1
EX-99.1
Audited Financial Statements for the year ended February 28, 1997, together with
report of independent accountants
2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheet of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) as of February 28, 1997, and the
related statements of operations, changes in stockholders' deficit and
cash flows for the year ended February 28, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Clinical
Laboratory, Inc. as of February 28, 1997, and the results of its operations and
its cash flows for the year ended February 28, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as a whole.
As discussed in Note 3 to the combined financial statements, effective March 1,
1996, Physicians Clinical Laboratory, Inc. adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
Ernst & Young LLP
Sacramento, California
May 9, 1997
2
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Physicians Clinical Laboratory, Inc.:
We have audited the accompanying balance sheet of Physicians Clinical
Laboratory, Inc. (a Delaware corporation) as of February 29, 1996, and the
related statements of operations, changes in stockholders' equity (deficit) and
cash flows for each of the two years in the period ended February 29, 1996.
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 Physicians Clinical
Laboratory, Inc. as of February 29, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended February 29, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced a
significant decline in operating income margins, a substantial net loss on
operations, a negative operating cash flow, a negative working capital position
and is in default under the terms of substantially all of its loan agreements.
As a result, the lenders have the right to demand immediate payment of
approximately $123.2 million of indebtedness and to foreclose on the Company's
assets. The Company does not have sufficient resources to repay the
indebtedness and has engaged an adviser to seek a proposed restructuring of the
Company's indebtedness. All of these factors and others discussed in Notes 1
and 2 raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements as a whole.
Arthur Andersen LLP
Sacramento, California
June 28, 1996
3
4
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29 (28), 1996 AND 1997
February 29, February 28,
Assets 1996 1997
- ---------------------------------------------------------------- ----------- -----------
CURRENT ASSETS:
Cash $ 391,815 $ 500,516
Trade accounts receivable --
Third parties 17,948,681 18,998,025
Related parties 476,923 322,964
----------- -----------
Total accounts receivable 18,425,604 19,320,989
Less -- Allowance for doubtful accounts 4,632,000 9,729,785
----------- -----------
Net accounts receivable 13,793,604 9,591,204
Notes receivable -- current 350,000 361,650
Supplies inventory 1,370,742 1,534,592
Prepaid costs and other assets 618,287 1,501,298
----------- -----------
Total current assets 16,524,448 13,489,260
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, less accumulated
depreciation and amortization of $19,196,157 and $23,238,541,
respectively 16,929,581 11,595,900
INTANGIBLE ASSETS:
Leasehold interest, less accumulated amortization of $1,452,045 1,525,704 --
Customer lists, less accumulated amortization of $5,104,303 22,278,986 --
Covenants not to compete, less accumulated amortization of
$ 3,482,760 2,140,231 --
Goodwill, less accumulated amortization of $6,692,555 31,525,140 --
----------- -----------
Total net intangible assets 57,470,061 --
OTHER LONG-TERM ASSETS 488,289 686,855
----------- -----------
Total assets $91,412,379 $25,772,015
=========== ===========
The accompanying notes are an integral part of these statements.
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5
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 29 (28), 1996 AND 1997
February 29, February 28,
Liabilities and Stockholders' Equity 1996 1997
- ---------------------------------------------------------------- ----------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt $ 123,880,031 $ 283,687
Note payable to related party -- 5,000,000
Line of credit ($4,556,818 available to be drawn) -- 5,243,182
Accounts payable 12,185,439 1,237,338
Accrued payroll 1,954,271 1,857,352
Accrued paid time-off 1,255,634 170,201
Accrued interest 8,544,639 5,121,598
Other accrued expenses 4,635,019 1,708,074
------------- -------------
Total current liabilities 152,455,033 20,621,432
LONG-TERM DEBT, less current installments 955,393 631,309
OTHER LONG-TERM LIABILITIES 2,614,537 --
LIABILITIES SUBJECT TO COMPROMISE (Note 3) -- 167,776,289
------------- -------------
Total liabilities 156,024,963 189,029,030
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 8 and 14)
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; 6,033,087 and 6,071,419 shares issued and
outstanding as of February 29 (28), 1996 and 1997,
respectively 60,331 60,714
Additional paid-in capital 15,536,906 15,570,802
Retained deficit (80,209,821) (178,888,531)
------------- -------------
Total stockholders' deficit (64,612,584) (163,257,015)
------------- -------------
Total liabilities and stockholders' deficit $ 91,412,379 $ 25,772,015
============= =============
The accompanying notes are an integral part of these statements.
5
6
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
Year Ended February 28 (29),
--------------------------------------------------
1995 1996 1997
------------- ------------ -------------
NET REVENUE
Net revenue from third parties $ 107,565,433 $ 86,828,901 $ 60,422,858
Net revenue from related parties 3,546,012 3,562,950 2,407,989
------------- ------------ -------------
Total net revenue 111,111,445 90,391,851 62,830,847
DIRECT LABORATORY COSTS 35,335,270 31,881,339 23,117,090
------------- ------------ -------------
Gross profit 75,776,175 58,510,512 39,713,757
LABORATORY SUPPORT COSTS 24,741,263 26,509,055 20,013,962
------------- ------------ -------------
Laboratory profit 51,034,912 32,001,457 19,699,795
SELLING, GENERAL AND ADMINISTRATIVE 26,626,847 27,739,434 24,880,448
PROVISION FOR DOUBTFUL ACCOUNTS (NOTE 3) 4,318,516 30,538,625 8,843,252
DEPRECIATION, AMORTIZATION AND WRITE DOWN OF INTANGIBLES
(NOTE 3) 9,881,687 36,326,689 69,070,097
CREDIT RESTRUCTURING COSTS -- 4,903,436 --
REORGANIZATION CHARGES -- -- 1,558,820
NONRECURRING ACQUISITION INTEGRATION
EXPENSE 9,250,188 -- --
------------- ------------ -------------
Operating income (loss) 957,674 (67,506,727) (84,652,822)
INTEREST EXPENSE (9,012,583) (12,898,919) (15,838,895)
INTEREST INCOME 88,269 61,285 21,855
NONOPERATING INCOME (EXPENSE), net 181,291 (383,375) (1,708,848)
------------- ------------ -------------
Loss before benefit for income taxes (7,785,349) (80,727,736) (102,178,710)
BENEFIT FOR INCOME TAXES 2,189,112 1,543,250 --
------------- ------------ -------------
Loss before extraordinary gain (5,596,237) (79,184,486) (102,178,710)
------------- ------------ -------------
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT, net of taxes of $0 -- -- 3,500,000
------------- ------------ -------------
NET LOSS $ (5,596,237) $(79,184,486) $ (98,678,710)
============= ============ =============
LOSS BEFORE EXTRAORDINARY GAIN
PER COMMON SHARE $ (0.93) $ (13.13) $ (16.85)
============= ============ =============
NET LOSS PER COMMON SHARE $ (0.93) $ (13.13) $ (16.28)
============= ============ =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,013,000 6,030,000 6,063,000
============= ============ =============
The accompanying notes are an integral part of these statements.
6
7
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
Year Ended February 28 (29),
------------------------------------------------
1995 1996 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (5,596,237) $(79,184,486) $(98,678,710)
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation, amortization and write down
of intangible assets 9,881,687 36,326,689 69,070,097
Provision for doubtful accounts 4,318,516 30,538,625 8,843,252
Credit Restructuring Costs -- 3,118,592 --
Net change in income tax refund
receivable (5,181,785) 5,181,785 --
Net changes in operating assets and
liabilities (4,322,761) 1,487,822 19,626,940
------------ ------------ ------------
Net cash used in operating activities (900,580) (2,530,973) (1,138,421)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase of intangible assets in
connection with acquisitions (2,739,413) -- (1,632,968)
Purchase of Damon net of cash acquired (58,111,866) -- --
Net acquisitions and disposals of equipment
and leasehold improvements (8,989,249) (1,963,463) 366,613
------------ ------------ ------------
Net cash used in investing activities (69,840,528) (1,963,463) (1,266,355)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term debt 83,438,587 6,266,763 5,443,182
Payments of principal on long-term debt--
Third parties (13,934,416) (1,586,407) 536,016
Gain on extinguishment of debt -- -- (3,500,000)
Proceeds from exercise of stock options 41,250 -- --
Proceeds from sale of capital stock 111,224 23,999 34,279
------------ ------------ ------------
Net cash provided by financing activities 69,656,645 4,704,355 2,513,477
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (1,084,463) 209,919 108,701
CASH AND CASH EQUIVALENTS,
beginning of year 1,266,359 181,896 391,815
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year $ 181,896 $ 391,815 $ 500,516
============ ============ ============
The accompanying notes are an integral part of these statements.
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8
PHYSICIANS CLINICAL LABORATORY, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED FEBRUARY 28 (29), 1995, 1996 AND 1997
Common Common Additional Retained
Stock Shares Stock Amount Paid-In Capital Earnings (Deficit)
------------ ------------ --------------- ------------------
BALANCE AT MARCH 1, 1994 6,006,606 $ 60,066 $ 15,360,704 $ 4,570,902
Net loss -- -- -- (5,596,237)
Proceeds from exercise of stock options 7,500 75 41,175 --
Proceeds from sale of capital stock 13,603 136 111,082 --
--------- ----------- ------------ -------------
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 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 38,332 383 33,896 --
--------- ----------- ------------ -------------
BALANCE AT FEBRUARY 28, 1997 6,071,419 $ 60,714 $ 15,570,802 $(178,888,531)
========= =========== ============ =============
The accompanying notes are an integral part of these statements.
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9
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND OPERATIONS:
Physicians Clinical Laboratory, Inc. ("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 filed a 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" (Note 3). 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 2.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company 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 1996. Management's Plan of Reorganization has been
effectuated, as described in Note 2. 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.
(2) PLAN OF REORGANIZATION:
On April 18, 1997 the Bankruptcy Court confirmed the Company's Plan of
Reorganization (Plan). Before the Company can emerge from bankruptcy (Effective
Date) certain conditions of the Plan must be met. The Plan is the result of
extensive negotiations, both prior to and during the pendency of the Company's
Chapter 11 cases among the Company, the Senior Lenders, certain of the Company's
Subordinated Debenture holders, the Creditors' Committee and other
parties-in-interest. The Plan reflects the results of negotiations with Nu-Tech
Bio-Med, Inc. ("Nu-Tech"), which resulted in Nu-Tech's commitment to invest
$14.8 million into the Company in return for the majority of the reorganized
Company's common stock.
The confirmed Plan provides for the following:
- Nu-Tech to receive 35.6% of the reorganized Company's common
stock in exchange for its holdings of senior secured debt.
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10
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Nu-Tech to receive 17% of the reorganized Company's common
stock as a result of the purchase of Medical Science Institute
(MSI) by the Company from Nu-Tech (see Note 15).
- Senior Lenders to receive $55 million in new senior secured
promissory notes and 38.1% of the reorganized Company's common
stock.
- The holders of the Company's Subordinated Debentures to
receive 9.3% of the reorganized Company's common stock.
- The Company's general unsecured claims to receive a pro rata
share of (i) $2.45 million in cash and (ii) a $400,000
noninterest-bearing note due one year after the Effective Date.
- The Company's existing shareholders to receive warrants to
purchase up to 5% of the shares of the reorganized Company's
common stock at a price of $13.30 per share.
ADMINISTRATIVE CLAIMS
On the Effective Date, each holder of an Allowed Administrative Claim shall
receive Cash equal to the amount of such Allowed Administrative Claim, unless
the holder and Company agree to other terms or a Final Order of the Bankruptcy
Court provides for other terms. However, Allowed Administrative Claims
representing obligations incurred in the ordinary course of business or
otherwise assumed by the Company pursuant to the Plan (including Administrative
Claims of governmental units for taxes) shall be assumed on the Effective Date
and paid, performed or settled by the reorganized Company when due in
accordance with the terms and conditions of the particular agreements governing
the obligations.
Priority Tax Claims
Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise
agreed by the holder of a Priority Tax Claim and the Company or the reorganized
Company, each holder of a Priority Tax Claim will receive in full satisfaction
of such Claim, deferred cash payments over a period not exceeding six years
from the date of assessment of such Claim. Payments will be made in equal
quarterly installments of principal, plus simple interest accruing from the
Effective Date at 8% per annum on the unpaid portion of each Priority Tax
Claim.
Unless otherwise agreed by the holder of a Priority Tax Claim and the Company or
the reorganized Company, the first payment will be payable one year after the
Effective Date or, if the Priority Tax Claim is not allowed within one year
after the Effective Date, the first day of the quarter following the date on
which (a) an order allowing such Claim becomes a Final Order or (b) a
Stipulation regarding the Amount and Nature of Claim is executed by the
reorganized Company and the Claim holder.
Debtor-in-Possession (DIP) Financing Facility Claims
Immediately prior to the Effective Date, provided that no unwaived events of
default exist under the DIP Financing Facility, any amount available under the
DIP Financing Facility shall be borrowed by the Company so that the total
outstanding principal balance thereunder is $9,800,000. On the Effective Date,
all amounts owing under the DIP Financing Facility shall be forgiven without
any payment by the Company or further action by any party.
Quarterly Fees to U.S. Trustee
The reorganized Company shall pay all quarterly fees payable to the U.S.
Trustee's Office for the Company after Confirmation, consistent with applicable
provisions of the Bankruptcy Code and Bankruptcy Rules.
10
11
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLASSIFIED CLAIMS AND INTERESTS
All Claims and Interest, except Administrative Claims and Priority Tax Claims,
are placed in the Classes described below.
Each Claim or Interest is classified in a particular Class only to the extent
that the Claim or Interest qualifies within the description of that Class and
is classified in other Classes to the extent that any remainder of the Claim or
Interest qualifies within the description of other Classes. A Claim or
Interest is also classified in a particular Class only to the extent that such
Claim or Interest is an Allowed Claim or Allowed Interest in that Class and has
not been paid, released or otherwise satisfied prior to the Effective Date.
CLASS 1 - PRIORITY CLAIMS
Classification: Class 1 consists of all Priority Claims against the Company.
Treatment: On the Effective Date, each holder of an Allowed Class 1 claim
shall receive Cash equal to the amount of the Claim, unless the holder and the
reorganized Company agree to a different treatment. Any Allowed Class 1 Claim
not due and owing on the Effective Date will be paid in full in Cash by the
reorganized Company when such Claim becomes due.
CLASS 2 - SENIOR DEBT CLAIMS
Classification: Class 2 consists of all Senior Debt Claims against the
Company.
Treatment: On the Effective Date, the existing lender agreements shall
automatically be terminated without further action by any party and shall no
longer be of any force or effect. Each holder of an allowed Senior Debt claim
shall receive, on or as soon as practicable after the Effective Date, its Pro
Rata Share of 952,000 shares of New Common Stock, which constitutes 38.1% of
the amount of New Common Stock to be issued and outstanding on the Effective
Date and the $55 million of New Senior Notes.
CLASS 3 - NU-TECH SENIOR DEBT CLAIMS
Classification: Class 3 consists of all Nu-Tech Senior Debt Claims.
Treatment: On the Effective Date, the existing lender agreements shall
automatically be terminated without further action by any party and shall no
longer be of any force or effect. Nu-Tech shall receive, on or as soon as
practicable after the Effective Date, 890,000 shares of New Common Stock, which
constitutes 35.6% of the amount of New Common Stock to be issued and
outstanding on the Effective Date.
CLASS 4 - OTHER SECURED CLAIMS
Classification: Class 4 consists of all Other Secured Claims against the
Company.
Treatment: On the Effective Date, at the option of the reorganized Company,
each Allowed Class 4 Claim shall be treated pursuant to either (i) or (ii)
below:
(i) the reorganized Company may transfer the property securing the
Claim to the holder of the Claim, in full satisfaction of the Claim; or
11
12
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) the Claim may be Reinstated as follows: (A) any default,
other than a default of a kind specified in section 365(b)(2) of Bankruptcy
Code, shall be cured; (B) the maturity of the Claim shall be reinstated as the
maturity existed before any default; (C) the holder of the Claim shall be
compensated for any damages incurred as a result of any reasonable reliance by
the holder on any contractual provision that entitled the holder to demand or
receive accelerated payment of the Claim; and (D) the other legal, equitable or
contractual rights to which the claim entitles the holder shall not otherwise
be altered.
CLASS 5 - UNSECURED CLAIMS
Classification: Class 5 consists of all Unsecured Claims against the Company,
including the CEO Claims.
Treatment: On the Effective Date, the Company will deliver to the Third-Party
Disbursing Agent, to be held in the Class 5 Disbursement Account for the
benefit of holders of Allowed Class 5 Claims, $2.45 million in Cash and a New
Unsecured Note in the amount of $400,000. Each holder of an Allowed Class 5
Claim, in full and final satisfaction of such Allowed Claim, shall receive its
Pro Rata share of the assets held in the Class 5 Disbursement Account in
accordance with the provisions of the Plan.
CLASS 6 - OLD SUBORDINATED DEBENTURE CLAIMS
Classification: Class 6 consists of all Old Subordinated Debenture Claims
against the Company.
Treatment: On the Effective Date, the Old Indenture and the Old Subordinated
Debentures shall be automatically terminated without further action by any
party and shall no longer be of any force and effect. Each holder of an
Allowed Old Subordinated Debenture Claim, in full and final satisfaction of
such Allowed Claim, shall receive, on or as soon as practicable after the
Effective Date, its Pro Rata Share of 232,500 shares of New Common Stock, which
constitutes 9.3% of the amount of New Common Stock to be issued and outstanding
on the Effective Date.
CLASS 7 - INTERESTS OF HOLDERS OF OLD COMMON STOCK IN PCL
Classification: Class 7 consists of the interests of holders of Old Common
Stock in PCL.
Treatment: Each holder of an Allowed Class 7 interest shall receive, in full
and final satisfaction of such Interest, its Pro Rata Share of the New Warrants
issued pursuant to the New Warrant Agreement. The New Warrants will allow
existing shareholders to purchase up to 5% of the shares of the Reorganized
Company's common stock at a price of $13.30 per share.
CLASS 8 - INTERESTS OF HOLDERS OF INTERESTS IN SUBSIDIARIES
Classification: Class 8 consists of the Interests of the Subsidiary Debtors.
Treatment: In full and final satisfaction of the Allowed Class 8 Interests,
the Company shall retain its Interests in each of the Subsidiary Debtors. Each
Subsidiary Debtor shall be merged into the Reorganized Company on the Effective
Date.
CLASS 9 - INTERESTS OF HOLDERS OF OLD STOCK OPTIONS AND OLD WARRANTS
Classification: Class 9 consists of the Interests of the holders of Old Stock
Options and Old Warrants.
Treatment: The holders of Class 9 Interests shall not receive or retain any
property under the Plan on account of such Interests.
12
13
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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--
Equipment and leasehold improvements are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, except for leasehold improvements which are being amortized over the
life of the lease. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation or amortization are removed from the
accounts and any resulting gain or loss is recognized in operations for the
period. The cost of maintenance and repairs is charged to income as incurred,
significant renewals and betterments are capitalized.
13
14
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
INTANGIBLE ASSETS--
All amortization is 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
Prior to fiscal 1995, the Company used a 36 year amortization life for
goodwill. Effective March 1, 1994, the Company adopted a goodwill life of 19
years due to the rapid changes occurring in the healthcare industry. The 19
years has also been applied on a remaining life basis for goodwill relating to
acquisitions made prior to March 1, 1994. The effect of reducing the life to
19 years was to increase amortization expense for fiscal 1995 by approximately
$1,300,000.
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. Using this
approach, the Company recorded a write-down of $25,000,000 to intangible assets
which was allocated to Goodwill as of February 29, 1996. The amount of the
write-down was based upon a Board-approved restructuring plan prepared by
investment bankers engaged to assist and advise the Company on a proposed
restructuring of the Company's indebtedness.
During 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 have
resulted in significant cash flow deficits and continued operating losses. As a
result, management has reevaluated the recoverability of goodwill and other
intangible assets and concluded they have no continuing value. Accordingly,
the Company has recorded a $59.4 million write-off of those assets.
14
15
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense less the write-down of intangibles, for leasehold interest
was $277,189, $257,983 and $250,813, covenants not to compete, $1,114,835,
$1,070,242 and $1,027,598, goodwill, $2,765,197, $3,367,445 and $2,011,458, and
customer lists $1,410,399, $1,431,449 and $1,441,226 in fiscal 1995, 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.
EARNINGS PER SHARE --
Weighted average shares outstanding include common stock equivalents computed
using the treasury stock method except for periods in which their inclusion
would be anti-dilutive. It is probable that the Plan of Reorganization will
require the issuance of common stock or common stock equivalents, thereby
diluting current equity interests.
LIABILITIES SUBJECT TO COMPROMISE --
Liabilities subject to compromise consist of the following:
February 28, 1997
-----------------
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
=================
REORGANIZATION CHARGES--
Reorganization charges consist primarily of professional fees incurred as part
of the Chapter 11 bankruptcy.
15
16
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $362,851, $391,926 and
$326,920 for the years ended February 28 (29), 1995, 1996 and 1997,
respectively.
Laboratory support costs consist of patient service center costs, courier costs,
laboratory administration expenses, customer service costs, materials management
costs and management service charges from related parties. Management service
charges from related parties were $876,004, $868,338 and $405,419 for the years
ended February 28 (29), 1995, 1996 and 1997, respectively.
16
17
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPAIRS AND MAINTENANCE EXPENSE--
Repairs and maintenance expense was $1,140,424, $1,174,077 and $908,795 in
fiscal 1995, 1996 and 1997, respectively.
INCOME TAXES--
The provision for income taxes and related tax assets and liabilities have been
computed in accordance with SFAS No. 109, "Accounting for Income Taxes."
STATEMENTS OF CASH FLOWS--
Net changes in operating assets and liabilities consist of the following:
Year Ended February 28 (29),
-----------------------------------------------
1995 1996 1997
------------ ----------- ------------
Increase in accounts receivable $(12,402,033) $(9,917,080) $ (4,640,852)
Net (increase) decrease in supplies
inventory, prepaid costs, deposits and
other assets (952,735) 2,017,177 (1,257,077)
Increase in accounts payable and accrued
expenses 9,032,007 9,387,725 25,524,869
------------ ----------- ------------
Net change in operating assets and liabilities $ (4,322,761) $ 1,487,822 $ 19,626,940
============ =========== ============
Supplemental disclosure of cash flow information is as follows:
Year Ended February 28 (29),
----------------------------------------
1995 1996 1997
---------- ---------- ----------
Cash paid for interest--
Third parties $8,199,578 $4,400,969 $ 26,277
17
18
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-cash transactions consist of the following:
Year Ended February 28 (29),
----------------------------------------
1995 1996 1997
-------- -------- ----------
Gain on extinguishment of debt paid by a related party $ -- $ -- $3,500,000
Note payable to related party resulting from MSI acquisition $ -- $ -- $5,000,000
18
19
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS--
Certain reclassifications to prior years' financial statements have been made
to conform to the 1997 presentation.
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.
Services under government programs represent approximately 29%, 30%
and 33% of net revenue for the year ended February 28 (29), 1995, 1996 and
1997, respectively. The Company's primary concentration of credit risk is
accounts receivable, which consist of amounts owed by various governmental
agencies, insurance companies and private patients. Significant concentrations
of gross accounts receivable at February 29 (28), 1996 and 1997, reside in
receivables from governmental agencies of 48% and 52%, respectively.
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 29%, 30%
and 33% of net revenue for the year ended February 28 (29), 1995, 1996 and
1997, respectively. The Company's primary concentration of credit risk is
accounts receivable, which consist of amounts owed by various governmental
agencies, insurance companies and private patients. Significant concentrations
of gross accounts receivable at February 28 (29), 1996 and 1997, reside in
receivables from governmental agencies of 48% and 52%, 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
The carrying amount approximates fair value.
19
20
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It was not practicable to estimate the fair value of the Company's
debt due to the debt being in default. See Note 1 and 5.
USE OF ESTIMATE 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.
NEW ACCOUNTING PRONOUNCEMENTS --
In 1997, the Company adopted Statements of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The pronouncement requires that
assets to be held and used, and assets held for sale be reviewed for
impairment. Any loss resulting from the impairment of such assets held and
used is included as a component of continuing operations.
Also in 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with the provisions of the
pronouncement, the Company elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock option plans.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The Company has not yet
determined what the impact of Statement 128 will be on the calculation of fully
diluted earnings per share.
20
21
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consist of the following:
February 29, 1996
-----------------
Cost
-----------
Equipment $27,417,178
Furniture and fixtures 2,614,725
Leasehold improvements 6,093,835
-----------
Total 36,125,738
Less - Accumulated depreciation
and amortization 19,196,157
-----------
Net book value 16,929,581
===========
February 28, 1997
-----------------
Cost
-----------
Equipment $28,259,918
Furniture and fixtures 2,194,510
Leasehold improvements 4,380,013
-----------
Total 34,834,441
Less - Accumulated depreciation
and amortization 23,238,541
-----------
Net book value 11,595,900
===========
Depreciation expense relating to equipment and leasehold improvements charged to
operations was $9,881,687, $11,326,689 and $4,967,068 for fiscal years ended
1995, 1996 and 1997, respectively. As of February (29) 28, 1996 and 1997,
respectively, the Company recorded a write down of $25,000,000 and $59,371,935
to intangible assets.
21
22
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LONG-TERM DEBT:
Long-term debt consists of the following:
February 29 (28),
-----------------------------
1996 1997
------------ ------------
Convertible subordinated debentures, currently in default, par
value $1,000 per debenture, bearing interest at 7.5% due 2000
The debentures are convertible into shares of common stock at
any time before maturity at a conversion price of $12.20 per
share $ 40,000,000 $ 40,000,000
Variable interest rate notes payable to banks, currently in
default, 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 47,359,476 43,859,476
Various lines of credit, currently in default, 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 33,500,000 33,700,000
Notes payable to former owners of acquired laboratories,
currently in default, 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 2,383,493 2,376,113
Notes payable for Accounts Payable vendors converted to notes,
currently in default, with interest rates ranging from 8% to
12%, principal due in monthly and quarterly installments due
through April 1988 -- 1,047,767
Note payable to the City of Burbank, non-interest bearing, due
annually through September 2005 (annual payments forgiven if
building is still occupied) 150,000 150,000
Capital lease obligations (Note 8) 1,442,455 850,935
------------ ------------
Liabilities subject to compromise in 1997 -- 121,984,291
22
23
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28 (29),
----------------------------
1996 1997
------------ ----------
Note payable to related party, bearing interest at 10%,
principal to be 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
Note payable bearing interest at 10%, principal due in monthly
installments of $11,886 through May 1997 -- 35,075
Capital lease obligations (Note 8) -- 618,189
------------ ----------
124,835,424 5,914,996
Less - Current installments 123,880,031 5,283,687
------------ ----------
Long-term debt, less current installments $ 955,393 $ 631,309
============ ==========
23
24
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 28, 1997, the prime rate was 8.25%. All assets of the Company
are pledged as collateral to secure its borrowings. The loan agreements with
the Bank are conditional upon the Company's ongoing ability to comply with
certain covenants. The covenants include the maintenance of specified working
capital and debt-to-worth ratios.
The Company has 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 secured indebtedness under the Credit Agreement is classified as a Class 2
claim under the Plan. The Company has 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. The
Debentures are classified as a Class 3 claim under the Plan. The Company does
not have available cash or other cash resources available to cure the defaults
under the Credit Agreement or the Indenture covering the Debentures, or
otherwise to make interest or principal payments with respect to its debt
obligations.
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 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, 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, constitute
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.
As a result of the Company's failure to make principal and interest payments
under its existing 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 guarantor, 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 guarantor paid the full amount of the guaranty to
the Senior Lenders. This extraordinary item resulted in a net gain per common
share of $.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 Company's common stock currently trades in the over-the-counter
market.
24
25
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is
obligated to maintain an effective registration statement covering the
Debentures and the Company's common stock with respect to which the Debentures
are convertible.
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),
-----------------
1998 $ 126,210,043
1999 45,542
2000 49,843
2001 54,549
2002 59,701
Thereafter 10,485
---------------
$ 126,430,163
===============
The above table reflects maturities of long-term debt before the effects of
changes under the Plan that will occur on the Effective Date. On the Effective
Date, substantially all of the existing long-term debt will be replaced with $55
million of New Senior Notes and common stock of the New Company, as described in
Note 2.
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.
25
26
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LINE OF CREDIT:
The company has a line of credit with a financial institution which provides 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, and $4,556,818 was available to be withdrawn.
Immediately prior to the Effective Date, provided that no unwaived event of
default exists under the DIP Financing Facility, any amounts available under the
DIP Financing Facility will be borrowed by the Company so that the total
outstanding principal balance thereunder is $9,800,000. On the Effective Date,
all amounts owing under DIP Financing Facility will be forgiven without any
payment by the Debtors or further action by any party. The line is secured by a
first priority lien and security interest in all assets of the company.
(7) INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
Year Ended February 28 (29),
----------------------------------------------------
1995 1996 1997
----------- ----------- --------------
Current--
Federal $(2,947,750) $ (141,820) $ --
State -- (42,842) --
----------- ----------- --------------
(2,947,750) (184,662) --
Deferred--
Federal 531,783 (1,043,396) --
State 226,855 (315,192) --
----------- ----------- --------------
758,638 (1,358,588) --
----------- ----------- --------------
$(2,189,112) $(1,543,250) $ --
=========== =========== ==============
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
Year Ended February 28 (29),
-------------------------------
1995 1996 1997
----- ----- -----
Federal statutory income tax rate (34.0%) (34.0%) (34.0%)
State franchise taxes, net of (6.1%) (6.1%) (6.1%)
federal income tax benefit
Change in valuation allowance 5.8% 38.3% 40.1%
Additional provision for
intangible assets 4.5% -- --
Other 1.7% (0.2%) --
----- ----- -----
(28.1%) (2.0%) --%
===== ===== =====
26
27
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 28, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $76,670,000 and
$38,370,000 respectively. The loss carryforwards expire between the years 1997
and 2012 for federal and state income tax purposes.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
YEAR ENDED FEBRUARY 29 (28),
------------------------------
1996 1997
------------ ------------
DEFERRED TAX (ASSETS)/LIABILITIES
Current
Accrued Expenses $ (1,114,146) $ (1,039,480)
Bad Debt (4,765,504) (8,842,877)
Prepaid Expenses 65,021 (282,184)
Other 499,304 214,915
------------ ------------
Total Current Deferred (Assets)/Liabilities (5,315,325) (9,949,626)
Valuation Allowance 5,315,325 9,949,626
------------ ------------
Net Current Deferred (Assets)/Liabilities -- --
Non-Current
Amortization (9,598,474) (30,247,568)
Depreciation (448,365) (843,566)
Net Operating Loss (15,037,165) (29,190,589)
Sec. 481(a) Cash to Accrual 44,032 --
------------ ------------
Total Non-Current Deferred (Assets)/Liabilities (25,039,972) (60,281,723)
Valuation Allowance 25,039,972 60,281,723
------------ ------------
Net Non-Current Deferred (Assets)/Liabilities -- --
TOTAL NET DEFERRED (ASSETS)/LIABILITIES $ -- $ --
============ ============
As discussed in Note 2, 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.
(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 $3,928,355 and $4,002,622, and related
accumulated amortization was $2,218,837 and $2,913,010 as of February 29, 1996
and February 28, 1997.
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.
27
28
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beginning March 1, 1989, the Company began subletting one of its unoccupied
facilities. The sublease term coincides 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.
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 9 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, 1997
are:
Year Ended Capital Operating
February 28 (29), Leases Leases
----------------- ------ ------
1998 $ 772,117 $ 2,778,390
1999 569,517 1,790,159
2000 309,002 1,057,639
2001 -- 223,408
2002 -- 81,849
Thereafter -- 42,050
----------------- ----------------
Total minimum lease payments 1,650,636 $ 5,973,495
================
Less -- Amount representing
Interest (at rates ranging from
7.2% to 20.7%) 181,512
-----------------
Present value of net minimum
capital lease payments $ 1,469,124
=================
Total rental expense under operating leases was $7,178,089, $10,199,909 and
$6,113,445 for fiscal years 1995, 1996 and 1997, respectively.
28
29
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. The
following laboratory and computer service revenue was billed by the Company to
stockholders (and their affiliated entities).
Year Ended February 28 (29),
----------------------------------------
1995 1996 1997
---------- ---------- ----------
Laboratory and computer service
revenue from stockholders $3,546,012 $3,562,950 $2,407,989
========== ========== ==========
Amounts due from stockholders and included in accounts receivable were as
follows:
February 29 (28),
-----------------------
1996 1997
-------- --------
Amounts due from stockholders $476,923 $322,964
======== ========
The Company received management services from Diagnostic Pathology Medical
Group, Inc. (DPMG), a stockholder of the Company. The services of certain
management personnel were provided to the Company for management fees at a cost
of $326,000, $256,253 and $104,010 for fiscal years 1995, 1996 and 1997,
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 $550,000, $188,000 and
$9,333 in fiscal years 1995, 1996 and 1997, respectively.
29
30
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company occasionally uses the specialized laboratory services of one of its
owners and several of its owners' stockholders. 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:
Year Ended February 28 (29),
----------------------------------
1995 1996 1997
-------- -------- --------
Billings from stockholders $362,851 $391,926 $326,920
======== ======== ========
The Company has loaned the 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
========
As of February 28, 1997, no payments have been received.
The Company also leases draw station space and purchases other services and
various supplies from several of its stockholders. The total amount paid by the
Company for these items was $123,944, $97,137 and $26,691 for fiscal years 1995,
1996 and 1997, respectively.
30
31
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $398,906 and $288,219 in fiscal years 1995 and 1996, respectively.
(11) STOCK OPTION PLAN AND WARRANTS:
STOCK OPTION PLAN
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 the acquisition of MGPL, PCLG and San Joaquin Diagnostic
Laboratories (SJDL), options were granted under a plan (the "Acquisition Stock
Option Plan") separate from the 1992 Plan and the 1994 Plan. The Stock Option
Plans are classified as class 9 claims under the Plan.
31
32
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTIONS OUTSTANDING
1992 1994 Acquisition Total Option
Plan Plan Plan Options Price
------------------------------------------------------------------
Outstanding at February 28, 1994 564,645 36,667 50,842 652,154 $5.50 - $14.25
Granted 188,000 30,000 -- 218,000 $8.88 - $11.50
Exercised (7,500) -- -- (7,500) $5.50
Forfeited (15,000) -- -- (15,000) $10.25 - $11.50
Expired -- -- (26,035) (26,035) $14.25
------------------------------------------------------------------
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
ADDITIONAL INFORMATION REGARDING STOCK OPTIONS:
2/28/95 2/29/96 2/28/97
--------------------------------
Authorized shares 941,491 941,491 941,491
Shares available for granting 119,872 204,717 204,717
Exercisable shares 293,683 372,787 451,891
In addition to the shares reflected above, 5,000 options each were granted to
each member of the Board of Directors, subject to shareholder approval. The
exercise price of these options will be 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.
WARRANTS
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.
32
33
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In exchange for the guaranty, Sutter Health received a warrant to purchase up
to 1,200,000 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.
(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 1995, 1996 and 1997, 13,603,
5,378 and 38,332 shares respectively of Common Stock were purchased through
this plan for $111,623, $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 AGREEMENT:
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 pre-tax 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, all employment contracts or agreements between the CEO and the
Company will be treated as a single Class 5 claim, in an allowed amount not
exceeding $390,000.
33
34
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) LEGAL PROCEEDINGS:
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.
Prepetition claims that were contingent, unliquidated, or disputed as of the
Petition Date, including, without limitation, those that arise in connection
with rejection of executory contracts or unexpired leases, may be allowed or
disallowed depending on the nature of the claim. Such claims may be fixed by
the Bankruptcy Court or otherwise settled or agreed upon by the parties and
approved by the Bankruptcy Court.
Described below are certain legal proceedings involving the Company that were
in existence as of the Petition Date. All such proceedings have been stayed
pursuant to section 362 of the Bankruptcy Code, and can only proceed with the
approval of the Bankruptcy Court. As a general matter, the treatment of claims
arising prior to the Petition Date, including claims on account of litigation,
will be determined and paid pursuant to the terms of the Plan. The Plan
provides that following the Effective Date, such prepetition litigation, as
well as postpetition litigation involving claims based upon prepetition events,
will become subject to a permanent injunction. The Plan further provides that
the Company, the reorganized Company or the Committee may resolve or adjudicate
the amount of a prepetition litigation claim in the manner in which such claim
would have been resolved if the Company had not instituted the Bankruptcy
Cases. Additionally, the Bankruptcy Court may enter orders modifying the
automatic stay and/or permanent injunction to permit certain matters to
continue to be prosecuted in the courts or before arbitrators where or before
whom such matters are pending, generally for the purpose of pursuing payment of
such claims as are insured from third-party insurers. Because of the
bankruptcy proceedings, the Company's financial exposure with respect to the
prepetition litigation claims set forth in actions currently pending against
the Company is limited by the Plan and should not have a material financial
impact on the Company.
A dispute has arisen between the Company and Medical Group Pathology
Laboratory, Inc. ("MGPL"), the seller of the Santa Barbara facility which the
Company acquired in 1992 (Acquisition), relating to the payment obligations
under the Agreement of Purchase and Sale of Assets between the Company and
MGPL. The Company and MGPL have been unable to reach successful negotiations
with respect to this matter. On November 8, 1995, MGPL commenced an action
(Litigation) against the Company in the Superior Court of the State of
California, Santa Barbara County, captioned Medical Group Pathology Laboratory,
Inc. v. Physicians Clinical Laboratory, Inc. (Case No. 210318). The complaint
alleges breach of the promissory note executed by the Company in connection
with the Acquisition and failure to pay amounts due thereunder equalling
$1,169,505 plus interest and late fees, and seeks compensatory damages in the
amount of sums allegedly due, in addition to unspecified general damages and
attorney's fees. In December, 1995, a default was entered against the Company
in the Litigation. The Company has no substantive defenses to the Litigation.
The Company was able to have the default set aside before a judgment was
entered in connection therewith. As of the Petition Date (at which time the
Litigation was stayed), a standstill agreement with MGPL was in effect,
pursuant to which the parties agreed to attempt in good faith to determine the
precise amount owed to MGPL by the Company under the MGPL Agreement. As of
February 28, 1997, the outstanding principal amount of the Note issued by the
Company to MGPL in connection with the MGPL Agreement was $890,107.
On June 20, 1996, suit was filed against the Company in the Superior Court of
Sacramento under the caption Maintenance Management Corporation v. Physicians
Clinical Laboratory, Inc., Case No. 96AS03171. This lawsuit relates to a
management contract entered into among the Company and the plaintiff therein,
and alleges breach of contract and fraudulent and negligent misrepresentation.
The complaint seeks compensatory damages in excess of
34
35
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$3.0 million, interest and expenses, as well as exemplary damages. However,
based upon the facts presently known to the Company, it does not believe that
the merits of these claims, if any, justify the amount of damages sought, and
the Company does not believe that this lawsuit, if adversely determined, would
have a material adverse effect on the financial condition of 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.
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.
To date, the Company has not experienced any significant liability with respect
to such claims.
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. If Mr. McKeeman were to prevail on appeal,
the Company would incur an administrative claim against their estates in the
approximate amount of $300,000.
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. The Company has produced and will continue to produce
documents in response to the DOD's subpoena. In late May 1997, the Company was
notified that its Medicare and Medi-Cal 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 is cooperating
with DOD and HHS in such investigations. The Company believes that these
investigations may be similar to investigations being conducted by DOD and HHS
with respect to the billing practices of the clinical laboratory testing
industry. The Company further believes that these investigations are in their
early stages. There can be no assurance that the result of such investigations
as they relate to the Company would not subject the Company to significant civil
or criminal liability (which could include substantial fines, penalties or
forfeitures, and mandatory or discretionary exclusion from participation in
Medicare, Medi-Cal and other government funded healthcare programs), which could
have a material adverse effect on the financial condition of the Company.
(15) ACQUISITIONS AND INTANGIBLE ASSETS:
In February 1997, the Company purchased 100% of the common stock of MSI from
Nu-Tech for $7,643,183.
35
36
PHYSICIANS CLINICAL LABORATORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounted for the transaction using the purchase method of
accounting and has included MSI in the accompanying financial statements. There
is no operating activity of MSI included in the statement of operations of the
Company for the year ended February 28, 1997. Pro forma results of operations
are as follows for the year ended February 28 (29):
Year Ended February 28 (29),
--------------------------------
1996 1997
------------- -------------
(Unaudited)
Net revenue $ 105,093,420 $ 75,125,077
Net loss $ (81,920,908) $(102,004,130)
Net loss per common share $ (13.58) $ (16.82)
36