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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _________ to _________
Commission file number 333-1700
COMMUNITY CARE SERVICES, INC.
(Name of small business issuer in its charter)
New York 13-3677548
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
18 Sargent Place
Mount Vernon, New York 10550
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 914-665-9050
Securities registered pursuant to Section 12 (b) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
<S> <C>
N/A
</TABLE>
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 par value
---------------------------------------
(Title of Class)
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Check whether the issuer (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 (or for such shorter period that the registrant was required to file
such reports), 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. [ ]
Issuer's revenues for the fiscal year ended March 31, 1999 were $17,942,000.
The aggregate market value of issuer's voting and non-voting common equity held
by non-affiliates of the issuer, computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of June 15, 1999 was $1,891,333.40.
On June 15, 1999, 7,217,851 shares of the registrant's $0.01 par value per share
common stock were outstanding.
Transitional Small Business Disclosure Format Yes / / No /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Community Care Services, Inc. ("the Company") was incorporated in the
State of New York in 1992. The Company provides home health care services and
products consisting primarily of respiratory equipment, rental and sale of
durable medical equipment and sells home health care supplies primarily in the
five boroughs of New York City, and Westchester, Rockland and Nassau Counties in
New York State, as well as northern New Jersey.
BUSINESS DEVELOPMENT
In April 1993, the Company acquired certain assets of Adam Health Care
Equipment Corp. ("Adam"), including inventory, office equipment and an
assignment of the office lease. Since acquiring the assets of Adam, the
Company's management has expanded operations by implementing a sales strategy
focusing on an informed diagnostic-centered approach, signing new major payor
contracts with additional HMOs and PPOs including Oxford Health Plans, Metro
Plus Health Maintenance Organization, NYLCare, The Bronx Health Plan, US
Healthcare, HealthFirst, and Local 1199 National Benefit Fund, and offering new
equipment, products and services such as low air loss beds, alternating pressure
beds and standing wheelchairs. In addition, the Company has significantly
increased its sales of medical supplies as a result of becoming a provider of
disposable medical supplies for the largest certified home health care agency in
New York.
On October 18, 1996, the Company consummated an initial public offering of
its securities. Pursuant to the offering, with an overallotment of 195,000
units, the Company sold 1,495,000 shares of the Company's common stock, par
value $.01 per share (the "Common Stock") at a price of $5.10 per share and
1,495,000 Class A Warrants at a price of $.10 per Warrant, each such Warrant
entitling the holders thereof to purchase one share of Common Stock at an
exercise price of $6.00 per share. The gross aggregate proceeds from the public
offering were $7,774,000 and the net proceeds to the Company were $5,638,326.
On May 10, 1997, the Company acquired 68% of the outstanding shares of
Metropolitan Respirator Service, Inc. ("MRS") for a purchase price of
approximately $5,993,000. The purchase price was approximately $5,993,000,
consisting of approximately $2,800,000 in cash, Promissory Notes with a face
value of $2,967,000 principal amount accruing interest at a rate of 6% per
annum, a portion of which was issued to certain MRS employees (including a
Promissory Note for $444,000 issued to
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Wade Wilson, the brother-in-law of Alan T. Sheinwald, who at the time was the
President and Chief Executive Officer of the Company), and 62,243 shares of
Common Stock with a value of $226,000 (See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions"). Also on May 10, 1997, the Company purchased the remaining 32% of
the outstanding shares of MRS in a separate transaction. The purchase price was
approximately $2,488,000 consisting of $1,300,000 in cash, 300,000 shares of
Common Stock with a value of $1,088,000 and a one year Promissory Note with a
face value of $100,000 accruing interest at a rate of 6% payable quarterly.
MRS was incorporated on April 15, 1974 and is engaged in the sale and
rental of medical supplies and durable medical equipment within the New York
metropolitan area. The Company has continued to operate MRS as a separate
business and has treated MRS as a wholly owned subsidiary.
On June 4, 1997, a search warrant was executed at the Company's executive
offices. The Company was informed that its then Chief Executive Officer and
Chief Operating Officer and the Company itself are targets of a U.S. Department
of Justice criminal investigation for allegedly improper payments relating to a
contract to provide healthcare services outside of New York State involving
Medicare (the "Federal Investigation"). If it is determined that the Company
engaged in criminal wrongdoing, the Company would be subject to criminal
penalties, which may include a fines of $1,000,000 or more and an order of
restitution, would be terminated as a Medicaid and Medicare services provider,
and could be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. Additionally, even if the Company is not
charged with criminal wrongdoing itself, but one or more of its past or present
officers or employees are convicted of crimes relating to their employment, the
Company could be terminated as a Medicaid and Medicare provider. In these
circumstances, although the Company would not be subject to automatic exclusion
from such programs it could be at risk of having its contracts with private
insurers and other non-governmental agencies terminated. If such occurred, it
would have a material adverse effect on the Company's business, results of
operations, and financial condition and the Company may not be able to continue
as a going concern. The Company has cooperated with the U.S. Department of
Justice in the Federal Investigation and has incurred legal expenses related
thereto of $90,000 and $301,000 in fiscal years 1999 and 1998, respectively.
See "Legal Proceedings" and "Management's Discussion and Analysis or Plan of
Operation - Investigations by U.S. Department of Justice and New York State
Department of Health".
On May 16, 1997, the New York State Department of Social Services ("DSS"),
which has subsequently been abolished and its functions assumed by the New York
State Department of Health ("DOH"), issued a Draft Notice of Proposed Agency
Action and Draft Audit Report regarding the Company ("The Draft Notice").
Pursuant to the Draft Notice, DSS sought recovery of $227,000 from the Company
as well as exclusion of the
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Company as a provider under the New York State Medicaid program. Pursuant to
DOH's process, the Company, through its healthcare regulatory counsel, submitted
a detailed response to the Draft Notice. DOH thereafter reviewed its draft
findings and recommendations and issued a final Notice, pursuant to which DOH
reduced the amount of the proposed audit recovery to $83,978. DOH has also
withdrawn its intention to exclude the Company as a provider under the New York
State Medicaid program. DOH has issued an advisory to the Company that continued
performance issues of the type or nature addressed in the audit could result in
a severe sanction in the future. As a further development, the Company has
agreed to surrender its Medicaid provider number, in favor of conducting its
Medicaid business through MRS. During the fourth quarter of fiscal year 1999 the
Company completed the transfer of its Medicaid business to MRS. The effective
date of the surrender of the Company's Medicaid provider number was March 1,
1999. See "Legal Proceedings" and "Management's Discussion and Analysis or Plan
of Operation - Investigations by U.S. Department of Justice and New York State
Department of Health".
The Company and LTTR Home Care, LLC ("LTTR") executed a letter of intent
effective April 6, 1999 providing for the purchase by LTTR or one of its
affiliates of all of the Company's issued and outstanding Common Stock for the
price of $1.20 per share, conditioned upon the successful negotiation of a
definitive written agreement, which was executed on June 14, 1999 and is further
described below, and the approval of the Company's shareholders. LTTR had
previously acquired 2,126,250 shares of the Company's Common Stock from Alan T.
Sheinwald, the Company's former President and Chief Executive Officer. Also
effective April 6, 1999, Dean L. Sloane, Mary Sloane, Joshua Sloane, Craig V.
Sloane and The Sloane Family Foundation executed a letter of intent pursuant to
which they agreed, for a period of forty-five business days, or such earlier
time as negotiations on a definitive merger agreement between LTTR and the
Company terminated, not to transfer, encumber, or engage in any discussions or
negotiations with respect to their shares of Common Stock.
At the Company's annual meeting of shareholders held on April 8, 1999,
Messrs. Bruce L. Ansnes and Craig V. Sloane and Dr. Bernard Kruger did not seek
re-election to the Board, although their names appeared as nominees on the
Proxies solicited by the Company. Three nominees proposed by Alan J. Landauer,
the Managing Member of LTTR, including Mr. Landauer, Thomas C. Blum and Gary J.
Spirgel, were elected to the Board of Directors, together with incumbent
Directors Dean L. Sloane and Louis Rocco. At a Board of Directors meeting
following the annual meeting, a Special Committee of independent members of the
Board of Directors comprised of Messrs. Sloane, Spirgel and Rocco was appointed
to evaluate the proposed merger and was delegated the authority to approve the
transaction on behalf of the Board of Directors if it found that the transaction
was fair and in the best interest of the Company. The Special Committee approved
the transaction on May 19, 1999, subject to the satisfactory resolution of the
remaining legal issues in the Merger Agreement, described below. On June 7,
1999, a meeting of the full
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Board of Directors was held, at which time the full Board of Directors ratified
the Special Committee's approval of the transaction.
On June 14, 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Landauer Hospital Supplies, Inc. ("LHS"), a New
York corporation and LHS Merger Sub, Inc., a wholly owned subsidiary of LHS
("Merger Sub"). LHS is an affiliate of LTTR and is controlled by Alan J.
Landauer. The Merger Agreement provides for the merger of the Company with
Merger Sub, with the Company being the surviving entity ("the Merger"). As part
of the Merger each shareholder (other than LHS and its affiliates) will receive
$1.20 in exchange for each share of Common Stock owned by them. The Merger is
subject to the approval of the holders of at least two-thirds of the Company's
issued and outstanding Common Stock. If the Merger is approved and consummated,
the Company will become a wholly-owned subsidiary of LHS. See "Management's
Discussion and Analysis or Plan of Operation - Subsequent Events" and "Certain
Relationships and Related Transactions - Merger Agreement."
On June 17, 1999, the Company filed a preliminary proxy statement with the
Securities and Exchange Commission soliciting shareholder approval for the
proposed Merger.
BUSINESS OF THE COMPANY
The Company is a provider of an extensive variety of home health care
products and services. The Company services the home health care market by
coordinating with various health care workers and payor case managers to
determine the home health needs of patients.
The importance of home health care is increasing as a result of
significant economic pressure within the health care industry. The ongoing
pressure to contain health care costs, while maintaining high quality care, is
accelerating the growth of alternate site care that reduces hospital admissions
and lengths of hospital stays, such as home health care.
The growth in home health care is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home health care often results in lower costs, which is
increasingly important under managed care. In addition, home health care has
grown rapidly as a result of advances in medical technology, which have
facilitated the delivery of services in alternate sites; demographic trends,
such as an aging population; and a strong preference among patients to receive
health care in their homes.
The home health care industry is highly fragmented and characterized by
local providers that typically do not offer a comprehensive range of
cost-effective services. These local providers often do not have the capital
necessary to expand their operations
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or the range of services offered, which limits their ability to compete for
managed care contracts and other referrals and to realize efficiencies in their
operations. As managed care has become more prevalent, payors increasingly are
seeking home health care providers that offer a cost-effective, comprehensive
range of services in each market served, which further inhibits the ability of
local providers to compete effectively. As a result of these economic and
competitive pressures, the home health care industry is undergoing rapid
consolidation, a trend the Company expects will continue.
PRODUCTS AND SERVICES
The Company services patients referred to the Company by nurses,
physicians, social workers and payor case managers, as well as discharge
planners at hospitals, HMOs, PPOs and rehabilitation centers. Working with these
individuals, the Company's personnel coordinate the delivery and set-up of the
products and supplies to be used by patients in their home recovery and care.
Upon receipt of an order, the Company will arrange for the appropriate products
and supplies to be delivered to the patient at home. At the time of delivery,
the Company's personnel will set up equipment as necessary and spend time with
the patient and/or care givers to explain the proper use of the medical
equipment delivered. The Company handles customer service inquiries via an 800
telephone number, and will generally send its personnel to visit the patient, if
necessary, to rectify any problems that may arise.
The primary categories of products provided by the Company (and examples
of the products available in each category) are set forth below:
Durable Medical Equipment ("DME")
- Hospital beds
- Wheelchairs
- Walking Aids
- Bathroom safety equipment
- Patient lifts
Disposable Medical Supplies ("Supplies")
- Incontinent products (diapers,
liners, chux)
- Wound care products (dressings and
bandages for treating decubitus
(bed sores and lesions), pressure
sores, ulcerations, etc.)
- Nutritional products (Ensure,
Sustacal, etc.)
- Diabetic products/supplies
- Ostomy supplies
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- Urological supplies
(catheters, etc.)
- Blood pressure products
- Skin care products
Rehabilitation Products- ("Rehabilitation")
- Powered operated vehicles
(Includes specialized versions
such as wheelchairs and
scooters)
- Advanced support surfaces (low
air loss beds, alternating
pressure mattresses)
- Specialized seating
Respiratory Equipment and Products ("Respiratory")
- 0(2) concentrators
- Nebulizers with compressors
- Suction pumps
- Oximetry equipment
- C-PAP (Continuous positive
air pressure) equipment
- Bi-PAP (Bi-level positive air
pressure) equipment
The Company provides diversified categories of products. The following
table sets forth the percentage of net revenues represented by categories for
the years ended March 31:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
DME and Supplies 54.7% 58.9%
Rehabilitation 15.0% 15.6%
Respiratory 30.3% 25.5%
----- -----
100.0% 100.0%
===== =====
</TABLE>
The Company's inventory is housed in its 20,000 square foot
office/warehouse facility in Mount Vernon, New York. All of its products are
readily available from more than one supplier and the Company can generally fill
an order within 24 hours of placement. The Company operates on a regular basis
24 hours a day, Monday through Saturday and provides services on an emergency
basis on Sundays. The Company utilizes its 800-telephone number for customer
service calls. The Company's office receives calls from 8:00 A.M., to 6:00 P.M.,
Monday through Friday and 9:00 A.M., to 1:00 P.M., on Saturdays, while an
answering service handles calls at all other hours. The Company's service
technicians are available to handle calls on a 24-hour basis.
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Generally, the fees charged by the Company for its products and supplies
are covered by third party payor arrangements such as Medicaid, Medicare or
private insurance. Equipment such as hospital beds, wheelchairs and patient
lifters covered by Medicare is generally paid for on a rental basis over a
15-month term. In many instances, such equipment is returned to the Company
prior to the 15-month term, in which case the equipment is re-conditioned and
available for a new rental term. Generally, the equipment can be reconditioned
for use to be available for several rental terms for a period in excess of five
years. The Company receives a semi-annual maintenance payment for any equipment
that is used in excess of 15 months on a per patient basis. Purchased equipment
covered by Medicare is reimbursed at approved published prices. Equipment
covered by Medicaid is generally sold pursuant to an approved price range or a
cost plus fee basis. Insurance payors use customary and usual standards for
their reimbursement terms, which are generally comparable to Medicare terms. For
the fiscal year ended March 31, 1999, the average days of sales outstanding from
the day of billing was 146 days from Medicare, 131 days from Medicaid and 128
days from private insurers and other non-governmental agencies, respectively. An
inconsequential percentage of the Company's business is direct cash sales to
customers. For the fiscal years ending March 31, 1999 and 1998, the allocation
of net revenues among the Company's third party payors was approximately 34.2%
and 30.0% to Medicare, 30.5% and 30.7% to Medicaid and 35.3% and 39.3% to
private insurers and other non-governmental agencies, respectively.
COMPETITION
The home health care provider industry is highly competitive. While there
are a few select national providers, the Company currently encounters its most
significant competition in providing home health care products from small
commercial providers operating in the New York metropolitan area. Relatively few
barriers to entry exist in the home health care industry. Accordingly, other
companies, including managed care organizations and health care providers that
currently are not serving the home health care market, may become competitors.
Recently there has been consolidation of home health care companies within the
New York metropolitan area. Such consolidation may limit the Company's ability
to maintain or increase its market share, which may materially affect its
business, results of operations and financial condition. The Company believes
that health care facilities in the geographic area serviced by the Company
consider quality of care, reliability and reputation to be the most important
factors in referring a home health care provider to its patients, although other
factors such as financial stability, personnel policies and practices and costs
are also considered.
The Company's objective is to enhance its position as a leading regional
provider of cost-effective, comprehensive home health care. Management believes
that offering comprehensive services and maintaining a strong regional presence
are essential to generate referrals, particularly from managed care
organizations and other payors. The
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Company expects that managed care contracts will generate an increasing number
of referrals as the penetration of managed care accelerates.
The Company has developed and implemented service and procedure standards
that comply with the standards required by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"), a nationally recognized organization that
develops standards for various health care industry segments and monitors
compliance with those standards through voluntary surveys of participating
providers. As the home health care industry has grown, the need for objective
quality measurements has increased. Not all providers have chosen to undergo the
accreditation process because of its expense and time burden. Consequently, the
Company has positioned itself to procure managed care contracts in part because
of its choice to undergo rigorous review of its operations. The Company and MRS
are JCAHO accredited.
GOVERNMENT REGULATION AND REIMBURSEMENT
The Company and MRS must comply with and are subject to extensive federal
and state regulations in connection with their participation in Medicaid and
Medicare. Medicare is a federal health insurance program for the elderly and for
chronically disabled individuals, which pays for equipment and services when
medically necessary. Medicare uses a charge-based reimbursement system for
purchased medical equipment based on approved published prices. Equipment such
as hospital beds, wheelchairs and patient lifters is generally paid for on a
rental basis over a 15 month term, with maintenance payments semi-annually
thereafter on a per patient basis.
Medicaid is a combined federal-state program for medical assistance to
impoverished individuals who are aged, blind or disabled or members of families
with dependent children. The Medicaid program in New York is subject to federal
requirements. The New York State Department of Health ("DOH") has the authority
to set levels of reimbursement within federal guidelines. These reimbursement
levels are generally consistent with the Company's customary charges.
The Company has submitted a reenrollment application to DOH for MRS, which
is currently pending. Pursuant to State regulations, reenrollment is required
due to change in ownership of MRS. An adverse determination on reenrollment,
which is not subject to judicial review, would have material adverse
consequences on the Company's business, results of operations and financial
condition. The Company has surrendered it Medicaid provider number as part of a
settlement reached with DOH and transferred its Medicaid business to MRS. See
"Additional Information About the Company and Its Business - Legal Proceedings."
Government funding for health care programs, including Medicare and
Medicaid, is subject to changes in laws and regulations, administrative rulings,
interpretations of policy, determinations by intermediaries and governmental
funding restrictions, all of
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which could materially increase or decrease program reimbursements for the
Company's products and services. Efforts have been made at various governmental
levels to reduce the costs of such programs, and no assurance can be given that
future funding levels for Medicare and Medicaid programs will be comparable to
present levels. Changes in reimbursement policies as a result of budget cuts or
other government action could adversely affect the Company's operations. The
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery systems and cost-control measures,
and public debate of these issues will likely continue in the future. The level
of revenues and profitability of the Company, like those of other health care
providers, will also be affected by the continuing efforts of private payors to
contain or reduce the costs of health care by lowering reimbursement rates,
increasing case management review of service, negotiating reduced contract
pricing and capitation arrangements.
The Company, like other Medicaid-Medicare providers, is subject to
governmental audits and other reviews and investigations related to Medicaid and
Medicare reimbursement claims. The Company is also subject to various fraud and
abuse laws that are designed to maintain the integrity of the Medicare and
Medicaid programs. These laws prohibit, among other things, any bribe, kickback,
rebate or remuneration of any kind in return for, or as an inducement for, the
referral of Medicare or Medicaid patients (the "Anti-kickback Statute"). The
United States Department of Health and Human Services ("HHS") has interpreted
the Anti-kickback Statute broadly to include the intentional payment of anything
of value to influence the referral of a Medicare and Medicaid recipient. HHS has
also adopted regulations creating "safe harbors" that exempt certain types of
business relationships and payments that do not appear to pose a threat of
Medicare and Medicaid program abuse. Transactions covered by the Anti-kickback
Statute that do not conform to applicable safe harbors are not necessarily in
violation of the Anti-kickback Statute, but the practice may be subject to
increased scrutiny and possible prosecution. A violation of the Anti-kickback
Statute may result in civil and criminal penalties, including imprisonment,
fines of up to $1,000,000 and orders of restitution, as well as exclusion from
participation in the Medicare and Medicaid programs.
Federal and state enforcement authorities have significantly increased the
amount of resources devoted to the investigation and prosecution of health care
fraud and abuse. For example, under the Health Insurance Portability and
Accountability Act (the "Act"), which was enacted in 1996, new appropriations
have been earmarked to fund government enforcement activities, a new federal
program has been established to coordinate and centralize such activities, and a
national data bank has been created to collect information regarding adverse
actions (including civil, criminal, license, and certification sanctions)
against health care providers, suppliers and or licensed practitioners.
The Act also strengthens existing anti-fraud programs. The Act conforms
Medicare's civil monetary penalty provision to cover certain conduct that is
prohibited
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elsewhere under the Medicare statute and other federal laws. The Act also added
a rule under the civil monetary penalty provision prohibiting a person from
remunerating a Medicare or Medicaid beneficiary that the person knows or should
know is likely to influence the beneficiary to order or receive items or
services. The Act further provides for mandatory exclusion from the
Medicare/Medicaid Programs of an individual (or entity) convicted of a felony
relating to health care fraud, and authorizes permissive exclusions of up to
three years for the conviction of other health care offenses. The Act also
allows for the permissive exclusion of certain individuals who (i) maintain a
controlling interest in a sanctioned entity and who knew or should have known of
the action constituting the basis of the sanction or (ii) who serve as managing
employees or officers of such a sanctioned entity.
There has also been an increase in enforcement activities under the fraud
and abuse laws pursuant to Operation Restore Trust, a federal government
initiative that focuses on the reimbursement practices of nursing homes, home
health care agencies and durable medical equipment companies located in the five
states with the largest Medicare populations. The targeted states include
California, Florida, Illinois, New York and Texas. Operation Restore Trust has
been responsible for millions of dollars in civil and criminal restitution,
fines, recovery of overpayments and the exclusion of a number of individuals and
corporations from the Medicare program.
Pursuant to the federal/state statutory regulations and administration of
the Medicaid program, each state has a Medicaid Fraud Control Unit. In New York
State that Unit is placed within the Office of the Attorney General. This office
has broad civil and criminal jurisdiction over Medicaid providers. In the course
of its operations, it reviews Medicaid providers. The Company is currently the
subject of such a review. Several other providers of medical equipment and
supplies in the same general geographic area have recently been subject to
similar reviews.
The Company has implemented a Medicare and Medicaid Compliance Plan. The
Compliance Plan encompasses a code of conduct, corporate policies on vendor
contracting, sales and marketing, billing, records management, and other
matters. The plan is being implemented by means of formal training program of
the Company's staff.
INSURANCE
The Company carries a board range of general liability, comprehensive
property damage, worker's compensation, professional liability, automobile and
other insurance coverage that management considers adequate for the protection
of its assets and operations. While management believes the manufacturers of the
equipment it sells or rents currently maintain their own insurance, and in some
cases the Company has received evidence of such coverage, there can be no
assurance that such manufacturers will continue to do so. There can be no
assurance that the coverage limits of such policies will be sufficient to cover
any judgements, settlements or cost relating to any pending or
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future legal proceedings. If the insurance carried by the Company is not
sufficient to cover any judgements, settlements or cost relating to pending or
future legal proceedings, the Company's business and financial condition could
be materially, adversely effected.
EMPLOYEES
As of March 31, 1999, the Company had approximately 130 employees, 117 of
who are full-time employees and 13 of who are part-time. Its management team is
comprised of four executives and four managers with extensive experience in the
home health care industry. The Company has two sales representatives and two
rehabilitation specialists who work on a salary. There are three dispatchers and
eight drivers who deliver products and are specially trained by the Company to
properly set up equipment and explain its use to patients. The Company has
fifteen warehouse workers, four repair specialists, and twenty five customer
service intake personnel, thirty three individuals who handle reimbursement and
a six person administrative staff. The Company also has twenty staff respiratory
therapists to provide service and advice to customers utilizing respiratory
equipment. Also, the Company has one person dedicated to its management
information system, two finance and accounting personnel and two purchasing
personnel. The Company also has 16 contract drivers who make deliveries. The
Company is not a party to any collective bargaining agreements and considers its
relations with employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company offices and warehouse are located in a 20,000 square foot
facility in Mount Vernon, New York, pursuant to a five year lease which
commenced January 1, 1996 and provides for annual rental payments of $114,000
for the first three years of the lease term and $132,000 for the last two years
of the lease term.
ITEM 3. LEGAL PROCEEDINGS
On June 4, 1997, a search warrant was executed at the Company's executive
offices. The Company was informed that its then Chief Executive Officer and
Chief Operating Officer and the Company itself are targets of a U.S. Department
of Justice criminal investigation for allegedly improper payments relating to a
contract to provide healthcare services outside of New York State involving
Medicare (the "Federal Investigation"). If it is determined that the Company
engaged in criminal wrongdoing, the Company would be subject to criminal
penalties, which may include a fines of $1,000,000 or more and an order of
restitution, would be terminated as a Medicaid and Medicare services provider,
and could be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. Additionally, even if the Company is not
charged with criminal wrongdoing itself, but one or more of its past or present
officers or employees are convicted of crimes relating to their employment, the
Company could be terminated as a Medicaid and Medicare provider. In these
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circumstances, although the Company would not be subject to automatic exclusion
from such programs it could be at risk of having its contracts with private
insurers and other non-governmental agencies terminated. If such occurred, it
would have a material adverse effect on the Company's business, results of
operations, and financial condition and the Company may not be able to continue
as a going concern. The Company has cooperated with the U.S. Department of
Justice in the Federal Investigation and has incurred legal expenses related
thereto of $90,000 and $301,000 in fiscal years 1999 and 1998, respectively. See
"Legal Proceedings" and "Management's Discussion and Analysis or Plan of
Operation - Investigations by U.S. Department of Justice and New York State
Department of Health".
On May 16, 1997, the New York State Department of Social Services ("DSS"),
which has subsequently been abolished and its functions assumed by the New York
State Department of Health ("DOH"), issued a Draft Notice of Proposed Agency
Action and Draft Audit Report regarding the Company ("The Draft Notice").
Pursuant to the Draft Notice, DSS sought recovery of $227,000 from the Company
as well as exclusion of the Company as a provider under the New York State
Medicaid program. Pursuant to DOH's process, the Company, through its healthcare
regulatory counsel, submitted a detailed response to the Draft Notice. DOH
thereafter reviewed its draft findings and recommendations and issued a final
notice, pursuant to which DOH reduced the amount of the proposed audit recovery
to $83,978. DOH has also withdrawn its intention to exclude the Company as a
provider under the New York State Medicaid program. DOH has issued an advisory
to the Company that continued performance issues of the type or nature addressed
in the audit could result in a severe sanction in the future. As a further
development, the Company has agreed to surrender its Medicaid provider number,
in favor of conducting its Medicaid business through MRS. During the fourth
quarter of fiscal year 1999 the Company completed the transfer of its Medicaid
business to MRS. The effective date of the surrender of the Company's Medicaid
provider number was March 1, 1999. See "Management's Discussion and Analysis or
Plan of Operation - Investigations by U.S. Department of Justice and New York
State Department of Health".
The Company is currently subject to review by the New York State Attorney
General's Medicaid Fraud Control Unit. In response to a subpoena duces tecum
issued by the Medicaid Fraud Control Unit in September 1996, the Company has
produced a substantial number of documents and provided its full cooperation.
The review is pending and the Company have not been advised of any determination
by the Medicaid Fraud Control Unit. Several other providers of medical equipment
and supplies in the same geographic area have recently been subject to similar
reviews.
From time to time the Company is a party to litigation arising in the
ordinary course of business. There can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities occurring out of
such claims.
12
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's shareholders was held on April 8, 1999
for the purpose of considering and voting upon approval of a reverse split of
the Common Stock by a ratio of 1:3, electing five persons to the Corporation's
Board of Directors, considering and voting upon approval of the following three
proposals to amend the Company's certificate of incorporation (the
"Certificate"): (i) a proposal to amend the Certificate to classify the
Company's Board of Directors into three classes of Directors with staggered
terms; (ii) a proposal to the amend the Certificate to limit those entitled to
call a special meeting of the shareholders of the Company to the Chairman of the
Board of Directors, the President of the Company or a majority of the Board of
Directors, and ratifying the appointment of Richard A. Eisner & Company, LLP as
Independent Auditor for the Company for the year ending March 31, 1999. Of
7,217,851 shares of Common Stock outstanding and eligible to be voted at the
annual meeting of shareholders, shareholders owning 7,106,563 shares, or 98.46%
of the outstanding Common Stock, were either present and voting at the meeting
or represented by proxy. The votes on each of the foregoing matters was as
follows:
1. PROPOSAL TO APPROVE THE REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, PAR
VALUE $.01 BY A RATIO OF 1:3.
1,549,948 FOR 5,530,665 AGAINST 15,500 ABSTAIN 10,450 NOT VOTED
--------- --------- ------ ------
2. ELECTION OF DIRECTORS
a. DEAN L. SLOANE
6,627,947 FOR 468,166 AGAINST 0 ABSTAIN 10,450 NOT VOTED
--------- ------- ------ ---------
b. BRUCE L. ANSNES
1,613,548 FOR 158,166 AGAINST 0 ABSTAIN 5,334,849 NOT VOTED
--------- ------- ------ ---------
c. DR. BERNARD KRUGER
1,613,548 FOR 158,166 AGAINST 0 ABSTAIN 5,334,849 NOT VOTED
--------- ------- ------ ---------
d. CRAIG V. SLOANE
1,613,648 FOR 158,166 AGAINST 0 ABSTAIN 5,334,749 NOT VOTED
--------- ------- ------ ---------
e. ALAN J. LANDAUER
5,324,399 FOR 0 AGAINST 0 ABSTAIN 1,782,164 NOT VOTED
--------- ------- ------ ---------
f. THOMAS C. BLUM
5,324,399 FOR 0 AGAINST 0 ABSTAIN 1,782,164 NOT VOTED
--------- ------- ------ ---------
13
<PAGE> 16
g. GARY J. SPIRGEL
5,324,399 FOR 0 AGAINST 0 ABSTAIN 1,782,164 NOT VOTED
--------- ------- ------ ---------
h. LOU ROCCO
6,627,947 FOR 468,166 AGAINST 0 ABSTAIN 10,450 NOT VOTED
--------- ------- ------ ---------
3. THE FOLLOWING THREE PROPOSALS TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION (THE "CERTIFICATE"):
a. Proposal to Amend the Certificate to Classify the Board of Directors into
Three Classes of Directors with Staggered Terms:
5,386,669 FOR 470,166 AGAINST 20,500 ABSTAIN 1,229,228 NOT VOTED
--------- ------- ------ ---------
b. Proposal to Amend the Certificate to Limit Those Entitled to Call a
Special Meeting of Shareholders to the Chairman of the Board of Directors,
the President of the Company or a Majority of the Board of Directors of
the Company:
5,365,069 FOR 496,666 AGAINST 15,600 ABSTAIN 1,229,228 NOT VOTED
--------- ------- ------ ---------
c. Proposal to Amend the Certificate to Require a Two-Thirds Majority Vote of
Either the Board of Directors or the Shareholders to Amend the By-laws of
the Company:
5,382,669 FOR 478,966 AGAINST 15,700 ABSTAIN 1,229,228 NOT VOTED
--------- ------- ------ ---------
4. PROPOSAL TO RATIFY SELECTION OF RICHARD A.EISNER AND COMPANY, LLP AS
CERTIFIED PUBLIC ACCOUNTANTS FOR THE YEAR ENDING MARCH 31, 1999.
6,678,547 FOR 392,966 AGAINST 24,600 ABSTAIN 10,450 NOT VOTED
--------- ------- ------ ---------
5. SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING (NO OTHER ISSUES
WERE ACTUALLY RAISED AT THE MEETING).
1,591,798 FOR 154,016 AGAINST 25,900 ABSTAIN 5,334,849 NOT VOTED
--------- ------- ------ ---------
14
<PAGE> 17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and class A warrants of the Company (the "Class A
Warrants") are traded on the OTC Bulletin Board and the Boston Stock Exchange
under the symbols "CCSE" and "CCSEW", respectively. Prior to March 31, 1999, the
Common Stock had been traded on the Nasdaq SmallCap Market, but was delisted
from the SmallCap Market following the determination by the Nasdaq Listing
Qualifications Panel that the Common Stock failed to maintain a minimum bid
price of $1.00 per share pursuant to Nasdaq Marketplace Rules.
Set forth below are the high and low bids for the Common Stock and Class A
Warrants during the periods indicated as provided by the Nasdaq SmallCap, and as
appeared on the OTC Bulletin Board following the delisting of the Common Stock
from the Nasdaq SmallCap Market at the close of business on March 30, 1999. Such
quotations reflect interdealer price without retail mark-up, markdown or
commissions, and may not reflect actual transactions.
COMMON STOCK FISCAL QUARTER ENDED
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
March 31, 1997 ... 4.875 3.938
June 30, 1997 .... 4.625 0.625
September 30, 1997 1.813 0.844
December 31, 1997 3.031 1.250
March 31, 1998 ... 4.625 1.906
June 30, 1998 .... 5.6875 1.375
September 30, 1998 2.9375 0.625
December 31,1998 . 0.9375 0.1875
March 31, 1999 ... 1.000 0.250
</TABLE>
CLASS A WARRANTS FISCAL QUARTER ENDED
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
March 31, 1997 ... 3.375 2.063
June 30, 1997 .... 3.125 0.125
September 30, 1997 0.500 0.063
December 31, 1997 1.000 0.344
March 31, 1998 ... 1.500 0.625
June 30, 1998 .... 1.375 0.3125
September 30, 1998 1.000 0.125
December 31, 1998 0.1875 0.010
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C>
March 31, 1999 ... 0.050 0.050
</TABLE>
On June 8, 1999, there were approximately 474 holders of record of the
Common Stock, which includes all shares held in nominee names by brokerage firms
and financial institutions as one stockholder.
The Company has not paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
From time to time the Company may publish forward-looking statements
related to such matters as anticipated financial performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These statements are typically identified
by the inclusion of phrases such as "the Company anticipates," "the Company
believes", "Management believes", and other phrases of similar meaning. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company is subject to significant external factors which could significantly
impact its business, including changes in Medicare, Medicaid, and private pay
reimbursement, government fraud and abuse initiatives and other such factors
which are beyond the control of the Company. Certain of these factors are
discussed herein. These factors, as well as future changes in reimbursement and
changes in interpretations of regulations, could cause future results to differ
materially from historical trends and management's current expectations.
INVESTIGATIONS BY U.S. DEPARTMENT OF JUSTICE AND NEW YORK STATE DEPARTMENT OF
HEALTH
If it were determined in the investigations by the U.S. Department of
Justice and the New York State Department of Health, that the Company engaged in
criminal wrongdoing, the Company would be subject to criminal penalties. In
addition, if it is determined that the Company engaged in criminal wrongdoing,
the Company would be terminated as a Medicaid and Medicare services provider,
and will be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. Additionally, even if the Company is not
charged with criminal wrongdoing itself, but one or more of its past or present
officers or employees are convicted of crimes relating to their employment, the
Company could be terminated as a Medicaid and Medicare
16
<PAGE> 19
provider. In these circumstances, although the Company would not be subject to
automatic exclusion from such programs, it could be at risk of having its
contracts with private insurers and other non-governmental agencies terminated.
If such occurred, it would have a material adverse effect on the Company's
business, results of operations, and financial condition and the Company may not
be able to continue as a going concern.
MEDICAL REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Balanced Budget Act (the "Budget Act") was signed by President Clinton
on August 5, 1997. The Budget Act provides for reductions in Medicare
reimbursement rates for oxygen and certain oxygen equipment. Oxygen
reimbursement rates were reduced to seventy five percent (75%) of their 1997
levels, beginning January 1, 1998 and has been further reduced to seventy
percent (70%) of their 1997 levels beginning January 1, 1999. In addition,
Consumer Price Index increases in oxygen reimbursement rates will not resume
until the year 2003.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
1998
Net revenues decreased by $1,162,000 or 6.1% to $17,942,000 at March 31,
1999 from $19,104,000 at March 31, 1998. The decrease in revenues was primarily
attributable to certain external factors that continue to impact the Company
including, the reductions in the oxygen reimbursements rates as a result of the
Budget Act, reductions in reimbursement rates by certain third party payors and
a reduction in referral based business.
The Company provides diversified categories of products. The following
table sets forth the percentage of net revenues represented by categories for
the years ended March 31:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
DME and Supplies 54.7% 58.9%
Rehabilitation 15.0% 15.6%
Respiratory 30.3% 25.5%
====== ======
100.0% 100.0%
====== ======
</TABLE>
Cost of revenues decreased by $714,000 or 9.3 % to $6,970,000 for the year
ended March 31, 1999 from $7,684,000 for the year ended March 31, 1998. Cost of
net revenues decreased as a percentage of net revenues to 38.8% for the year
ended March 31, 1999 from 40.2% for the year ended March 31, 1998. This decrease
in cost of net revenues as a percentage of net revenues for the year ended March
31, 1999 is primarily attributable to the change in the mix of net revenues.
17
<PAGE> 20
Selling, general and administrative expenses decreased by $1,379,000 or
13.7 % to $8,691,000 at March 31, 1999 from $10,070,000 at March 31, 1998,
representing a decrease as a percentage of net revenues of 4.3%, to 48.4% from
52.7%. This decrease is primarily attributable to a cost reduction plan
implemented by the Company, which included the closing of a retail operation,
the consolidation of warehouses and a reduction in personnel. Selling, general
and administrative expenses were also impacted by legal expenses aggregating
$90,000 in 1999 as compared to $301,000 in 1998, related to the ongoing Federal
Investigation of the Company.
The Company generated income from operations of $708,000 for the year
ended March 31, 1999, as compared to a loss from operations of $5,040,000 for
the year ended March 31, 1998. The increase in income from operations is
primarily attributable to cost reductions in selling, general and administrative
costs. The loss from operations for fiscal year ended March 31, 1998 is
primarily attributable to the charge to excess of purchase price over fair value
of net assets acquired of $4,225,000 and legal costs related to the Federal
Investigation of $301,000.
Interest income decreased by $17,000 to $6,000 for the fiscal year ended
March 31, 1999 from $23,000 for the fiscal year ended March 31, 1998 as a result
of lower average cash balances.
Interest expense increased by $75,000 or 15.2% to $568,000 for the fiscal
year ended March 31, 1999 from $493,000 for the fiscal year ended March 31,
1998. This increase was due to higher average outstanding interest bearing
obligations in 1999.
Provision for income taxes increased by $172,000 to $213,000 for the
fiscal year ended March 31, 1999 from $41,000 for the fiscal year ended March
31, 1998. This increase is primarily attributable to an increase in taxable
income for fiscal year 1999.
The Company had a net loss of $67,000 for the fiscal year ended March 31,
1999, as compared with net loss of $5,551,000 for the fiscal year ended March
31, 1998.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
1997
Net revenues increased by $9,351,000 or 95.9% to $19,104,000 at March 31,
1998 from $9,753,000 at March 31, 1997. The increase in revenues was primarily
from the acquisition of MRS in May 1997.
The Company provides diversified categories of products. The following
table sets forth the percentage of net revenues represented by categories for
the years ended March 31:
18
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------
1998 1997
------ ------
<S> <C> <C>
DME and Supplies 58.9% 78.5%
Rehabilitation 15.6% 16.0%
Respiratory 25.5% 5.5%
====== ======
100.0% 100.0%
====== ======
</TABLE>
Cost of revenues increased by $3,383,000 or 78.7% to $7,684,000 for the
year ended March 31, 1998 from $4,301,000 for the year ended March 31, 1997.
Cost of net revenues decreased as a percentage of net revenues to 40.2% for the
year ended March 31, 1998 from 44.1% for the year ended March 31, 1997. This
decrease in cost of net revenues as a percentage of net revenues for the year
ended March 31, 1998 is primarily attributable to the change in the mix of net
revenues and the MRS acquisition, which enhanced the ability of the Company to
procure products at more competitive prices by virtue of the increase in the
Company's market share and related ability to negotiate with its major vendors
for better pricing and extended credit terms.
Selling, general and administrative expenses increased by $5,767,000 or
134.0 % to $10,070,000 at March 31, 1998 from $4,303,000 at March 31, 1997,
representing an increase as a percentage of net revenues of 8.6%, to 52.7% from
44.1%. This increase is primarily attributable to costs associated of
integrating MRS into the operations of the Company, which includes occupancy
costs, telephone, utilities and insurance. Selling, general and administrative
expenses were also impacted by legal and other professional expenses aggregating
$301,000 related to the ongoing Federal Investigation of the Company.
On August 5, 1997, President Clinton signed the Balanced Budget Act (the
"Budget Act"). The Budget Act provides for reductions in Medicare reimbursement
rates for oxygen and certain oxygen equipment. Oxygen reimbursement rates were
reduced to seventy five percent (75%) of their 1997 levels, beginning January 1,
1998 and to seventy percent (70%) of their 1997 levels beginning January 1,
1999. In addition, Consumer Price Index increases in oxygen reimbursement rates
will not resume until 2003.
The Company has analyzed the impact of the Budget Act's oxygen
reimbursement reduction on its operating plans, liquidity, cash flows and the
recoverability of long lived assets. The recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate to the carrying amount, including
associated intangible assets of such operations. This evaluation resulted in a
charge of approximately $4,225,000 to the excess of purchase price over fair
value of net assets acquired. Also, this evaluation led the Company to determine
that the remaining amortization period for the excess of purchase price over
fair value of net assets acquired should be reduced from 30 to 20 years.
19
<PAGE> 22
Also, during the fiscal year ended March 31, 1998, the Company recorded
provision for doubtful accounts of $1,853,000. Management's decision was based
principally on its determination that recovery of the receivables were unlikely
and that the additional costs of collection would not prove to be economically
beneficial. The Company has since developed new procedures in its customer
service department, and has created a verification department to insure the
accuracy of the billing information to provide complete and accurate claims data
to payor sources to insure timely payment. Management believes these procedures
will reduce the number of claim denials and improve the Company's operating
efficiency and collection process.
The Company incurred a loss from operations of $5,040,000 for the year
ended March 31, 1998, as compared to income from operations of $659,000 for the
year ended March 31, 1997. The loss from operations is primarily attributable to
higher selling, general and administrative costs, the charge to excess of
purchase price over fair value of net assets acquired of $4,225,000, the
write-off of accounts receivable of $979,000, and legal costs related to the
Federal Investigation of $301,000.
Interest income decreased by $80,000. The decrease was due to the use of a
portion of the initial public offering proceeds to purchase MRS, thereby making
fewer funds available for investment.
Interest expense increased by $339,000 or 220.1% to $493,000 for the
fiscal year ended March 31, 1998 from $154,000 for the fiscal year ended March
31, 1997. This increase was due to an increase in outstanding indebtedness
related to the Company's line of credit with the Bank of New York, notes payable
to vendors, and notes issued to Adam and in connection with the Company's
acquisition of MRS.
The Company had a net loss of $5,551,000 for the fiscal year ended March
31, 1998, as compared with net income of $330,000 for the fiscal year ended
March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to a deficiency of approximately $1,562,000 at
March 31, 1999 from $866,000 at March 31, 1998. The current ratio decreased to
.79 at March 31, 1999 from .90 at March 31, 1998.
Net cash provided by operating activities was approximately $2,611,000 for
the year ended March 31, 1999 compared with approximately $2,689,000 for the
year ended March 31, 1998. The decrease of approximately $78,000 was primarily
attributable to the increase in accounts receivable and a decrease in accounts
payable and accrued expenses.
Net cash used in investing activities was approximately $1,355,000 for the
year ended March 31, 1999, compared with approximately $6,123,000 for the year
ended March 31, 1998. The decrease of approximately $4,768,000 is primarily
attributable to
20
<PAGE> 23
the acquisition of MRS in 1998 and decreases in purchases of rental equipment
and property and equipment.
Net cash used in financing activities for the year ended March 31, 1999
was approximately $1,448,000 compared with approximately $938,000 for the year
ended March 31, 1998. The change of approximately $510,000 was primarily
attributable to an increase in repayments of supplier notes offset by a decrease
in net borrowings under the Company's credit line.
The Company's future liquidity will continue to be dependent upon the
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable and accrued
expenses). In that regard, accounts receivable can have a significant impact on
the Company's liquidity. The Company has various types of accounts receivable,
such as receivables from patients and contracts. Accounts receivable are
generally outstanding for longer periods of time in the health care industry
than many other industries because of requirements to provide third party payors
with additional information subsequent to billing and the time required by such
payors to process claims. Certain accounts receivable frequently are outstanding
for more than 90 days.
Recently there has been consolidation within the New York metropolitan
area in the industry in which the Company operates. Such recent consolidation
may limit the Company's ability to maintain or increase its market share and
could materially adversely affect its business, results of operations and
financial condition.
The Company currently has a $2,500,000 line of credit with The Bank of New
York with interest payable at the prime rate. As of March 31, 1999,
approximately $2,500,000 was drawn down under the line. In July 1997, the Bank
notified the Company that it put a $2,500,000 cap on borrowings until the
uncertainty surrounding the Federal Investigation of the Company was resolved.
The Bank has transferred the administration of the credit facility within the
Bank to its Asset Recovery Department.
The Company entered into an agreement to finance a new computer system
with Tokai Financial Services, Inc. ("Tokai"). Although the agreement allows the
Company to draw down $600,000 under a credit line, Tokai initially capped the
line at $480,000 until the Federal Investigation is resolved. Once the $480,000
is drawn down under the credit line, it will then be converted into a master
lease agreement payable over forty eight months. The credit line and master
lease agreement bears interest at 11.6%. The interest rate is computed on a
floating rate of 6.5% above the two-year U.S. Treasury Bill. The two-year U.S.
Treasury Bill rate at March 31, 1999 was 5.02%. As of March 31, 1999, $279,000
has been drawn down under the credit line. In April 1999, the Company purchased
$180,000 of additional equipment, which was financed by Tokai. The line of
credit is collaterized by a lien on all of the Company's assets, subordinate to
prior lienholders.
21
<PAGE> 24
The Company believes that internally generated funds will provide
sufficient liquidity to enable it to meet its currently foreseeable working
capital requirements through March 2000. However, the Company may need to obtain
additional financing to continue its operations. There can be no assurance that
additional financings will be available if and when needed by, or on terms
acceptable to, the Company. Potential sources for any such financings have not
yet been identified. Furthermore, as indicated above, if in connection with the
Federal Investigation, the Company is found to have engaged in criminal
wrongdoing and/or it or MRS is terminated as a Medicaid and Medicare provider,
it would have a material adverse effect on the Company's business, results of
operations and financial condition, and the Company may not be able to continue
as a going concern.
SEASONALITY
The Company generally has not experienced seasonal fluctuation.
INFLATION
The Company has not experienced large increases in either the cost of
supplies or operating expenses due to inflation. Because of restrictions by
government and private medical insurance programs and the pressures to contain
the growth in the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company determined that it would be required to replace significant
portions of its software and hardware so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company presently believes that with
the addition of new software, the Year 2000 Issue will be remedied. However, if
such replacement is not made, or is not completed in a timely manner, the Year
2000 Issue could have a material impact on the operations of the Company.
The Company is in the process of developing a contingency plan for the
Year 2000 Issue and expects to complete the plan by the September 30, 1999.
The Company has inquired with of its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
parties' failure to
22
<PAGE> 25
remedy their own Year 2000 Issue. The Company's total Year 2000 project cost and
estimates to complete include the estimated costs and time associated with the
impact of relevant other parties' Year 2000 Issue, and are based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material adverse effect
on the Company.
The Company has and will continue to utilize both internal and external
resources to develop and test the software on its systems, including newly
purchased hardware. The Company plans to complete the implementation by August
31, 1999. The total cost of the project is estimated at $1,115,000 and is being
funded by a credit line and from operations. To date, the Company has incurred
costs of $960,000.
The cost of the project and the date on which the Company plans to
complete the project are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans. Specific factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained in this area.
CORPORATE COMPLIANCE PROGRAM
The complexity of the health care industry continues to increase. The laws
and regulations affecting the industry and reimbursement policies vary among
each individual payer. In addition to these regulations, the Company must adhere
to the guidelines established by the Office of Inspector General. In order to
assure that adequate systems are in place to facilitate ethical and legal
conduct the Company has recently chosen to implement a Corporate Compliance
Program. The first phase of the program implementation process the Company has
developed and delivered a compliance-training program to all of its employees.
In the second phase the Company will review all of its policies, procedures, and
practices to ensure that the activities of the employees and the Company as a
whole are in full compliance with relevant laws, standards, and federal
reimbursement guidelines.
SUBSEQUENT EVENTS
As of April 1, 1999, the Company entered into Restated and Amended
Employment Agreements with Messrs. Saverio D. Burdi and Louis Rocco providing
for base annual compensation of $225,000 and expiring on May 10, 2004, but which
may be extended for additional one year terms upon mutual agreement in writing.
In connection with the execution of these Restated and Amended Employment
Agreements, Non-Competition Agreements between the Company and Messrs. Burdi and
Rocco have been
23
<PAGE> 26
terminated and a non-competition provision has been added to their Restated and
Amended Employment Agreements covering the length of their Restated and Amended
Employment Agreements plus one year. See "Executive Compensation-Employment
Agreements" and "Certain Relationships and Related Transactions - Acquisition of
Metropolitan Respirator Service, Inc."
The Company and LTTR executed a letter of intent effective April 6, 1999
providing for the purchase by LTTR or one of its affiliates of all of the
Company's issued and outstanding Common Stock for the price of $1.20 per share,
conditioned upon the successful negotiation of a definitive written agreement,
which was executed on June 14, 1999 and further described below, and the
approval of the Company's shareholders. LTTR had previously acquired 2,126,250
shares of the Company's Common Stock from Alan T. Sheinwald, the Company's
former President and Chief Executive Officer. Also effective April 6, 1999, Dean
L. Sloane, Mary Sloane, Joshua Sloane, Craig V. Sloane and The Sloane Family
Foundation executed a letter of intent pursuant to which they agreed, for a
period of forty-five business days, or such earlier time as negotiations on a
definitive merger agreement between LTTR and the Company terminated, not to
transfer, encumber, or engage in any discussions or negotiations with respect to
their shares of Common Stock.
At the Company's annual meeting of shareholders held on April 8, 1999,
Messrs. Bruce L. Ansnes and Craig V. Sloane and Dr. Bernard Kruger did not seek
re-election to the Board, although their names appeared as nominees on the
Proxies solicited by the Company. Three nominees proposed by Alan J. Landauer,
the Managing Member of LTTR, including Mr. Landauer, Thomas C. Blum and Gary J.
Spirgel, were elected to the Board of Directors, together with incumbent
Directors Dean L. Sloane and Louis Rocco. At a Board of Directors meeting
following the annual meeting, a Special Committee of independent members of the
Board of Directors comprised of Messrs. Sloane, Spirgel and Rocco was appointed
to evaluate the proposed merger and was delegated the authority to approve the
transaction on behalf of the Board of Directors if it found that the transaction
was fair and in the best interest of the Company. The Special Committee approved
the Merger on June 14, 1999.
On June 14, 1999, the Company entered into the Merger Agreement. The
Merger Agreement provides for the merger of the Company with Merger Sub, with
the Company being the surviving entity. As part of the Merger each shareholder
(other than LHS and its affiliates) will receive $1.20 in exchange for each
share of Common Stock owned by them. The Merger is subject to the approval of
the holders of at least two-thirds of the Company's issued and outstanding
Common Stock. If the Merger is approved and consummated, the Company will become
a wholly-owned subsidiary of LHS. See "Description of Business - Business
Development" and "Certain Relationships and Related Transactions - Merger
Agreement."
24
<PAGE> 27
On June 17, 1999, the Company filed a preliminary proxy statement with
the Securities and Exchange Commission soliciting shareholder approval for the
proposed Merger.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements are contained on pages F-1 through F-24
of this Report and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants due to disagreements on
accounting and financial disclosure during the fiscal year ended March 31, 1999.
25
<PAGE> 28
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alan J. Landauer 50 Chairman of the Board of Directors
Thomas C. Blum 40 Director
Gary J. Spirgel 53 Director
Louis Rocco 48 Director, Vice President, Secretary,
President of MRS
Dean L. Sloane 53 Director
Saverio D. Burdi 40 Chief Operating Officer
Elia C. Guarneri 42 Chief Financial Officer
</TABLE>
Alan J. Landauer is the President and Chief Executive Officer of Landauer
Hospital Supplies, Inc., a home medical equipment provider, a position he has
held since 1980. He has also been the President and Chief Executive Officer of
Landauer Home Infusion Service from 1991 to the present. Mr. Landauer is active
in the management and growth of these home medical equipment providers and has
completed four acquisitions in the prior four years.
Thomas C. Blum is currently affiliated with Columbia Financial Partners,
which makes private investments in small financial institutions, as a
consultant. From September 1996 to October 1998, Mr. Blum was Managing Director
of Bear Stearns & Co. where he was responsible for investment banking
relationships in the financial institutions group. In the prior 12 years, Mr.
Blum was employed by Salomon Brothers Inc. rising to Vice President in
investment banking, where he was responsible for mergers and acquisitions,
capital raising and advisory work. From 1989 to 1992 Mr. Blum ran Salomon's
Asian financial institutions business from Tokyo, Japan.
Mr. Blum and Mr. Landauer are first cousins.
26
<PAGE> 29
Gary J. Spirgel was employed for 16 years by Health Force, Inc., a
national provider of home care services with 85 offices in 23 states and a
wholly owned subsidiary of Accustaff, Inc. From 1994 to 1998 he was President of
Health Force, where he had full operational responsibility for the company,
including profitability. His active employment with Health Force terminated in
April, 1998 when the division was sold.
Louis Rocco joined the Company in May 1997 as Vice President. He also
serves as President of MRS. Mr. Rocco was a founder of MRS and held various
executive positions in MRS from its inception through May 1997. Mr. Rocco is
a registered Respiratory Therapist and has a B.S. in Respiratory Therapy from
Long Island University.
Dean L. Sloane has been a director of the Company since its inception and
was appointed Chairman of the Board in July 1997 and held that position until
April 8, 1999. Since December 1988 he has been Chairman of the Board, President
and a Director of Community Medical Transport, Inc., a publicly traded company.
Saverio D. Burdi joined the Company in May 1997 as Senior Vice President
and was appointed Chief Operating Officer in July, 1997. Prior to joining the
Company, Mr. Burdi was an owner of MRS and was employed by MRS from June, 1989
through May 1997, and served as Vice President-Sales of MRS from June 1992
though May 1997.
Elia C. Guarneri joined the Company in January 1998 as Corporate
Controller, was appointed Acting Chief Financial Officer in October 1998 and
was named Chief Financial Officer on February 11, 1999. Prior to joining the
Company, Mr. Guarneri was Senior Accountant at Puglisi, Midler & Co. from
December 1995 to January 1998 and was a Staff Accountant at Tobin & Company
from October 1994 to December 1995. Prior to October 1994, Mr. Guarneri
attended Pace University. Mr. Guarneri received a B.B.A. from Pace
University and is a Certified Public Accountant.
None of the above listed officers and Directors of the Company have during
the past five years (i) been involved in a petition under the bankruptcy code of
the United States (ii) been convicted in a criminal preceding (iii) been the
subject of any order, judgment or decree enjoining him from, among other things,
acting as a broker, dealer, investment advisor, engaging in any type of business
practice or engaging in any activity in connection with the purchase or sale of
any security or in connection with any violation of federal or state securities
laws, (iv) been subject to any order or decree barring or suspending his right
to engage in any activities described in (iii) above, or (v) been found by a
court of competent jurisdiction in a civil action or by a governmental authority
to have violated any federal or state securities law.
Subsequent to the closing of the Company's initial public offering, the
underwriters were granted the right, but not the obligation, to appoint a
designee to serve as an advisor to the Board of Directors. The underwriters have
not designated an individual to serve in such capacity.
27
<PAGE> 30
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Form 3 and 4 and all amendments thereto
furnished to the Company during the fiscal year ended March 31, 1999, Forms
5, and all amendments thereto furnished to the Company with respect to the
fiscal year ended March 31, 1999, and all written representations received by
the Company from each person who was a director, officer or beneficial owner
of more than ten percent of a class of equity securities of the Company
during the fiscal year ended March 31, 1999, the Company believes that none
of such persons filed a late report during, or with respect to, the year,
except that due to an administrative oversight, Forms 5 for the following
persons were not filed in a timely manner: Bruce L. Ansnes, Saverio D.
Burdi, Elia C. Guarneri, Bernard M. Kruger, Matthew J. McDonough, Louis
Rocco, Craig V. Sloane, Dean L. Sloane and Wade Wilson. Forms 5 for each of
such persons will be filed promptly after the filing hereof.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is the remuneration for all services in all capacities to
the Company for the fiscal year ended March 31, 1999 of (a) all individuals
serving as the Company's Chief Executive Officer or acting in a similar capacity
during the fiscal year ended March 31, 1999, regardless of compensation level
and (b) the two other most highly compensated executive officers of the Company
who were serving as executive officers as of March 31, 1999 and whose total
annual salary and bonus exceeded $100,000 for the fiscal year ended March 31,
1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- --------------------------
Securities
Underlying All Other
Name & Principal Fiscal Other Annual Restricted - Options/ LTIP Compen-
Position Year Salary($) Bonus($) Compensation($) Stock Awards($) SAR's (#) Payouts($) sation
-------- ---- --------- -------- --------------- --------------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harris G. LeRoy II 1999 $149,413 $0 $ 0 0 0 0 0
Consultant (1) 1998 $ 0 $0 $ 0 0 0 0 0
1997 $ 0 $0 $ 0 0 0 0 0
Saverio Burdi 1999 $150,000 $0 $ 0 0 25,000 0 0
Chief Operating 1998 $139,000 $0 $7,000 0 25,000 0 0
Officer (2) 1997 $ 0 $0 $ 0 0 0 0 0
Louis Rocco 1999 $312,956 $0 $ 0 0 0 0 0
Secretary, 1998 $112,000 $0 $6,000 0 0 0 0
Vice President, 1997 $ 0 $0 $ 0 0 0 0 0
President of MRS
</TABLE>
- -----------------
28
<PAGE> 31
(1) Mr. LeRoy served as a consultant to the Company from August 24, 1998 until
April 22, 1999, during which time he was authorized by the Board of
Directors to exercise certain of the powers normally associated with the
Chief Executive Officer. In June 1999, the Company granted Mr. LeRoy
133,000 options with an exercise price of $1.31.
(2) Messrs. Burdi and Rocco commenced their employment with the Company on May
10, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information regarding stock options granted
during the fiscal year ended March 31, 1999 to (a) all individuals serving as
the Company's Chief Executive Officer or acting in a similar capacity during the
fiscal year ended March 31, 1999, regardless of compensation level and (b) the
two other most highly compensated executive officers of the Company who were
serving as executive officers as of March 31, 1999 and whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended March 31, 1999. The
Company has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS IN FISCAL EXERCISE EXPIRATION
NAME GRANTED(#)* YEAR PRICE($/SH) DATE
- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Harris G. LeRoy II (1) 0 0 -- --
Saverio D. Burdi (2) 25,000 71% $.50 December 2008
Louis Rocco 0 -- -- --
</TABLE>
- -----------
(1) Mr. LeRoy served as a consultant to the Company from August 24, 1998 until
April 22, 1999, during which time he was authorized by the Board of
Directors to exercise certain of the powers normally associated with the
Chief Executive Officer. In June 1999, the Company granted Mr. LeRoy
133,000 options with an exercise price of $1.31.
(2) These options were granted upon the cancellation of a previous grant of
25,000 options at an exercise of $4.00 per share.
* All options set forth were granted under the Company's Stock Option Plan
at 100% of the fair market value of the shares at the time the options were
granted and are intended to be, and with few exceptions, will be, incentive
stock options. All options are exercisable immediately and expire ten years
after the date of grant.
Options have value to the listed executives and to all option recipients
only if the stock price advances beyond the grant date price shown in the table
during the effective option period.
29
<PAGE> 32
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table shows information regarding stock options exercised
during the fiscal year ended March 31, 1999 by (a) all individuals serving as
the Company's Chief Executive Officer or acting in a similar capacity during the
fiscal year ended March 31, 1999, regardless of compensation level and (b) the
two other most highly compensated executive officers of the Company who were
serving as executive officers as of March 31, 1999 and whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended March 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FY-END(#) AT FY-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harris G. LeRoy II (1) 0 0 0 0 0 0
Saverio D. Burdi 0 0 0 25,000 0 0
Louis Rocco 0 0 0 0 0 0
</TABLE>
(1) Mr. LeRoy served as a consultant to the Company from August 24, 1998 until
April 22, 1999, during which time he was authorized by the Board of
Directors to exercise certain of the powers normally associated with the
Chief Executive Officer. In June 1999, the Company granted Mr. LeRoy
133,000 options with an exercise price of $1.31.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Saverio Burdi on May
10, 1997. The agreement has a three-year term, which renews for an additional
year on each anniversary of the agreement, and provides for a base annual
compensation of $120,000. Under the agreement, Mr. Burdi was granted options to
purchase 25,000 shares of Common Stock under the Company's Incentive Stock
Option Plan upon the execution of the agreement. The agreement also provides for
certain employee benefits including medical insurance, vacation and a car
allowance. Additionally, the Company entered into a Non-Competition Agreement
with Mr. Burdi covering the term of the employment agreement plus one year
following termination. In consideration for Mr. Burdi entering into the
Non-Competition Agreement, the Company agreed to pay Mr. Burdi a total of
$90,000 in allotments of $30,000 over thirty six months with payments made in
installments in accordance with the Company's established pay periods.
The Company entered into an employment agreement with Louis Rocco on May
10, 1997, which was amended on March 1, 1998. The agreement has a three-year
term, which renews for an additional year on each anniversary of the agreement,
and provides for a base compensation of $19,478 per month and entitles Mr. Rocco
to payments of $10,311 for the remainder of the term in the event that the
agreement is terminated for any reason prior to the end of the term. The
agreement also provides for certain employee
30
<PAGE> 33
benefits including medical insurance, vacation and a car allowance.
Additionally, the Company entered into a Non-Competition Agreement with Mr.
Rocco covering the term of the employment agreement plus one-year following
termination.
As of April 1, 1999, the Company entered into Restated and Amended
Employment Agreements with Messrs. Saverio D. Burdi and Louis Rocco providing
for base annual compensation of $225,000 and expiring on May 10, 2004, but which
may be extended for additional one year terms upon mutual agreement in writing.
In connection with the execution of these Restated and Amended Employment
Agreements, the Non-Competition Agreements between the Company and Messrs. Burdi
and Rocco have been terminated and a non-competition provision has been added to
their Restated and Amended Employment Agreements covering the length of their
Restated and Amended Employment Agreements plus one year. See "Management's
Discussion and Analysis or Plan of Operation - Subsequent Events" and "Certain
Relationships and Related Transactions - Acquisition of Metropolitan Respirator
Service, Inc."
CONSULTING AGREEMENT
On August 24, 1998, the Company entered into a six-month consulting
agreement with Harris G. LeRoy II to provide a strategic operating overview of
the Company. Mr. LeRoy received $1,000 a day along with 1,000 stock options per
day. The exercise price of the options is $1.31, which was the average closing
price of the Common Stock during the month of August, 1998. The options
accumulated and were to be issued to Mr. LeRoy upon the expiration or the
earlier termination of the consulting agreement. The consulting agreement
expired by its terms on March 31, 1999, but Mr. LeRoy continued to provide the
same consulting services to the Company through April 22, 1999 and received the
same compensation as provided in the consulting agreement during that time.
Pursuant to the consulting agreement, the Company issued 133,000 options to Mr.
LeRoy on June 7, 1999 at an exercise price of $1.31, which are exercisable
immediately and expire upon the earlier of June 7, 2009 or the consummation of a
merger, consolidation or other business combination between the Company and any
other business entity.
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan, as amended, (the "Plan") for
officers, employees, directors and consultants of the Company or any of its
subsidiaries. The Plan authorizes the granting of stock options to purchase an
aggregate of not more than 853,000 shares of Common Stock. As of the date
hereof, options to purchase an aggregate of 263,500 shares of Common Stock have
been granted and options to purchase 86,500 shares of Common Stock have been
canceled. Options to purchase an aggregate of 676,000 shares of Common Stock are
available for grant under the Plan.
The Plan is administered by a Stock Option Committee (the "Committee")
consisting of two disinterested members of the Board of Directors. In general,
the
31
<PAGE> 34
Committee will select the persons to whom options will be granted and will
determine, subject to the terms of the Plan, the number, the exercise period and
other provisions of such options.
Options granted to employees might be either incentive stock options
("ISOs") under the Internal Revenue Code or non-ISOs. The Board may determine
the exercise price, provided that, in the case of ISOs, such price may not be
less than 100% (110% in the case of ISOs granted to holders of 10% of the voting
power of the Company's stock) of the fair market value (as defined in the Plan)
of the Common Stock at the date of grant. The aggregate fair market value
(determined at time of option grant) of stock with respect to which ISOs become
exercisable for the first time in any year cannot exceed $100,000. The Company
does not expect the exercise price of non-ISOs to be less than fair market
value.
The options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the Plan as the Board
of Directors may impose. Each option, unless sooner terminated, shall expire no
later than 10 years (Five years in the case of ISOs granted to holders of 10% of
the voting power of the Company's stock) from the date of the grant. The Board
has the right to amend, suspend or terminate the Plan at any time, provided,
however, that unless ratified by the Company's shareholders within 12 months
thereafter, no amendment or change in the Plan will be effective: (a) increasing
the total number of shares which may be issued under the Plan; (b) reducing
below fair market value on the date of grant the price per share at which any
option which is an ISO may be granted; (c) extending the term of the Plan or
period during which any option which is an ISO may be granted or exercised; (d)
altering in any way the class of persons eligible to participate in the Plan;
(e) materially increasing the benefits accruing to participants under the Plan;
or (f) with respect to options which are ISOs, amending the Plan in any respect
which would cause such options to no longer qualify for incentive stock option
treatment pursuant to the Internal Revenue Code of 1986.
COMPENSATION OF DIRECTORS
Directors who are not employed by the Company are paid a fee of $1,000 for
each meeting attended and $500 for each committee meeting attended. All
directors are reimbursed for expenses incurred on behalf of the Company.
Commencing with the last quarter of 1997, Dean L. Sloane, a current Director and
the former Chairman of the Board of Directors, and Bruce L. Ansnes, the former
Vice Chairman of the Board of Directors, received stipends of $5,000 per quarter
for management services they provided to the Company. Such stipends ceased, with
respect to Mr. Ansnes, upon his resignation from the Board of Directors on March
23, 1999, and, with respect to Mr. Sloane, as of April 8, 1999.
32
<PAGE> 35
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock on June 15, 1999 with respect to (a) each person
or group known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (b) each director of the Company, (c) each
named executive officer of the Company (as that term is defined in Item
402(a)(2) of Regulation S-B promulgated by the Securities and Exchange
Commission) and (d) all officers and directors of the Company as a group. Except
as set forth below, all of such shares are held of record and beneficially.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- -------------------- ----------------
<S> <C> <C>
Alan J. Landauer............... 4,279,700(1) 59.30%
99 Calvert Street
Harrison, NY 10528
LTTR Home Care, LLC............ 2,126,250 29.46%
99 Calvert Street
Harrison, New York 10528
Dean L. Sloane................. 1,388,000(2) 19.23%
4 Gannett Drive
White Plains, NY 10604
Thomas C. Blum................. 10,000(3) *
Columbia Financial Partners, LP
375 Park Avenue
New York, NY 10152
</TABLE>
- ----------
(1) Includes 2,126,250 shares owned by LTTR. Also includes an aggregate of
2,091,450 shares owned by Dean L. Sloane, Craig V. Sloane, Mary Sloane, The
Sloane Family Foundation and DMJ Management Group, Inc. (the "Sloane Group"),
for which proxies have been granted to LHS and any designee of LHS, for the
purpose of voting such shares at any meeting of shareholders or in response to
any solicitations of proxies for a period of six months expiring December 14,
1999.
(2) Does not include 100,000 Shares owned by Mr. Sloane's wife, Mary Sloane, 800
shares owned by Mr. Sloane's son, Joshua Sloane and 175,000 Shares owned by The
Sloane Family Foundation for which Mr. Sloane disclaims beneficial ownership.
Mr. Sloane has granted an irrevocable proxy to LHS and any designee of LHS for
the purpose of voting such shares at any meeting of shareholders or in response
to any solicitation of proxies for a period of six months expiring December 14,
1999.
(3) Does not include 27,000 shares of Common Stock owned by Mr. Blum's brother
James J. Blum, for which Mr. Blum disclaims beneficial ownership.
33
<PAGE> 36
<TABLE>
<S> <C> <C>
Louis Rocco.......................... 293,056 4.06%
18 Sargent Place
Mt. Vernon, NY 10550
Gary J. Spirgel...................... 0 *
18 Sargent Place
Mount Vernon, NY 10550
Saverio D. Burdi..................... 87,243(4) 1.21%
18 Sargent Place
Mt. Vernon, NY 10550
Harris G. Leroy II..................... 133,000(5) 1.84%
6 Betsy Ross Court
Skillman, New Jersey 08558
All Officers and Directors as a Group.. 4,802,999(6) 66.54%
(7 persons)
</TABLE>
- ----------
*Less than one percent.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All transactions with officers and shareholders and their affiliates
were made on terms no less favorable to the Company than those available from
unaffiliated parties. All future transactions between the Company and its
officers, directors and 5% shareholders will be on terms no less favorable than
could be obtained by independent third parties and will be approved by a
majority of the independent disinterested directors of the Company.
ACQUISITION OF METROPOLITAN RESPIRATOR SERVICE, INC.
On May 10, 1997, the Company acquired 68% of the outstanding shares of
Metropolitan Respirator Service, Inc. ("MRS") from Messrs. Donald Fargnoli,
Louis Rocco and Saverio D. Burdi. The purchase price was approximately
$5,993,000, consisting of (i) approximately $2,800,000 in cash, of which
$970,598 was paid to Mr. Fargnoli, $1,063,502 was paid to Mr. Rocco and $765,900
was paid to Mr. Burdi; (ii)
- ----------
(4) Includes options to purchase 25,000 shares of Common Stock at an exercise
price of $.50 per share granted to Mr. Burdi as of December 14, 1998, which are
exercisable within 60 days.
(5) Includes options to purchase 133,000 shares of Common Stock at an exercise
price of $1.31 per share granted to Mr. LeRoy as of June 7, 1999, which are
exercisable within 60 days.
(6) Includes options to purchase 158,000 shares of Common Stock, which are
exercisable within 60 days.
34
<PAGE> 37
Promissory Notes with a face value of $2,967,000 accruing interest at a rate of
6% per annum, including a $1,176,400 Promissory Note issued to Mr. Fargnoli, a
$1,302,182 Promissory Note issued to Mr. Rocco and Promissory Notes issued to
certain MRS employees, including a Promissory Note for $444,340 issued to Wade
Wilson, who was appointed Vice President, Operation Systems, of the Company, and
(iii) 62,243 shares of the Common Stock with a value of $226,000 issued to
Saverio D. Burdi, of which 17,842 shares were held in escrow by the Company
until May 10, 1999 and have since been released to Mr. Burdi.
In March 1998, Mr. Rocco surrendered his $1,302,000 Promissory Note
issued in connection with the Company's acquisition of MRS. In consideration for
such action, the Company converted eighty percent of the Promissory Notes into
shares of Common Stock, with Mr. Rocco receiving 293,056 shares and a cash
payment of $73,000. The remaining amount of the Promissory Notes and interest
thereon will be repaid monthly in installments of $10,000.
Also, In March 1998, Mr. Fargnoli surrendered his $1,176,000 Promissory
Note issued to him in connection with the Company's acquisition of MRS. In
consideration for such action, the Company converted eighty percent of the
Promissory Notes into shares of Common Stock, with Mr. Fargnoli receiving
264,750 shares and a cash payment of $66,000. The remaining amount of the
Promissory Notes and interest thereon will be repaid monthly in installments of
$9,000. In May 1998, Mr. Fargnoli resigned from the Company. Mr. Fargnoli also
entered into a Consulting Agreement with the Company for a term of two years
expiring May 2000 for a fee of $55,000 per year.
Mr. Wilson's Promissory Note is payable in two payments. On January 2,
1999, one half of the principal and accrued interest was paid through the
issuance to him of 50,000 shares of Common Stock and the payment of $50,000 and
the remaining one half of the principal and accrued interest is payable January
2, 2000. In lieu of cash payment, Mr. Wilson may elect to convert up to eighty
percent (80%) of the outstanding principal balance of the Promissory Note and
the accrued interest thereon payable on the dates set forth above into 50,000
shares of Common Stock, based on a valuation of $4.00 per share, irrespective of
the actual market value of the shares on the date of such conversion. If Mr.
Wilson does not make such election, the Company may do so. With respect to the
remaining twenty (20%) of the payment due, Mr. Wilson may, but is not obligated
to, require that such amount be converted into shares or take such payment in
cash. At any time subsequent to the first anniversary of the execution of the
Promissory Note, if the Company conducts a secondary public offering of Common
Stock, Mr. Wilson shall have the opportunity to sell the shares in such offering
to the same extent and in proportion to the rights that the other executive
officers of the Company have. Mr. Wilson was terminated as an officer and
employee of the Company as of October 5, 1998, but continues to provide
consulting services to the Company.
35
<PAGE> 38
Upon the closing of the MRS acquisition, Mr. Fargnoli was appointed to
the Company's Board of Directors, Messrs. Fargnoli and Rocco were appointed as
Vice Presidents of the Company, Saverio D. Burdi was appointed as Senior Vice
President of the Company, and Wade Wilson was appointed as Senior Vice
President, Operation Systems, of the Company. Mr. Burdi was subsequently was
appointed Chief Operating Officer of the Company. The Company entered into three
year employment agreements with Messrs. Fargnoli, Rocco, Burdi and Wilson,
providing for annual base compensation of $110,000 for Messrs. Fargnoli and
Rocco and $120,000 for Messrs. Burdi and Wilson. Messrs. Burdi and Rocco's
employment agreements are described above. Messrs. Burdi and Wilson were granted
options to purchase 25,000 and 20,000 common shares, respectively, under the
Company's 1996 Stock Option Plan. Each of the agreements provides for certain
employee benefits and contains a non-competition provision covering the term of
the agreement plus one year following termination. Messrs. Fargnoli, Rocco,
Burdi and Wilson also entered into Non-Competition Agreements with the Company
which run through May 10, 2001, or the length of their respective Employment
Agreement plus one year, whichever is longer. Mr. Fargnoli has subsequently
resigned and Mr. Wilson's employment was terminated. Mr. Rocco's employment
agreement has been amended as described above.
As of April 1, 1999, the Company entered into Restated and Amended
Employment Agreements with Messrs. Saverio D. Burdi and Louis Rocco providing
for base annual compensation of $225,000 and expiring on May 10, 2004, but which
may be extended for additional one year terms upon mutual agreement in writing.
In connection with the execution of these Restated and Amended Employment
Agreements, the Non-Competition Agreements between the Company and Messrs. Burdi
and Rocco have been terminated and a non-competition provision has been added to
their Restated and Amended Employment Agreements covering the length of their
Restated and Amended Employment Agreements plus one year. See "Executive
Compensation - Employment Agreements" and "Management's Discussion and Analysis
or Plan of Operation Subsequent Events."
MERGER AGREEMENT
On June 14, 1999, the Company, LHS and Merger Sub entered into the
Merger Agreement. The Merger Agreement provides for the acquisition of all of
the outstanding common stock of the Company (other than shares owned by LHS and
it affiliates) by LHS for $1.20 per share pursuant to a merger between the
Company and Merger Sub. LHS is controlled by Alan J. Landauer, who is Chairman
of the Board of the Company. Mr. Landauer is also the Managing Member of LTTR,
which is the holder of 2,126,250 shares of the Company's issued and outstanding
Common Stock. (See "Description of Business - Business Development,"
"Management's Discussion and Analysis or Plan of Operation Subsequent Events"
and "Security Ownership of Certain Beneficial Owners and Management."
36
<PAGE> 39
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits filed as part of the Report on Form 10-KSB are listed in
the Index to Exhibits immediately following the financial statement schedules.
(b) Reports on Form 8-K
A Current Report Form 8-K was filed by the Company on April 20, 1999
reporting the change in control that occurred when Alan J. Landauer and his two
nominees, Thomas C. Blum and Gary J. Spirgel, were elected by the Company's
shareholders to the Board of Directors and Mr. Landauer was elected by the Board
of Directors as the Chairman of the Board. No financial statements were required
to be filed with this Form 8-K filing and none were included.
37
<PAGE> 40
SIGNATURES
In accordance with Section 13 of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMUNITY CARE SERVICES, INC.
-------------------------------------------
/S/ Saverio D. Burdi
-------------------------------------------
Saverio D. Burdi
Chief Operating Officer
(Principal Executive Officer)
/S/ Elia C. Guarneri
-------------------------------------------
Elia C. Guarneri
Chief Financial Officer
(Principal Accounting Officer)
Dated: June 29, 1999
In accordance with Section 13 of the 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:
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ Alan J. Landauer Director June 29, 1999
- -------------------------------------------------
Alan J. Landauer
/S/ Thomas C. Blum Director June 29, 1999
- -------------------------------------------------
Thomas C. Blum
/S/ Gary J. Spirgel Director June 29, 1999
- -------------------------------------------------
Gary J. Spirgel
/S/ Dean L. Sloane Director June 29, 1999
- -------------------------------------------------
Dean L. Sloane
/S/ Louis Rocco Director June 29, 1999
- -------------------------------------------------
Louis Rocco
</TABLE>
38
<PAGE> 41
FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company required to be included in Part
II, Item 7 are listed below:
<TABLE>
<CAPTION>
FORM10-KSB
PAGES
------------
<S> <C>
Independent Auditors' Report.................................... F-1
Consolidated Balance Sheet at March 31, 1999 ................... F-2
Consolidated Statements of Operations for the Years Ended
March 31, 1999 and 1998 ........................................ F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended March 31, 1999 and 1998 ............... F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999 and 1998 ........................................ F-5-F-6
Notes to Consolidated Financial Statements ..................... F-7-F-24
</TABLE>
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Community Care Services, Inc.
We have audited the accompanying consolidated balance sheet of Community Care
Services, Inc. and subsidiary as of March 31, 1999 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended March 31, 1999 and 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 enumerated above present fairly, in all
material respects, the consolidated financial position of Community Care
Services, Inc. and subsidiary as of March 31, 1999, and the consolidated results
of their operations and their consolidated cash flows for the years ended March
31, 1999 and 1998, in conformity with generally accepted accounting principles.
As discussed in Note M to the consolidated financial statements, the U.S.
Department of Justice is conducting a criminal investigation relating to
allegedly improper payments made in connection with the Company obtaining a
contract to provide services involving Medicare.
Richard A. Eisner & Company, LLP
New York, New York
May 28, 1999
With respect to Note O
June 14, 1999
F-1
<PAGE> 43
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS AT
MARCH 31,
1999
----
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 84,000
Accounts receivable,net of allowance for doubtful
accounts of $1,852,000 4,662,000
Inventory 459,000
Prepaid expenses and other current assets 116,000
Deferred tax asset, net 453,000
------------
TOTAL CURRENT ASSETS 5,774,000
Rental equipment, net 2,256,000
Property and equipment, net 1,474,000
Excess of purchase price over fair value of net assets acquired, net 2,151,000
Covenants not to compete, net 345,000
Accounts and customer list, net 262,000
Other assets 32,000
------------
TOTAL ASSETS $ 12,294,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 2,611,000
Accrued expenses 738,000
Note payable - Bank 2,500,000
Current portion of long term debt 1,372,000
Current portion of capital lease obligations 115,000
------------
TOTAL CURRENT LIABILITIES 7,336,000
Long term debt, net of current portion 99,000
Long term portion of capital lease obligations 140,000
------------
TOTAL LIABILITIES 7,575,000
------------
COMMITMENTS AND CONTINGENCIES (NOTES I AND M)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 1,000,000 shares, none issued
Common stock, $.01 par value; authorized 20,000,000 shares,
issued and outstanding 7,200,009 shares 72,000
Additional paid in capital 10,206,000
Accumulated Deficit (5,559,000)
------------
TOTAL STOCKHOLDERS' EQUITY 4,719,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,294,000
============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-2
<PAGE> 44
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------
1999 1998
---- ----
<S> <C> <C>
NET REVENUES $ 17,942,000 $ 19,104,000
COST AND EXPENSES: ------------ ------------
Cost of net revenues
Product and supply costs 6,213,000 6,810,000
Rental equipment depreciation 757,000 874,000
------------ ------------
COST OF NET REVENUES 6,970,000 7,684,000
Selling, general and administrative expenses 8,691,000 10,070,000
Provision for doubtful accounts 1,173,000 1,853,000
Amortization of intangible assets 400,000 312,000
Provision for impairment of long lived assets -- 4,225,000
------------ ------------
Total Cost and Expenses 17,234,000 24,144,000
------------ ------------
OPERATING INCOME (LOSS) 708,000 (5,040,000)
Interest income 6,000 23,000
Interest expense (568,000) (493,000)
------------ ------------
Income (Loss) before provision for income taxes 146,000 (5,510,000)
Provision for income taxes 213,000 41,000
------------ ------------
NET (LOSS) ($ 67,000) ($ 5,551,000)
============ ============
PER SHARE DATA :
Net (loss) per common share:
Basic and Diluted ($ 0.01) ($ 0.84)
------------ ------------
Weighted average number of common shares outstanding:
Basic and Diluted 7,151,542 6,595,913
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-3
<PAGE> 45
\ COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
NUMBER OF SHARES AMOUNT ADDITIONAL PAID IN ( ACCUMULATED } TOTALS
CAPITAL ( DEFICIT )
---------------- ------ ------------------ --------------- ------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1997 6,225,000 $ 62,000 $ 6,428,000 $ 59,000 $ 6,549,000
Issuance of common stock in
connection with acquisition 362,243 4,000 1,310,000 1,314,000
Conversion of notes payable to
common stock 557,806 5,000 2,193,000 2,198,000
Net loss (5,551,000) (5,551,000)
--------- ----------- ----------- ----------- -----------
Balance - March 31, 1998 7,145,049 71,000 9,931,000 (5,492,000) 4,510,000
Exercise of underwriter warrants 6,000 6,000
Issuance of stock options to consultant 52,000 52,000
Conversion of notes payable to
common stock 54,960 1,000 217,000 218,000
Net Loss (67,000) (67,000)
--------- ----------- ----------- ----------- -----------
Balance - March 31, 1999 7,200,009 $ 72,000 $10,206,000 $(5,559,000) $ 4,719,000
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
<PAGE> 46
COMMUNITY CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($67,000) ($5,551,000)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization expense 1,313,000 1,287,000
Non cash compensation 52,000 --
Write off of rental equipment 58,000 45,000
Loss on disposal of property and equipment 3,000 --
Provision for doubtful accounts 1,173,000 1,853,000
Provision for inventory allowance 39,000 97,000
Deferred taxes 176,000 327,000
Provision for impairment of long lived assets -- 4,225,000
Changes in operating assets and liabilities net of effects
from Metropolitan Respirator Services, Inc. acquisition:
Accounts receivable (229,000) (1,629,000)
Income tax receivable 268,000 (268,000)
Inventory 231,000 157,000
Prepaid expenses and other current assets 11,000 242,000
Other assets 4,000 (16,000)
Accounts payable and accrued expenses (421,000) 1,920,000
---------- ----------
Net cash provided by operating activities 2,611,000 2,689,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental equipment (935,000) (1,238,000)
Acquisition of property and equipment (420,000) (474,000)
Acquisition, net of cash acquired -- (4,411,000)
---------- ----------
Net cash (used in) investing activities (1,355,000) (6,123,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of underwriters warrants 6,000 --
Proceeds from provider advancement 74,000 --
Repayment of provider advancement (24,000) --
Proceeds of borrowings under credit lines 228,000 2,160,000
Repayments of credit line and term loan (53,000) (1,072,000)
Repayments of director and former stockholders loans and notes (199,000) (139,000)
Principal repayments of notes payable to suppliers (1,025,000) (601,000)
Principal repayments of notes payable to Adam
Health Care Equipment Corp. (283,000) (1,109,000)
Principal repayments of capital lease obligations (172,000) (177,000)
---------- ----------
Net cash (used in) financing activities (1,448,000) (938,000)
---------- ----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (192,000) (4,372,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 276,000 4,648,000
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 84,000 $ 276,000
========== ==========
</TABLE>
F-5
<PAGE> 47
COMMUNITY CARE SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
---------
1999 1998
----------- -----------
<S> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
Interest $ 537,000 $ 469,000
Taxes $ 38,000 $ 45,000
SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
Rental equipment acquired under capital lease $ 79,000 $ 43,000
Property and equipment acquired under capital lease $ 221,000 $ 255,000
Conversion of trade payables into notes payable $ 200,000 $ 1,744,000
Conversion of notes payables into common stock $ 218,000 $ 2,198,000
The Company purchased Metropolitan Respirator Service, Inc.
for $8,791,000 (including cash payments of $4,411,000)
The purchase price was allocated to the assets and liabilities
assumed based on their fair value as follows:
Current assets $ 3,771,000
Rental equipment 434,000
Property, plant and equipment 181,000
Other assets 947,000
Excess of purchase price over net assets acquired 6,527,000
Customer List 225,000
Non Compete Covenant 360,000
Current liabilities (3,431,000)
Long term liabilities (223,000)
Promissory notes issued (3,066,000)
Common stock issued (1,314,000)
-----------
Cash paid to acquire Metropolitan Respirator Service, Inc. $ 4,411,000
-----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 48
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - DESCRIPTION OF BUSINESS
Community Care Services, Inc., ("CCS") and its wholly owned subsidiary,
Metropolitan Respirator Service, Inc. ("MRS"), (collectively, "The Company")
provide home health care services and products consisting primarily of
respiratory equipment, rental and sale of durable medical equipment and sell
home health care supplies primarily in the five boroughs of New York City, and
Westchester, Rockland and Nassau Counties in New York State, as well as northern
New Jersey.
(NOTE B) - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies in the preparation of the financial
statements are as follows:
[1] Principles of consolidation and basis of presentation
The consolidated financial statements include CCS and its wholly owned
subsidiary, MRS. Intercompany balances and transactions have been eliminated in
consolidation.
[2] Revenue recognition
Revenues are recognized on the date services and products are provided
to patients and are recorded at the expected reimbursement rates with third
party payors, including private insurers, Medicare and Medicaid.
[3] Cash equivalents
Cash equivalents consist of highly liquid investments that have a
maturity of less than three months when purchased.
[4] Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist primarily of medical supplies sold directly to patients for
use in their home.
[5] Rental equipment
Rental equipment consists of medical equipment rented to patients for
use in their homes and is stated at depreciated cost. Depreciation is provided
using the straight-line method over the useful life of the equipment, which is
estimated at five years.
F-7
<PAGE> 49
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
[6] Property and equipment
Property and equipment are stated at depreciated or amortized cost,
including assets acquired under capital leases, and are depreciated or amortized
using the straight-line method over five years, the estimated useful lives of
the assets for financial reporting purposes, and accelerated methods for income
tax reporting purposes.
[7] Intangible assets
The excess of purchase price over fair value of net assets acquired is
being amortized on a straight-line basis over twenty years. The covenants not to
compete are being amortized on a straight-line basis over their contractual
lives which range from two to five years. The accounts and customer lists are
being amortized over the period of expected benefit, which is estimated to be
ten years. Intangible assets are evaluated periodically, and adjusted if
necessary, when events or other circumstances indicate that a permanent decline
in value below the carrying amount has occurred.
[8] Accounting for Impairment of Long-Lived Assets
In fiscal year 1998 the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company
reviewed its long-lived assets based on expected future cash flows and
determined that there was an impairment of such assets. Accordingly, in fiscal
year 1998, the Company recorded a charge to operations of approximately
$4,225,000 (See Note D).
[9] Income taxes
The Company records income taxes under the liability method as required
by Statement of Financial Accounting Standards No. 109 ("SFAS 109") "Accounting
for Income Taxes". Under the liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets or
liabilities are measured using the enacted tax rate expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when it is necessary
to reduce deferred tax assets to the amounts expected to be realized.
[10] Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and
F-8
<PAGE> 50
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Among the more significant
estimates included in these financial statements are the estimated allowance for
doubtful accounts, the deferred tax asset valuation allowance and the useful
life of excess of purchase price over fair value of net assets acquired. Actual
results could differ from those estimates.
[11] Net Loss Per Share
Basic and diluted net loss per share is determined by dividing net loss
by the weighted average number of common shares outstanding during the years.
Potentially issuable common shares, upon exercise or conversion of options,
warrants and convertible notes are not included in the fully-diluted calculation
as their effect would be antidilutive.
[12] Software Development Costs
In fiscal 1998, the Company adopted Statement of Position 98-1 ("SOP
98-1")"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" which was issued in March 1998. SOP 98-1 provides for the
capitalization of eligible costs of specified activities related to computer
software developed or obtained for internal use. The adoption did not have a
material effect on the financial statements.
[13] Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accruals approximate fair value because of the short-term
nature of these items. Based on the current market rates offered for similar
debt of the same maturity, the carrying amount of the Company's debt also
approximates fair value at March 31, 1999.
(NOTE C) - ACQUISITIONS
[1] Metropolitan Respirator Service, Inc.
On May 10, 1997, the Company acquired 68% of the outstanding shares of
MRS, which is engaged in the sale and rental of medical supplies and durable
medical equipment within the New York metropolitan area. The purchase price was
approximately $5,993,000, consisting of approximately $2,800,000 in cash,
Promissory Notes ("Promissory Notes") with a face value of $2,967,000 accruing
interest at a rate of 6% per annum, a portion of which was issued to certain MRS
employees (including a Promissory Note for $444,000 issued to the brother-in-law
of the then President and Chief Executive Officer of the Company), and 62,243
shares of the Company's common stock with a value of $226,000. The notes are
payable in two payments. On January 2, 1999, one half of the principal and
accrued interest was payable and the remaining one half of the principal and
accrued interest is payable January 2, 2000. In lieu of cash
F-9
<PAGE> 51
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
payment, the Promissory Notes holder ("Note Holder") may elect to convert up to
eighty percent (80%) of the outstanding principal balance of the Promissory
Notes and the accrued interest thereon payable on the dates set forth above into
shares of common stock, par value $.01 per share based on a valuation of $4.00
per share, irrespective of the actual market value of the shares on the date of
such conversion. If the Note Holder does not make such election, the Company may
do so. With respect to the remaining twenty (20%) of the payment due, the Note
Holder may, but is not obligated to, require that such amount be converted into
shares or take such payment in cash. In the aggregate, the Promissory Notes and
accrued interest may be converted into a maximum of 897,000 shares of common
shares of the Company (See Note E).
At any time subsequent to the first anniversary of the execution of the
Promissory Note, if the Company conducts a secondary public offering of
Company's common stock, the Note Holder shall have the opportunity to sell the
shares in such offering to the same extent and in proportion to the rights of
executive officers.
Also on May 10, 1997, the Company purchased the remaining 32% of the
outstanding shares of MRS in a separate transaction. The purchase price was
approximately $2,487,000 consisting of $1,300,000 in cash, 300,000 shares of
common shares of the Company with a value of $1,087,000 and a one year
Promissory Note with a face value of $100,000 accruing interest at a rate of 6%
payable quarterly.
The Company also incurred direct transaction costs amounting to
approximately $311,000.
Upon the closing of the MRS acquisition, the Company entered into
employment agreements with certain of the former owners of MRS who became
officers of the Company (See Note I) and in addition, certain of such
individuals were granted options to purchase 45,000 common shares, under the
Company's Incentive Stock Option Plan.
The purchase price has been allocated to the assets and liabilities
assumed based on their estimated fair values as follows:
Purchase Price:
<TABLE>
<S> <C>
Cash $ 4,100,000
Issuance of notes payable 3,066,000
Common stock 1,314,000
Costs of acquisition 311,000
------------
Total $ 8,791,000
============
Allocation:
Current assets $ 3,771,000
Rental equipment 434,000
</TABLE>
F-10
<PAGE> 52
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C>
Property and equipment 181,000
Other assets 947,000
Excess of purchase price over fair value of net assets acquired 6,527,000
Customer list 225,000
Non compete covenant 360,000
Current liabilities (3,431,000)
Long term liabilities (223,000)
------------
Total $ 8,791,000
============
</TABLE>
The MRS acquisition has been accounted for as a purchase and
accordingly, the results of operations of MRS are included in the consolidated
financial statements from the date of acquisition. Unaudited pro forma summary
of data for the fiscal year ended March 31, 1998, assuming the acquisition of
MRS had taken place on April 1, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1998
-----------
<S> <C>
Net revenues $20,102,000
Net (loss) ($6,299,000)
Net (loss) per common share - basic and diluted ($0.95)
</TABLE>
[2] ADAM HEALTH CARE EQUIPMENT CORP. ("ADAM")
In April 1993, the Company purchased certain assets and the business of
Adam for $1,500,000. The Company paid $150,000 at the execution of purchase
agreement and $300,000 at the closing. $1,000,000 of the balance was to be paid
in equal quarterly installments evidenced by promissory notes with interest at
6% per annum and a final payment due March 15, 1995. The remaining $50,000 would
be paid following the completion of a full Medicare billing cycle.
In 1993, the Company commenced an action against Adam and its
principals arising out the acquisition of certain assets of Adam by the Company
in April 1993.
On April 14, 1997, the Company entered into a Settlement Agreement and
Release discharging its lawsuit against Adam and its principals and all
counterclaims made by Adam against the Company. As part of the settlement the
Company agreed to pay Adam the sum of $1,450,000, of which $725,000 was paid
immediately, with the balance payable over a 36 month period, bearing interest
at the rate of 9% per annum. Additionally, a new covenant not to compete
covering a period of five years was entered into with certain principals of Adam
in exchange for $250,000, of which $125,000 was paid immediately and the balance
is payable over three years.
F-11
<PAGE> 53
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
(NOTE D) - IMPAIRMENT OF LONG LIVED ASSETS
The Balanced Budget Act (the "Budget Act") was signed by President
Clinton on August 5, 1997. The Budget Act provides for reductions in Medicare
reimbursement rates for oxygen and certain oxygen equipment. Oxygen
reimbursement rates were reduced to seventy five percent (75%) of their 1997
levels, beginning January 1, 1998 and to seventy percent (70%) of their 1997
levels beginning January 1, 1999. In addition, Consumer Price Index increases in
oxygen reimbursement rates will not resume until the year 2003.
The Company has analyzed the impact of the Budget Act's oxygen
reimbursement reduction on its operating plans, liquidity, cash flows and the
recoverability of long lived assets. The recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount including
associated intangible assets of such operations. This evaluation resulted in a
charge of approximately $4,225,000 to the excess of purchase price over fair
value of net assets acquired in fiscal year 1998. Also, this evaluation led the
Company to determine that the remaining amortization period for the excess of
purchase price over fair value of net assets acquired should be reduced from 30
to 20 years.
(NOTE E) - CONVERSION OF NOTES PAYABLE
On March 1, 1998, two officers of the Company and former owners of MRS,
who were issued Promissory Notes by the Company in the amounts of $1,302,000 and
$1,176,000, respectively, surrendered their Promissory Notes (See Note C). In
consideration for such action, the Company converted eighty percent of the
Promissory Notes into shares of its common stock, with such individuals
receiving 557,806 shares and cash payments of $139,000. The remaining amount of
the Promissory Notes and interest thereon will be repaid monthly. Such
individuals will receive monthly payments aggregating $19,000. On May 8, 1998,
one of such individuals resigned from his position with the Company and entered
into a Consulting Agreement for a term of two years expiring on May 9, 2000, for
a fee of $55,000 per year.
On January 2, 1999, the Company converted eighty percent (80%) of the
promissory note payments into 54,960 shares of its common stock. The remaining
twenty percent (20%) of the promissory note payments was paid in cash.
(NOTE F) - ACCOUNTS RECEIVABLE
Accounts receivable at March 31, 1999 consists of the following:
<TABLE>
<S> <C>
Billed receivables $ 4,539,000
Unbilled receivables 1,975,000
------------
</TABLE>
F-12
<PAGE> 54
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C>
6,514,000
Less allowance for doubtful accounts (1,852,000)
============
$ 4,662,000
============
</TABLE>
Unbilled receivables represent delivered products or services rendered
as of March 31, 1999 which will be billed when the Company obtains the
physician's written prescription. Management evaluates the adequacy of the
allowance based on the specific payor and general economic conditions including
the aging of the account and the nature of the payor (private or government
agencies).
In fiscal year 1999 and 1998, the Company recorded provisions for
doubtful accounts of $1,173,000 and $1,853,000, respectively, based principally
on its determination that recovery of the receivables were unlikely and that the
additional costs of collection would not prove to be economically beneficial.
(NOTE G) - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 consists of the following:
<TABLE>
<S> <C>
Machinery and Equipment $ 397,000
Software 911,000
Furniture and Fixtures 112,000
Delivery Vehicles 193,000
Leasehold Improvements 341,000
-------------
1,954,000
Less accumulated depreciation and amortization (480,000)
============
$ 1,474,000
============
</TABLE>
Included in property and equipment is approximately $517,000 of assets
acquired under capital leases. At March 31, 1999, the accumulated depreciation
of these assets is approximately $57,000.
(NOTE H) - EMPLOYEE BENEFIT PLANS
[1] Defined Benefit Plan:
MRS sponsored a noncontributory defined benefit pension plan covering
all non-union employees. The plan called for benefits to be paid to eligible
employees at retirement based primarily upon years of service with MRS and
compensation rates near
F-13
<PAGE> 55
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
retirement. Contributions to the plan reflected benefits attributed to
employees' services to date, as well as services expected to be earned in the
future. Plan assets consisted primarily of government securities. On October 15,
1997 the board of directors of MRS voted to freeze the plan, which was
subsequently terminated in February 1999 at which time the plan made lump sum
distributions of approximately $1,268,000 to plan participants.
Pension expense includes the following components:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Service cost-benefits earned during period $ 58,000
Interest cost on projected benefit obligation $ 64,000 61,000
Actual return on plan assets (40,000) (45,000)
Net amortization and deferral (33,000) (13,000)
Loss on termination of plan 85,000
-------- --------
Net periodic pension expense $ 76,000 $ 61,000
======== ========
</TABLE>
[2] Defined Contribution Plan
On February 27, 1998, Community Care Services, Inc. 401(k) Plan ("CCS
401(k) Plan") became effective. Subsequent to February 1998, the assets of
Metropolitan Respiratory Service Inc. Profit Sharing Plan were transferred to
the CCS 401(k) Plan. The CCS 401(k) Plan allows employees to contribute a
portion of their pretax and/or after tax income in accordance with specified
guidelines. The Company matches a percentage of the employee contributions up to
a certain limit. Such matching contribution aggregated $62,000 and $15,000 for
the fiscal years ended March 31, 1999 and 1998, respectively.
(NOTE I) - COMMITMENTS
The Company is obligated under long-term non-cancelable operating and
capital leases for premises and equipment expiring in various years through
2004. In addition to the basic rental on one of the premises, the lease provides
for increases for real estate taxes.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Years Ended March 31, Capital Lease Operating Lease
------------------ ------------------
<S> <C> <C>
2000 138,000 132,000
2001 98,000 99,000
</TABLE>
F-14
<PAGE> 56
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C> <C>
2002 36,000 0
2003 17,000 0
2004 6,000 0
--------- ----------
Total minimum lease payments 295,000 $ 231,000
---------
Less amounts representing interest (40,000)
---------
Present value of minimum lease payments $255,000
---------
</TABLE>
Rent expense was $182,000 and $302,000 for the years ended March 31,
1999 and 1998, respectively.
As of April 1, 1999, the Company entered into restated and amended
employment agreements with two officers providing for base annual compensation
of $225,000 and expiring on May 10, 2004, but which may be extended for
additional one year terms upon mutual written agreement.
(NOTE J) - INDEBTEDNESS
[1] Note Payable - Bank:
On March 14, 1997, the Company obtained a $4,000,000 line of credit
from The Bank of New York ("BONY"), which is evidenced by a promissory note. In
July 1997, BONY notified the Company that it put a $2,500,000 cap on borrowings
until the uncertainty surrounding the Federal investigation of the Company is
completed (See Note M). As of May 31, 1999, the Company had drawn down
$2,500,000. The loan is collateralized by all assets of the Company, bears
interest at the prime rate (7.75% at March 31, 1999) and is payable on demand.
[2] Notes payable
<TABLE>
<S> <C>
Suppliers
Payable at monthly intervals beginning July 1999 through December 2000,
unsecured, with interest at 9.0% 60,000
Payable at monthly intervals through February 2000, unsecured, with
Interest at 14.4% 118,000
Payable at monthly intervals through June 1999, collaterized by all assets
of the Company, subordinate to Note Payable - Bank with interest at 10.5% 195,000
Other
Notes payable - VIPS Medicare System payable at monthly intervals
through July 1999, with interest at 12.0% 50,000
Notes payable - Adam Health Care Equipment Corp., collateralized by
certain assets, subordinate to Note Payable - Bank bearing interest
at 9%, payable in monthly principal payments of $23,000 307,000
Notes payable in connection with acquisition of MRS, accruing interest at
a rate of 6%, $462,000 due January 2000 (See Note C) 462,000
</TABLE>
F-15
<PAGE> 57
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C> <C>
Credit line - Tokai Financial Services, Inc. 279,000
-----------
Total Debt $ 1,471,000
Less Current Portion (1,372,000)
-----------
Long Term Portion $ 99,000
-----------
</TABLE>
Future principal payments of long-term debt are as follows:
<TABLE>
<S> <C>
2000 $ 1,372,000
2001 99,000
------------
$ 1,471,000
------------
</TABLE>
In March 1998, the Company entered into an agreement to finance a new
computer system with Tokai Financial Services, Inc. ("Tokai"). The agreement
allows the Company to draw down $600,000 under a line of credit. Tokai has
capped the line at $480,000 until the federal investigation, as described in
Note M is resolved. Once the $480,000 is drawn down under the line of credit, it
will then be converted into a master lease agreement payable over forty eight
months. The line of credit and master lease agreement bear interest at 11.6%.
The interest rate is computed on a floating rate of 6.5% above the two-year U.S.
Treasury Bill. The two-year U.S. Treasury Bill rate at March 31, 1999 was 5.02%.
As of March 31,1999, $279,000 has been drawn down under the line of credit. In
April 1999, the Company purchased $180,000 of additional equipment, which was
financed by Tokai. The line of credit is collaterized by a lien on all of the
Company's assets, subordinate to prior lienholders.
(NOTE K) - STOCKHOLDERS' EQUITY
[1] Common Stock
The following table summarizes the amount of Common Stock reserved for
issuance at March 31, 1999:
<TABLE>
<S> <C>
Stock Option Plan 853,000
Convertible Promissory Notes 54,960
</TABLE>
F-16
<PAGE> 58
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C>
Warrants 5,783,332
----------
Total Common Stock Reserved for Issuance 6,691,292
----------
</TABLE>
[2] Warrants
In connection with the Company's initial public offering in fiscal year
1996 the Company issued 1,495,000 Class A warrants. In fiscal year 1996 the
Company exchanged 3,171,665 shares of common stock for 2,883,332 Class A
warrants. Each Class A warrant entitles its holder, commencing two years from
October 1996, to purchase one share of common stock at an exercise price of
$6.00 per share. The warrants expire on October 17, 2003, seven years after
October 1996.
The warrants are redeemable by the Company at a price of $.05 per
redeemable warrant, commencing two years from the effective date of the initial
public offering and prior to their expiration, on 30 days prior written notice
to the registered holder of the Class A warrants, providing the closing high bid
price per share of the common stock, or the last sale price per share if listed
on a national exchange for a period of 20 consecutive trading days ending not
more than three days prior to the date of any redemption notice equals or
exceeds at least $8.00, subject to adjustment. The warrants are exercisable
until the close of the business day preceding the date fixed for redemption. In
addition, subject to the rules of the NASD, the Company has agreed to engage
Maidstone Financial Inc. as warrant solicitation agent, in connection with which
it would be entitled to an 8% fee upon exercise of the warrants.
In connection with the issuance in 1996 of certain notes payable (the
"8% Notes Payable"), which were repaid from the proceeds of the Company's
initial public offering, the Company issued warrants for the purchase of
1,275,000 shares of common stock at a purchase price of $7.50 per share;
exercisable commencing February 1997 to February 2001. Upon closing of the
initial public offering the warrants were exchanged into an equal number of
Class A warrants.
[3] Underwriters' Warrant
In connection with its initial public offering, the Company sold to its
underwriters, for $10, an underwriters' warrant to purchase 130,000 shares of
common stock and/or 130,000 Class A warrants. The underwriters' warrant is
exercisable for a four-year period commencing one year from October 1996 and
entitles the underwriters to purchase each share of common stock or warrant
covered thereby at an exercise price of $8.42, of common stock or warrant,
subject to adjustment in certain events. The underwriters' warrant may not be
sold, transferred, assigned or hypothecated except to officers of the
underwriters or members of the selling group of any officer or partner of any
member of the selling group. The price is payable for the securities upon
exercise of the underwriters'
F-17
<PAGE> 59
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
warrant and the number of securities underlying the underwriters' warrant are
subject to adjustment to prevent dilution.
In June 1998, 31,850 underwriter warrants were exercised for
approximately $6,000 and the Company issued 31,850 Class A warrants.
The following table summarizes the Class A Warrants outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
EXERCISE
PRICE
--------------
<S> <C> <C>
Warrants issued in exchange for common $ 6.00 2,883,332
shares
Warrants issued with 8% Notes Payable $ 7.50 1,275,000
Warrants issued with initial public offering $ 6.00 1,495,000
Underwriters' warrants $ 8.42 130,000
---------
Total Class A Warrants Outstanding 5,783,332
---------
</TABLE>
[4] Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock with designations, rights and preferences
determined from time to time by its Board of Directors.
Accordingly, the Company's Board of Directors is empowered, without
shareholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of the common stock. In the event of issuance,
the preferred stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
[5] Stock Option Plan
The Company's 1996 Stock Option Plan, as amended, (the "Plan")
authorizes the granting of stock options to officers, employees, directors and
consultants of the Company or any of its subsidiaries to purchase an aggregate
of not more than 853,000 shares of the Company's common stock. As of March 31,
1999, options to purchase an aggregate of 252,500 shares of common stock have
been granted and options to purchase 86,500 shares have been canceled. Options
to purchase an aggregate of 687,000 shares of common stock are available for
grant under the Plan.
The Plan is administered by a Stock Option Committee (the "Committee")
consisting of two disinterested members of the Board of Directors. In general,
the
F-18
<PAGE> 60
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
Committee will select the persons to whom options will be granted and will
determine, subject to the terms of the Plan, the number, the exercise period and
other provisions of such options. The options granted will be exercisable on the
second anniversary date of the grant.
Options granted to employees might be either incentive stock options
("ISOs") under the Internal Revenue Code or non-ISOs. The Board may determine
the exercise price, provided that, in the case of ISOs, such price may not be
less than 100% (110% in the case of ISOs granted to holders of 10% of the voting
power of the Company's stock) of the fair market value (as defined in the Plan)
of the Company's common stock at the date of grant. The aggregate fair market
value (determined at time of option grant) of stock with respect to which ISOs
become exercisable for the first time in any year cannot exceed $100,000. The
Company does not expect the exercise price of non-ISOs to be less than fair
market value.
Additional information with respect to options issued under the plan is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------------------------------- -------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at April 1, 89,500 $ 4.32 31,500 $ 4.97
Granted 157,000(1) 1.13 62,000 3.55
Exercised
Canceled (80,500) (4.00) (4,000) 4.76
----------------- ----------------- ----------------- ----------------
Outstanding at March 31, 166,000 $ 1.28 89,500 $ 4.32
----------------- ------------------ ---------------- -----------------
Exercisable at March 31, 137,000 $ 1.39 0 $ 0.00
----------------- ------------------ ---------------- -----------------
Weighted average fair value of options $ .37 $ 2.44
granted ------------------ -----------------
</TABLE>
(1) Includes 122,000 options earned by a consultant which are to be
issued subsequent to March 31, 1999.
The following table summarizes information about outstanding stock
options granted at March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE REMAINING
RANGE OF EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE
--------------------- --------------------- --------------------------- ----------------------
<S> <C> <C> <C>
$ 5.10 5,000 7.50 $ 5.10
</TABLE>
F-19
<PAGE> 61
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<S> <C> <C> <C>
2.38 4,000 8.17 2.38
1.31 122,000 10.0 1.31
.50 10,000 .08 .50
.50 25,000 9.75 .50
---------
166,000
---------
</TABLE>
The Company applies APB No. 25 and related Interpretations in
accounting for its employee stock options. Accordingly, no compensation cost has
been recognized for its employee stock option grants. The effect of applying
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation", on 1999 and 1998 pro forma net loss,
as stated below is not necessarily representative of the effects on reported net
income (loss) for future years due to, among other things: (1) the vesting
period of the stock options and (2) the fair value of additional stock options
in future years. Had compensation costs for the Company's stock option grants
been determined based upon the fair value at the grant dates for awards
consistent with the methodology prescribed under SFAS No. 123, the Company's net
(loss) income and (loss) earnings per share would have been the proforma amounts
indicated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
------------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Net Loss
As reported ($ 67,000) ($ 5,551,000)
Proforma ($ 77,000) ($ 5,674,000)
Net Loss per share
As reported ($ 0.01) ($ 0.84)
Proforma ($ 0.01) ($ 0.86)
</TABLE>
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999 and 1998 as indicated
follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Dividend yield 0% 0%
Volatility .6 .6
Risk free interest rate 5.55 % 5.55%
Expected life 10 10
</TABLE>
(NOTE L) - CONCENTRATION OF RISK:
Percentage of revenues from principal sources was as follows:
F-20
<PAGE> 62
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1999 1998
----------------
<S> <C> <C>
Medicaid 30.5% 30.7%
Medicare 34.2% 30.0%
Private insurance and other non government agencies 35.3% 39.3%
================
Total 100.0% 100.0%
================
</TABLE>
Percentage of accounts receivable was as follows:
<TABLE>
<CAPTION>
AT
MARCH 31,
----------------
1999 1998
----------------
<S> <C> <C>
Medicaid 19.7% 18.0%
Medicare 28.1% 37.3%
Private insurance and other non governmental agencies 52.2% 44.7%
================
Total 100.0% 100.0%
================
</TABLE>
The Company derives the majority of its revenue from reimbursements by
third-party payors, typically invoicing and collecting payments directly from
the third-party payor.
During the fiscal years ended March 31, 1999 and March 31, 1998, the
Company's five largest sources of referral accounted for approximately 55% and
41%, of the Company's total net revenues, respectively.
During the fiscal year ended March 31, 1999, the Company purchased
approximately $3,599,000 of product and supply from two vendors. These purchases
represent 57.9% of the total purchases of product and supply. At March 31, 1999
the Company has note and trade payables due to such vendors of approximately
$1,465,000.
Reimbursements can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors. A reduction in coverage or reimbursement rates by third-party payors
could have a material adverse effect on the Company's results of operations.
The Company must comply and is subject to extensive federal and state
regulations in connection with its participation in Medicaid and Medicare. Like
other Medicaid and Medicare providers, it is subject to governmental audits and
other reviews and investigations related to Medicaid and Medicare reimbursement
claims. It is also subject to various fraud and abuse laws that are designed to
maintain the integrity of the Medicare and Medicaid programs (See Note M).
F-21
<PAGE> 63
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE M) - CONTINGENCIES
On June 4, 1997, a search warrant was executed at the Company's executive
offices. The Company was informed that its then Chief Executive Officer and
Chief Operating Officer and the Company itself are targets of a U. S. Department
of Justice criminal investigation for allegedly improper payments relating to a
contract to provide healthcare services outside of New York State involving
Medicare. If it is determined that the Company engaged in criminal wrongdoing,
the Company will be subject to criminal penalties, which may include a fine of
$1,000,000 or more and an order of restitution, would be terminated as a
Medicaid and Medicare services provider, and could also be at the risk of having
its contracts with private insurers and other non-governmental agencies
terminated. Additionally, even if the Company is not charged with criminal
wrongdoing itself, but one or more past or present officers or employees are
convicted of crimes related to their employment the Company could be terminated
as a Medicaid and Medicare provider. In these circumstances, although the
Company would not be subject to automatic exclusion from such programs, it could
be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. If such occurred, it would have a material
adverse effect on the Company's business, results of operations, and financial
condition and the Company may not be able to continue as a going concern. The
Company has cooperated with the government in the Department of Justice criminal
investigation.
The New York State Department of Health ("DOH") performs audits and
investigations of the New York State Medicaid Program. The New York State
Department of Social Services ("DSS") previously performed this function. The
DSS was abolished as a result of New York State legislation. Prior to the
abolishment of DSS, that agency, on May 16, 1997, issued a Draft Notice of
Proposed Agency Action and Draft Audit Report regarding the Company ("The Draft
Notice"). Pursuant to the Draft Notice, DSS sought recovery of $227,000 from the
Company as well as exclusion of the Company as a provider under the New York
State Medicaid program. Pursuant to DOH's process, the Company, through its
healthcare regulatory counsel, submitted a detailed response to the Draft
Notice. DOH thereafter reviewed its draft findings and recommendations and
issued a final Notice, pursuant to which DOH reduced the amount of the proposed
audit recovery to $83,978. DOH has also withdrawn its intention to exclude the
Company as a provider under the New York State Medicaid program. DOH has issued
an advisory to the Company that continued performance issues of the type or
nature addressed in the audit could result in a severe sanction in the future.
As a further development, the Company has agreed to surrender its Medicaid
provider number, in favor of conducting its Medicaid business through MRS.
During the fourth quarter of fiscal year 1999 the Company completed the transfer
of its Medicaid business to MRS. The effective date of the surrender of the
Company Medicaid provider number was March 1, 1999.
The Company is currently subject to review by the New York State Attorney
General's Medicaid Fraud Control Unit. In response to a subpoena duces tecum
issued by the Medicaid Fraud Control Unit in September 1996, the Company has
produced a substantial number of documents and provided its full cooperation.
The review is pending and the Company has not been advised of any determination
by the Medicaid Fraud Control Unit.
(NOTE N) - INCOME TAXES
F-22
<PAGE> 64
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company files its federal tax return on a consolidated basis
commencing with fiscal year ended March 31, 1999.
The provision (benefit) for income taxes for the fiscal years ended March
31 consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
------------------------
1999 1998
-------- -----------
<S> <C> <C>
Current
Federal 0 ($268,000)
State and local $ 37,000 (18,000)
-------- -----------
Total current 37,000 (286,000)
-------- -----------
Deferred
Federal 116,000 216,000
State and local 60,000 111,000
-------- -----------
Total deferred 176,000 327,000
-------- -----------
Provision for income taxes $213,000 $ 41,000
======== ===========
</TABLE>
The difference between the provision for income taxes and the amount that
would be computed by applying the statutory federal income tax rate to income
before taxes is attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------------------
1999 1998
-------- -----------
<S> <C> <C>
Provision (benefit) for federal income taxes
at statutory rate of 34% $ 50,000 ($1,873,000)
State and local provision (benefit), net of 43,000 (707,000)
federal effect
Non deductible items, primarily goodwill 94,000 1,856,000
Increase in valuation allowance 0 979,000
Utilization of net operating loss 0 (268,000)
Underaccrual of prior years' state and local
taxes, net of federal effect 26,000 0
Other 54,000
-------- -----------
Provision for income taxes $213,000 $ 41,000
======== ===========
</TABLE>
The net deferred tax asset at March 31, 1999, consists of the following:
F-23
<PAGE> 65
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $741,000
Inventory allowance 64,000
Accrued liabilities 94,000
Federal and state net operating loss carryforwards 526,000
Financial depreciation and amortization in excess of
tax 7,000
----------
Total deferred tax assets, before valuation allowance 1,432,000
Less: Valuation allowance (979,000)
----------
Net deferred tax assets $453,000
==========
</TABLE>
The valuation allowance has been provided against a portion of the
deferred tax asset as realization of future tax benefits attributable thereto is
not considered more likely than not. The valuation allowance increased by
$979,000 during the year ended March 31, 1998. There was no change in the
valuation allowance during the year ended March 31, 1999.
As of March 31, 1999, the Company has approximately $1,315,000 of net
operating loss carryforwards available, expiring in 2013. If the merger referred
to in Note O is consummated, there will be an annual limit on the net operating
loss carryforwards as required by the provisions of Section 382 of the Internal
Revenue Code, which may require an increase in the valuation allowance.
(NOTE O) - SUBSEQUENT EVENTS
On June 14, 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Landauer Hospital Supplies, Inc. ("LHS"), a New
York corporation and LHS Merger Sub, Inc., a wholly owned subsidiary of LHS
("Merger Sub"). LHS is an affiliate of LTTR Home Care, LLC ("LTTR") and is
controlled by the chairman of the Company's Board of Directors. LTTR had
previously acquired 2,126,250 shares of the Company's Common Stock from the
Company's former President and Chief Executive Officer. The Merger Agreement
provides for the merger of the Company with Merger Sub, with the Company being
the surviving entity ("the Merger"). As part of the Merger each shareholder
(other than LHS and its affiliates) will receive $1.20 in cash in exchange for
each share of Common Stock owned by them. The Merger is subject to the approval
of the holders of at least two-thirds of the Company's issued and outstanding
Common Stock. If the Merger is approved and consummated, the Company will become
a wholly-owned subsidiary of LHS. The Company has agreed that if the Merger is
not consummated, the Company will pay LHS a termination fee of $350,000, plus
certain other costs.
F-24
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.01 Certificate of Incorporation*
3.02 By-Laws*
3.03 Certificate of Amendment to Certificate of Incorporation*
3.04 Certificate of Amendment to Certificate of Incorporation*
3.05 Certificate of Amendment to Certificate of Incorporation*
3.06 Certificate of Amendment to Certificate of Incorporation*
4.01 Specimen Certificate representing the Common Stock, Par value $.01
per share.*
9.01 Shareholders Agreement dated as of March 12, 1999 by and among Alan
Landauer, Donald Fargnoli, Allan Goldfeder, Louis Rocco, Saverio
Burdi and Wade Wilson (incorporated herein by reference to Amendment
No. 1 to Schedule 13D filed on March 18, 1999 by Alan J. Landauer
and LTTR Home Care, LLC).
10.01 1996 Stock Option Plan (Amended)*
10.02 Form of Stock Option Agreement*
10.03 Form of Employment Agreement to be entered into between the Company
and Alan T. Sheinwald*
10.04 Form of Employment Agreement to be entered into between the Company
and Allan Goldfeder*
10.07 Lease dated January 1, 1996 by and between the Company and Petrillo
Realty Development Corporation*
10.08 Form of Warrant Agreement*
10.09 Form of Conversion Agreement*
10.10 Form of Financial Advisory and Investment Banking Agreement between
Maidstone Financial, Inc. and the Company*
10.11 Stock Purchase Agreement among Community Care Services, Inc., as
Buyer, and Donald Fargnoli, Louis Rocco and Saverio D. Burdi, as
Sellers, dated May 10, 1997 (Incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated May 14, 1997)
(The Company has requested confidential treatment for a portion of
this Exhibit).
10.12 Stock Purchase Agreement among Community Care Services, Inc., as
Buyer, and Jack Prince, as Seller, dated May 10, 1997 (Incorporated
by reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated May 14, 1997).
10.13 Non-negotiable Promissory Note of Community Care Services, Inc.
issued to Donald Fargnoli dated May 10, 1997 (Incorporated by
reference to Exhibit 2.3 to the Company's Current Report on Form 8-K
dated May 14, 1997).
</TABLE>
<PAGE> 67
<TABLE>
<S> <C>
10.14 Non-negotiable Promissory Note of Community Care Services, Inc.
issued to Louis Rocco dated May 10, 1997 (Incorporated by reference
to Exhibit 2.4 to the Company's Current Report on Form 8-K dated May
14, 1997).
10.15 Employment Agreement between the Company and Saverio D. Burdi dated
May 10, 1997**
10.16 Employment Agreement between the Company and Donald Fargnoli dated
May 10, 1997**
10.17 Employment Agreement between the Company and Louis Rocco dated May
10, 1997**
10.18 Employment Agreement between the Company and Wade Wilson dated May
10, 1997**
10.19 Letter Agreement between the Company and Donald Fargnoli dated March
1, 1998**
10.20 Letter Agreement between the Company and Louis Rocco dated March 1,
1998**
10.21 Amendment No.1 to Employment Agreement between the Company and
Donald Fargnoli dated March 1, 1998**
10.22 Amendment No. 1 to Employment Agreement between the Company and
Louis Rocco dated March 1, 1998**
10.23 Consulting Agreement between the Company and Donald Fargnoli dated
May 9, 1998**
10.24 Letter Agreement between the Company and Donald Fargnoli dated May
9, 1998**
10.25 Letter of Intent dated as of April 6, 1999, between LTTR Home Care,
LLC Community Care Services, Inc. (incorporated by reference to
Amendment No. 2 to Schedule 13D filed by Alan J. Landauer and LTTR
Home Care, LLC on April 23, 1999)
10.26 Letter Agreement dated as of April 6, 1999, among LTTR Home Care,
LLC and Dean L Sloane, Mary Sloane, Craig V. Sloane, Joshua Sloane
and the Sloane Family Foundation (incorporated by reference to
Amendment No. 2 to Schedule 13D filed by Alan J. Landauer and LTTR
Home Care, LLC on April 23, 1999)
10.27 Agreement and Plan of Merger dated as of June 14, 1999, among the
Company, Landauer Hospital Supplies, Inc. and LHS Merger Sub, Inc.
(incorporated herein by reference to the Company's Preliminary Proxy
Statement filed on June 17, 1999)
10.28 Restated and Amended Employment Agreement between the Company and
Saverio D. Burdi dated April 1, 1999
10.29 Restated and Amended Employment Agreement between the Company and
Louis Rocco dated April 1, 1999
21.01 Subsidiaries
27.01 Financial Data Schedule
</TABLE>
*Incorporated by reference to the Company's Registration Statement on Form SB-2
dated October 16, 1996.
<PAGE> 68
**Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1998.
<PAGE> 1
EXHIBIT 10.28
RESTATED AND AMENDED EMPLOYMENT AGREEMENT
RESTATED AND AMENDED EMPLOYMENT AGREEMENT between Community Care Services,
Inc., a New York corporation (the "Corporation") and Saverio D. Burdi
("Executive") dated as of April 1, 1999.
W I T N E S S E T H:
WHEREAS, the Corporation and Executive have entered into an Employment
Agreement (the "Employment Agreement") and Non-Competition Agreement (the
"Non-Competition Agreement"), both dated May 10, 1997; and
WHEREAS, Executive and the Corporation desire to restate and amend the
Employment Agreement as set forth herein;
WHEREAS, Executive and the Corporation desire to incorporate the terms of
the Non-Competition Agreement into the Employment Agreement and to terminate the
original Non-Competition Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. Employment Agreement and Non-Competition Agreement Superseded. The
Employment Agreement and Non-Competition Agreement are hereby terminated and
superseded by this Restated and Amended Employment Agreement.
2. Employment. The Corporation agrees to and does hereby continue to
employ and Executive agrees to and does hereby accept continued employment by
the Corporation, as Senior Vice President of the Corporation, or in any other
similar capacity as
<PAGE> 2
determined by its Chief Executive Officer, subject to the supervision and
direction of its Chief Executive Officer, for the period commencing on April 1,
1999 and ending at midnight on May 10, 2004, subject to prior termination in
accordance with the provisions hereof (the "Term"). The Term may be extended for
successive one year periods, as mutually agreed in writing by the Corporation
and Executive; provided that the Corporation will give notice to Executive at
least six months prior to the end of the Term or any extension thereof if it
desires to extend this Agreement. The Term less any reduction or extensions of
the Term pursuant to the provisions hereof, shall be referred to in this
Agreement as the "Employment Period."
3. Scope of Duties. As Senior Vice President, Executive will carry out all
reasonable tasks which are typically commensurate with such position assigned to
him by the Board of Directors and the Chief Executive Officer. Executive agrees
that he will devote his full time and effort during the Employment Period to the
performance of the duties of his office. Executive shall make his business
headquarters at Mount Vernon, New York and shall relocate should the Corporation
change its headquarters; provided, however, that in no event will Executive be
required to relocate outside of a thirty (30) mile radius from Mt. Vernon, New
York. Executive shall undertake such travel as the Corporation may request.
4. Compensation.
(a) Executive Compensation. For the services and duties to be
rendered and performed by Executive during the Employment Period, the
Corporation agrees to pay Executive compensation at the rate of Two Hundred
Twenty Five Thousand Dollars ($225,000.00) per annum (hereinafter referred to as
"Executive Compensation"), effective
2
<PAGE> 3
April 1, 1999. Executive Compensation shall be payable in accordance with the
Corporation's customary payroll practices. The Corporation shall reimburse
Executive for all expenses reasonably and necessarily incurred in connection
with his employment by the Corporation, including business related travel and
entertainment expenses while absent on the Corporation's business from its
business headquarters, subject to the limitations and guidelines generally
imposed by the Corporation on its executives.
(b) Car Allowance. During the Employment Period, Executive shall be
entitled to an automobile allowance of Seven Hundred Dollars ($700) per month,
which shall be taxable to Executive to the extent that the automobile is used
for non-business purposes.
(c) Bonus and Incentive Compensation. During the Employment Period,
Executive will be eligible to participate in bonus and incentive compensation
programs for executives that may be established by the Corporation from time to
time.
5. Vacation. During the first two (2) years of the Employment Period,
Executive shall be entitled to a paid vacation in each such year equal to three
(3) weeks. Thereafter, Executive shall be entitled to four (4) weeks paid
vacation per year. Said vacation may be taken at the sole discretion of
Executive. Executive shall also be entitled to paid sick and personal days in
accordance with the Corporation's policies for senior executives, as adopted
from time to time.
6. Nondisclosure. Executive acknowledges that as an officer of the
Corporation and several of its Affiliates (as defined below) he has been, and as
an executive of the Corporation and , at the discretion of the Corporation, one
or more of the Affiliates, throughout the Employment Period he will be, privy to
trade secrets and other proprietary
3
<PAGE> 4
and/or confidential information (whether in written, verbal or any other form)
relating to the existing or contemplated business and/or field of interest of
the Corporation and its Affiliates, or of any corporation or other legal entity
in which the Corporation or any of its Affiliates has an ownership interest of
more than five percent (5%), and any proprietary information (whether in
written, verbal or any other form) of any of the Corporation's customers,
suppliers, licensor or licensees, including, but not limited to, information
relating to inventions, disclosures, processes, systems, methods, formulae,
patents, patent applications, machinery, materials, notes, drawings, research
activities and plans, costs of production, contract forms, prices, volume of
sales, promotional methods, list of names or classes or customers, which he has
heretofore acquired or which he may hereafter acquire during his employment with
the Corporation or any of its Affiliates, in both cases whether during or
outside business hours, whether or not on the Subsidiary's or the Corporation's
premises, as the result of any disclosures to him, or in any other way, shall be
regarded as held by him in a fiduciary capacity solely for the benefit of the
Corporation, its successors or assigns, and shall not at any time, either during
the Employment Period or thereafter, be disclosed, divulged, furnished, or made
accessible by him to anyone, or be otherwise used by him, except in the regular
course of business of the Corporation or its Affiliates. Upon termination of his
employment, Executive shall promptly return or deliver to the Corporation all
tangible forms of such information in his possession or control, and shall
retain no copies thereof. Information shall, for purposes of this Agreement, be
considered to be confidential if not known by the trade generally, even though
such information may have been disclosed on a confidential basis to one or more
third parties pursuant to any business discussion or agreement, including
distribution agreements, joint research
4
<PAGE> 5
agreements or other agreements entered into by the Subsidiary or the Corporation
or any of their Affiliates. For the purposes of this Agreement, "Affiliates"
shall mean any corporation, partnership, joint venture, other entity of any type
or individual that directly or indirectly, through one or more intermediaries,
controls or is controlled, or is under common control with, the Subsidiary or
the Corporation, as the case may be.
7. Patents. Executive agrees to and does hereby sell, assign, transfer and
set over to the Corporation, its successors, assigns, or Affiliates, as the case
may be, all his right, title, and interest in and to any inventions,
improvements, processes, patents or applications for patents which he develops
or conceives individually or in conjunction with others during his employment by
the Corporation, or, having possibly conceived same prior to his employment, may
complete while in the employ of the Corporation or any of its Affiliates, in
both cases whether during or outside business hours, whether or not on the
Corporation's premises, which inventions, improvements, processes, patents or
applications for patents are (i) in connection with any matters within the scope
of the existing or contemplated business of the Corporation or any of its
Affiliates or (ii) aided by the use of time, materials, facilities or
information paid for or provided by the Corporation, all of the foregoing to be
held and enjoyed by the Corporation, its successors, assigns or Affiliates, as
the case may be, to the full extent of the term for which any Letters Patent may
be granted and as fully as the same would have been held by Executive, had this
Agreement not been made. Executive will make, execute and deliver any and all
instruments and documents necessary to obtain patents for such inventions,
improvements and processes in any and all countries. Executive hereby
irrevocably appoints the Corporation to be his attorney in fact in the name of
and on behalf of Executive to execute all such instruments and do all such
5
<PAGE> 6
things and generally to use Executive's name for the purposes of assuring to the
Corporation (or its nominee) the full benefit of its rights under the provisions
of this Article 7, such power to be exercised only if Executive improperly
refuses to fulfill his obligations under this Article 7.
8. Restriction on Competition. Executive covenants and agrees that during
the Executive's Employment Period and for a period of one (1) year after
Executive's last day of employment, he will not (i) enter, directly or
indirectly, into the employ of or render, directly or indirectly, any services
to any person, firm or corporation engaged in any business competitive with the
business of the Corporation in any part of the Restricted Territory, as
hereinafter defined, in which the Corporation is doing business on the date of
termination; (ii) engage, directly or indirectly, in any such business for his
own account; (iii) become interested, directly or indirectly, in any such
business as an individual, partner, shareholder, creditor, director, officer,
principal, agent, employee, trustee, consultant, advisor or in any other
relationship or capacity; (iv) contact or solicit, or attempt to contact or
solicit, any person or entity for whom the Corporation performed services or
actively marketed for the purpose of performing services, or with whom Executive
had any dealings, during the one (1) year period immediately prior to the
termination of Executive's Employment Period; or (v) hire, subcontract, employ
or engage, or contract or solicit, for the purpose of hiring, subcontracting,
employing or engaging, any person or entity who was an employee of the
Corporation at the time of the termination of Executive's Employment Period or
during the one (1) year period immediately prior to the termination of
Executive's Employment Period.
6
<PAGE> 7
For the purposes of this Agreement, "Restricted Territory" shall mean the
following counties: in the State of New York: New York, Bronx, Queens, Kings,
Richmond, Nassau, Suffolk, Westchester, Rockland, and Orange Counties; in the
State of Connecticut: Fairfield and Hartford Counties and in the State of New
Jersey: Bergen, Essex, Sussex, Passaic and Hudson Counties.
9. Earlier Termination.
(a) Death. In the event of the death of Executive during the
Employment Period, this Agreement shall automatically terminate on the date of
his death. Upon termination of this Agreement pursuant to this Article 9(a), the
Corporation shall have no further obligations or liabilities under this
Agreement other than to pay to Executive's estate (i) the portion, if any, of
his compensation that remains accrued but unpaid, (ii) the amount of any
expenses reimbursable in accordance with Article 9(a) above and (iii) any
amounts due under any of the Corporation's benefit, welfare or pension plans or
under any bonus or incentive plans.
(b) Disability. In the event of Executive's Total Disability (as
defined below) for one hundred eighty (180) days in the aggregate during any
consecutive twelve (12) month period during the Employment Period, the
Corporation shall have the right to terminate this Agreement by giving Executive
thirty (30) days' prior written notice thereof and, upon the expiration of such
thirty (30) day period, Executive's employment under this Agreement shall
terminate. If Executive shall resume his duties within thirty (30) days after
receipt of such a notice of termination and continue to perform his duties for
two (2) consecutive weeks thereafter, then the Employment Period shall be deemed
to continue in full force and effect, without any reduction in salary and other
benefits, and the
7
<PAGE> 8
notice of termination shall be considered null and void and of no effect. Upon
termination of this Agreement pursuant to this Article 9(b), the Corporation
shall have no further obligations or liabilities under this Agreement other than
to pay to Executive (i) the portion, if any, of his compensation that remains
accrued but unpaid, (ii) the amount of any expenses reimbursable in accordance
with Article 4(a) above, and (iii) any amounts due under any of the
Corporation's benefit, welfare or pension plans or any bonus or incentive plans.
The term "Total Disability," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor designated by the parties, renders Executive unable or incompetent to
carry out his material duties and responsibilities under this Agreement.
Notwithstanding the foregoing, if Executive is covered under any policy of
disability insurance obtained by the Corporation, under no circumstances shall
the definition of "Total Disability" differ from the definition of that term in
such policy. If the parties are unable to agree upon an independent medical
doctor to render an opinion, each shall designate one medical doctor, and the
two so designated shall jointly select a third independent medical doctor, whose
decision shall be binding.
(c) Termination for Cause. The Corporation may discharge Executive
for "Cause" upon notice and thereby immediately terminate his employment under
this Agreement. For purposes of this Agreement, the Corporation shall have
"Cause" to terminate Executive's employment if Executive, in the reasonable
judgment of the Corporation, (i) materially breaches any of his agreements,
obligations or duties under this Agreement and does not cure such breach or
commence in good faith to correct such breach within thirty (30) days after
notice, (ii) fails to carry out any reasonable lawful directive of the Chief
Executive Officer of the Corporation which Executive is required to do pursuant
8
<PAGE> 9
to this Agreement and does not cure such breach or commence in good faith to
correct such breach within ten (10) days after notice, (iii) embezzles or
converts to his own use any funds of the Corporation or any client or customer
of the Corporation, (iv) willfully converts to his own use any property of the
Corporation without the Corporation's consent, (v) is convicted of a felony
(other than a vehicular infraction which does not involve injuries to persons or
property), or (vi) is adjudicated an incompetent.
10. Employee Benefits. Executive shall be entitled to participate in the
Corporation's medical plan and in the Corporation's existing 401(k) plan. In
addition to the foregoing, the Corporation shall pay up to $25,000 per year on
behalf of Executive to fund Executive's participation in such supplemental
executive benefit programs as may be requested by Executive, subject to the
consent of the Chief Executive Officer, which shall not be unreasonably
withheld.
11. Assignment. In the event of a future disposition by the Corporation
(whether direct or indirect, by sale of assets or stock, merger, consolidation
or otherwise) of all or substantially all of its business and/or assets, the
Corporation will require any successor, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such disposition had taken place.
12. Notices. All notices required or permitted to be given hereunder shall
be mailed by certified mail, delivered by recognized overnight courier service
for which a written receipt is given, or delivered by hand to the party to whom
such notice is required or permitted to be given hereunder. If mailed, any such
notice shall be deemed to have been given when mailed as evidenced by the
postmark at point of mailing. If delivered by hand,
9
<PAGE> 10
any such notice shall be deemed to have been given when received by the party to
whom notice is given, as evidenced by written and dated receipt of the receiving
party.
Any notice to the Corporation or to any assignee of the Corporation shall
be addressed as follows:
Community Care Services, Inc.
18 Sargent Place
Mount Vernon, New York 10550
Any notice to Executive shall be addressed to the Executive's address
appearing on the records of the Corporation at the time such notice is given.
Executive at any time may by written notice designated an attorney who is to
receive copies of all notices.
Either party may change the address to which notice to it is to be
addressed, by notice as provided herein.
13. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York governing contracts made in
and to be performed solely in such State.
14. Effective Date. This Agreement shall become effective as of the date
first written above.
15. Waiver of Breach. The waiver by either party of a breach of this
Agreement shall not be effective unless in writing signed by the party to be
charged therewith and will not operate or be construed as a waiver of any other
subsequent breach.
16. Equitable Relief. With respect to the covenants contained in Articles
6, 7 and 8 of this Agreement, Executive agrees that any remedy at law for any
breach of said covenants may be inadequate and that the Corporation shall be
entitled to specific performance or any other mode of injunctive and/or other
equitable relief a court might
10
<PAGE> 11
award, including, but not limited to, an injunction restraining such breach or
threatened breach, in addition to any other remedies which might be available to
it.
IN WITNESS WHEREOF, the parties hereto have executed the above Agreement
as of the day and year first above written.
COMMUNITY CARE SERVICES, INC.
By: /s/ Elia C. Guarneri
-----------------------------------------
Elia C. Guarneri, Chief Financial Officer
EXECUTIVE:
/s/ Saverio D. Burdi
----------------------------------------------
Saverio D. Burdi
11
<PAGE> 1
EXHIBIT 10.29
RESTATED AND AMENDED EMPLOYMENT AGREEMENT
RESTATED AND AMENDED EMPLOYMENT AGREEMENT between Community Care Services,
Inc., a New York corporation (the "Corporation") and Louis Rocco ("Executive")
dated as of April 1, 1999.
W I T N E S S E T H:
WHEREAS, the Corporation and Executive have entered into an Employment
Agreement (the "Employment Agreement") and Non-Competition Agreement (the
"Non-Competition Agreement"), both dated May 10, 1997; and
WHEREAS, Executive and the Corporation desire to restate and amend the
Employment Agreement as set forth herein;
WHEREAS, Executive and the Corporation desire to incorporate the terms of
the Non-Competition Agreement into the Employment Agreement and to terminate the
original Non-Competition Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. Employment Agreement and Non-Competition Agreement Superseded. The
Employment Agreement and Non-Competition Agreement are hereby terminated and
superseded by this Restated and Amended Employment Agreement.
2. Employment. The Corporation agrees to and does hereby continue to
employ and Executive agrees to and does hereby accept continued employment by
the Corporation, as Senior Vice President of the Corporation, or in any other
similar capacity as
<PAGE> 2
determined by its Chief Executive Officer, subject to the supervision and
direction of its Chief Executive Officer, for the period commencing on April 1,
1999 and ending at midnight on May 10, 2004, subject to prior termination in
accordance with the provisions hereof (the "Term"). The Term may be extended for
successive one year periods, as mutually agreed in writing by the Corporation
and Executive; provided that the Corporation will give notice to Executive at
least six months prior to the end of the Term or any extension thereof if it
desires to extend this Agreement. The Term less any reduction or extensions of
the Term pursuant to the provisions hereof, shall be referred to in this
Agreement as the "Employment Period."
3. Scope of Duties. As Senior Vice President, Executive will carry out all
reasonable tasks which are typically commensurate with such position assigned to
him by the Board of Directors and the Chief Executive Officer. Executive agrees
that he will devote his full time and effort during the Employment Period to the
performance of the duties of his office. Executive shall make his business
headquarters at Mount Vernon, New York and shall relocate should the Corporation
change its headquarters; provided, however, that in no event will Executive be
required to relocate outside of a thirty (30) mile radius from Mt. Vernon, New
York. Executive shall undertake such travel as the Corporation may request.
4. Compensation.
(a) Executive Compensation. For the services and duties to be
rendered and performed by Executive during the Employment Period, the
Corporation agrees to pay Executive compensation at the rate of Two Hundred
Twenty Five Thousand Dollars ($225,000.00) per annum (hereinafter referred to as
"Executive Compensation"), effective
2
<PAGE> 3
April 1, 1999. Executive Compensation shall be payable in accordance with the
Corporation's customary payroll practices. The Corporation shall reimburse
Executive for all expenses reasonably and necessarily incurred in connection
with his employment by the Corporation, including business related travel and
entertainment expenses while absent on the Corporation's business from its
business headquarters, subject to the limitations and guidelines generally
imposed by the Corporation on its executives.
(b) Car Allowance. During the Employment Period, Executive shall be
entitled to an automobile allowance of Seven Hundred Dollars ($700) per month,
which shall be taxable to Executive to the extent that the automobile is used
for non-business purposes.
(c) Bonus and Incentive Compensation. During the Employment Period,
Executive will be eligible to participate in bonus and incentive compensation
programs for executives that may be established by the Corporation from time to
time.
5. Vacation. During the first two (2) years of the Employment Period,
Executive shall be entitled to a paid vacation in each such year equal to three
(3) weeks. Thereafter, Executive shall be entitled to four (4) weeks paid
vacation per year. Said vacation may be taken at the sole discretion of
Executive. Executive shall also be entitled to paid sick and personal days in
accordance with the Corporation's policies for senior executives, as adopted
from time to time.
6. Nondisclosure. Executive acknowledges that as an officer of the
Corporation and several of its Affiliates (as defined below) he has been, and as
an executive of the Corporation and , at the discretion of the Corporation, one
or more of the Affiliates, throughout the Employment Period he will be, privy to
trade secrets and other proprietary
3
<PAGE> 4
and/or confidential information (whether in written, verbal or any other form)
relating to the existing or contemplated business and/or field of interest of
the Corporation and its Affiliates, or of any corporation or other legal entity
in which the Corporation or any of its Affiliates has an ownership interest of
more than five percent (5%), and any proprietary information (whether in
written, verbal or any other form) of any of the Corporation's customers,
suppliers, licensor or licensees, including, but not limited to, information
relating to inventions, disclosures, processes, systems, methods, formulae,
patents, patent applications, machinery, materials, notes, drawings, research
activities and plans, costs of production, contract forms, prices, volume of
sales, promotional methods, list of names or classes or customers, which he has
heretofore acquired or which he may hereafter acquire during his employment with
the Corporation or any of its Affiliates, in both cases whether during or
outside business hours, whether or not on the Subsidiary's or the Corporation's
premises, as the result of any disclosures to him, or in any other way, shall be
regarded as held by him in a fiduciary capacity solely for the benefit of the
Corporation, its successors or assigns, and shall not at any time, either during
the Employment Period or thereafter, be disclosed, divulged, furnished, or made
accessible by him to anyone, or be otherwise used by him, except in the regular
course of business of the Corporation or its Affiliates. Upon termination of his
employment, Executive shall promptly return or deliver to the Corporation all
tangible forms of such information in his possession or control, and shall
retain no copies thereof. Information shall, for purposes of this Agreement, be
considered to be confidential if not known by the trade generally, even though
such information may have been disclosed on a confidential basis to one or more
third parties pursuant to any business discussion or agreement, including
distribution agreements, joint research
4
<PAGE> 5
agreements or other agreements entered into by the Subsidiary or the Corporation
or any of their Affiliates. For the purposes of this Agreement, "Affiliates"
shall mean any corporation, partnership, joint venture, other entity of any type
or individual that directly or indirectly, through one or more intermediaries,
controls or is controlled, or is under common control with, the Subsidiary or
the Corporation, as the case may be.
7. Patents. Executive agrees to and does hereby sell, assign, transfer and
set over to the Corporation, its successors, assigns, or Affiliates, as the case
may be, all his right, title, and interest in and to any inventions,
improvements, processes, patents or applications for patents which he develops
or conceives individually or in conjunction with others during his employment by
the Corporation, or, having possibly conceived same prior to his employment, may
complete while in the employ of the Corporation or any of its Affiliates, in
both cases whether during or outside business hours, whether or not on the
Corporation's premises, which inventions, improvements, processes, patents or
applications for patents are (i) in connection with any matters within the scope
of the existing or contemplated business of the Corporation or any of its
Affiliates or (ii) aided by the use of time, materials, facilities or
information paid for or provided by the Corporation, all of the foregoing to be
held and enjoyed by the Corporation, its successors, assigns or Affiliates, as
the case may be, to the full extent of the term for which any Letters Patent may
be granted and as fully as the same would have been held by Executive, had this
Agreement not been made. Executive will make, execute and deliver any and all
instruments and documents necessary to obtain patents for such inventions,
improvements and processes in any and all countries. Executive hereby
irrevocably appoints the Corporation to be his attorney in fact in the name of
and on behalf of Executive to execute all such instruments and do all such
5
<PAGE> 6
things and generally to use Executive's name for the purposes of assuring to the
Corporation (or its nominee) the full benefit of its rights under the provisions
of this Article 7, such power to be exercised only if Executive improperly
refuses to fulfill his obligations under this Article 7.
8. Restriction on Competition. Executive covenants and agrees that during
the Executive's Employment Period and for a period of one (1) year after
Executive's last day of employment, he will not (i) enter, directly or
indirectly, into the employ of or render, directly or indirectly, any services
to any person, firm or corporation engaged in any business competitive with the
business of the Corporation in any part of the Restricted Territory, as
hereinafter defined, in which the Corporation is doing business on the date of
termination; (ii) engage, directly or indirectly, in any such business for his
own account; (iii) become interested, directly or indirectly, in any such
business as an individual, partner, shareholder, creditor, director, officer,
principal, agent, employee, trustee, consultant, advisor or in any other
relationship or capacity; (iv) contact or solicit, or attempt to contact or
solicit, any person or entity for whom the Corporation performed services or
actively marketed for the purpose of performing services, or with whom Executive
had any dealings, during the one (1) year period immediately prior to the
termination of Executive's Employment Period; or (v) hire, subcontract, employ
or engage, or contract or solicit, for the purpose of hiring, subcontracting,
employing or engaging, any person or entity who was an employee of the
Corporation at the time of the termination of Executive's Employment Period or
during the one (1) year period immediately prior to the termination of
Executive's Employment Period.
6
<PAGE> 7
For the purposes of this Agreement, "Restricted Territory" shall mean the
following counties: in the State of New York: New York, Bronx, Queens, Kings,
Richmond, Nassau, Suffolk, Westchester, Rockland, and Orange Counties; in the
State of Connecticut: Fairfield and Hartford Counties and in the State of New
Jersey: Bergen, Essex, Sussex, Passaic and Hudson Counties.
9. Earlier Termination.
(a) Death. In the event of the death of Executive during the
Employment Period, this Agreement shall automatically terminate on the date of
his death. Upon termination of this Agreement pursuant to this Article 9(a), the
Corporation shall have no further obligations or liabilities under this
Agreement other than to pay to Executive's estate (i) the portion, if any, of
his compensation that remains accrued but unpaid, (ii) the amount of any
expenses reimbursable in accordance with Article 9(a) above and (iii) any
amounts due under any of the Corporation's benefit, welfare or pension plans or
under any bonus or incentive plans.
(b) Disability. In the event of Executive's Total Disability (as
defined below) for one hundred eighty (180) days in the aggregate during any
consecutive twelve (12) month period during the Employment Period, the
Corporation shall have the right to terminate this Agreement by giving Executive
thirty (30) days' prior written notice thereof and, upon the expiration of such
thirty (30) day period, Executive's employment under this Agreement shall
terminate. If Executive shall resume his duties within thirty (30) days after
receipt of such a notice of termination and continue to perform his duties for
two (2) consecutive weeks thereafter, then the Employment Period shall be deemed
to continue in full force and effect, without any reduction in salary and other
benefits, and the
7
<PAGE> 8
notice of termination shall be considered null and void and of no effect. Upon
termination of this Agreement pursuant to this Article 9(b), the Corporation
shall have no further obligations or liabilities under this Agreement other than
to pay to Executive (i) the portion, if any, of his compensation that remains
accrued but unpaid, (ii) the amount of any expenses reimbursable in accordance
with Article 4(a) above, and (iii) any amounts due under any of the
Corporation's benefit, welfare or pension plans or any bonus or incentive plans.
The term "Total Disability," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor designated by the parties, renders Executive unable or incompetent to
carry out his material duties and responsibilities under this Agreement.
Notwithstanding the foregoing, if Executive is covered under any policy of
disability insurance obtained by the Corporation, under no circumstances shall
the definition of "Total Disability" differ from the definition of that term in
such policy. If the parties are unable to agree upon an independent medical
doctor to render an opinion, each shall designate one medical doctor, and the
two so designated shall jointly select a third independent medical doctor, whose
decision shall be binding.
(c) Termination for Cause. The Corporation may discharge Executive
for "Cause" upon notice and thereby immediately terminate his employment under
this Agreement. For purposes of this Agreement, the Corporation shall have
"Cause" to terminate Executive's employment if Executive, in the reasonable
judgment of the Corporation, (i) materially breaches any of his agreements,
obligations or duties under this Agreement and does not cure such breach or
commence in good faith to correct such breach within thirty (30) days after
notice, (ii) fails to carry out any reasonable lawful directive of the Chief
Executive Officer of the Corporation which Executive is required to do pursuant
8
<PAGE> 9
to this Agreement and does not cure such breach or commence in good faith to
correct such breach within ten (10) days after notice, (iii) embezzles or
converts to his own use any funds of the Corporation or any client or customer
of the Corporation, (iv) willfully converts to his own use any property of the
Corporation without the Corporation's consent, (v) is convicted of a felony
(other than a vehicular infraction which does not involve injuries to persons or
property), or (vi) is adjudicated an incompetent.
10. Employee Benefits. Executive shall be entitled to participate in the
Corporation's medical plan and in the Corporation's existing 401(k) plan. In
addition to the foregoing, the Corporation shall pay up to $25,000 per year on
behalf of Executive to fund Executive's participation in such supplemental
executive benefit programs as may be requested by Executive, subject to the
consent of the Chief Executive Officer, which shall not be unreasonably
withheld.
11. Assignment. In the event of a future disposition by the Corporation
(whether direct or indirect, by sale of assets or stock, merger, consolidation
or otherwise) of all or substantially all of its business and/or assets, the
Corporation will require any successor, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such disposition had taken place.
12. Notices. All notices required or permitted to be given hereunder shall
be mailed by certified mail, delivered by recognized overnight courier service
for which a written receipt is given, or delivered by hand to the party to whom
such notice is required or permitted to be given hereunder. If mailed, any such
notice shall be deemed to have been given when mailed as evidenced by the
postmark at point of mailing. If delivered by hand,
9
<PAGE> 10
any such notice shall be deemed to have been given when received by the party to
whom notice is given, as evidenced by written and dated receipt of the receiving
party.
Any notice to the Corporation or to any assignee of the Corporation shall
be addressed as follows:
Community Care Services, Inc.
18 Sargent Place
Mount Vernon, New York 10550
Any notice to Executive shall be addressed to the Executive's address
appearing on the records of the Corporation at the time such notice is given.
Executive at any time may by written notice designated an attorney who is to
receive copies of all notices.
Either party may change the address to which notice to it is to be
addressed, by notice as provided herein.
13. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of New York governing contracts made in
and to be performed solely in such State.
14. Effective Date. This Agreement shall become effective as of the date
first written above.
15. Waiver of Breach. The waiver by either party of a breach of this
Agreement shall not be effective unless in writing signed by the party to be
charged therewith and will not operate or be construed as a waiver of any other
subsequent breach.
16. Equitable Relief. With respect to the covenants contained in Articles
6, 7 and 8 of this Agreement, Executive agrees that any remedy at law for any
breach of said covenants may be inadequate and that the Corporation shall be
entitled to specific performance or any other mode of injunctive and/or other
equitable relief a court might
10
<PAGE> 11
award, including, but not limited to, an injunction restraining such breach or
threatened breach, in addition to any other remedies which might be available to
it.
IN WITNESS WHEREOF, the parties hereto have executed the above Agreement
as of the day and year first above written.
COMMUNITY CARE SERVICES, INC.
By: /s/ Elia C. Guarneri
-----------------------------------------
Elia C. Guarneri, Chief Financial Officer
EXECUTIVE:
/s/ Louis Rocco
----------------------------------------------
Louis Rocco
11
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
Metropolitan Respirator Service, Inc.
Community Care Acquisition Corp. ( Inactive )
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS OF THE COMPANY AS OF AND FOR THE YEAR ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 84,000
<SECURITIES> 0
<RECEIVABLES> 6,514,000
<ALLOWANCES> 1,852,000
<INVENTORY> 459,000
<CURRENT-ASSETS> 5,774,000
<PP&E> 1,954,000
<DEPRECIATION> 480,000
<TOTAL-ASSETS> 12,294,000
<CURRENT-LIABILITIES> 7,336,000
<BONDS> 0
0
0
<COMMON> 72,000
<OTHER-SE> 10,206,000
<TOTAL-LIABILITY-AND-EQUITY> 12,294,000
<SALES> 0
<TOTAL-REVENUES> 17,942,000
<CGS> 6,970,000
<TOTAL-COSTS> 17,234,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 568,000
<INCOME-PRETAX> 146,000
<INCOME-TAX> (67,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,000)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
