<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to_____________
Commission file number
UNIVERSAL SELF CARE, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4228470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11585 Farmington Road.
Livonia, Michigan 48150
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (313) 261-2988
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, $.0001
Par Value, as of September 30, 1996 was 7,888,006 shares.
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
NUMBER
------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet - September 30, 1996
and June 30, 1996 3
Consolidated Statement of Operations - For the three
months ended September 30, 1996 and 1995 4
Consolidated Statement of Cash Flows - For the
three months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 9 - 10
PART II - OTHER INFORMATION 10
SIGNATURE 11
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UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
-------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 25,003 $ 91,066
Accounts receivable, net allowance for doubtful accounts
of $2,218,000 and $2,007,000, respectively 10,217,631 10,200,373
Inventories 711,536 551,154
Prepaid expenses 253,257 136,036
----------- ------------
TOTAL CURRENT ASSETS 11,207,427 10,978,629
PROPERTY AND EQUIPMENT
net of accumulated depreciation of $425,078 and $354,361, respectively 939,999 972,334
INTANGIBLE ASSETS 6,114,302 6,201,901
net of accumulated amortization of $620,370 and $532,771, respectively
DEPOSITS AND OTHER ASSETS 38,516 56,204
----------- ------------
$18,300,244 $ 18,209,068
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,440,339 $ 6,694,173
Notes payable - current portion 1,634,489 300,259
Related party loans 45,000 60,000
Accrued liabilities 1,047,300 1,632,911
State audit reserves 1,400,000 1,400,000
Payroll taxes payable 61,923 594,318
----------- ------------
TOTAL CURRENT LIABILITIES 9,629,051 10,681,661
LONG TERM NOTES PAYABLE, net of current portion 878,869 2,315,469
REVOLVING CREDIT LOAN 2,889,809 -
REDEEMABLE PREFERRED STOCK, Series A 2,154,873 2,246,209
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series B Cumulative Convertible, $.0001 par value,
10,000,000 shares authorized, 1,580,000 shares issued and outstanding 505,000 505,000
Common stock, $.0001 par value, 20,000,000 shares authorized, 7,888,006
shares issued and outstanding 788 788
Additional paid-in capital 10,623,796 10,623,796
Retained earnings/(deficit) (8,381,942) (8,163,855)
TOTAL STOCKHOLDERS' EQUITY 2,747,642 2,965,729
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,300,244 $ 18,209,068
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 11
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
1996 1995
-----------------------------------
<S> <C> <C>
REVENUES $ 9,212,566 $ 9,251,974
COST OF GOODS SOLD 5,363,823 5,654,303
------------ --------------
GROSS PROFIT 3,848,743 3,597,671
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,812,673 3,342,398
------------ --------------
OPERATING INCOME/(LOSS) 36,070 255,273
OTHER EXPENSES:
Interest expense, net 200,492 174,502
------------ --------------
NET INCOME/(LOSS) $ (164,423) $ 80,771
------------ --------------
NET INCOME/(LOSS) $ (0.02) $ 0.01
------------ --------------
WEIGHTED AVERAGE NUM-
BER OF SHARES USED IN
COMPUTATION 7,888,006 6,834,301
</TABLE>
See notes to consolidated financial statements.
Page 4 of 11
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (164,422) $ 80,771
Adjustments to reconcile net income (loss) to net cash from ------------- --------------
operating activities:
Depreciation and amortization 158,841 118,237
Changes in operating assets and liabilities:
(Increase) in accounts receivables (17,258) (1,446,958)
Decrease (increase) in inventories (160,382) 169,837
(Increase) in prepaid expenses (117,747) (317,221)
Decrease (increase) in deposits and other assets 17,688 (17,874)
(Increase) in intangible assets - (1,931)
(Decrease) in accounts payable (1,253,834) (25,771)
(Decrease) in accrued liabilities (585,611) (207,811)
(Decrease) in payroll taxes payable (532,395) -
------------ --------------
Total adjustments (2,490,698) (1,729,492)
------------ --------------
NET CASH (USED IN) OPERATING ACTIVITIES (2,655,120) (1,648,721)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (38,382) (55,206)
Net cash paid for acquisitions - (150,000)
NET CASH (USED IN) INVESTING ACTIVITIES (38,382) (205,206)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of related party loans (15,000) (50,000)
Borrowing of revolving credit line 3,000,000 167,000
Repayment of revolving credit line (110,191) -
Issuance of common stock, net of expenses - 333,332
Issuance of note payable, net of discount - 1,783,972
Net proceeds from (repayment of) long-term debt (102,370) (384,244)
Dividends paid on Series A Preferred Stock (53,664) 0
Redemption of Series A Preferred Stock (91,336) 0
------------ --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,627,439 1,850,060
------------ --------------
NET INCREASE (DECREASE) IN CASH (66,063) (3,867)
CASH AT BEGINNING OF PERIOD 91,066 87,853
------------ --------------
CASH AT END OF PERIOD $ 25,003 $ 83,986
------------ --------------
------------ --------------
</TABLE>
See notes to consolidated financial statements.
Page 5 of 11
<PAGE>
UNIVERSAL SELF CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
Reference is made to the annual report on form 10-KSB/A of Universal Self
care, Inc. (The "Company") dated October 15, 1996 for the year ended June 30,
1996.
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
position and the results of operations for the interim periods presented.
Except as otherwise disclosed, all such adjustments are of a normal and
recurring nature. The results of operations for any interim period are not
necessarily indicative of the results attainable for a full fiscal year.
2. EARNINGS/(LOSS) PER SHARE
Earnings/(loss) per share are based on the weighted average number of
common shares and common share equivalents outstanding during the period after
giving effect for preferred stock dividends during the period.
3. CONTINGENCIES
The Company has undergone an audit by representatives of the State of
California, State Controller's Office, Division of Audits. The purpose of the
audit was to determine the level of the Company's compliance with the guidelines
of the California Department of Health Services (Medi-Cal) and the California
State Board of Equalization. Representatives from the State Controller's Office
have raised the issue of whether the Company may have practiced two-tier pricing
policies in the charges to it's customers which are not in conformance with
Medi-Cal regulations. Under such regulations, a company may not charge any
customer prices less than those charged to the Medi-Cal program. Based upon
Management's independent review, the Company maintains that it has conformed
with pricing regulations because its prices are consistent within each of its
operating subsidiaries, Sugar Free and Home Therapy, and because these two
subsidiaries are offering different services. The Company's Management further
believes that the Medi-Cal program was charged the "prevailing prices" charged
for supplies, and that those charges were in compliance with current
regulations, and that the Representatives from the Controller's Office compared
prices for different services with different delivery methods. The State
Controller's Office contends that the reimbursement was paid for products, and
not for services, so the difference in pricing was not warranted based upon the
services rendered in conjunction with the products delivered. In July 1994, the
State Controller's Office issued an Auditor's Report with findings to the
Department of Health Services ("DHS") for the period beginning July 1, 1990
through June 30, 1993. The Report recommends a recovery of approximately $1.3
million due to such
<PAGE>
alleged two-tier pricing. In November 1994 the State Controller's Office issued
Letter of Demand for the recovery of such amounts due. In November 1994, the
Company issued a Statement of Disputed Issues with the Office of Administrative
Appeals, Department of Health Services as its formal appeal to the Letter of
Demand. A hearing before the Department of Health Services was held on January
16, 1996. The result of such hearing, announced in September 1996, was
confirmation of the State's position. The Company intends vigorously to contest
any recovery by the State with respect to such alleged improper pricing
practices for services rendered.
The Company has also undergone an audit by the California State Board of
Equalization ("SBE") as a result of separate findings made by the State
Controller's Office. The SBE has disagreed with the Company's policies
regarding its sales tax payments on certain items. Based upon Management's
independent review, the Company has maintained that sales of diabetes supplies,
when made pursuant to a doctor's prescription, are transactions exempt from the
collection and payment of sales taxes in California. The SBE has indicated that
only sales of insulin and insulin syringes are exempt from California sales tax
and that blood glucose meters, testing strips and finger-prick lancets are
taxable items. The SBE has assessed sales tax on the sales of these items and
it has issued a Notice of Determination against the Company for unpaid sales tax
covering the period July 1, 1989 through September 30, 1993. The Notice
determined a total amount due of $790,834, which is comprised of taxes due in
the amount of $691,695, and interest due through September 30, 1993 in the
amount of $99,139. The Company has protested these findings and is in the
process of appealing this assessment. A hearing scheduled for November 13, 1996
was postponed so that the SBE settlement department could review the Company's
appeal. The Company has accrued an additional $75,728 in fiscal 1996 for
possible interest and penalty payments on the taxes in question. The total
accrual for interest and penalty payments as of June 30, 1996 was $228,477. The
Company has accrued and paid sales taxes on sales of the items in question
during all periods since the last day of the period under audit. Such sales
taxes amounted to approximately $661,902 during the fiscal year ended June 30,
1995 and $759,143 during the fiscal year ended June 30, 1996.
Based upon the above contingencies, the Company has provided reserves, in
the event that a defense of its positions does not prevail, of $950,000 during
the fiscal year ended June 30, 1994 ($50,000 of which was deposited with SBE in
connection with its audit) and of an additional $500,000 during the fiscal year
ended June 30, 1995. Based upon Management's independent review, no addition
to the reserves during 1996 was determined to be appropriate. The combined
maximum amount demanded to be paid under both these actions is approximately
$2,090,830. Based upon the defenses involved, Management's independent review,
and information supplied by the Company's counsel and outside consultants, the
Company's Management believes that an estimated combined settlement amount for
these actions equal to $1,450,000, or 69% of the maximum amount demanded, is
reasonable under the circumstances. Allocation of the total reserve of
$1,450,000 between the DHS and the SBE actions is not possible because, in the
event of a settlement with DHS, the amount of the liability with the SBE could
be favorably impacted. The total reserve of $1,450,000 is considered adequate
at this time to cover any anticipated settlements relating to these matters.
<PAGE>
The Company has undergone an audit by Medicare covering the charges
submitted for reimbursement in the Western region (Region D) during the period
January 1, 1994 through December 31, 1995. Medicare determined that an
overpayment to the Company may have occurred as a result of the use of a
superseded diagnosis code on claims submitted. The claims in question were
originally submitted to Medicare in order to gain a denial of charges so that an
alternative carrier could be validly billed, since a denial is required by
certain intermediaries prior to billing for certain charges. Medicare may have
inappropiately made reimbursements on these charges. If this is determined to
be the case, the Company, or Medicare, will have recourse for reimbursement from
the alternative intermediary. Company management feels that the ultimate
settlement to Medicare will not have a material impact on earnings since an
alternative intermediary will be responsible for any amounts due.
4. REVOLVING LINE OF CREDIT
In August, 1996 the Company entered into an accounts receivable funding
agreement with Healthpartners Funding, L.P. ("Healthpartners") under which the
Company is able to borrow up to $4,500,000 against its qualified accounts
receivable. Qualified accounts are generally defined as those which are less
than 91 days old and are due from a third-party payee source (ie. Medicare,
Medicaid or Commercial insurance carrier) as opposed to those that are payable
directly by patients. The term of the agreement is three years. Outstanding
principal under the agreement is secured by a first priority lien against
substantially all of the Company's assets.
On August 30, 1996, the Company transacted for the initial draw under this
agreement, the maximum available amount of $3,000,000. Substantially all such
funds were immediately expended by the Company for the repayment of past due
payroll taxes, past due accounts payable and certain short-term notes payable.
On November 4, 1996, the Company's Loan and Security Agreement with
Healthpartners Funding, L.P. ("Healthpartners") was amended by, among other
things, amending the Base Rate of interest to equal 2.2% above the prime rate,
increasing funding under the loan by up to $1.4 million and providing for the
creation of a sole purpose subsidiary of the Company to be responsible for
marketing and managing all of the Company's managed care contracts("Newco").
Under the amended agreement, Healthpartners received warrants to acquire 5% of
the outstanding common stock of Newco, subject to anti-dilution protection,
registration rights and redemption provisions. Healthpartners also received a
warrant to acquire 375,000 shares of Company Common stock at an exercise price
equal to the lowest market price for such Common Stock during the month of
November 1996.
On September 30, 1996 the Company was in default of a financial covenant
of its Loan agreement with Healthpartners which required the Company's net loss
not to exceed $50,000 for its quarter ended September 30, 1996. The Company has
received a waiver from Healthpartners for its default under this financial
covenant.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 THREE MONTH PERIOD") as
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995 (THE "1995 THREE MONTH
PERIOD")
Revenue for the 1996 Three Month Period was $9,212,566, a decrease of
$39,408, or less than one percent from the 1995 Three Month Period. A
contributing factor was that customer refunds in the 1996 Three Month Period
were $30,415, an increase of $26,520 from the 1995 Three Month Period.
Total cost of goods sold during the 1996 Three Month Period were
$5,363,823, representing costs of approximately 58% of revenue for the period,
while total cost of goods sold for the 1995 Three Month Period were $5,654,303
or approximately 61% of revenue. This three point improvement is in part the
result of a volume discount from a vendor in the amount of $77,383 which covered
a three month period of time, April through June 30, 1996 and $25,933 for the
month of July. The volume discounts will continue throughout the 1997 fiscal
year to the extent that the Company meets specified purchasing levels.
Additionally, improved pricing agreements with several vendors has been a
contributing factor.
Selling, general and administrative expenses during the 1996 Three Month
Period increased to $3,723,956 or 40% of revenue, as compared to $3,311,805 or
36% of revenue during the 1995 Three Month Period. Accrual for bad debt expense
for the 1996 Three Month Period is 2% of revenue, as compared to the 1995 Three
Month Period was less than 1% of revenue. The combined costs of payroll and
fringe benefits, including sales commissions, increased by 3% during the 1996
Three Month Period over the 1995 Three Month Period.
Other expenses include interest expense, which increased by $22,453 during
the 1996 Three Month Period over the 1995 Three Month Period. These increases
were primarily due to the Healthpartners Funding, L.P. ("Healthpartners") line
of credit and interest charged by a vendor.
Net loss for the 1996 Three Month Period of $164,423 is primarily
attributable to the increase in selling, general and administrative expenses,
financing fees and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of $1,578,376,
compared to working capital of $296,968 at June 30, 1996. The increase in
working capital during the Three Month Period is primarily due to increases in
long-term borrowing as described below and to income from operations.
<PAGE>
Cash used by operations during the 1996 Three Month Period was $2,655,121
as compared to cash used by operations of $1,648,721 during the 1995 Three Month
Period. This decrease is due to the payment of several vendors, resulting in
less cash on hand and lower payables.
On August 30, 1996, the Company made its first borrowings under a Loan and
Security Agreement, dated as of August 15, 1996 (the "Loan Agreement"), by and
among the Company and HealthPartners Funding, L.P. ("HealthPartners"). Such
initial loan was in the aggregate principal amount of $3,000,000, of which
approximately $101,000 was utilized to pay a portion of the breakage costs under
a prior financing agreement, $200,000 was utilized to repay a short-term
outstanding loan and the balance was utilized to pay all past-due payroll taxes,
certain accounts payable and accrued expenses.
Pursuant to the Loan Agreement with HealthPartners, the Company may receive
revolving credit advances in an amount not to exceed the lesser of (a) 80% of
the qualified accounts receivable of the Company, or (b) $4,500,000. All loans
and other obligations under the Loan Agreement are secured by a first priority
lien and security interest in all accounts receivable of the Company. The Loan
Agreement was amended to contain a financial covenant which required that the
Company's net loss not exceed $50,000 for its quarter ended September 30, 1996,
and requires it achieve net income of at least $500,000 for its fiscal year
ending June 30, 1997. The Company was in default under the covenant concerning
the achievement of net for the quarter ending September 30, 1996 and this
default has been waived by Healthpartners.
In connection with the transactions pursuant to the Loan Agreement with
HealthPartners, the Company entered into an agreement with Fred Kassner, to
whom the Company remains indebted in the approximate amount of $1,474,000 (which
is due and payable on July 14, 1997). Pursuant to such agreement, Mr. Kassner
has agreed to subordinate his lien on the accounts receivable of the Company to
the lien and security interest held by HealthPartners in such collateral. In
addition, in consideration of Mr. Kassner's waiver of certain events of default
under his loan agreement with the Company (such events of default consisting of
the Company's failure to make certain mandatory prepayments out of the proceeds
received by the Company from certain exercises of the Company's common stock
purchase warrants), the Company has agreed to issue to Mr. Kassner five-year
warrants entitling Mr. Kassner to purchase up to 100,000 shares of common stock
of the Company at an exercise price of $2.50 per share. Mr. Kassner has a
pledge of all the outstanding stock of each of the Company's operating
subsidiaries to further secure the Company's outstanding indebtedness to him.
PART II - OTHER INFORMATION
5. Exhibits and reports on form 8-K
(a) Exhibits
10.1 Amendment No. 1 to Loan and Security Agreement
with Healthpartners Funding, L.P.
27.0 Financial data schedule
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
it's behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SELF CARE, INC.
BY:
BRIAN BOOKMEIER
PRESIDENT
Date: November 14, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,003
<SECURITIES> 0
<RECEIVABLES> 12,435,631
<ALLOWANCES> (2,218,000)
<INVENTORY> 711,536
<CURRENT-ASSETS> 11,207,427
<PP&E> 1,363,530
<DEPRECIATION> (423,531)
<TOTAL-ASSETS> 18,300,244
<CURRENT-LIABILITIES> 9,629,051
<BONDS> 0
2,154,873
505,000
<COMMON> 788
<OTHER-SE> 2,241,853
<TOTAL-LIABILITY-AND-EQUITY> 18,300,244
<SALES> 9,212,566
<TOTAL-REVENUES> 9,212,566
<CGS> 5,363,823
<TOTAL-COSTS> 3,812,673
<OTHER-EXPENSES> 200,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,492
<INCOME-PRETAX> (164,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (164,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
