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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 November 30, 1997
Commission File Number 0-20678
PHYSICIANS CLINICAL LABORATORY, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 68-0280528
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
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
--------------
</TABLE>
None
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(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding as of January 9, 1998 was
2,500,000.
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INDEX
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Page No.
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PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets (Unaudited)
as of November 30, 1997 and February 28, 1997...........................................................3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended November 30, 1997 and 1996...........................................4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended November 30, 1997..............................................................5
Notes to Condensed Consolidated Financial Statements.....................................................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Nine Months Ended November 30, 1997 and 1996................20
PART II -- OTHER INFORMATION.....................................................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................26
Signatures..............................................................................................27
</TABLE>
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF NOVEMBER 30, 1997 AND FEBRUARY 28, 1997
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<CAPTION>
SUCCESSOR CO. PREDECESSOR CO.
NOVEMBER 30, 1997 FEBRUARY 28, 1997
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ASSETS
CURRENT ASSETS
CASH $ 490,504 $ 500,516
ACCOUNTS RECEIVABLE, NET 11,214,303 9,591,204
OTHER RECEIVABLE 150,100 0
NOTES RECEIVABLE 9,000 361,650
SUPPLIES INVENTORY 1,415,180 1,534,592
OTHER CURRENT ASSETS 535,415 1,501,298
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TOTAL CURRENT ASSETS 13,814,502 13,489,260
EQUIPMENT AND IMPROVEMENTS, NET 2,817,278 11,595,900
REORGANIZATION VALUE IN EXCESS OF AMOUNTS
ALLOCABLE TO IDENTIFIABLE ASSETS 70,930,466 0
OTHER ASSETS 415,432 686,855
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TOTAL ASSETS $87,977,678 $ 25,772,015
=========== =============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
DEBTOR IN POSSESSION BORROWINGS $ 0 $ 5,243,182
CURRENT INSTALLMENTS OF LONG TERM DEBT 930,132 283,687
NOTE PAYABLE TO RELATED PARTY 0 5,000,000
ACCOUNTS PAYABLE 3,895,979 1,237,338
ACCRUED PAYROLL & OTHER 7,135,417 8,857,225
NOTES PAYABLE AND OTHER 776,599 0
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TOTAL CURRENT LIABILITIES 12,738,127 20,621,432
LONG TERM DEBT 59,617,118 631,309
LIABILITIES SUBJECT TO COMPROMISE 0 167,776,289
OTHER LONG TERM DEBT 1,700,672 0
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TOTAL LIABILITIES 74,055,917 189,029,030
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK 14,800,100 60,714
ADDITIONAL PAID IN CAPITAL 0 15,570,802
RETAINED EARNINGS (878,339) (178,888,531)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 13,921,761 (163,257,015)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $87,977,678 $ 25,772,015
=========== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
STATEMENTS
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
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Three Months Ended Nine Months Ended
November 30, November 30,
------------------------------ ------------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET REVENUE $ 16,841,670 $ 15,262,276 $ 51,302,366 $ 49,656,211
DIRECT LABORATORY COST 6,176,860 5,598,350 19,722,532 17,673,173
------------ ------------ ------------ ------------
Gross profit 10,664,810 9,663,926 31,579,834 31,983,038
LABORATORY SUPPORT COST 4,483,022 4,875,379 14,159,273 15,014,401
------------ ------------ ------------ ------------
Laboratory profit 6,181,788 4,788,547 17,420,561 16,968,637
OVERHEAD EXPENSE 6,184,803 9,133,214 20,100,261 27,295,122
CREDIT RESTRUCTURING EXPENSE 174,244 27,618 1,982,031 265,922
------------ ------------ ------------ ------------
Operating Loss (177,259) (4,372,285) (4,661,731) (10,592,407)
INTEREST EXPENSE AND OTHER, net 4,744,077 3,604,665 13,949,164 13,121,167
INCOME TAXES 0 0 0 0
------------ ------------ ------------ ------------
Net Loss ($ 4,921,336) ($ 7,976,950) ($18,610,895) ($23,713,574)
============ ============ ============ ============
EARNINGS PER SHARE: (a)
Primary N/A N/A N/A N/A
Fully Diluted N/A N/A N/A N/A
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: (a)
Primary N/A N/A N/A N/A
Fully Diluted N/A N/A N/A N/A
</TABLE>
(a) The net income per share and the
weighted average number of shares
for the company have not been
presented because, due to the
Reorganization and implementation of
Fresh-Start accounting, they are
not comparable to subsequent
periods.
The accompanying notes are an integral part
of these condensed financial statements.
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PHYSICIANS CLINICAL LABORATORY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($ 18,610,895) ($ 23,713,574)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 3,218,183 7,314,567
Provision for doubtful accounts 1,180,000 3,555,217
Write-down of tenant improvements related to
abandoned Southern California laboratory -- 1,804,082
Medicare/MediCal accrued settlement 2,100,000
IRS penalty 225,672
Changes in operating assets and liabilities
Increase in accounts receivable (5,476,086) (2,427,736)
Net decrease (increase) in inventories,
prepaid costs and other assets 481,675 (78,742)
Increase in accounts payable and accrued
expenses 936,831 12,889,742
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Net cash used in operating activities (15,944,620) (656,444)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements (267,495) (99,732)
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Net cash used in investing activities (267,495) (99,732)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under long term debt -- 3,338,423
Payments of principle on long term debt (2,450,000) (836,169)
Borrowings on LOC and long-term debt 3,852,103 --
Proceeds from sale of capital stock 14,800,000 34,163
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Net cash provided by financing activities 16,202,103 2,536,417
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Net increase (decrease) in cash and cash equivalents (10,012) 1,780,241
CASH AND CASH EQUIVALENTS,
beginning of period 500,516 391,815
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CASH AND CASH EQUIVALENTS,
end of period $ 490,504 $ 2,172,056
============= =============
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 financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) REORGANIZATION
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.
By order dated April 23, 1997, the Bankruptcy Court confirmed the
Second Amended Plan of Reorganization of Physicians Clinical Laboratory, Inc.
and Its Affiliated Debtors (the "Plan"). The effective date of the Plan occurred
on October 3, 1997 (the "Effective Date").
The principal business of the Company is to provide clinical laboratory
services in the State of California. As of January 9, 1998, the Company operated
one full service clinical laboratory in Sacramento, 14 "STAT" laboratories and
approximately 185 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.
(2) BASIS OF REPORTING
In November 1990, the American Institute of Certified Public
Accountants issued Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Pursuant to the
guidance provided by SOP 90-7, the Company (referred to as "Successor Company"
when compared to periods prior to October 3, 1997) has adopted "fresh start"
reporting as of the effective date of the Plan. Under "fresh start" reporting,
assets and liabilities were adjusted to reflect their estimated fair values and
the remaining accumulated deficit was eliminated, resulting in a new reporting
entity as of October 3, 1997. As a result, the financial statements as of and
for the period ending November 30, 1997 are not comparable with prior periods.
As a result of adopting fresh-start reporting, the Company recorded
reorganization value in excess of amounts allocable to identifiable assets of
approximately $70,930,000. Management is in the process of assessing the
appropriate life of this intangible asset. Material adjustments to the Company's
financial statements could result once the life of this intangible asset is
established.
The accompanying consolidated financial statements have been prepared
on a going concern basis. The ability of the Company to continue as a going
concern is dependent on, among other things, the ability to achieve satisfactory
levels of profitability and cash flow from operations and maintain compliance
with the financing agreements.
The accompanying consolidated financial statements do not include all
of the information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles, although the Company believes that the disclosures contained herein
are adequate to make the information not misleading. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation for the interim periods have been included in
the consolidated financial statements.
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The results of operations for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
(3) EXIT FINANCING
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 Securities America, Inc. ("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 6 - "Effectiveness
of the Plan of Reorganization - Daiwa Facility," herein).
(4) MANAGEMENT AND BOARD OF DIRECTOR CHANGES
During the pendency of the Bankruptcy Cases, as a condition to the
availability of funds under the Company's debtor in possession 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 acted as Chief Operating Officer, reporting
directly to the Debtors' Board of Directors.
From and after the Effective Date, Mr. Feigenbaum has served 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
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Mr. Feigenbaum's employment from and after the Effective Date (see Note 6 -
"Effectiveness of Plan of Reorganization," herein). Additionally, from and after
the Effective Date, Wayne E. Cottrell has served as Vice President, Finance.
(5) 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 $18,547,000 and $23,714,000 for
the nine months ended November 30, 1997 and 1996, respectively.
(6) EFFECTIVENESS OF THE PLAN OF REORGANIZATION
By order dated April 23,1997, the Plan was confirmed by the Bankruptcy
Court pursuant to section 1129 of the Bankruptcy Code. 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
Bankruptcy Court. Capitalized terms used but not defined in this Note 6 shall
have the meanings ascribed to them in the Plan.
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 Bankruptcy Court, on stipulation of the Plan Proponents (collectively,
the "Proponents") and the Official Committee of Unsecured Creditors (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 Bankruptcy 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, 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
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reorganized Company adopted Amended and Restated Bylaws effective as of
September 30, 1997 (the "Bylaws").
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 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, by and
between the reorganized Company and First Trust National Association
("FTNA")(the "Indenture"); (B) the Security Agreement, dated as of September 30,
1997, by and between the reorganized Company and FTNA; (C) the Pledge Agreement,
dated as of September 30, 1997, by and between the reorganized Company and FTNA;
(D) the Stockholders Agreement, dated as of September 30, 1997, between and
among the reorganized Company, Nu-Tech, and Oaktree; (E) the Employment
Agreement, dated as of September 30, 1997, by and between the reorganized
Company and J. Marvin Feigenbaum; (F) the Noncompetition Agreement, dated as of
September 30, 1997, by and between the reorganized Company and Nu- Tech; (G) the
Warrant Agreement, dated as of September 30, 1997, by and between the
reorganized Company and U.S. Trust Company of California, N.A., as warrant
agent; (H) the Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997, by and between the reorganized Company and the Funding
Corp.; (I) the Assignment of Healthcare Receivables Purchase and Transfer
Agreement as Collateral Security, dated September 30, 1997 by and between the
Funding Corp. and Daiwa; (J) the Loan and Security Agreement, dated as of
September 30, 1997, by and between the Funding Corp., and Daiwa; and (K) the
Depositary Agreement, dated as of September 30, 1997, between and among the
reorganized Company, the Funding Corp., Daiwa and Union Bank of California, N.A.
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
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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. "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, minimum 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 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
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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 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 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
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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.
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 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
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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 Stockholders Agreement
On the Effective Date, Nu-Tech and Oaktree Capital Management,LLC
("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 Partners, L.P. ("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,
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Belmont Fund, L.P., Belmont Capital Partners, II, L.P., Copernicus Fund, L.P.,
Galileo Fund, L.P. 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.
(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 (a "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
Bylaws 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 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
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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 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
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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 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
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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. On October 23, 1997, the reorganized 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 the 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 or
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 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.
(7) 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.ss. 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. ss.ss. 3729-3733, as
amended; the Civil Monetary Penalties Law, 42 U.S.C. ss. 1320a-7a; the Program
Fraud Civil Remedies Act, 31 U.S.C. ss.ss. 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. ss. 1320a-7a and 42 U.S.C. ss. 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.
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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:
(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, provide proper
training for its billing and marketing personnel, and
fulfill various reporting requirements to HHS;
(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:
(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
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(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).
By order dated April 23, 1997, the Bankruptcy Court confirmed the
Second Amended Plan of Reorganization of Physicians Clinical Laboratory, Inc.
and Its Affiliated Debtors (the "Plan"). The effective date of the Plan occurred
on October 3, 1997 (the "Effective Date").
CONSOLIDATED RESULTS OF OPERATIONS
The condensed consolidated financial statements have been presented on
the basis that the Company will continue as 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 Plan materially changed the amounts reported in the
accompanying condensed consolidated financial statements, which give effect to
adjustments to the carrying values of assets and liabilities as a consequence of
the Plan. The reorganized Company's ability to continue as a going concern is
contingent upon, among other things, the ability to achieve satisfactory levels
of profitability and cash flow from operations and maintain compliance with the
financing agreement.
THREE AND NINE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS
ENDED NOVEMBER 30, 1996
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 three quarters of fiscal year 1997-1998 are
consolidated with the Company's.
Net revenue grew from $15.3 million for the fiscal quarter ended
November 30, 1996 to $16.8 million for the same period ended November 30, 1997,
and from $49.7 million for the nine months ended November 30, 1996 to $51.3
million for the same period ended November 30, 1997. The increase is the result
of the MSI acquisition.
Direct laboratory expense increased from $5.6 million to $6.2 million
and from $17.7 million to $19.7 million for the three and nine month periods
ended November 30, 1996 and 1997, respectively. As a percent of net revenue,
direct laboratory expense at 36.7% did not change significantly, and increased
from 35.6% to 38.4% for the three and nine month periods ended November 30, 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 $4.5 million
during the three month period ended November 30, 1996 and 1997, respectively,
and from $15.0 million to $14.2 million for the nine month period ended November
30, 1996 and 1997, respectively. As a percent of net revenue, laboratory support
expense fell from 31.9% to 26.6% and from 30.2% to 27.6% for the three and nine
month periods ended November 30, 1996 and 1997, respectively. The Company is
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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 $5.5 million to
$4.4 million and from $16.4 million to $13.4 million for the three and nine
months ended November 30, 1996 and 1997 respectively. As a percentage of net
revenue SG&A fell from 36.0% to 25.8% and from 33.0% to 26.2% for the three and
nine month periods ended November 30, 1996 and 1997, respectively. The Company
continues to review these expenses and to make reductions when applicable.
Provision for doubtful accounts stayed constant at $1.2 million for the
three months ended November 30, 1996 and 1997 and decreased from $3.6 million to
$3.5 million for the nine months ended November 30, 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
$655,000 for the three months ended November 30, 1996 and 1997, respectively and
from $7.3 million to $3.2 million for the nine month periods ended November 30,
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 nine months of Fiscal 1998. Depreciation expense was also reduced
as a result of the reorganization and revaluation of assets associated with
fresh-start reporting.
Operating loss decreased from a loss of $4.4 million to $177,000 and
from $10.6 million to $4.7 million for the three and nine month periods ended
November 30, 1996 and 1997, respectively.
Interest expense decreased from $3.6 million to $2.6 million for the
three months ended November 30, 1996 and 1997, respectively and from $13.1
million to $11.7 million for the nine months ended November 30, 1996 and 1997,
respectively. The reduction in expense is the result of reduced debt as related
to restructuring and emergence from bankruptcy.
During the third fiscal quarter of Fiscal 1998 the Company recorded a
$2.1 million non-operating expense related to the settlement of the Medicare and
Medicaid regulatory investigation.
Net loss decreased from a loss of $8.0 million to $4.9 million and from
$23.7 million to $18.5 million for the three and nine month periods ended
November 30, 1996 and 1997, respectively.
REORGANIZATION COSTS
Reorganization costs includes all costs associated with the Bankruptcy
Cases. Pursuant to the guidance provided in SOP 90-7, the Company segregated on
its statement of operations for the three month period ended November 30, 1997 a
one-time non-recurring expense related to the Bankruptcy Cases in the amount of
$174,244 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
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<PAGE> 22
determined in accordance with the terms of the Plan. (See Note 6 -
"Effectiveness of the Plan of Reorganization", herein).
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 or as provided in the Plan.
Other liabilities may arise or be subject to compromise as a result of rejection
of executory contracts and unexpired leases or the Bankruptcy Court's resolution
of claims for contingencies and other disputed amounts.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after reorganization
to meet its restructured obligations and to fund the current obligations of the
reorganized Company. Under the Bankruptcy Code, the rights of and ultimate
payment to prepetition creditors may be substantially altered and, as to some
classes, eliminated.
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 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 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.
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 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.
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<PAGE> 23
In addition, the reorganized Company entered into the following
agreements: (A) the New Indenture, dated as of September 30, 1997, by and
between the reorganized Company and First Trust National Association
("FTNA")(the "Indenture"); (B) the Security Agreement, dated as of September 30,
1997, by and between the reorganized Company and FTNA; (C) the Pledge Agreement,
dated as of September 30, 1997, by and between the reorganized Company and FTNA;
(D) the Stockholders Agreement, dated as of September 30, 1997, between and
among the reorganized Company, Nu-Tech, and Oaktree; (E) the Employment
Agreement, dated as of September 30, 1997, by and between the reorganized
Company and J. Marvin Feigenbaum; (F) the Noncompetition Agreement, dated as of
September 30, 1997, by and between the reorganized Company and Nu- Tech; (G) the
Warrant Agreement, dated as of September 30, 1997, by and between the
reorganized Company and U.S. Trust Company of California, N.A., as warrant
agent; (H) the Healthcare Receivables Purchase and Transfer Agreement, dated as
of September 30, 1997, by and between the reorganized Company and the Funding
Corp.; (I) the Assignment of Healthcare Receivables Purchase and Transfer
Agreement as Collateral Security, dated September 30, 1997 by and between the
Funding Corp. and Daiwa; (J) the Loan and Security Agreement, dated as of
September 30, 1997, by and between the Funding Corp., and Daiwa; and (K) the
Depositary Agreement, dated as of September 30, 1997, between and among the
reorganized Company, the Funding Corp., Daiwa and Union Bank of California, N.A.
The terms of each of these agreements are summarized at Note 6 "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 the Company's chapter 11 filing.
The removal of the Company's common stock from listing on the NASDAQ
National Market System in October of 1995 constituted a Redemption Event under
the Company's Indenture governing its Debentures. Such Redemption Event required
the Company to offer to repurchase the Debentures from the holders thereof at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any. Written notice of the occurrence of such Redemption
Event was given to the registered holders of the Debentures on November 2, 1995,
and no such holder perfected its right to redeem such Debentures within the
period provided under the Indenture. In addition, under the terms of the
Registration Rights Agreement between the Company and the holders of the
Debentures, the Company is obligated to maintain an effective registration
statement covering the Debentures and the Company's common stock with respect to
which the Debentures are convertible.
-23-
<PAGE> 24
Following the Petition Date, the Company continued implementation of
the operational restructuring that began prior to the Petition Date. Such
operational restructuring consisted of actions taken in an effort to reduce
operating costs, improve cash collections, streamline the billing process and
increase revenue flows. These actions include:
o 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.
o Use of dedicated internal teams for concentrated account
receivable collection efforts in the Medicare, MediCal, client
and patient payor categories.
o Completion of centralized billing capabilities.
o Data processing system changes to improve billing and
collection efforts.
o Reductions in overhead by, among other things, closing
unprofitable locations.
o Moving the Company's principal executive offices from 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.
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 November 30, 1997, these efforts have resulted in labor and infrastructure
eliminations yielding approximately $1.6 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 for the nine months ended
November 30, 1997 reflects the effects of the emergence from chapter 11
proceedings as of October 3, 1997 and the effects of fresh-start reporting. As a
result, the cash flow statement as of November 30, 1997 is not comparable to
prior periods.
Cash flows from investing activities have been negative through the
periods prior to the and including first nine 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 increased from
$100,000 for the first nine months of Fiscal 1997 to $267,000 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 for the nine months ended November
30, 1997 reflects the effects of fresh-start reporting and the emergence from
chapter 11 proceedings as of October 3, 1997. As a result, the cash flow
statement as of November 30,1997 is not comparable to prior periods.
-24-
<PAGE> 25
As of November 30,1997, the Company had approximately $63.1 million in
indebtedness of which $55.0 million represents the Indenture; approximately $3.9
million represents the Exit Financing Facility; $1.8 million is due the federal
government under the Federal Agreement; 1.0 million is owed under capital lease
obligations; $0.6 million is due the IRS and other taxing authorities; $0.4
million is due prepetition creditors; and $0.4 million is due in prepetition
lease cure debt.
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 nine months ended
November 30, 1997. As of November 30, 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 and operating cash.
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 3 - "Exit
Financing", herein. As of November 30, the Company had operating cash of
approximately $491,000 and availability under the Exit Financing Facility of
approximately $20,000. As of such date, outstanding borrowings under the Exit
Financing Facility were approximately $3.9 million.
The foregoing statements constitute forward-looking information, and no
assurance can be given that such collections will be sufficient to satisfy the
Company's operating cash needs for the near term. Among the factors that could
cause actual results to differ materially from such expectations are that the
Company continues to experience 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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<PAGE> 26
PHYSICIANS CLINICAL LABORATORY, INC.
PART II -- OTHER INFORMATION
NOVEMBER 30, 1997
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
12.1 Statement Regarding Calculation of Ratios of Earnings to
Fixed Charges.
27 Financial Data Schedule.
b. Reports on Form 8-K filed during the quarter ended November 30,
1997:
On November 15, 1997, the Company filed a current report on
Form 8-K to report that the Effective Date of the Company's
Second Amended Joint Plan of Reorganization of Physicians
Clinical Laboratory and its Affiliated Debtors occurred on
October 3, 1997.
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<PAGE> 27
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)
January 21, 1998 /s/ Marvin Feigenbaum
------------------------------------
J. Marvin Feigenbaum
Chief Executive Officer
/s/ Wayne E. Cottrell
------------------------------------
Wayne E. Cottrell
Vice President, Finance
(Chief Accounting Officer)
-27-
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars, except ratio information)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
-----------------------
1997 1996
------- -------
<S> <C> <C>
1 Loss
Pre-tax loss (18,547) (23,714)
Interest expense1 11,604 13,121
------- -------
(6,943) (10,593)
======= =======
2 Fixed Charges
Interest expense1 11,604 13,121
======= =======
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 $18,547 and $23,714 for the three months ended November
30, 1997 and 1996, respectively.
- --------
1 Consists of interest on debt and imputed interest on capital leases.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 490,504
<SECURITIES> 0
<RECEIVABLES> 18,581,438
<ALLOWANCES> 7,367,135
<INVENTORY> 1,415,180
<CURRENT-ASSETS> 13,814,502
<PP&E> 13,977,778
<DEPRECIATION> 11,160,500
<TOTAL-ASSETS> 87,977,678
<CURRENT-LIABILITIES> 12,738,127
<BONDS> 0
0
0
<COMMON> 14,800,100
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 87,977,678
<SALES> 16,841,670
<TOTAL-REVENUES> 16,841,670
<CGS> 17,018,930
<TOTAL-COSTS> 21,763,006
<OTHER-EXPENSES> 2,100,069
<LOSS-PROVISION> 1,180,000
<INTEREST-EXPENSE> 2,644,007
<INCOME-PRETAX> (4,921,336)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,921,336)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,921,336)
<EPS-PRIMARY> (1.97)
<EPS-DILUTED> 0
</TABLE>
