================================================================================
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 MAY 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 (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: 6,349,770 shares of Common Stock,
$.001 par value, outstanding at July 15, 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 - 4
Consolidated Condensed Statements of Operations 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7 - 11
Management's Discussion and Analysis of 18 - 19
Financial Condition and Results of Operations
PART II - OTHER INFORMATION AND SIGNATURES 17 - 18
<PAGE>
<TABLE>
<CAPTION>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
MAY 31, NOVEMBER 30,
1996 1995
------------ ------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,011,700 $ 1,697,804
Short-term investments 11,880 11,620
Trade accounts receivable, less allowance
for doubtful accounts of $575,129
and $599,599, respectively 7,308,039 6,129,371
Settlements due from Medicare 12,199,901 10,372,741
Prepaid expenses 392,136 418,335
Amounts due from officers/directors 34,557 40,392
Current and deferred income taxes receivable 1,149,634 1,149,634
Other 118,610 344,482
------------ ------------
Total current assets 22,226,457 20,164,379
------------ ------------
NON-CURRENT ASSETS:
Net property and equipment 962,842 986,592
------------ ------------
Intangibles related to businesses
acquired 2,258,028 2,160,016
Non-competition agreements 479,426 479,426
------------ ------------
Total intangibles 2,737,454 2,639,442
Less: Accumulated amortization (723,958) (664,418)
------------ ------------
Net intangibles 2,013,496 1,975,024
------------ ------------
Deposits and other assets 258,858 244,826
------------ ------------
Total non-current assets 3,235,196 3,206,442
------------ ------------
Total assets $ 25,461,653 $ 23,370,821
============ ============
The accompanying notes are an integral part of
these consolidated condensed balance sheets.
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31, NOVEMBER 30,
1996 1995
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 1,817,237 $ 2,577,470
Line of credit payable (Note 3) 4,962,666 767,115
Accrued payroll and benefits 2,236,143 2,240,404
Accrued expenses 3,441,856 4,224,210
Income taxes payable 283,684 296,000
Capital leases 13,908 7,131
Notes payable 1,011,212 1,255,130
------------ ------------
Total current liabilities 13,766,706 11,367,460
------------ ------------
NON-CURRENT LIABILITIES:
Notes payable 557,335 882,965
Capital leases 42,667 45,304
------------ ------------
Total non-current liabilities 600,002 928,269
------------ ------------
------------ ------------
Total liabilities 14,366,708 12,295,729
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock- $.001 par value;
authorized 20,000,000 shares;
6,349,770 shares issued
and outstanding; respectively 6,350 6,350
Additional paid-in capital 22,428,887 22,428,887
Accumulated deficit (11,340,292) (11,360,145)
------------ ------------
Total stockholders' equity 11,094,945 11,075,092
------------ ------------
Total liabilities and
stockholders' equity $ 25,461,653 $ 23,370,821
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed balance sheets.
4
<PAGE>
<TABLE>
<CAPTION>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three months ended May 31, Six months ended May 31,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net revenue from services $15,968,499 $14,860,176 $30,474,127 $28,571,908
------------ ------------- --------------- ------------
Cost of services:
Professional salaries and benefits 8,429,888 7,391,322 15,949,854 14,823,716
Other professional expenses 1,492,261 1,410,833 2,951,022 2,812,082
------------ ------------- --------------- ------------
Total cost of services 9,922,149 8,802,155 18,900,876 17,635,798
------------ ------------- --------------- ------------
Gross margin 6,046,350 6,058,021 11,573,251 10,936,110
------------ ------------- --------------- ------------
Selling, general and administrative expenses:
Salaries and benefits 3,205,216 3,154,143 6,435,033 5,833,352
Legal expenses 67,148 370,652 204,762 856,666
Severance obligation - 646,724 - 646,724
All other expenses 2,382,016 1,727,232 4,405,239 3,302,124
------------ ------------- --------------- ------------
Total selling, general and administrative expenses 5,654,380 5,898,751 11,045,034 10,638,866
------------ ------------- --------------- ------------
Income from operations 391,970 159,270 528,217 297,244
------------ ------------- --------------- ------------
Interest and other income (expense):
Interest expense (125,799) (52,910) (234,933) (140,467)
Interest income 9,790 16,085 25,824 33,754
Other income,net 19,326 37,750 75,589 70,759
------------ ------------- --------------- ------------
Total interest and other income (expense) (96,683) 925 (133,520) (35,954)
------------ ------------- --------------- ------------
Income before provision for income taxes 295,287 160,195 394,697 261,290
Provision for income taxes (94,000) (38,000) (119,889) (76,000)
------------ ------------- --------------- ------------
Income before extraordinary item 201,287 122,195 274,808 185,290
Extraordinary loss on early extinguishment of debt (Note 3) - - (254,955) -
------------ ------------- --------------- ------------
Net income $201,287 $122,195 $19,853 $185,290
============ ============= =============== ============
Income per common share:
Income before extraordinary item $0.03 $0.02 $0.04 $0.03
Extraordinary loss on early extinguishment of debt - - (0.04) -
------------ ------------- --------------- ------------
Net income per common share $0.03 $0.02 $0.00 $0.03
============ ============= =============== ============
Weighted average common shares outstanding: 6,349,770 5,649,770 6,349,770 5,649,770
============ ============= =============== ============
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (UNAUDITED)
MAY 31, 1996 MAY 31, 1995
------------- -------------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income $19,853 $185,290
------------- -------------
Adjustments to reconcile net income to net cash provided
(Used) by operating activities:
Depreciation and amortization 421,523 354,494
Severance obligations - 630,000
Extraordinary loss on early extinguishment of debt (note 3) 99,955 -
Provision for losses on trade accounts receivable 143,339 153,673
Loss on disposal and retirement of intangibles, property and equipment - 5,380
Changes in assets and liabilities:
(Increase) decrease in assets-
Trade accounts receivable (1,202,387) 1,079,620
Settlements due from medicare (1,642,756) 643,637
Prepaid expenses and other current assets 26,197 (136,935)
Amounts due from officers/directors (8,289) 18,012
Income taxes recoverable - 40,895
Deposits and other assets (142,761) 387,729
Increase (decrease) in liabilities -
Accounts payable (781,076) (804,737)
Accrued payroll and payroll taxes (236,872) (312,161)
Accrued expenses and other (1,195,535) (1,236,829)
Income taxes payable (12,316) (280,992)
------------- -------------
Total adjustments (4,530,978) 541,786
------------- -------------
Net cash provided (used) by operating activities (4,511,125) 727,076
------------- -------------
Cash flows provided (used) by investing activities:
Sale (purchase) of short-term investments, net (260) 1,148,729
Capital expenditures (217,929) (148,159)
Proceeds from sale of california, new york and arizona home health operations 145,782 -
Purchase of therapy company (60,000) -
------------- -------------
Net cash provided (used) by investing activities (132,407) 1,000,570
------------- -------------
Cash flows provided (used) by financing activities:
Net increases (decreases) on line of credit payable 4,204,998 (304,912)
Payments under notes payable (241,500) (91,627)
Payments under capital leases (6,070)
------------- -------------
Net cash provided (used) by financing activities 3,957,428 (396,539)
------------- -------------
Net increase (decrease) in cash and cash equivalents (686,104) 1,331,107
Cash and cash equivalents at beginning of period 1,697,804 516,770
------------- -------------
Cash and cash equivalents at end of period $1,011,700 $1,847,877
============= =============
Supplemental cash flow disclosures:
cash paid: Income taxes $134,436 $226,048
Interest $230,645 $137,978
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
6
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 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 for operations for the three and six moinths ended May 31,
1996 are not necessarily indicative of the results to be expected for the entire
fiscal year ending November 30, 1996.
NOTE 2: ACQUISITION
In March 1996, a wholly-owned subsidiary of the company 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.
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 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. In connection with the Company's new financing
arrangements, the Company's workers' compensation insurance carrier reduced the
letter of credit requirement to $1.8 million from $2.0 million. As of May 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.
7
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 May 31, 1996, approximately $103,000 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 optiins 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 period of five years from the date of vesting.
NOTE 5: COMMITMENTS AND CONTINGENCIES -
Dade County Medicare Investigation:
On December 3, 1992, in connection with a federal investigation into
Medicare practices
8
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 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
9
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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
substantive information becomes available. Included in the settlements due from
Medicare as of May 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 May 31, 1996 are realizable at their
recorded amount.
As of June 1996, 43 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 has been the subject of an investigation
by the Securities and Exchange Commission ("SEC") relating to the Medicare
investigation by the United States Attorney. The SEC has not instituted any
enforcement proceedings against the Company and any resolution of the matter
with the United States Attorney's Office would not necessarily resolve any
potential future action by the SEC.
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 severance in the case of involuntary termination and/or a change in
control to promote adherence to non-competition provisions. Such agreements
provide for severance up to 12 months dependent upon the employee involved. The
maximum aggregate salary component commitment for these agreements would be
approximately $491,000 as of May 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
10
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
claims is based upon its actuarially determined loss experience. As of May 31,
1996 and November 30, 1995, such reserves totaled approximately $1.9 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 May 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 10.7% and 9.9% of consolidated net revenue from services for the
six months ended May 31, 1996 and May 31, 1995, respectively. Outstanding
accounts receivable were approximately $3.6 million and $3.0 million as of May
31, 1996 and November 30, 1995, respectively, and are included in trade accounts
receivable in the accompanying consolidated condensed balance sheets. As of June
30, 1996, approximately $2.9 million of the May 31, 1996 outstanding receivable
balance from these facilities remained unpaid. Approximately $834,000 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 is instituting 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.
11
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MAY 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,
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. In connection with the Company's new financing
arrangements, the Company's workers' compensation insurance carrier reduced the
letter of credit requirement to $1.8 million from $2.0 million. As of May 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.
12
<PAGE>
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) 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 May 31, 1996, principal borrowings under the credit facility were
approximately $5.0 million and approximately $103,000 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). If
significant contingencies become commitments, 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. Periodically, 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 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 May 31, 1996, approximately $548,000 of this amount has been
repaid under an eleven month repayment plan applicable to $859,000 of the debt.
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 ($4,511,000) and $727,000 for the six months ended May 31, 1996
and May 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
13
<PAGE>
activities. Financing activities principally consisted of net borrowings under
the Company's line of credit.
NET WORKING CAPITAL. As of May 31, 1996, the Company had approximately
$8.5 million of working capital and approximately $1.0 million of cash and cash
equivalents. The ratio of current assets to current liabilities at May 31, 1996
was 1:6 to 1. As of May 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.
14
<PAGE>
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED MAY 31, 1996
COMPARED WITH THREE AND SIX MONTHS ENDED MAY 31, 1995
Revenues. Consolidated net revenues increased $1,108,000, or 7.5%, from
$14,860,000 to $15,968,000 and $1,902,000, or 6.7%, from $28,572,000 to
$30,474,000 for the three and six months ended May 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 $240,000 and $335,000 for the three months
and six months ended May 31, 1996 as reflected in the consolidated presentation.
Net revenues from services provided by the Company's Homecare Group
remained relatively consistent with the prior year at approximately $11,500,000
and $22,302,000 for the three and six months ended May 31, 1996, respectively.
Contributing to the occurrence was the sale of certain company operations,
diminished business in the northeast region related to severe weather conditions
experienced during the first quarter, offset by an increase in Medicare revenues
for the period.
Net revenues from services provided by the Company's Travel Nurse Group
increased $976,000, or 32.4%, from $3,016,000 to $3,992,000 and $1,413,000, or
23.6%, from $5,987,000 to $7,400,000 for the three and six months ended May 31,
1995 and 1996, respectively. Contributing to this increase was a higher volume
of nurses under contract, up approximately 10.8% from the comparable period, 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 $332,000, or 89.7%, from $370,000 to $702,000 and
$669,000, or 158.7%, from $421,000 to $1,089,000 for the three and six months
ended May 31, 1995 and 1996, respectively. The primary reason for this
occurrence is the acquisition of certain therapy operations within the Atlanta
area on March 31, 1996, which contributed approximately $407,000 to revenues for
the second quarter of fiscal 1996.
Net revenues from services provided by the Company's Management
Services Group, HSS Health Initiatives, were approximately $19,000 for the three
and six months ended May 31, 1996. The operating group was formulated during
mid-second quarter and therefore only provided minimal revenues for the period.
COST OF SERVICES. Cost of services for the Homecare Group increased
$355,000, or 5.7%, from $6,219,000 to $6,574,000 for the three months ended May
31, 1996 and decreased $165,000 from $12,765,000 to $12,600,000 for the six
months ended May 31, 1996. Direct costs for the quarter ending May 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
15
<PAGE>
proprietary offices within the Homecare Group.
Cost of services for the Travel Nurse Group increased $741,000, or
30.7%, from $2,413,000 to $3,154,000 and $1,106,000, or 23.2%, from $4,769,000
to $5,875,000 for the three and six months ended May 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
primarily reasons for this increase.
Cost of services for the Company's Rehabilitation Services Group
increased $220,000, or 106%, from $208,000 to $428,000 and $529,000, or 226%,
from $234,000 to $763,000 for the three and six months ended May 31, 1995 and
1996, respectively. Higher independent contractor costs, in addition to the
acquisition 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 costs, travel, 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 decreased from 40.8% and 38.3% for the three
and six months ended May 31, 1995, to 37.9% and 38.0% for the three and six
months ended May 31, 1996. This decrease results from lower margins within the
Company's Travel Nurse, Tri Therapy Rehab and Proprietary Homecare Operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Although the Company
incurred increases in payroll and related costs, recruiting expenses and travel
expenses, as described below, such increases were offset by reductions in
worker's compensation and legal reserves of approximately $540,000 and $115,000
respectively for the three months ended May 31, 1996. Such reserves were
established in prior years and based on actuarial evaluations and favorable cost
controls, management has reduced the estimated ultimate liabilities. These
changes in estimates, after considering the related decreases in Medicare cost
reimbursement, served to improve income from operations by approximately
$522,000 for the three months and six months ended May 31, 1996. Selling,
general and administrative expenses decreased as a percentage of revenue from
39.7% and 37.2% for the three and six months ended May 31, 1995 to 35.4% and
36.2% for the comparable periods of the current year. The 1995 percentages are
impacted by a severance obligation to a previous officer of the Company in the
amount of approximately $647,000.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income
(expense), net, was approximately $98,000 higher during the three and six months
ended May 31, 1996 as compared to comparable periods of fiscal 1995 resulting
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.
Pre-tax Income. Pre-tax Income increased $135,000, or 84.4%, from
$160,000 to
16
<PAGE>
$295,000 and $133,000, or 50.8%, from $262,000 to $395,000 for the three and six
months ended May 31, 1995 and 1996, respectively. As previously discussed,
operations still reflect the loss of revenue as a consequence of the severe
weather conditions during the first quarter of fiscal 1996. Profitability was
enhanced by changes in the Company's business mix to higher margin, skilled
services, reductions in certain SG&A costs for the period, and the addition of
Seven Springs Rehabilitation acquired in March, 1996.
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.
17
<PAGE>
HOSPITAL STAFFING SERVICES, INC.
PART II - OTHER INFORMATION
MAY 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
None.
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
MAY 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,
----------------- Chief Executive Officer,
Ronald A. Cass President and Treasurer
Date: JULY 15, 1996
--------------
By:/s/RONALD G. HUNEYCUTT Ronald G. Huneycutt, Vice President of
---------------------- Finance/ Chief Financial Officer
Ronald G. Huneycutt Date: JULY 15, 1996
--------------
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 1,011,700
<SECURITIES> 11,880
<RECEIVABLES> 19,507,940
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,226,457
<PP&E> 962,842
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,461,653
<CURRENT-LIABILITIES> 13,766,706
<BONDS> 0
0
0
<COMMON> 6,350
<OTHER-SE> 11,088,595
<TOTAL-LIABILITY-AND-EQUITY> 25,461,653
<SALES> 30,474,127
<TOTAL-REVENUES> 30,474,127
<CGS> 18,900,876
<TOTAL-COSTS> 18,900,876
<OTHER-EXPENSES> 11,045,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234,933
<INCOME-PRETAX> 394,697
<INCOME-TAX> 119,889
<INCOME-CONTINUING> 274,808
<DISCONTINUED> 0
<EXTRAORDINARY> 254,955
<CHANGES> 0
<NET-INCOME> 19,853
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0
</TABLE>
