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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 August 31, 1997
Commission File Number 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 68-0280528
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3301 C Street, Suite 100E, Sacramento, CA 95816
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 444-3500
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None
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(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock outstanding as of November 14, 1997 was
2,500,000.
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INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
as of August 31, 1997 and February 28, 1997..........................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended August 31, 1997 and 1996..........................4
Condensed Statements of Cash Flows (Unaudited)
for the Six Months Ended ............................................................5
Notes to Condensed Consolidated Financial Statements.................................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................27
PART II -- OTHER INFORMATION................................................................37
Item 1. Legal Proceedings..........................................................37
Item 6. Exhibits and Reports on Form 8-K...........................................41
Signatures..........................................................................44
</TABLE>
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1997 AND FEBRUARY 28, 1997
<TABLE>
<CAPTION>
August 31, February 28,
1997 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 769,076 $ 500,516
Accounts receivable, net 11,755,327 9,591,204
Notes receivable 359,400 361,650
Supplies inventory 1,689,805 1,534,592
Other current assets 829,513 1,501,298
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Total current assets 15,403,121 13,489,260
EQUIPMENT AND IMPROVEMENTS, net 9,243,660 11,595,900
INTANGIBLE ASSETS, net 0 0
OTHER ASSETS 672,947 686,855
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Total assets $ 25,319,728 $ 25,772,015
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LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Debtor-in-Possession Borrowings $ 8,243,183 $ 5,243,182
Current Portion of Long Term Debt 270,025 283,687
Note payable to Related Party 5,000,000 5,000,000
Accounts Payable 2,456,124 1,237,338
Accrued Payroll & Other 18,379,580 8,857,225
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Total current liabilities 34,348,912 20,621,432
LONG-TERM DEBT 464,042 631,309
LIABILITIES SUBJECT TO COMPROMISE 167,454,300 167,776,289
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Total liabilities 202,267,254 189,029,030
STOCKHOLDERS' DEFICIT
Common Stock 60,713 60,714
Paid-in Capital 15,570,802 15,570,802
Retained Earnings (deficit) (192,579,041) (178,888,531)
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Total Stockholders' Deficit (176,947,526) (163,257,015)
Total Liabilities and Stockholders' Deficit $ 25,319,728 $ 25,772,015
============= =============
</TABLE>
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PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------- -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET REVENUE $ 16,745,854 $ 14,658,397 $ 34,460,695 $ 34,393,935
DIRECT LABORATORY COST 6,685,435 5,673,112 13,545,589 12,074,822
------------ ------------ ------------ ------------
Gross profit 10,060,419 8,985,285 20,915,106 22,319,113
LABORATORY SUPPORT COST 4,838,130 4,929,713 9,676,333 10,139,022
------------ ------------ ------------ ------------
Laboratory profit 5,222,289 4,055,572 11,238,773 12,180,091
OVERHEAD EXPENSE 6,805,001 8,850,350 13,915,461 18,161,908
CREDIT RESTRUCTURING EXPENSE 801,219 179,845 1,807,727 238,304
------------ ------------ ------------ ------------
Operating income (Loss) (2,383,931) (4,974,623) (4,484,415) (6,220,121)
INTEREST EXPENSE AND OTHER, net 4,616,976 5,764,186 9,205,087 9,516,502
INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
Net Income (Loss) $ (7,000,907) $(10,738,809) $(13,689,502) $(15,736,623)
============ ============ ============ ============
EARNINGS PER SHARE
Primary $ (1.15) $ (1.77) $ (2.25) $ (2.60)
Fully Diluted N/A N/A N/A N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Primary 6,071,000 6,058,000 6,071,000 6,050,000
Fully Diluted N/A N/A N/A N/A
</TABLE>
The accompanying 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 SIX MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(13,689,502) $(15,736,623)
Adjustments to reconcile net (loss) to net cash provided
by operating activities
Depreciation and amortization 2,507,368 4,902,617
Provision for doubtful accounts 2,332,655 2,374,388
Write-down of tenant improvements related to abandoned
southern California laboratory -- 1,804,082
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (4,496,777) (2,219,906)
Net decrease (increase) in inventories, prepaid
costs and other assets 532,730 (30,060)
(Decrease) increase in accounts payable and
accrued expenses 10,418,144 8,096,029
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Net cash provided by (used in) operating activities (2,395,382) (809,473)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase of intangible assets in connection with acquisitions -- --
Acquisition of equipment and leasehold improvements (155,128) (119,346)
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Net cash provided by (used in) investing activities (155,128) (119,346)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long term debt 3,000,000 1,138,423
Payments of principle on long term debt (180,930) (568,558)
Proceeds from sale of capital stock -- 34,163
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Net cash provided by financing activities 2,819,070 604,028
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Net increase (decrease) in cash and cash equivalents 268,560 (324,791)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 500,516 391,815
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 769,076 $ 67,024
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 0 $ 0
============ ============
Cash paid for income taxes $ 0 $ 0
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) REORGANIZATION AND BASIS OF REPORTING
On November 8, 1996 (the "Petition Date"), Physicians Clinical
Laboratory, Inc., a debtor in possession ("PCL"), and its subsidiaries, Quantum
Clinical Laboratories, Inc., Regional Reference Laboratory Governing
Corporation, Diagnostic Laboratories, Inc. and California Regional Reference
Laboratory (collectively, the "Debtors"), commenced reorganization cases (the
"Bankruptcy Cases") by filing voluntary petitions for relief under chapter 11,
Title 11 of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California, San Fernando Valley
Division (the "Bankruptcy Court"). For purposes of this Report, unless otherwise
referenced, the defined term "Company" shall apply to PCL and its consolidated
group of subsidiaries.
As previously disclosed, the Company had 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 had 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 ("Oaktree"), The Copernicus Fund, L.P.
("Copernicus"), DDJ Overseas Corp. ("DDJ"), Belmont Fund, L.P. ("Belmont I"),
Belmont Capital Partners, II, L.P. ("Belmont II) and Cerberus Partners, L.P.
("Cerberus") (collectively, the "Senior Lenders"). After months of negotiations,
on November 7, 1996, the Company, Nu-Tech and the Senior Lenders entered into an
agreement providing for a new investment of approximately $15 million into the
Company and an overall restructuring of the Company's balance sheet (the
"Prepetition Termsheet").
The Prepetition Termsheet formed the basis for the Company's plan of
reorganization (see Note 3 - "Prepetition Termsheet and Plan of Reorganization,"
herein), and paved the way for the Company's chapter 11 filing, the
restructuring of the Company's debt and the acquisition of a majority of the
Company by Nu-Tech. 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. The Company's Plan
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of Reorganization was confirmed by the Bankruptcy Court on April 23, 1997. (See
Note 3 -"Prepetition Termsheet and Plan of Reorganization" herein) and became
effective on October 3, 1997. (See Note 10 - "Effectiveness of the Plan of
Reorganization" herein).
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 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 August 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 November 3, 1997, the Company
operated one full service clinical laboratory in Sacramento, 14 "STAT"
laboratories and approximately 189 patient service centers located in close
proximity to referral sources 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
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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 August 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 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 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 were
secured by a first priority lien on and security interest in all of the
Company's assets and are also allowed administrative expenses under the
Bankruptcy Code, with priority over most administrative expenses of the kind
specified in sections 503(b) and 507(b) of the Bankruptcy Code.
The DIP Financing Facility provides that interest on advances to the
Company accrues at the rate of 2% above the prime rate and is only payable upon
an event of default described below or at the end of the term of the DIP
Financing Facility if the Company's plan of reorganization is not confirmed.
Upon the effective date of the Company's plan of reorganization, accrued
interest under the DIP Financing Facility will be forgiven.
The DIP Financing Facility imposes an annual commitment fee of 1% on the
unused portion of the $9.8 million limit. This commitment fee is only payable
upon an event of default described
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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 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
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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 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.
On September 30, 1997, the reorganized Company and its wholly owned
subsidiary, Bio-Cypher Funding Corp. (the "Funding Corp.") entered into a $10
million healthcare receivables financial facility (the "Exit Financing
Facility") with Daiwa. Under the Exit Financing Facility, the reorganized
Company sells and contributes all of its healthcare accounts receivables to the
Funding Corp., which in turn pledges such accounts receivable to Daiwa as
collateral for revolving loans. The proceeds of such revolving loans are used to
purchase the eligible accounts receivable from the reorganized Company. The
reorganized Company then uses such funds to fund future operating and capital
expenditures and to establish the future liquidity needed to operate its
businesses.
Under a Healthcare Receivables Purchase and Transfer Agreement, the
reorganized Company sells and contributes all of its healthcare accounts
receivables and related items to the Funding Corp. for a purchase price equal to
95% of the expected net value of those accounts receivable that meet certain
eligibility requirements. The reorganized Company will also act as the servicer
of such accounts receivable, continuing to conduct all billing and collection
responsibilities. The Funding Corp. may replace the reorganized Company with a
third-party servicer upon the occurrence of certain termination events.
Under a Loan and Security Agreement, the Funding Corp. pledges the
accounts receivable received from the reorganized Company to Daiwa as collateral
for revolving loans. Daiwa makes revolving loans available to the Funding Corp.
in an amount up to the lesser of (a) $10 million and (b) a borrowing base equal
to 85% of the value of eligible accounts receivables, subject to certain
adjustments. The Funding Corp. must pay interest on the outstanding balance of
these revolving loans at an interest rate per annum equal to two percent in
excess of the LIBOR Rate (as defined and calculated under the Loan and Security
Agreement), which interest rate will increase by three percent after an event of
default under the Loan and Security Agreement. The Funding Corp. must also pay
to Daiwa a monthly non-utilization fee equal to one-half of a percent on the
amount by which $10 million exceeds the outstanding balance of all revolving
loans during the prior month.
Both the Healthcare Receivables Purchase and Transfer Agreement and the
Loan and Security Agreement contain representations and warranties, affirmative
and negative covenants (including financial covenants), events of default and
events of termination that are typical in transactions of this nature. The Exit
Financing Facility expires on September 30, 1999. (See Note 10 - "Effectiveness
of the Plan of Reorganization - Daiwa Facility," herein).
(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
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willingness of the Senior Lenders to support a restructuring that provided value
for the Company's unsecured creditors and shareholders, was subject to numerous
conditions which, after lengthy negotiations, were agreed to by the Company in
the Prepetition Termsheet. These conditions included: (a) the filing of a
reorganization plan consistent with the Prepetition Termsheet by December 2,
1996, (b) the hiring of Nu-Tech's chief executive officer, J. Marvin Feigenbaum,
as Chief Operating Officer of PCL, effective immediately prior to the Petition
Date and (c) obtaining an order approving certain break-up fee and overbid
protections for Nu-Tech within 60 days of the Petition Date. (see Note 5 -
"Breakup/Overbid Protections," herein)
To provide the Company with sufficient liquidity to operate its
businesses during the Bankruptcy Cases, the Prepetition Termsheet required the
Senior Lenders to provide the DIP Financing Facility. Funds for the DIP
Financing Facility were obtained by the Senior Lenders from Nu-Tech, which
purchased approximately $13.33 million of the Senior Lenders' claims against the
Company for $10 million in cash, just prior to the Petition Date. Borrowings
under the DIP Financing Facility will be forgiven under the plan of
reorganization without any payment by the Company, provided that no event of
default occurs and continues under the DIP Financing Facility. In such case, $10
million of Nu-Tech's $15 million investment into the Debtors will have been made
at the outset of the Bankruptcy Cases. The Company's plan of reorganization, as
more fully discussed below, provides that on the effective date of the Company's
plan of reorganization, the $5.0 million promissory note issued by PCL to
Nu-Tech in connection with the MSI Stock Purchase will be forgiven, in exchange
for which Nu-Tech will receive an additional 17% of the New Common Stock.
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
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<PAGE> 12
shareholders and certain creditors to vote on the Plan by providing each with a
solicitation package (each, a "Solicitation Package") containing: (i) written
notice of (a) the Bankruptcy Court's approval of the Disclosure Statement, (b)
the commencement date of the confirmation hearing on the Plan, (c) the deadline
and procedures for filing objections to confirmation of the Plan, and (d) other
related issues; (ii) the Plan; (iii) the Disclosure Statement; (iv) a letter
from the Committee soliciting acceptances of the Plan; and (v) a ballot and a
ballot return envelope. February 11, 1997 was fixed by the Bankruptcy Court as
the voting record date for purposes of determining creditors and equity security
holders entitled to receive a Solicitation Package and to vote on the Plan,
subject to the disallowance of such creditors' claims and equity holders'
interests for voting purposes under certain circumstances.
The Plan was confirmed by the Bankruptcy Court at a hearing on April 18,
1997. Accordingly, on April 23, 1997 (the "Confirmation Date"), the Bankruptcy
Court entered the Findings of Fact, Conclusions of Law and Order Confirming
Second Amended Plan of Reorganization of Physicians Clinical Laboratory, Inc.
and Its Affiliated Debtors (the "Confirmation Order"). The Plan provides that
each of the conditions to the Effective Date as defined herein, must be
satisfied or waived as provided in the Plan by July 22, 1997, unless extended by
the Bankruptcy Court 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), (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 PCL's wholly-owned subsidiaries
will be merged with and into PCL 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. (See Note 10 - "Effectiveness of Plan of
Reorganization," herein).
The Company has also agreed that the reorganized Company will grant
registration rights with respect to the New Common Stock and the New Senior
Notes in substantially the forms hereinafter described. (See Note 10 -
"Effectiveness of Plan of Reorganization," herein).
In addition, 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
subject to certain restrictions. (See Note 10 - "Effectiveness of Plan of
Reorganization," herein).
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
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<PAGE> 13
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 filed an application with the
United States Securities and Exchange Commission to de-register its Common Stock
under the Securities Exchange Act of 1934. The de-registration became effective
on October 5, 1997.
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. As
discussed more fully herein (see Part II - "Regulatory Investigation," herein),
consummation of the Plan and the occurrence of the Effective Date was delayed
for some months pending the settlement of a government investigation which the
Company became aware of subsequent to the Confirmation Date. As a result of this
uncertainty, the Company received two extensions (until September 19, 1997 and
September 30, 1997, respectively) of the date by which all conditions to the
Effective Date had to be satisfied or waived under the Plan. All conditions to
the Effective Date as required by the Plan were satisfied on September 30, 1997
and the Effective Date of the Plan occurred on October 3, 1997.
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.
(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 August 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):
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<PAGE> 14
<TABLE>
<CAPTION>
<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, consequently, whether interest thereon will be paid.
(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. The Debtors received no offers
to purchase their stock or assets from any entity other than as set forth in the
Plan.
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<PAGE> 15
(6) MANAGEMENT CHANGES
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, was
appointed as Chief Operating Officer of the Company. On November 7, 1996, the
Company and Mr. Feigenbaum entered into an employment agreement, governing the
terms of Mr. Feigenbaum's employment with the Company as Chief Operating Officer
during this period. From and after the Petition Date, Mr. Feigenbaum has acted
as Chief Operating Officer, reporting directly to the Debtors' Board of
Directors.
From and after the Effective Date, Mr. Feigenbaum will serve as the
President and Chief Executive Officer of the reorganized Company. The
reorganized Company and Mr. Feigenbaum entered into a new employment agreement,
dated as of the Effective Date, governing the terms of Mr. Feigenbaum's
employment from and after the Effective Date (see Note 10 - "Effectiveness of
Plan of Reorganization," herein). Additionally, from and after the Effective
Date, Wayne E. Cottrell will serve as Vice President, Finance. Mr. Cottrell
currently holds this position.
(7) BAR DATE, DISPUTE RESOLUTION PROCEDURE AND OTHER CLAIM MATTERS
The Company filed schedules of assets and liabilities or statements of
financial affairs as required by Bankruptcy Rule 1007 on December 19, 1996.
On December 19, 1996, the Bankruptcy Court entered an order establishing
January 31, 1997 as the deadline for creditors to file proofs of claim against
the Debtors (the "Original Bar Date"). On April 3, 1997, the Bankruptcy Court
entered an order establishing April 30, 1997 (the "Supplemental Bar Date") as
the deadline for plaintiffs in certain lawsuits who did not receive notice of
the Original Bar Date to file proofs of claim. The Company is engaged in 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. Numerous claims that are disputed for various reasons have been or 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 $13,690,000 and $15,737,000 for
the three months ended August 31, 1997 and 1996, respectively.
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<PAGE> 16
(10) EFFECTIVENESS OF THE PLAN OF REORGANIZATION
As described more fully above, the Plan was confirmed by the Bankruptcy
Court pursuant to section 1129 of the Bankruptcy Code on the Confirmation Date.
By separate order, the Debtors' chapter 11 estates were substantively
consolidated. Pursuant to the Plan, all conditions to the Effective Date of the
Plan were to be satisfied or waived on or before July 22, 1997, unless such date
was extended by the Court.
In late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. In late May, 1997, PCL was also notified
that its Medicare and MediCal billing practices were undergoing review by the
Office of Inspector General of the United States Department of Health and Human
Services ("HHS/OIG"), and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review. Due to
PCL's cooperation and negotiations with these government agencies, on July 24,
1997, the Court, on stipulation of the Proponents and the Committee, extended
the date by which all conditions to the Effective Date had to be satisfied or
waived pursuant to the Plan for 60 days to September 19, 1997, and stated that
the terms and conditions of the Plan would continue in full force and effect.
The Court thereafter extended such date for an additional 11 days until
September 30, 1997.
Pursuant to the Plan, prior to the Effective Date, all of the Debtors
were merged with and into the Company. On September 30, 1997, all conditions to
the Effective Date in the Plan were satisfied. On October 3, 1997, the Effective
Date was declared by the Company and the following actions occurred:
The Old Common Stock of each Debtor, the Old Stock Options and the Old
Warrants (collectively, the "Capital Stock"), the Existing Lender Agreements,
that certain Indenture dated as of August 24, 1993 by and among PCL, Donaldson,
Lufkin & Jenrette Securities Corporation and Smith Barney Shearson, Inc., and
all related agreements (collectively, the "Old Indenture") and the Debentures
were deemed canceled and of no further force and effect. The Company amended and
restated its Certificate of Incorporation in the State of Delaware, which is
Exhibit 3.1 hereto, and which authorized the issuance of 50,000,000 shares of
common stock, par value $0.01 per share (the "New Common Stock"). The
reorganized Company issued, inter alia, (i) 2,500,000 shares of New Common
Stock, (ii) senior secured notes, in the principal amount of $55,000,000 and
(iii) warrants, exercisable within five years of the Effective Date, to purchase
approximately 131,579 shares of New Common Stock to be issued and outstanding on
the Effective Date, at an exercise price of $13.30 per share. In addition, the
reorganized Company adopted Amended and Restated Bylaws effective as of
September 30, 1997 (the "Bylaws"), which are Exhibit 3.2 hereto.
The Company satisfied its obligations to its impaired creditors as
follows: (A) Nu-Tech received 1,315,000 shares of New Common Stock, or
approximately 52.6% of the authorized shares of the New Common Stock issued and
outstanding on the Effective Date, constituting an estimated percentage recovery
of 79.58% of its allowed claims; of those shares, 890,000 shares were in
exchange for approximately $13.0 million in senior secured debt (which debt
Nu-Tech purchased from the Senior Lenders just prior to the Petition Date);
Nu-Tech also received an additional 425,000 shares in exchange for Nu-Tech's
cancellation of the MSI Acquisition Note; (B) the Senior Lenders, which held an
aggregate of approximately $80.0 million of secured debt, each received a pro
rata share of $55.0 million in new senior secured notes and 952,500 shares of
New Common Stock, which constitutes 38.1% of the amount of issued and
outstanding New Common Stock, constituting an estimated percentage recovery of
84.37% of their aggregate allowed claims; (C) the holders of the Debentures each
received a pro rata share of 232,500 shares of New Common Stock, which
constitutes 9.3% of the amount of issued and outstanding New Common Stock,
constituting an estimated percentage recovery of 5.9% of their aggregate allowed
claims; (D) the Company's former
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<PAGE> 17
shareholders will receive warrants to purchase 131,579 shares 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) each of the Company's general unsecured creditors received a
pro rata share of $2.45 million in cash and an unsecured note in the principal
amount of $400,000, constituting an estimated percentage recovery of 16.29% of
their aggregate allowed claims. The holders of Old Stock Options and Old
Warrants did not receive any distributions or property under the Plan.
In addition, the reorganized Company entered into the following
agreements: (A) the New Indenture, dated as of September 30, 1997 between the
reorganized Company and First Trust National Association ("FTNA"), which is
Exhibit 4.1 hereto (the "Indenture"); (B) the Security Agreement, dated as of
September 30, 1997, between the reorganized Company and FTNA, which is Exhibit
4.2 hereto; (C) the Pledge Agreement, dated as of September 30, 1997, between
the reorganized Company and FTNA, which is Exhibit 4.3 hereto; (D) the
Stockholders Agreement, dated as of September 30, 1997, by and among the
reorganized Company, Nu-Tech, and Oaktree, which is Exhibit 4.6 hereto; (E) the
Employment Agreement, made as of September 30, 1997, by and between the
reorganized Company and J. Marvin Feigenbaum, which is Exhibit 10.1 hereto; (F)
the Noncompetition Agreement, made as of September 30, 1997, by and among the
reorganized Company and Nu-Tech, which is Exhibit 10.2 hereto; (G) the Warrant
Agreement, dated as of September 30, 1997, between the reorganized Company and
U.S. Trust Company of California, N.A., as warrant agent, which is Exhibit 4.7
hereto; (H) the Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997, which is Exhibit 4.8 hereto; (I) the Assignment of
Healthcare Receivables Purchase and Transfer Agreement as Collateral Security,
dated September 30, 1997 and which is Exhibit 4.9 hereto; (J) the Loan and
Security Agreement, dated as of September 30, 1997, between the Funding Corp.,
and Daiwa, which is Exhibit 4.10 hereto; and (K) the Depositary Agreement, dated
as of September 30, 1997, among the reorganized Company, the Funding Corp.,
Daiwa, and Union Bank of California, N.A., which is Exhibit 4.11 hereto.
The Indenture
The Indenture was entered into between the reorganized Company and FTNA
in connection with the issuance of the reorganized Company's $55,000,000 Senior
Secured Notes Due 2004. The original principal amount is $55,000,000 and the
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. The reorganized Company may not make any interest payments in
kind once a cash interest payment has been made pursuant to the Indenture. After
two years, the Notes will bear interest at the rate of 11% per annum in cash,
which rate will be increased by 1% per annum through maturity. Interest will be
payable semi-annually. To the extent lawful, the reorganized Company will pay
interest on overdue principal and overdue installments of interest at the rate
of 1% per annum in excess of the then applicable interest rate on the Notes. The
Notes will mature seven years after issuance.
The Notes may be redeemed, at the reorganized Company's option, in whole
or in part, upon not less than 30 or more than 60 days' notice, at a redemption
price equal to 100% of the principal amount thereon, plus accrued and unpaid
interest thereon through the applicable redemption date. Except with respect to
certain repurchase obligations, the reorganized Company will not be obligated to
make mandatory redemption or sinking fund payments with respect to the Notes.
Upon the occurrence of a Change of Control (as defined in the Indenture), each
noteholder shall have the right to require the reorganized Company to repurchase
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount of such Note, plus accrued and unpaid interest through the date
of repurchase. When the aggregate amount of excess proceeds from any asset sale
exceeds $5.0 million, the reorganized Company will be obligated to make an offer
to repurchase the maximum principal amount of Notes that may be purchased with
such Excess Proceeds at an offer price in cash equal to 100% of the principal
amount of such Notes at maturity, plus accrued and unpaid interest.
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<PAGE> 18
"Excess Proceeds" means the net proceeds from any asset sale that have not been
applied, at the reorganized Company's option, (a) to permanently reduce amounts
outstanding under the Exit Financing Facility, or (b) to make an investment in a
permitted business or certain permissible capital expenditures with respect to
the acquisition of certain long term tangible assets. Upon consummation by the
reorganized Company of an underwritten public offering of its capital stock, the
reorganized Company shall be obligated to offer to purchase the maximum
principal amount of Notes possible from the Equity Net Proceeds at an offer
price in cash equal to 100% of the principal amount of such Notes at maturity,
plus accrued and unpaid interest. "Equity Net Proceeds" means 35% of the net
proceeds received by the reorganized Company from any such public offering of
its capital stock.
Payment of the Notes is secured by a first priority security interest in
all existing and future assets of the reorganized Company including, without
limitation, accounts, equipment, inventory, intellectual property (including
patents, copyrights and trademarks), documents, instruments and any and all
proceeds of the foregoing. Finally, as additional collateral for payment of the
Notes, the reorganized Company pledged all of the capital stock of its now
owned, or hereafter acquired, subsidiaries, for the benefit of the noteholders.
Each of the Security Agreement and Pledge Agreement contains customary
provisions regarding the preservation of collateral, defaults and remedies, as
well as customary covenants, representations and warranties. Pursuant to an
intercreditor agreement between the Trustee (on behalf of the noteholders) and
Daiwa, the security interests granted to the Trustee in the reorganized
Company's receivables will be subordinated to Daiwa, as the lender providing the
Exit Financing Facility.
Until the first two cash interest payments are made by the reorganized
Company, the Indenture will contain covenants regarding minimum EBITDA (earnings
before interest, taxes, depreciation and amortization), minimum tangible net
worth, minimal EBITDA/interest expense coverage and certain restrictions on
capital expenditures. The Indenture contains customary covenants,
representations and warranties, as well as customary provisions regarding
defaults, remedies and modifications. The Indenture is Exhibit 4.1 hereto.
The Warrant Agreement
The reorganized Company has agreed to issue warrants (subject to
adjustment as set forth below) for the purchase by warrant holders of an
aggregate of 131,579 shares of New Common Stock in the reorganized Company, $.01
par value, which amount constitutes approximately 5% of the shares of the New
Common Stock to be issued and outstanding immediately after the Effective Date
of the Plan. Each warrant will entitle the holder thereof to acquire one share
of New Common Stock at a price of $13.30 per share. The exercise price was
derived based upon an assumed total enterprise value for the reorganized Company
of $90 million. The warrants will be exercisable at any time from 9:00 a.m., New
York City time, on the date of their issuance to 5:00 p.m., New York City time,
on the fifth anniversary of the Effective Date of the Plan (the "Exercise
Period"). Each warrant not exercised prior to the expiration of the Exercise
Period will become void.
The number and kind of securities purchasable upon the exercise of
warrants and the exercise price therefor will be subject to adjustment upon the
occurrence of certain events, including the issuance of New Common Stock or
other shares of capital stock as a dividend or distribution on the New Common
Stock; subdivisions, reclassifications and combinations of the New Common Stock;
the issuance to all holders of New Common Stock of certain rights, options or
warrants entitling them to subscribe for or purchase New Common Stock; the
distribution to holders of New Common Stock of evidences of indebtedness or
assets of the reorganized Company or any entity controlled by the reorganized
Company (excluding cash dividends or cash distributions from consolidated
earnings or surplus legally available for such dividends or distributions); the
distribution to holders of New Common Stock of shares of capital stock of any
entity controlled by the reorganized Company; the issuance of shares of New
Common Stock for less consideration than the then-current market price of the
New Common Stock; and the issuance of securities convertible into or
exchangeable or
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<PAGE> 19
exercisable for shares of New Common Stock or rights to subscribe for such
securities, for a consolidation per share of New Common Stock deliverable on
such conversion, exchange or exercise that is less than the then-current market
price thereof (although that no adjustment in such shares or exercise price will
be required in connection with the issuance of the New Common Stock, options,
rights, warrants or other securities pursuant to the Plan, any plan adopted by
the reorganized Company or any entity controlled by the reorganized Company for
the benefit of employees or directors, or any share purchase rights plan adopted
by the reorganized Company; the issuance of shares of New Common Stock or
securities convertible into or exchangeable for shares of New Common Stock
pursuant to an underwritten public offering satisfying specified criteria; sales
of New Common Stock pursuant to a plan adopted by the reorganized Company for
the reinvestment of dividends or interest; the issuance of shares of New Common
Stock to shareholders of any corporation which is acquired by, merged into or
made a part or subsidiary of the reorganized Company in an arm's-length
transaction; or a change in the par value of the New Common Stock).
Additionally, no adjustment will be required if in connection with any of the
events otherwise giving rise to an adjustment the holders of the warrants
receive such rights, securities or assets as such holders would have been
entitled had the warrants been exercised immediately prior to such event, and no
adjustment will be required unless such adjustment would require a change in the
aggregate number of shares of New Common Stock issuable upon the hypothetical
exercise of a warrant of at least 1% (but any adjustment requiring a change of
less than 1% will be carried forward and taken into account in any subsequent
adjustment).
The reorganized Company and the warrant agent may from time to time
supplement or amend the Warrant Agreement without the approval of any holder to
cure, among other things, any ambiguity or to correct or supplement any
provision or to comply with the requirements of any national securities
exchange. Any other supplement or amendment to the Warrant Agreement may be made
with the approval of the holders of a majority of the then outstanding warrants;
provided, however, that any such amendment or supplement that (i) increases the
exercise price; (ii) decreases the number of shares of New Common Stock issuable
upon exercise of warrants; or (iii) shortens the Exercise Period requires the
consent of each holder of a warrant affected thereby. The Warrant Agreement is
Exhibit 4.7 hereto.
The New Common Stock Registration Rights Agreement.
After the earlier of: (a) thirty months from the date of the New
Common Stock Registration Rights Agreement, or (b) six months after the date
that the first registration statement filed by the reorganized Company with
respect to shares of the New Common Stock in connection with an underwritten
public offering is declared effective by the Commission, and continuing
throughout the term of the New Common Stock Registration Rights Agreement, those
shareholders (including Nu-Tech) holding at least a majority of the Registrable
Securities (as defined therein) issued to the Senior Lenders and the Registrant
under the Plan shall have the right to request the registration of such
Registrable Securities (a "Demand"). The reorganized Company will then be
required to file with the Commission, within 120 days after receiving notice of
such Demand (such time period to be extended by the number of days that a
Suspension Period may be in effect), a registration statement (a "Stock
Registration Statement") on Form S-1 or Form S-3, if use of such a form is then
available to cover resales of Registrable Securities. Such holders thereof must
satisfy certain conditions relating to the provision of information in
connection with any Stock Registration Statement. The reorganized Company will
use commercially reasonable efforts to cause any Stock Registration Statement to
be declared effective by the Commission within 180 days of such Demand.
In the event that the reorganized Company defaults under its
obligations with respect to the registration of the New Common Stock, under
certain circumstances, the reorganized Company will be liable for liquidated
damages for the period that such default continues. No liquidated damages will
be payable with respect to any week commencing two years or more after the
reorganized Company consummates a registered public offering of its equity
securities.
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Under the New Common Stock Registration Rights Agreement,
"Registrable Securities" means the New Common Stock acquired by persons pursuant
to the Plan or acquired by their successors and permitted assigns in accordance
with such agreement. The holders of the New Common Stock who are a party to the
New Common Stock Registration Rights Agreement will have the right to make one
Demand for the filing of a Stock Registration Statement.
The New Common Stock Registration Rights Agreement contains a
variety of other provisions applicable to a demand registration and will include
certain limited provisions pertaining to a shelf registration. However, the
provisions of the New Common Stock Registration Rights Agreement are for the
exclusive benefit of the parties thereto. The reorganized Company is required to
pay specified expenses in connection with such registration and is required to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The registration rights provided for in
the New Common Stock Registration Rights Agreement are transferable to permitted
transferees of New Common Stock that comply with specified procedures. The New
Common Stock Registration Rights Agreement is Exhibit 4.5 hereto.
The New Senior Notes Registration Rights Agreement.
After a period of 15 months from the date of the New Senior Notes
Registration Rights Agreement, and continuing throughout the term of the New
Senior Notes Registration Rights Agreement, those Senior Lenders holding at
least a majority of the Registrable Securities (as defined therein) issued to
the Senior Lenders under the Plan shall have the right to make a Demand. The
reorganized Company will then be required to file with the Commission within 120
days after receiving notice of such Demand (such time period to be extended by
the number of days that a Suspension Period may be in effect), a registration
statement (a "Note Registration Statement") on Form S-1 or Form S-3, if use of
such a form is then available to cover resales of Registrable Securities. Such
holders thereof must satisfy certain conditions relating to the provision of
information in connection with any Note Registration Statement. The reorganized
Company will use commercially reasonable efforts to cause any Note Registration
Statement to be declared effective by the Commission within 180 days of such
Demand.
In the event that the reorganized Company defaults under its
obligations with respect to the registration of the New Senior Notes, under
certain circumstances, the reorganized Company will be liable for liquidated
damages for the period that such default continues. No liquidated damages will
be payable with respect to any week commencing two years or more after the
reorganized Company consummates a registered public offering of its equity
securities.
Under the New Senior Notes Registration Rights Agreement,
"Registrable Securities" means the New Senior Notes acquired by persons pursuant
to the Plan or acquired by their successors and permitted assigns in accordance
with such agreement. The holders of the New Senior Notes who are a party to the
New Senior Notes Registration Rights Agreement will have the right to make one
Demand for the filing of a Note Registration Statement.
The New Senior Notes Registration Rights Agreement contains a
variety of other provisions applicable to a demand registration and will include
certain limited provisions pertaining to a shelf registration. However, the
provisions of the New Senior Notes Registration Rights Agreement are for the
exclusive benefit of the parties thereto. The reorganized Company is required to
pay specified expenses in connection with such registration and is required to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The registration rights provided for the
New Senior Notes Registration Rights Agreement are transferable to permitted
transferees of New Senior Notes that comply with specified procedures. The New
Senior Notes Registration Rights Agreement is Exhibit 4.4 hereto.
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The Stockholders Agreement
On the Effective Date, Nu-Tech and Oaktree (collectively, the
"Stockholders") and the reorganized Company entered into the Stockholders
Agreement as of September 30, 1997. Following is a brief description of the
substantive provisions of such agreement:
(i) Transfer Restrictions. None of the shares of the New Common
Stock or any securities exercisable for or convertible into the New Common Stock
(the "Securities") held by the Stockholders may be transferred unless (A) the
transferee shall deliver to the reorganized Company a written acknowledgment
that the Securities are subject to the Stockholders Agreement; (B) such transfer
shall be made pursuant to a public offering registered under the Securities Act
and in accordance with applicable state law; (C) such transfer is made to an
Affiliate of the transferring Stockholder; or (D) such transfer is made by
Nu-Tech in a pro rata distribution of Securities to its stockholders. In
addition, the Stockholders agree that they will not, without the prior written
consent of the reorganized Company, transfer any shares of Common Stock to
Cerberus or any entity which owns, directly or indirectly, 5% or more of the
issued and outstanding equity securities of any entity that conducts clinical or
specialized laboratory services as its principal business.
(ii) Stockholder Share Purchase Rights. If the reorganized
Company desires in good faith to issue or transfer the Securities, the
reorganized Company shall deliver a written notice of the proposed transfer to
each of Nu-Tech and Oaktree (the "Transfer Notice"), which notice shall contain
a description of the proposed transaction and the terms thereof, and shall be
accompanied by a copy of the bona fide third party written offer. If the
reorganized Company receives authority from its Board of Directors, it may issue
the Securities on the terms set forth in the Transfer Notice; subsequently
(except in certain circumstances set forth in the Shareholders Agreement), the
reorganized Company shall make the offer to sell to each Stockholder a pro rata
portion of the Securities based upon such Stockholder's holdings of New Common
Stock. Any Stockholder may, by written notice, accept such offer, in whole or in
part, within thirty days after receipt of the offer.
The reorganized Company's Certificate of Incorporation also
provides certain shareholders with rights to acquire additional shares pro rata
to their holdings if additional shares are issued or transferred by the
reorganized Company. The terms of the Certificate of Incorporation are identical
to those set forth in the Stockholders' Agreement, except that in addition to
Nu-Tech and Oaktree, Belmont I, Belmont II, Copernicus, Gallileo Fund, L.P.
("Gallileo") and Cerberus, and all of their respective permitted transferees,
are the beneficiaries of such purchase rights.
(iii) Initial Board of Directors. The Initial Board of Directors,
as specified in the Shareholders Agreement, is comprised of:
Dr. Nathan Rubin
Mr. J. Marvin Feigenbaum
Mr. Matthew S. Barrett
Mr. David Sterling
Mr. William J. Begley
(iv) Voting Agreement. On or after September 30, 1998, at the
next annual or special meeting called for the purpose of electing directors,
each Stockholder shall elect five members of the Board of Directors, of which
two individuals shall be designated by OCM Administrative Services, L.L.C. or
its designee ("OCM") (an affiliate of Oaktree) and three individuals shall be
designated by Nu-Tech. If a director designated by OCM or Nu-Tech vacates such
position for any reason prior to the expiration of his or her term, then OCM or
Nu-Tech shall have the right to nominate a replacement so long as it continues
to beneficially own the percentage of outstanding Securities specified in the
Stockholders Agreement.
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(v) Corporate Governance. During such time as OCM has the right
to designate Directors under the Stockholders Agreement, an affirmative vote of
at least one Director who is appointed by OCM shall be required to: (A)
authorize or propose to authorize any agreement of the reorganized Company other
than issuances of securities pursuant to the Warrants, employee benefit plans,
management incentive plans or employment agreements with officers of the
reorganized Company; (B) issue, or propose to issue any capital stock; (C)
modify or propose to modify the Certificate of Incorporation or the By-Laws of
the reorganized Company; (D) directly or indirectly acquire or propose to
acquire any of its capital stock, or any security exercisable or exchangeable
for or convertible into any of its capital stock; (E) effect or propose to
effect a recapitalization or reorganization of the reorganized Company in any
form; (F) consolidate or merge, or propose to consolidate or merge, or transfer
all or substantially all of the properties and assets of the reorganized
Company; (G) incur, or cause any subsidiary of the reorganized Company to incur
any indebtedness or other payment obligation out of the ordinary course of
business (other than amounts borrowed pursuant to the Loan and Security
Agreement), that exceeds $1,000,000 when aggregated with all other outstanding
indebtedness of the reorganized Company and its subsidiaries; (H) make any
Capital Expenditure that exceeds $1,000,000 when aggregated with all other
Capital Expenditures in the immediately preceding twelve month period; or (I)
modify the Employment Agreement (as defined below) or otherwise approve any
compensation arrangement or other transaction for the benefit of Mr. Feigenbaum
other than as provided in the Employment Agreement. The Stockholders Agreement
is Exhibit 4.6 hereto.
The Certificate of Incorporation and the Bylaws
The Certificate of Incorporation provides that the number of Directors
shall be five, the Directors may be elected only at an annual meeting of
Stockholders, and said election need not be by written ballot unless requested
by the Chairman or by the majority stockholders. Vacancies on the Board will be
filled solely by the majority of the remaining Directors then in office and
Board Members elected in this manner will hold office until the next annual
meeting and until his or her successor is elected and qualified. Any Director
may be removed from office only at an annual or special meeting of the
stockholders, the notice of which meeting states that the removal of a Director
is among the purposes of the meeting, and with an affirmative vote of the
holders of at least 66 2/3% of the voting stock. The Certificate of
Incorporation provides that each Director, officer, employee or agent of the
reorganized Company shall be indemnified by the reorganized Company to the full
extent permitted by law, and will be entitled to advancement of expenses in
connection therewith.
The Bylaws of the reorganized Company provide, in general, that (i)
subject to the Certificate of Incorporation, the number of Directors will be
fixed within a specified range by a majority of the total number of the
reorganized Company Directors then in office; (ii) the Directors in office from
time to time will fill any newly created directorship or vacancy on the Board;
(iii) Directors may be removed only by the holders of at least 66 2/3% of the
reorganized Company's voting stock; (iv) special meetings of stockholders may be
called only by the Chairman of the Board or the Secretary of the reorganized
Company within ten days of receipt of the written request of a majority of the
total number of Directors of the reorganized Company that the reorganized
Company would have if there were no vacancies, or the holders of record of at
least 10% of the voting stock, and any such request must state the purpose or
purposes of the proposed meeting; and subject to certain exceptions, the
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number of Directors of the reorganized Company that the reorganized Company
would have if there were no vacancies, or the holders of record of at least 10%
of the voting stock, and any such request must state the purpose or purposes of
the proposed meeting; and subject to certain exceptions, the Board may postpone
and reschedule any previously scheduled annual or special meeting of
stockholders.
The Bylaws also require that stockholders desiring to bring any
business before an annual meeting of stockholders deliver written notice thereof
to the Secretary of the reorganized Company not less than 50 days in advance of
the meeting of stockholders; provided, however, that in the event that the date
of the meeting is not publicly announced by the reorganized Company more than 60
days prior to the meeting, notice by the stockholder to be timely must be
delivered to the Secretary of the reorganized Company not later than the close
of business on the tenth day following the day on which such announcement of the
date of the meeting was so communicated. The Bylaws further require that the
notice by the stockholder set forth a description of the business to be brought
before the meeting and the reasons for conducting such business at the meeting
and certain information concerning the stockholder proposing such business at
the meeting and the beneficial owner, if any, on whose behalf the proposal is
made, including their names and addresses, the class and number of shares of the
reorganized Company that are owned beneficially and of record by each of them
and any material interest of either in the business proposed to be brought
before the meeting.
The Bylaws also provide that the terms of any Director who is also an
officer of the reorganized Company will terminate automatically, without any
further action on the part of the Board or such Director, upon the termination
for any reason of such Director in his or her capacity as an officer of the
reorganized Company.
Under applicable provisions of the Delaware General Corporation Law, the
approval of a Delaware company's board of directors, in addition to stockholder
approval, is required to adopt any amendment to a company's certificate of
incorporation, but a company's bylaws may be amended either by action of its
stockholders or, if the company's certificate of incorporation so provides, its
board of directors. However, the reorganized Company's Certificate and Bylaws
provide that the provisions summarized above and certain other provisions,
including those relating to the classification of the Board and nominating
procedures, may not be amended by the stockholders nor may any provisions
inconsistent therewith be adopted by the stockholders, without the affirmative
vote of the holders of at least 75% of the company's voting stock, voting
together as a single class. The Company's Certificate authorizes the Board to
approve amendments to the Bylaws. Any amendment to the Bylaws relating to the
automatic termination of any Director who is an officer upon termination of such
officer would require the affirmative vote of the holders of at least 66 2/3% of
the Directors then in office.
DAIWA FACILITY
On September 30, 1997, the reorganized Company and its wholly owned
subsidiary, the Funding Corp., entered into the Exit Financing Facility with
Daiwa. Under the Exit Financing Facility, the reorganized Company sells and
contributes all of its healthcare accounts receivables to the Funding Corp.,
which in turn pledges such accounts receivable to the Daiwa as collateral for
revolving loans. The proceeds of such revolving loans are used to purchase the
eligible accounts receivable from the reorganized Company. The reorganized
Company then uses such funds to fund future operating and capital expenditures
and to establish the future liquidity needed to operate its businesses.
Under a Healthcare Receivables Purchase and Transfer Agreement, the
reorganized Company sells and contributes all of its healthcare accounts
receivables and related items to the Funding Corp. for a purchase price equal to
95% of the expected net value of those accounts receivable that meet certain
eligibility requirements. The reorganized Company will also act as the servicer
of such accounts receivable, continuing to conduct all billing and collection
responsibilities. The Funding Corp. may replace the reorganized Company with a
third-party servicer upon the occurrence of certain termination events.
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Under a Loan and Security Agreement, the Funding Corp. pledges the
accounts receivable received from the reorganized Company to Daiwa as collateral
for revolving loans. Daiwa makes revolving loans available to the Funding Corp.
in an amount up to the lessor of (a) $10 million and (b) a borrowing base equal
to 85% of the value of eligible accounts receivable, subject to certain
adjustments. The Funding Corp. must pay interest on the outstanding balance of
these revolving loans at an interest rate per annum equal to two percent in
excess of the LIBOR Rate (as defined and calculated under the Loan and Security
Agreement), which interest rate will increase by three percent after an event of
default under the Loan and Security Agreement. The Funding Corp. must also pay
to Daiwa a monthly non-utilization fee equal to one-half of a percent on the
amount by which $10 million exceeds the outstanding balance of all revolving
loans during the prior month.
Both the Healthcare Receivables Purchase and Transfer Agreement and the
Loan and Security Agreement contain representations and warranties, affirmative
and negative covenants (including financial covenants), events of default and
events of termination that are typical in transactions of this nature. The Exit
Financing Facility expires on September 30, 1999.
Employment Agreement
On September 30, 1997, J. Marvin Feigenbaum, President and Chief
Executive Officer of Registrant, entered into an Employment Agreement with the
reorganized Company pursuant to which he is also to be employed as President and
Chief Executive Officer and Chairman of the Board of the reorganized Company.
The employment of Mr. Feigenbaum is for a term of three years at a base salary
of $104,000 per annum through October 31, 1997, and $208,000 per annum
thereafter. The reorganized Company is to provide Mr. Feigenbaum with health
insurance to the extent not provided for under other employment arrangements,
long term disability insurance, reimbursement for reasonable and necessary
expenses incurred, and an automobile allowance of $500 per month relating to the
use of an automobile while in the state of California, and certain travel and
living expenses. Mr. Feigenbaum is also to be provided with a policy of term
life insurance in the amount of $500,000. As part of his Employment Agreement
with the reorganized Company, Mr. Feigenbaum is subject to certain
non-disclosure provisions and a restrictive covenant which provide for the
non-disclosure of trade secrets and confidential information of the reorganized
Company and which information is not generally known. While employed by PCL, Mr.
Feigenbaum may not become associated with another business which is directly
involved in the provision of clinical laboratory services anywhere in the United
States and, in the event of his termination of employment under certain
circumstances, Mr. Feigenbaum is not to engage in any competitive act in the
United States prior to September 30, 2001. In connection with his employment by
the reorganized Company, The reorganized Company granted to Mr. Feigenbaum
options to purchase 100,000 shares of the reorganized Company's common stock at
an exercise price of $.25 per share and granted options to purchase an
additional 100,000 shares of the reorganized Company's common stock at an
exercise price of $5 per share, which latter 100,000 options vest and become
exercisable based on the reorganized Company's performance for each of the years
ended December 31, 1997, 1998 and 1999. Such Employment Agreement is Exhibit
10.1 hereto. On October 23, 1997, the Company's Board of Directors authorized an
amendment to the Employment Agreement providing that all 200,000 options granted
to Mr. Feigenbaum would be exercisable at $.25 per share without regard to the
previously imposed performance conditions.
Non-Competition Agreement
On September 30, 1997, Nu-Tech entered into a Non-Competition Agreement
with the reorganized Company. The entry into this agreement was in connection
with the purchase by reorganized Company of all of the shares of capital stock
of Medical Science Institute, Inc., which were formerly owned by Nu-Tech. The
Non-Competition Agreement provides that Nu-Tech will not, directly indirectly,
engage in a business which is involved in the provision of clinical laboratory
services in the United States during such time as Nu-Tech is the beneficial
owner of 25% of the issued
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and outstanding shares of the reorganized Company; provided, however, that the
specialized cancer or genetic diagnostic laboratory services shall not be deemed
to be clinical laboratory services for the purposes of the Non-Competition
Agreement. The Non-Competition Agreement is Exhibit 10.2 hereto.
(11) REGULATORY INVESTIGATION
In late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS") billing practices. In late May, 1997, PCL was also notified
that its Medicare and MediCal billing practices were undergoing review by the
Office of Inspector General of the United States Department of Health and Human
Services ("HHS/OIG"), and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review.
The United States alleged that PCL submitted or caused to be submitted
false and fraudulent claims for payment to the Medicare program ("Medicare"),
Title XVIII of the Social Security Act, 42 U.S.C. ss.Section 1395-1395ddd, the
MediCal Program, Title XIX of the Social Security Act and other federally funded
health programs, for clinical laboratory services during the period from January
1, 1992 to July 18, 1997. During the course of its investigation, the Government
revealed that its investigation was prompted by the filing of a qui tam action
- -- a whistleblower complaint -- by Taylor McKeeman (the "Relator"), a former
officer of the Debtors, alleging that PCL violated the False Claims Act for
certain actions detailed in the Complaint filed in the District Court for the
Eastern District of California, in United States ex rel. Taylor McKeeman v.
Physicians Clinical Laboratory, et al., CIV-S97-I005GEBGGH (the "Qui Tam
Action").
The United States also alleged certain claims and causes of action
against PCL predicated upon the False Claims Act, 31 U.S.C. Sections 3729-3733,
as amended; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a; the
Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-12; and the provisions
for exclusion from the Medicare and State health care programs, 42 U.S.C. ss.
1320a-7(b), 42 U.S.C. Section 1320a-7a and 42 U.S.C. Section 1320a-7(d); as well
as under common law theories for damages and penalties arising out of claims for
reimbursement for clinical laboratory services (collectively, with the Qui Tam
Action, the "Government Claims").
PCL denied the respective allegations of the United States and the
Relator. Nevertheless, PCL immediately recognized that the Government Claims
were significant and would adversely affect the Debtors' ability, among other
things, to satisfy all conditions to the Effective Date and to consummate the
Plan.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle the Government Claims. The final agreement (the
"Federal Agreement") resolved the Government Claims on substantially the
following terms. The following description of the terms and provisions of the
Federal Agreement is a summary only, and is qualified in its entirety by the
actual terms and conditions of the Federal Agreement, which is Exhibit 99.2
hereto.
(1) PCL paid to the United States Government $200,000 18 days
after the Court issued its order approving the Settlement
Agreement (October 7, 1997); and will pay $1,800,000 in
principal plus interest calculated at the Treasury Bill
interest rate payable in equal monthly installments of
$25,000 for six years;
(2) PCL entered into a five-year corporate integrity agreement
(the "Corporate Integrity Agreement") with the HHS/OIG,
pursuant to which PCL will, among other requirements, set
up and follow an internal corporate compliance plan with
monitoring provided by an internal corporate compliance
officer,
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provide proper training for its billing and marketing
personnel, and fulfill various reporting requirements to
HHS. The Corporate Integrity Agreement is Exhibit 99.3
hereto;
(3) PCL and J. Marvin Feigenbaum were released from civil and
criminal liability under the False Claims Act and common
law causes of action in connection with their billing
practices from January 1, 1992, to July 18, 1997;
(4) The amounts owed to the United States will not be
dischargeable in any bankruptcy; and
(5) If PCL defaults on any of its obligations under the
Settlement Agreement, all amounts owed will be immediately
due, all releases will be void and PCL may be excluded
from participation in Medicare and Medicaid.
Subsequent to reaching an agreement in principle with the United States,
PCL approached representatives of the State of California (the "State") to
discuss the compromise and settlement of any outstanding claims that the State
might have against PCL for its prior billing practices involving the MediCal
program for clinical laboratory services during the period from January 1, 1992
to July 18, 1997. On or about August 28, 1997, PCL and the State reached a final
agreement to settle such claims (the "State Agreement"). The State Agreement
resolved the claims on substantially the following terms. The following
description of the terms and provisions of the State Agreement is a summary
only, and is qualified in its entirety by the actual terms and conditions of the
State Agreement, which is Exhibit 99.1 hereto.
(1) PCL paid the State the sum of $100,000 22 days after the
Court issued its order approving the Settlement Agreement
(October 11). All of the terms of the Corporate Integrity
Agreement executed by the Company and the United States
Government are incorporated by reference and all of the
terms therein are made applicable to the Settlement
Agreement with the State;
(2) The State released PCL and J. Marvin Feigenbaum from any
civil or administrative monetary claim or cause of action
that the California Department of Health Services had or
may have had, and from any action seeking exclusion from
the MediCal program with regard to the provision of an
reimbursement for laboratory services under the MediCal
program;
(3) The State released PCL and Mr. Feigenbaum from any
criminal liability for any conduct covered by the State
Agreement; and
(4) PCL will cooperate in any further investigation of
individuals and entities not released by the State in the
State Agreement.
On September 19, 1997, the Bankruptcy Court granted the Debtors' motion to
approve the Federal Agreement and the State Agreement. The Bankruptcy Court's
order became final on September 30, 1997.
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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).
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 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 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.
In late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to The reorganized Company's Civilian Health and Medical
Program of Uniformed Services ("CHAMPUS") billing practices. In late May, 1997,
PCL was also notified that its Medicare and MediCal billing practices were
undergoing review by the Office of Inspector General of the United States
Department of Health and Human Services ("HHS/OIG"), and in early June of 1997,
PCL received a subpoena to furnish certain documents to HHS/OIG in connection
with such review. The regulatory
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investigation and the settlement agreements reached in connection therewith are
summarized at Note 11 - "Regulatory Investigation," herein.
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, compliance, after the Effective Date, with the Exit
Financing Facility and the ability to generate sufficient cash from operations.
THREE AND SIX MONTHS ENDED AUGUST 31, 1996 COMPARED TO THREE AND SIX MONTHS
ENDED AUGUST 31, 1997
On February 26, 1997, the Company acquired Medical Science Institute
("MSI") a clinical laboratory company located in southern California. MSI's
revenue and expenses for the first two quarters of fiscal year 1997-1998 are
consolidated with the Company's. On July 1, 1997, the financial systems were
merged, making the comparison of financial data segregating MSI's contributions
impossible.
Net revenue grew from $14.7 million for the fiscal quarter ended August
31, 1996 to $16.7 million for the same period ended August 31, 1997, and from
$34.4 million for the six months ended August 31, 1996 to $34.5 million for the
same period ended August 31, 1997. The increase is the results of the MSI
acquisition.
Direct laboratory expense increased from $5.7 million to $6.7 million
and from $12.1 million to $13.5 million for the three and six month periods
ended August 31, 1996 and 1997, respectively. As a percent of net revenue,
direct laboratory expense increased from 38.7% to 39.9% and from 35.1% to 39.3%
for the three and six month periods ended August 31, 1996 and 1997,
respectively. This increase in expense is the result of the MSI acquisition. In
August of 1997, the majority of the clinical testing and all of the information
systems associated with MSI were consolidated into the Company's Sacramento
operation.
Laboratory support expense fell from $4.9 million to $4.8 million during
the three month period ended August 31, 1996 and 1997 respectively and from
$10.1 million to $9.7 million for the six month period ended August 31, 1996 and
1997 respectively. As a percent of net revenue, laboratory support expense fell
from 33.6% to 28.9% and from 29.5% to 28.1% for the three and six month periods
ended August 31, 1996 and 1997 respectively. The Company is reducing these
expenses as a result of consolidation efforts associated with the MSI
acquisition and through the elimination of unprofitable operations.
Selling, general and administrative expense fell from $5.4 million to
$4.4 million and from $10.9 million to $9.1 million for the three and six months
ended August 31, 1996 and 1997 respectively. As a percentage of net revenue SG&A
fell from 37.2% to 26.4% and from 31.7% to 26.3% for the three and six month
periods ended August 31, 1996 and 1997, respectively. The Company continues to
review these expenses and to make reductions when applicable.
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Provision for doubtful accounts increased from $984,000 for the three
months ended August 31, 1996 to $1.2 million for the three months ended August
31, 1997 and decreased from $2.4 million to $2.3 million for the six months
ended August 31, 1996 and 1997, respectively. 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 $2.4 million to $1.2
million for the three months ended August 31, 1996 and 1997, respectively and
from $4.9 million to $2.5 million for the six month periods ended August 31,
1996 and 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 half of Fiscal 1998.
Operating loss decreased from a loss of $5.0 million to $2.4 million and
from $6.2 million to $4.5 million for the three and six month periods ended
August 31, 1996 and 1997, respectively.
Interest expense decreased from $5.8 million to $4.6 million for the
three months ended August 31, 1996 and 1997, respectively and from $9.5 million
to $9.2 million for the six months ended August 31, 1996 and 1997, respectively.
The reduction in expense is the result of an additional accrual in the second
fiscal quarter of fiscal 1997 to provide for fees and penalties related to the
former bank loans.
Net income increased from a loss of $10.7 million to $7.0 million and
from $15.7 million to $13.7 million for the three and six month periods ended
August 31, 1996 and 1997, respectively.
REORGANIZATION COSTS
Reorganization costs includes all costs associated with the Bankruptcy
Cases. Pursuant to the guidance provided in SOP90 -7, the Company segregated on
its statement of operations for the three month period ended August 31, 1997 a
one-time non-recurring expense related to the Bankruptcy Cases in the amount of
$801,219 for professional consultants' fees and out-of-pocket expenses incurred
in connection therewith.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Filing
As discussed previously, PCL and its subsidiaries filed voluntary
petitions for relief under chapter 11 of the Bankruptcy Code on November 8,
1996. Under chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on, events that occurred on or
before the Petition Date. The ultimate terms of settlement of these claims will
be determined in accordance with the terms of the Plan, which was confirmed by
the Bankruptcy Court on April 18, 1997. (See Note 3 - "Prepetition Termsheet and
Plan of Reorganization", herein).
Until the Effective Date, only such payments on prepetition obligations
that are approved or required by the Bankruptcy Court will be made. Except as
approved by the Bankruptcy Court, principal and interest payments on prepetition
debt have not been made since the Petition Date and will not be made without the
Bankruptcy Court's approval. Other liabilities may arise or be subject to
compromise as a result of rejection of executory contracts and unexpired leases
or the Bankruptcy Court's resolution of claims for contingencies and other
disputed amounts.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and to fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights
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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. (See Note 2 -
"Cash Collateral, Debtor in Possession Financing and Exit Financing," herein).
On November 7, 1996, the Company, the Senior Lenders and Nu-Tech entered
into the Prepetition Termsheet. The willingness of Nu-Tech to invest new capital
into the Company, and the willingness of the Senior Lenders to support a
restructuring that provided value for the Company's unsecured creditors and
shareholders, was subject to numerous conditions which, after lengthy
negotiations, were agreed to by the Company in the Prepetition Termsheet. These
conditions included: (1) the filing of a reorganization plan consistent with the
Prepetition Termsheet by December 2, 1996, (2) the hiring of Nu-Tech's chief
executive officer, J. Marvin Feigenbaum, as Chief Operating Officer of PCL,
effective immediately prior to the Petition Date and (3) obtaining an order
approving certain break-up fee and overbid protections for Nu-Tech within 60
days of the Petition Date. (See Note 3 -- "Prepetition Termsheet and Plan of
Reorganization," herein).
On December 2, 1996, 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 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.
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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
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, unless such date
is extended by the Bankruptcy Court.
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 (which note comprised part of the purchase price paid by the Company to
Nu-Tech in connection with the MSI Stock Purchase), (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
PCL's wholly-owned subsidiaries will be merged with and into PCL 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 New Senior Notes to be issued by the reorganized
Company. (See Note 10 - "Effectiveness of Plan of Reorganization," herein).
The Company has also agreed to grant registration rights with respect to
the New Common Stock and the New Senior Notes in substantially the forms
described herein. (See Note 10 "Effectiveness of Plan of Reorganization,"
herein).
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 subject to
certain restrictions. (See Note 10 - "Effectiveness of Plan of Reorganization,"
herein).
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
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shareholders after the Effective Date, the Company filed an application with the
United States Securities and Exchange Commission to de-register its Common Stock
under the Securities Exchange Act of 1934. The de-registration became effective
on October 5, 1997.
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. (See Note 3 -
"Prepetition Termsheet and Plan of Reorganization," herein). 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. As
discussed more fully herein (see Part II -- "Regulatory Investigation," herein),
consummation of the Plan and the occurrence of the Effective Date was delayed
for some months pending the settlement of a Government investigation which the
Company became aware of subsequent to the Confirmation Date. As a result of this
uncertainty, the Company received two extensions (until September 19, 1997 and
September 30, 1997 respectively) of the date by which all conditions to the
Effective Date had to be satisfied or waived under the Plan. All conditions to
the Effective Date as required by the Plan were satisfied on September 30, 1997
and the Effective Date of the Plan occurred on October 3, 1997.
Pursuant to the Plan, prior to the Effective Date, all of the Debtors
were merged with and into the Company. On September 30, 1997, all conditions to
the Effective Date in the Plan were satisfied. On October 30, 1997, the
Effective Date was declared by the Company and the following actions occurred:
The Capital Stock, the Existing Lender Agreements, the Old Indenture and
the Debentures were deemed canceled and of no further force and effect. The
Company amended and restated its Certificate of Incorporation in the State of
Delaware, which is Exhibit 3.1 hereto, which authorized the issuance of the New
Common Stock. The reorganized Company issued, inter alia, (i) 2,500,000 shares
of New Common Stock, (ii) senior secured notes, in the principal amount of
$55,000,000 and (iii) warrants, exercisable within five years of the Effective
Date, to purchase approximately 131,579 shares of New Common Stock to be issued
and outstanding on the Effective Date, at an exercise price of $13.30 per share.
In addition, the reorganized Company adopted Amended and Restated Bylaws
effective as of September 30, 1997, which are Exhibit 3.2 hereto.
The Company satisfied its obligations to its impaired creditors as
follows: (A) Nu-Tech received 890,000 shares of New Common Stock, which
constitutes approximately 35.6% of the amount of issued and outstanding New
Common Stock, in exchange for approximately $13.0 million in senior secured debt
(which debt it purchased from the Senior Lenders just prior to the Petition
Date), constituting an estimated percentage recovery of 79.58% of its allowed
claims; Nu-Tech also received an additional 17% of the amount of New Common
Stock issued and outstanding on the Effective Date in exchange for Nu-Tech's
cancellation of the MSI Acquisition Note; (B) the Senior Lenders, which held an
aggregate of approximately $80.0 million of secured debt, each received a pro
rata share of $55.0 million in new senior secured notes and 952,500 shares of
New Common Stock, which constitutes 38.1% of the amount of issued and
outstanding New Common Stock, constituting an estimated percentage recovery of
84.37% of their aggregate allowed claims; (C) the holders of the Debentures each
received a pro rata share of 232,500 shares of New Common Stock, which
constitutes 9.3% of the amount of issued and outstanding New Common Stock,
constituting an
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estimated percentage recovery of 5.9% of their aggregate allowed claims; (D) the
Company's former shareholders will receive warrants to purchase 131,579 shares
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) each of the Company' s general unsecured
creditors received a pro rata share of $2.45 million in cash and an unsecured
note in the principal amount of $400,000, constituting an estimated percentage
recovery of 16.29% of their aggregate allowed claims. The holders of Old Stock
Options and Old Warrants did not receive any distributions or property under the
Plan.
In addition, the reorganized Company entered into the following
agreements: (A) the New Indenture, dated as of September 30, 1997 between the
reorganized Company and FTNA, which is Exhibit 4.1 hereto; (B) the Security
Agreement, dated as of September 30, 1997, between the reorganized Company and
FTNA, which is Exhibit 4.2 hereto; (C) the Pledge Agreement, dated as of
September 30, 1997, between the reorganized Company and FTNA, which is Exhibit
4.3 hereto; (D) the Stockholders Agreement, dated as of September 30, 1997, by
and among the reorganized Company, Nu-Tech, and Oaktree, which is Exhibit 4.6
hereto; (E) the Employment Agreement, made as of September 30, 1997, by and
between the reorganized Company and J. Marvin Feigenbaum, which is Exhibit 10.1
hereto; (F) the Noncompetition Agreement, made as of September 30, 1997, by and
among the reorganized Company and Nu-Tech, which is Exhibit 10.2 hereto; (G) the
Warrant Agreement, dated as of September 30, 1997, between the reorganized
Company and U.S. Trust Company of California, N.A., which is Exhibit 4.7 hereto;
(H) the Healthcare Receivables Purchase and Transfer Agreement, dated as of
September 30, 1997, which is Exhibit 4.8 hereto; (I) the Assignment of
Healthcare Receivables Purchase and Transfer Agreement as Collateral Security,
dated September 30, 1997 and which is Exhibit 4.9 hereto; (J) the Loan and
Security Agreement, dated as of September 30, 1997, between the Funding Corp.,
and Daiwa, which is Exhibit 4.10 hereto; and (K) the Depositary Agreement, dated
as of September 30, 1997, among reorganized PCL, the Funding Corp., Daiwa, and
Union Bank of California, N.A., which is Exhibit 4.11 hereto. The terms of each
of these agreements are summarized at Note 10 - "Effectiveness of the Plan of
Reorganization," herein.
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, June 30, 1997 and September 30, 1997,
each in the amount of $3.6 million. In addition, the Company failed to make four
interest payments each in the amount of $1.5 million in respect of its
Debentures due on August 15, 1995, February 16, 1996, August 15, 1996, February
17, 1997 and August 15, 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
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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. The MSI Burbank facility was consolidated into the
Sacramento laboratory in August 1997. These 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 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).
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 $809,000 in the
first six months of Fiscal 1997 to $2.4 million for the same period in Fiscal
1998 principally as a result of increased accounts receivable.
Cash flows from investing activities have been negative through the
periods prior to the and including first six 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
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increased from $119,000 for the first six months of Fiscal 1997 to $155,000 for
the same period in Fiscal 1998. The increase in cash used in investing
activities in Fiscal 1998 is due to 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 ($325,000) for the six month period ended August 31, 1996 to $269,000 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 August 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 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, June 30, 1997 and September 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 August 31, 1997, the Company had approximately $501,000 in cash plus
approximately $1.6 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. The Company's business does not
generally require significant expenditures for property, plant and equipment.
Expenditures related to such capital items were approximately 0.5% of net
revenues for the three months ended August 31, 1997. As of August 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 reorganized Company as
additional capital. In addition, after the Effective Date, amounts available
under the Exit Financing Facility will be available to the Company to meet its
cash needs.
On September 30, 1997, the reorganized Company and its wholly owned
subsidiary, the Funding Corp., entered into the Exit Financing Facility with
Daiwa. The terms of the Exit Financing Facility are summarized at Note 10 -
"Effectiveness of the Plan of Reorganization - Daiwa Facility." The Company
anticipates that its operating cash needs for the near term will be met by
accounts receivable collection, operating cash and amounts available under the
Exit Financing Facility. As of October 31, 1997, the Company had operating cash
of approximately $1.2 million and availability under the Exit Financing Facility
of approximately $186,000. As of such date, outstanding borrowings under the
Exit Financing Facility were approximately $4.6 million.
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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 reductions in third-party payor reimbursement
rates, billing and collection problems and the effects of significant changes in
the health care industry.
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PHYSICIANS CLINICAL LABORATORY, INC.
PART II -- OTHER INFORMATION
AUGUST 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.
Under relevant provisions of the Bankruptcy Code, the Company has the
right, subject to the approval of the Bankruptcy Court, to assume or reject
executory contracts and unexpired leases, including real property leases. In
this context, "assumption" requires that the Company cure, or provide adequate
assurance that it will cure, all existing defaults under the contract or lease
and provide adequate assurance of future performance under the contract or lease
and provide adequate assurance of future performance under relevant provisions
of the Bankruptcy Code; and "rejection" means that the Company is relieved from
its obligations to perform further under the contract or lease. Rejection of an
executory contract or lease may constitute a breach of that contract and may
-37-
<PAGE> 38
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. On the Confirmation Date, the Company either assumed or
rejected all of its remaining executory contracts and unexpired 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.
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. In addition,
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.
Described below are certain legal proceedings involving the Company
that arose after the Petition Date.
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<PAGE> 39
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
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<PAGE> 40
(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 late May, 1997, PCL became aware of a subpoena it had received in
April of 1997 to furnish certain documents to the United States Department of
Defense with respect to PCL's CHAMPUS billing practices. In late May, 1997, PCL
was also notified that its Medicare and MediCal billing practices were
undergoing review HHS/OIG, and in early June of 1997, PCL received a subpoena to
furnish certain documents to HHS/OIG in connection with such review.
The United States alleged that PCL submitted or caused to be submitted
false and fraudulent claims for payment to Medicare, Title XVIII of the Social
Security Act, 42 U.S.C. Sections 1395-1395ddd, the MediCal Program, Title XIX of
the Social Security Act and other federally funded health programs, for clinical
laboratory services during the period from January 1, 1992 to July 18, 1997.
During the course of its investigation, the Government revealed that its
investigation was prompted by the filing of a qui tam action -- a whistleblower
complaint -- by the Relator, a former officer of the Debtors, alleging that PCL
violated the False Claims Act for certain actions detailed in the Complaint
filed in the District Court for the Eastern District of California, in United
States ex rel. Taylor McKeeman v. Physicians Clinical Laboratory, et al.,
CIV-S97-I005GEBGGH.
The United States also alleged certain claims and causes of action
against PCL predicated upon the False Claims Act, 31 U.S.C. Sections 3729-3733,
as amended; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a; the
Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-12; and the provisions
for exclusion from the Medicare and State health care programs, 42 U.S.C. ss.
1320a-7(b), 42 U.S.C. Section 1320a-7a and 42 U.S.C. Section 1320a-7(d); as well
as under common law theories for damages and penalties arising out of claims for
reimbursement for clinical laboratory services.
PCL denied the respective allegations of the United States and the
Relator. Nevertheless, PCL immediately recognized that the Government Claims
were significant and would adversely affect the Debtors' ability, among other
things, to satisfy all conditions to the Effective Date and to consummate the
Plan.
On or about July 18, 1997, PCL and the United States reached an
agreement in principle to settle the Government Claims. The final agreement (the
"Federal Agreement") resolved the Government Claims on substantially the
following terms. The following description of the terms and provisions of the
Federal Agreement is a summary only, and is qualified in its entirety by the
actual terms and conditions of the Federal Agreement, which is Exhibit 99.2
hereto.
(1) PCL paid to the United States Government $200,000 18
days after the Court issued its order approving the
Settlement Agreement (October 7, 1997); and will pay
$1,800,000 in principal plus interest calculated at the
Treasury Bill interest rate payable in equal monthly
installments of $25,000 for six years;
(2) PCL entered into the Corporate Integrity Agreement with
the HHS/OIG, pursuant to which will, among other
requirements, set up and follow an internal corporate
compliance plan with monitoring provided by an internal
corporate compliance officer, provide proper training
for its billing and
-40-
<PAGE> 41
marketing personnel, and fulfill various reporting
requirements to HHS. The Corporate Integrity Agreement
is Exhibit 99.3 hereto;
(3) PCL and J. Marvin Feigenbaum were released from civil
and criminal liability under the False Claims Act and
common law causes of action in connection with their
billing practices from January 1, 1992, to July 18,
1997;
(4) The amounts owed to the United States will not be
dischargeable in any bankruptcy; and
(5) If PCL defaults on any of its obligations under the
Settlement Agreement, all amounts owed will be
immediately due, all releases will be void and may be
excluded from participation in Medicare and Medicaid.
Subsequent to reaching an agreement in principle with the United States,
PCL approached representatives of the State of California to discuss the
compromise and settlement of any outstanding claims that the State might have
against PCL for its prior billing practices involving the MediCal program for
clinical laboratory services during the period from January 1, 1992 to July 18,
1997. On or about August 28, 1997, PCL and the State reached a final agreement
to settle such claims. The State Agreement resolved the claims on substantially
the following terms. The following description of the terms and provisions of
the State Agreement is a summary only, and is qualified in its entirety by the
actual terms and conditions of the State Agreement, which is Exhibit 99.1
hereto.
(1) PCL paid the State the sum of $100,000 22 days after the
Court issued its order approving the Settlement
Agreement (October 11). All of the terms of the
Corporate Integrity Agreement executed by PCL and the
United States Government are incorporated by reference
and all of the terms therein are made applicable to the
Settlement Agreement with the state;
(2) The State released PCL and J. Marvin Feigenbaum from any
civil or administrative monetary claim or cause of
action that the California Department of Health Services
had or may have had, and from any action seeking
exclusion from the MediCal program with regard to the
provision of an reimbursement for laboratory services
under the MediCal program;
(3) The State released PCL and Mr. Feigenbaum from any
criminal liability for any conduct covered by the State
Agreement; and
(4) PCL will cooperate in any further investigation of
individuals and entities not released by the State in
the State Agreement.
On September 19, 1997, the Bankruptcy Court granted the Debtors' motion to
approve the Federal Agreement and the State Agreements. The Bankruptcy Court's
order became final on September 30, 1997.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.1 Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory and its Affiliated Debtors, filed with the
Bankruptcy Court on February 7, 1997 (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on From 8-K for
June 6, 1997) (without exhibits).
-41-
<PAGE> 42
3.1 Amended and Restated Certificate of Incorporation of PCL
(incorporated by reference to Exhibit 99.3 of the Company's
Current Report on Form 8-K for September 30, 1997).
3.2 Amended and Restated Bylaws of PCL, effective as of September 30,
1997 (incorporated by reference to Exhibit 99.4 of the Company's
Current Report on Form 8-K for September 30, 1997).
4.1. Indenture, dated as of September 30, 1997, among Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"), and
First Trust National Association ("FTNA") (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form
8-K for September 30, 1997).
4.2. Security Agreement, dated as of September 30, 1997 between PCL
and FTNA (incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K for September 30, 1997).
4.3. Pledge Agreement, dated as of September 30, 1997, between PCL and
FTNA (incorporated by reference to Exhibit 4.3 of the Company's
Current Report on Form 8-K for September 30, 1997).
4.4. Note Registration Rights Agreement, dated as of September 30,
1997, by and among PCL, Oaktree, Copernicus, Galileo, Belmont I,
Belmont II, and Cerberus (incorporated by reference to Exhibit
4.4 of the Company's Current Report on Form 8-K for September
30,1997).
4.5. Stock Registration Rights Agreement, dated as of September 30,
1997, by and among PCL, Nu-Tech, Oaktree, Copernicus, Galileo,
Belmont I, Belmont II, and Cerberus (incorporated by reference to
Exhibit 4.5 of the Company's Current Report on Form 8-K for
September 30, 1997).
4.6. Stockholders Agreement, dated as of September 30, 1997, by and
among PCL, Nu-Tech, and Oaktree (incorporated by reference to
Exhibit 4.6 of the Company's Current Report on Form 8-K for
September 30, 1997).
4.7 Warrant Agreement, dated as of September 30, 1997, between PCL
and U.S. Trust Company of California, N.A., as warrant agent
(incorporated by reference to Exhibit 4.7 of the Company's
Current Report on Form 8-K for September 30, 1997.
4.8 Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997 (incorporated by reference to Exhibit 4.8
of the Company's Current Report on Form 8-K for September 30,
1997).
4.9 Assignment of Healthcare Receivables Purchase and Transfer
Agreement as Collateral Security (incorporated by reference to
Exhibit 4.9 of the Company's Current Report on Form 8-K for
September 30, 1997).
4.10 Loan and Security Agreement, dated as of September 30, 1997,
between Bio-Cypher Funding Corp, a Delaware corporation ("Funding
Corp."), and Daiwa Healthco-2 LLC, a Delaware LLC ("Daiwa")
(incorporated by reference to Exhibit 4.10 of the Company's
Current Report on Form 8-K for September 30, 1997).
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<PAGE> 43
4.11. Depositary Agreement, dated as of September 30, 1997, among PCL,
Funding Corp., Daiwa, and Union Bank of California, N.A.
(incorporated by reference to Exhibit 4.11 of the Company's
Current Report on Form 8-K for September 30, 1997).
10.1 Employment Agreement, made as of September 30, 1997, by and
between PCL and J. Marvin Feigenbaum (incorporated by reference
to Exhibit 99.1 of the Company's Current Report on Form 8-K for
September 30, 1997).
10.2 Noncompetition Agreement, made as of September 30, 1997, by and
among PCL and Nu-Tech (incorporated by reference to Exhibit 99.2
of the Company's Current Report on Form 8-K for September 30,
1997).
12.1 Statement Regarding Calculation of Ratios of Earnings to Fixed
Charges.
99.1. Settlement Agreement re: State of California (incorporated by
reference to Exhibit 99.5 of the Company's Current Report on Form
8-K for September 30, 1997).
99.2. Settlement Agreement re: Federal Government (incorporated by
reference to Exhibit 99.6 of the Company's Current Report on Form
8-K for September 30, 1997).
99.3. Corporate Integrity Agreement between the United States
Department of Health and Human Services and PCL (incorporated by
reference to Exhibit 99.7 of the Company's Current Report on Form
8-K for September 30, 1997).
b. Reports on Form 8-K filed during the quarter ended August 31,
1997:
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 on its Affiliated Debtors.
-43-
<PAGE> 44
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)
/s/ J. Marvin Feigenbaum
--------------------------------------------
J. Marvin Feigenbaum
Chief Executive Officer
/s/ Wayne E. Cottrell
--------------------------------------------
Wayne E. Cottrell
Vice President, Finance
(Chief Accounting Officer)
-44-
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars, except ratio information)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31,
--------------------------------
1997 1996
-------- --------
<S> <C> <C> <C>
1. Loss
Pre-tax loss (13,690) (15,737)
Interest expense(1) 9,205 9,517
-------- --------
(4,485) (6,220)
======== ========
2. Fixed Charges
Interest expense(1) 9,205 9,517
======== ========
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 $13,690, and $15,737 for the three months ended August 31,
1997 and 1996, respectively.
- --------
(1) Consists of interest on debt and imputed interest on capital leases.
-45-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 769,076
<SECURITIES> 0
<RECEIVABLES> 16,924,819
<ALLOWANCES> 5,169,492
<INVENTORY> 1,689,805
<CURRENT-ASSETS> 15,403,121
<PP&E> 34,936,161
<DEPRECIATION> 25,692,501
<TOTAL-ASSETS> 25,319,728
<CURRENT-LIABILITIES> 34,348,912
<BONDS> 0
0
0
<COMMON> 60,713
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,319,728
<SALES> 16,745,854
<TOTAL-REVENUES> 16,745,854
<CGS> 19,129,785
<TOTAL-COSTS> 23,746,761
<OTHER-EXPENSES> 48,123
<LOSS-PROVISION> 1,166,133
<INTEREST-EXPENSE> 4,568,861
<INCOME-PRETAX> (7,000,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,000,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,000,907)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> 0
</TABLE>
