===================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 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 Number 0-11781
HOSPITAL STAFFING SERVICES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2150637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6245 North Federal Highway, Suite 400
Fort Lauderdale, Florida 33308-1900
(Address of principal executive offices)
(954) 771 - 0500
Registrant'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 X
___No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,359,770
shares of Common Stock, $.001 par value, outstanding
at September 30, 1996.
==================================
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page(s)
PART I - FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial 6 - 10
Statements
Management's Discussion and Analysis of 11 - 16
Financial Condition and Results of Operations
PART II - OTHER INFORMATION AND SIGNATURES 17 - 19
2
<PAGE>
<TABLE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
--------------- ----------------------------------------------
August 31, November 30, August 31, November 30,
1996 1995 1996 1995
--------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
CURRENT ASSETS: CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 486,327 $ 1,697,804 Accounts payable .............. $ 1,848,562 $ 2,577,470
Short-term investments ................... 12,011 11,620 Line of credit payable (Note 3) 4,885,122 767,115
Trade accounts receivable, ............... Accrued payroll and benefits .. 1,829,232 2,240,404
less allowance for doubtful ............ Accrued expenses .............. 3,065,274 4,224,210
accounts of $677,179
and $599,599, respectively ............. 7,441,537 6,129,371 Income taxes payable .......... 193,043 296,000
Settlements due from Medicare ............ 12,187,497 10,372,741 Capital leases ................ 16,980 7,131
Prepaid expenses ......................... 322,659 418,335 Notes payable ................. 829,324 1,255,130
Amounts due from officers
and directors .......................... 69,064 40,392
Notes receivable ......................... 99,909 --
Current and deferred income
taxes receivable ....................... 436,592 1,149,634
Other .................................... 365,106 344,482
--------------- ------------- -------------- ------------
Total current assets 21,420,702 20,164,379 Total current liabilities 12,667,537 11,367,460
--------------- ------------- -------------- ------------
NON-CURRENT ASSETS: NON-CURRENT LIABILITIES:
Notes payable 444,728 882,965
Capital leases 71,455 45,304
Minority interest in limited
partnership 49,126 -
-------------- --------------
Net property and equipment 852,663 986,592 Total non-current liabilities 565,309 928,269
--------------- ------------- -------------- --------------
-------------- --------------
Total liabilities 13,232,846 12,295,729
-------------- --------------
Intangibles related to businesses COMMITMENTS AND CONTINGENCIES (Notes 3 & 5)
acquired 2,258,028 2,160,016
Non-competition agreements 479,426 479,426 STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
--------------- ------------- authorized 5,000,000 shares;
Total intangibles 2,737,454 2,639,442 none issued or outstanding - -
Less: Accumulated amortization (754,546) (664,418)
--------------- -------------
Net intangibles 1,982,908 1,975,024 Common stock- $.001 par value;
--------------- ------------- authorized 20,000,000 shares;
6,359,770 shares issued and
outstanding; respectively 6,360 6,350
Deposits and other assets 236,964 244,826 Additional paid-in capital 22,452,627 22,428,887
--------------- -------------
Accumulated deficit (11,198,596) (11,360,145)
-------------- --------------
Total non-current assets 3,072,535 3,206,442 Total stockholders' equity 11,260,391 11,075,092
--------------- ------------- -------------- --------------
Total liabilities and
Total assets $24,493,237 $23,370,821 stockholders' equity $24,493,237 $23,370,821
=============== ============= ============== ==============
<FN>
The accompanying notes are an integral part of
these consolidated condensed balance sheets.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
<CAPTION>
Three months ended August 31, Nine months ended August 31,
1996 1995 1996 1995
-------------- -------------- -------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue from services $15,603,347 $13,521,691 $46,077,474 $42,093,599
-------------- -------------- -------------- -------------
Cost of services:
Professional salaries and benefits 7,952,769 7,033,095 23,902,623 21,856,811
Other professional expenses 1,570,642 1,353,056 4,521,664 4,165,138
-------------- -------------- -------------- -------------
Total cost of services 9,523,411 8,386,151 28,424,287 26,021,949
-------------- -------------- -------------- -------------
Gross margin 6,079,936 5,135,540 17,653,187 16,071,650
-------------- -------------- -------------- -------------
Selling, general and administrative expenses:
Salaries and benefits 3,533,239 2,801,983 9,968,272 8,635,336
Legal, severance and other expenses 2,385,564 2,010,493 6,995,565 6,816,006
Total selling, general and
-------------- -------------- -------------- -------------
administrative expenses 5,918,803 4,812,476 16,963,837 15,451,342
-------------- -------------- -------------- -------------
Income from operations 161,133 323,064 689,350 620,308
-------------- -------------- -------------- -------------
Interest and other income (expense):
Interest expense (154,778) (62,951) (389,711) (203,418)
Interest income 31,859 18,670 57,683 52,424
Other income,net 120,887 3,622 196,476 74,381
-------------- -------------- -------------- -------------
Total interest and other income (expense) (2,032) (40,659) (135,552) (76,613)
-------------- -------------- -------------- -------------
Income before provision for income taxes 159,101 282,405 553,798 543,695
Provision for income taxes (17,406) (46,000) (137,295) (122,000)
-------------- -------------- -------------- -------------
Income before extraordinary item 141,695 236,405 416,503 421,695
Extraordinary loss on early extinguishment
of debt (Note 3) - - (254,955) -
-------------- -------------- -------------- -------------
Net income $141,695 $236,405 $161,548 $421,695
============== ============== ============== =============
Income per common share:
Income before extraordinary item $0.02 $0.04 $0.07 $0.07
Extraordinary loss on early extinguishment
of debt - - (0.04) -
-------------- -------------- -------------- -------------
Net income per common share $0.02 $0.04 $0.03 $0.07
============== ============== ============== =============
Weighted average common shares outstanding: 6,356,292 5,780,403 6,351,952 5,780,403
============== ============== ============== =============
<FN>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
For the nine months ended:
August 31, 1996 August 31, 1995
-------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income ........................................................ $ 161,548 $ 421,695
----------- -----------
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization ................................. 590,973 540,950
Severance obligations ......................................... -- 630,000
Extraordinary loss on early extinguishment
of debt (Note 3) ......................................... 99,955 --
Provision for losses on trade accounts receivable ............. 163,590 624,919
Loss on disposal and retirement of intangibles,
property and equipment.................................... -- 4,236
Changes in assets and liabilities:
(Increase) decrease in assets-
Trade accounts receivable ................................. (1,356,136) 262,562
Settlements due from Medicare ............................. (1,630,352) 1,581,311
Prepaid expenses and other current assets ................. 95,673 (105,480)
Amounts due from officers/directors ....................... (43,322) 68,949
Income taxes receivable ................................... 713,043 (178,780)
Deposits and other assets ................................. (397,600) 439,792
Increase (decrease) in liabilities -
Accounts payable .......................................... (749,225) (1,834,230)
Accrued payroll and payroll taxes ......................... (643,783) (253,133)
Accrued expenses and other ................................ (1,710,180) (1,817,818)
Income taxes payable ...................................... (102,957) (256,067)
----------- -----------
Total adjustments ................................................ (4,970,321) (292,789)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ..................... (4,808,773) 128,906
----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net .................... (391) 1,148,729
Capital expenditures .............................................. (177,215) (215,319)
Proceeds from sale of California, New York
and Arizona home health operations ............................ 145,782 --
Purchase of therapy company ....................................... (60,000) --
Notes receivable .................................................. (50,783) --
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ..................... (142,607) 933,410
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Net increases (decreases) on line of credit payable ............... 4,083,630 644,210
Payments under notes payable ...................................... (354,107) (209,805)
Payments under capital leases ..................................... (13,370) --
Exercise of Stock Options ......................................... 23,750 --
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ..................... 3,739,903 434,405
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (1,211,477) 1,496,721
Cash and cash equivalents at beginning of period .................. 1,697,804 516,770
----------- -----------
Cash and cash equivalents at end of period ........................ $ 486,327 $ 2,013,491
=========== ===========
Supplemental Cash Flow Disclosures:
Cash paid: Income Taxes $ 234,077 $ 466,723
Interest $ 387,717 $ 197,651
<FN>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
</FN>
</TABLE>
5
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1996
(Unaudited)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by Hospital Staffing Services, Inc.
and subsidiaries (the "Company") for quarterly financial reporting purposes are
the same as those disclosed in the Company's annual financial statements on Form
10-K. In the opinion of management, the accompanying consolidated condensed
financial statements reflect all adjustments (which consist only of normal
recurring adjustments) necessary for a fair presentation of the information
presented.
The quarterly consolidated condensed financial statements herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company's management
believes the disclosures are adequate to make the information not misleading, it
is suggested that these quarterly consolidated condensed financial statements be
read in conjunction with the audited annual financial statements and footnotes
therein. The results of operations for the three and nine months ended August
31, 1996 are not necessarily indicative of the results to be expected for the
entire fiscal year ending November 30, 1996.
NOTE 2: ACQUISITION AND START-UPS
In March 1996, the Company's Rehabilitation Service Group acquired the
assets and liabilities of a therapy company for an aggregate purchase price of
approximately $60,000 resulting in additions to intangibles of $98,012. In
addition, the Group opened three therapy clinics in Florida and one in Rhode
Island during the third quarter. The Company's primary investments in these
clinics are short term, one year leases.
In August 1996 the Company, through a subsidiary, completed an
agreement to provide billing, accounting and cost reimbursement support services
to a management company in California. Currently the management company has
thirteen homecare agencies under contract.
NOTE 3: DEBT
In February 1996, the Company entered into a two-year $8 million
uncommitted revolving line of credit with a commercial finance company.
The credit facility bears interest at prime plus two percent per annum,
payable monthly, is secured by substantially all assets of the Company and
requires adherence to certain financial
6
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
covenants. Borrowing is based on the Company's eligible accounts receivable as
defined. A portion of the proceeds from this new credit facility was used to
retire the remaining outstanding indebtedness with the Company's prior lender.
The new credit facility includes up to $2.0 million securing a standby
letter of credit required by the insurance carrier for the Company's workers'
compensation coverage. As of August 31, 1996, the Company was contingently
liable for a $1.8 million standby letter of credit issued by its lender
representing a reduction of otherwise available borrowing.
Similar to the prior line of credit, the total borrowing available is
subject to the renewal of certain nursing services contracts in the U.S. Virgin
Islands. Such contracts are in the process of renewal and management is of the
opinion that the full borrowing capacity will be available to the Company.
Additionally, while the interest rate on the new facility is unchanged from the
prior facility, administration fees and charges related to the line of credit
are significantly reduced.
The new line of credit contains a number of covenants, some of which
could affect the Company's operations. The most significant of these covenants
include (i) maintenance of minimum tangible net worth; (ii) timely submission of
monthly, quarterly and annual financial statements; (iii) limitations on
payments to employees or related parties for consulting agreements and in the
case of terminating employees, severance agreements; (iv) restrictions on new
debt, guarantees and the payment of dividends; and (v) approval and/or notice
requirements for acquisitions, mergers, the sale of assets and changes in
management. The Company is in compliance with all required loan covenants.
As of August 31, 1996, approximately $610,000 was available for
additional borrowing under the line of credit.
In retiring the old line of credit, the Company incurred a penalty of
approximately $150,000 and wrote off approximately $104,955 in the first quarter
of fiscal 1996 of unamortized loan costs associated with the retired
indebtedness. As a result, the Company recorded an after-tax loss of $254,955,
which has been reflected in the Company's consolidated condensed statement of
operations as an extraordinary item.
NOTE 4: STOCKHOLDERS' EQUITY
1990 Stock Option Plan
Pursuant to Board action during the first quarter of fiscal 1996,
42,500 options to purchase common stock were granted to certain key employees
(under the 1990 Stock Option Plan) with an exercise price ranging from $2.375 to
$3.00 per share. The exercise price exceeded the market price of the common
stock at the date of the grant. Of the 42,500 options granted, 30,000 options
vest as of the date of the award and are exercisable for a period of five years
from the date of vesting and 12,500 options vest one year from the date of the
award and are exercisable for a
7
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
period of five years from the date of vesting. No options were granted in the
second or third quarters. In the third quarter 10,000 options to purchase common
stock were exercised at their price of $2.375 per share.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Dade County Medicare Investigation:
On December 3, 1992, in connection with a federal investigation into
Medicare practices by health care providers in South Florida, the Company was
served with federal search warrants. In response to the issuance of the federal
search warrants, the Company engaged counsel who initiated a lawyer-directed
internal investigation into its Medicare claims processing system. This internal
investigation focused on a review of the compliance of the Company's Medicare
practices with applicable laws and regulations.
On December 15, 1992, the Health Care Financing Administration (HCFA)
(through its fiscal intermediary) notified the Company of its decision to
suspend reimbursement to the Company's South Florida Medicare offices. Such
suspension of Medicare payments in South Florida was based, in part, upon
allegations of fraud arising from the federal investigation into claims that
were submitted to Medicare for services that were not rendered. Management
believes that the alleged violations and investigation relate to the Company's
Dade County, Florida Medicare provider and to the allocation of certain
corporate overhead costs to that provider and other of the Company's providers.
Neither the federal investigation nor the reason for the suspension relates to
services performed by other of the Company's former or existing Medicare
providers.
In December 1992, due to circumstances arising from the investigation
and suspension of Medicare payments, the Company downsized, and eventually
closed, its offices in Dade, Broward and Monroe counties, Florida, and
terminated its subcontracting relationships with staffing providers in South
Florida.
Subsequent to December 1992, the Company continued to operate its
Medicare office in Palm Beach County, Florida at a substantial cost to the
Company, in anticipation of the reinstatement of Medicare payments. However, the
Company was unable to reach agreement with HCFA regarding the reinstatement of
Medicare payments to its South Florida operations. Therefore, in February 1993,
the Company effectively closed its South Florida Medicare operations by closing
the Palm Beach County Medicare office. The Company currently has no Medicare
operations in Florida.
As a result of the federal investigation and HCFA suspension, in fiscal
year 1993 the Company undertook an internal review program, which included
obtaining advice and consultation from an attorney specializing in Medicare law,
engaging a criminal defense attorney and implementing a billing review and
submission program. The Company has completed the billing
8
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
program with respect to all visits not subject to a claim of timely filing.
While the majority of fiscal years 1991 and 1992 claims were billed, a number of
claims were not billed based upon the Company's determination that the claims
did not comply with the guidelines established as part of its internal review
program. Management at this time is unable to estimate when the ultimate outcome
of the fiscal years 1991 and 1992 claims submissions will be known or when the
federal investigation may conclude. Accordingly, it is unknown what ultimate
impact, if any, the outcome of these matters will have on the Company's
consolidated financial statements.
The settlement amounts due to the Company as reflected in the
accompanying consolidated condensed balance sheets, as well as net revenue from
services presented in the accompanying consolidated condensed statements of
operations, are presented net of estimated Medicare reimbursement disallowances.
The estimated disallowances are subject to continual review and, as such, may be
increased or decreased as subsequent information becomes available. Included in
the settlements due from Medicare as of August 31, 1996 is approximately $2.7
million for the Company's former South Florida Medicare operations representing
primarily claims billed by the Company subsequent to closure of its South
Florida Medicare operations. The Company believes that the settlements due from
Medicare as recorded in the Company's consolidated balance sheet as of August
31, 1996 are realizable at their recorded amount.
As of October 1996, 47 months have passed since execution of the search
warrants, and no charges have been brought against the Company or any of its
officers or employees. The Company has been engaged in discussions with
representatives from the United States Attorney's Office for the Southern
District of Florida concerning the possible resolution of the Medicare
investigation and allegations as they might affect the Company directly. There
are no assurances that these discussions will result in a successful resolution
of these matters or in a resolution that would not be materially adverse to the
Company. Even if the Company is successful in resolving the Medicare
investigation with the federal government, in accordance with its
indemnification obligations under its Articles of Incorporation and Bylaws, the
Company may continue to incur legal expenses on behalf of certain of its
existing and former employees who are individually the subject of such
investigation. In addition, the Company had been the subject of a staff inquiry
by the Securities and Exchange Commission ("SEC") relating to the Medicare
investigation by the United States Attorney. In July 1996 the SEC notified the
Company that they had terminated their inquiry and that at that time no
enforcement actions have been recommended to the commission.
Litigation, Claims and Assessments:
In the ordinary course of business, the Company is exposed to various
claims and legal proceedings other than those items discussed above. In
management's opinion, the outcome of all other such matters will not have a
material impact upon the Company's consolidated financial position and
consolidated results of operations.
Termination and Benefits Agreements:
The Company has agreements with certain of its key employees, which
provide for
9
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HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
severance in the case of involuntary termination and/or a change in control, to
promote adherence to non-competition provisions. Such agreements provide
severance payments for up to 12 months dependent upon the employee involved. The
maximum aggregate salary component commitment for these agreements would be
approximately $534,000 as of August 31, 1996.
Self-Funded Insurance Plans:
The Company self-funds its health and workers' compensation programs up
to policy limits, as defined. Claims in excess of such limits are insured by
third party reinsurers. The Company's estimate of its liability for both
outstanding as well as incurred but not reported claims is based upon its
actuarially determined loss experience. As of August 31, 1996 and November 30,
1995, such reserves totaled approximately $1.9 million and $2.6 million,
respectively, and are included as a component of accrued expenses in the
accompanying consolidated condensed balance sheets. Differences between actual
losses and reserve estimates are recognized in the period when such differences
become known. Management believes that the differences, if any, between actual
losses reported subsequent to August 31, 1996 and its recorded reserve estimates
will not be material.
NOTE 6: CONCENTRATION OF CREDIT RISK
The Company has been providing services to healthcare facilities
located in the U.S. Virgin Islands, which are owned by the government of the
U.S. Virgin Islands, since 1991. Revenues from these facilities accounted for
approximately 10.2% and 9.7% of consolidated net revenue from services for the
nine months ended August 31, 1996 and August 31, 1995, respectively. Outstanding
accounts receivable were approximately $3.6 million and $3.0 million as of
August 31, 1996 and November 30, 1995, respectively, and are included in trade
accounts receivable in the accompanying consolidated condensed balance sheets
and approximately $1,093,000 of this amount has been outstanding for 180 days or
greater. Collections from customers located in the U.S. Virgin Islands are
significantly slower than the Company's domestic customer base. The government
of the U.S. Virgin Islands currently acknowledges the debt and has instituted a
plan to liquidate the amounts past due. Accordingly, for this reason and because
the Company has experienced no collection losses during the history of these
contracts, no allowances for doubtful accounts have been recorded related to
these outstanding receivables.
10
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
August 31, 1996
Liquidity and Capital Resources -
General. Prior to its acquisition of the Continental and CarePoint Home
Health Agencies in July, 1990 and February, 1991, respectively, the Company
funded its growth internally and through the net proceeds of $9,036,000 obtained
from two public offerings. The Company later obtained a line of credit, term
note and term loan to satisfy a portion of the acquisition costs and provide for
future working capital requirements. The Company's capital requirements consist
of funding current operations, expanding services provided by its home care,
including support services to non owned home care agencies, staffing and
rehabilitative businesses, and the acquisition of compatible companies that can
be integrated with existing operating units.
The Company expects to meet short-term liquidity needs through cash
flow and borrowings available under its new credit facility as discussed below.
Line of Credit. In February 1996, the Company entered into a two-year
$8 million uncommitted revolving line of credit with a commercial finance
company.
The credit facility bears interest at prime plus two percent per annum,
payable monthly, is secured by substantially all assets of the Company and
requires adherence to certain financial covenants. Borrowing is based on the
Company's eligible accounts receivable as defined. A portion of the proceeds
from this new credit facility was used to retire the remaining outstanding
indebtedness with the Company's prior lender.
The new credit facility includes up to $2.0 million securing a standby
letter of credit required by the insurance carrier for the Company's workers'
compensation coverage. As of August 31, 1996, the Company was contingently
liable for a $1.8 million standby letter of credit issued by its lender
representing a reduction of otherwise eligible borrowing.
Similar to the prior line of credit, the total borrowing available is
subject to the renewal of certain nursing services contracts in the U.S. Virgin
Islands. Such contracts are in the process of renewal and management is of the
opinion that the full borrowing capacity will be available to the Company.
Additionally, while the interest rate on the new facility is unchanged from the
prior facility, administration fees and charges related to the line of credit
are significantly reduced.
Restrictive Covenants. The new line of credit contains a number of
covenants some of which could affect the Company's operations. The most
significant of these covenants include (i)
11
<PAGE>
maintenance of minimum tangible net worth; (ii) timely submission of monthly,
quarterly and annual financial statements; (iii) limitations on payments to
employees or related parties for consulting agreements and in the case of
terminating employees, severance agreements; (iv) restrictions on new debt,
guarantees and the payment of dividends; and (v) approval and/or notice
requirements for acquisitions, mergers, the sale of assets and changes in
management.
As of August 31, 1996, principal borrowings under the credit facility
were approximately $4.9 million and approximately $610,000 was available for
additional borrowing under the line of credit. Additionally, the Company is in
compliance with all required loan covenants.
While management believes that the present credit facility is generally
adequate to meet the Company's working capital needs (in the absence of slow
collections of accounts receivable), the present facility is not adequate to
provide for any significant liabilities that may arise (see Note 5 to the
Consolidated Condensed Financial Statements). If significant contingencies
become liabilities, then, in the absence of raising additional capital, the
Company's liquidity will be adversely affected and the Company may be unable to
fund its commitments as they become due.
Settlements due to and from Medicare. In the normal course of business,
the Company has estimated settlements due to and from the Medicare program. The
estimated settlement amounts due to Medicare are the result of: 1) interim
reimbursement rates, at which the Company was paid for its services throughout
the year, exceeding the Company's actual costs of providing such services and 2)
revisions by certain intermediaries of the Company's reported reimbursable costs
after the intermediaries' review or audits of the Company's cost report filings.
Estimated settlements due from Medicare are presented net of estimated
settlements due to Medicare in the accompanying Consolidated Condensed Balance
Sheets. Management's plans to fund settlements to Medicare as they become due
include: 1) negotiating extended payment plans, 2) incurring additional
borrowings under the line of credit, if available, 3) using proceeds from
additional capital that may be raised, or 4) offsetting amounts due from the
Medicare program to the Company. However, there are no assurances that the
Company will be able to successfully utilize any of these four funding options.
At November 30, 1995, the Company had amounts due to Medicare under
notification from the Medicare program's fiscal intermediaries of approximately
$2.4 million. As of August 31, 1996, approximately $859,000 of this amount has
been repaid. The remainder is expected to be offset against amounts due from the
Medicare program to the Company.
Cash Position. Net cash provided/(used) by operating activities was
approximately ($4,809,000) and $129,000 for the nine months ended August 31,
1996 and August 31, 1995, respectively.
In addition to increases or decreases in cash flow from operating
activities, the Company's overall cash position can be significantly affected by
its investing and financing activities.
12
<PAGE>
Financing activities principally consisted of net borrowings under the Company's
line of credit.
Net Working Capital. As of August 31, 1996, the Company had
approximately $8.8 million of working capital and approximately $.5 million of
cash and cash equivalents. The ratio of current assets to current liabilities at
August 31, 1996 was 1.7 to 1. As of August 31, 1996, the Company's commitments
that would require large or unusual amounts of cash consisted of office rents,
repayments to the Medicare program, severance obligation to a former officer,
and an amount due to the Chairman and Chief Executive Officer.
13
<PAGE>
Results of Operations - Three and Nine Months Ended August 31, 1996
Compared With Three and Nine Months Ended August 31, 1995
Revenues. Consolidated net revenues increased $2,082,000, or 15.4%,
from $13,521,000 to $15,603,000 and $3,984,000, or 9.5%, from $42,094,000 to
$46,078,000 for the three and nine months ended August 31, 1995 and 1996,
respectively. This increase is primarily attributable to higher revenues within
the Company's Travel Nurse, Rehabilitative and Management Services Groups. The
discussions below of individual segments do not include the elimination of
intergroup charges of approximately $34,400 and $370,500 for the three months
and nine months, respectively, ended August 31, 1996, as reflected in the
consolidated presentation.
Net revenues from the Company's Homecare Group for the nine months
ended August 31, 1996, increased by $1,221,000, or 3.7%, from $32,856,000 to
$34,077,000. Substantially all of this increase occurred in the third quarter,
and the increase relates primarily to Medicare revenues in the New England
region.
Net revenues from services provided by the Company's Travel Nurse Group
increased $371,000, or 14.6%, from $2,542,000 to $2,913,000 and $1,784,000, or
20.9%, from $8,530,000 to $10,314,000 for the three and nine months ended August
31, 1995 and 1996, respectively. Contributing to this increase was a higher
volume of nurses under contract, new staffing operations within the Company's
New England region, and a continued enhancement of strategic marketing, employee
training, and customer service.
Net revenues from services provided by the Company's Rehabilitation
Services Group increased $143,000, or 29.6%, from $483,000 to $626,000 and
$812,000, or 89.8%, from $904,000 to $1,716,000 for the three and nine months
ended August 31, 1995 and 1996, respectively. The increase was due primarily to
revenues attributable to certain therapy operations within the Atlanta area
acquired on March 31, 1996, and the opening of four (4) therapy clinics in the
three months ended August 31, 1996.
Net revenues from services provided by the Company's Management
Services Group, HSS Health Initiatives, were approximately $324,000 and $342,000
for the three and nine months ended August 31, 1996. The operating group was
established during mid-second quarter.
Cost of Services. Cost of services for the Homecare Group increased
$360,000, or 5.9%, from $6,125,000 to $6,485,000 for the three months ended
August 31,1996, and $194,000, or 1.0%, from $18,890,000 to $19,084,000 for the
nine months ended August 31, 1996. Direct costs for the quarter ending August
31, 1996 are higher due to a greater utilization of Medicare visits in the
Company's northeast region resulting in higher independent contractor, payroll
and related expenses. Year-to-date this increase was offset by the downsizing
and/or consolidation of certain proprietary offices within the Homecare Group.
Cost of services for the Travel Nurse Group increased $415,000, or
20.4%, from $2,035,000 to $2,450,000, and $1,522,000, or 22.4%, from $6,803,000
to $8,325,000 for the three and nine months ended August 31, 1995 and 1996,
respectively. A higher volume of nurses under contract and new operations
established in the New England region, as previously discussed, are the primary
reasons for this increase.
14
<PAGE>
Cost of services for the Company's Rehabilitation Services Group
increased $183,000, or 62.9%, from $291,000 to $474,000, and $712,000, or
135.8%, from $525,000 to $1,237,000, for the three and nine months ended August
31, 1995 and 1996, respectively. Higher independent contractor costs, in
addition to the acquisition of a therapy company and the opening of four (4)
clinics previously discussed, have resulted in this increase.
Gross Margin. The Company's gross margin before selling, general and
administrative expenses is the difference between amounts charged by the Company
to its clients or amounts reimbursed by third party payors, and wages the
Company pays to its medical personnel, plus related housing, travel, and
insurance costs and other benefits.
The Company's gross margin is subject to a number of factors such as
billing rates, pay rates and cost of travel and housing. The impact of these
factors vary due to competitive and seasonal factors as well as the geographic
mix and type of service (discipline and payor source) being performed by the
Company.
The Company's gross margin increased from 38.0% and 38.2% for the three
and nine months ended August 31, 1995, to 39.0% and 38.3% for the three and nine
months ended August 31, 1996. These increases result from higher margins within
the Company's Homecare Operations and the higher margins of the Company's
Management Services Group offset somewhat by lower margins in the Travel Nurse
and Rehabilitation Group.
Selling, General and Administration. The Company's Selling, General and
Administration Expenses increased $1,106,000 or 23.0% from $4,813,000 to
$5,919,000, and $1,513,000 or 9.8% from $15,451,000 to $16,964,000 for the three
and nine months ended August 31, 1995, and 1996, respectively. Of the increase,
the majority of which occurred in the third quarter, approximately $600,000 is a
function of accrual reversals in Workers' Compensation and Legal reserves in the
third quarter of 1995. The remainder of the increase is the result of the
therapy clinic acquisition and the start up of the four clinics in the
Rehabilitation Group and normal increases.
Interest and Other Income (Expense). Interest and other income
(expense), net, was approximately $59,000 higher net expense during the nine
months ended August 31, 1996, as compared to 1995. This increased net expense
resulted primarily from higher average outstanding borrowings under the
Company's credit facility and interest costs related to a note payable to the
Company's landlord in connection with the lease termination penalty incurred in
fiscal 1995, net of recoveries of accounts receivable in sold operations of
approximately $120,000 during the third quarter of 1996.
Pre-tax Income. Pre-tax Income decreased $123,000 or 43.7% from
$282,000 to $159,000 for the three months ended August 31, 1995 and 1996,
respectively; however, increased $10,000 or 1.9% from $544,000 to $554,000 for
the nine months ended August 31, 1995 and 1996, respectively. As previously
discussed, gross margins increased in the third quarter but were offset
15
<PAGE>
by increases in Selling, General and Administration expenses.
Extraordinary Items. In connection with the early extinguishment of its
debt to its prior lender, the Company incurred an extraordinary charge of
$254,955 during the first quarter of 1996.
16
<PAGE>
HOSPITAL STAFFING SERVICES, INC.
PART II - OTHER INFORMATION
August 31, 1996
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Notes to Consolidated Financial
Statements. See also "Item 3 - Legal Proceedings"
which is incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1995 filed with the Securities and
Exchange Commission on February 27, 1996.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting. The 1995 Annual Meeting of
Shareholders of the Company was held in Fort
Lauderdale, Florida on June 4, 1996. The following
individuals were elected as directors to hold office
until the next annual meeting of shareholders or
until their successors have been elected and duly
qualified:
<TABLE>
<CAPTION>
Director Shares For Shares Withheld
-------- ---------- ---------------
<S> <C> <C>
Ronald A. Cass 4,194,573 919,856
Robert A. Fields 4,207,353 907,076
William F. McConnell 4,207,153 907,276
Hector L. Ziperovich, M.D.4,205,793 908,636
</TABLE>
Shareholders also acted upon the following proposal
at the Annual Meeting:
Ratified the appointment of Arthur Andersen, LLP as
independent auditors of the Company for the fiscal
year ending November 30, 1996. Votes totaled
5,052,328 for; 32,561 against; and 29,540
abstentions.
17
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports - None.
18
<PAGE>
HOSPITAL STAFFING SERVICES, INC.
SIGNATURES
August 31, 1996
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOSPITAL STAFFING SERVICES, INC.
By:/s/Ronald A. Cass Ronald A. Cass, Chairman of the Board,
Ronald A. Cass Chief Executive Officer, President and Treasurer
Date: October 14, 1996
By:/s/Ronald G. Huneycutt Ronald G. Huneycutt, Vice President of Finance/
Ronald G. Huneycutt Chief Financial Officer
Date: October 14, 1996
19
