior Lenders' consent or Bankruptcy Court approval.
Accordingly, and as contemplated by the Prepetition Termsheet, on November 12,
1996, the Bankruptcy Court entered an interim order and on December 3, 1996, the
Bankruptcy Court entered a final order authorizing the Company to use the cash
collateral under specified conditions, as consented to by the Senior Lenders.
Use of cash collateral would not have provided the Company with
sufficient liquidity to sustain their operations during the Bankruptcy Cases.
Thus, to provide additional necessary liquidity, as contemplated by the
Prepetition Termsheet, the Company entered into the DIP Financing Facility with
the Senior Lenders. (See Note 2 - "Cash Collateral, Debtor in Possession
Financing and Exit Financing," herein). The DIP Financing Facility provided the
Company with up to $9.8 million of borrowing capacity during the Bankruptcy
Cases, for ordinary working capital purposes and to fund the a plan of
reorganization as contemplated by the Prepetition Termsheet. (See Note 3
- -"Prepetition Termsheet and Plan of Reorganization," herein). On November 12,
1996, the Bankruptcy Court entered an interim order approving borrowings of up
to $2.0 million under the DIP Financing Facility. On December 3, 1996, the
Bankruptcy Court entered a final order approving all aspects of the DIP
Financing Facility.
Under the DIP Financing Facility, the Senior Lenders agreed to make
loans to the Company in an aggregate principal amount not to exceed $9.8
million. The obligations of the Company under the DIP Financing Facility are
secured by a first priority lien on and security interest in all of the
Company's assets and are also allowed administrative expenses under the
Bankruptcy Code, with priority over administrative expenses of the kind
specified in sections 503(b) and 507(b) of the Bankruptcy Code.
The DIP Financing Facility provides that interest on advances to the
Company accrues at the rate of 2% above the prime rate and is only payable upon
an event of default described below or at the end of the term of the DIP
Financing Facility if the Company's plan of reorganization is not confirmed. On
the Effective Date, accrued interest under the DIP Financing Facility will be
forgiven.
The DIP Financing Facility imposes an annual commitment fee of 1% on
the unused portion of the $9.8 million limit. This commitment fee is only
payable upon an event of default described below or at the end of the term of
the DIP Financing Facility if the Company's plan of reorganization is not
confirmed. On the Effective Date, accrued commitment fees will be forgiven.
In addition to other terms and conditions customary for debtor in
possession financings of this type, the DIP Financing Facility required the
Company to obtain Bankruptcy Court approval of the following: (i) provisions
acknowledging the amount and validity of certain senior secured claims and
security interests, the amount and validity of the Debentures, and that such
debt and security interests are not subject to challenge, dispute or avoidance
in the Bankruptcy Cases; (ii) provisions waiving and releasing any known or
unknown claims of the chapter 11 estates arising out of (a) the Credit
Agreement, dated as of April 1, 1994, among PCL, Wells Fargo Bank, National
Association, as agent ("Wells Fargo Bank, N.A."), and other financial
institutions party thereto, and the first through fifth amendments to the Credit
Agreement (as amended, the "Credit Agreement"); (b) the Term Notes by PCL in
favor of the banks party to the Credit Agreement, dated April 4, 1994; (c) the
Overline Revolving Notes by PCL in favor of the Banks party to the Credit
Agreement, dated May 10, 1995; (d) the Indenture Regarding $40 Million of 7.5%
Convertible Subordinated Documents Due In 2000, dated as of August 24, 1993, by
and among PCL, Donaldson, Lufkin & Jenrette Securities Corporation and Smith
Barney Shearson, Inc.; (e) the Collateral and Security Agreement, dated as of
April 1, 1994, among PCL, Wells Fargo Bank, N.A., as agent for the other
financial institutions party thereto; (f) the Trademark and Service Mark
Security Agreement, dated as of April 1, 1994, between Wells Fargo Bank, N.A.,
and California Regional Reference Laboratory; (g) the Guaranty and Security
Agreement, dated as of April 1, 1994, between Quantum Clinical Laboratories,
Inc. and Wells Fargo Bank, N.A., as agent for the financial institutions party
to the Credit Agreement; (h) the Guaranty and Security Agreement, dated as of
April 1, 1994,
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between Regional Reference Laboratory Governing Corporation and Wells Fargo,
Bank, N.A., as agent for the financial institutions party to the Credit
Agreement; and (i) the Guaranty and Security Agreement, dated as of April 1,
1994, between California Regional Reference Laboratory and Wells Fargo Bank,
N.A., as agent for the financial institutions party to the Credit Agreement (the
"Existing Lender Agreements"); (iii) provisions waiving any rights of surcharge
under section 506(c) of the Bankruptcy Code and rights of recovery under section
502(d) of the Bankruptcy Code; and (iv) provisions stating that upon an event of
default by the Company under the DIP Financing Facility, the Senior Lenders will
have the right to seek an order from the Bankruptcy Court, on five days' notice,
providing for the termination of all stays, including the automatic stay of
section 362 of the Bankruptcy Code, to permit the Senior Lenders to exercise
their rights and remedies under the DIP Financing Facility as if no bankruptcy
stay were in effect.
Moreover, the DIP Financing Facility contains the following events of
default, designed to ensure that the Company perform its obligations under the
Prepetition Termsheet: (a) failure of the breakup/overbid protections (see Note
5 - "Breakup/Overbid Protections," herein) to be approved by the Bankruptcy
Court; (b) withdrawal of the Company's plan of reorganization by the Company or
proposal by the Company of a plan of reorganization inconsistent with the terms
of the Prepetition Termsheet; (c) termination of the Company's exclusive right
to file and solicit acceptances with respect to the Company's plan of
reorganization for the benefit of any party other than the Proponents; (d)
removal or termination of J. Marvin Feigenbaum as Chief Operating Officer of the
Company other than in accordance with his employment agreement or modification
by the Company of his employment agreement without the Proponents' written
consent; and (e) termination by J. Marvin Feigenbaum of his employment agreement
in accordance with its terms. In addition, the DIP Financing Facility contains
events of default customary for debtor in possession financings of this type.
The DIP Financing Facility terminates upon an event of default
described above or on the first anniversary of the Petition Date if the
Company's plan of reorganization is not confirmed. Provided no event of default
occurs and is continuing immediately prior to the effective date of the
Company's plan of reorganization, the unused principal availability under the
DIP Financing Facility will be fully drawn. On the Effective Date, the principal
balance of the DIP Financing Facility, all accrued interest and all fees will be
forgiven without any payment by the Company.
On November 7, 1996, the Company, the Senior Lenders and Nu-Tech
entered into the Prepetition Termsheet. The willingness of Nu-Tech to invest new
capital into the Company, and the willingness of the Senior Lenders to support a
restructuring that provided value for the Company's unsecured creditors and
shareholders, was subject to numerous conditions which, after lengthy
negotiations, were agreed to by the Company in the Prepetition Termsheet. These
conditions included: (1) the filing of a reorganization plan consistent with the
Prepetition Termsheet by December 2, 1996, (2) the hiring of Nu-Tech's chief
executive officer, J. Marvin Feigenbaum, as Chief Operating Officer of PCL,
effective immediately prior to the Petition Date and (3) obtaining an order
approving certain break-up fee and overbid protections for Nu-Tech within 60
days of the Petition Date. (See Note 5 - "Breakup/Overbid Protections," herein).
To provide the Company with sufficient liquidity to operate its
businesses during the Bankruptcy Cases, the Prepetition Termsheet required the
Senior Lenders to provide the DIP Financing Facility. Funds for the DIP
Financing Facility were obtained by the Senior Lenders from Nu-Tech, which
purchased approximately $13.33 million of the Senior Lenders' claims against the
Company for $10 million in cash, just prior to the Petition Date. Borrowings
under the DIP Financing Facility will be forgiven under the Plan without any
payment by the Company, provided that no event of default occurs and continues
under the DIP Financing Facility. In such case, $10 million of Nu-Tech's $15
million investment into the Debtors will have been made at the outset of the
Bankruptcy Cases. The Plan provides that on the Effective Date, the $5.0 million
promissory note issued by PCL to Nu-Tech in connection with the MSI Stock
Purchase will be forgiven, in exchange for which Nu-Tech will receive an
additional 17% of the New Common Stock. (See Part II, Item 5 "Other
Information," herein).
As set forth in more detail above, the DIP Financing Facility contains
numerous provisions requiring the Company to perform its obligations under the
Prepetition Termsheet. If the Company fails to do so, it will be in default
under the DIP Financing Facility, which will give the Senior Lenders and Nu-Tech
the right to seek to foreclose on their security interests in the Company's
assets. The Company believes that if the Senior Lenders and Nu-Tech foreclose
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on their security interests in the Company's assets, no other creditors or
shareholders will receive any recovery on their claims against or interests in
the Company. In addition, even if the Senior Lenders and Nu-Tech do not
foreclose on their security interests, absent the ability to borrow funds under
the DIP Financing Facility, the Company is unlikely to have sufficient working
capital to continue to operate its businesses.
Finally, the Prepetition Termsheet required that the Company's plan of
reorganization provide that holders of general unsecured claims and Debenture
claims and holders of common stock interests will only be entitled to a
distribution under the Plan if the Voting Condition was satisfied. The Voting
Condition, which has been satisfied (as discussed below), required the holders
of such general unsecured claims and Debenture claims to accept the Plan.
On December 2, 1996, the Company, Nu-Tech and the Senior Lenders
(collectively, the "Proponents") filed a joint plan of reorganization with the
Bankruptcy Court. The December 2 plan embodied certain changes to the economic
terms contained in the Prepetition Termsheet, based upon negotiations with the
Committee and certain orders entered by the Bankruptcy Court during the
Bankruptcy Cases. On January 17, 1997, the Proponents filed an amended joint
reorganization plan with the Bankruptcy Court, which contained certain
amendments to the plan filed on December 2, 1996. On February 7, 1997, the
Proponents filed the Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory, Inc. and Its Affiliated Debtors (the "Plan") with the
Bankruptcy Court, which contained certain amendments to the plan filed on
January 17, 1997. The Plan is jointly proposed by the Proponents.
By order of the Bankruptcy Court entered February 14, 1997, the
Disclosure Statement describing, among other things, the terms and conditions of
the Plan was approved by the Bankruptcy Court as containing "adequate
information" within the meaning of section 1125 of the Bankruptcy Code. On
February 20, 1997, the Company began soliciting its shareholders and certain
creditors to vote on the Plan by providing each with a solicitation package
(each, a "Solicitation Package") containing: (i) written notice of (a) the
Bankruptcy Court's approval of the Disclosure Statement, (b) the commencement
date of the confirmation hearing on the Plan, (c) the deadline and procedures
for filing objections to confirmation of the Plan, and (d) other related issues;
(ii) the Plan; (iii) the Disclosure Statement; (iv) a letter from the Committee
soliciting acceptances of the Plan; and (v) a ballot and a ballot return
envelope. February 11, 1997 was fixed by the Bankruptcy Court as the voting
record date for purposes of determining creditors and equity security holders
entitled to receive a Solicitation Package and to vote on the Plan, subject to
the disallowance of such creditors' claims and equity holders' interests for
voting purposes under certain circumstances.
The Plan was confirmed by the Bankruptcy Court on the Confirmation
Date. The Plan provides that each of the conditions to the Effective Date must
be satisfied or waived as provided in the Plan by July 22, 1997. Moreover, the
Company's shareholders and creditors voted to approve the Plan, and accordingly,
the Voting Condition was satisfied.
On the Effective Date, the Company will settle its obligations to its
impaired creditors as follows: (A) Nu-Tech will receive 35.6% of the New Common
Stock in exchange for its holdings of approximately $13.0 million in senior
secured debt (which debt it purchased from the Senior Lenders just prior to the
Petition Date), and 17% of the New Common Stock in exchange for Nu-Tech's
cancellation of a note executed by the Company in the principal amount of $5.0
million (the "Nu-Tech Stock Purchase") (which note comprised part of the
purchase price paid by the Company to Nu-Tech in connection with the MSI Stock
Purchase -- See Part II, Item 5 - "Other Information," herein), (B) the Senior
Lenders, which presently own an aggregate of approximately $80.0 million of
secured debt, will receive $55.0 million in new senior secured debt and 38.1% of
the New Common Stock, (C) the holders of the Debentures will receive 9.3% of the
New Common Stock, (D) the Company's shareholders will receive warrants to
purchase 5% of the New Common Stock for a period of up to five years, at a
purchase price of $13.30 per share, which price is based upon an implied
enterprise value for the Company of $90.0 million, and (E) the Company's
remaining general unsecured creditors will receive a pro rata share of each of
$2.45 million in cash and an unsecured note in the principal amount of $400,000
due on the first anniversary of the Effective Date, without interest. The Plan
also provides that all of the Company's wholly-owned subsidiaries will be merged
with and into the Company immediately prior to the Effective Date of the Plan.
On April 18, 1997, the Bankruptcy Court granted the Company's request
to substantively consolidate the Bankruptcy Cases into a single chapter 11 case
for purposes of the Plan and the
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distribution provisions thereunder. Pursuant to such ruling, on the Confirmation
Date, (1) all intercompany claims by and among the Debtors were deemed
eliminated, (2) all assets and liabilities of the Debtors were merged or treated
as though they were merged, (3) any obligations of any Debtor and all guaranties
thereof executed by one or more of the Debtors were deemed to be one obligation
of reorganized PCL, (4) any claims filed or to be filed in connection with any
such obligation and guaranties were deemed one claim against reorganized PCL,
(5) each claim filed in the Bankruptcy Case of any Debtor were deemed filed
against reorganized PCL in the consolidated Bankruptcy Case on the Confirmation
Date, in accordance with the substantive consolidation of the assets and
liabilities of the Debtors and all claims based on guaranties of payment,
collection or performance made by the Debtors as to obligations of any other
Debtor were discharged, released and of no further force and effect, and (6) all
transfers, disbursements and distributions made by any Debtor were deemed to be
made by all of the Debtors.
The Plan provides for the substantive consolidation of the estates, so
that the assets and liabilities of the Debtors are treated as if the assets were
held by, and the liabilities incurred by, a single entity.
The effectiveness of the Plan is subject to certain conditions set
forth in the Plan, including, but not limited to, the execution of a
shareholders agreement between Nu-Tech and certain of the Senior Lenders and the
consummation of the Nu-Tech Stock Purchase by Nu-Tech and the reorganized
Company.
The foregoing description of the principal terms of the Plan is
qualified in its entirety by the full text of such document, which is filed as
Exhibit 2.1, hereto and incorporated herein by this reference.
Section 5.2.4 of the Plan contemplates that the reorganized Company
may, in the exercise of its business judgment, enter into an exit financing
facility on or after the Effective Date in an aggregate amount up to $10 million
to be secured by accounts receivable of the reorganized Company and the proceeds
thereof. Prior to the Confirmation Date, the Company obtained a commitment for
exit financing from Daiwa to provide a working capital credit facility to the
Company. On April 18, 1997, the Bankruptcy Court approved a commitment letter
with Daiwa and authorized the Company to pay a $250,000 advisory fee to Daiwa.
The Company has reached an agreement in principle with Daiwa to provide the
reorganized Company with a post-Effective Date working capital credit facility,
subject to certain conditions, of up to $10 million. Negotiations between the
Company and Daiwa with respect to the Exit Financing Facility are continuing.
GENERAL
As a result of insufficient cash flows caused by, among other things,
billing and collection problems and failure to integrate the California
laboratory operations of Damon, which it acquired in 1994, and, to a lesser
extent, reductions in third-party payor reimbursement rates and effects and
changes in the health care industry, the Company was unable to make interest
payments due monthly under the Credit Agreement since September 1995, each in
the amount of approximately $660,000 (excluding penalties on unpaid amounts),
principal amortization payments due on September 13, 1995 and October 6, 1995,
each in the amount of $600,000, principal amortization payments due on November
3, 1995 and December 29, 1995, each in the amount of $1.2 million, and principal
amortization payments due on February 7, 1996, June 30, 1996, September 30, 1996
and December 31, 1996 and March 31, 1997, each in the amount of $3.6 million. In
addition, the Company failed to make four interest payments each in the amount
of $1.5 million in respect of its Debentures due on August 15, 1995, February
16, 1996, August 15, 1996 and February 17, 1997, respectively. Failure to pay
the interest with respect to the Debentures, as well as failure to timely pay
principal and interest with respect to the loans under the Credit
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<PAGE> 21
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 removal of the Company's common stock from listing on the Nasdaq
National Market System in October of 1995 constituted a Redemption Event under
the Company's Indenture governing its Debentures. Such Redemption Event required
the Company to offer to repurchase the Debentures from the holders thereof at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any. Written notice of the occurrence of such Redemption
Event was given to the registered holders of the Debentures on November 2, 1995,
and no such holder perfected its right to redeem such Debentures within the
period provided under the Indenture. In addition, under the terms of the
Registration Rights Agreement between the Company and the holders of the
Debentures, the Company is obligated to maintain an effective registration
statement covering the Debentures and the Company's common stock with respect to
which the Debentures are convertible.
Following the Petition Date, the Company has continued implementation
of the operational restructuring that began prior to the Petition Date. Such
operational restructuring consisted of actions taken in an effort to reduce
operating costs, improve cash collections, streamline the billing process and
increase revenue flows. These actions include:
o Elimination of 383 (approximately 30%) full time equivalent
employee positions.
o Consolidation of facilities. The Fresno hub laboratory was
closed in June 1995 and consolidated into the Sacramento
laboratory. The Company's Southern California hub laboratory
was downsized in June 1996 and consolidated into the
Sacramento laboratory. Both locations maintain expanded STAT
facilities.
o Use of dedicated internal teams for concentrated account
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
o Completion of centralized billing capabilities.
o Data processing system changes to improve billing and
collection efforts.
o Reductions in overhead by, among other things, closing
unprofitable locations.
o Moving the Company's principal executive offices from its
current location at 2495 Natomas Park Drive in Sacramento (the
"Headquarters") to the Company's main laboratory facility,
located at 3301 C Street, in Sacramento, and the Company will
be moving the Company's billing department to a new facility,
located at 201 Lathrop Way in Sacramento (the "Lathrop
Premises") and rejecting the Headquarters Lease. The
Bankruptcy Court authorized the Company to enter into a lease
for the Lathrop Premises on February 28, 1997. The Company
expects to vacate the Headquarters in June 1997 and, on May
21, 1997, the Bankruptcy Court granted the Company's motion
requesting authority to reject the Headquarters lease on ten
days' notice to the Headquarters lessor. (See Part II, Item 1
- "Legal Proceedings," herein).
During and subsequent to the third quarter of Fiscal 1996, the Company has
reduced expenses and consolidated a significant portion of the testing done at
its South Hub Lab into the Sacramento facility. As of December 1996, these
efforts have resulted in labor and infrastructure eliminations yielding
approximately $1.75 million per month in expense reductions. In addition to 383
full time employee equivalent reductions,
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<PAGE> 22
certain unprofitable patient service centers have been closed, certain
unprofitable capitated contracts have been eliminated and certain courier
routes have been restructured.
Net cash flows from operating activities increased from ($168,000) in
the first nine months of Fiscal 1996 to ($656,000) for the same period in Fiscal
1997 principally as a result of increases in prepaid expenses and greater
operating losses.
Cash flows from investing activities have been negative through the
periods prior to and including the first three quarters of Fiscal 1997, due
almost wholly to the Company's laboratory acquisitions and purchases of
equipment and leasehold improvements. Uses of cash from investing activities
fell from $2.2 million for the first nine months of Fiscal 1996 to $100,000 for
the same period in Fiscal 1997. The decrease in cash used in investing
activities in Fiscal 1997 is due to reduced acquisitions and reduced equipment
and tenant improvement purchases.
Cash flows from financing activities have reflected borrowings and
repayments of long term debt. Cash provide by financing activities decreased
from $3.2 million for three period ended November 30, 1995 to $2.5 million for
the same period in fiscal 1997. This reduction in cash flows from financing
activities is the result of reduced borrowings over the period.
As of November 30, 1996, the Company had approximately $127.4 million
of indebtedness of which $40 million represents the Debentures; approximately
$80.9 million represents bank borrowings under certain term loans and lines of
credit; approximately $2.4 million is owed to the former owners of acquired
laboratories; approximately $1.0 million is owed to vendors whose debt has been
converted to notes payable; approximately $2.0 million is owed the Senior
Lenders under the DIP Financing Facility in relation to the November 8, 1996
chapter 11 filing, which facility will be forgiven on the Effective Date;
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 $0.97 million is owed under capital lease
obligations. Of such indebtedness, $40 million bears interest at 7.5% and is due
by its terms in August 2000; $47.4 million in bank borrowings bears interest at
prime plus 3% and is due by its terms in March 2000; $33.5 million in bank
borrowings bears interest at prime plus 3% 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; $2.0 million bears interest at prime plus 2%. 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; however, the Plan provides that the Company will pay such
liabilities, as compromised, after the Effective Date.
The Company failed to make the interest payments due monthly under the
Credit Agreement since September, 1995, each in the amount of approximately
$660,000, (excluding penalties on unpaid amounts), and also failed to make the
principal amortization payments under the Credit Agreement due on September 13,
1995 and October 6, 1995 (each in the amount of $600,000), the principal
amortization payments due on November 3, 1995, December 29, 1995 and March 31,
1996 (each in the amount of $1.2 million), and principal amortization payments
due on February 7, 1996, June 30, 1996, September 30, 1996, December 31, 1996
and March 31, 1997 (each in the amount of $3.6 million). The Company has been in
default since September of 1995 with respect to its secured indebtedness under
the Credit Agreement.
At November 30, 1996, the Company had approximately $2.2 million in
cash plus approximately $7.8 million is available under the DIP Financing
Facility. In addition, after the Effective Date, the Plan contemplates the
availability of up to $10.0 million under the Exit Financing Facility.
Negotiations with respect to the Exit Financing Facility are continuing. The
Company's business does not generally require significant expenditures for
property, plant and equipment. Expenditures related to such capital items were
approximately 0.7% of net revenues for the nine months ended November 30, 1996.
As of November 30, 1996, the Company had no material commitments for capital
expenditures.
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<PAGE> 23
The Company anticipates that its operating cash needs for the near term
will be met by accounts receivable collection, operating cash and, until the
Effective Date, amounts available under the DIP Financing Facility. After the
Effective Date, the DIP Financing Facility will be forgiven and the remaining
amount available thereunder will be available to the Company as additional
capital. In addition, the Company is negotiating with Daiwa for an Exit
Financing Facility of up to $10.0 million. The foregoing statements
constitute 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.
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<PAGE> 24
PHYSICIANS CLINICAL LABORATORY, INC.
PART II -- OTHER INFORMATION
NOVEMBER 30, 1996
Item 1. Legal Proceedings
Chapter 11 Reorganization
The Company, which has been experiencing significant operating losses
and facing severe liquidity problems, determined that it was not likely to meet
its cash repayment obligations on existing indebtedness, including approximately
$80.9 million of secured indebtedness due under the Credit Agreement, and
interest payments related to the Debentures. The Company believed that further
refinancings of its existing indebtedness would not be sufficient to enable the
Company to continue to exist.
Accordingly, on November 8, 1996, the Company and its subsidiaries
commenced reorganization cases by filing voluntary petitions for relief under
chapter 11 of the Bankruptcy Code in the Bankruptcy Court. See "Liquidity and
Capital Resources," above. Under chapter 11, actions to enforce certain claims
against the Company are stayed if the claims arose, or are based on, events that
occurred on or before the Petition Date. The ultimate terms of settlement of
these claims will be determined in accordance with the terms of the Plan
confirmed by the Bankruptcy Court on April 18, 1997.
Since the Petition Date, the Debtors have continued in possession of
their properties and, as debtors in possession, are authorized to operate and
manage each of their respective businesses and enter into all transactions,
including obtaining services, supplies and inventories, that each could have
entered into in the ordinary course of business had there been no bankruptcy
filings. As debtors in possession, the Debtors may not engage in transactions
outside of the ordinary course of business without approval of the Bankruptcy
Court, after notice and hearing. The Company has sought and obtained orders from
the Bankruptcy Court intended to facilitate the normal operations of the
Company, including orders (i) authorizing the Company to maintain its
consolidated cash management system, (ii) authorizing the payment of certain
prepetition claims, including claims for employee business expenses, wages,
salaries, employee benefits and certain rent obligations, (iii) authorizing the
Company to use cash collateral and approving the Company's DIP Financing
Facility, as previously described, and (iv) approving certain premium financing
agreements.
On November 18, 1996, the United States Trustee appointed the Committee
pursuant to section 1102 of the Bankruptcy Code. The Committee has the right to
review and object to certain business transactions and participated in the
negotiation of the Company's plan of reorganization (see Note 3 - "Prepetition
Termsheet and Plan of Reorganization," herein). Under the Bankruptcy Code, the
Company will be required to pay legal and other advisory fees of the Committee
associated with the Bankruptcy Cases until the Effective Date.
The Company has the right, subject to the approval of the Bankruptcy
Court, under relevant provisions of the Bankruptcy Code, to assume or reject
executory contracts and unexpired leases, including real property leases.
Certain parties to such executory contracts and unexpired leases with the
Company, including parties to such real property leases, may file motions with
the Bankruptcy Court seeking to require the Company to assume or reject those
contracts or leases.
In this context, "assumption" requires that the Company cure, or
provide adequate assurance that it will cure, all existing defaults under the
contract or lease and provide adequate assurance of future performance under the
contract or lease and provide adequate assurance of future performance under
relevant provisions of the Bankruptcy Code; and "rejection" means that the
Company is relieved from its obligations to perform further under the contract
or lease. Rejection of an executory contract or lease may constitute a breach of
that contract and may afford the non-debtor party the right to assert a claim
against the bankruptcy estate for damages arising out of the breach, which claim
shall be allowed or disallowed as if such claim had arisen before the Petition
Date.
By order of the Bankruptcy Court, effective February 14, 1997, the
Company received approval to (a) reject 62 nonresidential real property leases;
(b) assume 149 nonresidential real
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<PAGE> 25
property leases; and (c) extend the time, through and including the Confirmation
Date of its plan of reorganization, within which it may assume or reject 16 of
its remaining nonresidential real property leases. As more fully described
above, assumption of leases requires the Company to cure, or to provide adequate
assurance that it will cure, all existing defaults under the lease. On April 14,
1997, the Bankruptcy Court entered an order approving certain procedures for
assuming the Company's remaining leases not previously assumed, rejected or
slated for rejection pursuant to the Plan (the "Remaining Leases").
On December 19, 1996, the Bankruptcy Court entered an order
establishing January 31, 1997 as the Original Bar Date. On April 3, 1997, the
Bankruptcy Court entered an order establishing April 30, 1997 as the deadline
for filing proofs of claim with respect to plaintiffs in certain lawsuits who
did not receive notice of the Original Bar Date. All creditors (with certain
limited exceptions) must file proofs of claim against the Company with respect
to prepetition claims on or before the applicable bar dates or be forever barred
from (1) asserting claims that such person or entity possesses against the
Company and (2) voting upon, or receiving distribution under, any plan of
reorganization.
Prepetition claims that were contingent, unliquidated, or disputed as
of the Petition Date, including, without limitation, those that arise in
connection with rejection of executory contracts or unexpired leases, may be
allowed or disallowed depending on the nature of the claim. Such claims may be
fixed by the Bankruptcy Court or otherwise settled or agreed upon by the parties
and approved by the Bankruptcy Court.
Described below are certain legal proceedings involving the Company
that were in existence as of the Petition Date. All such proceedings have been
stayed pursuant to section 362 of the Bankruptcy Code, and can only proceed with
the approval of the Bankruptcy Court. As a general matter, the treatment of
claims arising prior to the Petition Date, including claims on account of
litigation, will be determined and paid pursuant to the terms of the Plan. The
Plan provides that following the Effective Date, such prepetition litigation, as
well as postpetition litigation involving claims based upon prepetition events,
will become subject to a permanent injunction. The Plan further provides that
the Company, the reorganized Company or the Committee may resolve or adjudicate
the amount of a prepetition litigation claim in the manner in which such claim
would have been resolved if the Company had not instituted the Bankruptcy Cases.
Additionally, the Bankruptcy Court may enter orders modifying the automatic stay
and/or permanent injunction to permit certain matters to continue to be
prosecuted in the courts or before arbitrators where or before whom such matters
are pending, generally for the purpose of pursuing payment of such claims as are
insured from third-party insurers. Because of the bankruptcy proceedings, the
Company's financial exposure with respect to the prepetition litigation claims
set forth in actions currently pending against the Company is limited by the
Plan and should not have a material financial impact on the Company.
Prepetition Litigation
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 1996, and in the Company's subsequent Form
10-Q reports, there are several material pending legal proceedings against the
Company. On June 20, 1996, an action 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 by and between the Company
and Maintenance Management Corporation ("MMC"), 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. Even notwithstanding the limitations on the Company's liability
exposure resulting from the bankruptcy proceedings, as described above, the
Company does not believe that either the merits of these claims, if any, justify
the amount of damages sought, or that this lawsuit, if adversely determined,
would have had a material adverse effect on the financial condition of the
Company.
There is a dispute pending 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 "MGPL Agreement"). 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
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<PAGE> 26
Acquisition and failure to pay amounts due thereunder equalling $1,169,505 plus
interest and late fees, and seeks compensatory damages in the amount of sums
allegedly due, in addition to unspecified general damages and attorney's fees.
In December, 1995, a default was entered against the Company in the Litigation.
The Company has no substantive defenses to the Litigation. The Company was able
to have the default set aside before a judgment was entered in connection
therewith. As of the Petition Date (at which time the Litigation was stayed), a
standstill agreement with MGPL was in effect, pursuant to which the parties
agreed to attempt in good faith to determine the precise amount owed to MGPL by
the Company under the MGPL Agreement. As of November 30, 1996, the outstanding
principal amount of the Note issued by the Company to MGPL in connection with
the MGPL Agreement was $890,000.
In the ordinary course of business, several lawsuits have been filed
against the Company by former employees alleging, among other things, employment
discrimination and harassment, fraud, wrongful (including retaliatory) discharge
in violation of public policy, and related claims, including intentional and
negligent infliction of emotional distress, loss of consortium, breach of
contract and breach of the covenant of good faith and fair dealing. A number of
such suits include claims against current employees of the Company. Any
existing indemnification arrangements between any such employees and the
Company with respect to such claims are subject to the terms of the Plan as
prepetition claims, as described above.
Additionally, several lawsuits have been filed against the Company by
former patients alleging medical malpractice and requesting punitive damages.
Notwithstanding the limitations on the Company's liability exposure resulting
from the bankruptcy proceedings, as described above, the Company does not expect
these matters, either individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company. Moreover, the Company
believes that its insurance policies may cover some or all judgments against the
Company, if any, in these matters.
To date, the Company has not experienced any significant liability with
respect to such claims.
Postpetition Litigation
On or about January 22, 1997, Taylor R. McKeeman, the Company's former
Vice President for Laboratory Operations, filed a Request for Payment of
Administrative Expense with respect to a prepetition Separation Agreement
between the Company and Mr. McKeeman. Under the Separation Agreement, Mr.
McKeeman is entitled to receive a severance payment in the event he is
terminated after a "Change in Control" occurs, as such term is defined in the
Separation Agreement. This request was denied by order of the Bankruptcy Court,
entered on March 19, 1997, because (i) no Change in Control occurred prior to
the termination of Mr. McKeeman's employment and (ii) any claim of Mr. McKeeman
against the Company's bankruptcy estates arising out of the Separation Agreement
constitutes a prepetition claim. Mr. McKeeman filed a notice of appeal on or
about March 5, 1997. If Mr. McKeeman were to prevail on appeal, the Company
would incur an administrative claim against their estates in the approximate
amount of $300,000.
-26-
<PAGE> 27
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.
Regulatory Investigation
In April of 1997, the Company received a subpoena to furnish certain
documents to the United States Department of Defense ("DOD") with respect to the
Company's Civilian Health and Medical Program of Uniformed Services ("CHAMPUS")
billing practices. The Company has produced and will continue to produce
documents in response to the DOD's subpoena. In late May 1997, the Company was
notified that its Medicare and Medi-Cal billing practices also were undergoing
review by the United States Department of Health and Human Services ("HHS").
The Company is cooperating with DOD and HHS in such investigations. The Company
believes that these investigations may be similar to investigations being
conducted by DOD and HHS with respect to the billing practices of the clinical
laboratory testing industry. The Company further believes that these
investigations are in their early stages. There can be no assurance that the
result of such investigations as they relate to the Company would not subject
the Company to significant civil or criminal liability (which could include
substantial fines, penalties or forfeitures, and mandatory or discretionary
exclusion from participation in Medicare, Medi-Cal and other government funded
healthcare programs), which could have a material adverse effect on the
financial condition of the Company.
Item 3. Defaults on Senior Securities
The following paragraphs describe the existing defaults under the
Company's Credit Agreement and debt instruments. Such defaults will remain
outstanding until the Effective Date, at which time the Company's obligations
under such Credit Agreement and such debt instruments will be extinguished and
the obligees under such Credit Agreement and such debt instruments will receive
distributions from the reorganized Company in accordance with the terms and
conditions of the Plan.
Credit Agreement Defaults
As previously reported in its Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 1996, 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 related to the Debentures and the Note
issued by the Company in connection with the acquisition of Medical Group
Pathology Laboratory. (See "Other Indebtedness," below).
The Company failed to make interest payments due monthly since
September 1995 under the Credit Agreement, each in the amount of approximately
$660,000 (excluding penalties on unpaid amounts), and also failed to make the
principal amortization payments under the Credit Agreement due on September 13,
1995 and October 6, 1995 (each in the amount of $600,000), the principal
amortization payments due on November 3, 1995, December 29, 1995 and March 31,
1996 (each in the amount of $1.2 million), principal amortization payments due
on February 7, 1996, June 30, 1996, September 30, 1996, December 31, 1996 and
March 31, 1997 (each in the amount of $3.6 million). The Company also failed to
make the remaining payment of $150,000 due on December 31, 1995 for the
remainder of the restructure fee under the Third Amendment to the Credit
Agreement.
As of the date hereof, all of the lenders that were party to the
Existing Lender Agreements have assigned to third parties their interests in the
Company's debt obligations under the Credit Agreement. These third party
assignees are the Senior Lenders (Oaktree Capital Management, LLC, The
Copernicus Fund, L.P., DDJ Overseas Corp., Belmont Fund, L.P., Belmont Capital
Partners II, L.P., and Cerberus Partners, L.P.) These assignments were made
pursuant to terms and conditions that do not impact the nature of the Company's
obligations arising out of the Credit Agreement or the existing defaults
thereunder.
Subordinated Debentures
The Company failed to make four interest payments, each in the amount
of $1.5 million, due on August 15, 1995, February 15, 1996, and August 31, 1996,
and February 17, 1997, 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 October 1995 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
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<PAGE> 28
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.
Other Indebtedness
Prior to the Petition Date, the Company engaged in negotiations with
Pathologists' Clinical Laboratories of Glendale, Inc. ("PCL Partners") 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 November 30, 1996, the
outstanding principal amount of the Note issued by the Company to Pathologists
Clinical Laboratory of Glendale in connection with such purchase was
approximately $1,485,000.
By stipulation and order of the Bankruptcy Court, dated April 18, 1997
(the "Stipulation"), PCL Partners and the Company agreed as follows: (i) PCL
Partners has an unsecured Class 5 Claim under the Plan in the amount of
$1,654,847, less the Net Proceeds (as hereinafter defined); (ii) the automatic
stay shall be modified to permit Ostrin & Ostrin to sell certain items of PCL
Partner's collateral set forth on Exhibit A to the Stipulation (the
"Collateral") on or before July 15, 1997; (iii) Ostrin & Ostrin shall remit the
proceeds of the sale of the Collateral, less Ostrin & Ostrin's fees of $40.00
per hour and expenses (the "Net Proceeds"), within 15 days of receipt; (iv) PCL
Partners shall waive all other claims against the Company, except for any claims
which may arise from certain equipment leases set forth on Exhibit B to the
Stipulation, including claims arising from the Agreement of Purchase and Sale of
Assets.
Prior to the Petition Date, 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 reach a successful compromise 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 MGPL 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 1. 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. In August of
1996, in connection with the Company's sale of its Santa Barbara histology and
cytology operations to an affiliate of Medical Group Pathology Laboratory, Inc.,
Medical Group Pathology Laboratory, Inc. and the Company entered into another
standstill agreement, which standstill agreement had not expired as of the
Petition Date. Accordingly, the lawsuit has been stayed. The Company has no
substantive defenses to this lawsuit. As of November 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.
Item 5. Other Information
MSI Stock Purchase
On February 24, 1997, the Company entered into an Agreement for
Purchase and Sale of Stock (the "MSI Stock Purchase Agreement") with Nu-Tech,
whereby PCL acquired all issued and outstanding shares (the "Shares") of Medical
Science Institute, Inc. ("MSI") from Nu-Tech, the beneficial and record owner of
all issued and outstanding shares of MSI (the "MSI Stock Purchase"). The closing
of the transactions contemplated by the MSI Stock Purchase Agreement (the
"Closing") occurred on February 26, 1997.
In consideration for the Shares, the Company paid to Nu-Tech an
aggregate amount in cash equal to $2,643,183.03. The Company also issued and
delivered a Promissory Note to Nu-Tech in the principal amount of $5,000,000,
pursuant to the Plan, the Promissory Note will
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<PAGE> 29
be forgiven by Nu-Tech on the Effective Date, in exchange for which forgiveness
Nu-Tech will acquire 17% of the New Common Stock. The aggregate consideration
and other payments to be made in connection with the foregoing transaction were
arrived at pursuant to arms' length negotiations between the Company and
Nu-Tech.
As the Company was a debtor in possession in the chapter 11 case before
the Bankruptcy Court on the Closing Date, Bankruptcy Court approval was required
with respect to the purchase of the Shares and the related transactions, and
such approval was granted by court order on January 29, 1997.
Board of Directors
On the Effective Date, the terms of office of the current
members of the Company's Board of Directors will cease. On and after the
Effective Date, the following individuals will become members of
the reorganized Company's Board of Directors: Mr. J. Marvin Feigenbaum
(Chairman), Mr. David Sterling, Mr. Leonard Green and Mr. Matthew Barrett.
Pursuant to the terms of the Plan, the remaining initial Board member will be
designated by the Senior Lenders.
<TABLE>
<CAPTION>
Page
Item 6. Exhibits and Reports on Form 8-K Number
-------------------------------- ------
<S> <C> <C>
a. Exhibits
2.1 Agreement for Purchase and Sale of Stock, dated February 24,
1997, between the Company, Medical Science Institute, Inc. and
Nu-Tech Bio-Med, Inc. (attached as Exhibit 2.1 to the
Company's Current Report on Form 8-K for March 13, 1997).
2.2 Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory and its Affiliated Debtors, filed with the
Bankruptcy Court on February 7, 1997 (attached as Exhibit 2.1
to the Company's Current Report on Form 8-K for June 6, 1997)
(without exhibits).
2.3 Findings of Fact, Conclusions of Law and Order Confirming
Second Amended Plan of Reorganization of Physicians Clinical
Laboratory, Inc. and Its Affiliated Debtors, dated April 23,
1997 (attached as Exhibit 2.2 to the Company's Current
Report on Form 8-K for June 6, 1997).
4.1 First Amendment to Credit Agreement, dated as of July 28, 1994
(incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K for May 8, 1995) (without exhibits
and schedules).
4.2 Second Amendment to Credit Agreement, dated as of September
27, 1994 (incorporated by reference to Exhibit 4.3 of the
Company's Current Report on Form 8-K for May 8, 1995) (without
exhibits and schedules).
4.3 Third Amendment to Credit Agreement, dated as of May 10, 1995
(incorporated by reference to Exhibit 4.4 of the Company's
Current Report on Form 8-K for May 8, 1995) (without exhibits
and schedules).
4.4 Fourth Amendment to Credit Agreement, dated as of July 31,
1995 (incorporated by reference to Exhibit 4.13 of the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1995) (without exhibits and schedules).
4.5 Fifth Amendment to Credit Agreement, dated as of February 20,
1996 (attached as Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996)
(without exhibits and schedules).
</TABLE>
-29-
<PAGE> 30
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
4.5 Guaranty, dated as of May 10, 1995, granted by Sutter Health
to the Banks (incorporated by reference to Exhibit 4.5 of the
Company's Current Report on Form 8-K for May 8, 1995).
4.6 Form of Guaranty executed by Diagnostic Laboratories, Inc.,
Regional Reference Laboratory Governing Corporation, and
Quantum Clinical Laboratories, Inc., each a subsidiary
corporation of the Company, and California Regional Reference
Laboratory, a limited partnership of which the Company is,
indirectly, the sole general partner and limited partner
(incorporated by reference to Exhibit 4.6 of the Company's
Current Report on Form 8-K for May 8, 1995).
4.7 Agreement, dated as of May 10, 1995, between the Company and
Sutter Health (incorporated by reference to Exhibit 4.7 of the
Company's Current Report on Form 8-K for May 8, 1995).
4.17 Warrant W-001, dated as of May 10, 1995 (incorporated by
reference to Exhibit 4.8 of the Company's Current Report on
Form 8-K for May 8, 1995).
10.1 Employment Agreement between the Company and J. Marvin
Feigenbaum, dated as of November 7, 1996 (attached as Exhibit
10.1 to the Company's Current Report on Form 8-K for November
13, 1996).
12.1 Statement regarding calculation of ratios of earnings to fixed
charges.
99 Text of the Company's press release dated April 21, 1997
relating to the confirmation of the Company's Plan of
Reorganization (attached as Exhibit 99 to the Company's
Current Report on Form 8-K for June 6, 1997).
b. Reports on Form 8-K filed during the quarter ended November
30, 1996:
The Company filed a current report on Form 8-K on November 13,
1996 to report that the Company and its wholly-owned
subsidiaries filed voluntary petitions for relief under
chapter 11 of the Bankruptcy Code, as well as the Termsheet
with respect to the DIP Facility, the employment of J. Marvin
Feigenbaum as Chief Operating Officer of the Company during
the pendency of the chapter 11 proceedings, and the
resignation of Dennis H. Tootelian as a Director of the
Company.
The Company filed a current report on Form 8-K on March 13,
1997 to report the Company's purchase of all outstanding
shares of stock of Medical Science Institute, Inc. ("MSI")
from Nu-Tech Bio-Med, Inc. ("Nu-Tech") pursuant to an
Agreement for Purchase and Sale of Stock, dated February 24,
1997, between the Company, MSI and Nu-Tech.
The Company filed a current report on Form 8-K on June 6, 1997
to report the confirmation by the Bankruptcy Court of the
Company's Second Amended Joint Plan of Reorganization of
Physicians Clinical Laboratory and its Affiliated Debtors.
</TABLE>
-30-
<PAGE> 31
PHYSICIANS CLINICAL LABORATORY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIANS CLINICAL LABORATORY, INC.
(Registrant)
June 6, 1997 /s/ J. Marvin Feigenbaum
------------------------
J. Marvin Feigenbaum
Chief Operating Officer
/s/ Richard M. Brooks
------------------------
Richard M. Brooks
Senior Vice President
Chief Financial Officer
/s/ Wayne E. Cottrell
------------------------
Wayne E. Cottrell
Vice President, Finance
(Chief Accounting Officer)
-31-
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars, except ratio information)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
1 Loss
Pre-tax loss (23,705) (20,808)
Interest expense(1) 11,448 9,217
------- -------
(12,257) (11,591)
======= =======
2 Fixed Charges
Interest expense(1) 11,448 9,217
======= =======
3 Ratio (1 divided by 2) N/A(A) N/A(A)
======= =======
</TABLE>
(A) Earnings are inadequate to cover fixed charges. The amount of the
deficiency is $23,705, and $20,808 for the nine months ended November
30, 1996 and 1995, respectively.
- --------
1 Consists of interest on debt and imputed interest on capital leases.
-32-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 67,024
<SECURITIES> 0
<RECEIVABLES> 19,522,124
<ALLOWANCES> 5,883,000
<INVENTORY> 1,245,033
<CURRENT-ASSETS> 16,075,659
<PP&E> 34,441,001
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,375,806
<CURRENT-LIABILITIES> 160,689,661
<BONDS> 0
0
0
<COMMON> 60,713
<OTHER-SE> (80,375,762)
<TOTAL-LIABILITY-AND-EQUITY> 84,375,806
<SALES> 14,658,397
<TOTAL-REVENUES> 14,658,397
<CGS> 19,633,020
<TOTAL-COSTS> 25,397,206
<OTHER-EXPENSES> 1,818,115
<LOSS-PROVISION> 2,374,388
<INTEREST-EXPENSE> 5,764,186
<INCOME-PRETAX> (10,738,809)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,738,809)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,738,809)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> 0
</TABLE>
