UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment on
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)
<PAGE>
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: July 23, 1999 UNILAB CORPORATION
By: /s/ Brian D. Urban
Name: Brian D. Urban
Title: Executive Vice President,
Chief Financial Officer and Treasurer
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
February 29 (28), 1996, 1997 and 1998
<PAGE>
C O N T E N T S
Page
3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 6
CONSOLIDATED STATEMENTS OF OPERATIONS 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
<PAGE>
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and 1998 and November 30, 1998
<TABLE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
Predecessor
Company Reorganized Company
February 28, February 28, November 30,
1997 1998 1998
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 500,516 $ 190,013 $ 1,411,014
Trade accounts receivable -
Third parties 18,998,025 12,701,052 17,391,507
Related parties 322,964 476,642 554,255
---------------- ------------------ ------------------
Total accounts receivable 19,320,989 13,177,694 17,945,762
Less allowance for doubtful accounts 9,729,785 2,245,986 8,115,867
---------------- ------------------ ------------------
Net accounts receivable 9,591,204 10,931,708 9,829,895
Notes receivable -- current 361,650 - -
Supplies inventory 1,534,592 1,180,920 1,469,043
Prepaid costs and other assets 1,501,298 394,474 671,188
---------------- ------------------ ------------------
Total current assets 13,489,260 12,697,115 13,381,140
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, less
accumulated depreciation and amortization of
$23,238,541 and $594,972, respectively 11,595,900 2,531,448 2,497,469
REORGANIZATION VALUE in excess of amounts
allocable to identifiable assets, less accumulated
amortization of $1,571,000 - 24,012,605 22,826,464
OTHER LONG-TERM ASSETS 686,855 424,131 463,966
--------------- ----------- ------------
Total assets $ 25,772,015 $ 39,665,299 $ 39,169,039
================ ================== ==================
</TABLE>
<PAGE>
<TABLE>
Liabilities and Stockholders' DEFICIT
<CAPTION>
Predecessor
Company Reorganized Company
February 28, February 28, November 30,
1997 1998 1998
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt and leases $ 283,687 $ 48,360,853 $ 56,193,104
Note payable to related party 5,000,000 - -
Note payable to creditors - 400,000 -
Line of credit 5,243,182 4,517,766 4,720,136
Accounts payable 1,237,338 4,717,344 7,106,145
Accrued payroll 1,857,352 1,263,122 1,310,336
Accrued paid time-off 170,201 952,935 626,835
Accrued interest 5,121,598 2,730,411 1,471,207
Other accrued expenses 1,708,074 3,293,075 2,992,627
-------------- ------------- --------------
Total current liabilities 20,621,432 66,235,506 74,420,390
LONG-TERM DEBT, less current installments 631,309 2,346,173 8,341,819
LIABILITIES SUBJECT TO COMPROMISE 167,776,289 - -
---------------- ---------------- ---------------
Total liabilities 189,029,030 68,581,679 82,762,209
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.01 per share -
20,000,000 shares authorized; none issued or outstanding - - -
Common stock, par value $0.01 per share --
30,000,000 shares authorized; 6,071,419 shares
issued and outstanding as of February 28, 1997 60,714 - -
Common stock, par value $0.01 per share -
50,000,000 shares authorized; 2,500,000 shares
issued and outstanding as of February 28, 1998 - 25,000 -
Preferred stock, par value $0.01 per share -
20,000,000 shares authorized; none
issued or outstanding - - -
Common stock, par value $0.01 per share -
30,000,000 shares authorized; 2,500,000 shares
issued and outstanding as of November 30, 1998 - - 25,000
Additional paid-in capital 15,570,802 22,775,000 22,775,000
Accumulated deficit (178,888,531) (51,716,380) (66,393,170)
Total stockholders' deficit (163,257,015) (28,916,380) (43,593,170)
---------------- ---------------- ---------------
Total liabilities and stockholders' deficit $ 25,772,015 $ 39,665,299 $ 39,169,039
================ =============== ===============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 29 (28), 1996, 1997 and 1998 and
Twelve Months Ended November 30, 1998
<CAPTION>
Predecessor Company Reorganized Company
Seven Twelve
Months Five Months Months
Ended Ended Ended
Years Ended February 29 (28), September 30, February 28, November 30,
1996 1997 1997 1998 1998
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue
Net revenue from third parties $ 86,828,901 $ 60,422,858 $ 39,466,458 $ 25,432,951 $ 55,988,202
Net revenue from related parties 3,562,950 2,407,989 856,377 740,462 1,584,554
---------------- --------------- --------------- --------------- ---------------
Total net revenue 90,391,851 62,830,847 40,322,835 26,173,413 57,572,756
Direct laboratory costs 31,881,339 23,117,090 15,775,669 9,839,627 24,643,600
---------------- --------------- --------------- --------------- ---------------
Gross profit 58,510,512 39,713,757 24,547,166 16,333,786 32,929,156
Laboratory support costs 26,509,055 20,013,962 11,233,414 7,328,075 17,991,127
---------------- --------------- --------------- --------------- ---------------
Laboratory profit 32,001,457 19,699,795 13,313,752 9,005,711 14,938,029
Selling, general and administrative 27,739,434 24,880,448 10,652,308 7,093,342 16,551,120
Provision for doubtful accounts 30,538,625 8,843,252 2,908,004 2,245,986 4,705,243
Credit restructuring costs 4,903,436 - - - -
Reorganization charges - 1,558,820 1,982,032 503,470 475,417
Depreciation and amortization 17,453,808 9,698,163 2,910,593 2,170,769 4,666,457
Write down of intangibles 18,872,881 59,371,934 - 45,327,000 44,727,000
---------------- --------------- --------------- --------------- ---------------
Operating loss (67,506,727) (84,652,822) (5,139,185) (48,334,856) (56,187,208)
Interest expense (12,898,919) (15,838,895) (10,491,718) (3,568,405) (9,557,282)
Interest income 61,285 21,855 8 1,634 28,040
Nonoperating income (expense), net (383,375) (1,708,848) (2,294,285) 185,247 280,380
----------------- --------------- --------------- --------------- ---------------
Loss before benefit for income taxes (80,727,736) (102,178,710) (17,925,180) (51,716,380) (65,436,070)
Benefit for income taxes 1,543,250 - - - -
---------------- --------------- --------------- --------------- ---------------
Loss before extraordinary gain (79,184,486) (102,178,710) (17,925,180) (51,716,380) (65,436,070)
Fresh start adjustment - - 60,053,472 - -
Extraordinary gain on extinguishment
of debt, net of taxes of $0 - 3,500,000 121,128,723 - -
---------------- --------------- --------------- --------------- ---------------
NET (LOSS) INCOME$ (79,184,486) $ (98,678,710) $ 163,257,015 $ (51,716,380) $ (65,436,070)
=============== ============== =============== ============== ===============
Loss per common share - basic and diluted * * * $ (20.69) $ (26.17)
============== ==============
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.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 29 (28), 1996, 1997 and 1998 and
Twelve Months Ended November 30, 1998
<CAPTION>
Predecessor Company Reorganized Company
Seven Twelve
Months Five Months Months
Ended Ended Ended
Years Ended February 29 (28), September 30, February 28, November 30,
1996 1997 1997 1998 1998
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $ (79,184,486) $ (98,678,710) $ 163,257,015 $ (51,716,380) $ (65,436,070)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Fresh start adjustments - - (60,087,877) - -
Gain on debt extinguishment - - (121,128,723) - -
Medicare/MediCal settlement in debt - - 2,100,000 - -
Depreciation, amortization and write
down of intangible assets 36,326,689 69,070,097 2,910,593 47,497,769 49,393,457
Provision for doubtful accounts 30,538,625 8,843,252 2,908,004 2,245,986 4,705,243
Amortization of debt discount - - - 588,000 1,409,800
Credit restructuring costs 3,118,592 - - - -
Net change in income tax refund
receivable 5,181,785 - - - -
Net changes in operating assets and
liabilities 1,487,822 19,626,940 7,511,988 (1,879,888) 5,430,217
----------- ------------- ----------- ------------- -------------
Net cash used in operating activities (2,530,973) (1,138,421) (2,529,000) (3,264,513) (4,497,353)
---------------- --------------- --------------- --------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase of intangible assets
in connection with acquisitions - (1,632,968) - - -
Net acquisitions and disposals of
equipment and leasehold improvements (1,963,463) 366,613 (194,655) (79,189) (529,748)
---------------- --------------- --------------- --------------- ---------------
Net cash used in investing activities (1,963,463) (1,266,355) (194,655) (79,189) (529,748)
---------------- --------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of debt 6,266,763 5,443,182 4,556,818 4,517,766 7,062,015
Payments of debt (1,586,407) 536,016 (235,575) (3,082,155) (1,122,437)
Gain on extinguishment of debt - (3,500,000) - - -
Proceeds from sale of capital stock 23,999 34,279 - - -
---------------- --------------- --------------- --------------- ---------------
Net cash provided by financing
activities 4,704,355 2,513,477 4,321,243 1,435,611 5,939,578
---------------- --------------- --------------- --------------- ---------------
Net increase (decrease) in cash
and cash equivalents 209,919 108,701 1,597,588 (1,908,091) 912,477
CASH AND CASH EQUIVALENTS,
beginning of period 181,896 391,815 500,516 2,098,104 498,537
---------------- --------------- --------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
end of period $ 391,815 $ 500,516 $ 2,098,104 $ 190,013 $ 1,411,014
================ ============= =============== ============== =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Three Years Ended February 28, 1998 and Twelve Months Ended November 30, 1998
<CAPTION>
Common Common Additional Accumulated
Stock Shares Stock Amount Paid-In Capital Deficit
<S> <C> <C> <C> <C>
BALANCE AT FEBRUARY 28, 1995 6,027,709 $ 60,277 $ 15,512,961 $ (1,025,335)
Net loss - - - (79,184,486)
Proceeds from sale of capital stock
options 5,378 54 23,945 -
---------------- --------------- --------------- ---------------
BALANCE AT FEBRUARY 29, 1996 6,033,087 60,331 15,536,906 (80,209,821)
Net loss - - - (98,678,710)
Proceeds from sale of capital stock
options 38,332 383 33,896 -
---------------- --------------- --------------- ---------------
BALANCE AT FEBRUARY 28, 1997 6,071,419 60,714 15,570,802 (178,888,531)
Net income - Predecessor Company - - - 163,257,015
Issuance of stock for debt 2,500,000 25,000 22,775,000 -
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 -
Net loss - Reorganized Company - - - (51,716,380)
---------------- --------------- --------------- ---------------
BALANCE AT February 28, 1998 2,500,000 $ 25,000 $ 22,775,000 $ (51,716,380)
Net loss - Reorganized Company
(Unaudited) - - - (15,276,790)
---------------- --------------- --------------- ---------------
BALANCE AT NOVEMBER 30, 1998
(Unaudited) 2,500,000 $ 25,000 $ 22,775,000 $ (66,993,170)
================ =============== =============== ===============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>
PHYSICIANS CLINICAL LABORATORY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29 (28), 1996, 1997 and 1998
(1) REORGANIZATION
Physicians Clinical Laboratory, Inc. and subsidiaries ("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 then 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.
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 debt.
o Nu-Tech receive 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 (Note 16).
o Senior Lenders received $55 million in new senior secured
promissory notes and 952,500 shares (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.
<PAGE>
(1) REORGANIZATION - CONTINUED
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 was
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.
(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 than 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".
(2) FRESH START REPORTING - CONTINUED
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 purposes, 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.
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 Confirmation Reorganized
Balance Sheet of Plan Fresh-Start Balance Sheet
September 30, 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 - (448,264) 2,035,419
---------------- -------------- --------------- ---------------
Total current assets 16,280,333 1,556,817 (4,749,870) 13,087,280
Equipment & improvements, net 8,879,962 - (5,827,934) 3,052,028
Reorganization value - - 70,910,605 70,910,605
Other assets 687,139 - (279,329) 407,810
---------------- --------------- --------------- ---------------
Total assets $ 25,847,434 $ 1,556,817 $ 60,053,472 $ 87,457,723
================ =============== =============== ==============
</TABLE>
<PAGE>
<TABLE>
(2) FRESH START REPORTING - CONTINUED
<CAPTION>
Pre-Fresh Start Confirmation Reorganized
Balance Sheet of Plan Fresh-Start Balance Sheet
September 30, Debt Fair Value September 30,
1997 Discharge (a) Adjustments (b) 1997
---------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C>
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
---------------- --------------- ---------------- ---------------
Total liabilities and stockholders'
equity(deficit) $ 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>
(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 of 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. Although the Plan of Reorganization
has been effectuated, as described in Note 1 above, the Company continues to
experience losses and lack liquidity. In addition, the Company is in default
under a substantial portion of its debt agreements, which allows its lenders the
right to accelerate the debt repayment. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities or any other adjustments that might be
necessary should the Company be unable to continue as a going concern.
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Management believes the following actions and plans will allow the Company to
continue as a going concern: new loans were obtained in June 1998 for
$4,000,000, and in October 1998 for $2,000,000 which mature in 2001 with
interest payable in kind (Note 5), new sales personnel were hired to increase
revenue volume and additional cost reductions are planned. Management intends to
renegotiate with its lenders, as necessary, to prevent acceleration of loan
maturities. However, no assurances can be given that these actions will result
in achieving profitability or positive cash flows or maintaining the debt
structure. See Note 17.
Consolidation
The accompanying consolidated financial statements include the accounts of
Physicians Clinical Laboratory, Inc. and its subsidiaries (Physicians Clinical
Laboratory, Inc. and its subsidiaries are collectively referred to
hereinafter as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
Cash and cash equivalents 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 $162,508 at February 28, 1998 under the line of credit
(Note 6).
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
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.
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.
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The estimated useful lives of the 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 for the five months ended February 28, 1998 was $
1,571,000.
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 $34.7 million. See Note 17.
Intangible Assets
Prior to fiscal 1998, all amortization was calculated using the straight-line
method over the following lives:
Life
Customer list 19 years
Covenant not to compete Life of Agreement
Goodwill 19 years
Leasehold interest Life 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.
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 assets in fiscal 1997.
Amortization expense less the write-down of intangibles, for leasehold interest
was $257,983 and $250,813, covenants not to compete, $1,070,242 and $1,027,598,
goodwill, $3,367,445, and $2,011,458, and customer lists $1,431,449 and
$1,441,226 in fiscal 1996 and 1997, respectively.
Debt Issuance Costs
Costs incurred in connection with the issuance of the convertible subordinated
debentures, notes payable to banks and lines of credit are deferred and
amortized over the life of the related debt using an effective interest rate
method. During fiscal year 1996, the debt issuance costs related to the bank
debt and the Convertible Subordinated Debentures was expensed due to defaults
with covenants in the lending agreement and the Indenture. The amounts were
$1,450,140 and $1,668,466, respectively and are included in credit restructuring
costs in the Statement of Operations.
Liabilities Subject to Compromise
As a result of the Chapter 11 proceedings, claims in existence prior to the
filing of the petition were classified in the balance sheet as "liabilities
subject to compromise" at February 28, 1997. All of these claims, as well as
claims arising subsequent to the filing date, were settled in fiscal 1998 in
accordance with the Plan of Reorganization (Note 1).
Liabilities subject to compromise at February 28, 1997 consisted of the
following:
Long-term debt $ 121,984,291
Accounts payable 15,737,121
Accrued paid time-off 1,123,185
Accrued interest 18,993,764
Other accrued expenses 9,937,928
---------------------
Total liabilities subject to compromise $ 167,776,289
=====================
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Earnings (Loss) Per Share
Effective February 28, 1998, the Company adopted Financial Accounting Standards
(SFAS) 128, "Earnings per Share". Basic loss per common share is based upon the
weighted average number of common shares outstanding for the five month period
ended February 28, 1998. Diluted loss per common share excludes the option to
purchase 200,000 shares and the warrants to purchase 131,579 shares, both
outstanding for the five months ended February 28, 1998. The effect of including
these potential common shares 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 $391,926, $326,920 and
$200,000 for fiscal year 1996, 1997, and 1998, 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 parties. Management service
charges from related parties were $868,338, $405,419 and $200,000 for fiscal
year 1996, 1997 and 1998, respectively.
Repairs and Maintenance Expense
Repairs and maintenance expense was $1,174,077, $908,795 and $605,965 in fiscal
year 1996, 1997 and 1998, respectively.
Stock Based Compensation
Stock option grants are accounted for in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. There is no
compensation expense recognized for qualified stock options with an exercise
price equal to the fair value of the shares at the date of grant. For certain
non-qualified stock options granted to employees, the Company recognizes as
compensation expense the excess of the market value of the common stock issuable
upon exercise of such options over the aggregate exercise price of such options.
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 and liabilities as well as net operating loss
carryforwards and are measured using the enacted tax rates and laws that will be
in effect when the differences reverse. Deferred tax assets are reduced by a
valuation allowance to reflect the uncertainty associated with their ultimate
realization.
Statements of Cash Flows
<TABLE>
Net changes in operating assets and liabilities consist of the following:
<CAPTION>
Predecessor Company Reorganized
Seven Company
Months Five Months
Ended Ended
Years Ended February 29 (28), September 30, February 28,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Increase in accounts receivable $ (9,917,080) $ (4,640,852) $ (6,176,108) $ (4,223,937)
Net decrease (increase) in supplies
inventory, prepaid costs, deposits and
other assets 2,017,177 (1,257,077) 551,923 443,704
Increase in accounts payable and accrued
expenses 9,387,725 25,524,869 13,136,173 1,900,345
------------- ------------- --------------- -------------
Net change in operating assets
and liabilities $ 1,487,822 $ 19,626,940 $ 7,511,988 $ (1,879,888)
============ ============== ============ =============
Supplemental disclosure of cash flow
information is as follows:
Cash paid for interest $ 4,400,969 $ 26,277 $ - $ 249,994
=============== =============== ============= ===============
</TABLE>
Non-cash transactions consist of the following:
Year ended February 28, 1997:
Gain on extinguishment of debt paid by a related party of $3,500,000.
Note payable to related party resulting from MSI acquisition of
$5,000,000.
Year ended February 28, 1998:
Issuance of stock for debt under the Plan of Reorganization (Note 1).
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 30%, 33% and 30% of
net revenue for fiscal year 1996, 1997 and 1998, 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, 1997 and 1998, reside in receivables from governmental agencies of 52% 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:
Notes receivable carrying amount approximates fair value.
Prior to the reorganization, it was not practicable to estimate the fair value
of the Company's debt due to the debt being in default. As of February 28, 1998,
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, 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 those estimates.
<PAGE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This
statement, effective for fiscal years beginning after December 15, 1997, would
require the Company to report components of comprehensive income in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined by Concepts Statement No. 5,
Elements of Financial Statements, as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company is evaluating this pronouncement and will report any components of
comprehensive income as necessary.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information.
This statement, effective for financial statements for periods beginning after
December 15, 1997, requires that a public business enterprise reports financial
and descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company is evaluating this pronouncement and will
make any segment disclosures as necessary.
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
Predecessor Reorganized
February 28, 1997 February 28, 1998
Equipment $ 28,259,919 $ 1,855,032
Furniture and fixtures 2,194,510 304,238
Leasehold improvements 4,380,012 967,150
------------------ -----------------
Total 34,834,441 3,126,420
Less accumulated depreciation
and amortization 23,238,541 594,972
------------------ -----------------
Net book value $ 11,595,900 $ 2,531,448
================== =================
Depreciation expense relating to equipment, and leasehold improvements
charged to operations was $11,326,689, $4,967,068 and $3,510,363 for
fiscal year 1996, 1997 and 1998, respectively.
<PAGE>
(5) LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
<CAPTION>
Predecessor Reorganized
Company Company
February 28, February 28,
1997 1998
<S> <C> <C>
Convertible subordinated debentures, par value $1,000 per debenture, bearing
interest at 7.5% due 2000. The debentures were convertible into shares of
common stock at any time before maturity at a conversion price of $12.20 per
share $ 40,000,000 $ -
Variable interest rate notes payable to banks, bearing interest at prime plus 3%
plus 2% for penalties and interest; unpaid principal payments are bearing
interest and penalties of prime plus 3% plus 2%, principal due in aggregate
monthly and quarterly installments, with final payments due March 2000,
secured by all assets of the Company 43,859,476 -
Various lines of credit, which allow aggregate borrowings up to $33,700,000
bearing interest at prime plus 3% plus 2% for penalties and interest; unpaid
principal payments are bearing interest and penalties of prime plus 3% plus
2%, interest due monthly and quarterly with principal due through March 1997,
secured by all assets of the Company 33,700,000 -
Notes payable to former owners of acquired laboratories, with interest rates
ranging from 6.0% to 6.7%, with additional late charges of 3% and 6%,
respectively, due monthly with principal due through July 1996; secured by
assets acquired from the related laboratories 2,376,113 -
Notes payable for Accounts Payable vendors converted to notes, with interest
rates ranging from 8% to 12%, principal due in monthly and quarterly
installments due through April 1988 1,047,767 -
</TABLE>
<PAGE>
<TABLE>
(5) LONG-TERM DEBT - CONTINUED
<CAPTION>
Predecessor Reorganized
Company Company
February 28, February 28,
1997 1998
<S> <C> <C>
Note payable to the City of Burbank, non-interest bearing, due annually through
September 2005 (annual payments forgiven if building is still occupied) 150,000 -
Capital lease obligations 850,935 -
---------------- ----------
Liabilities subject to compromise in 1997 (Note 3) $ 121,984,291 $ -
================ ==========
Note payable to related party, bearing interest at 10%, principal satisfied by
issuance of 17% of issued and outstanding stock of reorganized company;
secured by property, assets, and rights of any kind $ 5,000,000 $ -
Note payable to the Internal Revenue Service, bearing interest at 9%,
principal due in monthly installments of $5,301 through May 2002 261,732 237,915
Note payable bearing interest at 10%, principal due in monthly installments
of $11,886 through May 1997 35,075 37,386
Senior Secured Notes Due 2004, face amount $55,000,000, net of unamortized
discount of $7,412,000, currently in default - 47,588,000
Note payable to the United States government, bearing interest monthly at the 30
day Treasury Bill rate (5.6% at 1998), principal due in monthly installments
of $25,000 through July 2003 (Note 15) - 1,650,000
</TABLE>
<PAGE>
<TABLE>
(5) LONG-TERM DEBT - CONTINUED
<CAPTION>
Predecessor Reorganized
Company Company
February 28, February 28,
1997 1998
<S> <C> <C>
Note payable to the Internal Revenue Service, bearing interest at 8%,
principal due in quarterly installments of $18,418 through December 2003 - 255,672
Capital lease obligations (Note 8) 618,189 938,053
------------- -------------
5,914,996 50,707,026
Less current installments 5,283,687 48,360,853
------------- -------------
$ 631,309 $ 2,346,173
</TABLE>
Predecessor Company
The Company had been in default since September of 1995 with respect to
principal and interest payments and certain covenants under its Credit Agreement
with respect to approximately $80.9 million of secured indebtedness. The Company
had also been in default since September of 1995 with respect to interest
payments on its $40 million 7.5% Convertible Subordinated Debentures due 2000
and the note issued by the Company in connection with the acquisition of Medical
Group Pathology Laboratory.
During the second quarter of fiscal 1996, the Company entered into negotiations
for the restructuring of its bank debt. The negotiations resulted in the third
and fourth amendment to its Credit Agreement with a group of banks led by Wells
Fargo Bank National Association (the then holders of the Company's debt
obligations pursuant to the Credit Agreement hereinafter are referred to as the
"Bank Group"). As a result of insufficient cash flows caused by, among other
things, reductions in third party payor reimbursement rates, billing and
collection problems and effects and changes in the health care industry, the
Company was unable to make interest payments under its Credit Agreement due
monthly 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, December 29, 1995 and
March 31, 1996, each in the amount of $1,200,000, principal amortization
payments due on February 7, 1996, June 30, 1996, September 30, 1996, December
31, 1996 and March 31, 1997, each in the amount of $3.6 million. 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 15, (5)
LONG-TERM DEBT - CONTINUED
1996, August 15, 1996 and February 17, 1997, respectively. Failure to pay the
interest with respect to the Debentures, as well as failure to timely pay
principal and interest with respect to the loans under the Credit Agreement,
constituted defaults under the Credit Agreement and the Indenture governing the
Debentures. The deferred financing costs related to the Credit Agreement and the
Debentures of $1,450,140 and $1,668,466 were written off as of August 31, 1995
and February 29, 1996, respectively. The costs associated with the Credit
Agreement restructuring and write off of the deferred financing costs has been
reflected in the statement of operations as Credit Restructuring costs in fiscal
1996.
As a result of the Company's failure to make principal and interest payments
under its Lender Agreements, the Company and its Senior Lenders entered into the
Third Amendment to the Credit Agreement in May 1995. In connection with the
Third Amendment to the Credit Agreement, the lenders required the Company's
guarantors, one of the Company's largest shareholders, to provide a guaranty of
the Company's borrowings in the amount of $3.5 million. In December 1996, the
Company's guarantors paid the full amount of the guaranty to the Senior Lenders.
This extraordinary item resulted in a net gain per common share of $0.57.
On October 13, 1995, the Company was notified by the Nasdaq Stock Market Listing
Qualification Committee (the "Listing Committee") that the Company's common
stock would be removed from listing on the Nasdaq National Market but would be
listed on the Nasdaq SmallCap Market due to the Company's inability to satisfy
the Nasdaq National Market's net tangible assets requirement. The Company had
been granted a temporary exception to the Nasdaq National Market's net tangible
asset requirement, which exception expired on October 12, 1995. The Company's
common stock began to trade on the Nasdaq SmallCap Market on Monday October 16,
1995. On October 25, 1995, the Listing Committee determined not to extend
certain exceptions to the applicable listing requirements, and the Company's
common stock was removed from trading on the Nasdaq SmallCap Market.
The removal of the Company's common stock from listing on the Nasdaq National
Market System constituted a Redemption Event under the Company's Indenture
governing its Debentures. Such Redemption Event required the Company to offer to
repurchase the Debentures from the holders thereof at a redemption price equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any. Written notice of the occurrence of such Redemption Event was given to the
registered holders of the Debentures on November 2, 1995, and no such holder
perfected its right to redeem such Debentures within the period provided under
the Indenture. In addition, under the terms of the Registration Rights Agreement
between the Company and holders of the Debentures, the Company was obligated to
maintain an effective registration statement covering the Debentures and the
Company's common stock with respect to which the Debentures are convertible.
<PAGE>
(5) LONG-TERM DEBT - CONTINUED
On November 4, 1993, the Company entered into an interest rate swap with an
investment bank. The swap is for $10,000,000 notional amount with a fixed rate
of 4.5625% received by the Company and a floating rate paid by the Company at
the six-month London Interbank Offered Rate (LIBOR). The rate adjustment dates
are November 8 and May 8 each year and the payment dates are six months after
the rate adjustment date. The swap contract expired November 8, 1996.
As of February 29, 1996 six month LIBOR was 5.297%. The Company did not make its
May 8, 1995, November 8, 1995 and May 8, 1996 semi-annual payments of $76,684,
$93,750 and $59,375 based upon six month LIBOR of 6.094% as of November 8, 1994,
6.061% as of May 8, 1995 and 5.75% as of November 8, 1995. As of February 28,
1997 the fair value of this contract was a liability of the Company of
approximately $150,000.
The Company entered into the swap to convert a portion of its fixed rate
subordinated debentures to a variable rate. As such, the Company had been
accruing the net payments to be made on the contract as an adjustment to
interest expense.
Reorganized Company
As provided by the Plan of Reorganization, the Company issued $55,000,000
principal amount 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 $47,000,000 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 plus 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.
<PAGE>
(5) LONG-TERM DEBT - CONTINUED
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 (Note 6).
Each of the agreements contains certain financial covenants and restrictions.
The Company was in violation of certain covenants in 1998 and does not expect to
be in compliance subsequent to 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.
Maturities of long-term debt, excluding capital lease obligations, in each of
the next five fiscal years are as follows:
Year Ended
February 28 (29),
1999 $ 47,939,250
2000 411,275
2001 420,452
2002 456,659
2003 374,938
Thereafter 166,399
-----------------
$ 49,768,973
Subsequent Events
In June, 1998, a significant stockholder, which is also a significant holder of
Senior Secured Notes, loaned the Company $4 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 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 (Note 14).
On October 29, 1998, the same stockholder loaned the Company an additional $2
million for working capital. This loan has the same terms and provisions as the
$4 million loan discussed above. In connection with the loan, the stockholder's
agreement was amended to modify certain corporate governance rights previously
granted to Nu-Tech.
<PAGE>
(6) LINE OF CREDIT
Predecessor Company
The Company had a line of credit with a financial institution which provided for
maximum borrowings of $9,800,000 under the DIP Financing Facility bearing
interest at prime plus 2%. As of February 28, 1997, $5,243,182 had been
withdrawn on the line. Immediately prior to the Effective Date, all amounts
available under the DIP Financing Facility were borrowed by the Company so that
the total outstanding principal balance was $9,800,000. On the Effective Date,
all amounts owing under DIP Financing Facility were forgiven without any payment
by the Debtors and the facility was terminated. The line was secured by a first
priority lien and security interest in all assets of the Company.
Reorganized Company
On September 30, 1997, the Company and its wholly owned subsidiary, the
Bio-Cypher Funding Corp. (the "Funding Corp."), entered into a credit facility
with Daiwa Healthco-3 LLC (formerly known as Daiwa Healthco-2 LLC). Under the
credit facility, the 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
Company. The credit facility expires September 30, 1999. The debt is classified
as a current liability under accounting literature for revolving credit
agreements that contain both a subjective acceleration clause and a lockbox
arrangement.
Under the Healthcare Receivables Purchase and Transfer Agreement, the 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 Company acts as the servicer of such accounts receivable. The agreement
requires the use of lockboxes which are restricted to withdrawal by Daiwa. The
Funding Corp. may replace the reorganized Company with a third-party servicer
upon the occurrence of certain termination events.
Under the Loan and Security Agreement with Daiwa, the maximum available to the
Funding Corp. is $10 million, subject to a borrowing base equal to 85% of the
value of eligible accounts receivable and subject to certain adjustments. At
February 28, 1998, there was $0 available to be drawn. Interest is payable
monthly at LIBOR Rate plus 3%, which interest rate will increase by 2% after an
event of default. The effective interest rate was 8.8125% on February 28, 1998.
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.
<PAGE>
(6) LINE OF CREDIT - CONTINUED
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 Company and
the Funding Corp. are not in compliance with certain covenants, which
constitutes an event of default. The lender has the right to accelerate payment
of the debt.
(7) INCOME TAXES
<TABLE>
The benefit for income taxes consists of the following:
<CAPTION>
Predecessor Company Reorganized
Seven Company
Months Five Months
Ended Ended
Years Ended February 29 (28), September 30, February 28,
1996 1997 1997 1998
<S> <C> <C> <C> <C>
Current
Federal $ 141,820 $ - $ - $ -
State 42,842 - - -
---------------- --------------- --------------- ---------------
184,662 - - -
Deferred
Federal 1,043,396 - - -
State 315,192 - - -
---------------- --------------- --------------- ---------------
1,358,588 - - -
---------------- --------------- --------------- ---------------
$ 1,543,250 $ - $ - $ -
================ =============== =============== ===============
</TABLE>
<TABLE>
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
<CAPTION>
Predecessor Company Reorganized
Seven Company
Months Five Months
Ended Ended
Years Ended February 29 (28), September 30, February 28,
1996 1997 1997 1998
<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 (6.1%) (6.1%) 6.1% (6.1%)
Change in valuation allowance 38.3% 40.1% (27.6%) 9.9%
Reorganization value - - (12.5%) 29.3%
Other (0.2%) - - .9%
-------------- --------------- --------------- --------------
(2.0%) -% -% -%
============== =============== =============== ===============
</TABLE>
<PAGE>
(7) INCOME TAXES - CONTINUED
At February 28, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $12,400,000 and
$3,600,000 respectively. The loss carryforwards expire between the years 1998
and 2013 for federal and state income tax purposes. As a result of emerging from
bankruptcy and the change in ownership, approximately $5,300,000 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.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>
Predecessor Reorganized
Company Company
February 28, February 28,
1997 1998
<S> <C> <C>
DEFERRED TAX (ASSETS) LIABILITIES
Current
Accrued Expenses $ (1,039,480) $ (382,489)
Bad Debt (8,842,877) (3,371,865)
Prepaid Expenses (282,184) (158,673)
Other 214,915 455,544
-------------- -------------
Total Current Deferred (Assets) Liabilities (9,949,626) (3,457,483)
Valuation Allowance 9,949,626 3,457,483
Net Current Deferred (Assets) Liabilities - -
Non-Current
Amortization (30,247,568) (25,290,782)
Depreciation (843,566) (1,068,831)
Net Operating Loss (29,190,589) (4,448,792)
------------------ ---------------
Total Non-Current Deferred (Assets) Liabilities (60,281,723) (30,808,405)
Valuation Allowance 60,281,723 30,808,405
Net Non-Current Deferred (Assets) Liabilities - -
---------------- ---------------
TOTAL NET DEFERRED (ASSETS) LIABILITIES $ - $ -
================ ===============
</TABLE>
<PAGE>
(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 $4,002,622, and related
accumulated amortization was $2,913,010 and $128,612 as of February 28, 1997 and
February 28, 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.
Beginning March 1, 1989, the Company began subletting one of its unoccupied
facilities. The sublease term coincided with that of the remaining primary lease
of eight years with rent for the year ended February 28, 1997 equal to $217,795
and subject to annual increases based on the Consumer Price Index not to exceed
10% per year. There were no material subleases of facilities in 1998.
The Company also leases remote draw station space, several automobiles and other
equipment, which have been classified as operating leases and expire over the
next 6 years. Many of the draw station leases have renewal options and monthly
lease payment subject to annual increases.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of February 28, 1998
are:
Year Ended Capital Operating
February 28 (29), Leases Leases
1999 $ 437,318 $ 2,835,750
2000 375,339 1,794,068
2001 50,312 1,073,070
2002 50,000 740,771
2003 50,000 311,003
Thereafter - 31,075
------------ -------------
Total minimum lease payments 962,969 $ 6,785,737
=============
Less amounts representing interest 24,916
------------
Present value of net minimum
capital lease payments $ 938,053
============
Total rental expense under operating leases was $10,199,909, $6,113,445
and $4,480,602 for fiscal year 1996, 1997 and 1998, respectively.
<PAGE>
(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 1998 (Note 1), these former stockholders no longer
own stock and hold only warrants.
<TABLE>
<CAPTION>
Year Ended February 29 (28),
1996 1997 1998
--------------- --------------- ----------------
<S> <C> <C> <C>
Laboratory and computer service revenue from
stockholders (warrant holders) $ 3,562,950 $ 2,407,989 $ 1,596,839
=============== =============== ================
</TABLE>
Amounts due from stockholders (warrant holders in 1998) and included in accounts
receivable were as follows:
February 28,
1997 1998
Amounts due from stockholders (warrant holders) $ 322,964 $ 476,642
=========== ===========
The Company received management services from Diagnostic Pathology Medical
Group, Inc. (DPMG), a former stockholder (warrant holder in 1998) of the
Company. The services of certain management personnel were provided to the
Company for management fees at a cost of $256,253, $104,010 and $0 for fiscal
year 1996, 1997 and 1998, respectively.
In addition, the Company received professional services from the former owners
of certain of its acquisitions. Professional service fees paid in connection
with the related professional service agreements were $188,000, $9,333 and $0 in
fiscal year 1996, 1997 and 1998, 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. 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:
<TABLE>
<CAPTION>
Year Ended February 29 (28),
1996 1997 1998
--------------- --------------- ----------------
<S> <C> <C> <C>
Billings from stockholders (warrant holders
in 1998) $ 391,926 $ 326,920 $ 200,000
=============== =============== ================
</TABLE>
<PAGE>
(9) RELATED PARTY TRANSACTIONS - CONTINUED
The Company also leases draw station space and purchases other services and
various supplies from several of its prior stockholders (warrant holders in
1998). The total amount paid by the Company for these items was $97,137, $26,691
and $0 for fiscal year 1996, 1997 and 1998, respectively.
The Company has loaned the prior President and CEO funds at various times as
follows:
Date Interest Rate Amount
October 1990 10% $ 50,000
October 1993 7% 150,000
August 1994 7% 150,000
-----------------
Total outstanding as of February 28, 1997 $ 350,000
=================
During the year ended February 28, 1998, the Company released the prior
President from all payment obligations under the loans.
(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 employee who have at least one full
year of service. The Company contribution to the 401(k) plan was discontinued
effective December 31, 1995. The Company contributed $288,219 in fiscal year
1996.
<PAGE>
(11) STOCK OPTION PLANS AND WARRANTS
Stock Option Plans
In March 1992 and February 1994, the Board of Directors adopted and the
stockholders of the Company subsequently approved two separate stock option
plans (the "1992 Plan" and the "1994 Plan," respectively and together, the
"Stock Option Plans"). These Stock Option Plans provide for the granting to
employees and directors of nonqualified stock options to purchase authorized but
unissued common stock. The maximum number of shares that may be sold under the
1992 Plan and the 1994 Plan is 590,649 and 300,000, respectively, subject to
anti-dilution adjustments. The Board of Directors has designated the
Compensation Committee to administer the Stock Option Plans. The Committee is
empowered to designate the employees who will receive options and to determine
the number of shares, vesting schedule, option price (which may not be less than
85% of the fair market value of the optioned shares), and option term (which may
not exceed ten years except in limited circumstances). Options may provide for
payment of the option price in cash, by application of vested deferred
compensation credits, or by the surrender of shares owned by the optionee for
more than one year. Options are not transferable except upon death and may be
exercised during the lifetime only by the optionee or his legal representative.
Options will terminate 180 days or 270 days after termination of the optionee's
employment under the 1992 Plan and the 1994 Plan, respectively, or two years
after permanent disability or death. The Board of Directors may amend the Stock
Option Plan in any respect. The Committee may modify outstanding options or may
accept the cancellation of existing options in return for the grant of new
options (which may be for the same or a different number of shares and specify
the same or a different option price). No option may be granted under the 1992
Plan or the 1994 Plan after July 28, 2002, or January 12, 2004, respectively.
In connection with certain acquisitions, options were granted under a plan (the
"Acquisition Stock Option Plan") separate from the 1992 Plan and the 1994 Plan.
In addition to the shares reflected in the following table, 5,000 options each
were granted to each member of the Board of Directors, subject to shareholder
approval. The exercise price of these options was 85% of the greater of the
market price of the Company's common stock on November 14, 1994 and the price on
the date of shareholder approval.
All options outstanding at the petition date and the related plans have been
cancelled under the Plan of Reorganization (Note 1).
<PAGE>
(11) STOCK OPTION PLANS AND WARRANTS - CONTINUED
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 have been changed to the pro forma
amounts for the five month period ended February 28, 1998 as follows:
As Reported Pro Forma
Net loss $ (51,716,380) $(51,746,380)
Net loss per share - basic and diluted $ (20.69) $ (20.69)
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.
<TABLE>
Stock Options Outstanding
<CAPTION>
1992 1994 Acquisition New Total Option
Plan Plan Plan Plan Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at February 28, 1995 730,145 66,667 24,807 - 821,619 $5.50 - $14.25
Granted 10,000 - - - 10,000 $4.25
Forfeited (94,845) - - - (94,845) $5.50 - $11.50
--------- --------- ----------- --------- ----------- ---------------
Outstanding at February 29, 1996
and February 28, 1997 645,300 66,667 24,807 - 736,774 $5.50 - $11.50
Cancelled in bankruptcy (645,300) (66,667) (24,807) - (736,774) $5.50 - $11.50
Granted - - - 200,000 200,000 $.25
--------- --------- ----------- ----------- ----------- ---------------
Outstanding at February 28, 1998 - - - 200,000 200,000 $.25
========= ========= =========== =========== =========== ===============
</TABLE>
<PAGE>
(11) STOCK OPTION PLANS AND WARRANTS - CONTINUED
Additional information regarding stock options:
2/29/96 2/28/97 2/28/98
Authorized shares 941,491 941,491 200,000
Shares available for granting 119,872 204,717 200,000
Exercisable shares 372,787 451,891 200,000
Warrants - Predecessor Company
In connection with a revision to the Company's Credit Agreement with the Bank
Group (the Third Amendment), two warrants were issued to Sutter Health in
exchange for a guaranty of $3,500,000 of borrowings from the Bank Group. In
December 1996, Sutter Health paid the $3,500,000 guaranty as the Company was in
default of the Credit Agreement.
In exchange for the guaranty, Sutter Health received a warrant to purchase up to
11,200,000 shares of the Company's common stock (Warrant A) and a second warrant
to purchase up to 300,000 shares of the Company's common stock (Warrant B). The
exercise prices of Warrant A are as follows:
Tranche 1: 125,000 shares at $4.2219 per share
Tranche 2: 687,500 shares at $5.1266 per share
Tranche 3: 387,500 shares at $5.1266 per share
Tranches 1 and 2 became exercisable May 10, 1995. Tranche 3 became exercisable
June 10, 1995.
Warrant B became exercisable as of June 10, 1995. Rights to purchase shares
under Warrant B may be exercised under the same terms as Tranche 3. Both
warrants expired 90 days from the expiration date of the guaranty.
All warrants outstanding at the bankruptcy effective date have been cancelled
under the Plan of Reorganization (Note 1).
Warrants - Reorganized Company
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.
<PAGE>
(12) EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Board of Directors adopted, and the shareholders approved, an
employee stock purchase plan ("ESPP") which provide employees of the Company
with an opportunity to purchase common stock of the Company at 85% of fair
market value through payroll deductions. The maximum number of shares that may
be sold under the ESPP is 225,000 subject to adjustments upon changes in
capitalization of the Company. During fiscal 1996 and 1997, 5,378, and 38,332
shares, respectively, of common stock were purchased through this plan for
$24,090 and $34,279, respectively. The Board of Directors has designated the
Compensation Committee to administer the ESPP. On February 29, 1996, 198,883
shares were available to be granted under the plan. The ESPP was discontinued
effective June 30, 1996.
(13) EMPLOYMENT AGREEMENTS
Predecessor Company
The Company's CEO entered into an employment agreement with the Company with a
term expiring on February 28, 1999, which provides for his employment as Chief
Executive Officer. This agreement provides for a base salary of $375,000
annually and for quarterly bonuses of up to 3% of pre-tax net profits dependent
on the achievement of pretax net profit and other performance objectives. The
Company may terminate the agreement before the end of its term if certain
performance objectives have not been achieved. The Company may also terminate
the agreement without any cause by providing severance pay equal to two times
current base salary plus bonus for the four preceding quarterly periods.
The CEO also entered into two compensation agreements with the Company. Under
one of these agreements, the CEO received the sum of $155,000 in cash on March
1, 1992, representing payment of accrued deferred compensation, and an
additional deferred compensation credit of $100,000 that may be applied only to
offset the purchase price of stock options awarded to the CEO which are
described in Note 9.
Under the other agreement, a deferred compensation account in the amount of
$1,855,000 was established for the CEO which vests at the rate of one seventh on
March 1 in each of the years 1993 through 1999. The vested portion, in general,
may be applied only to offset the purchase price of stock options granted to the
CEO. If, on any March 1 vesting date, the fair market value of the Company is
determined to be less than $40 million, the vesting schedule is delayed by one
year.
Under the Plan of Reorganization, all employment contracts or agreements between
the CEO and the Company were unsecured claims and the contracts terminated.
<PAGE>
(13) EMPLOYMENT AGREEMENTS - CONTINUED
Reorganized Company
Effective September 30, 1997, the Company entered into an employment agreement
with it's 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.
(14) STOCKHOLDERS' EQUITY
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, 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.
<PAGE>
(14) STOCKHOLDERS' EQUITY - CONTINUED
The agreement was amended in June 1998 in conjunction with a loan of $4 million
to the Company (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.
(15) LEGAL PROCEEDINGS
Prepetition Litigation
As discussed previously, on November 8, 1996 (Petition Date), 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.
Under chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with the terms of the Plan confirmed by the Bankruptcy
Court on April 18, 1997. The majority of prepetition claims have been settled.
Any remaining pending litigation is limited to participation in the unsecured
creditors class settlement under the Plan and will not have a material financial
impact on the Company.
In the ordinary course of business, several lawsuits have been filed against the
Company by former employees alleging, among other things, employment
discrimination and harassment, fraud, wrongful (including retaliatory) discharge
in violation of public policy, and related claims, including intentional and
negligent infliction of emotional distress, loss of consortium, breach of
contract and breach of the covenant of good faith and fair dealing. A number of
such suits include claims against current employees of the Company. Any existing
indemnification arrangements between any such employees and the Company with
respect to such claims are subject to the terms of the Plan as prepetition
claims, as described above.
<PAGE>
(15) LEGAL PROCEEDINGS - CONTINUED
Additionally, several lawsuits have been filed against the Company by former
patients alleging medical malpractice and requesting punitive damages.
Notwithstanding the limitations on the Company's liability exposure resulting
from the bankruptcy proceedings, as described above, the Company does not expect
these matters, either individually or in the aggregate, to have a material
adverse effect on the financial condition of the Company. Moreover, the Company
believes that its insurance policies may cover some or all judgments against the
Company, if any, in these matters.
Postpetition Litigation
On or about January 22, 1997, Taylor R. McKeeman, the Company's former Vice
President for Laboratory Operations, filed a Request for Payment of
Administrative Expense with respect to a prepetition Separation Agreement
between the Company and Mr. McKeeman. Under the Separation Agreement, Mr.
McKeeman is entitled to receive a severance payment in the event he is
terminated after a "Change in Control" occurs, as such term is defined in the
Separation Agreement. This request was denied by order of the Bankruptcy Court,
entered on March 19, 1997, because (i) no Change in Control occurred prior to
the termination of Mr. McKeeman's employment and (ii) any claim of Mr. McKeeman
against the Company's bankruptcy estates arising out of the Separation Agreement
constitutes a prepetition claim. Mr. McKeeman filed a notice of appeal on or
about March 5, 1997. On February 2, 1998, the Bankruptcy Court found in favor of
the Company and 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 tortious 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.
<PAGE>
(15) LEGAL PROCEEDINGS - CONTINUED
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 (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.
<PAGE>
(16) 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 year ended February 29,
1996 and February 28, 1997 (unaudited++):
1996 1997
------------- ----------------
Net revenue $ 105,093,420 $ 75,125,077
Net loss $ (81,920,908) $ (102,004,130)
Net loss per common share * *
*Loss per share amount relates to the predecessor company and is not meaningful
due to the reorganization (Note 1).
(17) SUBSEQUENT EVENT - SALE OF BUSINESS
On April 5, 1999, the Company entered into an Asset Purchase Agreement for the
sale of the 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 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
merger of Bio-Cypher Funding Corp. into the Company prior to closing, and
repayment of the credit facility with Daiwa.
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 Company intends to begin liquidation after the sale.
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 statement of operations for the year ended December
31, 1998 gives 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 December 31, 1998. 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 December 31, 1998
(Unaudited)
(in thousands)
<CAPTION>
Historical Unilab Historical BCL Pro Forma Pro Forma
December 31, 1998 November 30, 1998(a) Adjustments Unilab
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
$(1,411) (b)
Cash and cash equivalents $20,137 $1,411 (8,543) (c) $11,594
Accounts receivable, net 41,326 9,830 51,156
Inventory of Supplies 3,055 1,469 4,524
Prepaid expenses and other
current assets 1,045 671 (671) (b) 1,045
----- --- ----- -----
Total current assets 65,563 13,381 (10,625) 68,319
Property and equipment, net 11,277 2,498 (2,101) (b) 11,674
(22,826) (b)
Goodwill, net 56,949 22,826 31,678 (e) 88,627
Other intangible assets, net 2,370 - 2,370
Other assets 6,301 464 (464) (b) 6,301
----- --- ----- -----
$142,460 $39,169 $(4,338) $177,291
======== ======= =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $1,206 $60,913 $(60,913) (b) 1,206
Accounts payable and accrued (10,395) (b)
liabilities 14,533 11,570 2,369 (d) 18,077
Accrued payroll and benefits 6,892 1,937 8,829
----- ----- -----
Total current liabilities 22,631 74,420 (68,939) 28,112
Long-term debt, net of current (8,342) (b)
Portion 137,170 8,342 25,000 (c) 162,170
Other liabilities 4,026 - 1,100 (b) 5,126
----- ---------- ----- -----
163,827 82,762 (51,181) 195,408
Shareholders' Equity (Deficit)
Convertible preferred stock 4 - 4
(25) (b)
Common stock 407 25 10 (c) 417
(22,775) (b)
Additional paid-in capital 228,395 22,775 3,240 (c) 231,635
Accumulated deficit (250,173) (66,393) 66,393 (b) (250,173)
--------- -------- ------ ---------
Total shareholders' equity (deficit) (21,367) (43,593) 46,843 (18,117)
-------- -------- ------ --------
$142,460 $39,169 $(4,338) $177,291
======== ======= ======== ========
<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 November 30, 1998 has been
included in Unilab's pro forma balance sheet at December 31, 1998.
(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 $31.7 million of additional goodwill.
<PAGE>
<TABLE>
Unilab Corporation
Pro Forma Statement of Operations
Year Ended December 31, 1998
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
Historical BCL
Historical Unilab Historical Meris Dec 1, 1997- Pro Forma Pro Forma
Jan 1-Dec 31, 1998 Jan 1-Nov 5, 1998(a) Nov 30, 1998(b) Adjustments Unilab (o)
<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 Intangibles - - 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) (17,156)
Other - - 280 280
---------- ------------ --------- ----------
Income (loss) before
income taxes 10,703 (9,550) (65,436) (12,177)
Tax provision - - - -
---------- ---------- --------- ----------
Net income (loss) 10,703 (9,550) (65,436) (12,177)
====== ======= ======== =========
Preferred stock dividends 131 - - 131
Net income (loss) available to
common stockholders $10,572 $(9,550) $(65,436) $(12,308)
======= ======== ========= =========
Earnings (loss) per share:
Basic $0.26 $(0.30)
Diluted $0.25 $(0.30)
<FN>
See Notes to Pro Forma Statement 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 and
other intangible assets recorded in connection with the acquisition of BCL.
(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.
(k) Does not reflect reductions to historical amounts as a result of the future
termination of employment of certain employees, the closure of certain
facilities, the elimination of certain consulting expenses (primarily
related to advisors retained by Meris to assist with Meris' bankruptcy
process), and the termination or non-assumption of certain contracts for
various services relating to the Meris and BCL acquisitions. "Adjusted
EBTIDA" is shown below to reflect certain benefits that may result from
these estimated cost savings.
Pro Forma and Adjusted EBITDA is calculated as follows:
Year Ended
December 31, 1998
Pro Forma net loss $ (12,177)
Adjustments:
Interest expense 17,156
Income tax (benefit) -
Depreciation and amortization 11,218
--------------
Pro Forma EBITDA 16,197
Adjustments:
8,304
Employee terminations - Meris 1,254
Closure of facilities - Meris 2,400
Consulting services - Meris
17,088
Employee terminations - BCL 2,657
Closure of facilities - BCL 2,107
Termination or non-assumption of contracts - BCL
--------------
Adjusted Pro Forma EBITDA $50,007
--------------
EBITDA is defined, for any period, as earnings before interest expense,
income taxes, depreciation and amortization. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. EBITDA should not be considered an alternative
to net income as a measure of the Company's operating results or to cash
flow as a measure of liquidity. In addition, although the EBITDA measure of
performance is not recognized under generally accepted accounting
principles, it is widely used by various companies as a general measure of
a company's performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to depreciation
and amortization, which can very significantly depending on accounting
methods (particularly where acquisitions are involved) or non-operating
factors such as historical cost bases. Because EBITDA is not calculated
identically by all companies, the presentation herein may not be strictly
comparable to other similarly titled measures of other companies.
