U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO.3
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended: December 31, 1995
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from
Commission file number 0-9836
COSMETIC SCIENCES, INC.
Exact name of registrant as specified in its charter
New York
22-2210547
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
One Old Country Road, Suite 335, Carle Place, N.Y. 11514
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 516-248-2273,
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such other 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part llI of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State the registrant's revenues for its most recent fiscal year:
$7,367,958
The aggregate market value of the Company's voting common stock held by
non-affiliates computed by reference to the average bid and ask price
on March 28, 1996 was $3,019,018.
(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: 19,300,229 common shares
as of March 30, 1996
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement for the 1996 Annual
Meeting of Shareholders of the Company are incorporated by reference into
Part III hereof.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
<PAGE>
PART I
Item 1. Description of Business
-----------------------
Background
- ----------
Cosmetic Sciences, Inc. (the "Company") is in the business of providing
home health care services, principally personal hygiene, homemaking, general
patient safety, and to a lesser extent nursing services ("Home Care"),
primarily through contracts with government agencies under the Medicaid
program. The Company is a holding company which derives 100 percent of its
revenues from the operation of TPC Home Care Services, Inc. ("TPC"), an 83
percent owned subsidiary doing business as Extended Family Care.
The Company was incorporated in New York on May 10,1978 under the name
M.A.E. Enterprises, Inc. In 1980, the name of the Company was changed to
Cosmetic Sciences, Inc. and also in 1980, the Company completed its initial
public offering of 1.5 million shares of common stock, raising gross proceeds
of $1.5 million. Between 1980 and 1985, the Company engaged in research,
development, marketing and distribution of medical devices and cosmetics.
These products never proved to be commercially viable, and by the mid-1980's
the development of these products were discontinued and the subsidiaries
through which these businesses were operated were dissolved.
In August 1984, the Company entered the Home Care industry by acquiring
all of the outstanding shares of TPC, which at the time was providing Home
Care services in New York and New Jersey. In December 1984, the shareholders
of the Company received as a dividend approximately 17 percent of the
outstanding common stock of TPC, leaving TPC as an 83 percent owned subsidiary
of the Company.
On April 25, 1985, TPC entered into an agreement to acquire all of the
outstanding stock of another home health care company doing business in New
Jersey called A-Round the Clock Nursing Services, Inc. ("A-Round the Clock").
In December 1985, a Form S-1 Registration Statement was declared effective in
anticipation of an initial public offering by TPC. Proceeds from this
offering were to provide the funding for the acquisition of A-Round the
Clock. However, the underwriter terminated the offering, and TPC was unable
to find another underwriter to complete the offering. TPC was forced to
borrow the funds required to consummate the acquisition of A-Round the Clock.
The burden of the additional debt service, coupled with the increased demand
for working capital, further reduced cash flow. Facing bank foreclosure upon
TPC's accounts receivable, significant tax arrears and cash shortfalls, the
Company and TPC filed a petition under Chapter 11 of the U.S. Bankruptcy Code,
in the U.S. Bankruptcy Court, Southern District, New York, in August 1986.
<PAGE>
Following the filing of the bankruptcy petition, TPC continued to
operate its Home Care business as a debtor in possession. In July 1987 a
secured lender foreclosed on the common stock of A-Round the Clock, and took
possession and control of the business of A-Round the Clock. TPC continued to
provide Home Care services with operating branches in Hempstead, New York and
Hackensack, New Jersey.
In 1992, the Company's headquarters were moved from Hempstead, New York
to Carle Place, New York. In March 1994, TPC opened a branch office in
Irvington, New Jersey, which moved in March 1996 to East Orange. In February
1995, a satellite office of the Hackensack branch office was opened in
Paterson, New Jersey, which is relocating to Clifton, New Jersey on or about
April 15, 1996. In August 1995, a TPC satellite office was opened in Jersey
City, New Jersey and in March 1996, a satellite office was opened in
Elizabeth, New Jersey.
In October 1993, and in connection with the Company's Amended Plan of
Reorganization adopted in 1992, an investment group, COSS Holding Corp.
("C.O.S.S."), invested cash of $250,000 in the Company and thereby became the
holder of approximately 66 percent or 12,748,658 shares of the Company's
common stock. [See "Legal Proceedings"]
On October 31, 1995, the Company, TPC and C.O.S.S. entered into an
agreement with Arbor Home Healthcare Holdings, LLC. ("Arbor") (in which Ivan
Kaufman owns a 99% interest), pursuant to which the Company granted Arbor the
option to purchase 13 million newly issued shares of its common stock for $1.3
million, ($.10 per share). This option can be exercised by Arbor in two equal
installments of 6.5 million shares on or before June 21, 1996 and November 1,
1996, respectively. Upon exercising both installments of this option, Arbor
will own approximately 40 percent of the outstanding common stock of the
Company. To date, neither installment of the option has been exercised. In
addition, C.O.S.S. has agreed to place its holdings of the Company's common
stock in a voting trust, providing Arbor the right to direct the voting of
such shares and to elect a majority of the board of directors of the Company.
The Company, C.O.S.S. and Arbor have also entered into various agreements
relating to C.O.S.S.' holdings of the Company's common stock. [See "Certain
Relationships and Related Transactions" in the Company's Form 10K-SB item
13].Mr Kaufman is not affiliated with any of the current officers or directors
of the Company.
On October 31, 1995, C.S.I. entered into an agreement with Arbor Management,
LLC (in which Ivan Kaufman owns a 99% interest), for two years by which C.S.I.
will pay $7,500 a month to Arbor Management, LLC for management services,
including accounting, finance, human resources and marketing, rendered to the
Company.
<PAGE>
Home Care Services
- ------------------
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20
percent. Primary reasons cited for such rapid growth include: (1) the general
aging of the United States' population; (2) the cost savings achievable
through at-home treatment as an alternative to hospital care; (3) medical and
technological advances which enable a growing number of treatments to be
administered at home rather than in a medical facility; and (4) Insurance
(both government regulated and private) reimbursement policies which provide
certain incentives to minimize the length of in-patient hospital care.
TPC provides its patients the services of certified home health aides,
personal care aides, homemakers and to a lesser extent registered and licensed
practical nurses. These individuals are part-time employees of TPC who work
for TPC as needed. TPC's roster of Home Care personnel includes approximately
435 paraprofessionals and 10 nurses.
TPC requires its paraprofessionals and nurses to meet certain licensing,
certification, and/or other requirements. TPC conducts mandatory in-service
classes for its nurses and paraprofessionals both to meet New York and New
Jersey continuing education requirements and to fulfill TPC's own quality
assurance standards. These in-service classes typically last between three
and six hours and are offered periodically. They are taught by health care
professionals selected by TPC for their expertise in their fields, including
nurses, physical therapists, social workers and occasionally physicians. All
field staff employees are subject to an internal review not less than every 60
days.
TPC was recently surveyed by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) and, in February 1996, was found to meet the
requirements for accreditation. JCAHO is the accrediting body for hospitals;
its accreditation enhances TPC's contractual business. TPC's accreditation
will expire in October 1998, at which time TPC must be resurveyed for the
following three-year term.
Procedure for a Typical Home Care Placement
When TPC accepts a new patient for service, TPC's Director of Nursing or
nursing supervisor confers with the patient's physician and other medical and
health care professionals (collectively, the patient's "Health Care Team") to
(1) obtain the physician's orders; (2) acquire a detailed description of the
patient's
<PAGE>
medical problem; (3) determine the patient's specific home care
requirements (the "Protocol"), including the plan of treatment and
pharmaceutical services, products and equipment which will be needed; and (4)
determine the type of personnel and the number of hours and shifts required.
The Director of Nursing and/or a nursing supervisor seeks to verify all
initial information received and selects the appropriate Home Care personnel
to care for the patient.
In a typical Home Care case, TPC's personnel assigned to the case visit
the patient on a prescribed schedule to administer the Protocol and to provide
other general care to the patient. All Home Care cases are supervised by a
nursing supervisor to ascertain whether any problems have arisen in connection
with the services. Occasionally the Company acts as a subcontractor for other
home care companies, implementing the patient Potocol under the direct
supervision of the primary contractor. TPC's nurses and paraprofessionals are
in frequent contact with the patient's Health Care Team.
Care Givers
- -----------
TPC employs a variety of clinical and ancillary personnel as follows:
1. Certified Home Health Aides ("CHHA") provide assistance as prescribed by
the physician in accordance with the Protocol and assist with personal
hygiene, housekeeping, general patient safety and other supportive
tasks. CHHAs hold a higher level of education, classroom training and
field supervision than Personal Care Aides.
2. Personal Care Aides ("PCA") assist the patient with personal hygiene,
dressing, bathing, meal preparation/feeding, housekeeping, general
patient safety and other activities of daily living.
3. Homemakers assist with light housekeeping, meal preparation and
shopping.
4. Registered Nurses ("RN") supervise and implement plans of treatment as
mandated by a physician, administer medication, maintain required
documentation and supervise all other non-RN health care employees.
5. Licensed Practical Nurses ("LPN") can administer certain medications and
assist the RN's in performing certain procedures.
ORGANIZATIONAL STRUCTURE
- ------------------------
Branch Description
- ------------------
TPC presently has three operating branches, three satellite sites, and a
corporate headquarters. The branches are located in New York and New Jersey
with corporate headquarters located in New York. Each operating branch is
licensed by the appropriate state agency for its location. Each operating
branch is staffed by a director of nursing, nursing supervisors, a branch
director, a personnel
<PAGE>
manager, staffing coordinator(s) and clerical personnel.
TPC conducts its own in house state approved training courses to prepare
qualified employees for employment. In addition, TPC maintains a recruiting
program to attract qualified personnel to its staff.
Customers
- ---------
TPC has four types of customers: public assistance agencies, other
third party payers, insurance companies and private pay customers.
Public assistance agencies, which provided approximately 81 percent and
71 percent of total TPC's revenues in 1995 and 1994, respectively, are billed
directly for Home Care services provided to individuals who have qualified
for Medicaid benefits. TPC's business in Nassau County, New York is tied
directly to a single contract between TPC and the Department of Social
Services in Nassau County. A substantial portion of TPC's business would be
lost should this single contract be terminated. The contract with Nassau
County is renewable on an annual basis and has been in existence in excess of
ten years. TPC has no reason to believe that this contract will not be
renewed in the future, however, there is no assurance that the contract will
be renewed.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant a Medicaid contract to any accredited home health care agency. New
business is obtained through referrals from physicians, county medical
services, community organizations, hospital social service workers, nurses,
insurance companies and the patient's family.
Other third party payers, such as hospitals and other health care
institutions, provided 11 percent and 12 percent of total TPC's revenues, in
1995 and 1994, respectively. The third party payer subcontracts with TPC for
Home Care services. These contracts are generally non-exclusive.
The insurance segment of TPC's business represented approximately 2 and
7 percent of TPC's total revenues in 1995 and 1994, respectively. This
business is dependent upon the insurer's decision to enter into various
preferred provider networks ("PPO") and health maintenance organization
networks ("HMO"). The insurance segment has become more closely linked to
associations with various PPOs and HMOs. Therefore, TPC will have to develop
alliances with such networks or risk the loss of business.
Private pay customers represented approximately 6 and 10 percent of
TPC's revenues in 1995 and 1994, respectively. These customers have
determined, for a
<PAGE>
variety of reasons, including ineligibility of public
assistance, or insurance benefits, to personally pay for the Home Care
services provided by TPC. These customers are referred to TPC from a variety
of sources.
The charts below sets forth: (a) the percent of total TPC's revenues by
type of customer; (b) percent of total TPC's revenues by state; and (c) TPC
Medicaid revenues as percentages of total state revenues.
<TABLE>
<CAPTION>
Percent of Total TPC Revenues by Type of Customer 1995 1994
- ------------------------------------------------- ---- ----
<S> <C> <C>
Medicaid (Through public assistance agencies) 81% 71%
Other third party payers 11 12
Insurance 2 7
Private pay 6 10
---- ----
100% 100%
Percent of Total TPC Revenues by State 1995 1994
---- ----
New York 25% 36%
New Jersey 75 64
TPC Medicaid Revenues as Percentages of
Total State Revenues 1995 1994
- -------------------------------------- ---- ----
New York 82% 84%
New Jersey 80 63
</TABLE>
Governmental Regulation and Licensing
- -------------------------------------
The Company's business is subject to substantial regulation by state and
local authorities. These regulations can cause significant time delays, as
well as additional costs, as TPC must comply with state eligibility standards
for licensing and/or accreditation as a Home Care provider. The imposition of
more stringent regulatory requirements or the denial, revocation, or
suspension of any license or accreditation necessary for TPC to operate in a
particular market could have a material adverse effect on TPC's operations.
Medicaid reimbursement rates in New York and New Jersey are not
negotiated by TPC, but are established by these respective states. Recent
budgetary pressures at the federal and state governmental level, may in the
future, reduce the allocation of federal and state budgetary dollars
appropriated for the Medicaid program. This reduction, if it occurs, will
have a negative impact on TPC's revenues and profitability. Federal and state
budgetary pressures may
<PAGE>
adversely impact TPC by: (1) reducing the Medicaid
reimbursement rates paid by the state; (2) reducing the number of hours that
will be reimbursed per case; and (3) reducing the funding of one or more
public assistance agencies with which TPC presently does business. [See
"Management's Discussion and Analysis or Plan of Operation - Industry
Information" and "Forward Looking Statements - Cautionary Factors"]
New York State requires approval of the Public Health Council of the New
York State Department of Health ("NYPHC") for any change in a "Controlling
Person" of an operator of a licensed health care services agency ("LHCSA").
Control of an entity is presumed to exist if any person owns, controls or
holds the power to vote 10% or more of the voting securities of such entity.
To the extent TPC or the Company may seek to acquire control of an LHCSA, TPC
would have to be granted the approval of the NYPHC prior to exercising control
over such LHCSA. NYPHC approval is also required if any entity seeks control
of more than 10 percent of the voting securities of the Company or TPC. The
NYPHC has approved the change of control that occurred from the acquisition
by C.O.S.S. of approximately 66 percent of the Company's common stock and the
option granted to Arbor to acquire 40 percent of the Company's common stock.
Health regulatory agencies of New York and New Jersey, where TPC
operates, require satisfaction of certain standards with respect to personnel,
services and supervision. Health regulatory agencies also require the
establishment of a professional advisory group that includes at least one
physician, one registered nurse and other representatives from related
disciplines or consumer groups. TPC is currently in compliance with such
standards.
Applicable federal and state "anti-kickback" regulations in general
provide that TPC may not make certain payments in order to receive referrals
of patients. The Company believes that it is in compliance with both state
and Federal "anti-kickback" regulations.
Competitive Conditions
- ----------------------
TPC's health care operations face competition in recruiting qualified
health care personnel, securing customers and providing services, from
numerous proprietary health care agencies and not-for-profit organizations,
many of which are substantially larger and better financed than TPC.
In New York, TPC has an annual contract with the Department of Social
Services in Nassau County representing approximately 21 percent of TPC's total
revenue in 1995. This type of contract was awarded to approximately sixty
home health care agencies, and currently, no additional agencies are permitted
to bid on this contract. Cases are referred to agencies on a rotating basis.
TPC is at a competitive disadvantage in other locations in New York State,
since TPC does not have Medicaid contracts in areas other than Nassau County.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant Medicaid contracts to any accredited home health care agency. Each
branch office of TPC has a contract with the New Jersey Department of Medicaid
for billing and administrative purposes. For New Jersey, new business is
dependent on referrals through physicians, county medical services, community
organizations, hospital social service workers, nurses, insurance companies
and the patient's family. Consequently, all of TPC's New Jersey business is
subject to numerous competitive factors. TPC believes that prompt service,
price (excluding Medicaid which by virtue of fixed reimbursement rates cannot
be a differentiating factor), quality of service and the range of services
offered are the principal factors which enable it to compete effectively in
the New Jersey market.
Marketing and Sales
- -------------------
TPC currently markets its health care personnel and services in Nassau
and Queens counties in New York, and in the eastern and northern counties in
New Jersey. TPC's services are marketed by a team of professionals headed by
a Regional Director, in each state. All of TPC's services are promoted
through print and yellow page advertising, brochures, direct mail and visual
presentations through field sales calls. Targeted clients are hospitals,
nursing homes, retirement centers, social service agencies, senior citizen
centers and other home care companies for sub-contract referrals. TPC's
representatives maintain telephonic contact not only to maintain a
relationship with existing referral sources, but also to establish new sources
and markets. TPC's staff attend health care sponsored seminars and various
trade shows and exhibitions.
Business Strategy
- -----------------
The Company's business strategy is to provide Home Care services to a
diversified mix of customers in the geographic markets served by the Company.
The Company anticipates growing its business in the following ways: (a)
opening new locations in both its existing and additional geographic markets;
(b) adding additional products and services, including hospice care and
skilled pediatric care; and (c) forming joint ventures and alliances and/or
acquiring other Home Care businesses. (See "Forward Looking Statements -
Cautionary Factors")
Liability Insurance
- -------------------
TPC is exposed to potential liability in the event of negligence or
wrongful
<PAGE>
acts of its personnel. TPC maintains liability insurance which it
believes to be adequate. There can be no assurance, however, that TPC will be
able to maintain its existing insurance at an acceptable cost or obtain
additional insurance in the future as required. There can be no assurance
that TPC's insurance will be sufficient to cover liabilities resulting from
claims that may be brought in the future.
Employees
- ---------
The Company currently has approximately 490 employees, 45 of which are
full-time employees. TPC has no union contracts with any of its employees and
believes that its relationship with its employees is good. TPC pays its
employees at rates that it believes are competitive.
Employees at one branch of TPC are attempting to organize a union to
represent the employees at the branch. An initial hearing before the National
Labor Relations Board ("NLRB") has determined that a vote should be taken by
the employees of this branch to decide whether the union should represent
these employees. It is uncertain whether the efforts to unionize this branch
will be successful. The Company, however, does not anticipate a material
adverse affect on its operations and financial condition should the efforts to
unionize the branch prove successful. 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, they would have a
material effect upon the Company's operations or financial condition.
Securities Filings
- ------------------
Since filing its petition for bankruptcy in 1986, the Company has not
filed any required reports under the Securities Exchange Act of 1934 (the
"Exchange Act"). The last such report filed was the Company's Form 10-K for
the fiscal year ended December 31, 1985. During the years while in
bankruptcy, the Company did not possess adequate financial and staffing
resources to produce audited financial statements and other reports as
required by the Exchange Act. The Company has made a commitment to file the
reports as required under the Exchange Act commencing with this report.
As a result of the Company's past non-compliance with the Exchange Act,
the Securities and Exchange Commission (the "SEC") may determine to bring
civil and administrative proceedings against the Company. While the
likelihood of such proceedings being brought is uncertain, if such proceedings
were brought, the Company could be subject to substantial monetary penalties
and other administrative remedies. The Company is also aware that if the SEC
were to seek substantial monetary or administrative remedies against the
Company, Arbor may not elect to exercise its option, which, if exercised
fully, would result in an injection of
<PAGE>
$1.3 million of capital into the Company.
Forward Looking Statements - Cautionary Factors
- -----------------------------------------------
Except for the historical information and statements contained in this
Report, the matters and items set forth in this Report are forward looking
statements that involve uncertainties and risks some of which are discussed at
appropriate points in the Report and are also summarized as follows:
1. The Company derives most of its revenues from Medicaid
reimbursements. To the extent Medicaid reimbursements are reduced the
Company's revenues 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.
2. The Company's expansion strategy is contingent upon obtaining
additional financing. As such, if the Company were unable to obtain such
financing, it may fail to achieve all or part of its expansion strategy. The
Company believes its expansion strategy would be sufficiently funded if Arbor
exercises its option in full and injects $1.3 million of equity into the
Company. If the capital required to fund the Company's expansion strategy
does not come from Arbor through its exercise of its option in full, the
Company will seek alternative financing to fund its expansion strategy.
Item 2. Description of Property
-----------------------
The Company's corporate office is located in Carle Place, New York. The
lease expires on November 30, 2000. The Company leases 2,060 gross square
feet at an annual rental of $39,140, with annual escalations of 12%.
TPC's New York branch is located in Hempstead, New York. The space
consists of 1,688 square feet for a rental period expiring on July 31, 2000 at
an annual rental of $20,286.
TPC operates two branch offices and three satellite offices in New
Jersey.
The East Orange, New Jersey branch office occupies approximately 2,250
square feet. The lease term runs from March 1, 1996 through February 28, 2001
at an annual rental of $29,400.
The Hackensack, New Jersey branch office occupies approximately 2,000
square feet at an annual rental of $27,600, pursuant to a lease that expires
on February 28, 2000.
The Clifton, New Jersey office will be a satellite office of the
Hackensack branch office. Additionally, the Clifton location will serve as
the New Jersey
<PAGE>
Regional Office. This location occupies approximately 3,500
square feet with an annual rental of $61,250. The lease term expires January
31, 2006. The Patterson, New Jersey satellite office will move to the Clifton
Regional Office on or about April 15, 1996. The present Paterson, New Jersey
office is a satellite office of the Hackensack branch office. TPC occupies
approximately 500 square feet at an annual rental of $6,000. The lease is on
a year by year basis with a thirty day termination clause.
The Jersey City, New Jersey office is a satellite office of the
Hackensack branch office consisting of approximately 1,500 square feet. The
term of the lease is from July 1, 1995 through June 30, 2000. The minimum
rental is $15,600 per year with an annual increase of 4%.
The Elizabeth, New Jersey office which opened on March 1, 1996, is a
satellite office of the East Orange branch office. This office occupies
approximately 1,150 square feet and has an annual rental is $13,464. The
lease expires on February 28, 1999.
Item 3. Legal Proceedings
-----------------
In October 1992, Telford Home Assistance, Inc., d/b/a Extended Care
("Telford"), brought an action in New York State Supreme Court (the "Supreme
Court") against TPC, alleging corporate name infringement. Telford is a home
health care provider located in Suffolk County, New York. The suit alleged
that TPC, d/b/a Extended Family Care infringed upon the name, Extended Care,
and had hurt Telford's business relationships with common clients. In
September 1994, the Supreme Court entered a summary judgment in favor of
Telford. TPC appealed this judgement and in January 1995 won an unanimous
reversal by the Supreme Court, Appellate Division, Second Department, which
dismissed the action and awarded TPC reimbursement of legal costs. Telford
moved to appeal this decision to the New York Court of Appeals, which motion
was denied in May 1995.
Bankruptcy Proceedings
- ----------------------
In 1986 the Company and TPC filed for protection from its creditors
under Chapter 11 of the U.S. Bankruptcy Code in the Southern District, New
York. An Amended Joint Plan of Reorganization (the "Plan") dated February 5,
1992 was filed for both the Company and TPC. The Plan was approved on March
23, 1992. Shareholders of the Company prior to the bankruptcy filing retained
ownership of their shares.
There were seven classes of creditors. Some creditors withdrew their
claims, some received cash or negotiated extended payment terms, and some were
<PAGE>
offered an option of receiving cash or newly issued common stock. The latter
group of creditors received 1,388,959 shares of newly issued common stock in
exchange for their claims.
As noted above, COSS received 12,749,658 shares of newly issued common
stock, representing 66 percent of the Company's outstanding common stock for a
$250,000 cash investment.
A Final Decree was entered on January 13, 1995 confirming that the Plan
has been consummated permitting the Company and TPC to emerge from bankruptcy
proceedings.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
(a) Market Information
------------------
The Common Stock of the Company has traded in the over-the-counter
market since November 1980. Prices for the Company's common stock are quoted
in the "pink sheets".
The high and low bid quotations for the common stock for each quarter of
1994 and 1995 are shown below. These quotations were supplied by National
Quotation Bureau, Inc., located in Cedar Grove, New Jersey. The prices
reported reflect inter-dealer quotations that may not represent actual
transactions and do not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
Bid Prices ($)
1995 High Low
---- --------------------
<S> <C> <C>
First Quarter $.125 $.031
Second Quarter .250 .063
Third Quarter .250 .063
Fourth Quarter .375 .063
Bid Prices ($)
1994 High Low
---- --------------------
First Quarter $.125 $.031
Second Quarter .094 .031
Third Quarter .100 .031
Fourth Quarter .100 .020
</TABLE>
(b) Holders
------
There are 1,295 holders of record of the Company's common stock as of
March 20, 1996.
(c) Dividends
---------
The Company has not paid dividends in the past ten years. The Company's
policy is to retain earnings in the Company to provide for future growth and,
<PAGE>
therefore, it is not anticipated that the Company will pay dividends in the
foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
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 audited consolidated
financial statements and related notes contained elsewhere in this filing.
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.
Industry Information
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20
percent for this industry sector. Primary reasons cited for such rapid
growth include: (1) the general aging of the United States' population; (2)
the substantial cost savings achievable through at-home treatment as an
alternative to hospital care; (3) medical and technological advances which
enable a growing number of treatments to be administered at home rather than
in a medical facility; and (4) Insurance (both government regulated and
private) reimbursement policies which provide certain incentives to minimize
the length of in-patient hospital care. The Company believes that the factors
above will continue to contribute to steady growth for the home care industry.
The Company is aware of discussions in New York and New Jersey at the
executive and legislative branches of government, concerning a possible
reduction of Medicaid reimbursement rates. The Company does not know if any
such reduction will occur, or if it were to occur, the extent of the
reduction, and therefore does not know if there would be a material adverse
effect on the Company's financial condition as a result of any such reduction.
[See "Forward Looking Statements - Cautionary Factors"]
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
<PAGE>
Net Patient Service Revenue: Net patient service revenue increased $2,757,768
or 60% to $7,367,958 for the year ended December 31, 1995 from $4,610,190 for
the year ended December 31, 1994. The addition of two new branches in 1995
increased net patient service revenue by $1,149,408 or 25%. The balance of the
increase in net patient service revenue resulted from an increase in the
remaining branches' net patient service revenue of $1,608,360 or 35% from 1994
to 1995, due to a general upward trend in the Home Care business, and
aggressive recruiting and marketing programs that enabled the Company to
increase its referral sources and number of cases serviced.
Cost of Services: Cost of services increased $1,805,292 or 62% to $4,706,196
for 1995 from $2,900,904 for 1994. The increase in cost of services is
primarily due to increases in field staff payroll cost resulting from a 60%
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 $467,938 or 28% to $2,128,432 for 1995 from
$1,660,494 for 1994. This increase reflects higher administrative salaries,
marketing and facility expenses associated with the additional branch
locations and the increase in case volume. Selling, general and
administrative expenses as a percentage of net revenues decreased to 29% in
1995 from 36% in 1994, which was primarily attributable to fixed overhead
being absorbed by the increase in net patient service revenue.
Provision For Income taxes: Provision for income taxes increased $173,000 or
481% to $209,000 for the year ended December 31, 1995 from $36,000 for the
year ended December 31, 1994. The increase is primarily due to a $420,926 or
420% increase in pre-tax income (adjusted for permanent taxable differences)
and partially due to an increase in the Company's effective tax rate from 1994
to 1995.
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
<PAGE>
to its personnel at the time they render services, while it receives payments
for services rendered over an extended period of time (30 to 90 days). At
December 31, 1995 and December 31, 1994, the Company's accounts receivable
balances were $895,131 and $803,664, respectively. During 1995 and 1994,
TPC's days sales in accounts receivable was approximately 49 and 61 days,
respectively.
At December 31, 1995, the Company had working capital of $285,828.
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.
In 1995 and 1994, the Company generated cash from operating activities
of $555,433 and $39,713 respectively. The change in cash generated from
operating activities in 1995 was a result of increased revenues and
profitability and a faster collection of accounts receivable.
During 1995 the Company invested $57,373 in property and equipment
primarily for purchases of computers, telecommunication equipment, and
furniture and equipment associated with the Company's two new branch
locations.
In 1995, the Company used cash to pay down $83,687 in various loan and
capital lease obligations. In 1994, the Company had net borrowings of $41,949
from various parties.
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"), the Company expects its future capital needs to increase. Should
Arbor exercise its option in full to purchase common stock of the Company in
1996 (See "Certain Relationships and Related Transactions") 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. [See "Forward
Looking Statements - Cautionary Factors"]
Item 7. Financial Statements.
--------------------
The Company's financial statements and schedules appear at the end of this
Report.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
Effective February 19, 1996, the Company dismissed Rose, Michlin, Karpf
& Co. ("Rose, Michlin") as its independent auditor for the audit of its
financial statements. The new independent auditor to be engaged by the
Company to audit the Company's financial statements, effective February 19,
1996, is Carpenter & Onorato, P.C.
Rose, Michlin did not complete the audit of the Company's financial
statements for the two most recent fiscal years 1994 and 1995. However,
during these years there were no disagreements with Rose, Michlin on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure. Further, the Company was not advised by Rose,
Michlin during this period of the existence of any of the events described in
Item 304(a)(1)(B) of Regulation S-B.
The decision to change accountants was recommended and approved by the
Board of Directors.
During the Company's two most recent fiscal years and to the present,
there were no issues, as such are defined in Item 304(a)(2) of Regulation S-B
that were consulted upon with the newly appointed accountant to the Company or
Rose, Michlin.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
-------------------------------------------------------------
The directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mary Ann Page 54 Acting Chief Executive
Officer/Vice-President/
Director/Director Nominee
Patricia Cantalupo 36 Vice-President/Director
Peter P. Jackson 45 Former Chief Executive
Officer of TPC
Paul Elenio 28 Vice President,
Controller
Robert Kohlmeyer 41 Secretary,
Treasurer/Director
Steven Gorenstein 52 Former President,
Chief Executive Officer
and Director
Joseph Martello 40 Director Nominee
Joseph Heller 32 Director Nominee
</TABLE>
Mary Ann Page
Acting Chief Executive Officer since January 1996; Vice
President and Director of the Company since June 1994. Ms. Page
is also President and a Director of TPC Home Care Services, Inc.,
the Company's majority-owned subsidiary ("TPC"). From 1991 to
1993, Ms Page held the position of Director of Training for
Health Force, a national home health care agency, where she was
responsible for training new franchisees in all aspects of home
care personnel services. From 1988 to 1991, she held the
position of Director of Franchising for Winston Franchising Corp.
Ms. Page is expected to stand for reelection as a director at the
Company's Annual Meeting (the "Meeting").
Patricia Cantalupo
Vice President and Director since 1992. Dr. Cantalupo is
also a Vice President and Secretary of TPC. Dr. Cantalupo has
been the principal owner of Cantalupo Chiropractic Associates, a
full service multi-disciplinary Chiropractic Health Care
Facility, since 1985. Dr. Cantalupo is not expected to stand for
reelection at the Meeting.
<PAGE>
Peter Jackson
Managing Director of Business Development since January 1996. Mr.
Jackson was Chief Executive Officer of TPC from July 1993 to December 1995.
From 1975 to 1984 Mr. Jackson was President of International Real Estate
Computer Company, a software development company for real estate advisory and
appraisal services. From 1972 to 1992 Mr. Jackson was President of Jackson
Associates, a national commercial real estate appraisal firm which also
specialized in nursing home cost evaluation for medical reimbursement rates.
Paul Elenio
Vice President and Controller of the Company since January
1996. From 1993 to 1995 Mr. Elenio held the position of
Financial Reporting and Tax Supervisor for BankAmerica Mortgage,
FSB, formally Arbor National Mortgage, Inc., a mortgage banking
company which originated, sold and serviced residential and
al mortgages. From 1991 to 1993, Mr. Elenio held the
position of Senior Accountant for Arbor National Mortgage, Inc.
Robert Kohlmeyer
Secretary, Treasurer and Director of the Company since 1992.
Mr. Kohlmeyer is also Secretary/Treasurer and Director of TPC.
Mr. Kohlmeyer has been President and Chief Operating Officer of
CRK Contracting, a regional large scale electrical contracting
company, since 1987. Mr. Kohlmeyer is not expected to stand for
reelection as a director at the Meeting.
Steve Gorenstein
President, Chief Executive Officer and Director of the
Company since 1992. Mr. Gorenstein resigned as an officer and
director in January 1996. From 1991 to present, Mr. Gorenstein
has been President of Career Placements, Inc., a temporary
employment agency.
Joseph Martello
From August 1995 to present Mr. Martello has been Senior
Vice President and Chief Financial Officer of Arbor Home
Healthcare Holding, LLC, a holding company which holds the option
to purchase up to 13,000,000 shares of the Company's Common
<PAGE>
Stock. See "Certain Relationships and Related Transactions." Mr.
Martello, from 1993 to the present, has been Senior Vice
President and Chief Financial Officer of Arbor National
Commercial Mortgage, LLC (and its predecessor), a nationwide
provider of debt and equity financing to multifamily borrowers.
From August 1995 to present, Mr. Martello has been Senior Vice
President and Chief Financial Officer of Arbor Management, LLC, a
company which is active in the marketing, financing and
management of growth oriented businesses. See "Certain
Relationships and Related Transactions." From 1990 to 1995, Mr.
Martello was Senior Vice President and Chief Financial Officer of
Arbor National Mortgage, Inc. (and its successor), a mortgage
banking company which originated, sold and serviced residential
mortgages. In 1995 Arbor National Mortgage, Inc. was sold to
BankAmerica Mortgage, FSB. From 1979 to 1990, Mr. Martello was a
Senior Manager for Ernst & Young, LLP, an international
accounting and consulting firm. Mr. Martello is a Certified
Public Accountant. Mr. Martello is expected to be a nominee for
election as a director for the first time at the Meeting.
Joseph Heller
From August 1995 to the present, Mr. Heller has been a Vice
President of Arbor Home Healthcare Holding, LLC. From June 1995
to the present, Mr. Heller has also been Vice President of
Corporate Planning for Arbor Management, LLC. From 1991 to May
1995, Mr. Heller has held the positions of Vice President of
Financial Analysis and Budgeting and Director of Shareholder
Relations for Arbor National Mortgage, Inc. and its successor.
From 1990 to 1991, Mr. Heller was an Acquisition Associate for
WinStar Services, Inc., a merchant and investment banking firm.
From 1987 to 1990, Mr. Heller was a Senior Analyst for Morgan
Stanley & Co., a leading investment banking firm, and from 1985
to 1987, Mr. Heller was a Senior Accountant for Ernst & Young,
LLP, an international accounting and consulting firm. Mr. Heller
is a Certified Public Accountant; in 1991, he received a Masters
degree in Business Administration from Fordham University. Mr.
Heller is expected to be a nominee for director for the first
time at the Meeting.
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file initial
reports of ownership and reports of changes in ownership with the Securities
and Exchange Commission ("SEC"). Such persons are required by SEC regulation
to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received by it
with respect to fiscal 1995, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of a registered class of
the Company's equity securities have been timely complied with, except that
COSS, Steven Gorenstein, Mary Ann Page, Patricia Cantalupo, Robert Kohlmeyer,
Peter Jackson and Paul Elenio failed to timely file a Form 3 - Initial
Statement of Beneficial Ownership. Paul Elenio has since filed his Form 3.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
(a) (b) (c) (d) (e)
Name and
Principal Other
Position Year Salary($) Bonus($) Compensation($)
_________ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Steve Gorenstein 1995 $0 $0 $0
Chief Executive Officer 1994 $0 $0 $0
President and Director 1993 $0 $0 $0
Mary Ann Page 1995 $82,210 $6,250 $
Acting Chief Executive 1994 $66,221 $0 $
Officer 1993 $ 9,231 $0 $
</TABLE>
No officer of the Company received compensation in excess of
$100,000. Members of the Board of Directors received no
compensation of any kind for services provided as a director.
There are no employment agreements with any officer or
director of the Company or its subsidiaries.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of certain beneficial owners.
The following sets forth the holdings of any person known by
the issuer to be the beneficial owner of more than five percent
of the Company's Common Stock:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Title of Class Beneficial Owner Ownership Class
_____________ ___________________ ________________ __________
<S> <C> <C> <C>
Common Stock COSS Holding Corp. 12,749,658 66.1
1 Old Country Road
Suite 500
Carle Place, NY. 11514
<PAGE>
Common Stock Arbor Home Healthcare 25,749,658 (1) 79.7
Holding, LLC
333 Earle Ovington Blvd.
Uniondale, NY. 11553
Common Stock Ivan Kaufman 25,749,658 (1)(2) 79.7
c/o Arbor Home
Healthcare Holding, LLC
333 Earle Ovington Blvd.
Uniondale, NY. 11553
_______________________________________
</TABLE>
<PAGE>
(1) Includes and gives effect to the exercise in full of options
held by Arbor to purchase up to 13 million newly issued
shares from the Company. Includes voting power over
12,749,658 shares owned by COSS Holding Corp. pursuant to a
voting trust. (See "Certain Relationships and Related
Transactions").
(2) Ivan Kaufman owns a 99 percent interest in Arbor Home
Healthcare Holding LLC. and is its controlling member.
(b) Security Ownership of Management.
The following sets forth the holdings of all of the
Company's directors, executive officers and director nominees, as
well as all directors and officers as a group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
______________ ___________________ _________________ _________
<S> <C> <C> <C>
Common Stock Steven Gorenstein 0 0
16 Barrington Place
Dix Hills, NY 11747
Common Stock Robert Kohlmeyer (1) 0 0
86 Hilltop Drive
Smithtown, NY 11787
Common Stock Mary Ann Page 0 0
c/o Cosmetic Sciences, Inc.
1 Old Country Road
Carle Place, NY 11514
Common Stock Patricia Cantalupo 0 0
50 Harvard Drive
Westbury, NY 11590
Common Stock Peter P. Jackson 110,000 (1) *
c/o Cosmetic Sciences, Inc.
1 Old Country Road
Carle Place, NY 11514
Common Stock Paul Elenio 0 0
c/o Cosmetic Sciences, Inc.
1 Old Country Road
Carle Place, NY 11514
<PAGE>
Common Stock Joseph Martello 0 0
c/o Arbor Management, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
<PAGE>
Common Stock Joseph Heller 0 0
c/o Arbor Management, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
Common Stock All directors and
executive officers
as a group 110,000 *
_____________________________________
*Less than 1%
</TABLE>
(1) Owned by son Steven Jackson. Peter Jackson disclaims
beneficial ownership of these shares.
(c) Changes in control
COSS has agreed to place all of its 12,749,658 shares of the
Company's Common Stock (the "COSS Shares"), representing
approximately 66 percent of the currently outstanding Company
Common Stock, in a voting trust. Arbor will have the right under
this voting trust to direct the voting of all of the COSS Shares
and to nominate a majority of the Company's Board of Directors.
(See "Certain Relationships and Related Transactions".)
In addition, pursuant to a certain Amended and Restated
Option Agreement (the "Option Agreement"), dated as of October
31, 1995, by and among Arbor, COSS, COSS' shareholders, the
Company, and TPC, Arbor acquired from the Company an option to
purchase up to 13 million newly issued shares of the Company's
Common Stock, which would constitute 40 percent of the Company's
outstanding Common Stock if exercised in full. Should this option
be exercised in full, Arbor will have beneficial ownership and
voting rights as to 79.7 percent of the outstanding Common Stock
of the Company, due to the exercise of this option in full and
voting control over the Coss Shares. (See "Certain Relationships
and Related Transactions".)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a certain Amended and Restated Option Agreement
(the "Option Agreement"), dated as of October 31, 1995, by and
among Arbor, COSS, COSS' shareholders, the Company, and TPC,
Arbor acquired from the Company an option to purchase up to 13
million shares of the Company's Common Stock as follows: (a)
Arbor has an irrevocable option (the "First Option") to purchase,
by June 21, 1996, 6.5 million shares of the Company's Common
Stock at an exercise price of $.10 per share; (b) subject to
Arbor's timely exercise of the First Option, Arbor will be given
the option (the "Second Option") to purchase, by November 1,
1996, up to an additional 6.5 million shares of the Company's
Common Stock at an exercise price of $.10 per share. The First
and Second Options are subject to adjustment in the event of
stock splits and similar events.
<PAGE>
COSS has agreed to place all of the Coss Shares representing
approximately 66 percent of the currently outstanding Company
Common Stock, in a voting trust. Arbor will have the right under
this voting trust to direct the voting of all of the COSS Shares
and to nominate a majority of the Company's Board of Directors.
In addition, under certain circumstances, the trustee of the
voting trust is required to observe certain restrictions in the
event COSS wishes to effect a sale, transfer or encumbrance of
the COSS Shares. COSS will retain all economic rights in the
COSS Shares, including, but not limited to, its right to
dividends. The Option Agreement also provides for various
negative covenants in favor of Arbor with respect to actions that
may be taken by COSS, its shareholders, the Company and TPC.
Pursuant to a Registration Rights and Conditional Put Option
Agreement (the "Registration Rights Agreement"), dated as of
October 31, 1995, between COSS and the Company, the Company has
agreed to register the COSS Shares for resale under the
Securities Act of 1933, as amended (the "Securities Act"), upon
the written demand of COSS made at any time commencing one year
after the date on which the Company's Common Stock is listed on
the Nasdaq Stock Market (whether as a SmallCap Market security or
a National Market System security, or any equivalent or successor
of the foregoing). Pursuant to the Registration Rights
Agreement, the Company will be obligated to file up to three
registration statements, with one-third of the COSS Shares
(subject to certain adjustments) to be registered in each year of
such three year period. Notwithstanding the foregoing, the
Company has the right to reject the demand by COSS, following
which COSS may require that the Company redeem the COSS Shares at
a price equal to 75 percent of the average bid price in effect
during the thirty trading days prior to the demand for
registration. Upon the Company's rejection of the demand, COSS,
at its option, may sell the COSS Shares to a party other than the
Company, subject to the Company's right of first refusal on such
sale. Arbor has the right to purchase the COSS Shares in lieu of
the Company on the same terms and conditions granted the Company
as described the two preceding sentences. In addition, COSS has
been granted certain registration rights in the event the Company
shall register any shares for sale under the Securities Act.
On October 31, 1995, the Company entered into a two year
Financial Services Agreement with Arbor Management LLC ("Arbor
Mgt."). This Agreement requires Arbor Mgt. to provide consulting
services in the areas of finance, information systems, accounting
and marketing. Arbor Mgt. receives a fee of $7,500 per month for
these services. This agreement is subject to early termination
if Arbor Health's First Option is not exercised or upon the
listing of the Company's Common Stock on the NASDAQ Stock Market.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Item 13. Exhibits and Reports on Form 8-K.
---------------------------------
(b) Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 31, 1995 in
connection with the granting of Arbor an option to purchase 13 million shares of
the Company's common stock. Item 1. Changes in Control and Item 7. Financial
Statements and Exhibits were reported in this Report. No financial statements
were filed with this Report.
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Consolidated Financial Statements
Years Ended December 31, 1995 and 1994
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COSMETIC SCIENCES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report F - 2
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1994 F - 3
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 F - 4
Consolidated Statements of Shareholder's Equity for the
years ended December 31, 1995 and 1994 F - 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 F - 6
Notes to Consolidated Financial Statements F - 7
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
Cosmetic Sciences, Inc.
We have audited the accompanying balance sheets of Cosmetic
Sciences, Inc. and subsidiary, as of December 31, 1995 and 1994 and
the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Cosmetic Sciences, Inc., at December 31, 1995
and 1994 and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Carpenter & Onorato, P.C.
Certified Public Accountants
Garden City, NY 11530
March 8, 1996
F - 2
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
Assets
------
<S> <C> <C>
Current Assets:
Cash $ 511,563 $ 97,190
Accounts receivable, net of allowance
for doubtful accounts of $100,000
and $48,190, respectively (note 2) 895,131 803,664
Prepaid expenses 146,809 72,756
---------- ---------
Total current assets 1,553,503 973,610
Property and equipment, net (note 5) 118,591 38,449
Other assets:
Deferred taxes (note 7) 259,000 468,000
License, net (notes 3 and 6) 515,832 555,511
Other 11,197 7,123
---------- ----------
Total assets $2,458,123 $2,042,693
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 222,677 $ 204,695
Accrued expenses (note 10) 543,974 325,683
Customer deposits 59,146 71,270
Notes payable (note 4) 148,449 218,449
Payroll taxes payable (note 10) 280,584 332,858
Current portion of obligations under
capital leases 12,845 -
--------- ---------
Total current liabilities 1,267,675 1,152,955
--------- ---------
Non-current liabilities:
Long-term debt (note 4) 54,500 62,000
Obligations under capital leases 40,010 -
--------- ---------
Total non-current liabilities 94,510 62,000
--------- ---------
Total liabilities 1,362,185 1,214,955
---------- ---------
Commitments and contingencies (notes 8, 9, and 10)
Minority interest in subsidiary 140,008 93,610
--------- ---------
Shareholders' equity (notes 6 and 7)
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 (deficit) 122,580 (99,222)
-------- ----------
Total shareholders' equity 955,930 734,128
-------- ----------
Total liabilities and shareholders' equity $2,458,123 $2,042,693
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net patient service revenue (note 2) $ 7,367,958 $4,610,190
----------- ----------
Cost of services:
Salaries 4,058,749 2,495,237
Payroll taxes and other 647,447 405,667
----------- ----------
Total cost of services 4,706,196 2,900,904
----------- ----------
Gross profit 2,661,762 1,709,286
Selling, general and administrative expenses 2,128,432 1,660,494
----------- ---------
Provision for doubtful accounts 51,810 48,190
----------- ---------
Income from operations 481,520 602
Interest expense 4,320 21,072
------------ ---------
Income (loss) before provision for income
taxes and minority interest 477,200 (20,470)
Provision for income taxes, income tax
equivalent provision (note 7) 209,000 36,000
------------ --------
Net income (loss) before minority interest 268,200 (56,470)
Minority interest in subsidiary net income (loss) 46,398 (8,889)
------------ --------
Net income (loss) $ 221,802 $ (47,581)
=========== ===========
Primary earnings (loss) per share $ 0.0107 $ (0.0025)
============ ===========
Fully diluted earnings per share $ 0.0105 $ -
============ ===========
Weighted average number of shares outstanding:
Primary $20,823,555 $19,300,229
============ ============
Fully diluted $21,033,562 -
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
Earnings Shareholders'
Shares Amount Paid-in capital (Deficit) Equity
-------------------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1993 $ 19,300,229 $ 194,506 $ 220,524 $ (51,641) $ 363,389
Benefit of
utilization of
net operating
loss carryforward - - 418,320 - 418,320
Net loss - - - (47,581) (47,581)
------------ --------- ---------- ---------- ----------
December 31, 1994 19,300,229 194,506 638,844 (99,222) 734,128
Net income - - - 221,802 221,802
----------- --------- --------- ---------- ----------
December 31, 1995 $ 19,300,229 $ 194,506 $ 638,844 $122,580 $ 955,930
============ ========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
Cash flows from operating activities:
- ------------------------------------
<S> <C> <C>
Net income (loss) $ 221,802 $ (47,581)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Allowance for doubtful accounts 51,810 48,190
Depreciation and amortization 36,273 20,051
Amortization of intangible assets 39,679 39,679
Provision for income taxes, income tax equivalent provision 209,000 36,000
Minority interest in subsidiary income (loss) 46,398 (8,889)
Change in operating assets and liabilities:
(Increase) in assets:
Accounts receivable (143,276) (284,988)
Prepaid expenses (74,053) (10,945)
Security deposits (4,074) (2,700)
Increase (decrease) in liabilities:
Accounts payable 17,982 21,008
Accrued expenses 218,290 140,927
Customer deposits (12,124) 20,919
Payroll taxes payable (52,274) 68,042
------------ ----------
Net cash provided by operating activities 555,433 39,713
------------ -----------
Cash flow from investing activity:
- ----------------------------------
Purchase of property and equipment (57,373) (9,464)
------------ ---------
Net cash (used in) investing activity (57,373) (9,464)
------------ ---------
Cash flow from financing activity:
- ----------------------------------
Loans from affiliates - 61,949
Payment of obligations under capital leases (6,187) -
Repayment of loans (77,500) (20,000)
------------ ---------
Net cash (used in) provided by financing activities (83,687) 41,949
------------ ---------
Net increase in cash 414,373 72,198
Cash at beginning of year 97,190 24,992
------------ ---------
Cash at end of year $ 511,563 $ 97,190
============ ============
Supplemental disclosures:
Equipment acquired under capital lease obligation $ 59,042 $ -
============ ============
Cash paid during the year for:
Interest $ 5,825 $ 3,312
============ ============
Income taxes $ 654 $ 479
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995
(1) Significant Accounting Policies
- -------------------------------------
(a) Description of Business
-------------------------
Cosmetic Sciences, Inc. (C.S.I.) or (the Company), is primarily engaged
in the business of providing health care services in the home through its 83%
majority owned subsidiary, T.P.C. Home Care Services, Inc. (T.P.C.). C.S.I.
is the holding company for T.P.C.
T.P.C. is a licensed home care provider servicing patients since 1980.
T.P.C. has offices in New York and New Jersey, providing twenty four hour
home care services.
On August 5, 1986, T.P.C. and its parent, C.S.I., filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code. On
March 23, 1992, this plan of reorganization was confirmed by the United
States Bankruptcy Court. On January 13, 1995, the bankruptcy court issued a
final decree.
As part of the plan of reorganization, on October 8, 1993, per an agreement
between C.O.S.S. Holding Corp. (C.O.S.S.), an investor group, and C.S.I.
dated March 23, 1992, C.S.I. issued 12,749,658 shares of stock to C.O.S.S.
for $250,000 in cash which resulted in C.O.S.S. owning a 66% interest in
C.S.I. Also, unsecured creditors were given the option to receive a pro rata
share of C.S.I.'s common stock or 12% of the allowed amount of their
respective claims. This option resulted in C.S.I. issuing 1,388,959 shares
of common stock to the unsecured creditors.
On October 31, 1995, C.S.I. entered into an agreement with Arbor Home
Healthcare Holdings, LLC (Arbor) (in which Ivan Kaufman owns a 99% interest),
by which C.S.I. granted Arbor the irrevocable option for C.S.I. to issue
13,000,000 shares of C.S.I. stock to Arbor at $.10 per share. This option
agreement can be exercised by Arbor in two equal stock issuances of 6.5
million shares on or before June 21, 1996 and November 1, 1996, respectively.
Upon exercising such option, Arbor will own approximately a 40% interest in
C.S.I. In addition, per the agreement, C.O.S.S. has placed all of its
12,749,658 shares of C.S.I. common stock in a voting trust. Arbor has the
right to direct the voting of all of the C.O.S.S. shares and to nominate a
majority of the C.S.I. Board.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of C.S.I.
and its majority owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(Continued)
F - 7
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(c) Revenue Recognition and Allowance for Doubtful Accounts
-------------------------------------------------------
Net patient service revenue is recorded at the Company's reimbursement
rates or contracted rates. Such revenue is received from patients, third
party payors and others for services rendered. A significant portion of the
Company's revenue is received from third-party payors (i.e. Medicaid) and is
subject to audit and adjustment by those payors. A provision for doubtful
accounts is made for accounts receivable estimated to be uncollectible; which
is based upon management's evaluation of relevant facts that effect the
collectibility of accounts receivable.
(d) Property and Equipment
----------------------
Property and equipment are recorded at cost. The carrying amount of
the assets and related accumulated depreciation and amortization are removed
from the accounts when such assets are disposed of and the resulting gain or
loss is included in operations. Depreciation and amortization of equipment
and leasehold improvements are computed using the declining balance method
for the following useful lives of the assets:
Furniture and fixtures 5 - 7 years
Equipment 5 years
Leasehold improvements lesser of the useful life of the
asset or the remaining lease period.
(e) Post-retirement Health Care and Life Insurance Benefits
-------------------------------------------------------
The Company does not provide post-retirement benefits for its
employees.
(f) Income Taxes
------------
In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires recognition
of deferred tax liabilities and assets for the future tax consequences
attributable to temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities at statutory rates
expected to be in effect when such amounts are realized or settled. The
effects of statutory tax law or rate changes are reflected in income in the
period of enactment.
(g) Net Income (Loss) per Common Share
----------------------------------
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common stock and common stock
equivalents outstanding
(Continued)
F - 8
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
during each period. Common stock equivalents represent the dilutive
effect of the assumed exercise of certain outstanding stock options.
(2) Concentration of Segment Risk
-----------------------------
T.P.C. provides temporary health care personnel to in-home patients in New
York and New Jersey. T.P.C. grants credit to its patients who are insured
under third-party payor agreements. Deposits are required for all private
business. The mix of accounts receivable from private and third-party payors
at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Medicaid 62% 52%
Insurance 2 14
Other third-party payors 29 23
Private 7 11
---- ----
100% 100%
==== ====
</TABLE>
Historically, credit losses relating to customers have not been significant
and have been within management's expectations.
(3) Intangible Assets
-----------------
Intangible assets at December 31 are as follows:
<TABLE>
1995 1994
---- ----
<S> <C> <C>
License $595,190 $595,190
less accumulated amortization 79,358 39,679
-------- --------
$515,832 $555,511
======== ========
</TABLE>
The value of the above license was derived from the valuation of the
entity's assets as part of its "Fresh Start Reporting" (see note 6).
(Continued)
F - 9
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Notes Payable and Long-Term Debt
--------------------------------
Notes payable and long-term debt consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable - Bank due on demand.
$30,000 was paid in 1995 as full and
complete satisfaction of the original
$50,000 debt. $ - $ 50,000
Note payable, non-interest bearing,
payable in monthly installments of
$1,500 with a final balloon payment
of $26,000 due in August, 1998.
Interest on this note was not imputed
as the Company considers the amount to
be immaterial. 72,500 80,000
Notes payable, non-interest bearing and
payable on demand. 80,000 80,000
Due to Affiliated Parties (see note 8). 50,449 70,449
--------- ---------
Notes payable and long-term debt 202,949 280,449
Less current portion 148,449 218,449
---------- ---------
Long-term debt $ 54,500 $ 62,000
========== =========
</TABLE>
(5) Property and Equipment
----------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture and fixtures $ 18,751 $ 15,723
Machinery and equipment 167,108 112,763
Leasehold improvements 7,039 7,039
Equipment held under capital leases 59,042 -
--------- ---------
251,940 135,525
less accumulated depreciation
and amortization 133,349 97,076
--------- ---------
$118,591 $ 38,449
========= =========
</TABLE>
(Continued)
F - 10
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Fresh Start Reporting
---------------------
On October 8, 1993, the Company, pursuant to the plan of reorganization, issued
stock to C.O.S.S. in exchange for $250,000 and also issued stock to the
unsecured creditors (see note 1). Accordingly, the Company implemented
Statement of Position (SOP) 90-7, " Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." SOP 90-7 is applicable
because pre-reorganization shareholders received less than 50% of the Company's
new common stock and the reorganization value of the assets of the reorganized
Company is less than the total of all post-petition liabilities and allowed
claims.
SOP 90-7 requires an allocation of the reorganization value to the entity's
assets. The Company's reorganization value was determined to be $838,204. Such
reorganization value was first allocated to existing tangible assets (primarily
cash and accounts receivable) at book value and next to Home Health Care
Licenses (primarily state accreditation's and government agency contracts). The
reorganization value of its assets was determined by valuing the Company's
equity at the confirmation date (March 23, 1992), at fair value, and
adding post reorganization liabilities (valued at present value which
approximated fair value) on this date as reflected in the bankruptcy files.
The fair value of the Company's equity at the confirmation date was based on the
average consideration received by the Company for the stock issued to C.O.S.S.
and the unsecured creditors. Included in the reorganization value is the value
for the Company's Home Health Care Licenses of $595,190. This asset is
amortized by the straight line method over 15 years. Amortization expense for
each year equals $39,679 and is included in selling, general and administrative
expenses. The Company based the fifteen year amortization period on the
nature of the licenses, the Company's historical experience with the licenses
and management's estimate of the future term of the licenses. These licenses are
subject to periodic audits by various state agencies. In general, material non
compliance with state guidelines could result in a termination of the
licenses. However, the Company has been awarded the licenses over the
past ten years and is in compliance with all state guidelines as of December 31,
1995 and 1994, respectively.
Adopting "Fresh Start Reporting" resulted in the Company financial statements
being prepared on the basis that a new reporting entity was created. Assets and
liabilities were recorded at their estimated fair values and the Company's
accumulated deficit was eliminated.
Obligations aggregating $688,090 were discharged pursuant to the plan of
reorganization in 1992.
The effect of all "Fresh Start Reporting" adjustments resulted in income of
$595,190 which should have been reflected in the Statement of Operations for the
nine month period ended September 30, 1993. The accumulated deficit of
$2,343,097 at October 8, 1993 was reclassified to additional paid-in capital.
(7) Income Taxes
------------
"Fresh Start Reporting" requires the Company to report an income tax equivalent
provision when there is book taxable income and a pre-reorganization net
operating loss carryforward. This requirement applies despite the fact that the
Company's pre-reorganization net operating loss carryforward would eliminate (or
reduce) the related income tax payable. Therefore, the current
and future year benefit related to the carryforward is not reflected in net
loss, but instead is recorded as a direct increase to
additional-paid-in-capital.
(Continued)
F - 11
<PAGE>
COSMETIC SCIENCES INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
During the year ended December 31, 1994, the income tax equivalent
provision and the associated increase in additional paid-in-capital amounted to
$36,000 and $418,320, respectively. The income tax equivalent provision does
not effect the Company's income tax liability.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current
Federal $ - $ -
State - -
Income tax equivalent provision - 36,000
-------- --------
$ - $36,000
-------- --------
Deferred
Federal $160,500 $ -
State 48,500 -
-------- --------
209,000 -
-------- --------
$209,000 $36,000
======== ========
Deferred tax assets consist of the following:
Pre-reorganization net operating loss
carryforward $221,000 $451,000
Allowance for doubtful accounts 38,000 17,000
-------- --------
Total deferred tax assets $259,000 $468,000
======== ========
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Computed income tax expense (benefit) at 34% $162,000 $(7,000)
Increase in taxes resulting from:
Nondeductible expenses 15,000 35,000
State income taxes, net of federal tax benefit 32,000 7,000
Other - effect of graduated tax rates - 1,000
-------- --------
$209,000 $36,000
======== ========
</TABLE>
At December 31, 1995, the Company has a net operating loss carryforward (NOL) of
approximately $650,000 for tax purposes, expiring beginning with the year 2000
through 2008.
(Continued)
F - 12
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Related Party Transactions
--------------------------
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
C.O.S.S. holds a note which is non-interest
bearing, and payable upon demand. $ 25,449 $ 25,449
An officer of T.P.C. holds a note
which is non-interest bearing, and
payable upon demand. - 15,000
An officer of the Company holds a note
which bears an interest rate of 11% and
is payable upon demand. Annual interest
expense amounted to $3,238 and $3,312,
respectively. 25,000 30,000
--------- ---------
$ 50,449 $ 70,449
========= =========
</TABLE>
The landlord for the Company's corporate office is an officer of C.O.S.S. The
annual rental is $39,140 per year, and shall be increased by 12% over the prior
year's fixed minimum annual rent. The lease expires November 30, 2000.
On October 31, 1995, C.S.I. entered into an agreement with Arbor Management, LLC
(in which Ivan Kaufman owns a 99% interest), for two years by which C.S.I. will
pay $7,500 a month to Arbor Management, LLC for management services, including
accounting, finance, human resources and marketing, rendered to the Company.
(9) Commitments and Contingencies
-----------------------------
T.P.C. conducts its operations from leased office spaces in New York and New
Jersey. These leases expire at various dates through the year 2000. Management
expects that in the normal course of business, these leases will be renewed or
replaced by other leases. Rent expense for the years ended December 31 amounted
to $104,965 and $68,920, respectively.
The Company is also the lessee of machinery and equipment under capital leases
expiring in various years through 2000.
(Continued)
F - 13
<PAGE>
COSMETIC SCIENCES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, future net minimum lease payments under capital and operating
leases are as follows:
<TABLE>
<CAPTION>
1995
----
Capital Operating
------- ---------
<S> <C> <C>
1996 $ 12,845 $ 187,890
1997 12,845 207,671
1998 12,845 208,295
1999 9,722 197,699
2000 4,598 138,960
Thereafter - 326,462
-------- ----------
$ 52,855 $1,266,977
======== ===========
</TABLE>
The gross amount of assets recorded under capital lease obligations was $59,042
at December 31, 1995. Interest on the capital lease obligations was not
imputed as the Company considers the amount to be immaterial.
Since filing its petition for bankruptcy in 1986, the Company has not filed the
reports as required under the Securities Exchange Act of 1934 ("Exchange Act").
The Company last filed a Form 10K for the fiscal period ended December 31,
1985.
During the years in bankruptcy, the Company was unable to gather the financial
and staffing resources to produce audited financial statements and therefore,
has been delinquent in filing such reports. The Company has made an affirmative
commitment to file the reports required under the Exchange Act.
(10) Payroll Taxes Payable
---------------------
Payroll taxes payable includes pre-petition liabilities to various federal
and state governmental agencies in the amount of $221,443. In addition,
included in accrued expenses are penalties and interest incurred for the late
payment of payroll taxes totaling $102,979. The Company has commenced
negotiations with a federal agency to settle those agencies claims. Management
can make no assurances as to the outcome of these negotiations.
F - 14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this amended report 10-KSB/A to be signed on its behalf
by the undersigned, thereunto duly authorized.
(Registrant) COSMETIC SCIENCES, INC.
By: /s/ Paul Elenio
Paul Elenio
Vice President, Controller and
Principal Financial Officer
Date: August 26, 1996
In accordance with 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.
By: /s/ Mary Ann Page Date: August 26, 1996
Mary Ann Page
Acting Chief Executive Officer
and Director
By: /s/ Paul Elenio Date: August 26, 1996
Paul Elenio
Vice President, Controller and
Principal Financial Officer
By: /s/ Patricia Cantalupo Date: August 26, 1996
Patricia Cantalupo
Vice President and
Director
By: /s/ Robert Kohlmeyer Date: August 26, 1996
Robert Kohlmeyer
Secretary, Treasurer
and Director
