1
Financial Statements
Medical Science Institute
(Debtor-in-Possession)
Nine months ended September 30, 1996 and
year ended December 31, 1995
with Report of Independent Auditors
2
Medical Science Institute
(Debtor-in-Possession)
Financial Statements
Nine months ended September 30, 1996 and
year ended December 31, 1995
CONTENTS
Report of Independent Auditors...............................................1
Audited Financial Statements
Balance Sheets...............................................................3
Statements of Operations.....................................................5
Statements of Shareholder's Deficit..........................................6
Statements of Cash Flows.....................................................7
Notes to Financial Statements................................................9
3
Report of Independent Auditors
The Board of Directors
Medical Science Institute
We have audited the accompanying balance sheets of Medical Science Institute as
of September 30, 1996 and December 31, 1995, and the related statements of
operations, shareholder's deficit, and cash flows for the nine months ended
September 30, 1996 and the year ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Science Institute at
September 30, 1996 and December 31, 1995, and the results of its operations and
its cash flows for the nine months ended September 30, 1996 and the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Medical
Science Institute will continue as a going concern. As discussed in Notes 1 and
8 to the financial statements, recurring losses, an accumulated deficit and lack
of liquidity caused the Company to seek protection under the Federal Bankruptcy
Laws in 1995. Management's Plan of Reorganization has been effectuated and the
Company's new parent has proposed the sale of the Company to an affiliated
entity that is also currently operating under protection of the Federal
Bankruptcy Laws; such sale requires approval of the Bankruptcy Court. Although
the Company believes that the sale will be approved
1
4
there is no assurance that the transaction will be completed or, if completed,
that it will be on the same terms as proposed. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
January 7, 1997 ____________________________
2
5
Medical Science Institute
(Debtor-in-Possession)
Balance Sheets
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
ASSETS
Current assets:
Cash $ 1,735 $ 42,552
Patient accounts receivable, net of allowance for doubtful
accounts of $960,000 in 1996 and $872,000 in 1995 2,577,813 2,780,760
Inventory of supplies 132,017 195,256
Prepaid expenses and other assets 72,684 41,610
-------------------------------------------
Total current assets 2,784,249 3,060,178
Deposits 70,828 68,625
Property and equipment, net 605,797 830,145
-------------------------------------------
Total assets $ 3,460,874 $ 3,958,948
===========================================
3
6
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Bank overdraft $ 199,287 $ 36,190
Accounts payable and accrued expenses 1,343,317 1,003,443
-------------------------------------------
Total current liabilities 1,542,604 1,039,633
Liabilities subject to compromise:
Borrowings under line of credit 2,428,172 2,236,576
Accounts payable and accrued expenses 5,669,193 4,613,299
Third-party settlement 575,000 507,500
Loan payable - shareholder, net of loan receivable of
$96,667 in 1996 and $86,772 in 1995 102,461 112,356
Note payable 309,090 309,090
Capital lease obligations 698,682 710,585
-------------------------------------------
Total liabilities subject to compromise 9,782,598 8,489,406
-------------------------------------------
Total liabilities 11,325,202 9,529,039
Commitments and contingencies
Shareholder's deficit:
Common stock, no par value, 1,000,000 shares authorized, 600
shares issued and outstanding 18,000 18,000
Accumulated deficit (7,882,328) (5,588,091)
-------------------------------------------
Total shareholder's deficit (7,864,328) (5,570,091)
-------------------------------------------
Total liabilities and shareholder's deficit $ 3,460,874 $ 3,958,948
===========================================
See accompanying notes.
4
7
Medical Science Institute
(Debtor-in-Possession)
Statements of Operations
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
Net revenue $ 10,731,990 $ 19,055,559
Operating costs:
Salaries, wages and benefits 4,390,952 5,953,248
Supplies 1,864,530 3,589,090
Other operating costs 1,830,185 2,820,136
Provision for bad debts 399,553 1,710,925
Depreciation and amortization 228,728 349,074
-------------------------------------------
Total operating costs 8,713,948 14,422,473
Selling, general and administrative expenses 2,921,159 6,568,379
-------------------------------------------
Operating loss (903,117) (1,935,293)
Other expense (income):
Penalties 123,285 3,660
Interest expense 304,702 658,007
Interest income - (60)
Miscellaneous income - (86,494)
Loss on sale of asset - 4,048
-------------------------------------------
427,987 579,161
-------------------------------------------
Loss before reorganization items (1,331,104) (2,514,454)
Reorganization items:
Legal and accounting fees 963,133 157,456
-------------------------------------------
Net loss $ (2,294,237) $ (2,671,910)
===========================================
See accompanying notes.
5
8
Medical Science Institute
(Debtor-in-Possession)
Statements of Shareholder's Deficit
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
----------------------------------------------------------------
Balance at December 31, 1994 $ 18,000 $ (2,916,181) $ (2,898,181)
Net loss for 1995 - (2,671,910) (2,671,910)
----------------------------------------------------------------
Balance at December 31, 1995 18,000 (5,588,091) (5,570,091)
Net loss for the nine months ended
September 30, 1996 - (2,294,237) (2,294,237)
----------------------------------------------------------------
Balance at September 30, 1996 $ 18,000 $ (7,882,328) $ (7,864,328)
================================================================
See accompanying notes.
6
9
Medical Science Institute
(Debtor-in-Possession)
Statements of Cash Flows
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
OPERATING ACTIVITIES
Net loss $(2,294,237) $ (2,671,910)
Adjustments to reconcile net loss to cash provided used in
by operating activities:
Depreciation and amortization 228,728 349,074
Provision for bad debt 399,553 1,710,925
Changes in operating assets and liabilities:
Patient accounts receivable (196,606) (1,271,204)
Inventory of supplies 63,239 119,448
Prepaid expenses and other assets (31,074) 470,884
Deposits (2,203) (19,086)
Bank overdraft 163,097 (288,469)
Accounts payable and accrued expenses 1,395,768 1,793,931
Third-party settlement 67,500 146,500
-------------------------------------------
Net cash provided by (used in) operating activities (206,235) 340,093
INVESTING ACTIVITIES
Acquisition of property and equipment (4,380) (50,033)
-------------------------------------------
Net cash used in investing activities (4,380) (50,033)
FINANCING ACTIVITIES
Net increase (decrease) in borrowings under line of credit
191,596 (89,367)
Payments on debt obligations (21,798) (206,445)
Borrowings under debt obligations - 38,800
-------------------------------------------
Net cash provided by (used in) financing activities 169,798 (257,012)
-------------------------------------------
Net increase (decrease) in cash (40,817) 33,048
Cash, beginning of period 42,552 9,504
-------------------------------------------
Cash, end of period $ 1,735 $ 42,552
===========================================
7
10
Medical Science Institute
(Debtor-in-Possession)
Statements of Cash Flows (continued)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (none capitalized) $ 141,716 $ 468,225
Income taxes $ 800 $ 800
See accompanying notes.
8
11
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Medical Science Institute (the Company) is a California corporation providing
clinical laboratory testing services to physicians, managed-care organizations,
hospitals and other health care providers. The Company operates primarily in the
state of California.
On October 26, 1995, the Company filed petition for relief under Chapter 11 of
the Federal Bankruptcy Laws in the United States Bankruptcy Court. Under Chapter
11, certain claims against the Company in existence prior to the filing of the
petition for relief under the Federal Bankruptcy Laws are stayed while the
Company continues business operations as debtor-in-possession. These claims are
reflected in the balance sheets as "liabilities subject to compromise."
Additional claims (liabilities subject to compromise) may arise subsequent to
the filing date resulting from rejection of executory contracts, including
leases, and from the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts. Claims
secured against the Company's assets ("secured claims") also are stayed,
although the holders of such claims have the right to move the court for relief
from the stay. Secured claims are secured primarily by liens on the Company's
assets. Liabilities not subject to compromise reported in the accompanying
balance sheets will be continuing obligations of the Company subsequent to the
Company's emergence from bankruptcy.
The Company received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages. Credit
arrangements entered into subsequent to the Chapter 11 filings are described in
Note 8. As also described in Note 8, on November 18, 1996 Nu-Tech Bio Med, Inc.
(Nu-Tech) acquired the Company for certain consideration. No adjustments to the
recorded amounts of assets and liabilities that may result from the acquisition
have been included in the accompanying financial statements.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that Medical
Science Institute will continue as a going concern. Recurring losses, an
accumulated deficit and lack of liquidity caused the Company to seek protection
under the Federal Bankruptcy Laws in 1995. Management's Plan of Reorganization
has been effectuated, as described in Note 8, and the Company's new parent has
proposed the sale of the Company to an affiliated entity that is currently
operating under protection of the Federal Bankruptcy Laws; such sale requires
approval of the Bankruptcy Court. Although the
9
12
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Company believes that the sale will be approved there is no assurance that the
transaction will be completed or, if completed, that it will be on the same
terms as proposed. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
INVENTORY OF SUPPLIES
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
Equipment and leasehold improvements are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets which range from three to ten years, 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 expense as incurred, significant renewals and betterments are
capitalized.
INCOME TAXES
The liability method is used for accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FAIR VALUES OF FINANCIAL INSTRUMENTS
For cash, patient accounts receivable and accounts payable the carrying amounts
approximate fair value. It was not practicable to estimate the fair value of the
Company's debt obligations due to such debt being in default (See Notes 4 and
5).
10
13
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATIENT ACCOUNTS RECEIVABLE
The Company provides services to patients even though they may participate in
programs that do not pay full charges. As a result, the Company is exposed to
certain credit risks. The Company manages such risk by regularly reviewing its
accounts and contracts, and by providing appropriate allowances. Actual results
could differ from those estimates. Significant concentrations of gross patient
accounts receivable were as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
Medicare 29% 11%
Medi-Cal 20 30
Other negotiated contracts 15 15
Self-pay and commercial 36 44
===========================================
100% 100%
===========================================
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------------------
Laboratory equipment $ 1,330,414 $ 1,330,414
Furniture and fixtures 159,510 158,699
Computer equipment/software 778,365 777,481
Office equipment 5,240 4,554
Leasehold improvements 147,309 147,309
-------------------------------------------
2,420,838 2,418,457
Less accumulated depreciation and amortization (1,815,041) (1,588,312)
-------------------------------------------
$ 605,797 $830,145
===========================================
11
14
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
3. INCOME TAXES
At September 30, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $5,563,000 and $3,027,000
respectively, that are available to offset future income. The loss carryforwards
expire between the years 1997 and 2008 for federal and state income tax
purposes.
Significant components of the Company's deferred tax assets for federal and
state income taxes are as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------------------------------
Net operating loss carryforwards $ 2,173,000 $ 1,444,000
Allowance for doubtful accounts 337,000 346,000
Other 233,000 403,000
-----------------------------------------
Total deferred tax assets 2,743,000 2,193,000
Valuation allowance for deferred tax assets (2,743,000) (2,193,000)
-----------------------------------------
Net deferred tax assets $ - $ -
=========================================
As discussed in Note 8 the Company has filed petition for relief under Chapter
11 of the Federal Bankruptcy Laws. To the extent that the Company is insolvent,
cancellation of indebtedness income arising from the Plan of Reorganization will
be offset against the federal net operating losses. Additionally, as a result of
the "change in ownership" provisions of the Tax Reform Act of 1986, a portion of
any remaining federal net operating loss carryover may be subject to an annual
limitation regarding their utilization against taxable income in future periods.
4. LINE OF CREDIT
The Company has a line of credit with a financial institution which provides for
maximum borrowings of $1,850,000 (or such amount as the parties may increase or
decrease by mutual consent) with interest due monthly at a rate equal to eight
percent per annum over the highest prime rates in effect from time to time
charged by a selected group of banks, with a minimum annual interest rate of
13%. The maximum amount of borrowings outstanding at any time is limited based
on certain accounts receivable of the Company. The line is secured by all assets
of the Company and personally guaranteed by the Company's majority shareholder.
At September 30, 1996 and December 31, 1995, the Company had an aggregate
outstanding balance of $2,428,172 and $2,236,576, respectively. The Company is
in default on the line of credit agreement. As discussed in
12
15
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
4. LINE OF CREDIT (CONTINUED)
Note 8 the Company has filed petition for relief under Chapter 11 of the Federal
Bankruptcy Laws. The line of credit is classified as a Class One: Secured Claim
under the Plan of Reorganization.
5. NOTE PAYABLE
As of September 30, 1996 and December 31, 1995, the Company has a note payable
to a former shareholder in the amount of $309,090 with payments of principal and
interest at 8% due in monthly installments of $3,446 through September 1, 2007.
The Company is in default on its note payable. As discussed in Note 8 the
Company has filed petition for relief under Chapter 11 of the Federal Bankruptcy
Laws. The note payable has been classified as a Class Three: Allowed General
Unsecured Claims under the Plan of Reorganization.
6. LEASE OBLIGATIONS
The majority of the Company's noncancellable operating leases have been
terminated or restructured with month to month payment terms. Future minimum
payments at September 30, 1996, by year and in the aggregate, under restructured
noncancellable operating leases with terms of one year or more consist of the
following:
Three months ended December 31, 1996 $ 19,201
1997 140,632
1998 112,690
1999 30,720
2000 11,124
2001 4,635
======================
Total minimum lease payments $ 319,002
======================
As discussed in Note 8 the Company has filed petitions for relief under Chapter
11 of the Federal Bankruptcy Laws. The Company's capital lease obligations have
been classified as a Class Two: Other Secured Claims under the Plan of
Reorganization.
7. COMMITMENTS AND CONTINGENCIES
At September 30, 1996 there were various legal proceedings against the Company
which were resolved as part of the bankruptcy and Plan of Reorganization (see
Notes 1 and 8).
13
16
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
8. PLAN OF REORGANIZATION
On November 18, 1996 (Confirmation date), the Bankruptcy Court confirmed the
Company's Plan of Reorganization. According to the Plan of Reorganization the
existing Allowed Interests in the Company is cancelled and 100% of the issued
and outstanding equity of the Company is issued to Nu-Tech. Nu-Tech acquired the
Company free and clear of all claims, liens and interests that have been
asserted prior to the Confirmation date, excluding liabilities not subject to
compromise in the accompanying balance sheet at September 30, 1996. In
consideration, Nu-Tech paid cash in accordance with the terms and treatment of
claims described below. Additionally, Nu-Tech shall issue stock to certain
interests (the sole shareholder of the Company).
The confirmed plan requires Nu-Tech to make the following approximate cash
payments on the Confirmation date to satisfy the liabilities subject to
compromise including the $9,782,598 in the accompanying balance sheet at
September 30, 1996. Additionally, certain capital leases have been restructured
in connection with the bankruptcy proceedings. Subsequent to the Confirmation
date, $668,356 of such capital lease obligations were recorded by the Company.
The corresponding property and equipment is included in the accompanying balance
sheet. Payments required by Nu-Tech were approximately as follows:
Borrowing and accrued interest under line of credit (Class One) $ 2,600,000
Allowed General Unsecured Claims (Class Three) 750,000
Administrative Claims One 750,000
Post-Petition Payroll Taxes (Administrative Claim Four) 572,000
False Claims Act (Administrative Claim Three) 75,000
Other 103,000
========================
Total to be paid $ 4,850,000
========================
In addition, Nu-Tech is obligated for post Confirmation date payments of up to
an additional $425,000 in administrative expenses, $271,000 in federal payroll
taxes and $97,000 of state payroll and property taxes.
UNCLASSIFIED ADMINISTRATIVE CLAIMS
Unclassified Administrative Claims include the "actual, necessary costs and
expenses of preserving the estate" as determined by the Court after notice to
creditors of a request for payment and after a hearing thereon. The Code
requires that allowed administrative expenses be paid in full, to the extent
allowed by the Bankruptcy Court after notice and hearing, on the Confirmation
date unless the party holding the administrative claim agrees otherwise.
14
17
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
8. PLAN OF REORGANIZATION (CONTINUED)
UNCLASSIFIED ADMINISTRATIVE CLAIMS (CONTINUED)
With the exception of the Allowed Administrative Claims of Professionals
employed at the expense of the Estate, all Allowed Administrative Claims shall
be paid in cash: (a) on the latter of the Confirmation date or the date upon
which such Claim first becomes an allowed Claim; (b) in the ordinary course of
business; or (c) upon such terms and conditions as may be agreed to by the
holder of such claim.
Administrative Claims One: Professional Fees
At the Confirmation date, Nu-Tech is required to pay to the Disbursing Agent
$750,000 to be held and distributed exclusively for payment of Allowed
Administrative Claims of the professionals on a pro-rata basis.
As soon as reasonably practicable after the Court enters final orders allowing
their respective Professional Administrative Claims, the Disbursing Agent shall
remit to the Professionals a cash payment on account of their respective Allowed
Professional Administrative Claims, but not to exceed their pro-rata share, of
$750,000 except as otherwise may be agreed. Subject to the terms below, the
balance, if any of each professional's respective Allowed Administrative Claim,
in an aggregate amount not to exceed $425,000 (Unpaid Professional Fees), shall
be paid, without interest, in twelve equal monthly installments, commencing on
the fourth month after the Confirmation date and continuing through the
fifteenth month after the Confirmation date.
The Unpaid Professional Fees are secured and guaranteed by the following:
- Nu-Tech guaranty subject to separately executed guaranty on
behalf of each professional.
- The sole Company shareholder guaranty secured by a lien on the
Nu-Tech stock distributed to the shareholder.
- $300,000 of the $750,000 available to be distributed to Class
Three.
- Any recovery on the actions and other claims and causes of
action reserved to the Creditors committee.
15
18
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
8. PLAN OF REORGANIZATION (CONTINUED)
UNCLASSIFIED ADMINISTRATIVE CLAIMS (CONTINUED)
Administrative Claim Two: United States Trustee Fees
The fees under 28 U.S.C. Section 1930 of the United States Trustee owed by the
Company on the Confirmation date shall be paid in full no later than 30 days
following entry of the Confirmation order. Thereafter, post-confirmation fees of
the United States Trustee shall be payable from the funds held by the Disbursing
Agent on account of the general unsecured creditors.
Administrative Claim Three: False Claims Act Claims
The Company has reached an agreement with the government, the holder of False
Claims Act Claims, subject to final documentation, approval by the Department of
Justice and court approval, to provide the holder of such claims, the following
treatment in full and complete satisfaction of all alleged Medicare and Medi-Cal
overbilling claims which have been or may be asserted against the Company by or
on behalf of the federal or any state government with respect to conduct
occurring on or before the Confirmation date. The terms of such agreement are as
follows:
- The government (both state and federal) shall receive an
allowed general administrative claim in the amount of $75,000
- The government (both state and federal) shall receive an
allowed general unsecured claim in the amount of $500,000
Administrative Claim Four: Post-Petition Payroll Taxes
Post-petition state and federal payroll taxes of $572,000 is required to be paid
in full on the Confirmation date by Nu-Tech.
Allowed Priority Claims
The Code requires that the holders of pre-petition personal property and
pre-petition payroll taxes claims receive cash payments over a period not
exceeding six years after the date of assessment of such claim, unless agreed
otherwise. 11 U.S.C. section 1129(a)99). All Allowed Priority Claims shall be
paid in cash as required by Bankruptcy Code 1129(a)(9). The Internal Revenue
Service (IRS) holds a pre-petition unsecured claim for payroll taxes for
approximately $271,000. Under the plan the IRS will be paid this amount together
with interest in equal monthly installments of $5,302 commencing on the
Confirmation date for 65 months.
16
19
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
8. PLAN OF REORGANIZATION (CONTINUED)
CLASSIFIED CLAIMS
Class One: Secured Claim of Austin Financial Services, Inc.
The Allowed Secured Claim under the line of credit was paid in cash, on the
Confirmation date or upon such other terms and conditions as may be agreed to by
Austin Financial.
Class Two: Other Secured Claims
Class Two includes Allowed Secured Claims against the Company that are not
included in Class One. Each Allowed Secured Claim in Class Two will be
considered to be in its own separate subclass within Class Two, and each such
subclass shall be deemed to be a separate Class for purposes of this Plan.
Unless the holder of such a Claim agrees to less favorable treatment, each
Allowed Secured Claim in Class Two will, at the election of Nu-Tech in its sole
and absolute discretion, be treated as set forth below. Allowed Class Two
Secured Claims as to which Nu-Tech elects to treat under option (b) (as
described below) are impaired under the Plan.
Class Two Allowed Secured Claims shall receive one of the following treatments,
at the election of Nu-Tech: (a) cure and reinstatement, (b) payment of the
Allowed Secured Claim, with interest thereon from and after the Confirmation
date, over a period not to exceed four (4) years; (c) abandonment of the
collateral to the secured creditor in full and complete satisfaction of the
Allowed Secured Claim, or (d) such other treatment as may be agreed to by the
holder of such Claim.
Class Three: Allowed General Unsecured Claims
The holders of the Allowed General Unsecured Claims shall each receive their
pro-rata share of $750,000 in cash, net of payments made from the funds to
satisfy fees and expenses incurred on behalf of the Official Committee of
Unsecured Creditors (the Committee) from and after the Confirmation date in
administering and implementing the reorganization plan (including fees and
expenses incurred in objecting to general unsecured claims). In addition, Class
Three claims shall receive any recovery from the successful prosecution of
avoidance or other actions that may be undertaken in the sole and absolute
discretion of the Committee.
17
20
Medical Science Institute
(Debtor-in-Possession)
Notes to Financial Statements (continued)
8. PLAN OF REORGANIZATION (CONTINUED)
CLASSIFIED CLAIMS (CONTINUED)
Class Three A: Administrative Convenience Class Claims
Class Three A claims will receive a single distribution on or about the
Confirmation date, or as soon as practical, equal to 20% of the allowed amount
of such claim up to a maximum allowed amount of $2,500, whichever is less.
Class Four: Shareholder Interests
On the Confirmation date, the existing Allowed Interests in the Company
(including warrants, options and any other rights to acquire the Company's
stock) shall be terminated and no longer of any effect. The Plan of
Reorganization also stipulates that the sole shareholder of the Company shall
receive restricted Nu-Tech stock with a value of approximately $2,000,000 in
full and complete satisfaction of said interests and any and all options,
warrants and other rights to purchase an interest in the Company.
The future management of Reorganized MSI will be named by Nu-Tech and will
include the sole shareholder, who shall be employed pursuant to an Employment
Agreement, whose terms shall be two years at a stipulated compensation,
including certain incentive based payments.
The Company will account for the reorganization using fresh-start reporting.
Accordingly, all assets and liabilities will be restated to reflect their
reorganization value, which approximates fair value at the date of
reorganization.
18