<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1996
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to ____________________
Commission File No. 0-9836
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COSMETIC SCIENCES, INC.
- - --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 22-2210547
- - --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
One Old Country Road, Suite 335, Carle Place, New York 11514
- - --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(516) 248-2273
- - --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 _____ No __X___
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes _____ No __X___
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 19,000,226 common
shares, $.01 par value, as of May 14, 1996.
Transitional Small Business Disclosure Format (check on): Yes _____ No __X___
<PAGE>
COSMETIC SCIENCES, INC.
FIRST QUARTER REPORT ON FORM 10 - QSB
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Part I - Financial Information
Item 1 Page
----
Condensed Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information 10
Signatures 11
Exhibit Index 12
2
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COSMETIC SCIENCES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- -------------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash $ 204,119 $ 511,563
Accounts receivable, net of allowance for
doubtful accounts of $100,000 1,094,357 895,131
Prepaid expenses 134,771 146,809
---------- -----------
Total current assets 1,433,247 1,553,503
Property and equipment, net 160,938 118,591
Other assets:
Deferred taxes 297,500 259,000
License, net 505,912 515,832
Other 27,529 11,197
---------- -----------
Total assets $2,425,126 $ 2,458,123
========== ===========
Liabilities and Shareholders' Eguity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 760,360 $ 766,651
Payroll taxes payable 328,237 280,584
Notes payable 148,449 148,449
Other current liabilities 69,069 71,991
---------- -----------
Total current liabilities 1,306,115 1,267,675
---------- -----------
Non-current liabilities:
Long-term debt 50,000 54,500
Obligations under capital leases 36,799 40,010
---------- -----------
Total non-current liabilities 86,799 94,510
---------- -----------
Total liabilities 1392,914 1,362,185
---------- -----------
Commitments and contingencies
Minority interest in subsidiary 129,328 140,008
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Shareholders' equity
Common stock, $.01 par value, 20,000,000
shares authorized, 19,300,229 shares issued
and outstanding 194,506 194,506
Additional paid-in-capital 638,844 638,844
Retained earnings 69,534 122,580
---------- -----------
Total shareholders' equity 902,884 955,930
---------- -----------
Total liabilities and shareholders' equity $2,425,126 $ 2,458,123
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------
1996 1995
------------ -------------
<S> <C> <C>
Net patient service revenue $ 1,984,892 $ 1,644,455
Cost of services 1,246,264 1,042,760
------------ -------------
Gross profit 738,628 601,695
Selling, general and administrative expenses 838,512 459,684
------------ -------------
(Loss) income from operations (99,884) 142,011
Interest expense 2,343 828
------------ -------------
(Loss) income before (benefit) provision for
income taxes and minority interest (102,227) 141,183
(Benefit) provision for income taxes (38,500) 62,000
------------ -------------
Net (loss) income before minority interest (63,727) 79,183
Minority interest in subsidiary net (loss) income (10,681) 13,755
------------ -------------
Net (loss) income $ (53,046) $ 65,428
============ =============
(Loss) earnings per common share $ (0.0027) $ 0.0034
============ =============
Weighted average number of common shares outstanding 19,300,229 19,300,229
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------
1996 1995
------------ -------------
<S> <C> <C>
Cash flow from operating activities:
- - ------------------------------------
Net (loss) income $ (53,046) $ 65,428
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 14,195 3,308
Amortization of intangible assets 9,920 9,920
(Benefit) provision for income taxes (38,500) 62,000
Minority interest in subsidiary (loss) income (10,681) 13,755
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (199,226) (138,941)
Prepaid expenses 12,038 17,374
Other assets (16,332) (600)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (9,502) (160,761)
Payroll taxes payable 47,653 49,171
Other liabilities (2,922) 1,006
------------ --------------
Net cash used in operating activities (246,403) (78,340)
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Cash flow from investing activities:
- - ------------------------------------
Purchase of property and equipment (56,541) (4,855)
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Net cash used in investing activity (56,541) (4,855)
------------ --------------
Cash flow from financing activity:
Repayment of loans (4,500) -
------------ --------------
Net cash used in financing activities (4,500) -
------------ --------------
Net decrease in cash (307,444) (83,195)
Cash at beginning of period 511,563 97,190
------------ --------------
Cash at end of period $ 204,119 $ 13,995
============ ==============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 690 $ 2,489
============ =============
Income taxes $ 1,333 $ 529
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
COSMETIC SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,1996
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Cosmetic Sciences, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to form 10-QSB from Regulation S-B. Accordingly, these
financial statements do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments necessary for a fair presentation
(consisting of normal recurring accruals) have been included. The results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. For further information, refer to the audited consolidated financial
statements and notes thereto for the year ended December 31, 1995.
Note 2 - Net (Loss) Income Per Share
Net (loss) income per share is computed by dividing net (loss) income
by the weighted average number of shares of common stock outstanding during each
period.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This item contains forward looking information that involves
uncertainties and risk which are discussed below at "Forward Looking Statements,
Cautionary Factors."
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. This discussion
should be read in conjunction with the attached unaudited consolidated financial
statements and related notes, and with the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 1995.
Overview
The Company's revenues are derived from providing home health services
to individuals, in New York and New Jersey, through various contracts with
government agencies (under the Medicaid program) and to a lesser extent
hospitals, insurance companies, private pay and other third party payers.
Results of Operations
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Net Patient Service Revenue: Net patient service revenue increased $340,437 or
21% to $1,984,892 for the quarter ended March 31, 1996 from $1,644,455 for the
quarter ended March 31, 1995. The addition of three new satellite branches from
March 31, 1995 to March 31, 1996 increased net patient service revenue by
$578,460 or 35%. The remaining branches' net patient service revenue decreased
$238,023 or 14% , due to a reallocation of business to the new satellite
branches and an overall general decrease in authorized Medicaid reimbursable
hours by the New York State Department of Social Services (See "Forward Looking
Statements - Cautionary Factors").
Cost of Services: Cost of services increased $203,504 or 20% to $1,246,264 for
the quarter ended March 31, 1996 from $1,042,760 for the quarter ended March 31,
1995. The increase in cost of services is primarily due to increases in field
staff payroll costs resulting from the increase in net patient service revenue.
The Company's growth in the number of cases serviced increased the need for
additional field staff to service these cases.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased $378,828 or 82% to $838,512 for the quarter
ended March 31, 1996 from $459,684 for the quarter ended March 31, 1995.
Selling, general and administrative expenses as a percentage of net revenues
increased to 42% for the quarter ended March 31, 1996 from 28% for the quarter
ended March 31, 1995. This increase reflects higher administrative salaries,
marketing and facility expenses associated with the additional branch locations,
the increase in case volume, and the Company's investment in the corporate
7
<PAGE>
infrastructure necessary to achieve its business strategy. In addition,
professional fees increased due to the Company's commitment to resume filing the
reports required under the Securities Exchange Act of 1934. The Company
anticipates the current levels of selling, general and administrative expenses
as a percentage of net revenue to continue over the next three months and
subsequently decline throughout the remainder of the year.
(Benefit) Provision For Income taxes: The income tax benefit derived from the
quarter ended March 31, 1996 loss from operations is based on a 38% effective
tax rate compared to an income tax provision derived from the quarter ended
March 31, 1995 income from operations which was based on a 44% effective tax
rate. The decrease in the Company's effective tax rate was primarily due to the
reduction of certain permanent taxable differences.
Inflation and Seasonality
Medicaid reimbursements, which represent the Company's principal source
of revenue, have historically been adjusted to keep pace with inflation. There
can be no assurance that future Medicaid reimbursement will keep pace with
inflation.
The Company's business is generally not subject to seasonal trends.
Liquidity and Capital Resources
The nature of the Company's business requires weekly payments of wages
to its personnel as they render services, while the Company receives payments
for services rendered over an extended period of time (30 to 90 days). At March
31, 1996 the Company's accounts receivable balance increased $199,226 to
$1,094,357 from $895,131 at December 31, 1995. The increase in accounts
receivable was due to increased net patient service revenue and an increase in
days sales in accounts receivable from approximately 49 to 54 days.
At March 31, 1996, the Company had working capital of $127,132.
Historically, the Company's cash requirements have been met internally from
operations. The Company currently has no outstanding bank debt nor does it have
any agreements for a line of credit.
For the quarter ended March 31, 1996 and the quarter ended March 31,
1995, the Company used cash from operating activities of $246,403 and $78,340
respectively. The change in cash used from operating activities was a result of
increased selling, general and administrative expenses and accounts receivable
associated with the additional branch locations, increased financial reporting
requirements and the overall increase in net patient service revenue.
During the quarter ended March 31, 1996 the Company invested $56,541 in
property and equipment primarily for purchases of computers, telecommunication
equipment, and furniture and equipment associated with the relocation of one
branch and the opening of one additional branch.
8
<PAGE>
Forward Looking Statements - Cautionary Factors
1. The Company derives most of its revenues from Medicaid
reimbursements. To the extent Medicaid reimbursements are reduced, the Company's
revenues and profitability may be adversely impacted. Reductions in Medicaid
budgetary dollars are being discussed at the federal and state executive and
legislative levels, including the states of New York and New Jersey. During the
quarter ended March 31, 1996, a reduction in authorized Medicaid reimbursable
hours per case was imposed by the New York State Department of Social Services.
The results of this reduction did not have a material adverse effect on the
Company's results of operations for the quarter ended March 31, 1996. However,
if a similar Medicaid reduction is imposed by the state of New Jersey, the
results of this reduction would have a material adverse effect on the Company's
results of operation, as the Company currently derives a majority of its
revenues from New Jersey Medicaid reimbursements. The Company cannot predict the
magnitude of future reductions, if any, in Medicaid reimbursement rates or
reimbursable hours.
2. The Company believes that its liquidity and capital resources are
adequate for its current level of operations. However, due to its anticipated
geographical expansion, addition of new products and services and potential
acquisitions and joint ventures of other home care businesses (See "Business
Strategy" in the Company's 1995 10-KSB), the Company expects its future capital
needs to increase. Should Arbor Home Healthcare Holdings, LLC. ("Arbor")
exercise its option in full to purchase common stock of the Company in 1996 (See
"Certain Relationships and Related Transactions" in the Company's 1995 10-KSB)
it will contribute $1.3 million in cash to the Company. The Company believes
that the proceeds from the exercise of the Arbor option will be sufficient to
meet the Company's expansion related and working capital requirements over the
next twelve months. Should Arbor not exercise its option to purchase the
Company's shares, the Company will seek alternative financing to fund its
business expansion. The Company's inability to obtain alternative financing
could have a material adverse effect on the Company's business expansion plans.
9
<PAGE>
Part II: OTHER INFORMATION
Item 5. Other information:
Employees at one of the Company's branch offices are attempting to
organize a union to represent them. An initial hearing before the National Labor
Relations Board ("NLRB") on March 28, 1996 determined that a vote should be
taken by the employees of this branch to decide whether a union should represent
these employees. The vote took place on April 26, 1996 and the results were in
favor of the employees unionizing the branch. The details of the contract
between the Company and the union will be negotiated on a date that has yet to
be determined. However, the Company does not anticipate the union contract will
have a material adverse effect on the Company's operations or financial
condition. The Company does not know at this time whether efforts will be made
to unionize its other branches, whether those efforts would be successful, and
whether if successful, there would be a material effect upon the Company's
operations or financial condition.
Item 6. Exhibits and reports on Form 8-K.
a. Exhibits
See accompanying index to Exhibits.
b. The Company filed one report on Form 8-K on February 19, 1996
regarding a change in the Company's independent accountants.
All other items required in Part II are not applicable for the quarter
ended March 31, 1996.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
(Registrant) COSMETIC SCIENCES, INC.
Date: May 14, 1996 By: Mary Anne Page
----------------------------------
Mary Anne Page, Acting
Chief Executive Officer
and Director
Date: May 14, 1996 By: Paul Elenio
----------------------------------
Paul Elenio, Vice President,
Controller and Principal
Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit Page Number
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Exhibit 27 Financial Data Schedule 13
12
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 204,119
<SECURITIES> 0
<RECEIVABLES> 1,194,357
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,433,247
<PP&E> 308,481
<DEPRECIATION> 147,543
<TOTAL-ASSETS> 2,425,126
<CURRENT-LIABILITIES> 1,306,115
<BONDS> 0
0
0
<COMMON> 194,506
<OTHER-SE> 708,378
<TOTAL-LIABILITY-AND-EQUITY> 2,425,126
<SALES> 1,984,892
<TOTAL-REVENUES> 1,984,892
<CGS> 1,246,264
<TOTAL-COSTS> 1,246,264
<OTHER-EXPENSES> 838,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,343
<INCOME-PRETAX> (102,227)
<INCOME-TAX> (38,500)
<INCOME-CONTINUING> (53,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,046)
<EPS-PRIMARY> (.003)
<EPS-DILUTED> (.003)
</TABLE>
