UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
Form 8-K(A)
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): May 10, 1999
Unilab Corporation ("Unilab")
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
33-77286 95-4415490
(Commission File Number) (I.R.S. Employer Identification Number)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 996-7300
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Introductory Note:
This Amendment on Form 8-K(A) amends the current Report on Form 8-K
filed by Unilab on May 17, 1999 (the "Form 8-K") with respect to Unilab's
acquisition of substantially all of the assets of Physician's Clinical
Laboratories, Inc. d/b/a Bio-Cypher Laboratories ("BCL"). This Amendment is
being filed for the purposes of providing (i) the consolidated historical
financial statements of the BCL business acquired (the "BCL Financial
Information") and (ii) the Unaudited Pro Forma Financial Information of Unilab
and the notes thereto (collectively, the "Pro Forma Financial Information")
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Information of Business Acquired
Attached hereto as Exhibit 99.1 is the BCL Financial Information.
(b) Pro Forma Financial Information.
Attached hereto as Exhibit 99.2 is the Pro Forma Financial Information.
(c) Exhibits.
99.1 BCL Financial Information
99.2 Pro Forma Financial Information
<PAGE>
INDEX OF EXHIBITS
Exhibits Page
BCL Financial Information 99.1
Pro Forma Financial Information 99.2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act 1934,
Unilab Corporation has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 25, 1999 UNILAB CORPORATION
By: /s/ Brian D. Urban
Name: Brian D. Urban
Title: Executive Vice President,
Chief Financial Officer and Treasurer
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Physicians Clinical
Laboratory, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Physicians Clinical Laboratory, Inc. and its subsidiary at February 28, 1999,
and the results of their operations and their cash flows for the fiscal year
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. The consolidated financial statements of Physicians Clinical Laboratory,
Inc. and its subsidiary for the five month period ended February 28, 1998, the
seven month period ended September 30, 1997, and the fiscal year ended February
28, 1997 were audited by other auditors whose reports dated August 31, 1998 and
May 9, 1997 on those statements included an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern.
As discussed in Note 17, the Company consummated on May 9, 1999 the sale of
its business and substantially all of its assets and ceased operations. The
Company used part of the net sales proceeds to repay its line of credit, and
plans to liquidate and distribute the remaining sales proceeds to its Senior
Secured Note holder. The consolidated financial statements do not reflect any
adjustments that may be required for the disposition of the remaining assets at
amounts different from those reflected in the financial statements or amounts
which creditors may be required to accept in settlement of obligations due them
by the Company. As discussed in Note 14, the Company is a defendant in several
lawsuits. At February 28, 1999, the Company has not recorded a liability for
amounts which may be payable as a result of such lawsuits. The ultimate
resolution of the lawsuits cannot be determined at the present time;
accordingly, the consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
ODENBERG, ULLAKKO, MURANISHI & CO.
San Francisco, California
July 16, 1999
<PAGE>
REPORT OF INDEPENDENT CERTIFICATE PUBLIC ACCOUNTANTS
To the Stockholders
Physicians Clinical Laboratory, Inc.
We have audited the accompanying consolidated balance sheet of Physicians
Clinical Laboratory, Inc. (a Delaware corporation) and subsidiaries as of
February 28,1 998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the five month period ended
February 28, 1998 and the seven month period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Physicians
Clinical Laboratory, Inc. and subsidiaries as of February 28, 1998 and the
consolidated results of their operations and their cash flows for the five month
period ended February 28, 1998 and the seven month period ended September 30,
1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Physicians Clinical Laboratory, Inc. will continue as a going concern. As
more fully described in Notes 1 and 3 to the consolidated financial statements,
the Company has suffered recurring losses from operations and is in default of
loan covenants, which raises substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
On April 5, 1999, as discussed in note 17 to the consolidated financial
statements, the Company entered into an agreement to sell the business and
substantially all assets.
As more fully described in Notes 1 and 2 to the consolidated financial
statements, effective October 3, 1997, the Company emerged from bankruptcy. In
accordance with an American Institute of Certified Public Accountants' Statement
of Position, the Company has adopted "fresh start" reporting whereby its assets,
liabilities and new capital structure have been adjusted to reflect estimated
fair values as of September 30, 1997. As a result, the consolidated financial
statements for periods subsequent to September 30, 1997 reflect this basis of
reporting and are not comparable to the Company's pre-reorganization
consolidated financial statements.
GRANT THORNTON LLP
Sacramento, California
August 31, 1998, except for Notes 3 and 5 as to which the date is October 29,
1998 and except for Note 17 as to which the date is April 5, 1999
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheet of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) (the "Company") as of February 28,
1997, and the related statements of operations, changes in stockholders' equity
deficit and cash flows for the year ended February 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Clinical Laboratory,
Inc. as of February 28, 1997, and the results of its operations and its cash
flows for the year ended February 28, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced a significant decline in
operating income margins, a substantial net loss on operations, a negative
operating cash flow, a negative working capital position and is in default under
the terms of substantially all of its loan agreements. As a result, the lenders
have the right to demand immediate payment of approximately $123.2 million of
indebtedness and to foreclose on the Company's assets. The Company does not have
sufficient resources to repay the indebtedness and has engaged an advisor to
seek a proposed restructuring of the Company's indebtedness. All of these
factors and others discussed in Note 1 raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Ernst & Young LLP
Sacramento, California
May 9, 1997
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
February 28,
1999 1998
------- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 420,718 $ 190,013
Current assets held for sale................................................. 12,390,000 --
Trade accounts receivable, net of allowance for doubtful accounts of
$2,245,986, including $476,642 from related parties....................... -- 10,931,708
Supplies inventory........................................................... -- 1,180,920
Prepaid costs and other assets............................................... 524,540 394,474
----------- -------
Total current assets.................................................... 13,335,258 12,697,115
Equipment and leasehold improvements, less accumulated depreciation and
amortization of $594,972....................................................... -- 2,531,448
Assets held for sale.............................................................. 21,657,940 --
Reorganization value in excess of amounts allocable to identifiable assets, less
accumulated amortization of $1,571,000......................................... -- 24,012,605
Other long-term assets............................................................ 444,231 424,131
------------ -------
$35,437,429 $39,665,299
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt....................................... $56,697,329 $48,360,853
Line of credit............................................................... 4,658,014 4,517,766
Accounts payable............................................................. 7,589,316 5,117,344
Accrued payroll and vacation................................................. 1,982,977 2,216,057
Accrued interest............................................................. 3,619,627 2,730,411
Other accrued expenses....................................................... 2,672,686 3,293,075
------------ ---------
Total current liabilities............................................... 77,219,949 66,235,506
Long-term debt, less current installments......................................... 9,210,040 2,346,173
----------- ---------
Total liabilities....................................................... 86,429,989 68,581,679
Commitments and contingencies (Notes 11, 12, and 14).............................. -- --
Stockholders' deficit:
Preferred stock, par value $0.01 per share--20 million shares authorized;
none issued or outstanding................................................ -- --
Common stock, par value $0.01 per share--50 million shares authorized;
2.5 million shares issued and outstanding................................. 25,000 25,000
Additional paid-in capital................................................... 22,775,000 22,775,000
Accumulated deficit.......................................................... (73,792,560) (51,716,380)
------------- ------------
Total stockholders' deficit............................................. (50,992,560) (28,916,380)
--------------- ------------
$35,437,429 $39,665,299
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Reorganized Company || Predecessor Company
Fiscal year Five months || Seven months Fiscal year
ended ended || ended ended
February 28, February 28, || September 30, February 28,
1999 1998 || 1997 1997
<S> <C> <C> <C> <C>
Net revenue: ||
Net revenue from third parties.............. $ 53,404,926 $ 25,432,951 || $39,466,458 $ 60,422,858
Net revenue from related parties............ 2,166,905 740,462 || 856,377 2,407,989
----------------- -------- ------------- ---------
Total net revenue...................... 55,571,831 26,173,413 || 40,322,835 62,830,847
||
||
Direct laboratory costs.......................... 24,096,059 9,839,627 || 15,775,669 23,117,090
---------------- ---------- -------------- ----------
Gross profit........................... 31,475,772 16,333,786 || 24,547,166 39,713,757
||
||
Laboratory support costs......................... 18,553,460 7,328,075 || 11,233,414 20,013,962
---------------- ---------- -------------- ----------
Laboratory profit...................... 12,922,312 9,005,711 || 13,313,752 19,699,795
||
Selling, general and administrative.............. 15,785,249 7,093,342 || 10,652,308 24,880,448
Provision for doubtful accounts.................. 4,223,393 2,245,986 || 2,908,004 8,843,252
Reorganization charges........................... -- 503,470 || 1,982,032 1,558,820
Depreciation and amortization.................... 3,668,861 2,170,769 || 2,910,593 9,698,163
Write-down of intangibles and equipment and ||
leasehold improvements........................ 1,330,673 45,327,000 -- 59,371,934
------------ ----------- -------------- ----------
Operating loss......................... (12,085,864) (48,334,856)|| (5,139,185) (84,652,822)
||
Interest expense................................. (9,878,333) (3,568,405)|| (10,491,718) (15,838,895)
Interest income.................................. 31,466 1,634 || 8 21,855
Nonoperating income (expense), net............... 144,551 185,247 || (2,294,285) (1,708,848)
--------------- -------- ---- --------------- -----------
Loss before income taxes and ||
extraordinary items................. (21,788,180) (51,716,380) (17,925,180) (102,178,710)
||
Provision for state income taxes................. 288,000 || --
------------- ----------- ----------------- -----------
-- -- -- --
Loss before extraordinary items........ (22,076,180) (51,716,380)|| (17,925,180) (102,178,710)
||
||
Fresh start adjustment........................... -- -- || 60,053,472 --
Gain on extinguishment of debt, net of taxes ||
of $0 . 121,128,723 3,500,000
--------------- ------------ ------------- ---------
-- --
Net (loss) income...................... $(22,076,180) $(51,716,380)|| $163,257,015 $(98,678,710)
============ ============ ============- ============
Loss per common share basic and diluted.......... $ (8.83) $ (20.69)|| * *
========= =========
Weighted average common shares ||
outstanding................................... 2,500,000 2,500,000 * *
===== =========-===== =========-
<FN>
* Loss per share amount as it relates to the predecessor company is not meaningful due to the reorganization.
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<CAPTION>
Additional
Paid-in Accumulated Stockholders'
Common Stock Capital Deficit Deficit
Shares Amount
<S> <C> <C> <C> <C> <C>
Balance at February 29, 1996............... 6,033,087 $ 60,331 $15,536,906 $(80,209,821) $(64,612,584)
Net loss................................ -- -- -- (98,678,710) (98,678,710)
Proceeds from exercise of capital
stock options......................... 38,332 383 33,896 34,279
----- ------------- ------------ --------------------------------------
--
Balance at February 28, 1997............... 6,071,419 60,714 15,570,802 (178,888,531) (163,257,015)
Net income--Predecessor Company.......... -- -- -- 163,257,015 163,257,015
Issuance of stock for debt.............. 2,500,000 25,000 22,775,000 -- 22,800,000
Retired under plan of reorganization.... (6,071,419) (60,714) 60,714 -- --
Fresh start adjustments................. (15,631,516) 15,631,516
------------------------- --------------- ----------
-- -- --
Balance at September 30, 1997.............. 2,500,000 25,000 22,775,000 -- 22,800,000
Net loss--Reorganized Company............ (51,716,380) (51,716,380)
----------------------------------------- -------------- ------------
-- -- --
Balance at February 28, 1998............... 2,500,000 25,000 22,775,000 (51,716,380) (28,916,380)
Net loss................................ (22,076,180) (22,076,180)
------------------------------------------ -------------- ------------
-- -- --
Balance at February 28, 1999............... 2,500,000 $ 25,000 $22,775,000 $(73,792,560) $(50,992,560)
=========- ========- ===========- ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Reorganized Company Predecessor Company
Fiscal year Five months || Seven months Fiscal year
ended ended || ended ended
February 28, February 28, || September 30, February 28,
<S> <C> <C> <C> <C>
1999 1998 || 1997 1997
Operations: ||
Net (loss) income............................... $(22,076,180) $(51,716,380) || $163,257,015 $(98,678,710)
||
Items not requiring current use of cash: ||
Fresh start adjustments....................... -- -- || (60,087,877) --
Gain on debt extinguishment................... -- -- || (121,128,723) --
Write-down of equipment and leasehold ||
improvements............................... 1,330,673 -- -- --
Medicare/MediCal settlement in debt........... -- -- || 2,100,000 --
Interest payments made in kind................ 6,798,000 -- || -- --
Depreciation, amortization and write down ||
of intangible and other assets............. 3,668,861 47,497,769 2,910,593 69,070,097
Provision for doubtful accounts............... 2,151,034 2,245,986 || 2,908,004 8,843,252
Amortization of debt discount................. 1,427,000 588,000 || -- --
Net changes in operating assets ||
and liabilities............................ 1,032,249 (1,879,888) 7,511,988 19,626,940
----- ------------- ---------- ----- ------------- ----------
Cash used in operating activities.......... (5,668,363) (3,264,513) || (2,529,000) (1,138,421)
---- --------------- ----------- ---- --------------- -----------
||
||
Investments: ||
Increase in intangible assets in connection ||
with acquisitions............................. -- -- -- (1,632,968)
Net acquisitions and disposals of equipment ||
and leasehold improvements.................... (569,237) (79,189) (194,655) 366,613
------ ------------------------- ------- ---------------- -------
Cash used in investing activities.......... (569,237) (79,189) || (194,655) (1,266,355)
------ ------------------------- ------- ------------- -----------
||
||
Financing: ||
Borrowings of debt.............................. 7,000,000 4,517,766 || 4,556,818 5,443,182
Payments of debt................................ (531,695) (3,082,155) || (235,575) 536,016
Gain on extinguishment of debt.................. -- -- || -- (3,500,000)
Proceeds from issuance of common stock.......... || 34,279
--------------------------------- ----------------- ---------------
-- -- --
Cash provided by financing activities...... 6,468,305 1,435,611 || 4,321,243 2,513,477
----- --------------- ---------- ----- --------------- ---------
Net increase (decrease) in cash and cash ||
equivalents..................................... 230,705 (1,908,091) 1,597,588 108,701
Cash and cash equivalents, beginning ||
of period....................................... 190,013 2,098,104 500,516 391,815
------- ------------- ---------- -------- --------------- -------
Cash and cash equivalents, end of period........... $ 420,718 $ 190,013 || $ 2,098,104 $ 500,516
=========- =========- ===========- =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--REORGANIZATION:
Physicians Clinical Laboratory, Inc. and subsidiary ("PCL" or the
"Company") provides clinical laboratory services in the State of California. The
Company is a "hybrid" among clinical laboratory companies in that it serves both
as a traditional reference laboratory for office based physician-clients and as
an independent clinical laboratory for regional acute care hospitals. PCL
operates within the health care industry which is undergoing significant changes
such as managed care (including capitated payment arrangements), proposed
federal and state health care reform measures, third party payor reimbursement
decreases (including Medicare, MediCal and private insurance), industry
consolidation and increasing regulation of laboratory operations.
On November 8, 1996, the Company and all of its ___ subsidiaries filed a
petition for relief under Chapter 11 of the Federal Bankruptcy Laws in the
United States Bankruptcy Court. The Bankruptcy court confirmed the Company's
Second amended Plan of Reorganization (Plan) on April 18, 1997 and the Company
emerged from bankruptcy on October 3, 1997, the effective date of the Plan.
During the period from November 8, 1996 through October 3, 1997, the Company
operated as debtor-in-possession. The plan reflects the results of negotiations
among the parties-in-interest and Nu-Tech Bio-Med, Inc. ("Nu-Tech"), which
resulted in Nu-Tech's investment of $14.8 million into the Company in return for
the majority of new common stock.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages. Credit
arrangements entered into subsequent to the Chapter 11 filings are described
below:
Under the plan, holders of claims and interests were settled as follows:
o Nu-Tech received 890,000 shares (35.6%) of the reorganized Company's
common stock in exchange for its holdings of senior secured debts.
o Nu-Tech received 425,000 shares (17%) of the reorganized Company's
common stock as a result of the purchase of Medical Science Institute
(MSI) by the Company from Nu-Tech (see Note 16).
o Senior Lenders received $55 million in new senior secured promissory
notes and 952,500shares (38.1%) of the reorganized Company's common
stock.
o The holders of the Company's Subordinated Debentures received
232,500 shares (9.3%) of the reorganized Company's common stock.
o The Company's general unsecured creditors received a pro rata share of
$2.45 million in cash, plus a $400,000 non-interest bearing note due
October, 1998.
o Priority tax claims received deferred cash payments payable in
quarterly installments over 6 years plus interest.
o The Debtor-in-Possession financing facility was forgiven in full.
o The Company's existing stockholders received warrants to purchase up to
5% of the shares of the reorganized Company's common stock at a price
of $13.30 per share.
o All previously outstanding stock options and warrants were cancelled.
In accordance with the Plan, effective October 3, 1997, all previous
wholly-owned subsidiaries were merged into the Company and the Certificate of
Incorporation of the Company was amended whereby the authorized number of shares
of common stock was changed to 50,000,000 shares with a par value of $.01 per
share. Each original outstanding share of common stock of the Company was
cancelled.
Upon consummation of the Plan, the Company recognized an extraordinary gain
on debt discharge of approximately $121 million, which represented forgiveness
of debt, reduced by the estimated fair value of common stock and new debt issued
under the Plan. There was no tax expense recorded on the gain due to the net
operating loss carryforwards available at September 30, 1997. The Company's new
senior debt was stated at the present value of amounts to be paid, determined at
estimated current interest rates on October 3, 1997. This adjustment to present
value resulted in an aggregate carrying amount for the senior debt which is less
than the aggregate principal amount thereof, and will result in the amortization
of the difference into interest expense over the term of the debt.
NOTE 2--FRESH START REPORTING:
The Company has accounted for the reorganization using the principles of
fresh start accounting, as required by Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,
issued by the American Institute of Certified Public Accountants. Fresh start
accounting is required because pre-reorganization stockholders received less
than 50% of the new common stock and the reorganization value of the assets of
the reorganized Company is less that the total of all post-petition liabilities
and allowed claims.
Under the principles of fresh start accounting, the Company's total assets
were recorded at their assumed reorganization value, with the reorganization
value allocated to identifiable assets on the basis of their estimated fair
value. Accordingly, the Company's property and equipment and other assets were
reduced by approximately $10.8 million. In addition, the Company's accumulated
deficit of approximately $76 million was eliminated. The excess of the
reorganization value over the value of identifiable assets is reported as
"reorganization value in excess of amounts allocable to identifiable assets".
The total reorganization value was determined in consideration of several
factors. The methodology employed involved estimation of the Company's
enterprise value (the market value of stockholders' equity and the Company's
debt), taking into account the new investment by Nu-Tech and market rates for
similar debt instruments. This resulted in an estimated reorganization value of
approximately $87 million, of which the reorganization value in excess of
amounts allocable to identifiable assets was approximately $71 million. The
excess reorganization value will be amortized over 15 years.
For accounting purpose, the effects of the Plan and fresh start accounting
have been recorded as of September 30, 1997. Accordingly, all financial
statements for any period prior to September 30, 1997 are referred to as
"Predecessor Company" as they reflect the periods prior to the implementation of
fresh start accounting and are not comparable to the financial statements for
periods after the implementation of fresh start accounting.
<PAGE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effect of the Plan and the implementation of fresh start accounting on
the Company's consolidated balance sheet as of September 30, 1997 was as
follows:
<TABLE>
<CAPTION>
Pre-Fresh Start Reorganized
Balance Sheet Confirmation of Fresh-Start Balance Sheet
September 30, Plan Debt Fair Value September 30,
1997 Discharge(a) Adjustments(b) 1997
------ ------------- --------------- ----
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash .................................. $ 575,692 $ 1,556,817 $ (34,405) $2,098,104
Accounts receivable, net.................. 13,220,958 -- (4,267,201) 8,953,757
Inventory and other assets................ 2,483,683 -- 2,035,419
(448,264)
Total current assets................. 16,280,333 1,556,817 (4,749,870) 13,087,280
Equipment and improvements, net........... 8,879,962 -- (5,827,934) 3,052,028
Reorganization value...................... -- -- 70,910,605 70,910,605
Other assets.............................. 687,139 -- 407,810
(279,329)
$ 25,847,434 $ 1,556,817 $60,053,472 $87,457,723
============- ===========- =========== ===========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current portion of debt................... $ 1,255,132 $ -- $ -- $1,255,132
Accounts payable and accruals............. 11,056,542 -- -- 11,056,542
Note payable to creditors................. -- 2,850,000 -- 2,850,000
Debtor-in-possession borrowings........... 8,243,182 (8,243,182) -- --
Note payable to related party............. 5,000,000 (5,000,000)
-- --
Total current liabilities............ 25,554,856 (10,393,182) -- 15,161,674
Long-term debt............................ 2,240,377 47,255,672 -- 49,496,049
Liabilities subject to compromise......... 179,234,396 (179,234,396)
-- --
Total liabilities.................... 207,029,629 (142,371,906) -- 64,657,723
Stockholders' equity (deficit)............ (181,182,195) 143,928,723 60,053,472 22,800,000
$ 25,847,434 $ 1,556,817 $60,053,472 $87,457,723
============- ===========- ===========- ===========
<FN>
(a) To record the settlement of liabilities, the issuance of new debt and the
issuance of new stock pursuant to the Plan.
(b) To record the adjustments to state assets and liabilities at their
estimated fair value, including the establishment of reorganization value
in excess of amounts allocable to identifiable assets.
</FN>
</TABLE>
<PAGE>
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation
The consolidated financial statements as of and for the five months ended
February 28, 1998 are presented for the Company after the consummation for the
Plan. As discussed above, these statements were prepared under the principles of
fresh start accounting and are not comparable to the statements of prior
periods.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. In May 1999, the Company sold its
business operations and substantially all of it assets (see Note 17). The
Company used part of the net sales proceeds to repay its line of credit, and
plans to liquidate and distribute the remaining sales proceeds to its Senior
Secured Note holder.
Consolidation
The accompanying consolidated financial statements include the accounts
of Physicians Clinical Laboratory, Inc. and its subsidiary (Physicians
Clinical Laboratory, Inc. and its subsidiary are collectively referred to
hereinafter as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash equivalents
Cash and cash equivalent include cash in bank and on hand and liquid
investments with original maturities of three months or less. Included in cash
is restricted cash of $70,018 at February 28, 1999 under the line of credit (see
Note 6).
Concentration of credit risk
The Company places its cash and temporary cash investments with high credit
quality institutions. At February 28, 1999, and throughout the year, such
investments were in excess of FDIC insurance limits.
Supplies inventory
Supplies inventory is stated at cost, which approximates market value, on a
first-in, first-out (FIFO) basis. Supplies inventory consists primarily of
clinical laboratory supplies.
Equipment and leasehold improvements
As a result of the adoption of fresh start accounting, equipment and
leasehold improvements were adjusted to their estimated fair value as of
September 30, 1997 and historical accumulated depreciation and amortization was
eliminated. All equipment and leasehold improvements purchased after the
reorganization are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, except for leasehold improvements which are being
amortized over the life of the lease. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts and any resulting gain or loss is recognized in
operations for the period. The cost of maintenance and repairs is charged to
income as incurred, significant renewals and betterments are capitalized. The
estimated useful lives of equipment and leasehold improvements are as follows:
Estimated Useful Lives
Leasehold improvements 5-12 years
Laboratory equipment 5-20 years
Computer equipment 5-12 years
Furniture and fixtures 5-12 years
Automobiles 1-5 years
Excess reorganization value
Excess reorganization value is being amortized on a straight line basis
over 15 years. Amortization expense was approximately $2,382,000 for the twelve
months ended February 28, 1999 and $1,571,000 for the five months ended February
28, 1998.
After the reorganization, the Company continued to experience customer
losses and reduction in third party reimbursements, and has been unable to
completely achieve the operating performance anticipated in the reorganization
plan. These factors resulted in cash flow deficits and continued operating
losses. As a result, management has reevaluated the recoverability of the excess
reorganization value using a valuation methodology based on revised discounted
cash flow projections and the Company recorded a write-down of excess
reorganization value of approximately $45.3 million.
Intangible assets
Prior to fiscal 1998, amortization was calculated using the straight-line
method over the following lives: customer lists and goodwill - 19 years;
covenant not to compete - term of agreement; and leasehold interest term of
lease.
Subsequent to its acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segment's enterprise value and deducts the fair value of all
tangible and intangible assets to arrive at the recoverable value of goodwill.
During fiscal 1997, the Company continued to experience customer losses,
significant reduction in third party reimbursements and other changes in the
health care industry having adverse effects on the Company's operations. These
factors resulted in significant cash flow deficits and continued operating
losses. As a result, management reevaluated the recoverability of goodwill and
other intangible assets and concluded they had no continuing value. Accordingly,
the Company recorded a $59.4 million write-off of those asssets in fiscal 1997.
Amortization expenses less the write-down of intangibles, for leasehold
interest was $250,813, for covenants not to compete was $1,027,598, for goodwill
was $2,011,458 and for customer lists was $1,441,226 in fiscal 1997.
Assets held for sale
On May 9, 1999, the Company sold substantially all of its assets, including
trade accounts receivable, supplies inventory, equipment, intangible assets and
certain other assets (see Note 17). As a result, the Company PHYSICIANS CLINICAL
LABORATORY, INC. AND SUBSIDIARY has reported such assets at their net realizable
values under the caption, "Assets held for sale" at February 28, 1999.
<PAGE>
<TABLE>
<CAPTION>
A summary of assets held for sale at February 28, 1999 is as follows:
<S> <C>
Trade accounts receivable, net of allowance for doubtful accounts of $4,397,020................. $9,148,414
Supplies inventory................................................................................ 1,469,253
Prepaid expenses and other current assets......................................................... 225,000
Equipment, net of accumulated depreciation and amortization of $1,458,739:
Equipment.................................................................................... 875,912
Furniture and fixtures....................................................................... 106,780
Vehicles..................................................................................... 65,585
Capital leases............................................................................... 79,522
Reorganization value in excess of amounts allocable to identifiable assets, less amortization of
$3,950,362..................................................................................... 21,633,243
Other long-term assets............................................................................ 444,231
-------
34,047,940
Less current portion.............................................................................. 12,390,000
--------
Assets held for sale.............................................................................. $21,657,940
===========
</TABLE>
Earnings (loss) per share
Basic and diluted loss per common share is based upon the weighted average
number of common shares outstanding during the period. Diluted loss per common
share excludes the options and warrants to purchase common stock, since their
effect would be antidilutive.
Amounts for the predecessor company are not presented as the data is not
meaningful due to the Company's reorganization.
Reorganization charges
Reorganization charges consist primarily of professional fees incurred as
part of the Chapter 11 bankruptcy.
Direct laboratory and laboratory support costs
Direct laboratory costs consist of labor costs, supplies expense, reference
and pathology fees, utilities and other expenses. Included in reference and
pathology fees are charges from related parties of approximately $180,000,
$200,000, and $326,920 for fiscal 1999, 1998, and 1997, respectively.
Laboratory support costs consist of patient service center costs, courier
costs, laboratory administration expenses, customer service costs, materials
management costs and management service charges from related PHYSICIANS CLINICAL
LABORATORY, INC. AND SUBSIDIARY parties. Management service charges from related
parties were approximately $190,000, $200,000 and $405,419 for fiscal 1999,
1998, and 1997, respectively.
Repairs and maintenance expense
Repairs and maintenance expense were $473,530, $605,965 and
$908,795 in fiscal 1999, 1998, and 1997, respectively.
Stock based compensation
In 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of the pronouncement, the
Company elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock option plans.
Income taxes
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets, liabilities and net operating loss
carryforwards. Deferred tax assets are reduced by a valuation allowance to
reflect the uncertainty associated with their ultimate realization.
Accounts receivable and revenue recognition
Revenues are recognized when services are performed. Revenues under
capitated agreements are recognized monthly as earned. Expenses are accrued on a
monthly basis as services are provided.
As a result of the adoption of fresh start accounting, trade accounts
receivable were adjusted to their estimated fair value as of September 30, 1997
and the allowance for doubtful accounts was eliminated at that date.
Due to the significant changes occurring in the health care industry
related to managed care, billing system/process challenges and accounts
receivable collection problems, it is reasonably possible that the Company's
estimate of the net realizable value of accounts receivable will change in the
near term. No estimate can be made of a range of amounts of loss that are
reasonably possible.
Services under government programs represent approximately 34%, 30% and 33%
of net revenue for fiscal 1999, 1998, and 1997, respectively. The Company's
primary concentration of credit risk is accounts receivable, which consist of
amounts owed by various governmental agencies, insurance companies and private
patients. Significant concentrations of gross accounts receivable at February
28, 1999 and 1998 reside in receivables from governmental agencies of 62% and
55%, respectively.
Fair values of financial instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value.
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the immediate or short-term maturities of these financial
instruments. As of February 28, 1999, the Company's carrying value of debt
approximates fair value based on similar debt instruments available.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
NOTE 4--EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements at February 28, 1998 consist of the
following:
Equipment.......................................... $1,845,219
Automobile......................................... 9,813
Furniture and fixtures............................. 304,238
Leasehold improvements............................. 967,150
----- -------
3,126,420
Less--accumulated depreciation and amortization..... 594,972
----- -------
$2,531,448
Depreciation expense relating to equipment, and leasehold improvements
charged to operations was $1,301,010, $3,510,363, and $4,967,068 for fiscal
1999, 1998 and 1997, respectively. The Company wrote off all leasehold
improvements at February 28, 1999, because the related leases were terminated in
early fiscal 2000.
<PAGE>
NOTE 5--LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consists of the following:
February 28,
1999 1998
----- ----
<S> <C> <C>
Senior Secured Notes due in 2004, with a face amount of $55,000,000, net of
unamortized discount of $5,984,000 at February 28, 1999 and $7,411,200 at
February 28, 1998, plus capitalized interest of $6,798,000 and $0 at
February 28, 1999 and 1998, respectively, currently in default................... $55,813,800 $47,588,000
Notes payable to the Senior Secured Note holder, due and payable in June 2001....... 7,000,000 --
Note payable to the United States government, bearing interest monthly at the
30-day Treasury Bill rate (5.6% at February 28, 1999 and 1998), principal due
in monthly installments of $25,000 through July 2003 (see Note
14) . 1,375,000 1,650,000
Note payable to the Internal Revenue Service, bearing interest at 9%, principal
and interest due in monthly installments of $5,301 through May 2002.............. 174,577 237,915
Note payable to the Employment Development Department bearing interest at
10%, principal and interest due in monthly installments of $616 through
November 1, 2002................................................................. 26,288 37,386
Notes payable to Ford Credit Corp., bearing interest at 10.95%, principal and
interest due monthly, through December 2003...................................... 590,148 --
Note payable to the Internal Revenue Service, bearing interest at 8%, principal
and interest due in quarterly installments of $18,418 through December 2003...... 250,077 255,672
Capital lease obligations (see Note 8).............................................. 677,479 938,053
------------- -------
65,907,369 50,707,026
Less--current installments........................................................... 56,697,329 48,360,853
---------- ----------
$9,210,040 $2,346,173
</TABLE>
As provided by the Plan of Reorganization, the Company issued $55 million
in Senior Secured Notes, due in September 2004, to a group of senior lenders who
are also significant stockholders. The Notes have been recorded at their present
value of $47 million, based upon an estimated discount rate of 15%. The
difference between the present value and the aggregate principal amount will be
amortized into interest expense over the term of the debt. For the first two
years after issuance, the Notes bear interest at the rate of either 10% in cash
or 12% in kind (increase to principal), at the option of the Company. The
Company may not elect interest payments in kind once a cash interest payment has
been made. After two years, the Notes will bear interest at the rate of 11% in
cash, which rate will be increased by 1% per annum through maturity. Interest is
payable semi-annually. Interest on overdue payments will be at 1% over the then
applicable interest rate.
The Notes may be redeemed at the Company's option upon certain notice. The
Company is obligated to offer to repurchase the Notes upon the occurrence of a
change of control, upon certain defined asset sales, or upon consummation of an
underwritten public offering of its capital stock. All redemptions are at 100%
of principal plus accrued interest, except upon a change of control at 101% of
principal accrued interest. Under a registration rights agreement, at any time
after December 31, 1998, the holders of a majority of then outstanding Notes
have one right to request the Company to effect the registration of these Notes
under the Securities Act, subject to certain exceptions.
The Notes are collateralized by a first priority security interest in all
assets of the Company, including capital stock of its subsidiary, under a
Security Agreement and Pledge Agreement. Under an intercreditor and
subordination agreement, the security interests in the Company's receivables are
subordinated to Daiwa Healthco-2 LLC (see Note 6).
Each of the agreements contains certain financial covenants and
restrictions. The Company was in violation of certain covenants in fiscal 1999
and does not expect to be in compliance subsequent to fiscal year end, which
constitutes an event of default. The lender has the right to accelerate payment
of the debt, and accordingly, the debt has been classified as current portion of
long-term debt.
In fiscal 1997 in connection with a credit facility entered into by the
Predecessor Company, the Company recognized an extraordinary gain of $3.5
million when one of its largest stockholders repaid a portion of the Company's
debt which was in default and guaranteed by a stockholder.
In fiscal 1999, a significant stockholder, who is also a significant holder
of Senior Secured Notes, loaned the Company $7 million for working capital. The
loan bears interest at 15% per annum, payable semi-annually, and matures in June
2001. The Company has the option to pay interest in cash or by addition to
principal. The loan is senior to the $55 million in Senior Secured Notes and is
subordinated to the Daiwa credit facility. In connection with and as additional
consideration for the loan, Nu-Tech sold a portion of its shares to the lender
and amended the Stockholders' Agreement (see Note 13). In connection with the
loan, the Stockholders' Agreement was amended to modify certain corporate
governance rights previously granted to Nu-Tech.
Maturities of long-term debt, excluding capital lease obligations, in each
of the next five fiscal years are as follows:
2000 . $56,448,785
2001 . 651,344
2002 . 7,568,424
2003 . 386,337
2004 . 175,000
Thereafter.... --
$65,229,890
NOTE 6--LINE OF CREDIT:
At February 28, 1999, the Company had a $10 million line of credit, under
which it could borrow up to 85% of eligible accounts receivable, subject to
certain adjustments. Interest is payable monthly at the LIBOR Rate plus 3%,
which interest rate will increase by 2% after an event of default. The effective
interest rate was 9.95% on February 28, 1999. The Agreement also provides for a
monthly non-utilization fee equal to 1/2% on the unused maximum available and
upon early termination, a fee of $200,000. The loan is collateralized by a first
priority lien on all healthcare receivables and certain bank accounts. The line
of credit agreement contained financial and other covenants, and the Company was
not in compliance with certain covenants. In May 1999, the Company repaid the
borrowings under the line of credit (see Note 17).
<PAGE>
NOTE 7--INCOME TAXES:
The expense for income taxes consists of the following:
Reorganized Company Predecessor Company
Fiscal year Five months Seven months Fiscal year
ended ended ended ended
February 28, February 28, September 30, February 28,
1999 1998 1997 1997
Current:
Federal . $ -- $ -- $ -- $ --
State . 288,000 -- -- --
288,000 -- -- --
Deferred .
-- -- -- --
$ 288,000 $ -- $ -- $ --
========= ===== ====== =====
The effective tax rate and statutory federal income tax rates are
reconciled as follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
Fiscal year Five months Seven months Fiscal year
ended ended ended ended
February 28, February 28, September 30, February 28,
1999 1998 1997 1997
<S> <C> <C> <C> <C>
Federal statutory income tax rate......................... (34.0)% (34.0)% 34.0 % (34.0)%
State franchise taxes, net of federal income tax benefit. (4.8)% (6.1)% 6.1 % (6.1)%
Change in a valuation allowance........................... 40.1 % 9.9 % (27.6)% 40.1 %
Reorganization value...................................... -- 29.3 % (12.5)% --
Other . -- 0.9 % -- --
-- -- --
1.3 % 0.0 % 0.0 % 0.0 %
========= === ========= === ============== =========
</TABLE>
At February 28, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $30 million. The loss carryforwards
expire between fiscal 1998 and 2013 for federal income tax purposes. As a result
of emerging from bankruptcy and the change in ownership, approximately $5.3
million of the net operating loss carryforwards will be subject to an annual
limitation regarding their utilization against taxable income in future periods.
Under fresh start accounting, realization of these pre-effective date net
operating loss carryforwards, if any, will be recorded first as a reduction to
excess reorganization value, then to additional paid in capital.
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
February 28
1999 1998
<S> <C> <C>
Current:
Accrued expenses..................................... $(382,489)
Bad debt............................................. (3,371,865)
Prepaid expenses..................................... (158,673)
Other . $-- 455,544
Total current deferred (assets) liabilities..... -- (3,457,483)
Valuation allowance....................................... -- 3,457,483
Net current deferred (assets) liabilities....... -- --
Non-current:
Amortization.........................................
(25,290,782)
Depreciation......................................... (1,068,831)
Net operating loss................................... -- (4,448,792)
Total non-current deferred (assets) liabilities. -- (30,808,405)
Valuation allowance....................................... -- 30,808,405
Net non-current deferred (assets) liabilities... -- --
Total net deferred (assets) liabilities................... $-- $ --
=== ======
</TABLE>
The Company has not filed its federal and state income tax returns for
fiscal 1997 and subsequent years. The Company's deferred tax assets and
liabilities as of February 28, 1999 are not determinable. However, they would be
fully offset by a valuation allowance.
NOTE 8--LEASES:
The Company is obligated under capital leases for certain computer and
laboratory equipment that expire at various dates during the next five years.
Equipment under capital leases was $482,073, and related accumulated
amortization was $402,551 and $128,612 as of February 28, 1999 and 1998,
respectively.
The Company also leases its laboratories and patient service centers under
operating leases expiring over various terms. Many of the monthly lease payments
are subject to increases based on the Consumer Price Index from the base year.
The Company also leases remote draw station space, several automobiles and
other equipment, which have been classified as operating leases and which expire
over the next 5 years. Many of the draw station leases have renewal options and
monthly lease payments subject to annual increases.
<PAGE>
PHYSICIANS CLINICAL LABORATORY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of February 28, 1999
are:
Capital Operating
Fiscal years ended February 28, leases leases
2000................................................. $318,020 $2,043,534
2001................................................. 259,939 1,048,527
2002................................................. 216,616 626,918
2003................................................. -- 486,540
2004................................................. -- 380,815
Thereafter........................................... -- 18,836
Total minimum lease payments......................... 794,575 $4,605,170
==========
Less--amounts representing interest.................. 116,829
Present value of net minimum capital lease payments.. $677,746
========
Rental expense under operating leases was $4,398,950, $4,480,602,
and $6,113,445 for fiscal 1999, 1998, and 1997, respectively.
NOTE 9--RELATED PARTY TRANSACTIONS:
The Company provides laboratory and computer services to certain of its
stockholders (and their affiliated entities). Laboratory and computer service
charges are billed to and paid by the stockholders at negotiated rates. Under
the Plan of Reorganization in fiscal 1998 (see Note 1), these former
stockholders no longer own stock and hold only warrants.
Fiscal years ended February 28,
1999 1998 1997
------ ------ ----
Laboratory and computer service revenue
from stockholders
(warrant holders)........... $2,166,905 $1,596,839 $2,407,989
========== ========== ==========
Amounts due from stockholders (warrant holders) and included in accounts
receivable were as follows:
February 28,
1999 1998
------------- ----
Amounts due from stockholders (warrant holders)..... $337,368 $476,642
======== ========
The Company received management services from Diagnostic Pathology Medical
Group, Inc. ("DPMG"), a former stockholder (warrant holder) of the Company. The
services of certain management personnel were provided to the Company for
management fees at a cost of $0, $0 and $104,010 in fiscal 1999, 1998, and 1997,
respectively.
The Company occasionally uses the specialized laboratory services of one of
its owners and several of its owners' stockholders. These owners only hold
warrants in 1998 and 1999. Most of these services are billed to the Company at
negotiated discounts from the billing entities' customary charges. Amounts
billed to the Company were as follows:
Fiscal years ended February
28,
1999 1998 1997
Billings from stockholders (warrant holders) $190,000 $200,000 $326,920
======== ======== ========
The Company also leases draw station space and purchases other services and
various supplies from several of its prior stockholders (warrant holders). The
total amount paid by the Company for these items was $0, $0, and $26,691 for
fiscal 1999, 1998, and 1997 respectively.
At various times the Company has loaned its former President and CEO funds
totaling approximately $350,000. During the fiscal year ended February 28, 1998,
the Company released the former President from all payment obligations under the
loans.
NOTE 10--EMPLOYEE BENEFIT PLAN:
As of January 1, 1989, the Company adopted a 401(k) profit sharing plan
under which employees may contribute between 1% and 20% of their annual
compensation to the Plan. A minimum of 90 days of service is required prior to
participation in the Plan by an employee. On April 30, 1990, the plan was
amended to provide that the Company would contribute 50% of employee
contributions up to 6% of their annual gross compensation for those employees
who have at least one full year of service. The Company contribution to the
401(k) plan was discontinued effective December 31, 1995.
NOTE 11--STOCK OPTION PLANS AND WARRANTS:
Stock option plans
All options outstanding at the petition date and the related plans have
been cancelled under the Plan of Reorganization (see Note 1).
Effective with the Company's reorganization, a new stock option plan was
put into place. Under an employment agreement effective September 30, 1997, the
Company granted the president a 10 year option to purchase 200,000 shares of
common stock at an exercise price of $.25, which option is fully vested and
exercisable immediately. The option provides for payment of the option price in
cash or pursuant to a cashless exercise, and is subject to the same
anti-dilution provisions under the new warrants discussed below. The option is
not transferable except in limited circumstances and will terminate one year
after termination of the optionee's employment, except where such shares have
not been registered. The Company is obligated to register the shares upon any
appropriate filing and the expiration date will extend to the date of such
registration. Management estimated the market value of the stock to be less than
the exercise price and, accordingly, no compensation cost has been recognized.
Had compensation cost for the plan been determined based on the fair value
of the option at the grant date consistent with the method of Statement of
Financial Accounting Standards 123, Accounting for Stock-Based Compensation, the
Company's net loss and loss per share would not have been changed materially for
the five month period ended February 28, 1998 and the fiscal year ended February
28, 1999.
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes options--pricing model with the following assumptions used:
expected volatility 80%, risk-free interest rate 6%, no dividend yield and
expected life of 5 years.
Stock options outstanding at February 28, 1999 and 1998 was 200,000.
Additional information regarding stock options:
February 28
1999 1998
--------- -------
Authorized shares............... 200,000 200,000
Shares available for granting... 200,000 200,000
Exercisable shares.............. 200,000 200,000
Warrants
All warrants outstanding at the bankruptcy's effective date have been
canceled under the Plan of Reorganization (see Note 1).
Pursuant to the Plan of Reorganization and a Warrant Agreement, the Company
issued warrants to prior stockholders for the purchase of an aggregate of
131,579 shares of common stock. The exercise price under the warrants is $13.30
per share and the warrants expire October 3, 2002. The agreement includes
anti-dilution provisions for the adjustment of number of shares and exercise
price upon the occurrence of certain events.
NOTE 12--EMPLOYMENT AGREEMENTS:
Reorganized company
Effective September 30, 1997, the Company entered into an employment
agreement with its new president and CEO with a term of three years at a base
salary of $104,000 annually through October 31, 1997 and $208,000 annually
thereafter through September 30, 2000. Other benefits typical of such agreements
are also provided. The Company may terminate the agreement before the end of its
term for cause. The Company may also terminate the agreement without any cause
by providing severance pay equal to the base salary for the unexpired portion of
the agreement plus one year. The Company is obligated to pay the base salary for
the unexpired portion of the agreement upon the death, disability or reduction
in title or duties of the executive. In early fiscal 2000, the Company
terminated the CEO and recorded severance payments under the employment
agreement totaling approximately $300,000.
NOTE 13--STOCKHOLDERS' EQUITY (DEFICIT):
Stock registration rights
Effective with the Plan of Reorganization, the Company entered into a
Common Stock Registration Rights Agreement with the stockholders who received
Senior Secured Notes. The agreement provides these holders with the right for
one demand upon the Company, after the earlier of 30 months from the date of the
agreement or six months after a registration statement for an underwritten
public offering becomes effective, for the filing of a stock registration
statement with respect to their shares. The Company is liable for liquidated
damages in the event of a default.
Stockholders agreement
Effective with the Plan of Reorganization, Nu-Tech entered into a
Stockholders Agreement with certain of the stockholders who received Senior
Secured Notes. The agreement provides for restrictions on transfers of stock and
rights to acquire additional shares pro rata to their holdings if additional
shares are issued or transferred by the Company. The agreement also provides
rights to Nu-Tech to designate 3 members of the 5 member board of directors and
the other stockholders to designate 2 members, as long as certain ownership
percentage is maintained. Corporate governance provisions include limitations on
certain issuance of securities, merger or sale, PHYSICIANS CLINICAL LABORATORY,
INC. AND SUBSIDIARY capital expenditures, issuance of debt, or modifications to
the certificate of incorporation, bylaws or the president's employment agreement
without at least one vote of a director designated by the stockholder group.
The agreement was amended in fiscal 1999 in conjunction with a working
capital loan to the Company (see Note 5). The agreement as amended provides the
lender stockholder with the right to elect the majority of the board and
provides Nu-Tech the rights under the corporate governance provisions above. In
addition, Nu-Tech has granted to the lender stockholder an exclusive option to
purchase Nu-Tech's shares of the Company for a price of $10 million. The option
is exercisable upon certain actions of the board, subject to Nu-Tech stockholder
approval.
The amended agreement also has a buy-sell provision at defined prices.
Certificate of Incorporation
The Certificate of Incorporation provides the same purchase rights as under
the original Stockholders Agreement to all stockholders who received Senior
Secured Notes. The Company shall reserve shares of common stock for issuance
under the rights. The purchase rights terminate upon an initial public offering.
NOTE 14--LEGAL PROCEEDINGS:
On or about January 22, 1997, Taylor R. McKeeman, the Company's former Vice
President for Laboratory Operations, filed a Request for Payment of
Administrative Expense with respect to a prepetition Separation Agreement
between the Company and Mr. McKeeman. Under the Separation Agreement, Mr.
McKeeman is entitled to receive a severance payment in the event he is
terminated after a "Change in Control" occurs, as such term is defined in the
Separation Agreement. This request was denied by order of the Bankruptcy Court,
entered on March 19, 1997, because (i) no Change in Control occurred prior to
the termination of Mr. McKeeman's employment and (ii) any claim of Mr. McKeeman
against the Company's bankruptcy estate arising out of the Separation Agreement
constitutes a prepetition claim. Mr. McKeeman filed a notice of appeal on or
about March 5, 1997. On February 2, 1998, the Bankruptcy Court dismissed Mr.
McKeeman's appeal.
On June 9, 1998, Richard M. Brooks, the Company's former Senior
Vice-President and Chief Financial Officer, filed an Amended Proof of
Administrative Claim and Request for Payment Based Upon Post-Petition Torts
seeking in excess of $3,000,000 in damages for (a) the allegedly tortuous
termination of Brook's employment with the Company and (b) allegedly defamatory
statements made by the Company's chief executive officer about Brooks. The
Company filed its Debtors' Objection to and Motion for Summary Judgment of Mr.
Brooks' Amended Proof of Claim. On August 12, 1998, the Court denied the motion.
The matter is currently in discovery stages. The Company believes the claim has
no merit and intends to defend vigorously against the matter; however, the
outcome cannot be predicted. If Mr. Brooks were to prevail on either part of
this Claim, the Company would incur an administrative expense claim against its
Chapter 11 estate in an amount which would be fixed by the Bankruptcy Court. It
is reasonably possible the outcome could have a material financial impact on the
Company.
In the ordinary course of business, two related complaints have been filed
against the Company with the Department of Fair Employment and Housing (DFEH)
and the Equal Employment Opportunity Commission by former employees alleging
wrongful termination and discrimination. The Company has denied all allegations.
One complaint has been closed by the DFEH for lack of probable cause. It is not
possible to estimate the outcome of these complaints.
In the ordinary course of business, several lawsuits have been filed
against employees of the Company, and the Company has filed suit against former
employees of the Company which resulted in countersuits against the Company,
relating to alleged violations of employee agreements not to compete. In the
opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company.
Regulatory investigation
In April of 1997, the Company received a subpoena to furnish certain
documents to the United States Department of Defense ("DOD") with respect to the
Company's Civilian Health and Medical Program of Uniformed Services ("CHAMPUS")
billing practices. In late May 1997, the Company was notified that its Medicare
and MediCal billing practices also were undergoing review by the United States
Department of Health and Human Services ("HHS"), and in early June of 1997, the
Company received a subpoena to furnish certain documents to HHS in connection
with such review. The Company cooperated with DOD and HHS in such investigations
and in August 1997 entered into a settlement agreement, which was approved by
the Bankruptcy Court in September 1997. Under the settlement, the Company agreed
to pay $2 million to the United States, $200,000 immediately and the balance
over six years (see Note 5). The Company also entered into a 5 year corporate
integrity agreement with HHS to provide for an internal corporate compliance
plan. The settlement releases the Company and its president from civil and
criminal liability. Should the Company default on any provisions under the
agreement, the government may offset any remaining unpaid balance against monies
due the Company under any government program and may exclude the Company from
participation in the Medicare and State health care programs.
Subsequent to reaching agreement with the United States, the Company
proposed and reached a settlement with the State of California with respect to
billing practices under the MediCal program. The terms of the agreement are
similar to the agreement with the United States except the Company paid $100,000
in cash to the state.
NOTE 15--ACQUISITIONS:
In February 1997, the Company purchased 100% of the common stock of MSI
from Nu-Tech for $7,643,183. The Company accounted for the transaction using the
purchase method of accounting and included MSI in the accompanying financial
statements at February 28, 1997. There is no operating activity of MSI included
in the statement of operations of the Company for the year ended February 28,
1997. Under the Plan of Reorganization, MSI was legally merged into the Company
effective October 3, 1997.
Pro forma results of operations are as follows for the fiscal year ended
February 28, 1997 (unaudited):
Net revenue.................... $ 75,125,077
Net loss....................... (102,004,130)
Net loss per common share...... *
* Loss per share amounts relates to the predecessor company and is not
meaningful due to the reorganization (See Note 1).
<PAGE>
NOTE 16--STATEMENT OF CASH FLOWS:
Statement of cash flows
<TABLE>
Net changes in operating assets and liabilities consist of the following:
<CAPTION>
Reorganized Company Predecessor Company
Fiscal year Five months Seven months Fiscal year
ended ended ended ended
February 28, February 28, September 30, February 28,
1999 1998 1997 1997
------ ------- ------ ----
<S> <C> <C> <C> <C>
Increase in accounts receivable.......................... $(367,740) $(4,223,937) $(6,176,108) $ (4,640,852)
Net decrease (increase) in supplies inventory, prepaid
costs, deposits and other assets...................... (1,107,730) 443,704 551,923 (1,257,077)
Increase in accounts payable and accrued expenses........ 3,307,719 1,900,345 13,136,173 25,524,869
Net change in operating assets and liabilities........... $1,832,249 $(1,879,888) $ 7,511,988 $19,626,940
==========- =========== ===========- ===========
Supplemental disclosure of cash flow information is as follows:
Cash paid for interest................................... $ 764,117 $ 249,994 $ -- $ 26,277
=========- =========- ======- =========
</TABLE>
Non-cash transactions consist of the following:
Year ended February 28, 1997:
Gain on extinguishment of debt paid by a related party of $3.5
million.
Note payable to related party resulting from MSI acquisition of
$5 million.
Year ended February 28, 1998:
Issuance of stock for debt under the Plan of Reorganization (see
Note 1).
NOTE 17--SUBSEQUENT EVENT SALE OF BUSINESS:
On April 5, 1999, the Company entered into an Asset Purchase Agreement for
the sale of its business and substantially all assets to Unilab Corp. for a
total purchase price of approximately $40 million. The purchase price includes
approximately $9 million cash, one million shares of the common stock of Unilab,
assumption of approximately $3 million in liabilities, and a convertible note
for $25 million. The note has a 7.5% interest rate, with $10 million annual
principal payments, which may be paid in cash or in shares of Unilab common
stock, at Unilab's option, at a $3.00 per share conversion price for 75% of the
note, with the balance converting at then-current market price. The stock is
subject to a registration rights agreement. The agreement also provides for the
repayment of outstanding borrowings under the Company's line of credit (see Note
6) prior to closing.
As a result of the agreement, the Company reevaluated the recoverability of
the excess reorganization value based upon an estimated loss on the sale,
including costs of disposal. The Company recorded an additional write-down of
$10.6 million, resulting in a total write-down of excess reorganization value of
approximately $45.3 million.
The sale of the Company's business and assets was consummated on May 9,
1999. The Company has used part of the net sales proceeds to repay its line of
credit, and plans to liquidate and distribute the remaining sales proceeds to
its Senior Secured Note holder.
Unilab
Pro Forma Financial Statements (Unaudited)
The following pro forma financial statements have been derived by the
application of pro forma adjustments to the Company's historical financial
statements. The pro forma statements of operations for the year ended December
31, 1998 and the three months ended March 31, 1999 give effect to the asset
purchase agreements with Meris and BCL as if such transactions had been
consummated as of January 1, 1998. The pro forma balance sheet gives effect to
the asset purchase agreement with BCL as if such transaction had occurred as of
March 31, 1999. The adjustments are described in the accompanying notes. The pro
forma financial statements should not be considered indicative of actual results
that would have been achieved had the asset purchase agreements with Meris and
BCL been consummated on the dates indicated and do not purport to indicate
balance sheet data or results of operations as of any future date or for any
future period. The pro forma financial statements should be read in conjunction
with Unilab's, Meris', and BCL's historical financial statements and the notes
thereto.
<PAGE>
<TABLE>
Unilab Corporation
ProForma Balance Sheet
As of March 31, 1999
(Unaudited)
(in thousands)
<CAPTION>
Historical Unilab Historical BCL Pro Forma Pro Forma
March 31, 1999 February 28, 1999(a) Adjustments Unilab
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
$(421) (b)
Cash and cash equivalents $27,470 $421 (8,543) (c) $18,927
Accounts receivable, net 43,471 9,148 52,619
Inventory of Supplies 3,232 1,469 4,701
Prepaid expenses and other
current assets 1,575 750 (750) (b) 1,575
----- --- ----- -----
Total current assets 75,748 11,788 (9,714) 77,822
Property and equipment, net 11,274 1,128 (770) (b) 11,632
(21,633) (b)
Goodwill, net 56,447 21,633 32,445 (e) 88,892
Other intangible assets, net 2,221 - 2,221
Other assets 5,565 888 (888) (b) 5,565
----- --- ----- -----
$151,255 $35,437 $(560) $186,132
======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $1,176 $61,355 $(61,355) (b) 1,176
Accounts payable and accrued (12,707) (b)
liabilities 16,466 13,882 2,369 (d) 20,010
Accrued payroll and benefits 7,762 1,983 - 9,745
----- ----- ------------ -----
Total current liabilities 25,404 77,220 (71,693) 30,931
Long-term debt, net of current (9,210) (b)
Portion 136,882 9,210 25,000 (c) 161,882
Other liabilities 4,163 - 1,100 (b) 5,263
----- ---------- ----- -----
166,449 86,430 (54,803) 198,076
Shareholders' Equity (Deficit)
Convertible preferred stock 4 - 4
(25) (b)
Common stock 407 25 10 (c) 417
(22,775) (b)
Additional paid-in capital 228,435 22,775 3,240 (c) 231,675
Accumulated deficit (244,040) (73,793) 73,793 (b) (244,040)
--------- -------- ------ ---------
Total shareholders' equity (deficit) (15,194) (50,993) 54,243 (11,944)
-------- -------- ------ --------
$151,255 $35,437 $(560) $186,132
======== ======= ====== ========
<FN>
See Notes to Pro Forma Balance Sheet
</FN>
</TABLE>
<PAGE>
Unilab
Notes to Unaudited Pro Forma Balance Sheet
(a) On April 5, 1999, Unilab and BCL signed an asset purchase agreement whereby
Unilab acquired substantially all of the assets of BCL. The agreement was
effective on and Unilab took possession of the acquired net assets on May
10, 1999. BCL had a year-end date of February 28, and therefore BCL's
balance sheet at its natural quarterly period of February 28, 1997 has been
included in Unilab's pro forma balance sheet at March 31, 1999.
(b) Adjustment to reflect the net assets and liabilities not acquired or
assumed by Unilab as part of the acquisition of BCL. All acquired assets
and assumed liabilities, consisting principally of accounts receivable,
inventory of supplies, property and equipment, accrued payroll and benefits
and certain accounts payable and other liabilities, were recorded at their
fair value, which equated to the value in BCL's accounting records at
November 30, 1998 except property and equipment, net, which was written
down by $2.1 million from $2.5 million to $0.4 million to reflect the fair
market value of the property and equipment expected to be retained by
Unilab in its ongoing business.
(c) Adjustment to reflect the purchase price for the acquired net assets of BCL
noted in (a) above, consisting of a subordinated promissory note in the
principal amount of $25.0 million, bearing interest on the outstanding
balance at a rate of 7.5% per annum, $8.5 million in cash and the issuance
of 1.0 million shares of Unilab common stock valued at the closing price on
April 5, 1999 of $3.25 a share.
(d) Adjustment to reflect an accrual of approximately $2.4 million in costs
(primarily severance and payment of attorney fees and other closing costs)
expected to be incurred in connection with the integration of the acquired
BCL operations with those of Unilab and the closing of the asset purchase
agreement.
(e) The acquisition of the net assets of BCL is expected to result in
approximately $32.4 million of additional goodwill, determined as follows:
(in thousands)
Accounts receivable $9,148
Inventory of supplies 1,469
Property and equipment 358
---
Goodwill 32,445
Assets acquired $43,420
=======
Issuance of note 25,000
Accrued payroll and benefits 1,983
Assumed accounts payable 2,275
Liabilities associated with integration period 2,019
Acquisition fees, primarily legal costs 350
Cash payment 8,543
Common stock issued 3,250
-----
Purchase price/liabilities assumed or incurred $43,420
=======
Goodwill will be amortized over 20 years.
<PAGE>
<TABLE>
Unilab Corporation
Pro Forma Statement of Operations
Year Ended December 31, 1998
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Historical Unilab Historical Meris Historical BCL Pro Forma Pro Forma
Jan 1- Jan 1-Nov 5, Dec 1, 1997- Adjustments Unilab
Dec 31, 1998 Nov 5, 1998 (a) Nov 30, 1998 (b)
------------------ ----------------- --------------- ----------- ------
<S> <C> <C> <C> <C> <C>
Revenue $217,370 $22,008 $57,573 $296,951
Cost of Services 152,007 21,745 47,815 221,567
624 (c)
(3,357) (f)
Amortization and depreciation 7,592 - 4,667 1,692 (g) 11,218
Selling, general and administrative expenses 33,530 9,386 16,551 59,467
Writedown of intangible assets - - 44,727 (44,727 (j) -
--------- -------- ------ ----------- -------
Total operating expenses 193,129 31,131 113,760 292,252
------- ------ ------- -------
Operating income (loss) 24,241 (9,123) (56,187) 4,699
(427) (d)
889 (e)
Other expenses: (9,529) (h)
Interest, net 13,538 427 9,529 1,875 (i) 16,302
Other - - (280) (280)
----------- -------- ---------- --------
Income (loss) before income taxes 10,703 (9,550) (65,436) (11,323)
Tax provision - - - -
----------- -------- ---------- --------
Net income (loss) 10,703 (9,550) (65,436) (11,323)
====== ======= ======== ========
Preferred stock dividends 131 - - 131
Net income (loss) available to
common stockholders $10,572 $(9,550) $(65,436) $(11,454)
======= ======== ========= =========
Earnings (loss) per share:
Basic $0.26 $(0.27)
Diluted $0.25 $(0.27)
<FN>
See Notes to Pro Forma Statements of Operations
</FN>
</TABLE>
<PAGE>
<TABLE>
Unilab Corporation
Pro Forma Statement of Operations
Three Months ended March 31, 1999
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Historical Unilab Historical BCL Pro Forma Pro Forma
Jan 1-Mar 31, 1999 Dec 1,1998-Feb 28, 1999(b) Adjustments Unilab
------------------ --------------------------- ----------- ------
<S> <C> <C> <C> <C>
Revenue $63,559 $13,193 $76,752
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 18,455 7,197 25,652
Supplies 8,827 2,718 11,545
Other operating expenses 15,416 4,927 20,343
------ ----- ------
42,698 14,842 57,540
(593) (f)
(3,357) (f)
Amortization and depreciation 1,897 922 423 (g) 2,649
Selling, general and administrative expenses 9,312 - 9,312
Writedown of intangible assets - 1,331 (1,331) (j) -
---------- ----- -------- -------
Total operating expenses 53,907 17,095 69,501
------ ------ ------
Operating income (loss) 9,652 (3,902) 7,251
Other expenses: (2,515) (h)
Interest, net 3,486 2,515 469 (i) 3,955
Other - 3 3
---------- --------- -------
Income (loss) before income taxes 6,166 (6,420) 3,293
Tax provision - - -
---------- ---------- -------
Net income (loss) 6,166 (6,420) 3,293
===== ======= =======
Preferred stock dividends 33 - 33
Net income (loss) available to common stockholders $6,133 $(6,420) $3,260
====== ======== ======
Earnings (loss) per share:
Basic $0.15 $0.08
Diluted $0.14 $0.07
<FN>
See Notes to Pro Forma Statements of Operations
</FN>
</TABLE>
<PAGE>
Unilab
Notes to Unaudited Pro Forma Statement of Operations
(a) On September 16, 1998, Unilab and Meris signed an asset purchase agreement
whereby Unilab acquired substantially all the assets of Meris. The
agreement was approved on October 28,1998 by the United States Bankruptcy
Court in Los Angeles, California, and Unilab took possession of the
acquired net assets on November 5, 1998. The results of operations of Meris
for the period from January 1 through November 5, 1998 have been included
in Unilab's pro forma statement of operations for the year ended December
31, 1998. The results of operations of Meris since November 5, 1998 have
been included in Unilab's historical results of operations.
(b) On April 5, 1999, Unilab and BCL signed an asset purchase agreement whereby
Unilab acquired substantially all of the assets of BCL. The agreement was
effective on and Unilab took possession of the acquired net assets on May
10, 1999. BCL had a year-end date of February 28 and therefore BCL's
results for the twelve months ended November 30, 1998 have been included in
Unilab's pro forma statement of operations for the year ended December 31,
1998.
(c) To reflect additional amortization expense for the period from January 1
through November 5, 1998 associated with the goodwill and other
intangible assets recorded in connection with the acquisition of Meris.
(d) To reflect the elimination of the historical interest expense incurred by
Meris.
(e) To reflect interest expense for the period from January 1 through November
5, 1998 associated with the issuance of a $14.0 million convertible
subordinated note, bearing interest on the outstanding balance at a rate of
7.5% per annum, in connection with the acquisition of Meris.
(f) To reflect the elimination of the historical amortization expense incurred
by BCL
(g) To reflect additional amortization expense associated with the goodwill
recorded in connection with the acquisition of BCL, written-off over a
20-year period.
(h) To reflect the elimination of the historical interest expense incurred by
BCL.
(i) To reflect the interest expense associated with the issuance of a $25.0
million subordinated note, bearing interest on the outstanding balance at a
rate of 7.5% per annum, in connection with the acquisition of BCL.
(j) To reflect the elimination of the non-recurring charge recorded by BCL to
write-down intangible assets and goodwill for the permanent decline in
value below the Company's previous unamortized historical cost and the
write-down of fixed assets to fair market value.
(k) The number of shares used in the calculation of basic and diluted earnings
(loss) per share are as follows:
<TABLE>
<CAPTION>
Year ended Three months
Dec 31, 1998 ended Mar 31, 1999
------------ ------------------
<S> <C> <C>
Weighted average shares outstanding 40,665,289 40,728,546
Shares issued in connection with
the Bio-Cypher acquisition 1,000,000 1,000,000
--------- ---------
Shares used to compute basic EPS 41,665,289 41,728,546
Assumed conversion of $14.0 note
issued in connection with the acquisition of Meris - 4,666,667
Stock Options - 1,736,740
Convertible preferred stock - 364,000
------------ -------
Shares issued to compute diluted EPS 41,665,289 48,495,953
========== ==========
</TABLE>
The assumed conversion of the $14.0 million convertible subordinated note
issued in connection with the acquisition of Meris, the conversion of
preferred stock and the effect of stock options have not been included in
the calculation of pro forma diluted loss per share since its effect would
be anti-dilutive for the year ended December 31, 1998.
