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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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 1-11568
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
______ _______
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
_____
The issuer's net revenues for its most recent fiscal year was $34,001,626.
The aggregate market value of the voting stock held by non-affiliates for the
issuer as of September 12, 1997 was $15,436,020.
The number of shares outstanding of the registrant's Common Stock, $.0001
Par Value, as of September 12, 1997 was 9,724,579 shares.
Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS
General
Universal Self Care, Inc. ("Universal"or the "Company"), a Delaware
corporation incorporated in 1989, is a leading disease management Company in the
United States, specifically providing and/or managing comprehensive services to
persons suffering from diabetes.
Universal is the parent corporation for the following wholly-owned
operating subsidiaries: Physicians Support Services, Inc., a California
corporation ("PSS"); USC-Michigan, Inc., a Michigan corporation and its
wholly-owned subsidiary, PCS, Inc. - West (collectively identified as "Patient
Care Services"), a Michigan corporation; Diabetes Self Care, Inc. (formerly The
Thriftee Group, Inc.), a Virginia Corporation ("Diabetes Self Care"), and
Healthcare Management Solutions, Inc., a Virginia corporation ("Healthcare
Management Solutions"). Depending upon the context, the term "Company" refers
to either Universal alone, or Universal and one or more of its operating
subsidiaries. These subsidiaries and Universal do business as "Diabetes Self
Care," or "Healthcare Management Solutions," or "Universal Rx".
It is estimated by the American Diabetes Association that more than 16
million people in the United States (6% of the domestic population, based
upon 1990 United States census figures) suffer from diabetes, with over
625,000 new cases being diagnosed each year. The number of cases of diabetes
has tripled since the 1960s.
Lines of Business
The Company conducts its business through two (2) internally divided
operating divisions: the Diabetes Self Care and Healthcare Management Solutions
divisions. Approximately 89% of the Company=s revenue for the fiscal year ended
June 30, 1997 ("Fiscal 1997") was derived from Diabetes Self Care, whose primary
focus is on providing individuals with diabetes-related supplies: by
distributing both prescription and non-prescription medications and by providing
in-home training to persons suffering from diabetes. The Company has a software
license to operate and utilizes the MestaMed billing system (see "Organization
and Operations"), and currently has a data base with over 60,000 customers.
The Company's customer service operation maintains an individual customer
profile for each customer to determine the type of diabetes supplies used and
the frequency of such use for each customer. Additionally, customer service
representatives attempt to expand the product offerings purchased
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by customers with every phone call as part of the Company=s follow-up program to
monitor customer needs and generate additional revenues.
During Fiscal 1997, 11% of the Company's revenue was derived from
Healthcare Management Solutions, whose focus and concentration is on the
provision of services and medical supplies to managed care organizations and
companies that are self-insured medical programs for the provision of health
care benefits, by providing individual managed care or self-insured with
diabetes-related supplies and both prescription and non-prescription medications
as part of a disease management program. For the services and products
provided, Healthcare Management Solutions bills the organization and has a
software license to utilizes Sales Ally for its customer service operation (see
"Organization and Operation"). The Company's customer service operation
conducts one-on-one contact with each customer within the managed care group to
gather critical information, such as customer lifestyle, product utilization,
testing frequency and need for product utilization training. A customer profile
is developed and data is electronically sent to the respective managed care
group administrators for evaluation. The Company's contracts with managed care
customers generally give the Company the exclusive right to supply all
diabetes-related products to the individuals whose medical care is provided
and/or paid for by the contracting parties, at agreed upon prices, during the
contract period. The Healthcare Management Solutions operation is the fastest
growing part of the Company's business, and Management's strategy is directed
toward making this operation the dominant part of the Company's future business.
The Company offers to its customers a pharmacy benefit management (PBM)
program under the name Universal Rx. This added value program provides "managed
care services" to corporations that provide self-insured medical coverage to
their employees. Universal Rx=s services include management of diabetes product
purchasing and consulting services related to the types and amounts of products
which should be purchased by the self-insured program based upon statistical
information related to the population whose care is subject to management.
Organization and Operations
The Company has completed the consolidation of all operations into two
primary locations, one in Livonia, Michigan and the other in Roanoke,
Virginia. The Livonia office contains executive offices, new customer
development and sales and marketing departments. The Roanoke office contains
the customer service, order processing, billing operation, corporate finance,
and Medicare/Medicaid reimbursement operations. The Company has separated
shipping and warehousing into three regional distribution centers: Roanoke,
Virginia; Livonia, Michigan; and Van Nuys, California.
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The Company distributes to clients of Diabetes Self Care or the individual
participants in medical benefits programs serviced by Healthcare Management
Solutions (collectively "customers") a significant portion of its products by
common carrier and the United States Postal Service. The physician=s profile of
each customer dictates the initial requirements for goods and services ordered
from the Company. Based on this profile, the customer initially receives either
a 30, 60 or 90 day supply of the required products.
The Company maintains two pharmacies, one located in Virginia that is
licensed by the Virginia State Board of Pharmacy, and the other located in
California that is licensed by the State of California Department of Consumer
Affairs - State Board of Pharmacy. These pharmacies are utilized for the
preparation and/or distribution of diabetes-related supplies that are
available either with or without prescription. Neither pharmacy is available
for walk-in sales to customers.
Diabetes Self Care uses the MestaMed operating software for billing. The
Company has a license to operate the system, which is owned and serviced by MCS,
Inc. The Company has a annual service contract with MCS, Inc. for support and
software upgrades. Healthcare Management Solutions utilizes the Sales Ally
software for accumulating health related information and interfaces with
Microsoft's data base for billing. The Company has a license to operate Sales
Ally, which provides free annual technical support for those who have a license
to operate the software.
Products
The primary products sold and distributed by the Company include
prescription and some non-prescription items, including; insulin, syringes,
glucose test strips, glucose monitors, lancets, insulin pumps and diabetes pills
(oral hypoglycemic agents). Glucose strips, blood glucose monitors, syringes
and insulin are the four (4) dominant products distributed by the Company.
Glucose strip sales accounted for over 71% of the Company's consolidated net
sales during Fiscal 1997. The Company employs a staff of 44 product specialist
whose sole purpose is to provide individual in-home or in-hospital customer
training on products. Based upon medical prescriptions received by the Company,
a profile of required products for each customer is maintained and customers
generally are put on a program of scheduled product shipments so that they
receive the necessary diabetes supplies on a regular 30, 60 or 90 day basis.
Marketing and Sales
The Company markets its Diabetes Self Care products and services to
individuals referred by health care professionals: hospitals, clinics, private
physicians, diabetes educators, nurses, dieticians, home care companies, private
charitable organizations. Additionally, with the tremendous growth in the
managed care industry, Healthcare Management Solutions markets the Company's
products to managed care organizations and to large companies that operate
self-insured employee medical benefit programs. Marketing of Diabetes Self Care
products is also effected by placing advertisements in consumer publications,
through local print advertising and
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word of month. Marketing of the Healthcare Management Solutions program is
effected by building upon awareness of the Diabetes Self Care program, as well
as through attendance at National trade shows for the health care industry to
gain additional exposure to referral sources. The Company's products and
services are currently sold to customers in all 50 states through the efforts of
the Company's 19-person internal sales force and 15 outside sales
representatives, each with an assigned territory. Sales representatives also
involve themselves in community activities related to diabetes education and
in-home diabetes care.
The Company's sales representatives for Diabetes Self Care products are
responsible for contacting existing customer referral sources, developing new
referral sources while maintaining the existing client bases in their assigned
territories, and promoting the Company's scheduled product shipment program and
other services. All sales representatives complete a formal educational training
program that encompasses an overview of diabetes, the industry and its
operations. The sales representatives become familiar with the features and
operating procedures of the products that they sell. They are educated with
respect to the Company's policies and procedures of training customers and the
Company's operations.
Payment for scheduled, home delivery of products is made by the customer's
assignment of health benefits from the following health care programs-- Medicare
Part B, Medicaid (Medi-Cal for California residents eligible for Medicaid
benefits), or third party insurance companies--or by direct payment from
individual customers or health maintenance or self-insured organizations. The
sales price of the Company's Diabetes Self Care products is adjusted for any
contractual allowances required by Medicare Part B or Medi-Cal. Other than
contractual allowances, any difference between the product purchase price and
the reimbursement amount received by the Company is billed directly to the
customer or that customer's secondary insurance carrier for further collection.
The Company sells its Healthcare Management Solutions managed care program
to health organizations and large self-insured companies principally through the
efforts of sales representatives and the Company's senior management who work to
generate long-term contracts to provide diabetes-related products to members of
HMOs and employee participants in self-insured company health plans.
Upon the referral of a potential customer to either the Diabetes Self Care
or Healthcare Management Solutions program, the Company's sales representatives
verify the insurance coverage or other benefits and arrange for a personal visit
with the customer by a Company training representative. Normally, the customer
has just been diagnosed as having diabetes and the representative provides
emotional support as well as demonstrated experience that the disease can be
controlled, with the intent of instilling confidence that the customer can lead
a normal lifestyle. The training representative will review the physician's
order in detail with the individual for the types of products to be used and
the frequency of blood glucose testing to be performed. Based on this profile,
the representative will make recommendations regarding procedures to be
followed. The training representative provides detailed instruction on the
proper use of the blood glucose testing monitor and on the proper
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method to administer insulin. The customer will be encouraged to participate in
the Company's regularly scheduled supply maintenance program so that he or she
can receive necessary supplies on a periodic basis, subject to adjustment as
ongoing needs change.
The Company also provides mail order services, without further
consultation, to customers already experienced in handling the treatment of
diabetes. Following the initial order, the representative will periodically
contact the customer to determine further requirements.
Suppliers
The Company purchases prescription and non-prescription drugs and medical
products directly from manufacturers and wholesalers. The availability and
prices of products distributed by the Company are subject to market conditions.
When available, the Company takes advantage of special discounts offered by
suppliers. The Company's largest four suppliers during Fiscal 1997 were
LifeScan, Inc., from which the Company purchased approximately $10,686,000 of
inventory (56% of total purchases), Boehringer Mannheim, from which the company
purchased approximately $2,884,000 of inventory (15% of total purchases),
McKesson Wholesale, Inc., from which the Company purchased approximately
$1,558,000 of inventory (8% of total purchases) and Barnes Wholesale, Inc., from
which the Company purchased approximately $1,100,000 of inventory (6% of total
purchases).
The Company's largest four suppliers during the fiscal year ended June 30,
1996 ("Fiscal 1996") were LifeScan, Inc., from which the Company purchased
approximately $11,000,000 of inventory (53% of total purchases), Boehringer
Mannheim, from which the company purchased approximately $3,775,000 of inventory
(18% of total purchases), McKesson Wholesale, Inc., from which the Company
purchased approximately $3,505,000 of inventory (17% of total purchases) and
Medisense, Inc., from which the Company purchased approximately $838,000 of
inventory (4% of total purchases).
The Company's credit terms with its principal suppliers are standard
wholesale terms in the pharmaceutical industry, which is (i) a maximum of 25
days post-shipment cash payment if purchased from distributors (ii) or 30, 60
and 90 day terms with products purchased directly from manufacturers, depending
upon the products purchased.
Competition
There are numerous other companies on a local, regional and national level
throughout the United States that sell products and services to individuals with
diabetes. Although all of these companies deliver similar products to
individuals with diabetes, there are three different primary services that
differentiate the Company's products from those of other companies. These
include home delivery and training with follow-up monthly maintenance
deliveries, mail-order sales and managed care long-term contracts. The primary
service, home delivery and training, involves an individual visit with the
customer by a
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Company representative. The physician's order is reviewed, and specific
training on the use of the recommended products and advice on record-keeping,
diet and a variety of related subjects is provided. The customer is then
entered into a monthly maintenance program for supplies and is monitored on an
ongoing basis. The Company also provides non-scheduled mail-order services for
customers requiring individual purchases. Along with home delivery and training
services and mail order services, the Company provides complete insurance
reimbursement processing services so that the customer is not required to submit
insurance claims and wait for reimbursements.
National retail chain stores and pharmacies such as Price Club, K-Mart,
Wal-Mart, Revco and RiteAid, regional chains such as Duane Reade, and local
retailers sell many of the same diabetes supplies and equipment as those sold by
the Company. Many of the national and regional companies are more
well-established, larger and better financed than the Company. These companies
utilize their reputations and substantial marketing resources to attract
consumers with diabetes. However, retailers and pharmacies frequently have a
limited selection of products, and provide little or no training or follow-up in
the use of products by individuals suffering from diabetes. These retailers may
not offer third-party billing services, forcing the customer to pay for products
themselves and wait for subsequent reimbursement, even though the customer may
have insurance that covers all or a portion of the cost of the supplied
products.
The total number of retail competitors is large, and the market for
diabetes related products is fragmented because of its size and the low barriers
to entry. Company management believes that the number of companies in the
current market that offer either home delivery and training services, or
mail-order services, along with third-party insurance reimbursement processing
services, has been reduced slightly. This apparent reduction is believed to be
primarily the result of mergers and acquisitions and reductions in reimbursement
levels for insurance reimbursement (including Medicare and Medicaid). This
latter aspect of the Company's business is characterized by higher barriers to
entry due to the specialization of operations related to the processing of
third-party claims and high entry level costs. No new major competitors in this
aspect of the business have been identified over the past 12 months. Major
current competitors in this aspect of the Company's business would include
Liberty Medical and Diabetes Support Services, both located in Florida, Ideal
Diabetic in southern California, and Diabetes Control Center located in Texas.
Most companies that specialize in diabetes related products are local operations
that are not adequately capitalized, nor do they possess the specialized staff
or technology to effectively manage high volumes of third-party insurance
reimbursement claims.
Management believes that the Company's selling strategy, high customer
service emphasis, sophisticated direct third-party billing knowledge, managed
care program access and ability to sell its products through both mail and full
service home delivery provides the Company with a competitive advantage in the
marketplace.
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Patents and Trademarks
The Company possesses no patents, and does not possess federal trademark
protection for any logos that are material to its business. The Company
conducts its pharmacy and mail order operations under the name "Diabetes Self
Care", for which it has not filed for trademark protection. The Company
conducts its managed care program operation under the names "Healthcare
Management Solutions" and "Universal Rx", for which it has not filed for trade
mark protection.
The Company is not a party to any agreements pursuant to which it either
licenses the use of its name or any part of its operational methods to any third
party, or obtains a license to use the name or operational methods of any other
person.
Employees
As of August 31 1997, the Company employed approximately 315 full-time
employees. Of that number, 8 employees are in senior management, 78 are in
sales and marketing, and sales support, and 229 are in reimbursement and billing
services operation, general administration and corporate operations.
None of the Company's employees' are covered by collective bargaining
agreements. The Company believes its relations with employees are good.
Government Regulation
The health care industry, including the sale of diabetes products and
services, is subject to extensive public interest and governmental regulation on
both federal and state levels.
Third-Party Reimbursement Generally. Medicare Part B and Medicaid are
government funded health insurance programs. While Medicare Part B provides
federally-funded health insurance coverage for persons age 65 or older and for
certain disabled persons, the Medicaid program is administered and funded by
state governments and provides fully-paid health coverage to participants in the
Aid to Families with Dependent Children program (most commonly known as
"Welfare"). Medicare Part B and Medicaid provide reimbursement for certain of
the services, supplies and items provided by the Company, with such coverage of
the services and supplies which the Company provides being subject to extensive
regulation. The levels of reimbursement paid or payments made by such programs
are often lower than the levels of reimbursement paid by other third-party
payers, such as traditional indemnity insurance companies.
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The following table sets forth certain information with respect to the
percentage of the Company's revenues attributable to various reimbursement
sources:
________________________________________________________________________________
________________________________________________________________________________
Year Ended Year Ended
June 30, 1997 June 30, 1996
Private payers, including
insurance companies........... 18% of Total Sales 19% of Total Sales
Medicare Part B, Medicaid and other
governmental programs......... 71% of Total Sales 69% of Total Sales
Managed care contracts........ 11% of Total Sales 12% of Total Sales
100% of Total Sales 100% of Total Sales
________________________________________________________________________________
________________________________________________________________________________
The Company accepts assignment of Medicare Part B and Medicaid claims, as
well as claims with respect to other third-party payers, on behalf of its
patients whenever the reimbursement coverage is adequate to ensure payment of
the patient's obligations. The Company processes its customers' claims, accepts
payment at prevailing and allowable rates, and assumes the risks of delay or
non-payment for improperly billed services which are determined by the
third-party payor as being medically unnecessary. The Company employs the
administrative personnel necessary to transmit claims for product cost
reimbursement directly to private health insurance carriers, and seeks payment
for any non-reimbursed costs directly from patient-customers. No assurance can
be given that a significant number of future requests for reimbursement will not
be denied, although the company believes that its policies, procedures, and
prices currently minimize this risk. See "Item 3., Legal Proceedings."
Like other health care companies, the Company's revenue and profitability
are adversely affected by the continuing efforts of third-party payers
(including Medicare, Medicaid and managed care companies) to contain or reduce
the costs of health care by lowering reimbursement rates, increasing case
management review of bills for services and negotiating reduced contract
pricing. As expenditures in the home health care market continue to grow,
initiatives aimed at reducing the costs of product and service delivery in that
market are increasing.
Medi-Cal Program. The Company is approved by the State of California
Health and Welfare Agency, Department of Health Services (Medi-Cal) as a
supplier of pharmaceutical drugs, equipment and supplies to Medi-Cal qualified
patients. The Company is able to take assignments from Medi-Cal patients of
claims for cost reimbursement, and it submits such claims to Medi-Cal following
sales of products and services to covered persons. The Medi-Cal program
pre-determines the dollar amounts with respect to which product and service
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reimbursements will be made, and The Company accepts such reimbursement payments
in full satisfaction of patient accounts.
The California Department of Health Services is currently following a
pricing guideline which uses Average Wholesale Prices (AWP) plus 25% plus a
dispensing fee. The prices attainable using these guidelines provide
satisfactory profit margins from sale of products to Medi-Cal recipients. The
State of California has approved medical supplies, such as diabetes supplies, as
part of the reimbursable formulary for its budget year which began on July 1,
1997. The California Department of Health Services has announced it's intention
to move Medi-Cal recipients toward a managed-care system in the future and has
initiated this program in several counties. Management believes that it can
establish programs which can be marketed to the managed-care providers when this
transition is implemented, although there is no assurance that such will occur
and that the Company will not be materially affected by such a change in
reimbursement policy.
Medicare Part B Program. The Company is a participating Medicare part B
provider. As a Medicare provider, the Company can provide equipment and
supplies to Medicare beneficiaries, and obtain reimbursement directly from the
Medicare intermediaries. Medicare itself sets guidelines for the types and
quantities of equipment and supplies, the costs of which are reimbursable under
the Medicare program. In the event that full reimbursement is not obtained
through Medicare, patient-customers are personally responsible for full payment
either through secondary private insurance coverage or otherwise.
State Licensing and Regulation. Certain operations of the Company may be
subject to state and local regulation. Management believes that all of the
Company's present operations are substantially in compliance with such state and
local laws and regulations. See, Item 3, "Legal Proceedings." To the extent
the Company engages in new activities or expands current activities into new
states, the cost of compliance with applicable state and local regulations and
licensing requirements cannot be determined with any certainty at this time.
Insurance Coverage
Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have
become subject to an increasing number of lawsuits, many of which involve large
claims and significant defense costs. The Company may from time to time be
subject to such suits as a result of the nature of its business. The Company
maintains general liability insurance, including professional and product
liability, in an amount deemed adequate by management. There can be no
assurance, however, that claims in excess of the Company's insurance coverage
will not arise. In addition, the Company's insurance policies must be renewed
annually.
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The Company has a comprehensive general umbrella liability insurance policy
covering all its operations. This policy has coverage limits of $10,000,000 for
each occurrence, and $10,000,000 in aggregate for products liability, general
liability and malpractice claims.
The Company believes that its insurance coverage is customary in amount and
consists of such other terms and conditions as are generally consistent with
industry practice.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company does not own any of the properties from which it conducts
business. The following table sets forth information as to the material
properties which the Company leases.
Expiration Annual Size/Square Purchase
Location and Use Date Rental Feet Options
6442 Coldwater Canyon #204 September 15,
North Hollywood, CA 91606 1998 $9,240 825 No
(sales office)
5946 Kester Avenue October 31,
Van Nuys, CA 91411 1997 $26,088 3,500 No
(warehouse)
990 Highland Dr. Suite 104 A July 1, 1998 $8,100 490 No
Solana Beach, CA 92075
(sales office)
11585 Farmington Road September $110,244 6,600 Yes
Livonia, MI 48150 2002
(Principal executive office and
administration)
10957 Farmington Road November $22,353.60 2,006 No
Livonia, MI 48150 30, 1997
(warehouse)
11955 Farmington Road month to $8,400 1,000 No
Livonia, MI 48150 month
(sales offices) lease
3601 Thirlane Road November $208,632.12 23,762 No
Valley Court, Ste #4 & #5 2000
Roanoke, VA 24019
(operations offices and warehouse)
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ITEM 3. LEGAL PROCEEDINGS
Department of Health Services
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 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 appealed the audit determination made by the
State Controller's Office. In January 1996 a hearing was held before an
Administrative Law Judge. In July 1996 the Judge recommended that the
overpayment determination be upheld. In August 1996 the DHS adopted the
recommendation of the Law Judge as the final decision of the Director of DHS.
In January 1997 the Company filed an appeal to the decision with the Superior
Court for the County of Los Angeles. The Company intends to vigorously contest
any recovery by the State with respect to such alleged improper pricing
practices for services rendered.
Based upon the above contingency, the Company has provided a reserve, in
the event that a defense of its position does not prevail, of $700,000. The
Company had previously provided a combined reserve with the California State
Board of Equalization matter (below) in the amount of $1,630,000. Due to the
defined settlement amount on the other matter, the reserve has been allocated
among the two actions. Management believes that a total estimated settlement
amount of $700,000, or 54% of the maximum amount demanded, is reasonable under
the circumstances with respect to this matter.
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California State Board of Equalization
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 (see Department of Health Services above). The SBE has
disagreed with the Company's policies regarding its sales tax payments on
certain items. The SBE has maintained that blood glucose meters, testing strips
and finger-prick lancets are taxable items. The Company has taken the position
that these items are exempt from sales tax because they were provided pursuant
to a doctor's prescription and furthermore, they are part of an integrated
treatment for providing insulin and insulin syringes, items which are
specifically exempt from sales tax in California. In addition, the Company
maintains that a portion of the revenues earned from the sales of diabetic
supplies were non-taxable services rendered as a separate and distinct charge.
On January 6, 1997 the SBE issued a Notice of Determination of $860,004
for the period July 1, 1989 through September 30, 1993. Of this amount,
penalties of $69,170 were subsequently waived. Additionally, interest has
accrued on this assessment of $186,330. The Company filed for appeal of this
assessment. The matter was referred to the SBE settlement department and
Company management determined that it would be in the Company's best interest
to arrive at a final negotiated settlement amount. On April 24, 1997, the
Company agreed to a settlement of this matter for a total amount of $980,000.
Of this amount, $50,000 had previously been paid. Of the remaining
$930,000, $691,695 is associated with taxes and $238,305 is associated with
accrued interest. On August 1, 1997 the members of the Board of Equalization
have approved the Settlement Agreement signed by the Company on April 24,
1997. Under the terms of the settlement, the full $930,000 accepted in
settlement will be payable in installments: $300,000 was paid on September 8,
1997, $63,000 was paid on September 30, 1997, and monthly installments of
$63,000 to be paid on the last day of each succeeding month until the
liability, plus accrued interest, is repaid through June 30, 1998.
Medicare Part B
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
inappropriately made reimbursements on these charges. In November 1996 Medicare
issued a demand for refund of $795,702 plus interest of $35,475. In January
1997 Medicare began to offset the
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Company's claims for payment, and the interest charged to the Company's
account. The balance claimed in the most recent correspondence from Medicare
to be owed by the Company on March 31, 1997 was $808,887, of which $795,701
was principal and $22,290 was accrued interest. The Company rebilled
Medi-Cal $732,853 in February and in March $62,849. Company management feels
that the ultimate settlement to Medicare will not have a material impact on
earnings since the Company will collect any amounts paid to Medicare out of
amounts collected after rebillings to Medi-Cal.
Patient Care Services was previously the subject of an investigation by
Medicare for (i) Medicare's alleged overpayment for products and services
provided by Patient Care Services and (ii) Medicare's payment to the Patient
Care Services for claims which were allegedly not properly subject to Medicare
reimbursement. During fiscal 1995, Medicare withheld $300,766 of payments due
for claims reimbursement to cover previously estimated liabilities resulting
from this investigation. A further assessment in the amount of $78,500
resulting from a continuation of this investigation has been made, and that
amount withheld in July 1996. The Company went through an in-person hearing on
May 28, 1997 to contest Medicare's aggregate $379,000 of withheld
reimbursements, and the results were upheld. The Company's intends to appeal
the Hearing Officers decision and has retained counsel to contest the decision
in proceedings before an administrative law judge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
(The remainder of this page has been intentionally left blank)
-15-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The principal market for trading the Company's securities is the Nasdaq
Small Cap Market ("Nasdaq"), although the Company's Common Stock and Class A
Warrants are also traded on the Boston Stock Exchange.
PRICE RANGE OF OUTSTANDING COMMON STOCK
On December 18, 1992, the Common Stock began trading on Nasdaq and has
been quoted on Nasdaq at all times since that date.
The following table sets forth the high and low bid prices for each
fiscal quarter during the fiscal years ended June 30, 1996 and 1997, as
reported by Nasdaq. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and do not necessarily represent
actual transactions.
<TABLE>
High Bid Low Bid
-------- -------
<S> <C> <C>
Fiscal year ended June 30, 1996
-------------------------------
First Quarter ended September 30, 1995..... 3-1/2 2-7/16
Second Quarter ended December 31, 1995..... 2-11/16 1-5/8
Third Quarter ended March 31, 1996......... 4 1-7/8
Fourth Quarter ended June 30, 1996......... 3-13/16 2-1/2
Fiscal year ended June 30, 1997
-------------------------------
First Quarter ended September 30, 1996..... 2-7/8 2-1/4
Second Quarter ended December 31, 1996..... 3-1/2 2
Third Quarter ended March 31, 1997......... 4-1/8 2-3/4
Fourth Quarter ended June 30, 1997......... 3-3/16 2-11/16
</TABLE>
On September 12, 1997, the last trade price for a share of the Common
Stock was $2-1/2, as reported on Nasdaq, and the Company had 89 shareholders
of record.
-16-
<PAGE>
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future, but rather
intends instead to retain future earnings, if any, for reinvestment in its
business. In addition, on August 30, 1996, the Company made its first
borrowing under a Loan and Security Agreement, dated as of August 15, 1996
(the "Loan Agreement") with the Company's line of credit agreement with
HealthPartners Funding, L.P. (the "Loan Agreement") forbids the future
payment of dividends and redemption payments to holders of the Company's
Common Stock without consent of HealthPartners Funding L.P.
("HealthPartners"). Such agreement does permit dividend and redemption
payments to the Company's preferred stockholders, for which the Company is
currently obligated. See, Item 6., "Management's Discussion and Analysis Of
Financial Condition and Results Of Operations -Liquidity and Capital
Resources." Any future determination to pay cash dividends will be in
compliance with the Company's contractual obligations, and otherwise at the
discretion of the Board of Directors and based upon the Company's financial
condition, results of operations, capital requirements and such other factors
as the Board of Directors deems relevant.
The Company has issued and outstanding 1,580,000 shares of Preferred
Stock, which Preferred Stock consists of Series A and Series B Preferred
Stock. An aggregate sum of 464,000 shares of Series A Redeemable Preferred
Stock, $.0001 par value per share (the "Series A Preferred Stock") are
outstanding, which shares of Series A Preferred Stock are subject to: (i) a
liquidation and redemption preference of $5.00 per share; (ii) mandatory
redemption at the rate of 116,000 shares of Series A Preferred Stock
($580,000) per annum, redeemable in monthly portions of the full $580,000
annual amount (commencing October 31, 1995), or in a single redemption
payment of $580,000 per annum, at the Company's election based upon available
cash flow; (iii) the right to vote, together with the Common Stock as a
single class, for the election of directors and all other matters on which
stockholders of the Company are entitled to vote; and (iv) no payment of any
dividend. 138,850 shares of Series A Preferred stock have been redeemed
through June 30, 1997.
An aggregate of One Million (1,000,000) shares of Series B Redeemable
Preferred Stock, $.0001 par value per share (the "Series B Preferred Stock"),
are outstanding, which shares of Series B Preferred Stock are subject to: (i)
a liquidation preference of $1.00 per share ($1,000,000), subject and
subordinated only to the Series A Preferred Stock; (ii) payment of annual
cumulative dividends on September 30th of each year, commencing September 30,
1996, of $.02 per share ($20,000) for the period from April 25, 1995 through
June 30, 1996, $.03 per share ($30,000) for the year ending June 30, 1997,
$.04 per share ($40,000) for the year ending June 30, 1998, $.05 per share
($50,000) for the year ending June 30, 1999, $.06 per share ($60,000) for the
year ending June 30, 2000, and $.12 per share ($120,000) thereafter;
provided, that such annual cash dividend is payable only if the consolidated
pre-tax income of the Company and its subsidiaries shall exceed $500,000 in
the fiscal year ending immediately prior to the relevant September 30th
payment date; (iii) being convertible at any time at the option of the holder
into Common Stock of the Company at a
-17-
<PAGE>
conversion ratio of one share of Common Stock for every two (2) shares of
Series B Preferred Stock so converted (a maximum of 500,000 shares of Common
Stock); (iv) the right to vote, together with the Common Stock as a single
class, for the election of directors and all other matters on which
stockholders of the Company are entitled to vote; and (v) redemption, at the
sole option of the Company at any time commencing June 30, 2000, on 30 days'
prior written notice given by the Company, if the average of the closing bid
price of the Common Stock, as reported on The NASDAQ SmallCap Market (or the
last sale price of the Common Stock, if then traded on The NASDAQ National
Market System or another national securities exchange) during the 20
consecutive trading days ending on the third day prior to the date on which
notice of redemption is given shall equal or exceed $4.00 per share, with the
holders having the right to convert all or any portion of their Series B
Preferred Stock into Common Stock at any time after receipt of notice of
redemption and prior to the date fixed for redemption.
Messrs. Brian Bookmeier, Alan Korby and Matthew B. Gietzen own all of the
Company's outstanding shares of Preferred Stock. See Part III, "Item 9.,
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16 (a)" and "Item 11., Security Ownership of Certain Beneficial
Owners and Management."
(The remainder of this page has been intentionally left blank)
-18-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in the Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result"
and "the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales.
<TABLE>
Year Ended June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales................................... 100.0% 100.0%
Cost of sales............................... 58.8 62.1
-------- --------
Gross profit................................ 41.2 37.9
Selling, general & administrative........... 46.5 41.4
Restructuring costs......................... 0.0 (0.3)
Provision for State Audits.................. 0.0 0.0
-------- --------
Income (loss) from operations............... (5.3) (3.2)
Chrgs/writeoff terminated A/R sales mgmt.... 0.0 2.1
Interest expense............................ 2.5 1.7
-------- --------
Loss before income tax benefit.............. (7.8) (7.0)
Income Tax Benefit.......................... 0.0 0.0
-19-
<PAGE>
Net income (loss)........................... (7.8)% (7.0)%
-------- --------
-------- --------
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Revenue for the year ended June 30, 1997 ("Fiscal 1997") was
$34,001,626, a decrease of $2,255,789 or 7% from the year ended June 30, 1996
("Fiscal 1996"). Diabetes Self Care accounted for approximately $1,900,000
of the decrease. A contributing factor to the decrease is the discontinuance
of sales to certain unprofitable customers, approximately $ 1,300,000 in net
revenue in Fiscal 1997, but which discontinuance only reduced revenue by
$50,000 in Fiscal 1996. Additionally, the Company had no net revenue
associated with the Company's discontinued retail store operations in Fiscal
1997, as compared to $138,000 of such revenue in Fiscal 1996. Customer
refunds increased $119,000 in Fiscal 1997, or 6%, from Fiscal 1996. Managed
care business accounted for approximately $355,800 of the decrease in
revenues from Fiscal 1996. A contributing factor of such revenue is the
discontinuance of sales to certain unprofitable customers, approximately
$170,000 in net revenue in Fiscal 1997, compared to $15,000 in Fiscal 1996.
Approximately 71% of the Company's sales is reimbursed under the Federal
Medicare Part B or State Medicaid programs. Presently, reimbursement rates
are declining and this trend could have a negative impact on the Company's
future revenue.
Total cost of goods sold for Fiscal 1996 was over 62% of revenue,
while total cost of goods sold for Fiscal 1997 was $19,981,506, or
approximately 59% of revenue. This three point improvement as a percentage
of revenue is in part the result of favorable product discounts from various
vendors, as well as reduced sales of unprofitable products and services.
Total material costs during Fiscal 1997 was $ 19,126,146, compared to $
21,542,863 in Fiscal 1996, or a decrease of 12%. Additionally, the Company
continues to realize favorable variances regarding total cost of packaging.
Total packaging costs in Fiscal 1997 were $52,000 compared to $97,000 in
Fiscal 1996.
Selling, general and administrative expenses for Fiscal 1997 were
$15,798,780, or 46% of revenue, as compared to $15,022,290, or 41% of revenue
for Fiscal 1996. This increase as a percent of revenue is primarily due to:
higher fees charged by HealthPartners of $332,046, an increase of $254,313,
compared to Fiscal 1996; an increase to management consulting services to
$140,628, an increase of $111,343, compared to Fiscal 1996; an increase to
late fees of $110,245, an increase of $66,753, compared to Fiscal 1996; and
an increase to charitable donations to $63,625, or an increase of $59,811,
compared to Fiscal 1996.
Net loss for Fiscal 1997 was $2,653,231, as compared to a net loss
of $2,532,238 for Fiscal 1996. This increase is primarily due to the
increase in selling, general and administrative expenses, financing fees and
interest expense, and other factors identified above.
-20-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In May 1997, the Company completed a private placement of 500,000 shares
of Common Stock at $2.00 per share to accredited investors. Fees associated
with the private placement were $100,000.
In June 1997, the Company converted an aggregate of $ 2,018,829 of
Company indebtedness held by Messrs, H.T. Ardinger and Fred Kassner,
principal stockholders of the Company, into shares of common stock. The
Company had issued a $500,000 principal note, accruing interest at 10% per
annum and maturing on February 21, 1998, to Mr. Ardinger. Mr. Ardinger was
paid $ 71,156.54 in cash with respect to accrued interest, and the Company
converted the $500,000 of unpaid principal into 250,000 shares of common
stock at $2.00 a share. The Company had issued a $1,473,518 principal note
to Mr. F. Kassner, accruing interest at a rate of prime plus 2% and maturing
July 14, 1997. The aggregate of $1,518,829 of accrued interest and unpaid
principal was converted by Mr. Kassner into common stock at $2.00 a share.
The total amount of indebtedness converted to common stock by Messrs.
Ardinger and Kassner was $2,018,829, and 1,009,415 shares of common stock
were issued. Commission associated with the debt conversion was paid through
the issuance of 50,458 shares of common stock. In June 1997, the Company
also completed an additional private placement of 250,000 shares of Common
Stock at $2.00 per share, paid in cash from Mr. Ardinger.
On April 24, 1997 the Company agreed to a settlement with the State Board
of Equalization for a total amount of $930,000. Under the terms of the
settlement, $300,000 was paid on September 8, 1997, $63,000 was paid on
September 30, 1997, and monthly installments of $63,000 to be paid on the
last day of each succeeding month until the liability, plus accrued interest,
is repaid through June 30, 1998.
Shares of common stock sold in the May and June 1997 private placements
and indebtedness conversion are subject to "piggyback" registration rights.
The Company received cash proceeds of $1,400,000 from the sale of shares in
these private placements. Commission associated with this private placement
were paid by the issuance of 75,458 shares of common stock and the cash
payment of $100,000.
In February 1994, pursuant to agreements executed in December 1993, all
of the shares of capital stock in Patient Care Services held by Ms. Barbara
Milinko, a former principal shareholder of such company, were purchased in
equal portions by Messrs. Korby, Bookmeier and Gietzen, the principal
shareholders of Patient Care Services at the time of the merger Patient Care
Services with the Company in April 1995 (the "Merger"), for an aggregate of
$325,000 (the "Stock Note"). At the same time that Ms. Milinko sold her
shares, Patient Care Services became obligated to pay her $825,000 in accrued
compensation (the "Accrued Compensation"), of which $130,000 was paid at
closing and the $695,000 balance became payable in 102 monthly installments
of $6,813 through 2003. In June 1995, $150,000 of the Accrued compensation
was prepaid to Ms. Milinko in consideration of her consent to the Merger with
Patient Care Services, which consent was required under the terms of
applicable agreements. As of June 30, 1997, a $195,632 balance was due to
Ms. Milinko.
Pursuant to a Stock Purchase Agreement, dated April 26, 1996, the Company
acquired all of the outstanding capital stock of P.C.S. Northfield, Inc., a
company engaged in the marketing
-21-
<PAGE>
and sale of products used in the treatment of diabetes. Prior to the
acquisition, the Company had provided administrative services, including
billing and receivables collection, to P.C.S. Northfield, Inc. The purchase
price for stock acquired was a $350,000 three-year promissory note, bearing
10% annual interest, with equal monthly payments of principal and interest
equal to $10,413 per month. The seller also received 32,278 shares of
Company Common Stock. As of June 30, 1997, $199,855 was due on this note.
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 minus a reserve on account of certain contingent liabilities of
the Company, including certain California audits and proceedings (which
reserve was initially fixed at $1,500,000, subject to reduction in the event
and to the extent that the subject contingencies are resolved). 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.
On November 4, 1996, HealthPartners amended the Loan Agreement
("Amendment No. 1") to reduce the initial reserve of $1,500,000 to $100,000
and to make available to the Company a maximum loan amount of $4,500,000. In
consideration for the supplemental $1,400,000 in financing, HealthPartners
was issued warrants to acquire 225,000 shares of common stock at a exercise
price $2.25 per share expiring March 18, 2002.
On March 14, 1997, HealthPartners amended the Loan Agreement (Amendment
No. 2") to make available an increase in the $4,500,000 line of credit to a
maximum of $7,500,000 through June 18, 1997. In consideration for the three
month increase in the line of credit, the Company paid additional
administrative fees to HealthPartners of $ 10,000.00.
On June 20, 1997, HealthPartners amended the Loan Agreement (Amendment
No. 3") to make available an increase in the $4,500,000 line of credit to a
maximum of $6,200,000 through September 22, 1997. In consideration for the
three month increase in the line of credit, the Company paid additional
administrative fees to HealthPartners of $ 15,000.00.
On September 25, 1997, HealthPartners amended the Loan Agreement
(Amendment No.
-22-
<PAGE>
4") which contained a financial covenant that the Company will achieve net
income of at least $500,000 for its fiscal year ending June 30, 1997. In
consideration for the wavier, the Company paid additional administrative fees
to HealthPartners of $ 2,500.00. The agreement now contains a financial
covenant (8.1.t), which requires that the Company's net income for its fiscal
year ended June 30, 1998 be no lower than $0 (zero).
CASH FLOW
As of June 30, 1997 Universal had working capital of $3,128,805
compared to a working capital of $296,968 at June 30, 1996. The increase in
working capital during the year is primarily due to the conversion of
$1,473,518 of indebtedness to common stock, gross proceeds from two private
placements of common stock aggregating $1,500,000 and borrowing under the
revolving credit line, which are classified as long term debt which enabled
the Company to significantly reduce short term payables.
As of June 30, 1997, Universal had $541,814 in cash, compared to cash of
$91,066 at June 30, 1996. This increase in cash results from $ 4,947,461
provided by financing activities, $273,021 used by investing activities and $
4,223,692 used by operations.
Accounts receivable for the Company increased by only $40,818 during the
fiscal year ended June 30, 1997. The principal means by which accounts
receivable experience is measured is the calculation of accounts receivable
days outstanding. The accounts receivable days outstanding in 1997 was 108
days, as compared to 103 days in 1996. This increase is due to lower sales
levels and to slower payment cycles by certain intermediaries, resulting in
less cash on hand and higher receivable levels. The Company also experienced
computer capacity limitations which slowed the collection process on older
receivable accounts. More efficient computer hardware and software upgrades
have been installed allowing the Company to accelerate collection of these
accounts with the expectation of reducing the accounts receivable aging and
size.
The Company is working to meet cash obligations and to continue its
growth by (i) increasing the rate of collection on older accounts receivable,
(ii) decreasing the amount of accounts receivable, (iii) restructuring work
flow to increase efficiency, (iv) controlling expenditures to reduce general
operating costs, (v) expanding the loan facility with HealthPartners and (vi)
exploring the possibility of additional equity offerings. There can be no
assurance that any such steps will be successful.
NET OPERATING LOSSES
The Company has net operating loss carryforwards for tax purposes
totaling $8,257,000 at June 30, 1997, expiring in the years 2004 to 2012.
Substantially all of these carryforwards are subject to limitations on annual
utilization due to "equity structure shifts" or "owner shifts" involving 5%
stockholders (as these terms are defined in Section 382 of the Internal
Revenue Code) which have resulted in a more than 50% change in ownership.
-23-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
Page
Number
--------
<S> <C>
Independent Auditor's Report................. F - 2
Consolidated Balance Sheet as of
June 30, 1997.............................. F - 3
Consolidated Statement of Operations for
the years ended June 30, 1996 and 1997..... F - 4
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
June 30, 1996 and 1997..................... F - 5
Consolidated Statement of Cash Flows for
the years ended June 30, 1996 and 1997..... F - 6-7
Notes to the Consolidated Financial
Statements................................. F - 8-24
</TABLE>
-24-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
Universal Self Care, Inc.
We have audited the accompanying consolidated balance sheet of Universal
Self Care, Inc. and Subsidiaries as of June 30, 1997 and the related statements
of operations, changes in stockholders' equity and cash flows for the years
ended June 30, 1997 and 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 Universal Self Care, Inc.
and Subsidiaries as of June 30, 1997 and the results of its operations and its
cash flows for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.
\s\ Feldman Radin & Co., P.C.
------------------------------
Feldman Radin & Co.,P.C.
Certified Public Accountants
New York, New York
September 22, 1997
F-2
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 541,814
Accounts receivable, net allowance for doubtful
accounts of $2,261,684........................... 10,241,191
Inventories........................................ 551,692
Prepaid expenses................................... 111,910
---------------
TOTAL CURRENT ASSETS............................. 11,446,607
PROPERTY AND EQUIPMENT
net of accumulated depreciation of $618,017......... 956,446
INTANGIBLE ASSETS,
net of accumulated amortization of $806,265 ........ 5,847,321
DEPOSITS AND OTHER ASSETS............................. 48,356
---------------
$18,298,730
---------------
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $5,319,625
Notes payable--current portion........................ 208,126
Accrued liabilities................................... 1,976,419
State audit reserves.................................. 700,000
Payroll taxes payable................................. 113,632
---------------
TOTAL CURRENT LIABILITIES.... 8,317,802
LONG TERM NOTES PAYABLE, net of current portion......... 262,916
REVOLVING CREDIT LOAN................................... 4,365,410
REDEEMABLE PREFERRED STOCK, Series A.................... 1,829,658
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
Common stock, $.0001 par value, 40,000,000 shares
authorized, 9,724,579 shares issued and
outstanding as of June 30, 1997...................... 972
Additional paid-in capital............................. 14,045,838
Accumulated earnings/(deficit)......................... (11,028,866)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... 3,522,944
---------------
---------------
$18,298,730
---------------
---------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUES........................................................................... $ 34,001,626 $ 36,257,415
COST OF GOODS SOLD................................................................. 19,981,506 22,504,611
------------- -------------
GROSS PROFIT..................................................................... 14,020,120 13,752,804
------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 15,798,780 15,022,290
RESTRUCTURING CHARGES.............................................................. -- (100,507)
------------- -------------
15,798,780 14,921,783
------------- -------------
OPERATING INCOME/( LOSS)........................................................... (1,778,659) (1,168,979)
OTHER EXPENSES:
Charges and writeoffs in connection with terminated accounts receivable sales
agreement...................................................................... -- 747,707
Interest expense, net............................................................ 874,572 615,552
------------- -------------
874,572 1,363,259
------------- -------------
NET INCOME/( LOSS)................................................................. $ (2,653,231) $ (2,532,238)
------------- -------------
------------- -------------
NET INCOME/(LOSS) PER SHARE........................................................ $ (0.35) $ (0.40)
------------- -------------
------------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION.............................. 8,084,278 6,843,943
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES B COMMON STOCK ADDITIONAL TOTAL
-------------------- ---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- --------- --------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--June 30, 1995................... 1,000,000 $ 505,000 6,149,057 $ 615 $8,607,951 $(5,420,132) $3,693,434
Shares issued to employees........... 148,000 15 147,985 148,000
Shares issued upon exercise of Bridge
lenders' warrants.................. 222,223 22 (22)
Warrants issued in connection with
private financing.................. 216,028 216,028
Debt converted as consideration for
exercise of options................ 150,000 15 149,985 150,000
Exercise of Class B Warrants......... 344,720 34 517,046 517,080
Shares issued for acquisition........ 32,278 3 149,997 150,000
Options exercised for cash........... 100,000 10 149,990 150,000
Debt converted as consideration for
exercise of options................ 667,655 67 776,415 776,482
Shares issued in settlement of note
payable............................ 74,073 7 99,993 100,000
Dividends paid on Preferred Stock
Series A........................... (211,485) (211,485)
Various expenses associated with
stock issuances.................... (162,572) (162,572)
Write off of discount associated with
warrants issued in private
financing upon early retirement of
debt............................... (29,000) (29,000)
Net loss............................. (2,532,238) (2,532,238)
--------- --------- --------- ----- ---------- ------------ ------------
Balance--June 30, 1996................... 1,000,000 505,000 7,888,006 788 10,623,796 (8,163,855) 2,965,729
Shares issued in connection with
private offering................... 500,000 50 999,950 1,000,000
Shares issued in connection with
private offering................... 250,000 25 499,975 500,000
Debt converted as consideration for
exercise of options................ 1,009,415 101 2,018,729 2,018,830
Dividends paid on Preferred Stock
Series A........................... (211,780) (211,780)
Various expenses associated with
private placement.................. (100,004) (100,004)
Various expenses associated with
consulting services................ 1,700 0 3,400 3,400
Shares issued in connection with
expenses associated to debt
convertion......................... 75,458 8 (8)
Net loss............................. (2,653,231) (2,653,231)
--------- --------- --------- ----- ---------- ------------ ------------
Balance--June 30, 1997............... 1,000,000 $ 505,000 9,724,579 $ 972 $14,045,838 ($11,028,866) $3,522,944
--------- --------- --------- ----- ---------- ------------ ------------
--------- --------- --------- ----- ---------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/( loss)............................... $(2,653,231) $ (2,532,238)
------------- --------------
Adjustments to reconcile net income/(loss)
to net cash from operating activities:
Depreciation and amortization................ 651,151 549,083
Loss on disposal of fixed assets............. -- 23,632
Changes in operating assets and liabilities:
Increase in accounts receivables............... (40,818) (1,043,823)
(Increase) decrease in inventories............. (538) 803,778
Decrease in prepaid expenses................... 24,126 179,498
Decrease in deposits and other assets.......... 7,848 153,464
(Increase) in intangible assets................ (7,664) --
(Decrease) increase in accounts payable........ (1,367,387) 1,480,836
(Decrease) increase in accrued
liabilities.................................. 343,508 555,452
(Decrease) increase in payroll taxes
payable...................................... (480,686) 594,318
(Decrease) in state audit reserves............. (700,000) --
------------- --------------
Total adjustments............................ (1,570,461) 3,296,238
------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES........ (4,223,692) 764,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (273,021) (585,697)
Net cash paid for acquisitions................... -- (194,306)
------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES........ (273,021) (780,003)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance/(Repayments) of related party loans..... (60,000) (100,000)
Borrowing of revolving credit line............... 4,365,410 (884,000)
Issuance of common stock, net of expenses........ 1,403,399 652,508
Proceeds from related party loans................ -- 60,000
Net proceeds from (repayment of) long-term debt.. (133,017) 532,375
Dividends paid on Series A Preferred Stock....... (211,780) (211,485)
Redemption of Series A Preferred Stock........... (416,551) (30,182)
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 4,947,461 19,216
------------- --------------
NET INCREASE (DECREASE) IN CASH.................... 450,748 3,213
CASH AT BEGINNING OF PERIOD........................ 91,066 87,853
------------- --------------
CASH AT END OF PERIOD.............................. $ 541,814 $ 91,066
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and finance charges........................... $ 623,804 $ 664,082
---------- ----------
---------- ----------
</TABLE>
During the year ended June 30, 1997, the Company paid $82,212, income tax.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the year ended June 30, 1996, the Company acquired a Company for
$500,000, of which securities with a total value of $150,000 and a note for
$350,000 were issued.
During the year ended June 30, 1996, the Company acquired a Company for
$609,104, of which $459,104 was covered by a note payable to the Seller.
During the year ended June 30, 1996, an individual exchanged $776,482 of
indebtedness in consideration for the exercise of 450,000 Warrants and 217,655
Class B Warrants to acquire 667,655 shares of common stock .
During the year ended June 30, 1996, a director converted notes of $150,000
as consideration for 150,000 options which were exercised.
During the year ended June 30, 1997, an individual converted notes of
$1,518,830 as consideration for 759,415 shares of common stock.
During the year ended June 30, 1997, an individual converted notes of
$500,000 as consideration for 250,000 shares of common stock.
See notes to consolidated financial statements.
F-7
<PAGE>
UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
Universal Self Care, Inc. (the "Company"), is a Delaware corporation formed
on May 12, 1989. The Company was organized as a holding company and prior to
January 1994 had three wholly-owned subsidiaries: Clinishare Diabetes Centers,
Inc. d/b/a SugarFree Centers, Inc. ("SugarFree"), Superior Care RX, Inc.
("Superior Care RX") and Physicians Support Services, Inc. d/b/a Home Therapy
Services ("Home Therapy").
Home Therapy specializes in providing diabetes supplies and services to
individuals in their homes, including insulin, syringes and other items required
to inject insulin, and provides maintenance services to diabetes patients.
SugarFree operated ten diabetes centers which provided health food and supplies
to individuals with diabetes.
In January 1994, the Company acquired a group of six companies, all of
which were under common control. The six companies were: Fieldcor, Inc.,
Eldercor of Florida, Inc., Eldercor of California, Inc., Medical Accounting
Specialists, Inc., Apperson Pharmacy, Inc., and Diabetic Depot of America Inc. -
collectively known as the Thriftee Group ("Thriftee"). Thriftee is primarily
engaged in the sale of general retail diabetes supplies throughout the United
States. Thriftee currently conducts business under the name "Diabetes Self
Care".
In April 1995, the Company merged a newly formed, wholly-owned subsidiary,
USC-Michigan, Inc., with PCS Management, Inc., a Michigan Corporation ("PCS"),
with USC-Michigan, Inc. as the surviving corporation. This transaction also
resulted in USC-Michigan, Inc. becoming the parent of PCS's wholly-owned
subsidiary, PCS, Inc.-West. PCS is primarily engaged in the sale of general
retail diabetes supplies throughout the United States, and currently conducts
business under name Diabetes Self Care.
In February 1997, the Company formed a new, wholly-owned subsidiary,
Healthcare Management Solutions (HMS), Inc., a Virginia Corporation. HMS
focuses on providing supplies and services to the managed care industry.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated.
B. Revenue Recognition - Patient services revenue is earned from
commercial,
F-8
<PAGE>
Medicaid and Medicare Part B patient treatment charges. Revenue is
recognized at the time the service is rendered or when the
products are shipped. Medicare and Medicaid reimbursements
("Third-Party") are based on allowable charges. The difference
between the Companies' established billing rates and contracted or
anticipated reimbursement rates is recorded as a contractual allowance
and offset against patient revenues. Final determination of
reimbursement is subject to audit and retroactive adjustment by
respective third party intermediaries. Settlements based on Medicare
and Medicaid audits, if any, are recorded in the year they become
known. For each of the years ended June 30, 1997 and 1996,
approximately 95% of revenue was derived from Third-Party
reimbursements programs.
C. Inventories - Inventories consisting of pharmaceutical, health food
products and other diabetes supplies are carried at the lower of cost
(first-in, first-out) or market.
D. Property and Equipment - Property and equipment is stated at cost and
is depreciated on a straight-line basis over the estimated useful
lives of the assets. Leasehold improvements are amortized over the
terms of their respective leases or the service lives of the
improvements, whichever is shorter.
E. Loss Per Share - Loss per share is computed on the basis of the
weighted average number of common shares outstanding during the
respective periods. Net loss is increased by any applicable preferred
stock dividends.
F. Intangible Assets - Intangible assets, consisting of goodwill,
non-compete agreements and customer list, are being amortized on a
straight-line basis over their estimated useful lives.
G. Goodwill - Goodwill arising from business acquisitions, is being
amortized on the straight-line method over 20 years. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through projected undiscounted future cash flows
of the acquired companies.
H. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the
F-9
<PAGE>
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
I. Accounting For Stock Based Compensation - In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation". The
standard permits companies to choose to follow the accounting
proscribed by the standard for securities issued to employees or to
continue to follow the method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees",
coupled with certain pro forma disclosures. The Company has adopted
the disclosure only aspect of this statement.
J. Fair Value of Financial Instruments - Effective December 31, 1996,
the Company adopted Statement of Financial Accounting Standards No.
107, "Disclosures About Fair Value Financial Instruments", which
requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet. The
carrying amounts reported in the balance sheet for cash, trade,
receivables, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments.
K. Impairment of Long-Lived Assets - The Company has 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" for its current fiscal year. Such adoption had no
material effect on the Financial Statements of the Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Office equipment $ 1,404,557
Leasehold improvements 169,906
----------
1,574,463
Accumulated depreciation (618,017)
----------
$ 956,446
----------
----------
3. COMMITMENTS AND CONTINGENCIES
A. 1) Lease Commitments - The Company is obligated under seven
non-cancelable operating leases.
Rent expense for the years ended June 30, 1997 and 1996 was $450,945
and $526,289, respectively. Minimum rental commitments for the
remaining active leases over the next five years are as follows:
1998 $ 404,946
1999 362,284
2000 344,944
2001 110,224
2002 110,244
F-10
<PAGE>
2) Employment Agreements - The President of Healthcare Management
Solutions, Inc., a subsidiary of the Company, entered into a two
year contract on December 16, 1996, effective with the Company on
January 1, 1997 under an employment agreement the term of which
ends on December 31, 1999. The employment agreement calls for an
annual base salary of $ 150,000. In connection with the
employment agreement, the Company granted 175,000 shares of
common stock at an options exercise price of $1.70 per share
(fair market value on the date of grant). The right to acquire
shares under these options vested December 16, 1996.
In connection with the PCS Acquisition, the Company entered into
five year employment agreements with each of the three PCS
officers calling for compensation of $150,000 per year.
In March 1996, the Company entered into a two year employment
agreement with an individual given the position of National Vice
President - Sales, for annual compensation of $95,000. In
connection with the employment agreement, the Company granted
30,000 shares of common stock at an option exercise price of
$1.50 per share (fair market value on the date of grant). Half,
or 15,000 options vest in one year, or March 10, 1997, and
another 15,000 vest at the end of the second year, or March 10,
1998.
B. 1) California State Audits-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
F-11
<PAGE>
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 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
appealed the audit determination made by the State Controller's
Office. In January 1996 a hearing was held before an
Administrative Law Judge. In July 1996 the Judge recommended
that the overpayment determination be upheld. In August 1996 the
DHS adopted the recommendation of the Law Judge as the final
decision of the Director of DHS. In January 1997 the Company
filed an appeal to the decision with the Superior Court for the
County of Los Angeles. The Company intends to vigorously contest
any recovery by the State with respect to such alleged improper
pricing practices for services rendered.
Based upon the above contingency, the Company has provided a
reserve, in the event that a defense of its position does not
prevail, of $700,000. The Company had previously provided a
combined reserve with the California State Board of Equalization
matter (below) in the amount of $1,630,000. Due to the defined
settlement amount on the other matter, the reserve has been
allocated among the two actions. Management believes that a
total estimated settlement amount of $700,000, or 54% of the
maximum amount demanded, is reasonable under the circumstances
with respect to this matter.
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 (see Department of Health
Services above). The SBE has disagreed with the Company's
policies regarding its sales tax payments on certain items. The
SBE has maintained that blood glucose meters, testing strips and
finger-prick lancets are taxable items. The Company has taken
the position that these items are exempt from sales tax because
they were provided pursuant to a doctor's prescription and
furthermore, they are part of an integrated treatment for
providing insulin and insulin syringes, items which are
specifically exempt from sales tax in California. In addition,
the Company maintains that a portion of the revenues earned from
the sales of diabetic supplies were non-taxable services rendered
as a separate and distinct charge.
On January 6, 1997 the SBE issued a Notice of Determination of
$860,004 for the period July 1, 1989 through September 30, 1993.
Of this amount, penalties of $69,170 were subsequently waived.
Additionally, interest has accrued on this assessment of
$186,330. The Company filed for appeal of this assessment. The
matter was referred to the SBE settlement department and Company
management determined that it would be in the Company's best
interest
F-12
<PAGE>
to arrive at a final negotiated settlement amount. On
April 24, 1997, the Company agreed to a settlement of this matter
for a total amount of $980,000. Of this amount, $50,000 had
previously been paid. Of the remaining $930,000, $691,695 is
associated with taxes and $238,305 is associated with accrued
interest. On August 1, 1997 the members of the Board of
Equalization tentatively approved the Settlement Agreement signed
by the Company on April 24, 1997. Under the terms of the
settlement, the full $930,000 accepted in settlement will be
payable in installments: $300,000 was paid on September 8, 1997,
$63,000 was paid on September 30, 1997 and monthly installments
of $63,000 to be paid on the last day of each succeeding month
until the liability, plus accrued interest, is repaid through
June 30, 1998
2) Medicare Audit- 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
inappropriately made reimbursements on these charges. In
November 1996 Medicare issued a demand for refund of $795,702
plus interest of $35,475. In January 1997 Medicare began to
offset the Company's claims for payment, and the interest
charged to the Company's account. The balance claimed, in the
most recent correspondence from Medicare to be owed by the
Company on March 31, 1997 was $808,887, of which $795,701 was
principal and $22,290 was accrued interest. The Company rebilled
Medi-Cal $732,853 in February and in March $62,849. Company
management feels that the ultimate settlement to Medicare will
not have a material impact on earnings since the Company will
collect any amounts paid to Medicare out of amounts collected
after rebillings to Medi-Cal.
Patient Care Services was previously the subject of an
investigation by Medicare for (i) Medicare's alleged overpayment
for products and services provided by Patient Care Services and
(ii) Medicare's payment to the Patient Care Services for claims
which were allegedly not properly subject to Medicare
reimbursement. During fiscal 1995, Medicare withheld $300,766 of
payments due for claims reimbursement to cover previously
estimated liabilities resulting from this investigation. A
further assessment in the amount of $78,500 resulting from a
continuation of this investigation has been made, and that amount
withheld in July 1996. The Company went through an in-person
hearing on May 28, 1997 to contest Medicare's aggregate $379,000
of withheld reimbursements, and the results were upheld. The
Company's intends to appeal the Hearing Officers decision and has
retained counsel to contest the
F-13
<PAGE>
decision in proceedings before an administrative law judge.
4. NOTES PAYABLE
Notes payable at June 30, 1997 consists of the following:
Note payable to former employee of PCS, interest imputed at
8%, payable in monthly installments, maturing in 2003,
secured by the tangible and intangible assets of PCS $ 195,632
Due to a former owner of a subsidiary, unsecured, interest
payable at 10%, payable monthly, maturing March 1999 199,855
Others, with various interest rates and maturity dates 75,555
--------
471,042
Less: current maturities (208,126)
--------
$ 262,916
--------
--------
Principal payments through maturity are as follows:
1997 $ 208,126
1998 153,431
1999 109,485
5. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred
tax assets. At June 30, 1997, the Company had net deferred tax assets of
$3,550,000. The Company has recorded a valuation allowance for the full
amount of the net deferred tax assets.
F-14
<PAGE>
The following table illustrates the source and status of the Company's
major deferred tax assets and (liabilities):
Net operating loss carryforward $ 3,303,000
Litigation accruals 280,000
Accrued compensation 118,000
Cash to accrual adjustments (151,000)
Valuation allowance (3,550,000)
-----------
Net deferred tax asset recorded $ --
-----------
-----------
The provision for income taxes differs from the amount computed applying
the statutory federal income tax rate to income before income taxes as
follows:
Year Ended June 30,
------------------------
1997 1996
----------- ---------
Income tax benefit computed at statutory rate $ 929,000 $ 886,000
Effect of permanent differences (142,000) (184,000)
Effect of temporary differences 231,000 (8,000)
Income tax benefit not recognized (1,018,000) (694,000)
----------- ---------
Income tax benefit $ -- $ --
----------- ---------
----------- ---------
The Company has net operating loss carryforwards for tax purposes
totaling $8,257,000 at June 30, 1997 expiring in the years 2004 to 2012.
Substantially all of the carryforwards are subject to limitations on annual
utilization because there are "equity structure shifts" or "owner shifts"
involving 5% stockholders (as these terms are defined in Section 382 of the
Internal Revenue Code), which have resulted in a more than 50% change in
ownership.
6. ACQUISITIONS
A. In April 1995, the Company merged a newly formed, wholly-owned
subsidiary, USC-Michigan, Inc., with PCS Management, Inc., a Michigan
F-15
<PAGE>
Corporation ("PCS"), with USC-Michigan, Inc. as the surviving
corporation. This transaction also resulted in USC-Michigan, Inc.
becoming the parent of PCS's wholly-owned subsidiary, PCS, Inc.-West.
The Acquisition is accounted for as a purchase. The purchase price
totaled $4,145,299, and was settled through the issuance of Company
securities as follows: (i) 1,400,000 shares of common stock valued at
$1,414,000; (ii) 580,000 shares of Series A Preferred Stock valued at
$2,226,299, the present value of the mandatory redemption payments;
and (iii) 1,000,000 shares of Series B Convertible Preferred Stock,
valued at $505,000, established through reference to the value
attributable to the common stock. Additionally the Company incurred
acquisition costs of $126,958.
The following summarizes the purchase of PCS:
Purchase price including acquisition costs $ 4,272,257
Fair value of liabilities assumed 4,455,422
Fair value of assets acquired (3,767,150)
-----------
Goodwill $ 4,960,529
-----------
-----------
Goodwill resulting from the acquisition is being amortized over a
period of 20 years.
B. During the year ended June 30, 1996, the Company made two small
acquisitions recording $483,219 in goodwill. Additionally, in January
1994, the Company acquired Thriftee resulting in goodwill of $770,188.
Goodwill resulting from these acquisitions is being amortized over a
period of 20 years.
7. REDEEMABLE PREFERRED STOCK, SERIES A
In April 1995, in connection with the Acquisition of PCS, the
Company issued 580,000 shares of Series A Redeemable Preferred Stock.
The shares contain a liquidation preference of $5 per share and pay no
dividends. They are mandatorily redeemable at $5 per share, over a five
year period, in equal monthly installments beginning October 1995. The
Company has recorded the present value of the required future payments
as a liability, utilizing a discount rate of 9%. The portion of the
monthly redemption installments which are attributable to this
discounting factor are accounted for as preferred stock dividends.
Payments through maturity are as follows:
F-16
<PAGE>
1998 $ 580,000
1999 580,000
2000 580,000
2001 398,786
8. STOCKHOLDERS' EQUITY
A. Preferred Stock - The Certificate of Incorporation of the Company
authorizes the issuance of a maximum of 10,000,000 shares of preferred
stock. The Company's Board of Directors is vested with the authority
to divide the class of preferred shares into series and to fix and
determine the relative rights and preferences of shares of any such
series to the extent permitted by the laws of the State of Delaware
and the Articles of Incorporation.
B. In April 1995, in connection with the Acquisition of PCS, the Company
issued 1,000,000 shares of Series B Cumulative Convertible Preferred
Stock. Each share contains a liquidation preference of $1.00 per
share. Each share is convertible into common stock at the rate of two
shares for one common share. Each share pays a cumulative dividend at
the rate of from $.02 per share annually, beginning in September 1996,
increasing to $.12 per share through June 30, 2000. However, such
dividend only becomes payable if, in the immediate preceding fiscal
year, the Company had pre-tax income of at least $500,000.
C. In July 1995, the Company sold 148,000 shares to certain management
employees for $1.00 per share, which is the value at which they were
accounted for.
D. In July 1995, 222,223 warrants which were issued in connection with a
private placement in January and February 1995 were exercised for $.01
per share.
E. In December 1995, warrants to acquire 150,000 shares at $1.00 per
share were exercised by a director in exchange for the forgiveness of
$150,000 in debt.
F. In April, 1996, the Company issued 32,278 shares in connection with an
acquisition valued at $150,000.
F-17
<PAGE>
G. In April 1996, a private lender exercised 450,000 warrants at $1.00
per share and 217,655 Class B warrants at $1.50 per share in exchange
for the cancellation of debt totaling $776,483.
H. In April 1996, the Company reduced the exercise price of its Class B
warrants from $4.50 per share to $1.50 per share. Subsequently, a
total of 562,375 warrants were exercised (including 217,655 by a
private lender for conversion of debt).
I. In June 1996, an officer exercised options to purchase 100,000 shares
at $1.50 per share.
J. In May 1997, the Company sold 500,000 shares in the first private
placement to unrelated third parties for $2.00 per share.
K. In June 1997, the Company sold 250,000 shares in the second private
placement to a principal stockholder party for $2.00 per share.
L. In June 1997, the Company converted $2,018,830 of indebtedness held by
principal stockholders for 1,009,415 of common stock for $2.00 per
share.
M. In June 1997, the Company issued 75,458 common stock for fees
associated with the raising of equity and conversion of indebtedness
for $2.00 per share.
9. STOCK OPTIONS
A. The Company's 1992 Employee Stock Option Plan (the "1992 Plan") was
approved by the Company's Board of Directors and stockholders in June
1992. On July 28, 1993, 310,000 stock options, exercisable at $1.50
per share, for a period of ten years, were issued under the 1992 Plan.
Options granted under the 1992 plan may include those qualified
as incentive stock options under Section 422A of the Internal Revenue
Code of 1986, as amended, as well as non-qualified options. Employees
as well as other individuals, such as outside directors, who provide
necessary services to the Company are eligible to participate in the
1992 Plan. Non-employees and part-time employees may receive only
non-qualified stock options. The maximum number of shares of common
stock for which options may be granted under the 1992 Plan is 500,000
shares.
B. The Company's Management Non-Qualified Stock Option Plan (the
"Management Plan") was approved by the Company's Board of Directors in
December 1992. On July 28, 1993, 100,000 stock options, exercisable at
$1.50 per share, for a period of ten years, were issued under the
Management Plan. Management and key employees, as well as outside
directors and other
F-18
<PAGE>
individuals who provide necessary services to the Company, are
eligible to participate in the Management Plan. Options
granted under the Management Plan are nonqualified options. The
maximum number of shares of Common Stock for which options may be
granted under the Management Plan is 550,000. None of the options
outstanding under this plan are exercisable.
C. In February 1994, the Company issued ten year options to purchase up
to 175,000 shares, at a price of $1.25 per share, to the former
president of Thriftee in consideration of his waiver of certain rights
to acquire equity in certain of the constituent corporations of
Thriftee. These options vest as follows: 75,000 in February 1995,
50,000 in February 1996, and 50,000 in February 1997.
D. In December, 1995, two members of the Board of Directors exchanged
indebtedness represented by notes aggregating $200,000 principal,
which had become delinquent, for demand notes in the same amount. In
consideration for agreeing to such exchange of indebtedness, and for
waiving all past defaults under such canceled notes and advances, the
Directors were issued 5-year warrants to purchase an aggregate of
300,000 shares of the Company's Common Stock at $1.00 per share. One
director immediately exercised 150,000 of such warrants in
consideration for his cancellation of the Company's $150,000
indebtedness owed to him.
E. In June 1996, an officer exercised options to purchase 100,000 shares
for $1.50 per share.
F. During fiscal 1996, the Company issued 416,667 five year options at
$1.35 per share to four officers in consideration of their forgiving
salaries, totalling $500,000 for the period covering May 1996 to
May 1997.
G. In March 1996, the Company issued 30,000 options at $1.50 per share to
the National Vice President-Sales in conjunction with a two year
employment contract. These options vest as follows: 15,000 in March
1997, 15,000 in March 1998.
H. In December 1996, the Company issued 175,000 options at $1.70 per
share to the President of Healthcare Management Solutions, Inc. in
conjunction with a two year employment contract. These options vested
in December 1996.
I. In January 1997, the Company issued 100,000 options at $1.75 per share
for consulting services.
F-19
<PAGE>
10. ACCOUNTING FOR STOCK OPTIONS
The Company accounts for stock options issued to employees under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", under which no
compensation expense is recognized if the exercise price equals the stocks
market value on the measurement date (generally the grant date). In fiscal
1997, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation" for disclosure purposes.
For disclosure purposes, the fair value of each option is measured on the
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions used for stock options granted during the years
ended June 30, 1997 and 1996, respectively; annual dividends of $0.00 for
both years; expected volatility of 86.3% for both years; risk free interest
rate of 7.0% for both years, and expected life of five years for both years.
If the Company had recognized compensation cost in accordance with SFAS
No. 123, the Company's pro forma net loss and net loss per share would have
been $3.3 million and $.35 for fiscal 1997 and $2.6 million and $.41 for
fiscal 1996. The SFAS No. 123 method does not apply to grants prior to July
1, 1995, and accordingly, the resulting pro forma information may not be
representative of that to be expected in future years.
The following table summarizes the changes in options outstanding and the
related price ranges:
<TABLE>
<CAPTION>
Weighted
Average Range of
Shares Exercise Price Exercise Price
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding at June 30, 1995 585,000 $ 1.43 $1.25 - $1.50
Granted 746,667 1.22 1.00 - 1.50
Exercised (250,000) 1.20 1.00 - 1.50
--------- ------- -------------
Balance June 30, 1996 1,081,667 1.33 1.00 - 1.50
Granted 275,999 1.72 1.70 - 2.25
--------- ------- -------------
Balance June 30, 1997 1,357,666 $ 1.41 $1.00 - $2.25
---------
---------
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1997:
Weighted Average
Range of Average Remaining Contractual
Exercise Prices Outstanding Life in Years
---------------- ----------- ---------------------
$1.00 - $2.25 1,357,666 5.26
---------------- ----------- ---------------------
---------------- ----------- ---------------------
Options exercisable and the weighted average exercise price at June 30,
1997 and 1996 were: 1,342,666 and $1.41, and 1,001,667 and $1.33,
respectively.
11. PUBLIC WARRANTS
In December, 1992, the Company sold a total of 571,900 Units to the
public at $9.125 per Unit. Each of the Units sold by the Company consisted
of three shares of common stock, $.0001 par value, two Class A Warrants
each to purchase one share of common stock at an exercise price of $3.30
per share and one class B Warrant to purchase one share of common stock at
an exercise price of $4.50 per share. The Class A Warrants are exercisable
through December 1997. In April 1996, the Company reduced the price of the
Class B warrants to $1.50 and 562,375 were subsequently exercised. Upon
exercise, each warrant was converted to one share of the Company's common
stock and one Class A Warrant. The Class B Warrants were exercisable
through December 1994, but were subsequently extended through June 1996,
when they expired. The Company has the right to redeem the Class A Warrants
at $.05 per Warrant upon the common stock achieving certain market price
targets and the tendering of a written notification to the warrant holders
20 days prior to taking such action. Additionally, in connection with the
Public-offering, the Underwriters received 114,000 Class "C" warrants which
entitled them to purchase Units for $4.62 per Unit which expire
December 1997.
12. PRIVATE FINANCING
In April 1995, the Company borrowed $1,000,000 in exchange for a note
payable bearing interest at a commercial bank's fluctuating prime rate plus
two percent. This note becomes due in two years and was secured by the
accounts receivable of one of the Company's wholly-owned subsidiaries, Home
Therapy. As part of this financing, the Company issued warrants to acquire
an aggregate 175,000 shares of common stock, at an exercise price of $1.00
per share. In July 1995, the Company borrowed $2,000,000 from the same
lender in exchange for a note payable bearing interest at the same
commercial bank's prime rate plus two percent. This note becomes due in
two years and was secured by the accounts receivable of PCS, Inc. - West.
As part of this second financing, the Company issued warrants to acquire an
additional 310,000 shares of common stock, at an exercise price of $1.00
per share. Proceeds from these financings which are attributable to the
warrants (based on their relative fair value) are recorded as a discount
and amortized as additional interest expense over the life of the notes.
The total amount of such discount recorded in connection with these two
financings was approximately $231,000.
In June 1995, the same lender lent the Company $250,000 under an
unsecured promissory note bearing interest at 9% per annum, maturing in
June 1996.
During fiscal 1996, the Company repaid the April 1995 and June 1995
loans aggregating $1,250,000. In April 1996, the Company exchanged
$776,482 of indebtedness in consideration for: the exercise of 450,000
Warrants at an exercise price of $1.00 per share to aquire 450,000 shares
of common stock; and the exercise
F-20
<PAGE>
of 217,655 Class B Warrants at an exercise price of $1.00 per share, to
acquire 217,655 shares of common stock and acquisition of 217,655 Class
A Warrants.
In August 1996, the Company issued this lender 100,000 five-year
warrants to purchase common stock at $2.50 per share, in consideration of
his waiver of certain loan covenant violations.
In November 1996, the Company issued this lender 225,000 five-year
warrants to purchase common stock at $2.25 per share, in consideration for
an increase in the line of credit.
13. RELATED PARTY LOANS
In December 1994, three individuals serving as officers and/or
directors of the Company, advanced an aggregate of $200,000 to the Company,
bearing interest at 12% per annum and repayable on June 30, 1995. In
January 1995, the Company repaid $50,000 to one individual. Additionally,
in January 1995, one of the above directors lent PCS $100,000 under a
promissory note bearing interest at 11.5%, which came due in February 1995.
All the above loans were refinanced as demand notes on December 1, 1995 and
any defaults were waived. During fiscal year 1996, $150,000 of loans was
converted as consideration for the exercise of stock options. All loans
from these lenders are now paid-off.
As of June 30, 1997, the Company had no related party loans
outstanding.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk consist principally of patient care receivables. The vast
majority of such receivables are due from third party reimbursement
sources, including private insurance companies and Federal and state
medical insurance programs. Although the ability of some third party
payers to meet their obligations may be affected by developments in the
health care industry, most of such third party payers are considered
financially healthy and large enough to where it is not an issue from the
Company's standpoint.
15. RESTRUCTURING CHARGES
During the fiscal year ended June 30, 1995, the Company incurred
restructuring charges in connection with two distinct organizational
actions: (i) the consolidation of billing operations in Virginia and (ii)
the decision to close substantially all of its stores. Restructuring
charges connected with the consolidation of billing approximated $276,000
and consisted of temporary and duplicate staffing, training and moving
costs. Charges connected with the store closings approximated
F-21
<PAGE>
$178,000 and consisted of inventory and leasehold improvement write-offs
and accruals for estimated lease termination costs. During the fiscal year
ended June 30, 1996, the Company reversed approximately $101,000 of
previously estimated lease termination costs.
16. PRIVATE PLACEMENT
During January and February 1995, the Company borrowed a total of
$400,000 in a private placement of secured promissory notes bearing
interest at 10%. The notes had a term of six months and were repaid in
July 1995. The lenders received warrants to purchase 222,223 shares of the
Company's common stock exercisable at $0.01 per warrant in addition to the
notes. The relative value of the warrants to that of the notes was
recorded as a discount on the notes, totaling approximately $171,000. Such
discount was written off as an additional finance charge over the term of
the notes.
17. ACCOUNTS RECEIVABLE SALES AGREEMENT
In January, 1996, the Company entered into an agreement with Daiwa
HealthCo.-1 Inc. ("Daiwa") which provided for the sale by the Company of
accounts receivable. The agreement provided for the purchase by DAIWA of
up to $10,000,000 in outstanding receivables, at any one time. In May
1996, upon the execution of a mutually agreed upon waiver, the Company
ceased selling receivables to DAIWA under this agreement. In consideration
of such waiver, the Company paid to DAIWA a termination fee of
approximately $202,000. Total receivables sold during the period covered
by this agreement were approximately $11,907,000. Total discounts and fees
incurred by the Company in connection with this agreement were
approximately $747,000.
18. ACCOUNTS RECEIVABLE FUNDING AGREEMENT
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) as opposed to those
that are payable directly by patients. Of the total credit facility,
$1,500,000 has been specifically allocated by the lender towards payment of
the final settlement amount of the California audit and is unavailable to
the Company for other purposes. The base rate applicable to outstanding
principal amounts is prime + 2.2%. 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.
F-22
<PAGE>
On September 1, 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.
The agreement contains certain other covenants, including but not
limited to, a deterioration in the Company's financial condition. The
agreement also forbids the payment of dividends on the Company's common
stock. A violation of such covenants gives the lender the right to
immediately call the loan.
On November 4, 1996, HealthPartners amended the Loan Agreement
("Amendment No. 1") to reduce the initial reserve of $1,500,000 to $100,000
and to make available to the Company a maximum loan amount of $4,500,000.
In consideration for the supplemental $1,400,000 in financing,
HealthPartners was issued warrants to acquire 225,000 shares of common
stock at a exercise price $2.25 per share expiring March 18, 2002.
On March 14, 1997, HealthPartners amended the Loan Agreement
(Amendment No. 2") to make available an increase in the $4,500,000 line of
credit to a maximum of $7,500,000 through June 18, 1997. In consideration
for the three month increase in the line of credit, the Company paid
additional administrative fees to HealthPartners of $ 10,000.00.
On June 20, 1997, HealthPartners amended the Loan Agreement
(Amendment No. 3") to make available an increase in the $4,500,000 line of
credit to a maximum of $6,200,000 through September 22, 1997. In
consideration for the three month increase in the line of credit, the
Company paid additional administrative fees to HealthPartners of $
15,000.00.
On September 25, 1997, HealthPartners amended the Loan Agreement
(Amendment No. 4") which contained a financial covenant that the Company
will achieve net income of at least $500,000 for its fiscal year ending
June 30, 1997. In consideration for the wavier, the Company paid additional
administrative fees to HealthPartners of $ 2,500.00. The agreement now
contains a financial covenant (8.1.t), which requires that the Company's
net income for its fiscal year ended June 30, 1998 be no lower than $0
(zero).
19. FOURTH QUARTER ADJUSTMENTS - UNAUDITED
During the fiscal year ended June 30, 1997, the Company experienced
turnover of employees which left a void in the function of estimating
billed amounts
F-23
<PAGE>
and price setting of the Company's inventory. Consequently, the annual
pricing updates and estimates into the MestaMed software system was not
completed until late fourth quarter 1997. The negative impact on the
financials spiked the Company's fourth quarter more than allowable charged
(MAC) and skewed the results. The Company's June 30, 1997 average MAC per
quarter was $2,367,000, and in fourth quarter it was $3,367,000.
F-24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
-25-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)
OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of September 12, 1997
are as follows:
<TABLE>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Brian D. Bookmeier..... 39 President of Universal Self Care,
Inc., Acting Chief Financial
Officer and Director
Steven Leichtner, M.D... 52 Director
Tod J. Robinson......... 36 Vice President - National Sales for
Diabetes Self Care, Inc. (formerly
Thriftee Group)
Edward T. Buchholz....... 54 President, Healthcare Management
Solutions, Inc., Vice President
Universal Self Care and Vice
Chairman of the Board of Director
Alan M. Korby............ 40 President, Diabetes Self Care,
Inc., Vice President Universal Self
Care, Inc. and Director
Matthew B. Gietzen....... 34 Vice President of Fulfillment,
Secretary and Director
James Linesch........... 43 Director
</TABLE>
Set forth below is a brief background of the officers, directors and key
employees of the Company, based on information supplied by them.
-26-
<PAGE>
BRIAN D. BOOKMEIER. Mr. Bookmeier has served as President, Chief
Executive Officer and a director of the Company since July 1995. From
September 1989 until its Merger into the Company Mr. Bookmeier served as
Executive Vice President and a Director of Patient Care Services, a home
medical equipment supply company that specialized in diabetes management, and
the sale of related equipment and supplies. He has been a Director of the
American Diabetes Association since June 1995.
EDWARD T. BUCHHOLZ. Since May 14, 1997 Mr. Buchholz has served as Vice
Chairman of the Board. Mr. Buchholz has served as a Vice President and a
Director of the Company since February 8, 1994. Since December 16, 1996 Mr.
Buchholz has served as President and CEO of the Company's managed care
program, "Healthcare Management Solutions, Inc.". Prior to this he served as
President of Diabetes Self Care, Inc. Mr. Buchholz started his health care
career in 1969 with The Hartford Insurance Company and has held numerous
executive positions in the industry over the past 25 years. From October
1985 to December 1989, Mr. Buchholz served as President of Shoney's Va/Md
Construction Co., Inc., a commercial builder of restaurants and motels in
Virginia, Maryland and Delaware. During that same period he also served as
President of Eastern Commercial Real Estate Services, Inc., an insurance
consulting firm and developer of commercial property.
ALAN M. KORBY. Mr. Korby has served as a Vice President and a director
of the Company since July 1995. Mr. Korby has also served as President of
USC-Michigan, Inc., the Company's wholly-owned subsidiary, since July 1995
and the President of Diabetes Self Care, Inc. Since March 8, 1997. From its
founding in November 1987 until its Merger into the Company, Mr. Korby served
as President and a Director of Patient Care Services, a home medical
equipment supply company that specialized in diabetes management, and the
sale of related equipment and supplies.
MATTHEW B. GIETZEN. Mr. Gietzen has been the Secretary and a director of
USC since July 1995. Mr. Gietzen has also served as Vice President of
USC-Michigan, Inc., the Company's wholly-owned subsidiary, since July 1995.
From January 1988 until its Merger into the Company, Mr. Gietzen served as
Executive Vice President and a Director of PCS Management, Inc., a home
medical equipment supply company that specialized in diabetes management, and
the sale of related equipment and supplies.
TOD J. ROBINSON. Mr. Robinson has served with the Company since April
1996, as the National Vice President of Sales for Diabetes Self Care, Inc.
From October 1989 to April 1996, Mr. Robinson held a variety of positions
with Home Diagnostics, Inc. (HDI), a medical device manufacturer that
specializes in diabetes testing equipment, serving as the Director of New
Business Development, National Accounts Manager and finally Sales Manager.
From September 1986 to October 1989, Mr. Robinson was Sales Manager and
Product Manager for Friden Alcatel in its business products division.
STEVEN LEICHTER, M.D.. Since February 1997, Dr. Leichter has served as a
-27-
<PAGE>
Director of the Company. Dr. Leichter has been on the faculty at University
of California, Davis, from 1976 to 1977, the University of Kentucky from 1977
to 1988, and Eastern Virginia Medical School from 1988 to 1995, where he was
Professor of Internal Medicine. In 1995, he moved to Columbus, Georgia to
join Dr. Garry August in an endocrinology practice. He is also Co-Director
of the West Georgia Center for Metabolic Disorders and President of the
Columbus Metabolic Foundation. Dr. Leichter has more than 60 published
scientific papers and book chapters. His most recent paper was published in
Diabetes Care in September, 1995. He has been a consultant to the World
Health Organization and chaired the Committee that wrote the International
Plan for Diabetes of the United Nations. He is currently a consultant to 5
national corporations in diabetes, and is on the editorial review for the
Archives of Internal Medicine, a journal of the American Medical Association.
JAMES LINESCH. Since February 1997, Mr. Linesch has served as a Director
of the Company. Mr. Linesch is currently the President, Chief Executive
Officer and Chief Financial Officer of CompuMed, a public computer company
involved with computer assisted diagnosis of medical conditions, which he
joined in April 1996 as Vice President and Chief Financial Officer. Mr.
Linesch served as a Vice President, Chief Financial Officer and Controller of
the Company from August 1991 to April 1996. From may 1988 to August 1991,
Mr. Linesch served as the Chief Financial Officer of Science Dynamics Corp.,
a corporation involved in the development of computer software.
(The remainder of this page has been intentionally left blank)
-28-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------------------------------------
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs(#) Payouts sation
- --------------------- ---- ------ ----- ------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian Bookmeier...... 1995 $ 38,834 0 $ 3,250 $ 0 $ 0 $ 0 $ 0
President and Chief 1996 $179,306 0 $15,000 $ 0 $ 0 $ 0 $ 0
Executive 1997 $ 51,408 0 $18,000 $ 0 $ 0 $ 0 $ 0
Officer and Director
Edward T. Buchholz... 1995 $ 94,808 0 $ 7,800 $ 0 $ 0 $ 0 $ 0
President, Healthcare 1996 $163,900 0 $13,320 $ 0 $ 0 $ 0 $ 0
Management Solution, 1997 $147,321 0 $ 6,610 $ 0 $ 0 $ 0 $ 0
Inc. and Director
Tod J. Robinson...... 1995 0 0 0 $ 0 $ 0 $ 0 $ 0
V.P. of National 1996 $ 26,962 0 $1,500 $ 0 $ 0 $ 0 $ 0
Sales for Diabetes 1997 $122,879 0 $ 6,000 $ 0 $ 0 $ 0 $ 0
Self Care, Inc.
</TABLE>
-29-
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Edward Buchholz entered into a three year contract on December 16,
1996, effective on January 1, 1997, employment the term of which ends on
December 31, 1999. Mr. Buchholz's is the President and Chief Executive
Officer of Healthcare Management Solution, Inc., a subsidiary of the Company.
Mr. Buchholz's employment agreement provides him with an annual base salary
of $ 150,000. In connection with his employment agreement, Mr. Buchholz was
granted options to acquire 175,000 shares of common stock at an exercise
price of $1.70 per share (fair market value on the date of grant), vested on
the date of grant.
In connection with consummation of the Merger, the Company entered into
separate employment agreements expiring June 30, 2000 with each of Messrs.
Alan Korby, Brian Bookmeier and Matthew B. Gietzen. Under the terms of such
agreements, each of Messrs. Korby, Bookmeier and Gietzen serve as the Vice
President, President and Chief Executive Officer, and Vice President,
respectively, of the Company. Under such employment agreements, they each
receive a base salary of $150,000 per annum, plus customary fringe benefits,
including medical insurance and the use of an automobile paid for by the
Company, the aggregate value of which fringe benefits to each such person is
estimated at no more than $18,000.
On April 25, 1996, each of Messrs. Bookmeier, Korby and Gietzen agreed
to waive the payment of installments of their annual compensation from the
Company during the annual period commencing May 1, 1996, in the aggregate
amount of $150,000 for each such person, and Mr. Buchholz agreed to waive the
payment of installments of his annual compensation from the Company during
the annual period commencing May 1, 1996 in the aggregate amount of $50,000.
In consideration for such waiver of compensation, each of Messrs. Bookmeier,
Korby and Gietzen was granted a five-year non-qualified stock option to
acquire 125,000 shares of Company Common Stock at an exercise price of $1.35
per share and Mr. Buchholz was granted a five-year non-qualified stock
options to acquire 41,667 shares of Company Common Stock at an exercise price
of $1.35 per share. All of the options granted to Messrs. Bookmeier, Korby,
Gietzen and Buchholz vested in full on May 1, 1996. The closing sale price
for a share of Common Stock on April 25, 1996, as reported by Nasdaq, was
$2-5/8. On May 1, 1997, each of Messrs. Bookmeier, Korby and Gietzen again
began to receive full annual compensation under their employment agreement.
In March 1996, Mr. Tod Robinson entered into a two-year employment
agreement with Diabetes Self Care, Inc., a wholly-owned subsidiary of the
Company. Under such agreement, Mr. Robinson is to serve as the National Vice
President-Sales for Diabetes Self Care, having responsibility for marketing
and sales efforts throughout the United States for such company. Mr.
Robinson's employment base salary is $95,000 per annum. He has the
opportunity to earn a Performance Bonus of up to $1,000 based upon achieving
performance goals to be identified by the Company's management, as well as a
Commission of $1,000 for each executed managed care contract covering more
than 10,000 lives which he originates. Mr. Robinson's employment
-30-
<PAGE>
contract also provides for certain profit participation, pursuant to which he
will earn .5% of the net after-tax profits of Diabetes Self Care for each fiscal
year (and prorations thereof) during the term of the employment agreement. In
the event that such net after-tax profits exceed $500,000 for any fiscal year,
the profit participation shall be increased by $10,000. Mr Robinson may also
receive additional discretionary bonuses, and customary fringe benefits. On
March 10, 1996, in connection with commencing his employment, Mr. Robinson was
granted options to acquire 30,000 shares of the Company's common stock at an
exercise price of $1.50 per share. The closing sale price for a share of common
stock on March 8, 1996 (the last business day before the date of such
agreement), as reported by Nasdaq, was $2-15/16.
Each director of the Company receives a $25,000 annual directors fees for
attendance at Board meetings, as well as reimbursement for the actual expenses
incurred in attending such meetings. Officers and key employees of the Company
receive employment benefits (e.g., health insurance, automobile allowances)
other than cash compensation and interests in the Company's employee stock
option plan.
The following table sets forth information concerning individual grants of
stock options made during the last completed fiscal year to any persons named in
the Summary Compensation Table to whom options were granted during the period.
Options/SAR Grants in Last Fiscal Year
Individual Grants
- -------------------------------------------------------------------------------
Number of Percent of
Securities Total
Underlying Options/SAR Exercise or
Options/SARs Granted in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------
Edward T. 175,000 100% $1.70 December 9,
Buchholz 2006
- --------------------------------------------------------------------------------
The following table sets forth information concerning options exercised and
the number of unexercised options, and the value of such unexercised options,
for any persons named in the Summary Compensation Table.
-31-
<PAGE>
Aggregated Option/SAR Exercised
In Last fiscal Year and Fiscal
Year-End Option/SAR Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised the-Money
Shares Acquired Value Realized Options/SARs Options/SARs at
Name on Exercise (#) ($) at FY-End(#) FY-End($)
(a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------------------
Exercisable/ Exercisable/
Unexecisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brian D. Bookmeier 0 0 125,000/0 $187,500
- -----------------------------------------------------------------------------------------------------------------------
Edward T. Buchholz 0 0 41,667/0 $58,334/0
0 0 125,000/50,000 $187,500/$75,000
0 0 350,000 $367,500
- -----------------------------------------------------------------------------------------------------------------------
Tod J. Robinson 0 0 30,000/0 $18,750/$18,750
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table identifies each person or entity known to the Company
to be the beneficial owner of more than five percent of the Company's common
stock on September 12, 1997, each director of the Company and all the directors
and officers of the Company as a group, and sets forth the number of shares of
the Company's common stock beneficially owned by each such person and such group
and the percentage of the shares of the Company's outstanding common stock owned
by each such person and such group. In all cases, the named person has sole
voting power and sole investment power of the securities, unless otherwise
specified.
Percentage of
Name and Address Number of Shares of Common Outstanding
of Beneficial Owner Stock Beneficially Owned(1) Common Stock Owned
- ------------------- --------------------------- -------------------
-32-
<PAGE>
H. T. Ardinger 500,000 5.1 %
9040 Governors Row
Dallas, TX 75356
Brian D. Bookmeier 579,148 5.8 %
37119 Muirfield
Livonia, MI 48150 (2)
Edward T. Buchholz 601,358 5.8 %
265 Waterside Drive
Moneta, VA 24124 (3)
Matthew B. Gietzen 577,147 5.8 %
23307 Mystic Street
Novi, MI 48375 (2)
Fred Kassner 1,951,950 18.6 %
59 Spring Street
Ramsey, NJ 07446 (4)
Alan M. Korby 574,148 5.7 %
24054 Roma Ridge
Novi, MI 48375 (2)
James Linesch 136,000 1.0 %
3401 Walnut Avenue
Manhattan Beach, CA 90266
Robert L.Moody, Jr. 607,560 6.1 %
2302 Post Office Street, Suite 601
Galveston, TX 77550 (4)
Robert M. Rubin 613,789 6.2 %
6060 Kings Gate Circle
Delray Beach, FL 33484 (4)
All officers and directors
as a group (5 persons)
(2)(3) 2,467,801 22.1 %
--------- ------
- ------------------
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the
power to dispose or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the next 60
days. Unless otherwise noted, beneficial ownership consists of sole
ownership, voting and investment rights.
-33-
<PAGE>
(2) Includes (I) 333,334 shares of Common Stock held by Mr. Korby as well as
166,666 shares of Common Stock issuable to Mr. Korby upon conversion of his
333,333 shares of Series B Preferred Stock, (ii) 338,333 shares of Common
Stock held by Mr. Bookmeier as well as 166,667 shares of Common Stock
issuable to Mr. Bookmeier upon conversion of his 333,334 shares of Series B
Preferred Stock and (iii) 336,334 shares of Common Stock held by Mr.
Gietzen as well as 166,667 shares of Common Stock issuable to Mr. Gietzen
upon conversion of his 333,333 shares of Series B Preferred Stock. Also
includes options to purchase 125,000 shares of Common Stock at $1.35 per
share, granted to each of Messrs. Korby, Bookmeier and Gietzen in
connection with the waiver of certain cash compensation in 1996. 39,179 of
the shares of Common Stock issued to each of Messrs. Korby, Bookmeier and
Gietzen (117,537 shares in the aggregate), have been pledged to Barbara
Milinko to secure a $325,000 note payable to Ms. Milinko by Messrs. Korby,
Bookmeier and Gietzen. Does not include any shares of Series A Preferred
Stock held by Messrs. Korby, Bookmeier and Geitzen.
(3) Includes shares underlying options to purchase 350,000 shares of common
stock granted to Mr. Buchholz under his Employment Agreement 175,000 at
$1.25 and 175,000, at $1.70 per share, options to purchase an aggregate
of 175,000 shares of Company Common Stock at $1.25 per share granted in
connection with the acquisition of Diabetes Self care, Inc. and options
to purchase an aggregate of 41,667 shares of Company Common Stock at
$1.35 per share granted in connection with the waiver of certain cash
compensation in 1996.
(4) For Mr. Kassner, includes 642,535 shares of Common Stock underlying the
Company's publicly-traded Class A Warrants and 100,000 shares of Common
Stock underlying Warrants granted in connection with certain financial
accommodations granted by Mr. Kassner related to the release of security
interests in Company assets. For Mr. Moody, includes Class A warrants to
purchase an aggregate of 307,560 shares of Company Common Stock. For Mr.
Rubin, includes the shares underlying 100,000 warrants granted in
connection with the waiver of defaults under then existing indebtedness.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of June 30, 1994, the Company had made advances to Edward Buchholz, then
President of Diabetes Self Care, Inc., in the amount of $14,929. Payments on
this receivable were made in amounts equivalent to 50% of Mr. Buchholz's sales
commissions. As of September 10, 1997, the balance of this loan due the Company
was approximately $6,347.
Under the terms of the Patient Care Services Merger Agreement, each of
Messrs. Rubin, and Damon Testaverde, agreed to vote all of the shares of Company
Common Stock to be owned by them following the Merger for so long as each of
such person(s) shall continue to hold not less than 73% of the percentage of the
outstanding shares of Company Common Stock issued to him upon consummation of
the Merger, for the election of each of Messrs. Korby, Bookmeier and Gietzen to
the Board of Directors of the Company. In addition, any additional nominees to
the Company's Board of Directors must be acceptable to Messrs. Rubin and
Testaverde and to a majority of Messrs. Korby, Bookmeier and Gietzen to the
extent that such persons meet the share ownership criterion set forth above.
In April 1996, Fred Kassner exchanged $ 776,482 of indebtedness in
consideration for: the exercise of 450,000 Warrants at an exercise price of
$1.00 per share to acquire 450,000 shares of common stock; and the exercise of
217,655 Class B Warrants at an
-34-
<PAGE>
exercise price of $1.50 per share, to acquire 217,655 shares of common stock and
the acquisition of 217,655 Class A Warrants.
See Item 6. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for information concerning loans made to the Company
by certain members of Company management and by principal stockholders of the
Company.
(The remainder of this page has been intentionally left blank)
-35-
<PAGE>
ITEM 13.
(a) Exhibits
Number Description of Exhibit
3.1(a) Certificate of Incorporation of the Company. (1)
3.1(b) Certificate of Renewal of Charter of the Company. (1)
3.1(c) Certificate of Amendment of Charter of the Company. (3)
3.2 By-Laws of the Company. (3)
3.3 Certificate of Designations, Preferences and Relative, Participating,
Optional or other special rights of Series A Redeemable Preferred
Stock. (9)
3.4. Certificate of Designations, Preferences and Relative, Participating,
Optional or other special rights of Series B Convertible Preferred
Stock. (9)
4.1(a) Specimen Certificate of the Company's Common Stock. (2)
4.1(b) Specimen of Redeemable Common Stock Purchase Warrant. (5)
4.2 Form of Warrant Agent Agreement between the Company and American Stock
Transfer Company. (2)
4.3 Form of Underwriter's Warrant Agreement. (6)
4.4 1992 Employee Incentive Stock Option Plan, including form of Incentive
Stock Option Agreement. (2)
10.4 Employment Agreement, dated April 12, 1995, by and between the Company
and Alan Korby. (12)
10.5 Employment Agreement, dated April 12, 1995, by and between the Company
and Brian D. Bookmeier. (12)
10.6 Employment Agreement, dated April 12, 1995, by and between the Company
and Matthew Gietzen. (12)
10.7 Voting Agreement, dated April 12, 1995, by and among Messrs.
Rubin, Testaverde, Korby, Bookmeier and Gietzen. (12)
10.8 Management Non-Qualified Stock Option Plan. (5)
10.9 Non-Competition and Non-Disclosure Agreement, date April 12, 1995, by
and among the Company, USC-Michigan, Inc. and Messrs. korby,
Bookmeier and Gietzen. (12)
10.13 Agreement and Plan of Merger, dated December 4, 1992, by and among the
Company, Fieldcor, Inc., Medical Accounting Specialists, Inc.,
Diabetic Depot of America, Inc., and Kenneth F. Payne, Jr. and Clayton
R. Wisely. (7)
10.14 Stock Purchase Agreement, dated as of January 31, 1994, by and between
the Company and Kenneth F. Payne, Jr. and Clayton R. Wisely. (7)
10.15 Letter agreement, dated January 31, 1994, between the Company and
Kenneth F. Payne, Jr. and Clayton R. Wisely, restructuring certain
proposed stock purchases as asset purchases. (7)
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<PAGE>
10.16 Non-Competition and Non-Disclosure Agreement, dated February 8, 1994,
by and between The Thriftee Group and Edward T. Buchholz, Kenneth F.
Payne, Jr. and Clayton R. Wisely. (7)
10.17 Distribution Agreement, dated February 8, 1994, by and between the
Company and The Thriftee Group Wholesale Pharmacy, Inc. (7)
10.18 Supplemental indemnification agreement, dated February 8, 1994,
between the Company and Kenneth F. Payne, Jr. and Clayton R. Wisely.
(7)
10.19 Employment Agreement, dated February 8, 1994, between the Company and
Edward T. Buchholz. (7)
10.20 Stock Option Agreement, dated as of February 8, 1994, by and between
the Company and Edward T. Buchholz. (7)
10.25 Amended and Restated Plan and Agreement of Merger, by and between the
Company, PCS Management, Inc., PCS, Inc.-West, Universal Self Care,
Inc., USC-Michigan, Inc. ("USCM"), Alan Korby, Brian Bookmeier, and
Matthew B. Gietzen, including all Exhibits (schedules omitted).(10)
10.26 First Amendment to the Amended and Restated Agreement and Plan of
Merger.(10)
10.27 Loan Agreement, dated April 28, 1995, by and among Fred Kassner
("Lender"), the Company, USCM and PCS., Inc. - West (all Schedules
omitted). (12)
10.28 Security Agreement, dated April 28, 1995, by and among Lender, the
Company, USCM and PCS, Inc. - West. (12)
10.29 Credit Facility Promissory Note, dated April 28, 1995, made by the
Company, USCM and PCS, Inc. - West. (12)
10.30 Warrant Agreement, dated April 28, 1995, by and between the Company
and Lender. (12)
10.31 Registration Rights Agreement, dated April 28, 1995, by and
between the Company and Lender. (12)
10.32 Loan Agreement, dated July 14, 1995, by and among Fred Kassner
("Lender"), the Company, USCM and PCS., Inc. - West (all Schedules
omitted). (11)
10.33 Security Agreement, dated July 14, 1995, by and among Lender, the
Company, USCM and PCS, Inc. - West. (11)
10.34 Credit Facility Promissory Note, dated July 14, 1995, made by the
Company, USCM and PCS, Inc. - West. (11)
10.35 Warrant Agreement, dated July 14, 1995, by and between the Company and
Lender. (11)
10.36 Registration Rights Agreement, dated July 14, 1995, by and between the
Company and Lender. (11)
10.37 Lease Agreement, dated October 30, 1995, for the Thirlane Road,
Roanoke, Virginia property, by and between Abmar Valley Court,
I.P.and Diabetes Self Care. (16)
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<PAGE>
10.38 Health care Receivables Purchase Agreement, dated as of January 17,
1996, by and between the Company, the Providers and Daiwa
Healthco-1, Inc. ("Daiwa"). (14)
10.39 Letter agreement dated January 17, 1996 by and among the Company,
certain of the Providers and Fred Kassner. (14)
10.40 Amendment to Loan Agreement dated as of January 17, 1996 by and among
the Company, the providers and Fred Kassner. (14)
10.41 Stock Pledge Agreement dated January 17, 1996 by and between the
Company, USC-Michigan, Inc. (One of the Providers) and Fred
Kassner.(14)
10.42 Loan and Security Agreement, dated as of August 15, 1996, by and the
Company and HealthPartners Funding, L.P. (15)
10.43 Letter agreement dated August 15, 1996, addressed to HealthPartners
Funding, L.P., and executed by Fred Kassner (15)
10.44 Letter agreement dated August 29, 1996 by abd between the Company and
Fred Kassner, in respect of certain events of default and the
issuance of certain Common Stock purchase warrants. (15)
10.45 Employment Agreement, dated March 10, 1996, by and between Diabetes
Self Care, Inc. And Tod Robinson.
10.46 Promissory Note, dated February 21, 1996 in $500,000 principal amount
made by the Company to H. T. Ardinger.
10.47 Letter agreement dated August 29, 1996 by abd between the Company and
Fred Kassner, in respect of certain events of default and the
issuance of certain Common Stock purchase warrants. (15)
10.48 Letter Agreement dated October 15, 1996, by and between the Company,
its operating subsidiaries and HealthPartners Funding, L.P. (18)
10.49 Letter Agreement dated November 4, 1996, by and between the Company,
its operating subsidiaries and HealthPartners Funding, L.P.(17)
10.50 Letter Agreement dated September 25, 1997, by and between the Company,
its operating subsidiaries and HealthPartners Funding, L.P.
22. Subsidiaries
- ---------------------
1. Incorporated by reference, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 filed on August 3, 1992, SEC No.
33-50426.
2. Incorporated by reference, filed as an exhibit to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 filed on October
13, 1992.
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<PAGE>
3. Incorporated by reference, filed as an exhibit to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 filed on November
10, 1992.
4. Incorporated by reference, filed as an exhibit to Amendment No. 3 to
the Registrant's Registration Statement on Form S-1 filed on November
13, 1992.
5. Incorporated by reference, filed as an exhibit to Amendment No. 4 to
the Registrant's Registration Statement on Form S-1 filed on December
4, 1992.
6. Incorporated by reference, filed as an exhibit to Amendment No. 5 to
the Registrant's Registration Statement on Form S-1 filed on December
8, 1992.
7. Incorporated by reference, filed as an Exhibit to the Company's Report
on Form 8-K, filed on February 23, 1994.
8. Incorporated by reference, filed as an Exhibit to the Company's Annual
Report on Form 10-KSB, filed on October 13, 1994.
9. Incorporated by reference, filed as an Exhibit to the Company's
Current Report on Form 8-K, filed on December 2, 1994.
10. Incorporated by reference, filed as an Exhibit to the Company's
Current Report on Form 8-K, filed on April 19, 1995.
11. Incorporated by reference, filed as an Exhibit to the Company's
Current Report on Form 8-K, filed on July 26, 1995.
12. Incorporated by reference, filed as an exhibit to the Registrant's
Registration Statement on Form SB-2, filed on July 31, 1995, SEC No.
33-95222.
13. Incorporated by reference, filed as an exhibit to the Registrant's
Registration Statement on Form SB-2 filed on July 31, 1995, SEC File
No. 33-95222.
14. Incorporated by reference, filed an Exhibit to the Company's Current
Report on Form 8-K, filed on January 30, 1996.
15. Incorporated by reference, filed as an Exhibit to the Company's Report
on Form 8-K, filed on September 10, 1996.
16. Incorporated by reference, filed as an exhibit to Amendment No. 2 to
the Registrant's Registration Statement on Form SB-2 filed on February
20, 1996, SEC File No. 33-95222.
17. Incorporated by reference, filed as an exhibit to the Company's
Report on Form 10-QSB, filed on November 14, 1996.
18. Incorporated by reference, filed as an exhibit to the Company's
Report on Form 10-KSB, filed on October 15, 1996.
(b) Exhibits LIST OF REPORTS ON FORM 8-K
There were no reports on Form 8-K during the quarter ended June 30,
1997.
-39-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: October 10, 1997 UNIVERSAL SELF CARE, INC.
By: /s/ Brian Bookmeier
-------------------------------
Brian Bookmeier, President and
Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated
Signatures Title Date
---------- ----- ----
/s/ Brian Bookmeier President, Chief October 10,1997
- --------------------- Executive Officer, and
Brian Bookmeier Acting Chief Financial
Officer and Director
/s/ Steven Leichtner Director October 10,1997
- ---------------------
Steven Leichtner, M.D.
/s/ Alan Korby Director October 10,1997
- ---------------------
Alan Korby
/s/ Matthew Gietzen Director October 10,1997
- ---------------------
Matthew Gietzen
/s/ James Linesch Director October 10,1997
- ---------------------
James Linesch
/s/ Edward Buchholz Vice Chairman of the October 10,1997
- --------------------- Board and Director
Edward Buchholz
-40-
<PAGE>
Exhibit 10.46
PROMISSORY NOTE
24 MONTH NOTE
$500,000 UNIVERSAL SELF CARE, INC. FEB 21, 1996
For value received, Universal Self Care, Inc. promises to pay H.T. Ardinger
of 9040 Governors Row, Dallas, Texas, the principal sum of Five Hundred
Thousand Dollars ($500,000.00) with interest starting February 21, 1996, on
the unpaid principal at the rate of ten percent (10%) per annum. Accumulated
interest to date is due and payable February 21, 1997 (the loan anniversary
date). All remaining accumulated interest and principal is due and payable
on February 21, 1998 (24 months from the loan origination).
Universal may pay any principal and/or accumulated interest in advance of the
due dates without penalty. All payments of interest and principal are to be
made in lawful money of the United States of America.
Should default be made in payment of principal and interest and action for
collection be instituted on this Note, Universal promise to pay all
reasonable attorney fees incurred in the collection of this debt.
In acceptance of above terms
- ------------------------------- ----------------------------------------
Brian D. Bookmeier H.T. Ardinger
President 9040 Governors Row
Universal Self Care, Inc. Dallas, Texas 75356
11585 Farmington Road
Livonia, Michigan 48150
<PAGE>
Exhibit 10.50
September 25, 1997
HCFP Funding, Inc.
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Attention: Michael Gardullo, Vice President
Dear Mr. Gardullo:
Reference is made to that certain Loan and Security Agreement dated as
of August 15, 1996 (the "Loan Agreement"), as amended, by and among UNIVERSAL
SELF CARE, INC., a Delaware corporation, DIABETES SELF CARE, INC., a Virginia
corporation, PCS, INC - WEST, a Michigan corporation, and PHYSICIANS SUPPORT
SERVICES, INC., a California corporation (collectively, the "Borrower"), and
HCFP FUNDING, INC. (The "Lender"). All capitalized terms used but not defined
in this letter shall have the respective meanings given them in the Loan
Agreement.
Lender hereby waives the Event of Default by Borrower arising from
Borrower having not met the minimum net income requirement of $500,000.00 as
reflected on the audited consolidated financial statements for the fiscal
year ended June 30, 1997, referenced in Section 8.1 (s) of the Loan
Agreement. The foregoing waiver shall in no way constitute a waiver of any
breach by Borrower of any other provision contained in the Loan Documents, or
a limitation of any of the other rights and remedies of Lender under the Loan
Documents.
Lender and Borrower hereby acknowledge and agree, as evidenced by their
respective signatures below, that the Loan agreement is hereby amended to add
the following Section 8.1(t):
"(t)Borrower's net income (in accordance with GAAP) reflected on the
audited consolidated financial statements for the fiscal year ended June 30,
1998, as reflected on Form 10K submitted by Borrower to the U.S. Securities
and Exchange Commission, shall be no lower than $0 (zero)."
Except as expressly modified hereby, the Loan Agreement the terms,
conditions, and provisions of the Loan Agreement shall remain in full force
and effect and shall not be modified or otherwise effected by the execution
of this letter. A waiver fee of $2,500.00 will be charged to cover
associated expenses.
<PAGE>
Very truly yours,
ATTEST: UNIVERSAL SELF CARE, INC.,
(Seal) a Delaware corporation
By: By:
------------------------ --------------------------
Name: Name:
Title: Title:
ATTEST: DIABETES SELF CARE, INC.,
(Seal) a Virginia corporation
By: By:
------------------------ --------------------------
Name: Name:
Title: Title:
ATTEST: PCS, INC.-WEST,
(Seal) a Michigan corporation
By: By:
------------------------ --------------------------
Name: Name:
Title: Title:
ATTEST: PHYSICIANS SUPPORT SERVICES, INC.
(Seal) a California corporation
By: By:
------------------------ --------------------------
Name: Name:
Title: Title:
2
<PAGE>
THE FOREGOING IS ACKNOWLEDGED AND AGREED AS OF THIS 25TH DAY OF SEPTEMBER
1997:
HCFP FUNDING, INC.,
By:______________________SEAL)
Name:
Title:
3
<PAGE>
Exhibit 22
"SUBSIDIARIES LIST"
1. Physican Support Services, Inc.
2. USC-Michigan, Inc.
3. Diabetes Self Care, Inc.
4. PCS, Inc. - West
5. Healthcare Management Solutions, Inc.
-41-
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 541,814
<SECURITIES> 0
<RECEIVABLES> 12,502,875
<ALLOWANCES> (2,261,684)
<INVENTORY> 551,692
<CURRENT-ASSETS> 11,446,607
<PP&E> 1,574,463
<DEPRECIATION> (618,017)
<TOTAL-ASSETS> 18,298,730
<CURRENT-LIABILITIES> 8,317,802
<BONDS> 0
1,829,658
505,000
<COMMON> 972
<OTHER-SE> 3,016,972
<TOTAL-LIABILITY-AND-EQUITY> 18,298,730
<SALES> 34,001,626
<TOTAL-REVENUES> 34,001,626
<CGS> 19,981,506
<TOTAL-COSTS> 19,981,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,898,198
<INTEREST-EXPENSE> 874,572
<INCOME-PRETAX> (2,653,231)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,653,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> 0
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