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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ending May 31, 1997
Commission File Number 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 68-0280528
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(State or other jurisdiction of incorporation (I.R.S. Employer
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) 444-3500
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</TABLE>
None
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(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Number of shares of common stock outstanding as of June 23, 1997 was 6,071,419.
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INDEX
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<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
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Condensed Consolidated Balance Sheets as of May 31, 1997 and 3
February 28, 1997
Condensed Consolidated Statements of Operations for the three month 4
ended May 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the three month 5
ended May 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results 17
of Operations for the three months ended May 31, 1997 and 1996
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 3. Defaults on Senior Securities 32
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 38
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 1997 AND FEBRUARY 28, 1997
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<CAPTION>
May 31, February 28,
1997 1997
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<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash $ 457,095 $ 500,516
Accounts receivable, net 10,290,079 9,591,204
Notes receivable 360,100 361,650
Supplies inventory 1,616,285 1,534,592
Other current assets 692,878 1,501,298
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Total current assets 13,416,437 13,489,260
EQUIPMENT AND IMPROVEMENTS, net 10,314,380 11,595,900
INTANGIBLE ASSETS, net 0 0
OTHER ASSETS 675,357 686,855
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Total assets $ 24,406,174 $ 25,772,015
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LIABILITIES & STOCKHOLDERS'
DEFICIT
CURRENT LIABILITIES:
Debtor-in-Possession Borrowings $ 5,943,183 $ 5,243,182
Current Portion of Long Term Debt 300,740 283,687
Note payable to Related Party 5,000,000 5,000,000
Accounts payable 1,502,975 1,237,338
Accrued payroll & other 13,555,824 8,857,225
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Total current liabilities 26,302,722 20,621,432
LONG-TERM DEBT 595,951 631,309
LIABILITIES SUBJECT TO COMPROMISE 167,454,300 167,776,289
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Total liabilities 194,352,973 189,029,030
STOCKHOLDERS' DEFICIT
Common Stock 60,714 60,714
Paid-in capital 15,570,802 15,570,802
Retained earnings (deficit) (185,578,315) (178,888,531)
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Total stockholders' deficit (169,946,799) (163,257,015)
Total liabilities and stockholders' deficit $ 24,406,174 $ 25,772,015
============= =============
</TABLE>
The accompany notes are an integral part of these
condensed financial statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 1997 AND 1996
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<CAPTION>
THREE MONTHS ENDED
MAY 31,
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1997 1996
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NET REVENUE $ 17,714,841 $ 19,735,539
DIRECT LABORATORY COST 6,860,158 6,401,713
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Gross profit 10,854,683 13,333,826
LABORATORY SUPPORT COST 4,838,201 5,209,312
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Laboratory profit 6,016,482 8,124,514
OVERHEAD EXPENSE 7,110,458 9,370,017
CREDIT RESTRUCTURING 1,006,508 0
EXPENSE
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Operating Income (Loss) (2,100,484) (1,245,503)
INTEREST EXPENSE AND OTHER, 4,588,111 3,752,317
net
INCOME TAXES 0 0
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Net Income (Loss) ($ 6,688,595) ($ 4,997,820)
============ ============
EARNINGS (LOSS) PER SHARE:
Primary ($1.10) ($0.83)
Fully Diluted N/A N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Primary 6,071,000 6,050,000
Fully Diluted N/A N/A
</TABLE>
The accompany notes are an integral part of these
condensed financial statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MAY 31, 1997 AND 1996
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<CAPTION>
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($6,688,595) ($4,997,820)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 1,281,486 2,481,449
Provision for doubtful accounts 1,166,512 1,390,009
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (1,863,836) (3,297,058)
Net decrease (increase) in inventories, prepaid
costs and other assets 738,227 150,355
(Decrease) increase in accounts payable and
accrued expenses 4,641,056 4,282,472
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Net cash provided by (used in) operating activities (725,150) 9,407
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of intangible assets in connection with -- --
acquisitions
Acquisition of equipment and leasehold improvements 34 (109,047)
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Net cash provided by (used in) investing activities 34 (109,047)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on LOC and long term debt 700,000 --
Payments of principle on long term debt (18,305) (234,275)
Proceeds from sale of capital stock -- 19,115
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Net cash provided by financing activities 681,695 (215,160)
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Net increase (decrease) in cash and cash equivalents (43,421) (314,800)
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 500,516 391,815
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 457,095 $ 77,015
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 0 $ 0
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Cash paid for income taxes $ 0 $ 0
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</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 May 31, 1997, 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 payments 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),
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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.
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 May 31, 1997, subject to adjustment in the reorganization process. Under
chapter 11, actions to enforce certain claims against the Company are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date. Other liabilities may arise or be subject to compromise as a
result of rejection of executory contracts and unexpired leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. As a general matter, the treatment of these liabilities will be
determined as a part of the formulation and confirmation of a plan of
reorganization. (See Note 4 - "Liabilities Subject to Compromise," herein).
The accompanying condensed consolidated financial statements have been
presented on the basis that the Company is a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As a result of the chapter 11 filing and circumstances
relating to this event, realization of assets and satisfaction of liabilities is
subject to uncertainty. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
ordinary course of business. The condensed consolidated financial statements do
not include any of the adjustments to the assets or liabilities that may result
from the outcome of the bankruptcy proceedings. The ability of the Company to
continue as a going concern is dependent on, among other things, future
profitable operations, compliance, until the effective date of the plan of
reorganization, with the debtor in possession financing agreement (see Note 2 -
"Cash Collateral, Debtor in Possession Financing and Exit Financing," herein),
and the ability to generate sufficient cash from operations and obtain financing
sources to meet future obligations.
The principal business of the Company is to provide clinical laboratory
services in the State of California. As of May 31, 1997, the Company operated
two full service clinical laboratories consisting of one in Sacramento and one
in Burbank, 16 "STAT" laboratories and approximately 188 patient service centers
located in close proximity to referral sources
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throughout the Company's service areas. The Company is a "hybrid" among clinical
laboratory companies in that it serves both as a traditional reference
laboratory for approximately 7300 office-based physicians/clients and as an
independent clinical laboratory to acute hospital customers.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The condensed consolidated financial statements
include the accounts of PCL and its consolidated group of Debtor subsidiaries.
All material intercompany balances and transactions have been eliminated in
consolidation. The operating results for the three month period ended May 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended February 28, 1998 ("Fiscal 1998"). For further information, refer to
the financial statements and related notes included in the Company's annual
report on Form 10-K for the year ended February 28, 1997 ("Fiscal 1997").
(2) CASH COLLATERAL, DEBTOR IN POSSESSION FINANCING AND EXIT
FINANCING
Critical to the Company's ability to restructure its businesses and to
emerge from chapter 11 was its ability to maintain liquidity to meet operating
needs during the Bankruptcy Cases. As a result of filing for chapter 11
protection, cash generated from services rendered prior to the Bankruptcy Cases
is "cash collateral" of the Senior Lenders, pursuant to their security interests
therein. Under the Bankruptcy Code, this cash collateral could not be used by
the Company without the Senior Lenders' consent or Bankruptcy Court approval.
Accordingly, and as contemplated by the Prepetition Termsheet, on November 12,
1996, the Bankruptcy Court entered an interim order and on December 3, 1996, the
Bankruptcy Court entered a final order authorizing the Company to use 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.
Section 363; (2) Regarding Terms and Conditions of Post-Petition Secured
Financing from Senior Lenders Pursuant to 11 U.S.C. Section 364; (3) Validating
Pre-Bankruptcy Liens, Security Interests and Claims; (4) Providing Adequate
Protection; (5) Granting Post-Petition Liens and Security Interests; (6)
Granting Claims Pursuant to 11 U.S.C. Sections 503 and 507(b); and (7)
Granting Relief from The Automatic Stay (the "DIP Financing Facility") with the
Senior Lenders. The DIP Financing Facility provided the Company with up to $9.8
million of borrowing capacity during the Bankruptcy Cases, for ordinary working
capital purposes and to fund the plan of reorganization as contemplated by the
Prepetition Termsheet. (See Note 3 -"Prepetition Termsheet and Plan of
Reorganization" herein). On November 12, 1996, the Bankruptcy Court entered an
interim order approving borrowings of up to $2.0 million under the DIP Financing
Facility. On December 3, 1996, the Bankruptcy Court entered a final order
approving all aspects of the DIP Financing Facility.
Under the DIP Financing Facility, the Senior Lenders agreed to make loans
to the Company in an aggregate principal amount not to exceed $9.8 million. The
obligations of the Company under the DIP Financing Facility are secured by a
first priority lien on and
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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 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
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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 Plan, 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) 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 breakup fee and overbid protections for Nu-Tech within 60 days
of the Petition Date. (see Note 5 - "Breakup/Overbid Protections," herein)
To provide the Company with sufficient liquidity to operate its businesses
during the Bankruptcy Cases, the Prepetition Termsheet required the Senior
Lenders to provide the DIP Financing Facility. Funds for the DIP Financing
Facility were obtained by the Senior Lenders from Nu-Tech, which purchased
approximately $13.33 million of the Senior Lenders' claims against the Company
for $10 million in cash, just prior to the Petition Date. Borrowings under the
DIP Financing Facility will be forgiven under the plan of reorganization without
any payment by the Company, provided that no event of default occurs and
continues under the DIP Financing Facility. In such case, $10 million of Nu-
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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
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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.
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.
Under the terms of the Plan, the Senior Lenders will receive, among other
things, $55 million in Senior Secured Notes (the "New Senior Notes") to be
issued by the reorganized Company. Although the reorganized Company and the
Senior Lenders are still engaged in negotiations with respect to the Senior
Notes, the reorganized Company and the Senior Lenders expect that the principal
terms of the indenture governing the New Senior Notes (the "Indenture") will be
substantially as follows: First, the New Senior Notes will bear interest at the
rate of either 10% per annum in cash or 12% per annum in kind, at the option of
the reorganized Company, for the first two years after issuance and 11% per
annum per year through maturity. Second, the New Senior Notes will mature seven
years after issuance. Third, each holder of the New Senior Notes may require the
reorganized Company to repurchase such holder's New Senior Notes upon (i) the
occurrence of a Change in Control (as defined in the Indenture); (ii) the sale
of assets of the reorganized Company yielding net unapplied proceeds of a
certain amount; and (iii) the consummation of an underwritten public offering of
the reorganized Company's capital stock. Fourth, the New Senior Notes will be
secured by a first priority security interest in all existing and future assets
of the reorganized Company, except that it is anticipated that the Senior
Lenders will agree to subordinate such security interests in the receivables of
the reorganized Company to security interests granted to the lender providing
the Exit Financing Facility (as herein defined). Finally, the Indenture will
contain customary covenants, representations and warranties and customary
provisions regarding defaults, remedies and modifications.
The Company has also agreed that the reorganized Company will issue
registration rights with respect to the New Common Stock and the New Senior
Notes in substantially the forms hereinafter described. Under the New Senior
Notes Registration Rights Agreement, during the duration of this agreement and
after a period of 15 months from its date, Senior Lenders holding at least a
majority of certain of the New Senior Notes may
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<PAGE> 13
request the reorganized Company to register such New Senior Notes. The terms of
the New Common Stock Registration Rights Agreement provide that during the
duration of the New Common Stock Registration Rights Agreement and after the
earlier of (i) 30 months from its date, or (ii) six months after the date that
the reorganized Company files its first registration of its New Common Stock,
those Senior Lenders holding at least a majority of certain of the New Common
Stock shall have the right to request the registration of such New Common Stock.
In addition, it is anticipated that certain of the shareholders of the
reorganized Company will enter into a shareholders agreement, pursuant to which
the right of such shareholders to dispose of their shares in the reorganized
Company will be restricted to (i) dispositions to successors in interest who
agree to be bound by the shareholders agreement; (ii) dispositions under a
registered public offering; (iii) dispositions to an affiliate of the
transferring shareholder ("affiliate" defined as a person with the power to
direct the management or a 10% beneficial owner of the reorganized Company); and
(iv) dispositions by Nu-Tech made solely in a pro rata distribution of
securities to Nu-Tech's shareholder. Further, the shareholders will agree not to
transfer any of their securities in the reorganized Company to any entity which
owns 5% or more of an entity which conducts clinical or specialized laboratory
services as its principal business.
Under the terms of the Plan, Nu-Tech, the Senior Lenders and the holders
of the Debentures will receive 52.6%, 38.1% and 9.3%, respectively, of the New
Common Stock of the reorganized Company. Additionally, the holders of the Common
Stock of the Company will receive warrants to purchase 5% of the New Common
Stock to be issued and outstanding immediately after the Effective Date, on a
fully diluted basis, at the price of $13.30 per share. Because the Company
currently has fewer than 300 shareholders, and because the reorganized Company
will have fewer than 300 shareholders after the Effective Date, the Company has
filed an application with the United States Securities and Exchange Commission
to de-register its Common Stock under the Securities Exchange Act of 1934.
On April 18, 1997, the Bankruptcy Court granted the Company's request to
substantively consolidate the Bankruptcy Cases into a single chapter 11 case for
purposes of the Plan and the distribution provisions thereunder. Pursuant to
such ruling, on the Confirmation Date, (1) all intercompany claims by and among
the Debtors were deemed eliminated, (2) all assets and liabilities of the
Debtors were merged or treated as though they were merged, (3) any obligations
of any Debtor and all guaranties thereof executed by one or more of the Debtors
were deemed to be one obligation of the reorganized Company, (4) any claims
filed or to be filed in connection with any such obligation and guaranties were
deemed one claim against the reorganized Company, (5) each claim filed in the
Bankruptcy Case of any Debtor were deemed filed against the reorganized Company
in the consolidated Bankruptcy Case on the Confirmation Date, in accordance with
the substantive consolidation of the assets and liabilities of the Debtors and
all claims based on guaranties of payment, collection or performance made by the
Debtors as to obligations of any other Debtor were discharged, released and of
no further force and effect, and (6) all transfers, disbursements and
distributions made by any Debtor were deemed to be made by all of the Debtors.
The Plan provides for the substantive consolidation of the estates, so
that the assets and liabilities of the Debtors are treated as if the assets were
held by, and the liabilities incurred by, a single entity.
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<PAGE> 14
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 May 31, 1997, such amounts to the extent not paid, were included in accrued
expenses and other payables for the period set forth below (amounts in millions
of dollars):
<TABLE>
<S> <C>
Long Term Debt $122.0
Accounts Payable 15.4
Accrued Payroll & Other 22.6
Capitalized PSC Leases 7.5
-----
Total Liabilities Subject to Compromise $167.5
======
</TABLE>
Prior to the Petition Date, the Company was party to the Existing Lender
Agreements. Under the Existing Lender Agreements, the Debtors were indebted to
the Senior Lenders and Nu-Tech in the approximate amount of $94.3 million. In
connection with the Third Amendment to the Credit Agreement, the lenders
required the Company's guarantors to provide a guarantee of the Debtors'
borrowings under the Credit Agreement in the amount of $3.5 million. On December
30, 1996, the Company's guarantors paid $3.5 million to Nu-Tech and the Senior
Lenders in respect of the senior secured claims which thus reduced the amount of
the senior secured claims to approximately $90.8 million. The Senior Lenders and
Nu-Tech assert a security interest in substantially all of the assets of the
Company and its subsidiaries. No payments of principal or interest were made by
the Company under the Existing Loan Agreements from September 1995 to the
Petition Date. Accordingly, the Company was in default under the Existing Lender
Agreements beginning in September 1995.
The amounts and terms of these prepetition liabilities will be materially
changed by the Plan on the Effective Date.
Additional bankruptcy claims and prepetition liabilities may arise from
the rejection of executory contracts and unexpired leases, the resolution of
contingent and unliquidated claims and the settlement of disputed claims.
Consequently, the amounts included in the condensed consolidated balance sheets
as liabilities subject to compromise may be subject to future adjustment.
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" (SOP 90-7), the Company is not required to record
interest during chapter 11 proceedings on unsecured or undersecured prepetition
debt. Interest expense on certain secured debt will continue to be accrued but
is subject to settlement. No determination has been made regarding the value of
the property interests which secure certain debt and,
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<PAGE> 15
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 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.
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<PAGE> 16
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 $6,689,000 and $4,998,000 for the
three months ended May 31, 1997 and 1996, respectively.
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<PAGE> 17
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 May 31, 1997, 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 payments
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.
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<PAGE> 18
REGULATORY INVESTIGATION
In April of 1997, the Company received a subpoena to furnish certain
documents to the United States Department of Defense ("DOD") with respect to the
Company's Civilian Health and Medical Program of Uniformed Services ("CHAMPUS")
billing practices. The Company has produced and will continue to produce
documents in response to the DOD's subpoena. In late May 1997, the Company was
notified that its Medicare and Medi-Cal billing practices also were undergoing
review by the United States Department of Health and Human Services ("HHS"), and
in early June of 1997, the Company received a subpoena to furnish certain
documents to HHS in connection with such review. The Company is cooperating with
DOD and HHS in such investigations. The Company has been advised that its
billing practices are the subject of these investigations; the Company believes
that these investigations may be similar to other investigations being conducted
by DOD and HHS with respect to the billing practices of the clinical laboratory
testing industry. 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.
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.
FISCAL QUARTER ENDED MAY 31, 1996 COMPARED TO FISCAL QUARTER ENDED MAY 31, 1997
On February 26, 1997, the Company acquired Medical Science Institutes
("MSI") a clinical laboratory company located in southern California. MSI's
revenue and expenses for the first quarter of Fiscal 1997-1998 are consolidated
with the Company's.
Net revenue fell from $19.7 million for the three months ended May 31,
1996 to $17.7 million for the three months ended May 31, 1997. Without MSI, the
first fiscal quarter net revenue for the Company was $14.3 million. The revenue
reduction is the result of the loss of customers and continued reductions in
reimbursement from third party payers.
Direct laboratory expense increased from $6.4 million to $6.9 million for
the three months ended May 31, 1996 and 1997, respectively. Without MSI, the
Company's direct laboratory expense for the period fell to $5.5 million. As a
percentage of net revenue, direct laboratory expense increased from 32.4% to
38.7% for the fiscal quarters ended May 31, 1996 and 1997, respectively. Direct
laboratory expense increased as a result of running two full service labs.
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<PAGE> 19
Laboratory support cost fell from $5.2 million to $4.8 million for the
fiscal quarters ended May 31, 1996 and 1997, respectively. Without MSI, the
Company's laboratory support cost fell to $4.1 million for the fiscal quarter
ended May 31, 1997. As a percentage of net revenue laboratory support expense
increased from 26.4% for the fiscal quarter ended May 31, 1996 to 27.3% for the
same period in Fiscal 1998. As accessions are reduced, the Company continues to
reduce these expenses but the reduction in net revenues represented by reduced
reimbursement rates outweighs such expense reduction.
Selling, general and administrative expense fell from $5.4 million to $4.7
million for the fiscal quarters ended May 31, 1996 and 1997, respectively.
Without MSI, the Company's selling, general and administrative expense fell to
$3.8 million for the quarter ended May 31, 1997. As a percentage of net revenue,
selling, general and administrative expenses fell from 27.9% for the fiscal
quarter ended May 31, 1996 to 26.3% for the same period in Fiscal 1998. The
Company continues to review these expenses and to make reductions when
applicable.
Provision for doubtful accounts fell from $1.4 million for the three month
period ended May 31, 1996 to $1.2 million for the fiscal quarter ended May 31,
1997. Without MSI, the provisions for doubtful accounts for the three months
ended May 31, 1997 was $1.0 million. The provision for doubtful accounts is
based upon actual collection history and management's assessment of the health
of the California market and the economy as a whole.
Depreciation and amortization expense fell from $2.5 million to $1.3
million for the fiscal quarters ended May 31, 1996 and May 31, 1997,
respectively. This drop in expense is the result of the Company's decision to
write down to zero all intangible assets as of fiscal year ended February 28,
1997. Therefore, no amortization of intangible assets was recorded for the first
fiscal quarter of Fiscal 1998.
Operating loss grew from a loss of $1.2 million for the fiscal quarter
ended May 31, 1996 to $2.1 million for the fiscal quarter ended May 31, 1997.
Without MSI, the Company's operating loss for the fiscal quarter ended May 31,
1997 was $2.2 million.
Interest expense grew from $3.8 million to $4.6 million for the fiscal
quarters ended May 31, 1996 and 1997, respectively. The increase is related to
penalties associated with defaults on existing loan balances and interest
expense for the DIP Financing Facility.
Net income decreased from a loss of $5.0 million for the three months
ended May 31, 1996 to a loss of $6.7 million for the three months ended May 31,
1997. Without MSI, the Company's loss for the fiscal quarter ended May 31, 1997
was $6.8 million.
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 May 31, 1997 a
one-time non-recurring expense related to the credit restructuring and
preparations for the chapter 11 filing in the amount of $1,006,508 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
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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, 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 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
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<PAGE> 21
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, 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
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(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 breakup 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 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.
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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.
Under the terms of the Plan, the Senior Lenders will receive, among other
things, $55 million in Senior Secured Notes (the "New Senior Notes") to be
issued by the reorganized
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<PAGE> 24
Company. Although the reorganized Company and the Senior Lenders are still
engaged in negotiations with respect to the Senior Notes, the reorganized
Company and the Senior Lenders expect that the principal terms of the indenture
governing the New Senior Notes (the "Indenture") will be substantially as
follows: First, the New Senior Notes will bear interest at the rate of either
10% per annum in cash or 12% per annum in kind, at the option of the reorganized
Company, for the first two years after issuance and 11% per annum per year
through maturity. Second, the New Senior Notes will mature seven years after
issuance. Third, each holder of the New Senior Notes may require the reorganized
Company to repurchase such holder's New Senior Notes upon (i) the occurrence of
a Change in Control (as defined in the Indenture); (ii) the sale of assets of
the reorganized Company yielding net unapplied proceeds of a certain amount; and
(iii) the consummation of an underwritten public offering of the reorganized
Company's capital stock. Fourth, the New Senior Notes will be secured by a first
priority security interest in all existing and future assets of the reorganized
Company, except that it is anticipated that the Senior Lenders will agree to
subordinate such security interests in the receivables of the reorganized
Company to security interests granted to the lender providing the Exit Financing
Facility (as herein defined). Finally, the Indenture contains customary
covenants, representations and warranties and customary provisions regarding
defaults, remedies and modifications.
The Company has also agreed to issue registration rights with respect to
the New Common Stock and the New Senior Notes in substantially the forms
hereinafter described. Under the New Senior Notes Registration Rights Agreement,
during the duration of this agreement and after a period of 15 months from its
date, Senior Lenders holding at least a majority of certain of the New Senior
Notes may request the reorganized Company to register such New Senior Notes. The
terms of the New Common Stock Registration Rights Agreement provide that during
the duration of the New Common Stock Registration Rights Agreement and after the
earlier of (i) 30 months from its date, or (ii) six months after the date that
the reorganized Company files its first registration of its New Common Stock,
those Senior Lenders holding at least a majority of certain of the New Common
Stock shall have the right to request the registration of such New Common Stock.
In addition, it is anticipated that certain of the shareholders of the
Company will enter into a shareholders agreement, pursuant to which the right of
such shareholders to dispose of their shares in the Company will be restricted
to (i) dispositions to successors in interest who agree to be bound by the
shareholders agreement, (ii) dispositions under a registered public offering,
(iii) dispositions to an affiliate of the transferring shareholder ("affiliate"
defined as a person with the power to direct the management or a 10% beneficial
owner of the Company) and (iv) dispositions by Nu-Tech made solely in a pro rate
distribution of securities to Nu-Tech's shareholders. Further, the shareholders
will agree not to transfer any of their securities in the Company to any entity
which owns 5% or more of an entity which conducts clinical or specialized
laboratory services as its principal business.
Under the terms of the Plan, Nu-Tech, the Senior Lenders and the holders
of the Debentures will receive 52.6%, 38.1% and 9.3%, respectively, of the New
Common Stock of the reorganized Company. Additionally, the holders of the Common
Stock of the Company will receive warrants to purchase 5% of the New Common
Stock to be issued and outstanding immediately after the Effective Date, on a
fully diluted basis, at the price of 13.30 per share. Because the Company
currently has fewer than 300 shareholders, and because the reorganized Company
will have fewer than 300 shareholders after the Effective Date, the Company has
filed an application with the United States Securities and Exchange Commission
to de-register its Common Stock under the Securities Exchange Act of 1934.
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<PAGE> 25
On April 18, 1997, the Bankruptcy Court granted the Company's request to
substantively consolidate the Bankruptcy Cases into a single chapter 11 case for
purposes of the Plan and the distribution provisions thereunder. Pursuant to
such ruling, on the Confirmation Date, (1) all intercompany claims by and among
the Debtors were deemed eliminated, (2) all assets and liabilities of the
Debtors were merged or treated as though they were merged, (3) any obligations
of any Debtor and all guaranties thereof executed by one or more of the Debtors
were deemed to be one obligation of the reorganized Company, (4) any claims
filed or to be filed in connection with any such obligation and guaranties were
deemed one claim against the reorganized Company, (5) each claim filed in the
Bankruptcy Case of any Debtor were deemed filed against the reorganized Company
in the consolidated Bankruptcy Case on the Confirmation Date, in accordance with
the substantive consolidation of the assets and liabilities of the Debtors and
all claims based on guaranties of payment, collection or performance made by the
Debtors as to obligations of any other Debtor were discharged, released and of
no further force and effect, and (6) all transfers, disbursements and
distributions made by any Debtor were deemed to be made by all of the Debtors.
The Plan provides for the substantive consolidation of the estates, so
that the assets and liabilities of the Debtors are treated as if the assets were
held by, and the liabilities incurred by, a single entity.
The effectiveness of the Plan is subject to certain conditions set forth
in the Plan, including, but not limited to the execution of a shareholders
agreement between Nu-Tech and certain of the Senior Lenders and the consummation
of the Nu-Tech Stock Purchase by Nu-Tech and the reorganized Company.
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, December 31, 1996, March 31, 1997 and June 30, 1997, each in the amount of
$3.6 million.
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<PAGE> 26
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 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, and as liabilities subject to compromise since filing for Chapter 11
protection.
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:
- Consolidation of facilities. The Fresno hub laboratory was closed in
June 1995 and consolidated into the Sacramento laboratory. The
Company's Southern California hub laboratory was downsized in June
1996 and consolidated into the Sacramento laboratory. Both locations
maintain expanded STAT facilities.
- Use of dedicated internal teams for concentrated account receivable
collection efforts in the Medicare, MediCal, client and patient
payor categories.
- Completion of centralized billing capabilities.
- Data processing system changes to improve billing and collection
efforts.
- Reductions in overhead by, among other things, closing unprofitable
locations.
- 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 vacated 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).
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<PAGE> 27
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 and the MSI Burbank facility into the Sacramento facility. As
of August 1997, these efforts have resulted in labor and infrastructure
eliminations yielding approximately $1.5 million per month in expense
reductions. In addition, 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 decreased from $9,000 in the
first three months of Fiscal 1997 to ($725,000) for the same period in Fiscal
1998 principally as a result of greater operating losses.
Cash flows from investing activities have been negative through the
periods prior to the first three months of Fiscal 1998, due almost wholly to the
Company's laboratory acquisitions and purchases of equipment and leasehold
improvements. Uses of cash from investing activities fell from $109,000 for the
first three months of Fiscal 1997 to $0 for the same period in Fiscal 1998. The
decrease in cash used in investing activities in Fiscal 1998 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 provided by financing activities increased
from ($215,000) for the three month period ended May 31, 1996 to $682,000 for
the same period in Fiscal 1998. This increase in cash flows from financing
activities is the result of increased borrowings over the period.
As of May 31, 1997, the Company had approximately $133.8 million of
indebtedness of which $40 million represents the Debentures; approximately $77.6
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 $5.9 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;
approximately $1.5 million is owed under capital lease obligations;
approximately $0.26 million is owed in taxes; and $5.0 million is owed to
Nu-Tech for the purchase of MSI. All of such indebtedness (other than the $5.0
million owed to Nu-Tech) 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,
March 31, 1997 and June 30, 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 May 31, 1997, the Company had approximately $457,000 in cash plus
approximately $3.6 million 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. As discussed above, the Company has
reached an agreement in principle with Daiwa to provide the Company with the
Exit Financing Facility, and negotiations with
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<PAGE> 28
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 0.0% of
net revenues for the three months ended May 31, 1997. As of May 31, 1997, the
Company had no material commitments for capital expenditures.
The Company anticipates that its operating cash needs for the near term
will be met by accounts receivable collection, 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
amounts 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> 29
PHYSICIANS CLINICAL LABORATORY, INC.
PART II -- OTHER INFORMATION
MAY 31, 1997
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.
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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 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.
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Prepetition Litigation
As previously disclosed in the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1997, 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 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 May 31, 1997,
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.
-31-
<PAGE> 32
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.
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"), and
in early June of 1997, the Company received a subpoena to furnish certain
documents to HHS in connection with such review. The Company is cooperating with
DOD and HHS in such investigations. The Company has been advised that its
billing practices are the subject of these investigations; the Company believes
that these investigations may be similar to other investigations being conducted
by DOD and HHS with respect to the billing practices of the clinical laboratory
testing industry. 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
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<PAGE> 33
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, March 31, 1997 and
June 30, 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
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
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<PAGE> 34
agreement. As of May 31, 1997, 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 May 31, 1997, 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 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 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
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<PAGE> 35
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 identity
of the remaining initial Board member will be designated by the Senior Lenders.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <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).
</TABLE>
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<PAGE> 36
<TABLE>
<S> <C>
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).
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 May 31,
1997:
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
</TABLE>
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<PAGE> 37
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.
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<PAGE> 38
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)
November 14, 1997 /s/ J. Marvin Feigenbaum
-----------------------------------
J. Marvin Feigenbaum
Chief Executive Officer
/s/ Wayne E. Cottrell
-----------------------------------
Wayne E. Cottrell
Vice President, Finance
(Chief Accounting Officer)
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<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars, except ratio information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
1997 1996
------- -------
<S> <C> <C>
1. Loss
Pre-tax loss (6,689) (4,998)
Interest expense(1) 4,588 3,752
------- -------
(2,101) (1,246)
======= =======
2. Fixed Charges
Interest expense(1) 4,588 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 $6,689, and $4,998 for the three months ended May 31, 1997
and 1996, respectively.
- --------
(1) Consists of interest on debt and imputed interest on capital leases.
-39-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 457,095
<SECURITIES> 0
<RECEIVABLES> 15,328,283
<ALLOWANCES> 5,038,204
<INVENTORY> 1,616,285
<CURRENT-ASSETS> 13,416,437
<PP&E> 34,332,879
<DEPRECIATION> 24,018,499
<TOTAL-ASSETS> 24,406,174
<CURRENT-LIABILITIES> 26,302,722
<BONDS> 0
0
0
<COMMON> 60,714
<OTHER-SE> (170,007,513)
<TOTAL-LIABILITY-AND-EQUITY> 24,406,174
<SALES> 17,714,841
<TOTAL-REVENUES> 17,714,841
<CGS> 19,815,325
<TOTAL-COSTS> 24,403,436
<OTHER-EXPENSES> 133,012
<LOSS-PROVISION> 1,166,512
<INTEREST-EXPENSE> 4,455,099
<INCOME-PRETAX> (6,688,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,688,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,688,595)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> 0
</TABLE>
