-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PQkWLlcI4hJP7zQnLxtnIGKAN2mXuf+JE4Bhn4+sEsz6CzTaDu8EQcqjp8k7la6S RET4QwhwMP0z8/fgWq0vdw== 0000912057-96-022886.txt : 19961016 0000912057-96-022886.hdr.sgml : 19961016 ACCESSION NUMBER: 0000912057-96-022886 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL SELF CARE INC CENTRAL INDEX KEY: 0000879465 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 954228470 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11568 FILM NUMBER: 96643830 BUSINESS ADDRESS: STREET 1: 13715 BURBANK BLVD CITY: VAN NUYS STATE: CA ZIP: 91401 BUSINESS PHONE: 8189941093 MAIL ADDRESS: STREET 1: 13715 BURBANK BLVD CITY: VAN NUYS STATE: CA ZIP: 91401 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________ to_____________ Commission file number 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 $36,257,415. The aggregate market value of the voting stock held by non-affiliates for the issuer as of October 11, 1996 was $11,645,168. The number of shares outstanding of the registrant's Common Stock, $.0001 Par Value, as of October 11, 1996 was 7,889,706 shares. Documents incorporated by reference: None PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Universal Self Care, Inc. ("Universal"), a Delaware corporation incorporated in 1989, is a managed care company that supplies and distributes both prescription and non-prescription medications and medical instruments to persons suffering from diabetes. Universal is the parent corporation for the following wholly-owned subsidiaries: Clinishare Diabetes Centers, Inc., a California corporation ("Clinishare"); Physicians Support Services, Inc., a California corporation ("PSS"); USC-Michigan, Inc., a Michigan corporation and its wholly-owned subsidiary, PCS, Inc. - West ("Patient Care Services"), a Michigan corporation; The Thriftee Group, Inc. (formerly Fieldcor, Inc.), a Virginia corporation and Medical Accounting Specialists, Inc., a Virginia corporation. 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 "Universal Rx". The Company is completing the consolidation of all subsidiary operations in the two primary administrative offices in Livonia, Michigan and Roanoke, Virginia. The Livonia office contains executive offices, new customer development and sales and marketing departments. The Roanoke facility contains administrative offices, accounting, order maintenance, billing and reimbursement processing operations. Warehousing and shipping is regionally distributed in Roanoke, Virginia, Livonia, Michigan and Van Nuys, California. The existing market for the Company's products reaches all 50 states. 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 725,000 new cases being diagnosed each year. The Company's products are currently sold to customers through the efforts of the Company's in-house marketing staff. Sales of such products are made (i) by the efforts of sales representatives employed by the Company; (ii) by mail order for delivery by common carrier and (iii) through managed care contracts (d.b.a. Universal Rx) with business corporations and medical insurance groups. The Company's sales have traditionally been made to persons referred by physicians, diabetes nurse educators and other health care professionals and to persons reached by the Company's print advertising. Managed care contracts are the fastest growing segment of the business, and Management's business plan is directed toward making the managed care business the dominant part of the Company's business in the future. A profile of required products is maintained for each Company customer, and customers receive the necessary diabetes supplies on a scheduled monthly basis. Customers are contacted periodically to determine ongoing requirements and to otherwise adjust product shipments. -2- Universal Rx solicits contracts to provide "managed care services" to corporations that provide self-insured medical coverage to their employees. A contract with a managed care customer generally gives the Company the exclusive right to supply all diabetes-related products to the large numbers of persons whose medical care is provided and/or paid for by the contracting parties, at agreed upon prices, during the contract period. Universal Rx's managed care services include management of diabetes product purchasing and consulting services related to the types and amounts of related products which should be purchased by the customer. The Universal Rx program was designed in anticipation of changes in health care delivery systems proposed by state and Federal governments which are expected to favor managed care contracts. The Company's sales representatives are responsible for contacting customer referral sources and for promoting the Company's scheduled, monthly product shipment program and other services. Based upon medical prescriptions received by the Company, a profile of required products is maintained and customers who are part of the scheduled, monthly shipment program receive the necessary diabetes supplies on a regular monthly basis. Customers are contacted on a periodic basis to determine ongoing requirements and otherwise to adjust product shipments. The primary products sold include insulin, syringes, glucose test strips, glucose monitors, lancets and insulin pumps. Payment for scheduled, monthly home delivery of products is made by the customer's assignment to the Company of the customer's full Medicare, Medicaid (Medi-Cal for California residents eligible for Medicaid benefits) or other third party insurance cost reimbursement amount. The sales price of the Company's products is adjusted for any contractual allowances required by Medicare and 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. Managed care contract customers also receive home delivery of products and individual attention; however, claims are filed directly with the managed care company, with one invoice covering many customers. Payment is usually received in under 30 days with a minimum of administrative effort. The Company management believes that continued and increased participation in managed care contracts can represent a significant opportunity for the Company to improve its operating results. The Company distributes a significant portion of its products by common carrier and the United States Postal Service. Each customer determines an initial list of monthly necessities based upon his or her individual profile as provided by their physician. Based on this profile, the customer receives a monthly shipment of necessary supplies. The Company maintains a pharmacy in Virginia that is licensed by the Virginia State Board of Pharmacy, and one in California 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 supplies that are available by prescription and some non-prescription supplies. Neither pharmacy is available for walk-in sales to customers. -3- REVENUE, ASSETS AND PROFITS The Company's revenues are derived from the sale and distribution of diabetes supplies, equipment, publications and drugs related to the treatment and care of diabetes. During the year ended June 30, 1996, approximately 95% of the Company's total sales revenues were derived from third party payers such as Medicare, Medicaid (including Medi-Cal), insurance companies and other third party payor health care reimbursement programs (including self-insured corporations and HMOs). Approximately 5% of its revenues were from private party payments. Approximately 12% of Company reimbursement sales were made to HMOs and self-insured corporations through the efforts of the managed care program (Universal Rx). Glucose strips, blood glucose monitors, syringes and insulin are the four (4) most important products distributed by the Company. Glucose strip sales accounted for over 65% of the Company's consolidated net sales during the year ended June 30, 1996. SUPPLIERS The Company's largest four suppliers during the fiscal year ended June 30, 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 largest four suppliers during the fiscal year ended June 30, 1995 were Lifescan, Inc., from which the Company purchased approximately $3,900,000 of inventory (26% of total purchases), McKesson Wholesale, Inc., from which the Company purchased approximately $3,384,000 of inventory (22% of total purchases), Overland Pharmacy, Inc., from which the Company purchased approximately $2,335,000 of inventory (15% of total purchases) and Boehringer Mannheim, from which the Company purchased approximately $1,585,000 of inventory (10% of total purchases). The Company's credit terms with its principal suppliers are standard wholesale terms in the pharmaceutical industry, which is a maximum of 25 days post-shipment cash payment or 30, 60 and 90 day terms with manufacturers, depending upon the products purchased. SALES AND MARKETING The Company generates sales through the efforts of 32 "outside" sales representative employees who cover 34 states. In addition, the Company has a staff of 29 "inside" sales -4- representative employees who generate mail order sales from a list of customers who have previously ordered products and new customers generated from advertisements in trade journals. Sales are also generated through print advertising and word of mouth from referral sources and customers. The Company employs a staff of 67 trainers whose sole purpose is to provide individual in- home or in-hospital customer training on products. The Company's outside sales representatives are responsible for developing new referral sources while maintaining the current client base in their assigned territory. All outside sales representatives market directly to the following health care professionals: hospitals, clinics, private physicians, diabetes educators, nurses, dieticians, home care companies, private charitable organizations, county medical services and plan benefit designers, who on a regular basis see people with diabetes and can refer patients to the Company. The Company markets its managed care program to health organizations and large self-insured companies principally through the efforts of sales representatives who work to generate long-term contracts to provide diabetes products to members of HMOs and employee participants in self-insured company health plans. This area is currently and is expected to continue as the fastest growing part of the Company's business. Sales representatives involve themselves in community activities related to diabetes education and at-home diabetes care. The Company, throughout the year, is involved in national trade shows which provide exposure to referral sources. 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. Upon the referral of a potential customer, the Company verifies the insurance coverage and arranges for a personal visit with the customer by a Company 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 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 representative provides detailed instruction on the proper use of the blood glucose testing monitor and on the proper method to administer insulin. The customer will be encouraged to participate in the Company's monthly 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 to customers already experienced in handling the treatment of diabetes. Customers respond to print advertising in industry publications and contact Company representatives to make product purchases. The Company's representatives are -5- knowledgeable about the products and provide a friendly, supportive communication with the customer. Following the initial order, the representative will periodically contact the customer to determine further requirements. The Company maintains a follow-up program to monitor its customers' needs and generate on-going revenues. The Company does not depend upon any one or a limited number of customers for the sale of its products. During the years ended June 30, 1994, 1995 and 1996 no single customer accounted for more than 10% of the Company's consolidated net sales. 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 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 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, and local retailers sell many of the same diabetes supplies and equipment as those sold by the Company. Many of the national 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, but 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 reducing slightly primarily due to mergers and acquisitions and reductions in reimbursement levels for insurance reimbursement (including Medicare and Medicaid). This latter aspect of the -6- 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 third-party billing knowledge, managed care program and ability to sell its products through both mail-order and full service home delivery provides the Company with a competitive advantage in the diabetes products marketplace. PATENTS AND TRADEMARKS The Company possesses no patents. The Company possesses federal trademark protection for its SugarFree-Registered Trademark- logo. The Company conducts its pharmacy and mail order operations under the name "Thriftee Pharmacy & Diabetes Care", for which it has not filed for trademark 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 June 30, 1996, the Company employed approximately 284 full-time employees. Of that number, 7 employees are in senior management, 53 are in sales and marketing and sales support and 224 are in operations and corporate administration. None of the Company's operations 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 and Medicaid are government funded health insurance programs. While Medicare provides federally-funded health insurance coverage for -7- 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 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. 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, 1995 June 30, 1996 - -------------------------------------------------------------------------------------------- Private payers, including insurance companies . . . . . . . . . . . . 20% of Total Sales 19% of Total Sales - -------------------------------------------------------------------------------------------- Medicare, Medicaid and other governmental programs . . . . . . . 75% of Total Sales 69% of Total Sales - -------------------------------------------------------------------------------------------- Managed care contracts . . . . . . 5% of Total Sales 12% of Total Sales - -------------------------------------------------------------------------------------------- 100% of Total Sales 100% of Total Sales - --------------------------------------------------------------------------------------------
The Company accepts assignment of Medicare 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 unreimbursed 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. -8- 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 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, 1996. 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 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 The Company currently has in force workers compensation, property, business auto, general liability and product liability insurance policies for all its operations. The automobile policy has a combined single coverage of $1,000,000. The general and products liability coverage limits are $1,000,000 for each occurrence and $2,000,000 in aggregate. The Company also has a comprehensive general umbrella liability insurance policy covering -9- all its operations. This policy has coverage limits of $5,000,000 for each occurrence, and $5,000,000 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. 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 ----------------- ----------- ------ ----------- ---------- 13715 Burbank Boulevard August 31, $61,764 5,200 No Van Nuys, CA 91401 1996 (with (executive office) two 5-year renewals) 5946 Kester Avenue October 31, $26,088 3,500 No Van Nuys, CA 91411 1997 (warehouse) 4818 Starkey Road March 31, $120,300 13,400 No Roanoke, VA 24014 1998 (with (offices and warehouse) one 5-year renewal) 11585 Farmington Road (1) September $108,432 6,800 Yes Livonia, MI 48150 2002 (Principal executive office and administration) 10957 Farmington Road November 30, $22,713 2,000 No Livonia, MI 48150 1995 (warehouse) 11955 Farmington Road month to $8,400 1,000 No Livonia, MI 48150 month (sales offices) lease 3601 Thirlane Road November 2000 $121,855.50 15,744 No Valley Court, Ste #4 Roanoke, VA 24019 (adminisrative offices)
(1) The landlord of this property currently possesses a lien against the inventory of PSS and the inventory and equipment of PCS to secure lease payments. -10- During the 1995 fiscal year, the Company also leased ten (10) store locations in addition to the Van Nuys, California store. Seven of these stores were located in southern California, two stores were located in Texas and one store was located in Florida. By August 1995, all of the store locations were closed except for the Van Nuys location. The Van Nuys store location was closed April 30, 1996, subject to the retention of sales and accounting group offices at the Van Nuys location. The Van Nuys offices were closed on September 15, 1996. The California sales staff moved at that time to a small facility located at 6442 Coldwater Canyon Ave, North Hollywood, CA. The accounting group at the Van Nuys office moved to the Roanoke, Virginia administrative office facility on August 1, 1996. ITEM 3. LEGAL PROCEEDINGS 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 its 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 issued a Statement of Disputed Issues with the Office of Administrative Appeals, Department of Health Services as its formal appeal to the Letter of Demand. A hearing before the Department of Health Services was held on January 16, 1996. The result of such hearing, announced in September 1996, was confirmation of the State's position. The -11- Company intends to continue vigorously to contest any recovery by the State with respect to such alleged improper pricing practices for services rendered. The Company has also undergone an audit by the California State Board of Equalization ("SBE") as a result of separate findings made by the State Controller's Office. The SBE has disagreed with the Company's policies regarding its sales tax payments on certain items. Based upon Management's independent review, the Company has maintained that sales of diabetes supplies, when made pursuant to a doctor's prescription, are transactions exempt from the collection and payment of sales taxes in California. The SBE has indicated that only sales of insulin and insulin syringes are exempt from California sales tax and that blood glucose meters, testing strips and finger-prick lancets are taxable items. The SBE has assessed sales tax on the sales of these items and it has issued a Notice of Determination against the Company for unpaid sales tax covering the period July 1, 1989 through September 30, 1993. The Notice determined a total amount due of $790,834, which is comprised of taxes due in the amount of $691,695, and interest due through September 30, 1993 in the amount of $99,139. The Company has protested these findings and is in the process of appealing this assessment. A hearing before the SBE is scheduled for November 13, 1996. The Company has accrued and paid sales taxes on sales of the items in question during all periods since the last day of the period under audit. Such sales taxes amounted to approximately $661,902 during the fiscal year ended June 30, 1995 and $759,143 during the fiscal year ended June 30, 1996. The Company has accrued an additional $75,728 in fiscal 1996 for possible interest and penalty payments on the taxes in question. The total accrual for interest and penalty payments as of June 30, 1996 was $228,477. Based upon the above contingencies, the Company has provided reserves, in the event that a defense of its positions does not prevail, of $950,000 during the fiscal year ended June 30, 1994 ($50,000 of which was deposited with SBE in connection with its audit) and of an additional $500,000 during the fiscal year ended June 30, 1995. No additional reserves have been added during the fiscal year ended June 30, 1996. Based upon Management's independent review, no addition to the reserves during 1996 was determined to be appropriate. The combined maximum amount demanded to be paid under both these actions is approximately $2,090,830. Based upon the defenses involved, Management's independent review, and information supplied by the Company's counsel and outside consultants, the Company's Management believes that an estimated combined settlement amount for these actions equal to $1,450,000, or 69% of the maximum amount demanded, is reasonable under the circumstances. Allocation of the total reserve of $1,450,000 between the DHS and the SBE actions is not possible because, in the event of a settlement with DHS, the amount of the liability with the SBE could be favorably impacted. The total reserve of $1,450,000 is considered adequate at this time to cover any anticipated settlements relating to these matters. On January 17, 1996, the Company put into escrow $1,550,00 of the proceeds from its Health care Receivables Purchase Agreement with Daiwa Healthco-1, Inc. (the "Daiwa Agreement") to fund such reserve. Following termination of the Daiwa Agreement, in connection with its first borrowings under a Loan and Security Agreement (the "HealthPartners Facility"), dated as of August 15, 1996, with HealthPartners Funding, L.P. ("HealthPartners"), the Company was not required to create an escrow account in order to fund a reserve for settlement of the California SBE and State Controller's Office -12- actions, although the maximum amount of borrowings otherwise available under the HealthPartners Facility is reduced by $1,500,000 until such time as both California actions are settled. The PCS Companies were previously the subject of an investigation by Medicare for (i) Medicare's alleged overpayment for products and services provided by the PCS Companies and (ii) Medicare's payment to the PCS Companies 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 has requested an In-person Fair Trial Appeal to contest Medicare's appregate $379,000 of withheld reimbursements, which appellate hearing is expected to occur before January 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None (The remainder of this page has been intentionally left blank) -13- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The principal market for trading the Company's securities is 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, 1993, 1994, 1995 and 1996, 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. High Bid Low Bid -------- ------- FISCAL YEAR ENDED JUNE 30, 1993 Second Quarter ended December 31, 1992 (commencing December 18, 1992) 3 2-9/16 Third quarter ended March 31, 1993 2-3/4 1-7/8 Fourth quarter ended June 30,1993 2-9/16 2-1/16 FISCAL YEAR ENDED JUNE 30, 1994 First Quarter ended September 30, 1993 2-11/16 1-3/8 Second Quarter ended December 31, 1993 2-15/16 2-3/8 Third Quarter ended March 31, 1994 2-5/8 1-7/8 Fourth Quarter ended June 30, 1994 3-7/16 1-3/4 FISCAL YEAR ENDED JUNE 30, 1995 First Quarter ended September 30, 1994 4 2-1/8 Second Quarter ended December 31, 1994 3-1/4 1-7/8 Third Quarter ended March 31, 1995 2-3/8 1-1/8 Fourth Quarter ended June 30, 1995 3-1/8 1-5/8 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 -14- On October 8, 1996, the last trade price of the Common Stock was $2-7/16 as reported on Nasdaq, and the Company had 95 shareholders of record. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock (other than S corporation dividends paid by the PCS Companies prior to the Merger) 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, the Health care Partners Agreement forbids the future payment of dividends and redemption payments to holders of the Company's Common Stock without HealthPartners's consent. 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. 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), such that during each of the five annual periods commencing with the period ending September 30, 1996 and ending with the period ending September 30, 2000, the Company shall redeem not less than 116,000 shares of the Series A Preferred Stock for payment aggregating not less than Five Hundred Eighty Thousand ($580,000) Dollars in each such annual period; (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. 116,000 shares of Series A Preferred stock have been redeemed through September 30, 1996. 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 the Closing Date of the Merger 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 -15- a 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 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. Year Ended June 30, ------------------- 1995 1996 ---- ---- Net sales . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 65.2 62.1 ----- ----- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 34.8 37.9 Selling, general & administrative. . . . . . . . . . . . . . 38.4 41.4 Restructuring costs. . . . . . . . . . . . . . . . . . . . . 2.0 (0.3) Provision for State Audits . . . . . . . . . . . . . . . . . 2.2 0.0 ----- ----- Income (loss) from operations . . . . . . . . . . . . . . . (7.8) (3.2) Chrgs/writeoff terminated A/R sales agrmt . . . . . . . . . . 0.0 2.1 Interest expense . . . . . . . . . . . . . . . . . . . . . . 2.0 1.7 ----- ----- Loss before income tax benefit . . . . . . . . . . . . . . . (9.8) (7.0) Income Tax Benefit . . . . . . . . . . . . . . . . . . . . . 0.9 0.0 Net income (loss) . . . . . . . . . . . . . . . . . . . . . (8.9)% (7.0)% ----- ----- ----- ----- -16- FISCAL YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995 Revenue for the year ended June 30, 1996 was $36,257,415, an increase of $13,531,174, or 60%, from the year ended June 30, 1995. Patient Care Services revenue amounted to $2,569,274 during the 1995 fiscal year, being consolidated with Universal for only one quarter following the acquisition of Patient Care Services effective April 1, 1995. Patient Care Services revenue for fiscal year 1996 was $15,331,590. Revenue from the Company's discounted retail store operations was $137,512 for fiscal year 1996, or $1,006,677 less than similar revenue for fiscal year 1995. The last Company retail store closed on April 30, 1996. The annual revenue increase for full-year operations (exclusive of Patient Care Services and the retail stores), was $1,775,535 or a 9% increase over 1995. This increase is primarily due to increased sales volume from the efforts of the Company's sales staff, and increased managed care business from new and existing contracts. Total cost of goods sold for fiscal year 1995 was over 65% of revenue, while total cost of goods sold for fiscal year 1996 was $22,504,611 or approximately 62% of revenue. This three point improvement is the result of negotiated lower prices for higher purchase volumes, and favorable contracted programs with several vendors. Selling, general and administrative expenses for fiscal year 1996 were $15,022,290 or 41% of revenue, as compared to $8,720,395 and 38% of revenue for fiscal year 1995. This higher level of expense is the result of expense duplications following the consolidation and reorganization associated with the acquisition of PCS in fiscal 1995. The overlap of function, extensive travel requirements and the lack of a common computer network created a transitory need for more personnel Company wide, and resulted in increased MIS expense and travel expense. Total company staffing increased from 229 full-time employees in the beginning of the 1996 fiscal year to 284 at the end of the year. Payroll expense is expected to decline in fiscal 1997; especially as a percentage of revenue. Reorganization steps are well advanced at this time, and a complete computer system upgrade is nearing completion. Additional space was leased in Roanoke, Virginia on January 1, 1996 to house expanded executive and administrative functions. The original Roanoke, Virginia facility has been retained and is used as a warehouse and shipping center. Other expenses included substantial fees and interest expense related to a financing facility with DAIWA Healthco-1, Inc. (The "Daiwa facility") which was utilized from January 1996 until May 1996. Net interest expense increased in fiscal year 1996 to $615,552 from $470,139 in fiscal year 1995. This increase was partly due to $1,500,000 borrowed under the Daiwa facility and held as a cash reserve to fund California legal proceedings settlements. See Item 3, Legal Proceedings. Other interest expense resulted from increased borrowings under a line of credit with Crestar bank that was utilized in the first six months of fiscal 1996. In connection with the Acquisition of Patient Care Services, the Company established a deferred tax liability of $200,000. Due to the accumulated losses from operations, this liability was an offset as of June 30, 1995. As such, the Company recognized a corresponding income tax benefit of $200,000 in Fiscal 1995 that is not available in 1996. -17- Net loss increased to $2,532,238 in Fiscal 1996 from $2,032,239 in Fiscal 1995. The increase is primarily due to the increase in selling, general and administrative expenses, financing fees and interest expense. Also an additional reserve in the amount of $380,400 was taken for doubtful accounts, bringing the reserve total to $2,007,000 against a gross accounts receivable balance of $12,207,373. In association with certain legal proceedings in California, an additional $75,728 was accrued for possible interest and penalty payments. See Item 3, Legal Proceedings. LIQUIDITY AND CAPITAL RESOURCES In February 1995, Universal completed its borrowing of an aggregate of $400,000; evidenced by 10% notes due the earlier of completion of an additional public offering or July 1995, less placement costs of $52,000 ((the "Bridge Loan"). The Bridge Loan was repaid in July 1995. In July, 1995, the Bridge Loan lenders exercised warrants to acquire 222,223 shares of Common Stock acquired in the Bridge Loan transaction. In June and July 1995, the Company completed a private placement of 148,000 shares of Common Stock at $1.00 per share to management and non-management employees of the Company In August 1995, the Company purchased certain assets of a diabetes supply segment of a business that provides in-patient care for individuals with diabetes. The agreement provides the Company with the opportunity to sell diabetes supplies to the on-going customers of the company that provides in- patient care. The purchase price for these assets was approximately $609,000 and was payable as $150,000 at closing; followed by nine successive monthly installments of $51,012 plus interest. The acquisition involved the purchase of accounts receivable of approximately $326,000 and inventory and fixed assets of approximately $109,000. Goodwill was recorded in connection with this purchase of approximately $174,000. All purchase price installment payments have been made. 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. In connection with the Thriftee acquisition, Universal was required to make remaining payments aggregating $100,000 to Messrs. Buchholz, Wisely and Payne, the former stockholders of The Thriftee Group, on February 15, 1996. This debt was paid on February 15, 1996 by issuing 74,073 shares of common stock at an assumed per share price of $1.35. -18- To meet a short-term cash flow shortage in February 1996, the Company borrowed, on an unsecured basis, $500,000 at 8% annual interest from H. T. Ardinger, a principal stockholder of the Company. This loan originally matured on June 20, 1996, but was subsequently refinanced. The Company's $500,000 principal indebtedness to Mr. Ardinger is currently evidenced by a note maturing on February 21, 1998. All principal is due and payable in a single installment on February 21, 1998 with interest accruing at 10% per annum, One payment of accrued interest is due and payable on February 21, 1997, and a second installment of accrued interest to be due and payable along with outstanding principal on February 21, 1998. During the first half of fiscal 1996, the Company continued borrowing against its $1,200,000 revolving bank line of credit with Crestar Bank. On January 17, 1996, the Company entered into an Agreement with Daiwa Healthco-1, Inc. ("Daiwa") which provided for weekly sales of qualifying accounts receivable to Daiwa. The qualifying accounts receivable generally consisted of accounts that were less than 180 days unpaid from the service date. The sale proceeds to the Company were determined on a formula basis after allowance for certain default reserves, dilution reserves, servicing fees and other expenses. The initial sale of accounts receivable to Daiwa consisted of accounts receivable in an aggregate face amount of 6,000,000, and yielded initial gross proceeds to the Company of $3,840,000. In calculating the proceeds, Daiwa held back contractual allowances ( including fees) of approximately $2,160,000, or 36% of the face amount of the receivables. Fees charged in connection with this sale were approximately $117,000, or 2.44%. Under the terms of the agreement, collections on the receivables in excess of the initial gross proceeds, plus the fees, are returned to the Company. All accounts receivable sold to Daiwa on which Daiwa does not collect payment within 180 days are reassigned to the Company and replaced with eligible receivables of equal value. The proceeds from the Daiwa sale were applied to effect repayment in full of the Company's indebtedness to Crestar Bank under its revolving accounts receivable financing agreement in the amount of $1,009,000. Additionally, the Company repaid a loan owed to a principal stockholder lender in the principal amount of $1,000,000. With Daiwa sale proceeds, the Company also funded an escrow account in the amount of $1,550,000 to cover any recoveries which may be due as a result of the legal proceedings related to SBE and/or DHS. See Item 3, Legal Proceedings. The balance of the proceeds were applied to loan costs and to working capital. On July 14, 1995, the Company borrowed, from the same principal stockholder lender, $2,000,000 in exchange for a note payable bearing interest at a commercial bank's fluctuating prime rate plus two percent. This note matures in July 1997, and was secured by the accounts receivable of PCS, Inc. - West. At this time, the Company also borrowed an additional $250,000 from the same lender on an unsecured basis. As part of this financing, the Company issued warrants to acquire an aggregate 310,000 shares of Common Stock at an exercise price of $1.00 per share. The terms of this financing were amended in connection with the Daiwa purchase of qualifying accounts receivable. The two secured notes, aggregating $3,000,000 principal, along with the $250,000 unsecured note to the same lender, was secured by a subordinated lien on all of the Company's accounts receivable -19- not purchased by Daiwa. In April 1996, $776,482 of the indebtedness to this lender was repaid through the cancellation of indebtedness as payment of the exercise price of 450,000 warrants which were issued in connection with debt financings ($1.00 exercise price per warrant) and of 217,655 Series B Warrants ($1.50 exercise price per warrant). By May 23, 1996, Daiwa had less than $1,540,000 in purchased accounts receivable from Universal. The Company used this opportunity to buy back these remaining accounts from Daiwa by applying the reserve amount of $1,540,000 and ending the active use of this facility. In April 1996, the Company reduced the exercise price of its Series B Warrants from $4.40 to $1.50 until April 30, 1996. Each shareholder who exercised one Series B Warrant was also entitled to receive one Series A Warrant for each Series B warrant exercised. A total of 344,720 Series B Warrants were exercised, yielding $517,080 in additional capital funding to the Company. An additonal 217,655 Series B Warrants were exercised by one of the Company's lenders in exchange for payment of $326,482 in debt (see above). In February 1994, pursuant to agreements executed in December 1993, all of the shares of capital stock in the PCS Companies held by Ms. Barbara Milinko, a former principal shareholder of such companies, were purchased in equal portions by Messrs. Korby, Bookmeier and Gietzen, the principal shareholders of Patient Care Services (PCS) at the time of the Merger, for an aggregate of $325,000 (the "Stock Note"). At the same time that Ms. Milinko sold her shares, her employment by the PCS Companies was terminated and the PCS Companies 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, 1996, $244,429 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 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. 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. -20- 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 has initially been 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. In connection with the transactions pursuant to the Loan Agreement with HealthPartners, the Company entered into an agreement with Fred Kassner, to whom the Company remains indebted in the approximate amount of $1,474,000 (which is due and payable on July 14, 1997). Pursuant to such agreement, Mr. Kassner has agreed to subordinate his lien on the accounts receivable of the Company to the lien and security interest held by HealthPartners in such collateral. In addition, in consideration of Mr. Kassner's waiver of certain events of default under his loan agreement with the Company (such events of default consisting of the Company's failure to make certain mandatory prepayments out of the proceeds received by the Company from certain exercises of the Company's common stock purchase warrants), the Company has agreed to issue to Mr. Kassner five-year warrants entitling Mr. Kassner to purchase up to 100,000 shares of common stock of the Company at an exercise price of $2.50 per share. Mr. Kassner has a pledge of all the outstanding stock of each of the Company's operating subsidiaries to further secure the Company's outstanding indebtedness to him. CASH FLOW As of June 30, 1996 Universal had working capital of $296,968 compared to a working capital of $767,857 at June 30, 1995. The decrease in working capital during the year is primarily due to losses from operations plus the voluntary termination of a financing facility. As of June 30, 1996, Universal had $91,066 in cash, compared to cash of $87,853 at June 30, 1995. This slight increase in cash results from $764,000 obtained from operations, $780,003 used by investing activities and $19,216 provided by financing activities. Accounts receivable for the Company increased by $1,043,823 (net of effect of acquisitions) during the fiscal year ended June 30, 1996. The average days revenues in accounts receivable increased from approximately 85 days at June 30, 1995 to just over 100 days at June 30, 1996. This increase is due to higher 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. -21- The effect of the increase in accounts receivable was partially offset by an increase in the trade accounts payable of $1,380,836 during the fiscal year ended June 30, 1996. This increase was due to more favorable payment terms with certain vendors to manage the increase in purchasing requirements to support the higher level of sales revenues, and to delayed payments to other vendors. The Company anticipates that significant cash requirements will be required to maintain and grow the business. During the twelve months ended October 31, 1997, mandatory redemption payments are due on the Series A Preferred Stock which equal $580,000, installment payments of approximately $125,000 are due under a note payable, and deferred compensation payments are due of approximately $82,000. On July 14, 1997, a note payable of approximately $1,474,000 is due. The Company is working to meet these cash obligations and to continue its growth by (i) increasing the rate of collection on older accounts receivable; thereby decreasing the size of accounts receivable, (ii) restructuring the work flow for efficiency, (iii) controlling expenditures to reduce general operating costs, (iii) expanding the loan facility with HealthPartners and (iv) exploring the possibility of a new equity offering. NET OPERATING LOSSES The Company has net operating loss carryforwards for tax purposes totaling $5,150,000 at June 30, 1996 expiring in the years 2004 to 2011. Substantially all of these 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. ITEM 7. FINANCIAL STATEMENTS Page Number ------ INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED BALANCE SHEET F-3 CONSOLIDATED STATEMENT OF OPERATIONS F-4 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F-5 CONSOLIDATED STATEMENT OF CASH FLOWS F-6-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-22 -22- 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, 1996 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Universal Self Care, Inc. and Subsidiaries as of June 30, 1996 and the results of its operations and its cash flows for the years ended June 30, 1996 and 1995 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 20, 1996 -23- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30,1996 ASSETS CURRENT ASSETS: Cash $ 91,066 Accounts receivable, net of allowance for doubtful accounts of $2,007,000 10,200,373 Inventories 551,154 Prepaid expenses 136,036 ------------ TOTAL CURRENT ASSETS 10,978,629 PROPERTY AND EQUIPMENT net of accumulated depreciation of $354,361 972,334 INTANGIBLE ASSETS, net of accumulated amortization of $532,771 6,201,901 DEPOSITS AND OTHER ASSETS 56,204 ------------ $ 18,209,068 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 6,694,173 Notes payable - current portion 300,259 Related party loans 60,000 Accrued liabilities 1,632,911 State audit reserves 1,400,000 Payroll taxes payable 594,318 ------------ TOTAL CURRENT LIABILITIES 10,681,661 NOTES PAYABLE, net of current portion 2,315,469 REDEEMABLE PREFERRED STOCK, Series A 2,246,209 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, Series B Cumulative Convertible, $.0001 par value, 10,000,000 shares authorized, 1,580,000 shares issued and outstanding 505,000 Common stock, $.0001 par value, 20,000,000 shares authorized, 7,888,006 shares issued and outstanding 788 Additional paid-in capital 10,623,796 Accumulated deficit (8,163,855) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,965,729 ------------ $ 18,209,068 ------------ ------------
See notes to consolidated financial statements. -24- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30, --------------------------- 1996 1995 ------------ ------------ REVENUES $ 36,257,415 $ 22,726,241 COST OF GOODS SOLD 22,504,611 14,813,946 ------------ ------------ GROSS PROFIT 13,752,804 7,912,295 ------------ ------------ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,022,290 8,720,395 RESTRUCTURING CHARGES (100,507) 454,000 PROVISION FOR STATE AUDITS -- 500,000 ------------ ------------ 14,921,783 9,674,395 ------------ ------------ OPERATING LOSS BEFORE OTHER EXPENSES (1,168,979) (1,762,100) OTHER EXPENSES: Charges and writeoffs in connection with terminated accounts receivable sales agreement 747,707 -- Interest expense, net 615,552 470,139 ------------ ------------ 1,363,259 470,139 ------------ ------------ LOSS BEFORE INCOME TAX BENEFIT (2,532,238) (2,232,239) INCOME TAX BENEFIT -- 200,000 ------------ ------------ NET LOSS $ (2,532,238) $ (2,032,239) ------------ ------------ ------------ ------------ NET LOSS PER SHARE $ (0.40) $ (0.48) ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION 6,843,943 4,243,224 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. -25- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Series B Common Stock Additional Total ----------------------- ----------------- Paid-In Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity ---------- ---------- --------- ------ ------------ ------------ ----------- Balance - June 30, 1994 - $ - 3,789,057 $ 379 $ 6,110,256 $ (3,337,801) $ 2,772,834 Shares issued in acquisition of PCS 1,000,000 505,000 1,400,000 140 1,413,860 - 1,919,000 Shares issued for services - - 15,000 1 26,999 - 27,000 Issuance of common stock - - 945,000 95 1,056,836 - 1,056,931 Dividends paid on Preferred Stock Series A (50,092) (50,092) Net loss - - - - - (2,032,239) (2,032,239) ---------- ---------- --------- ------ ------------ ------------ ----------- 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) ---------- ---------- --------- ------ ------------ ------------ ----------- 1,000,000 $505,000 7,888,006 $ 788 $ 10,623,796 $ (8,163,855) $ 2,965,729 ---------- ---------- --------- ------ ------------ ------------ ----------- ---------- ---------- --------- ------ ------------ ------------ -----------
See notes to consolidated financial statements. -26- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30 ---------------------------- 1996 1995 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,532,238) $ (2,032,239) ------------ ------------ Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 549,083 269,577 Loss on disposal of fixed assets 23,632 27,449 Shares issued for services - 27,000 Changes in operating assets and liabilities (net of effects of acquisitions): Increase in accounts receivables (1,043,823) (2,225,002) Decrease (increase) in inventories 803,778 (84,679) Decrease (increase) in prepaid expenses 179,498 (241,411) Decrease in deposits and other assets 153,464 70,405 (Increase) in intangible assets - (110,916) Increase in accounts payable 1,480,836 1,757,113 Increase in accrued liabilities 555,452 46,460 Increase (decrease) in payroll taxes payable 594,318 (200,000) Increase in state audit reserves - 500,000 ------------ ------------ Total adjustments 3,296,238 (164,004) ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 764,000 (2,196,243) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (585,697) (132,122) Net cash paid for acquisitions (194,306) (176,168) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (780,003) (308,290) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of related party loans (100,000) (50,000) Repayment of revolving credit line (884,000) (261,800) Proceeds from sale of securities 652,508 1,023,811 Proceeds from related party loans 60,000 300,000 Net proceeds from (repayment of) long-term debt 532,375 1,328,482 Dividends paid on Series A Preferred Stock (211,485) - Redemption of Series A Preferred Stock (30,182) - ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 19,216 2,340,493 ------------ ------------ NET INCREASE (DECREASE) IN CASH 3,213 (164,040) CASH AT BEGINNING OF YEAR 87,853 251,893 ------------ ------------ CASH AT END OF YEAR $ 91,066 $ 87,853 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. -27- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, --------------------- 1996 1995 --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest and finance charges $ 644,082 $ 447,880 --------- --------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: During the year ended June 30, 1995, the Company issued securities with a total value of $4,145,299 in connection with the acquisition of PCS. During the year ended June 30, 1995, the Company accreted $50,092 in dividends on Class A Preferred Stock. 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 converted notes of $776,482 as consideration for 667,655 options which were exercised. During the year ended June 30, 1996, a director converted notes of $150,000 as consideration for 150,000 options which were exercised. See notes to consolidated financial statements. -28- UNIVERSAL SELF CARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 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. 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. 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, Medicaid and Medicare 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 -29- 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, 1996 and 1995, 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. Shares Issued for Services - Compensation expense is recorded when shares or options are granted for services based on the difference between the fair market value of the securities on the grant date and the amount required to be paid by the recipient. I. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -30- J. Recently Enacted Accounting Pronouncement - 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 chose to follow the accounting proscribed by the standard for securities issued to employees or to continue to follow the method proscribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, coupled with certain pro forma disclosures. The Company has not yet determined whether it will adopt the accounting aspects of this standard or simply choose to provide the required disclosures. If the disclosure-only option is selected, there would be no financial statement impact resulting from this standard. If the Company decides to adopt the accounting aspects, the financial statement impact of such decision can not be determined at this time. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following: Office equipment $ 1,169,21 Leasehold improvements 157,478 ------------ 1,326,69 Accumulated depreciation (354,361) ------------ $ 972,334 ------------ ------------ 3. COMMITMENTS AND CONTINGENCIES A. 1) Lease Commitments - The Company is obligated under seven non- cancelable operating leases. One location was closed during the fiscal year ended June 30, 1996, the lease for which expires August 31, 1996. Rent expense for the years ended June 30, 1996 and 1995 was $526,289 and $444,270, respectively. Minimum rental commitments for the remaining active leases over the next five years are as follows: 1997 $ 369,468 1998 376,952 1999 247,872 2000 249,840 2001 55,760 -31- 2) Employment Agreements - In February 1995, the Company entered into an employment agreement with the President of Thriftee. The agreement called for an annual base salary of $85,000, plus commissions and terminates in December 1996. In September 1995, the agreement was amended to increase the annual salary base to $150,000 and eliminate the provision for commissions. During the fiscal year 1996, the Company granted nonqualified five-year stock options to purchase 41,667 shares of the Company's common stock, exercisable commencing May 1, 1996 at an exercise price of $1.35 per share, in exchange for forgiveness of $50,000 of compensation payable under this contract over the period from May 1996 through April 1997. 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. During the fiscal year 1996, the Company granted nonqualified five-year stock options to purchase an aggregate of 375,000 shares of the Company's common stock, exercisable commencing May 1, 1996 at an exercise price of $1.35 per share, in exchange for forgiveness of aggregate compensation of $450,000 payable under these contracts over the period from May 1996 through April 1997. 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. 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 that covered the period from July 1, 1990 through June 30, 1993. 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 its customers which are not in conformance with Medi-Cal regulations. Under the regulations, a company may not charge any customer prices less than those charged to the Medi-Cal program. The Company maintains that it has conformed with pricing regulations because its prices are consistent for the services being provided. They contend that the Representatives from the Controller's Office have compared prices for different services with different delivery methods. The Company further believes that the Medi-Cal program was charged the "prevailing prices" charged for supplies, and those charges were in compliance with current regulations. 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 -32- the products delivered. In July 1995, the State Controller's Office issued an Auditor's Report with findings to the Department of Health Services ("DHS"). The Report recommends a recovery of approximately $1.3 million due to such alleged two-tier pricing. In October 1995, the State Controller's Office issued a Letter of Demand for the recovery of approximately $1.3 million resulting from the issues regarding two-tier pricing. In November 1995, the Company issued a Statement of Disputed Issues with the Office of Administrative Appeals, Department of Health Services as its formal appeal to the Letter of Demand. A hearing before the Department of Health Services was held on January 16, 1996, resulting in an affirmation of the State's position. Company management intends to continue vigorously defending its position regarding pricing practices among its subsidiaries. The Company has also undergone an audit by the California State Board of Equalization (SBE) as a result of findings from the State Controller's Office. The SBE has disagreed with the Company's policies regarding sales tax payment on certain items. The Company has maintained that sales of diabetes supplies, when made pursuant to a doctor's prescription, are transactions exempt from the payment of sales taxes in California. The SBE feels that only the sales of insulin and insulin syringes are exempt from California sales tax and the blood glucose meters, testing strips and finger-prick lancets are considered to be taxable items. The SBE has assessed sales tax on the sales of these items and they have issued a Notice of Determination covering the period from July 1, 1989 through September 30, 1993 totaling approximately $860,000. The Company has protested these findings and will appeal this assessment. The Company accrued and paid sales taxes of $661,902 on sales of the items in question during the fiscal year ended June 30, 1996. Based upon the above contingencies, the Company has provided a reserve, in the event that a defense of its position does not prevail, of $950,000 during the fiscal year ended June 30, 1994 ($50,000 of which was deposited in connection with the sales tax issue) and has provided a further reserve of $500,000 during the fiscal year ended June 30, 1995. The addition to the reserves during 1995 was determined to be appropriate at that time because management feels that a compromise and settlement may be required in order to terminate each of these matters. Allocation of the total reserve of $1,450,000 between the DHS and the SBE actions is not possible because, in the event of a settlement with DHS, the amount of the liability with the SBE could be favorably impacted. The total reserve of $1,450,000 is considered adequate at this time to cover any anticipated settlements relating to these matters. 2) Medicare Audit- The PCS Companies are currently the subject of an investigation by Medicare for (i) Medicare's alleged overpayment for products -33- provided by the PCS Companies and (ii) Medicare's payment to the PCS Companies for claims which were allegedly not properly subject to Medicare reimbursement. Medicare has withheld approximately $300,000 of the payments due for claims reimbursement to cover the estimated liability which may result from this investigation. Medicare has withheld an additional $79,000 of payments during July 1996 to cover the final liability identified during its investigation. Management of the Company intends to vigorously defend this assessment. 4. NOTES PAYABLE Notes payable at June 30, 1996 consists of the following: Notes payable to an individual, unsecured, interest payable at 10%, due February 1998 $ 500,000 Notes payable to an individual, interest payable at prime + 2%, due July 1997, net of discount 1,390,516 Note payable to former employee of PCS, interest imputed at 8%, payable in monthly installments, maturing in 2000, secured by the tangible and intangible assets of PCS 244,429 Due to a former owner of a subsidiary, unsecured, interest payable at 10%, payable monthly, maturing March 1999 299,358 Others, with various interest rates and maturity dates 181,425 ------------- 2,615,728 Less: current maturities (300,259) ------------- $ 2,315,469 ------------- ------------- Principal payments through maturity are as follows: 1997 $ 300,259 1998 2,115,532 1999 165,623 2000 34,314 -34- 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 No. 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, 1996, the Company had net deferred tax assets of $2,595,000. The Company has recorded a valuation allowance for the full amount of the net deferred tax assets. The following table illustrates the source and status of the Company's major deferred tax assets and (liabilities): Net operating loss carryforward $ 2,060,000 Litigation accruals 580,000 Accrued compensation 157,000 Cash to accrual adjustments (202,000) Valuation allowance (2,595,000) -------------- Net deferred tax asset recorded $ - -------------- -------------- At its acquisition date, PCS had a net deferred tax liability of $200,000 related to cash to accrual adjustments offset by accrued compensation deductions. This liability was eliminated through the tax effects of losses subsequent to the acquisition, enabling the Company to recognize some of the tax benefits of such losses. 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, -------------------------- 1996 1995 ----------- ---------- Income tax benefit computed at statutory rate $ 886,000 $ 810,000 Effect of permanent differences (184,000) (64,000) Effect of temporary differences (8,000) (259,000) Income tax benefit not recognized (694,000) (287,000) ----------- ---------- Income tax benefit $ - $ 200,000 ----------- ---------- ----------- ---------- -35- The Company has net operating loss carryforwards for tax purposes totaling $5,150,000 at June 30, 1996 expiring in the years 2004 to 2011. 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 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. The following table summarizes selected pro forma consolidated results of operations for the year ended June 30, 1995 (unaudited) of the Company and PCS as though the acquisition had been consummated at July 1, 1994. The pro forma amounts give effect to appropriate adjustments for the fair value of assets acquired and amortization of goodwill, depreciation and the issuance of Company securities. Furthermore, officer salary levels of PCS are adjusted to -36- reflect the new levels contractually agreed to upon the Acquisition. Income tax effects of all the above adjustments are recorded where appropriate. Year Ended June 30, 1995 ------------- Total Revenue $ 32,956,276 Net Loss $ (2,771,065) Net Loss per share (1) $ (0.55) Weighted Average Number of Shares 5,351,557 (1) Includes an adjustment for preferred stock dividends. 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: 1997 $ 580,000 1998 580,000 1999 580,000 2000 580,000 2001 290,000 -37- 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 November 1994, the Company agreed to issue 15,000 shares of common stock in settlement of certain compensation claims. Such shares were valued at an aggregate amount of $27,000. D. In April 1995, the Company sold 500,000 shares to an unrelated third party for $1.00 per share. E. In May 1995, the Company sold 300,000 shares to another unrelated third party for $1.00 per share. F. In June 1995, the Company sold 125,000 shares to a consultant for $1.00 per share, which is the value at which they were accounted for. G. 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. H. 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. I. 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. -38- J. In April, 1996, the Company issued 32,278 shares in connection with an acquisition valued at $150,000. K. 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. L. 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). M. In June 1996, an officer exercised options to purchase 100,000 shares at $1.50 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 (such options are all still outstanding and exercisable at June 30, 1995). 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 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 as of June 30, 1995. -39- 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 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 five year options at $1.35 per share to four officers in consideration of their forgiving salaries. 10. 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. 11. 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. -40- 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. An additional $776,483 was converted to equity as consideration for the exercise price of 667,655 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. 12. 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. As of June 30, 1996, the Company had $60,000 in loans from three individuals serving as officers and/or directors. Such amounts bear various interest rates and are due on demand. -41- 13. FOURTH QUARTER ADJUSTMENTS (UNAUDITED) The Company incurred approximately $500,000 in charges and fees due to the termination of its accounts receivable sales agreement with Daiwa. 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 $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 -42- 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 + 1/4%. The term of the agreement is three years. Outstanding principal under the agreement is secured by a first priority lien against substantially all of the Company's assets. On 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 financial covenants which require that the Company's net loss not exceed $50,000 for its quarter ended September 30, 1996, and that it achieve net income of at least $500,000 for its fiscal year ended June 30, 1997. 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. -43- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None (The remainder of this page has been intentionally left blank) -44- 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 October 11, 1996 are as follows: NAME AGE POSITION WITH THE COMPANY ---- --- -------------------------- Brian D. Bookmeier 38 President, Chief Executive Officer and Director Robert M. Rubin 56 Chairman of the Board of Directors Richard R. Hough 51 Vice President, Chief Operating Officer, Chief Financial Officer and Secretary Tod J. Robinson 35 Vice President - National Sales for Diabetes Self Care, Inc. (formerly Thriftee Group) Edward T. Buchholz 53 Executive Vice President, Divisional President of Diabetes Self Care, Inc. (formerly Thriftee Group) and Director Alan M. Korby 39 Vice President, Divisional President of PCS and Director Matthew B. Gietzen 33 Vice President of Fulfillment and Director Damon D. Testaverde 48 Director Set forth below is a brief background of the officers, directors and key employees of the Company, based on information supplied by them. -44- ROBERT M. RUBIN. Since May 1991, Mr. Rubin has been the Chairman of the Board and a principal stockholder of USC. Mr. Rubin was the founder, President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI") form its inception in 1976 until May 1986. Mr. Rubin continued as a director of SCI (now known as Olsten Corporation ["Olsten"] until the latter part of 1987. Olsten, an American Stock Exchange listed company, is engaged in providing home care and institutional staffing services and health care management services. Mr. Rubin is also a director, Chairman, Chief Executive Officer and minority stockholder of American United Global, Inc. ("AUG"), a public company engaged in the manufacture of sealing devices for automotive, aerospace and general industrial applications. From May 1991 to January 1994, Mr. Rubin served as Chairman of the Board and Chief Executive Officer of AUG and its subsidiaries. Mr. Rubin is also Chairman of the Board, Chief Executive Officer and a stockholder of ERD Waste Technology, Inc., a diversified waste management company specializing in the management and disposal of municipal solid waste, industrial and commercial non-hazardous waste and hazardous waste. Mr. Rubin is the Chairman of the Board and, through his equity ownership of AUG, a minority stockholder of Western Power & Equipment Corp., a public company engaged in the distribution of construction equipment, principally manufactured by Case Corporation. Mr. Rubin is also a director and minority stockholder of Response USA, Inc., a public company engaged in the sale and distribution of electronic security and personal emergency response systems; Diplomat Corporation, a public company engaged in the manufacture and distribution of baby products; Help at Home, Inc., a public company which provides home health care personnel; and Kaye Kotts Associates, Inc., a public company which provides tax preparation and assistance services. Mr. Rubin is a former director and Vice Chairman, and is currently a minority stockholder, of American Complex Care, Inc., a public company formerly engaged in providing on-site health care services, including intra-dermal infusion therapies. In April 1995, American Complex Care, Incorporated's operating subsidiaries made assignments of their assets for the benefits of creditors without resort to bankruptcy proceedings. BRIAN D. BOOKMEIER. Mr. Bookmeier has served as President, Chief Executive Officer and a director of USC since July 1995. Mr. Bookmeier has also served as Vice President of USC-Michigan, Inc., the Company's wholly-owned subsidiary, since July 1995. From September 1989 until its merger into USC- Michigan, Inc., Mr. Bookmeier served as Executive Vice President and a Director of PCS Management, Inc., a home medical equipment supply company that specializes in diabetes management, equipment and supplies. He is also a Director of the American Diabetes Association since June 1995. RICHARD R. HOUGH. Mr. Hough has served as Vice President and Chief Operating Officer of the Company since April 1996. In July 1996, Mr. Hough was appointed to the additional positions of Secretary and Chief Financial Officer. Mr. Hough began his career in the computer industry serving with IBM and Digital Equipment Corporation (DEC) for over 12 years in positions of Divisional Controller, Business Planning Manager and Pricing Specialist. He then served as a Vice President and Chief Financial Officer for several multi-billion dollar corporations. From March 1991 until June 1993, Mr. Hough was Chief Financial Officer for Advance Stores, Inc., a regional specialty store chain. Since June 1993 until coming with Universal, Mr. Hough was an independent business consultant specializing in business development, accounting controls and financial administration. -45- In the health care field, Mr. Hough was part-owner, Chief Financial Officer and Director of a medical management company that managed billing and collections, and consulted in the areas of business controls, evaluations and planning for medical groups, clinics and private medical practices. EDWARD T. BUCHHOLZ. Mr. Buchholz has served as a Vice President and a director of USC since July 1995. Mr. Buchholz became the President of each of the corporations comprising The Thriftee Group, wholly-owned subsidiaries of USC since February 1994, in January 1990. Mr. Buchholz has also served as President of Diabetes Self Care, Inc., the Company's wholly-owned subsidiary, since July 1995. He 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 USC since July 1995. Mr. Korby has also served as President of USC-Michigan, Inc., the Company's wholly-owned subsidiary, since July 1995. From its founding in November 1987 until its merger into USC-Michigan, Inc., Mr. Korby served as President and a Director of PCS Management, Inc., a home medical equipment supply company that specializes in diabetes management, equipment and supplies. MATTHEW B. GIETZEN. Mr. Gietzen has served as a Vice President 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 USC-Michigan, Inc., Mr. Gietzen served as Executive Vice President and a Director of PCS Management, Inc., a home medical equipment supply company that specializes in diabetes management, equipment and supplies. TOD J. ROBINSON. Mr. Robinson has served with the Company since April 1996 as the National Vice President of Sales for the Thriftee Group Division. 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 their business products division. DAMON D TESTAVERDE. Mr. Testaverde has been a director of USC since May 1991. From May 1991 until June 1995, Mr. Testaverde served as President and Chief Executive Officer of USC. From 1989 to March 1991, Mr. Testaverde served as the President and principal stockholder of R.H. Damon & Company, Inc., a former full service securities broker-dealer which ceased operations in March 1991. Since March 1994, Mr. Testaverde has been a registered representative with Network One Financial Services, Inc., a full service securities broker- dealer. From 1980 to 1986, Mr. Testaverde served in the capacity of President of S.D. Cohn & Co., Inc. A full service securities broker-dealer with active investment banking and brokerage operations. -46- Mr. Testaverde and R.H. Damon & Co., Inc., a non-operating broker-dealer of which Mr. Testaverde is a principal shareholder, were respondents in a NASD administrative proceeding (Market Surveillance Committee v. R.H. Damon & Co., Inc., et al., Compliant No. MS-1136), commenced May 24, 1991, in which the NASD alleged that respondents violated provisions of the NASD's Rules of Fair Practice and SEC Rule 10b-6 in connection with the purchase of and subsequent resale to retail customers of part of a large block of NASDAQ listed securities. The respondents have consented to a settlement of the matter, without admitting or denying the allegations of the complaint, by agreeing to pay fines and restitution (plus interest) to certain customers of R.H. Damon & Co. The settlement also provides for a censure of all respondents, in the proceeding and, in the case of the individual respondents, two-week suspensions from association with any NASD member firm and two-month suspensions from association with any such firm as a principal. Such suspensions have been completed. Mr. Testaverde is also a former director of American Complex Care, Incorporated, a public company formerly engaged in the provision of home health care infusion therapies and as a distributor of Medicare Part B products. In March 1995, American Complex Care, Incorporated's operating subsidiaries made assignments of their assets for the benefit of their creditors, without resort to bankruptcy proceedings. -47- ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
Long-Term Compensation - ---------------------------------------------------------------------------------------------------------------------------------- Annual Compensation Awards Payouts -------------------------------------------------------------------------------- Other Name and Annual Restricted Principal Compen- Stock Options/ LTIP Position Year Salary Bonus sation Awards SARs(#) Payouts All --------- ---- ------ ----- ------ ----------- -------- ------- Other Compen- sation ------- Brian Bookmeier 1994 0 0 0 $ 0 $ 0 $ 0 $ 0 President and 1995 $ 38,834 0 $ 3,250 $ 0 $ 0 $ 0 $ 0 Chief Executive 1996 $179,306 0 $ 15,000 $ 0 $ 0 $ 0 $ 0 Officer and Director Alan M. Korby 1994 0 0 0 $ 0 $ 0 $ 0 $ 0 Executive V.P., 1995 $ 38,834 0 $ 3,250 $ 0 $ 0 $ 0 $ 0 Marketing 1996 $179,826 0 $ 15,000 $ 0 $ 0 $ 0 $ 0 Matthew B. 1994 0 0 0 Gietzen 1995 $ 38,834 0 $ 3,250 Executive V.P. of 1996 $179,969 0 $ 15,000 Fulfillment and Director Edward T. 1994 0 Buchholz 1995 0 Executive V.P. of 1996 $163,900 0 $ 13,320 Fulfillment and Director
-48- EMPLOYMENT AND CONSULTING AGREEMENTS Mr. Edward Buchholz commenced employment with the Company on February 8, 1994 under an employment agreement the term of which ends on December 31, 1996. Mr. Buchholz's employment agreement provides him with an annual base salary of $85,000, as well as commission payments equal to one percent (1%) of all gross revenues of The Thriftee Group from managed care customers. In connection with his employment agreement, Mr. Buchholz was granted stock options at $1.25 per share (fair market value on the date of grant). The right to acquire shares under these options vests as follows: options to acquire 75,000 shares vest on February 8, 1995, options to acquire 50,000 shares vest on February 8, 1996 and options to acquire 50,000 shares vest on February 8, 1997. As of September 1995, Mr. Buchholz's employment agreement was amended and his compensation adjusted by increasing his salary to $150,000 per annum and eliminating his 1% commission. In connection with consummation of the PCS 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 will continue to serve as the President, Vice President and Vice President, respectively, of the PCS Companies, and they 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 his 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. 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 the marketing and sales efforts throughout the United States for such company. Mr. Robinson's -49- 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 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 11, 1996 (the next business day), 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 each of the executive officers named in the Summary Compensation Table.
- ---------------------------------------------------------------------------------------------------------------------------------- Number of Percent of Securities Total Options/ Underlying SARs Granted Exercise or Potential Realizable Value Options/SARs in Fiscal Base Price at Assummed Annual Rate of Name Granted (#) Year (S/Sh) Expiration Date Stock Price Apprecation for Option Term (a) (b) (c) (d) (e) 5% 10% - ---------------------------------------------------------------------------------------------------------------------------------- Brian D. Bookmeier 125,000 30 % $1.35 May 1, 2001 $ 250,828 $ 360,705 - ---------------------------------------------------------------------------------------------------------------------------------- Alan M. Korby 125,000 30 % $1.35 May 1, 2001 $ 250,828 $ 360,705 - ---------------------------------------------------------------------------------------------------------------------------------- Edward T. Buchholz 41,667 10 % $1.35 May 1, 2001 $ 83,610 $ 120,236 - ---------------------------------------------------------------------------------------------------------------------------------- Matthew B. Gietzen 125,000 30 % $1.35 May 1, 2001 $ 230,828 $ 360,705 - ----------------------------------------------------------------------------------------------------------------------------------
-50- The following table sets forth information concerning the number of unexercised options, and the value of such unexercised options, for each of the executive officers named in the Summary Compensation Table.
Aggregated Option/SAR Exercised In Last fiscal Year and Fiscal Year-End Option/SAR Values - ------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) Value of Unexercised In- Shares Value Number of Unexercised the-Money Options/SARs at Fiscal Acquired on Realized Options/SARs at Fiscal Year-End Year-End Name Exercise (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------------ Exercisable/ Exercisable/ Unexercisable Unexercisable Brian Bookmeier 125,000 0 125,000 / 0 $253,125 / 0 Alan M. Korby 125,000 0 125,000 / 0 $253,125 / 0 Edward Buchholz 41,667 0 41,677 / 0 $ 84,376 / 0 175,000 0 125,000 / 50,000 $265,625 / $106,250 Matthew Gietzen 125,000 0 125,000 / 0 $253,125 / 0
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 October 10, 1996, 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. Percentage of Name and Address Number of Shares of Common Outstanding of Beneficial Owner Stock Beneficially Owned(1) Common Stock Owned - ------------------- --------------------------- ------------------ Robert M. Rubin 1,016,298 12.6 % 6060 Kings Gate Circle Delray Beach, FL 33484 (2) Damon D. Testaverde 311,914 3.9 % 580 Oakdale Street Staten Island, NY 10312 (2) -51- Robert Moody, Jr. 600,000 7.3 % 2302 Post Office Street Suite 601 Galvaston, TX 77550 (3) H. T. Ardinger 1,064,600 12.6 % 9040 Governors Row Dallas, TX 75356 (3) Fred Kassner 1,352,310 16.5 % 59 Spring Street Ramsey, NJ 07446 (3) Edward T. Buchholz 201,358 2.5 % 265 Waterside Drive Moneta, VA 24121 (4) Alan M. Korby 625,000 7.8 % 24054 Roma Ridge Novi, MI 48375 (5) Brian D. Bookmeier 630,000 7.8 % 37119 Muirfield Livonia, MI 48150 (5) Matthew B. Gietzen 628,000 7.8 % 23307 Mystic Street Novi, MI 48375 (5) All officers and directors as a group (8 persons before Offering (2)(4)(5) 3,442,570 38.8 % - ---------------------------- (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. (2) Includes non-qualified stock options granted on July 28, 1993 to purchase 100,000 shares of common stock at $1.50 per share to Robert M. Rubin under the Management Stock Option Plan, 100,000 shares of common stock at $1.50 per share granted to Damon Testaverde under the 1992 Employee Stock Option Plan, and warrants issued to Robert M. Rubin and Damon Testaverde on December 13, 1995 to purchase 100,000 shares of common stock and 50,000 shares of common stock, respectively, at $1.00 per share. (3) For Mr. Moody includes Class A Warrants to purchase an aggregate of 300,000 shares of Company Common Stock, for Mr. Ardinger includes Class A Warrants to purchase an aggregate of 575,550 shares of Company Common Stock and for Mr. Kassner includes Class A Warrants to purchase an aggregate of 217,655 shares of Company Common Stock, at $3.30 per share, and warrants to purchase the aggregate of 100,000 shares at $2.50 per share. -52- (4) Includes options to purchase an aggregate of 125,000 shares of Company Common Stock at $1.25 per share and options to purchase an aggregate of 41,667 shares of Company Common Stock at $1.35 per share. Does not include options to purchase an aggregate of 50,000 shares of Company Common Stock at $1.25 per share which have not as yet vested. (5) 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. 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. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of June 30, 1994, the Company had made advances to Edward Buchholz, President of The Thriftee Group, 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 30, 1996 the balance of this loan due the Company was approximately $8,300. Under the terms of the PCS Merger Agreement, each of Messrs. Rubin, Testaverde, Korby, Bookmeier and Gietzen has agreed to vote all of the shares of Company Common Stock to be owned by them following the Merger for the election of Messrs. Rubin and Testaverde, and, for so long as 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, each of Messrs. Korby, Bookmeier and Gietzen to the Board of Directors of Universal and of the PCS Companies. 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 they meet the share ownership criterion set forth above. See Item 6. "Mangement'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. -53- ITEM 13. 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. (10) 3.4. Certificate of Designations, Preferences and Relative, Participating, Optional or other special rights of Series B Convertible Preferred Stock. (10) 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) 4.5 Consulting Agreement, dated April 24, 1995, by and between Universal Self Care, Inc. and Herman Epstein. (13) 4.6 Option Agreement, dated June 8, 1995, by and between Universal Self Care, Inc. and Herman Epstein. (13) 10.1 Lease Agreement, dated August 25, 1986, for Van Nuys, California property, by and among SugarFree and June Biermann and Barbara Toohey. (1) 10.2 Lease Agreement, dated September 27, 1988, for mail order and storage facilities located in Van Nuys, California, by and among June Biermann, Barbara Toohey and Clinishare, Inc. (1) 10.3 Employment Agreement, dated as of October 28, 1994, by and between the Company and James Linesch. (15) -54- NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.4 Employment Agreement, dated April 12, 1995, by and between the Company and Alan Korby. (15) 10.5 Employment Agreement, dated April 12, 1995, by and between the Company and Brian D. Bookmeier. (15) 10.6 Employment Agreement, dated April 12, 1995, by and between the Company and Matthew Gietzen. (15) 10.7 Voting Agreement, dated April 12, 1995, by and among Messrs. Rubin, Testaverde, Korby, Bookmeier and Gietzen. (15) 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. (15) 10.10 Lease Agreement, dated May 26, 1993, for the Houston, Texas property, by and between Eric A. Orzeck and SugarFree. (7) 10.11 Assignment and Assumption of Lease Agreement, dated May 26, 1993, for the San Antonio, Texas property, by and among Kaiser-Francis Oil Company, Inc., Diabetes Supplies of Texas, Inc. and SugarFree, including underlying lease agreement. (7) 10.12 Sublease Agreement, dated as of May 1, 1993, for the Santee, California property, by and between Price-Rite Pharmacy, Inc. and SugarFree, including underlying lease agreement. (7) 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. (8) 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. (8) 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. (8) -55- NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 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. (8) 10.17 Distribution Agreement, dated February 8, 1994, by and between the Company and The Thriftee Group Wholesale Pharmacy, Inc. (8) 10.18 Supplemental indemnification agreement, dated February 8, 1994, between the Company and Kenneth F. Payne, Jr. and Clayton R. Wisely. (8) 10.19 Employment Agreement, dated February 8, 1994, between the Company and Edward T. Buchholz. (8) 10.20 Stock Option Agreement, dated as of February 8, 1994, by and between the Company and Edward T. Buchholz. (8) 10.21 Loan Agreement, dated as of February 8, 1994, by and among The Thriftee Group and Crestar Bank. (8) 10.22 Unconditional Guaranty, dated February 8, 1994, made by the Company in favor of Crestar Bank. (8) 10.23 Assignment, Assumption and Non-Competition Agreement, dated June 30, 1994, by and between The Thriftee Group Wholesale Pharmacy, Inc. and Fieldcor, Inc. (9) 10.24 Loan Agreement, dated as of December 10, 1994, by and among Thriftee Group and Crestar Bank. (11) 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).(12) 10.26 First Amendment to the Amended and Restated Agreement and Plan of Merger.(12) 10.27 Loan Agreement, dated April 28, 1995, by and among Fred Kassner ("Lender"), the Company, USCM and PCS., Inc. - West (all Schedules omitted). (15) 10.28 Security Agreement, dated April 28, 1995, by and among Lender, the Company, USCM and PCS, Inc. - West. (15) -56- NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10.29 Credit Facility Promissory Note, dated April 28, 1995, made by the Company, USCM and PCS, Inc. - West. (15) 10.30 Warrant Agreement, dated April 28, 1995, by and between the Company and Lender. (15) 10.31 Registration Rights Agreement, dated April 28, 1995, by and between the Company and Lender. (15) 10.32 Loan Agreement, dated July 14, 1995, by and among Fred Kassner ("Lender"), the Company, USCM and PCS., Inc. - West (all Schedules omitted). (14) 10.33 Security Agreement, dated July 14, 1995, by and among Lender, the Company, USCM and PCS, Inc. - West. (14) 10.34 Credit Facility Promissory Note, dated July 14, 1995, made by the Company, USCM and PCS, Inc. - West. (14) 10.35 Warrant Agreement, dated July 14, 1995, by and between the Company and Lender. (14) 10.36 Registration Rights Agreement, dated July 14, 1995, by and between the Company and Lender. (14) 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) 10.38 Healthcare Receivables Purchase Agreement, dated as of January 17, 1996, by and between the Company, the Providers and Daiwa Healthco-1, Inc. ("Daiwa"). (17) 10.39 Letter agreement dated January 17, 1996 by and among the Company, certain of the Providers and Fred Kassner. (17) 10.40 Amendment to Loan Agreement dated as of January 17, 1996 by and among the Company, the providers and Fred Kassner. (17) 10.41 Stock Pledge Agreement dated January 17, 1996 by and between the Company, USC-Michigan, Inc. (one of the Providers) and Fred Kassner. (17) 10.42 Loan and Security Agreement, dated as of August 15, 1996, by and among the Company and Health Partners Funding, L.P. (18) 10.43 Letter agreement dated August 15, 1996, addressed to Health Partners Funding, L.P., and executed by Fred Kassner (18) 10.44 Letter agreement dated August 29, 1996 by and between the Company and Fred Kassner, in respect of certain events of default and the issuance of certain common stock purchase warrants (18) 10.45 Employment Agreement, dated March 10, 1996, by and between Diabetes Self Care, Inc. and Tod Robinson. __________________ 1. Incorporated by reference, filed as an exhibit to the Registrant's Registration Statement on Form S-1 filed on August 3, 1992, SEC File No. 33-50426. -57- 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. 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 Annual Report on Form 10-KSB, filed on September 27, 1994. 8. Incorporated by reference, filed as an Exhibit to the Company's Report on Form 8-K, filed on February 23, 1994. 9. Incorporated by reference, filed as an Exhibit to the Company's Annual Report on Form 10-KSB, filed on October 13, 1994. 10. Incorporated by reference, filed as an Exhibit to the Company's Current Report on Form 8-K, filed on December 2, 1994. 11. Incorporated by reference, filed as an Exhibit to the Company's Quarterly Report on Form 10-KSB, filed on February 15, 1995. 12. Incorporated by reference, filed as an Exhibit to the Company's Current Report on Form 8-K, filed on April 19, 1995. 13. Incorporated by reference, filed as an Exhibit to the Company's Registration Statement on Form S-8, filed on June 12, 1995. 14. Incorporated by reference, filed as an Exhibit to the Company's Current Report on Form 8-K, filed on July 26, 1995. -58- 15. 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. 16. 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. 17. Incorporated by reference, filed as an Exhibit to the Company's Current Report on Form 8-K, filed on January 30, 1996. 18. Incorporated by reference, filed as an Exhibit to the Company's Report on Form 8-K, filed on September 10, 1996. 19. 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. (The remainder of this page has been intentionally left blank) -59- 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 11, 1996 UNIVERSAL SELF CARE, INC. By: /s/ BRIAN BOOKMEIER ----------------------------------------- Brian Bookmeier, President 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 ---------- ----- ---- ROBERT M. RUBIN _____________________________ Chairman of the October 15, 1996 Robert M. Rubin Board and Director BRIAN BOOKMEIER _____________________________ President October 15, 1996 Brian Bookmeier _____________________________ Director October ____, 1996 Alan Korby MATTHEW GIETZEN _____________________________ Director October 15, 1996 Matthew Gietzen DAMON TESTAVERDE _____________________________ Director October 15, 1996 Damon Testaverde EDWARD BUCHHOLZ _____________________________ Director October 15, 1996 Edward Buchholz RICHARD HOUGH _____________________________ Chief Financial and October 15, 1996 Richard Hough Accounting Officer -60- EX-10.45 2 EXHIBIT 10.45 EMPLOYMENT AGREEMENT Exhibit EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), entered into as of this 10th day of March, 1996, by and between DIABETES SELF CARE, INC., a Virginia corporation having its principal offices at 3601 Thirlane Road, N.W., Suite 4, Roanoke, Virginia 24019 (the "Company"), and TOD ROBINSON, an individual residing at 12744 Via Nieve, San Diego, California 92130 (the "Employee"); W I T N E S S E T H : WHEREAS, the Employee has extensive experience relating the development, marketing and promotion of diabetic and other home care therapy products; and WHEREAS, to promote the ongoing business of the Company, the Company desires to assure itself of the right to the Employee's services from and after the date hereof, on the terms and conditions of this Agreement; and WHEREAS, the Employee is willing and able to render his services to the Company from and after the date hereof, on the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereby agree as follows: 1. Nature of Employment. (a) Subject to the terms and conditions of this Agreement, the Company shall, throughout the term of this Agreement, retain the Employee, and the Employee shall render services to the Company, in the capacity and with the title of National Vice President - Sales. In such capacity, the Employee shall have and exercise responsibility for overseeing and actively participating in the Company's marketing and sales efforts throughout the United States, together with such other similar or related duties as may be assigned to the Employee from time to time by the Board of Directors of the Company (the "Board"). Notwithstanding the assignment of certain duties by the Board, the Employee shall, on a day-to-day basis, report and be accountable directly to the Executive Vice President - Sales of the Company's parent corporation, Universal Self Care, Inc. ("USCI"). (b) Throughout the period of his employment hereunder, the Employee shall: (i) devote his full business time, attention, knowledge and skills, faithfully, diligently and to the best of his ability, to the active performance 1 of his duties and responsibilities hereunder on behalf of the Company; (ii) observe and carry out such reasonable rules, regulations, policies, directions and restrictions as may be established from time to time by the Board, including but not limited to the standard policies and procedures of the Company as in effect from time to time; and (iii) do such traveling as may reasonably be required in connection with the performance of such duties and responsibilities. (c) It is expected that, subject to the foregoing reasonable travel requirements, the Employee will perform his services hereunder primarily from his home office in San Diego, California. 2. Term of Employment. (a) Subject to prior termination in accordance with paragraph 2(b) below, the term of this Agreement and the Employee's employment hereunder shall commence on the date hereof and shall continue through March 10, 1998, and shall thereafter automatically renew for additional terms of one (1) year each unless either party gives written notice of termination to the other party not less than ninety (90) days prior to the end of any term (in which event this Agreement shall terminate effective as of the close of such term). (b) This Agreement may be terminated: (i) upon mutual written agreement of the Company and the Employee; (ii) at the option of the Employee, upon fourteen (14) days' prior written notice to the Company, in the event that the Company shall (A) fail to make any payment to the Employee required to be made under the terms of this Agreement within thirty (30) days after payment is due, or (B) fail to perform any other material covenant or agreement to be performed by it hereunder or take any action prohibited by this Agreement, and fail to cure or remedy same within thirty (30) days after written notice thereof to the Company; (iii) at the option of the Company, upon written notice to the Employee, "for cause" (as hereinafter defined); (iv) at the option of the Company in the event of the "permanent disability" (as hereinafter defined) of the Employee; or (v) upon the death of the Employee. (c) As used herein, the term "for cause" shall mean and be limited to: (i) any willful and material breach of this Agreement (including, without 2 limitation, the covenants contained in paragraph 5 below) by the Employee which in any case is not fully corrected within thirty (30) days after written notice of same from the Company to the Employee; (ii) gross neglect by the Employee of his duties and responsibilities hereunder; (iii) any fraud, criminal misconduct, breach of fiduciary duty, dishonesty, or gross and willful misconduct by the Employee in connection with the performance of his duties and responsibilities hereunder; (iv) the Employee being under the influence of alcohol or drugs during business hours or while on call, or being habitually drunk or addicted to drugs; (v) the commission by the Employee of any crime of moral turpitude, or any other action by the Employee which materially impairs or damages the reputation of the Company; or (vi) habitual breach by the Employee of any of the material provisions of this Agreement (regardless of any prior cure thereof). (d) As used herein, the term "permanent disability" shall mean, and be limited to, any physical or mental illness, disability or impairment that prevents the Employee from continuing the performance of his normal duties and responsibilities hereunder for a period in excess of six (6) consecutive months. For purposes of determining whether a "permanent disability" has occurred under this Agreement, the written determination thereof by two (2) qualified practicing physicians selected and paid for by the Company (and reasonably acceptable to the Employee) shall be conclusive. (e) Upon any termination of this Agreement as hereinabove provided, the Employee (or his estate or legal representatives, as the case may be) shall be entitled to receive any and all unpaid Base Salary, Performance Bonus, Commissions and Profit Participation (as such terms are hereinafter defined) appropriately prorated to and as of the effective date of termination (based on the number of days elapsed prior to the date of termination), and any other amounts then due and payable to the Employee hereunder. All such payments shall be made on the next applicable payment date therefor (as provided in paragraph 3 below) following the effective date of termination. 3. Compensation and Benefits. (a) Base Salary. As compensation for his services to be rendered hereunder, the Company shall pay to the Employee a base salary at the rate of Ninety-Five Thousand ($95,000) Dollars per annum (the "Base Salary"), payable in periodic installments in accordance with the standard payroll practices of the Company in effect from time to time. (b) Performance Bonus and Commission. Throughout the period of the Employee's employment hereunder, the Employee shall establish, on a monthly basis, referral and performance targets which shall be subject to review and 3 final approval by the Executive Vice President - Sales of USCI. The Company shall pay to the Employee, within fifteen (15) days after the close of each calendar month, (i) the sum of (A) $500 in the event that the Employee shall achieve 80% or more, but less than 90%, of the approved referral goal for the calendar month then ended, (B) $700 if the Employee shall achieve 90% or more, but less than 100%, of such approved referral goal, or (C) $1,000 if the Employee shall achieve 100% or more of such approved referral goal (in each instance, the "Performance Bonus"), and (ii) a commission of $1,000 for each fully executed managed care contract covering more than 10,000 lives which is originated by the Employee for the Company during the calendar month then ended ("Commissions"). The parties hereby confirm their intention to develop a comprehensive program for commissions on managed care contracts, which, subject to and upon final approval by the Employee and the Executive Vice President - Sales of USCI, will supersede and replace the Commission terms of the foregoing clause (ii). (c) Profit Participation. In addition to the other compensation herein provided, the Company shall pay to the Employee, within sixty (60) days after the close of each fiscal year of the Company during which the Employee shall be employed hereunder (appropriately prorated for partial years of employment hereunder), an amount (the "Profit Participation") equal to (i) one-half of one (0.5%) percent of the net after-tax profits of the Company for the fiscal year then ended, calculated in accordance with generally accepted accounting principals consistently applied ("After-Tax Profits"), plus (ii) if the After-Tax Profits exceed $500,000 for such fiscal year, the additional sum of $10,000. Regardless of whether any Profit Participation shall be payable hereunder in respect of any fiscal year, the Company shall provide to the Employee, within sixty (60) days after the close of each applicable fiscal year, a written statement setting forth the calculation of the Company's net after-tax profits for the subject fiscal year, and the calculation of the amount of the Profit Participation, if any, payable in respect thereof. Any and all Profit Participation shall not be charged as an expense of the Company for the fiscal year to which such Profit Participation relates, but may be charged as an expense of the Company in the year in which such Profit Participation is paid to the Employee. (d) Discretionary Bonus. The Company may, from time to time, in its sole and absolute discretion, pay to the Employee, as a special incentive, bonuses of up to $10,000 per annum based on the Employee's extraordinary efforts and/or the Company's favorable results of operations. Any such bonus(es) shall be in the sole and absolute discretion of the Company. (e) Automobile Allowance. Throughout the period of the Employee's employment hereunder, the Company shall pay to the Employee, on a monthly basis, a non-accountable automobile allowance in the amount of $500 per month, plus 4 reimbursement at the rate of $.29 per mile for all mileage incurred by the Employee on Company business and properly vouchered per Company policy. It is intended that the Employee utilize such automobile allowance for the financing or leasing of an automobile, and expenses related to the operation and maintenance thereof, but (i) the Employee shall not be required to account to the Company for the specific expenditure of such automobile allowance, and (ii) the Employee shall be solely responsible for the reporting of any and all income and the payment of any and all taxes which may be attributable to such automobile allowance. (f) Split-Dollar Life Insurance. The Company shall further provide to the Employee, throughout the period of his employment hereunder, a split-dollar life insurance policy providing a death benefit of $500,000 to such beneficiaries as may be designated by the Employee from time to time. The Employee may at any time elect to discontinue such coverage in his sole and absolute discretion. (g) Stock Options. Simultaneous with the execution and delivery of this Agreement, the Company is causing USCI to issue to the Employee a stock option whereby the Employee may, subject to the terms and conditions of the stock option agreement, purchase up to 30,000 restricted shares of common stock of USCI at an exercise price of $1.50 per share (subject to adjustment as provided in such stock option agreement). (h) Fringe Benefits. The Company shall also make available to the Employee, throughout the period of his employment hereunder, such benefits and perquisites as are generally provided by the Company to its employees, including but not limited to eligibility for participation in any group life, health, dental, disability or accident insurance, pension plan, profit-sharing plan, or other such benefit plan or policy which may presently be in effect or which may hereafter be adopted by the Company for the benefit of its employees generally; provided, however, that nothing herein contained shall be deemed to require the Company to adopt or maintain any particular plan or policy. Participation in such benefit plans shall be subject to standard waiting periods following the commencement of full-time employment, as currently provided in such plans. (i) Expenses. Throughout the period of the Employee's employment hereunder, the Company shall also reimburse the Employee, upon presentment by the Employee to the Company of appropriate receipts and vouchers therefor, for any reasonable out-of-pocket business expenses incurred by the Employee in connection with the performance of his duties and responsibilities hereunder; provided, however, that no reimbursement shall be required to be made for any expense which is not properly deductible (in whole or in part) by the Company for income tax purposes, or for any expense item which has not previously been 5 approved in accordance with the Company's standard policies and procedures in effect from time to time. 4. Vacation, etc. (a) Commencing ninety (90) days after the Employee begins full-time employment with the Company, the Employee shall be entitled to take, from time to time, normal and reasonable vacations with pay, consistent with the Company's standard policies and procedures in effect from time to time, at such times as shall be mutually convenient to the Employee and the Company, and so as not to interfere unduly with the conduct of the business of the Company. (b) Commencing ninety (90) days after the Employee begins full-time employment with the Company, the Employee shall further be entitled to paid holidays, personal days and sick days in accordance with the Company's standard policies and procedures in effect from time to time. 5. Restrictive Covenants. (a) The Employee hereby acknowledges and agrees that (i) the business contacts, customers, suppliers, technology, know-how, trade secrets, marketing techniques, promotional methods and other aspects of the business of the Company have been and are of value to the Company, and have provided and will hereafter provide the Company with substantial competitive advantage in the operation of its business, and (ii) he has and will continue to have detailed knowledge and possesses and will possess confidential information concerning the business and operations of the Company. The Employee hereby further acknowledges that his business skills are not uniquely suited to businesses of the type conducted by the Company, and that, if required, he could readily adapt and utilize such skills in one or more other types of businesses. (b) The Employee shall not, directly or indirectly, for himself or through or on behalf of any other person or entity: (i) at any time, divulge, transmit or otherwise disclose or cause to be divulged, transmitted or otherwise disclosed, any business contacts, client or customer lists, technology, know-how, trade secrets, marketing techniques, contracts or other confidential or proprietary information of the Company of whatever nature, whether now existing or hereafter created or developed (provided, however, that for purposes hereof, information shall not be considered to be confidential or proprietary if (A) it is a matter of common knowledge or public record, (B) it is generally known in the industry, or (C) the Employee can demonstrate that such information was already known to the 6 recipient thereof other than by reason of any breach of any obligation under this Agreement or any other confidentiality or non-disclosure agreement); and/or (ii) at any time during the period from the date hereof through and including the date of the termination of the Employee's employment with the Company, and for an additional period of one (1) year thereafter in the event that such termination is "for cause" (collectively, the "Restrictive Period"), invest, carry on, engage or become involved, either as an employee, agent, advisor, officer, director, stockholder (excluding ownership of not more than 3% of the outstanding shares of a publicly held corporation if such ownership does not involve managerial or operational responsibility), manager, partner, joint venturer, participant or consultant, in any business enterprise (other than USCI or its subsidiaries, affiliates, successors or assigns) which derives any material revenues from the offer or sale in the United States, at wholesale or retail, of any home diabetic care products or other goods or services offered or sold by USCI or its subsidiaries, affiliates, successors or assigns from time to time during the Restrictive Period, or which engages in any other business similar to or competitive with the business of USCI or its subsidiaries, affiliates, successors or assigns (as such business is constituted at the time that the Employee proposes to become involved in such other business enterprise); provided, however, that the Employee's activities on behalf of Nationwide Diabetes Supply Company, as, to the extent and in the manner described in Exhibit A annexed hereto (which Exhibit A has been prepared by the Employee) shall not be deemed a violation of this paragraph 5(b)(ii) so long as there is no violation of paragraph 5(b)(i) above in connection therewith, or a violation of paragraph 1(b)(i) above so long as there is no material interference with the Employee's performance of his duties and responsibilities to the Company by reason thereof. (c) The Employee and the Company hereby acknowledge and agree that, in the event of any breach by the Employee, directly or indirectly, of the foregoing restrictive covenants, it will be difficult to ascertain the precise amount of damages that may be suffered by the Company by reason of such breach; and accordingly, the parties hereby agree that, as liquidated damages (and not as a penalty) in respect of any such breach, the breaching party or parties shall be required to pay to the Company, on demand from time to time, cash amounts equal to any and all gross revenues derived by the breaching party or parties, directly or indirectly, from any and all violative acts or activities. The parties hereby agree that the foregoing constitutes a fair and reasonable estimate of the actual damages that might be suffered by reason of any breach of this paragraph 5 by the Employee, and the parties hereby agree to such liquidated damages in lieu of any and all other measures of damages that might be asserted in respect of any subject breach. 7 (d) The Employee and the Company hereby further acknowledge and agree that any breach by the Employee, directly or indirectly, of the foregoing restrictive covenants will cause the Company irreparable injury for which there is no adequate remedy at law. Accordingly, the Employee expressly agrees that, in the event of any such breach or any threatened breach hereunder by the Employee, directly or indirectly, the Company shall be entitled, in addition to any and all other remedies available (including but not limited to the liquidated damages provided for in paragraph 5(c) above), to seek and obtain injunctive and/or other equitable relief to require specific performance of or prevent, restrain and/or enjoin a breach under the provisions of this paragraph 5. (e) In the event of any dispute under or arising out of this paragraph 5, the prevailing party in such dispute shall be entitled to recover from the non-prevailing party or parties, in addition to any damages and/or other relief that may be awarded, its reasonable costs and expenses (including reasonable attorneys' fees) incurred in connection with prosecuting or defending the subject dispute. 6. Non-Assignability. In light of the unique personal services to be performed by the Employee hereunder, it is acknowledged and agreed that any purported or attempted assignment or transfer by the Employee of this Agreement or any of his duties, responsibilities or obligations hereunder shall be void. 7. Notices. Any notices, requests, demands or other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or three (3) days after being mailed by certified mail, return receipt requested, addressed to the party being notified at the address of such party first set forth above, or at such other address as such party may hereafter have designated by notice; provided, however, that any notice of change of address shall not be effective until its receipt by the party to be charged therewith. Copies of any notices or other communications to the Company shall simultaneously be sent by first class mail to Diabetes Self Care, 11585 Farmington Road, Livonia, Michigan 48150, Attn: Mr. Brian Bookmeier. 8. General. (a) Neither this Agreement nor any of the terms or conditions hereof may be waived, amended or modified except by means of a written instrument duly executed by the party to be charged therewith. Any waiver or amendment shall only be applicable in the specific instance, and shall not constitute or be construed as a waiver or amendment in any other or subsequent instance. No 8 failure or delay on the part of either party in respect of any enforcement of obligations hereunder shall in any manner affect such party's right to seek or effect enforcement at any other time or in respect of any other required performance. (b) Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the express prior written consent of the other party. (c) The captions and paragraph headings used in this Agreement are for convenience of reference only, and shall not affect the construction or interpretation of this Agreement or any of the provisions hereof. (d) This Agreement, and all matters or disputes relating to the validity, construction, performance or enforcement hereof, shall be governed, construed and controlled by and under the laws of the State of California. (e) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. (f) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original hereof, but all of which together shall constitute one and the same instrument. (g) Except for any legal or judicial proceeding which may be brought for injunctive and/or any other equitable relief as contemplated by paragraph 5(d) above, any dispute involving the interpretation or application of this Agreement shall be resolved by final and binding arbitration before one or more arbitrators designated by the American Arbitration Association in Livonia, Michigan. The award of such arbitrator(s) may be enforced in any court of competent jurisdiction. The prevailing party in any action or proceeding hereunder shall be entitled to an award for its costs and reasonable attorneys' fees in connection with such action or proceeding, and the arbitrator(s) in any arbitration hereunder shall be empowered and directed to make such an award in his, her or their discretion. (h) This Agreement constitutes the sole and entire agreement and understanding between the parties hereto as to the subject matter hereof, and supersedes all prior discussions, agreements and understandings of every kind and nature between them as to such subject matter. (i) This Agreement is intended for the sole and exclusive benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns, and no other person 9 or entity shall have any right to rely on this Agreement or to claim or derive any benefit herefrom absent the express written consent of the party to be charged with such reliance or benefit. (j) If any provision of this Agreement is held invalid or unenforceable, either in its entirety or by virtue of its scope or application to given circumstances, such provision shall thereupon be deemed modified only to the extent necessary to render same valid, or not applicable to given circumstances, or excised from this Agreement, as the situation may require; and this Agreement shall be construed and enforced as if such provision had been included herein as so modified in scope or application, or had not been included herein, as the case may be. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the date first set forth above. DIABETES SELF CARE, INC. By:_____________________________ ________________________________ TOD ROBINSON 10 EX-27 3 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 91,066 0 12,207,373 2,007,000 551,154 10,978,629 1,326,695 354,361 18,209,068 10,681,661 2,615,728 2,246,209 505,000 788 2,459,941 18,209,068 36,257,415 36,217,415 22,504,611 22,504,611 0 696,009 615,552 (2,532,238) 0 (2,532,238) 0 0 0 (2,532,238) (.40) 0
-----END PRIVACY-ENHANCED MESSAGE-----