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, 1997
[ ] 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 1-11131
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 500
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 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, 1997.
<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 Statements 6 - 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 17
PART II - OTHER INFORMATION AND SIGNATURES 18 - 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,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
CURRENT ASSETS: CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $138,398 $145,247 Accounts payable $1,961,891 $2,470,506
Short-term investments 11,186 12,145 Line of credit payable 9,274,189 6,540,793
Trade accounts receivable, less Accrued payroll and benefits 1,752,364 2,130,053
allowance for doubtful accounts of Accrued expenses 2,411,391 2,539,016
$719,497 and $559,251, respectively 7,820,696 9,622,122 Income taxes payable 187,577 216,096
Settlements due from Medicare 10,735,603 12,201,367 Capital leases 37,496 17,522
Amounts due from officers/directors 49,160 71,377 Notes payable 318,260 503,678
Current and deferred income
taxes receivable 567,168 587,215
Other current assets 513,147 599,062
-------------- -------------- -------------- --------------
Total current assets 19,835,358 23,238,535 Total current liabilities 15,943,168 14,417,664
-------------- -------------- -------------- --------------
NON-CURRENT ASSETS: NON-CURRENT LIABILITIES:
Notes payable 399,728 510,728
Capital leases 91,671 80,881
Other 74,000 73,999
-------------- --------------
Net property and equipment 739,924 879,735 Total non-current liabilities 565,399 665,608
-------------- -------------- -------------- --------------
Total liabilities 16,508,567 15,083,272
-------------- --------------
Intangibles related to businesses COMMITMENTS AND CONTINGENCIES
acquired 2,205,016 2,258,028
Non-competition agreements 479,426 479,426 STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
-------------- -------------- authorized 5,000,000 shares;
Total intangibles 2,684,442 2,737,454 none issued or outstanding
Less: Accumulated amortization (838,810) (785,133)
-------------- --------------
Net intangibles 1,845,632 1,952,321 Common stock- $.001 par value;
-------------- -------------- authorized 20,000,000 shares;
6,359,770 shares issued
and outstanding 6,360 6,360
Deposits and other assets 347,706 340,836
Additional paid-in capital 22,452,627 22,452,627
Accumulated deficit (16,198,934) (11,130,832)
-------------- -------------- -------------- --------------
Total non-current assets 2,933,262 3,172,892 Total stockholders' equity 6,260,053 11,328,155
-------------- -------------- -------------- --------------
Total liabilities and
Total assets $22,768,620 $26,411,427 stockholders' equity $22,768,620 $26,411,427
============== ============== ============== ==============
<FN>
The accompanying notes are an integral part of
these consolidated condensed statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Hospital Staffing Services, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
<CAPTION>
Three months ended Nine months ended
------------------------------------- -------------------------------------
--------------- ----------------- ----------------- ---------------
August 31, 1997 August 31, 1996 August 31, 1997 August 31, 1996
--------------- ----------------- ----------------- ---------------
------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue from services $11,493,646 $15,603,347 $45,255,043 $46,077,474
------------- -------------- -------------- --------------
Cost of services:
Professional salaries and benefits 8,515,949 7,952,769 25,689,894 23,902,623
Other professional expenses 1,620,137 1,570,642 4,789,782 4,521,664
------------- -------------- -------------- --------------
Total cost of services 10,136,086 9,523,411 30,479,676 28,424,287
------------- -------------- -------------- --------------
Gross margin 1,357,560 6,079,936 14,775,367 17,653,187
------------- -------------- -------------- --------------
Selling, general and administrative expenses:
Salaries and benefits 3,694,047 3,533,239 11,720,015 9,968,272
Other expenses 2,486,782 2,385,564 7,597,427 6,995,565
------------- -------------- -------------- --------------
Total selling, general and administrative expenses 6,180,829 5,918,803 19,317,442 16,963,837
------------- -------------- -------------- --------------
Income/(loss) from operations (4,823,269) 161,133 (4,542,075) 689,350
------------- -------------- -------------- --------------
Interest and other income (expense):
Interest expense (293,318) (154,778) (770,190) (389,710)
Interest income 11,186 31,859 8,757 57,686
Other income (expense), net (9,759) 120,887 252,406 196,472
------------- -------------- -------------- --------------
Total interest and other income (expense) (291,891) (2,032) (509,027) (135,552)
------------- -------------- -------------- --------------
Income/(loss) before provision for income taxes (5,115,160) 159,101 (5,051,102) 553,798
Provision for income taxes (5,000) (17,406) (17,000) (137,295)
------------- -------------- -------------- --------------
Income/(loss) before extraordinary item (5,120,160) 141,695 (5,068,102) 416,503
Extraordinary loss on early extinguishment of debt (254,955)
------------- -------------- -------------- --------------
Net income/(loss) ($5,120,160) $141,695 ($5,068,102) $161,548
============= ============== ============== ==============
Income/(loss) per common share:
Income/(loss) before extraordinary item ($0.81) $0.02 ($0.80) $0.07
Extraordinary loss on early extinguishment of debt (0.04)
------------- -------------- -------------- --------------
Net income/(loss) per common share ($0.81) $0.02 ($0.80) $0.03
============= ============== ============== ==============
Weighted average common shares outstanding: 6,359,770 6,356,292 6,359,770 6,351,952
============= ============== ============== ==============
<FN>
The accompanying notes are an integral part of
these consolidated condensed 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, 1997 August 31, 1996
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ($5,068,102) $161,548
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 544,760 590,973
Provision for losses on trade accounts receivable 462,774 163,590
Extraordinary loss on early extinguishment of debt 99,955
Loss on early retirement of Fixed Assets 11,543
Changes in assets and liabilities:
(Increase) decrease in assets-
Trade accounts receivable 1,338,652 (1,356,136)
Settlements due from Medicare 1,465,764 (1,630,352)
Prepaid expenses and other current assets 101,218 95,673
Amounts due from officers/directors 22,217 (43,322)
Current and deferred income taxes receivable 20,047 713,043
Other assets (18,814) (397,600)
Increase (decrease) in liabilities -
Accounts payable (508,615) (749,225)
Accrued payroll and benefits (377,689) (643,783)
Accrued expenses and other (175,793) (1,710,180)
Income taxes payable (28,519) (102,957)
------------ ------------
Total adjustments 2,857,545 (4,970,321)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,210,557) (4,808,773)
------------ ------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (44,040) (391)
Capital expenditures (106,031) (177,215)
Proceeds from sale of home health operations 145,782
Purchase of therapy company (60,000)
Notes receiveable (50,783)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (150,071) (142,607)
------------ ------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Line of credit borrowings 2,733,396 4,083,630
Extension fee on line of credit (100,000)
Payments under notes payable (248,250) (354,107)
Payments under capital leases (31,367) (13,370)
Exercise of stock options 23,750
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,353,779 3,739,903
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,849) (1,211,477)
Cash and cash equivalents at beginning of period 145,247 1,697,804
------------ ------------
============ ============
Cash and cash equivalents at end of period $138,398 $486,327
============ ============
Supplemental Cash Flow Disclosures:
Cash paid: Income Taxes $45,578 $234,077
Interest $770,190 $387,717
<FN>
The accompanying notes are an integral part of
these consolidated condensed statements.
</FN>
</TABLE>
5
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1997
(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
thereto. The results of operations for the three (3) and nine (9) months ended
August 31, 1997 are not necessarily indicative of the results to be expected for
the entire fiscal year ending November 30, 1997.
NOTE 2: GOING CONCERN
The Company has experienced cash flow deficits from operations in eight
of the eleven quarters since November 30, 1994 aggregating approximately $8.9
million, has incurred losses of $5.1 million in the nine months ended August 31,
1997, and currently has a loan balance on its line of credit in excess of
eligible borrowing under the terms of the loan agreement. In addition, in
September 1997 the Company became subject to three Notices of Overpayment After
Final Settlement received from Medicare Intermediaries requiring the repayment
of overpayments of approximately $6.1 million relating to the Company's New
England home care operations for fiscal 1993 and 1994, for which the Medicare
program seeks recoupment from cash payments otherwise due to the Company's New
England provider for services provided in 1996 and 1997. The Company is also
obligated to make payments totaling approximately $2.5 million for existing
Medicare repayment plans. As more fully described in Note 5, the Company is
subject to additional contingencies, the outcome of which may have a material
impact on the Company's results of operations and liquidity. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
Management's plans to address the cash flow deficits and operating
losses described above include a restructuring of its operations to return the
Company to profitability, sales of non-strategic assets to raise cash,
restructuring or replacing its current loan agreement to adequately fund working
capital needs, entering into extended repayment plans for overpayments due to
6
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (Continued)
Medicare, negotiating global settlements with the Medicare program of open cost
reports and appeal and reopening issues included in Settlements Due From
Medicare, and the issuance of equity securities. The Board of Directors of the
Company has also authorized management to explore the possibility of a
protective bankruptcy filing. There can be no assurance that the Medicare
payment recoupment will be lifted administratively, or that the Company will be
able to raise sufficient cash to continue to fund its operations.
NOTE 3: DEBT
On March 12, 1997, the Company amended its revolving line of credit to
increase the line to $14 million and to extend the term of the line for an
additional year to February 1999. Fees and other costs related to this amendment
amounted to approximately $100,000 and will be amortized over the extended term
of the line.
In June 1997, the Company further amended its revolving line of credit
to increase borrowing capacity by an additional $1.6 million by replacing
receivables, which collateralized the standby letter of credit, with other,
non-credit line receivables.
At October 13, 1997, the Company was not in compliance with certain
covenants in the loan agreement which require that the line's balance not exceed
"eligible borrowing," as defined, that the Company's tangible net worth exceed
$6,000,000 and that leases in excess of $50,000 be approved in writing. At
October 13, 1997, the line's balance was $9.2 million, exceeding eligible
borrowing by $258,000. The Company is currently in discussions with the lender
to cure these defaults.
NOTE 4: STOCKHOLDERS' EQUITY
1990 Stock Option Plan
Pursuant to Board action during the quarter ended February 28, 1997,
10,000 options to purchase common stock under the 1990 Stock Option Plan were
granted to a member of the Board of Directors with an exercise price of $2.375
per share. The exercise price was determined by reference to the average market
price over the ten (10) market days preceding the date of grant. The options
vested at the date of grant and are exercisable for a period of five years from
the date of grant.
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.
7
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (Continued)
In response to the issuance of the federalsearch warrants, the Company engaged
counsel who initiated a lawyer-directed internal investigation into its Medicare
claims processing system. Thisinternal 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 Medicare home care 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
home care operations in Florida.
As a result of the federal investigation and HCFA suspension, in fiscal
year 1993 the Company initiated a lawyer-directed internal investigation into
its Medicare claims processing system, 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. As of
November 30, 1994, the Company had 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.
8
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (Continued)
The estimated settlement amounts due to the Company from Medicare 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 substantive information becomes
available. Included in the settlements due from Medicare as of August 31, 1997
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
condensed balance sheet as of August 31, 1997 are realizable at their recorded
amount.
In August 1997, certain of the Company's current and former officers
and employees, including its current Chief Executive Officer, were served with
federal grand jury subpoenas requesting information. The Company believes these
subpoenas relate to the issues which precipitated the search warrants executed
in December 1992. The Company continues to be 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 such allegations 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 directors, officers or 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 had been recommended to the Commission.
Litigation, Claims and Assessments:
In the ordinary course of business, the Company is exposed to various
claims and incidents which may lead to 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, results of operations and cash flows.
Settlements Due To and From Medicare:
As a Medicare provider, the Company continually has estimated
settlements due to and from the Medicare Program. The estimated settlement
amounts due to Medicare are the result of:
9
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (Continued)
(1) interim reimbursement rates, atwhich the Company was paid for its services
throughout the year, exceeding the Company's actual costs of providing such
services; and (2) revisions by intermediaries of the Company's reported
reimbursable costs after the intermediaries' review oraudits 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. Until now, the Company has funded settlements to
Medicare as they become due by: (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. In addition, the Company
continues to be subject to lengthy time frames associated with resolving
Medicare appeal and reopening issues on cost reports reflecting amounts due from
Medicare. During September 1997, the Company received notification from two
intermediaries requiring repayments of approximately $6.1 which is in addition
to the remaining balances of $2.5 million from notices received in fiscal year
1996. Accordingly, as more fully described in Note 2, the Company is actively
seeking other alternatives to fund the repayments.
Also, during September 1997, President Clinton imposed a six month
moratorium on new home care providers and imposed additional restrictions on
existing providers. While the Company sees no direct adverse impact on its
operations from the six month moratorium, the President's message regarding
additional restrictions on existing providers along with accusations and other
remarks and analyses by legislators and regulators regarding the home care
industry has had, and the Company believes will continue to have, an adverse
impact on the business environment in which it operates.
The Company believes the Notices of Overpayment After Final Settlement
received in September 1997, as described above, are an indication of a new
climate between intermediaries and providers. It appears that there may be new
and different standards of documentation and interpretations of the Medicare
regulations than existed when the cost reports were prepared.
Because of the Notices of Overpayment After Final Settlement received
in September and the changes in the business and regulatory climate in which it
appears the Company now operates, in the quarter ended August 31, 1997 the
Company provided approximately $4,200,000 in additional allowances against the
Settlements Due From Medicare resulting in a corresponding charge against
income.
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 depending upon the employee involved. The
maximum aggregate salary component commitment for these agreements would be
approximately $507,000 as of August 31, 1997.
10
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, (Continued)
Self-Funded Insurance Plans:
The Company self-funds all of its workers' compensation and much of its
employee health coverage 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 historical loss experience. At both August 31,
1997 and November 30, 1996, such reserves totaled approximately $1.8 million 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 in which such differences become known.
Management believes that differences between actual losses incurred after August
31, 1997, related hereto, and its recorded reserve estimates will not be
material.
State Taxes:
On June 9, 1997, the Company received notice of assessment of state
income and franchise taxes payable based upon an audit of tax years 1992, 1993
and 1994. The assessment totals $170,000 including $46,000 of interest and
penalties. The Company has exercised its option to request a hearing at which
time the Company believes that the positions set forth in the tax return filed
will prevail and thus, no additional tax will be due. Accordingly, the Company
does not believe that the resolution of the notice will have a material impact
on the Company's financial position, results of operations or cash flows.
NOTE 6: CONCENTRATION OF CREDIT RISK
Since 1991, the Company has been providing services to healthcare
facilities located in the U.S. Virgin Islands, which facilities are owned by the
government of the U. S. Virgin Islands. Revenues from these facilities accounted
for approximately 6% and 10% of consolidated net revenue from services for the
nine months ended August 31, 1997 and August 31, 1996, respectively. Outstanding
accounts receivable attributable to services to facilities in the U.S. Virgin
Islands were approximately $2.1 million and $4.5 million as of August 31, 1997
and November 30, 1996, respectively, and are included in trade accounts
receivable in the accompanying consolidated condensed balance sheets.
Approximately $707,000 of the August 31, 1997 balance has been outstanding for
180 days or greater. As of August 31, 1997, $4.4 million of the $4.5 million
outstanding at November 30, 1996 had been collected. Collections from the
government owned healthcare facilities located in the U.S. Virgin Islands are
generally slower than the Company's domestic customer base; however, this has
been mitigated somewhat by an overall decrease in nurses placed in Virgin Island
healthcare facilities. The government of the U. S. Virgin Islands currently
acknowledges the debt and is instituting a plan to liquidate the amounts past
due. Accordingly, no allowance for doubtful accounts has 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
August 31, 1997
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations focuses on those factors that have had a
material effect on the Company's financial condition and results of operations
during the three and nine months ended August 31, 1997 and August 31, 1996. It
should be read in conjunction with the accompanying consolidated condensed
financial statements and notes thereto. Trends and contingencies of a material
nature are discussed to the extent known and considered relevant.
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations may include forward-looking statements that
are subject to certain risks, uncertainties and exceptions. Such forward-looking
statements are intended to be identified in this document by the words
"anticipate," "estimate," "expect," "possible," "potential" and similar
expressions. Actual results may vary materially. Factors that could cause actual
results to differ materially include, but are not limited to, general economic
conditions; competitive factors; changes in federal or state legislation
governing the Company's operations, including the Medicare and Medicaid
reimbursement climate; resolution of the Company's Dade County, Florida,
investigative issues; and the other risk factors disclosed on Exhibit 99.01 to
the Company's Annual Report on Form 10-K for the year ended November 30, 1996.
The Company provides: (i) home health care and other in-home support
services; (ii) interim staffing of nurses and other medical personnel, primarily
to hospitals; and (iii) rehabilitation services, including physical,
occupational, speech and other therapy services. These services are offered
through a pool of caregivers operating within the Company's network, which as of
August 31, 1997, consisted of 28 home health care branch offices in seven
states, active relationships for interim staffing needs with approximately 130
hospitals in 30 states and the U.S. Virgin Islands and six rehabilitation
clinics with one clinic located in Georgia, one clinic located in Tennessee, one
in Rhode Island and three in Florida.
Liquidity and Capital Resources
General. 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 has historically met
its short-term liquidity needs from cash flow from operations and borrowings
from its credit facility. However, during the nine-month period ended August 31,
1997, the Company incurred cash flow deficits from operations in the amount of
$2.2 million and has experienced cash flow deficits from operations in eight of
the eleven quarters since November 30, 1994 aggregating approximately $8.9
million. In addition, in September 1997 the Company became subject to three
Notices of Overpayment After Final Settlement received from Medicare
intermediaries requiring the repayment of overpayments of approximately $6.1
million relating to the Company's New England home care operations for fiscal
1993 and 1994, for which the
12
<PAGE>
Medicare program seeks recoupment from cash payments otherwise due to the
Company's New England provider for services provided in 1996 and 1997. The
Company is also obligated to make payments totaling approximately $2.5 million
for existing Medicare repayment plans. As discussed below and in Note 3, the
Company is also currently in default under the terms of its revolving line of
credit. The Medicare program's recoupment of payments to the Company's New
England Medicare home care provider has materially and adversely affected the
Company's liquidity.
The Company continues to contest the overpayment and to seek relief
from the Medicare payment recoupment through all available means, including the
Medicare program's administrative appeals process. The Company also has under
consideration alternative means to augment its short-term liquidity to fund
current operations, including the possibility of asset sales, cash infusions
from strategic and/or financial partners, and possible business combinations.
The Board of Directors of the Company has also authorized management to explore
the possibility of a protective bankruptcy filing. There can be no assurance
that the Medicare payment recoupment will be lifted administratively, or that
the Company will be able to raise sufficient cash to continue to fund its
operations. If the Company is unable to fund its operations, the Company's
ability to continue as a going concern may be materially and adversely affected
(see note 2).
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. On March 12, 1997, this line was increased to $14 million and extended
an additional year.
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.
The 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, 1997, the Company was contingently
liable for a $1.6 million standby letter of credit issued by its lender
representing a reduction of otherwise eligible borrowing. In June 1997, the
Company amended its agreement to replace the receivables which collateralized
the stand by letter of credit with other, non-credit line receivables; thus,
increasing eligible borrowing by $1.6 million.
Restrictive Covenants. The 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 August 31, 1997, principal borrowings under the credit facility
were approximately $9.3 million which exceeds eligible borrowing available on
that date by $437,000. The Company's present facility is not adequate to provide
for the approximately $8.6 million of program repayments due to Medicare, or for
any other significant liabilities that may arise. See
13
<PAGE>
Note 5. 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 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. Until recently the Company has been able to fund settlements to Medicare
as they become due by: (1) negotiating extended repayment 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, during September 1997, the Company
received notification from two intermediaries requiring repayments of
approximately $6.1 million which is in addition to the remaining balances of
$2.5 million from notices received in prior fiscal years. The Company continues
to be subject to lengthy time frames associated with resolving Medicare appeal
and reopening issues on cost reports reflecting amounts due from Medicare.
Accordingly, as discussed above, the Company is actively seeking other
alternatives to fund the repayments.
During September 1997, President Clinton imposed a six month moratorium
on new home care providers and imposed additional restrictions on existing
providers. While the Company sees no direct adverse impact on its operations
from the six month moratorium, the President's message regarding additional
restrictions on existing providers along with accusations and other remarks and
analyses by legislators and regulators regarding the home care industry has had,
and the Company believes will continue to have, an adverse impact on the
business environment in which it operates.
The Company believes the Notices of Overpayment After Final Settlement
received in September 1997, as described above, are an indication of a new
climate between intermediaries and providers. It appears that there may be new
and different standards of documentation and interpretations of the Medicare
regulations than existed when the cost reports were prepared.
Because of the Notices of Overpayment After Final Settlement received
in September and the changes in the business and regulatory climate in which it
appears the Company now operates, during the quarter ended August 31, 1997 the
Company provided approximately $4,200,000 in additional allowances against the
Settlements Due From Medicare, resulting in a corresponding charge against
income.
Cash Position. Net cash used by operating activities was approximately
$2.2 million and $4.8 million for the nine months ended August 31, 1997 and
August 31, 1996, 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.
14
<PAGE>
Financing activities principally consisted of net repayments of outstanding
borrowings under the Company's line of credit.
Net Working Capital. As of August 31, 1997, the Company had
approximately $3.9 million of working capital and approximately $138,000 of cash
and cash equivalents. The ratio of current assets to current liabilities at
August 31, 1997 was 1.2 to 1. As of August 31, 1997, the Company's commitments
that would require large or unusual amounts of cash consisted of office rents,
repayments to the Medicare Program, and amounts due to the Chairman and Chief
Executive Officer.
Results of Operations - Three and Nine Months Ended August 31, 1997
Compared With Three and Nine Months Ended August 31, 1996
Net Revenue. Consolidated net revenue decreased approximately
$4,110,000, or 26.3% to $11,494,000 and $822,000, or 1.8% to $45,255,000 for the
three and nine months ended August 31, 1996 and 1997, respectively. As more
fully discussed in Note 1 of the Company's annual financial statements on Form
10-K, variances from recorded estimated amounts of settlements due to and from
Medicare are treated as adjustments to revenue from Medicare in the period in
which such amounts are settled or when better information is known as to their
ultimate resolution. Accordingly, the $4.2 million charge described above is
recorded as a reduction of Medicare home care revenue for the quarter ended
August 31, 1997.
Net revenue from services provided by the Company's Homecare Group
decreased approximately $4,548,000, or 38.6% to $7,227,000 and $2,639,000, or
7.7% to $31,438,000 for the three and nine months ended August 31, 1996 and
1997, respectively. After considering the $4.2 million charge previously
described, net revenues are relatively flat for the quarter when compared to the
prior year. The nine month comparison reflects an increase of $1,598,000 or
4.7%, after excluding the $4.2 million charge, which is attributable to the
maturation of new home care branches established and certified during the latter
part of fiscal year 1996, the continued overall growth of the New England
Regional home care operations and the growth of the Mid South proprietary home
care operations.
Net revenue from services provided by the Company's HSS Staffing Group
increased by approximately $1,217,000, or 41.8%, to $4,130,000 and $2,323,000,
or 22.5% to $12,636,000 for the three and nine months ended August 31,1996 and
1997, respectively. This increase is attributable to the addition of more than
100 new client hospitals, the re-contracting of certain existing client
hospitals at more favorable rates facilitated by an increased demand for interim
staffing at healthcare facilities nation-wide. The addition of new clients has
also facilitated continued diversification of nurse placements, reducing the
Company's reliance on any one geographic area or client during the nine months
ended August 31, 1997, as compared to the prior year. See Note 6.
Net revenue from services provided by the Company's Rehabilitation
Services Group decreased approximately $503,000, or 80.4%, to $122,700 and
$718,000, or 41.8% to $998,000 for the three and nine months ended August 31,
1996 and 1997, respectively. The Rehabilitation
15
<PAGE>
Services Group's revenues decreased due to the closing of unprofitable sites and
the curtailment of low margin business in remaining sites.
Cost of Services. The cost of services for the Homecare Group increased
approximately $232,000, or 3.6%, to $6,717,000 and $634,000, or 3.3% to
$19,718,000 for the three and nine months ended August 31, 1996 and 1997,
respectively. The cost of services increase is attributable to increased
manpower needs to process increased revenue volume and normal salary increases.
Cost of services for the HSS Staffing Group increased approximately
$809,000, or 33.0%, to $3,259,000 and $1,501,000, or 18.0% to $9,826,000 for the
three and nine months ended August 31, 1996 and 1997, respectively. Such
increases are less than revenue increases for the HSS Staffing Group which
provided higher gross margins. The cost of service increase is principally
attributable to the salaries paid to, and housing expenses associated with, a
greater number of nurses and other healthcare professionals working at client
and proprietary facilities.
The cost of services for the Company's Rehabilitation Services Group
decreased approximately $342,000, or 72.1%, to $132,000 and $396,000, or 32.0%
to $841,000 for the three and nine months ended August 31, 1996 and 1997,
respectively. The decrease in the cost of services for the Rehabilitative
Services Group follows the decrease in revenues and is likewise attributable to
the closing of unprofitable sites and the curtailment of low margin business in
remaining sites.
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 payers 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 payer source) being performed by the
Company.
The Company's gross margin decreased approximately $4,722,000, or
77.7%, to $1.358,000 and $2,878,000, or 16.3% to $14,775,000 for the three and
nine months ended August 31, 1996 and 1997, respectively. Gross margin as a
percentage of revenue decreased from 39.0% to 11.8% and 38.3% to 32.6% for the
three and nine months ended August 31, 1996 and 1997, respectively. The decrease
in the third quarter is principally related to the $4.2 charge to revenue.
Selling, General and Administrative Expenses. Selling, General and
Administrative expenses increased approximately $262,000, or 4.4%, to $6,181,000
and $2,354,000, or 13.9% to $19,317,000 for the three and nine months ended
August 31, 1996 and 1997, respectively. The increase results from higher payroll
and payroll related costs relative to the investments by the Company to
reestablish information systems as an in-house function, to centralize patient
accounting for its Rehabilitative Services Group and certain recently certified
Homecare
16
<PAGE>
operations, and recruiting and travel expenses within both the Company's
Homecare and HSS Staffing Groups. Additionally, in the first nine months of
fiscal 1996, workers compensation insurance reserves and certain legal reserves
experienced non-recurring reductions of approximately $815,000 and $182,000,
respectively.
Interest and Other Income (Expense). Higher interest costs resulted
from increased borrowing under the Company's line of credit which were used to
fund the repayments of Medicare overpayments (see Note 5) and the expansion of
the Company's revenues. During the nine months ended August 31, 1997, average
borrowings outstanding were $7.8 million, compared to $3.8 million, for the
corresponding period of the prior year.
Pre-Tax Income. Pre-Tax Income decreased $5,274,000 from $159,000 in
income to a $5,115,000 loss and $5,605,000 from $554,000 in income to a
$5,051,000 loss for the three and nine months ended August 31, 1996 and 1997,
respectively. As previously discussed, the losses are principally the result of
the $4.2 million charge and losses from rehabilitation services.
Extraordinary Item. In connection with the early extinguishment of
its debt owing to its prior lender, the Company incurred an extraordinary charge
of $254,955 during the first quarter of 1996.
Accounting Pronouncements. Effective December 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." Such adoption had no
effect on the Company's Consolidated Condensed Financial Statements for the
three and nine months ended August 31, 1997.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which requires adoption
during the Company's current fiscal year. SFAS No. 123 requires that the
Company's financial statements include certain disclosures regarding stock-based
employee compensation arrangements. Changes in accounting for stock-based
compensation are optional and, therefore, the Company will adopt only the
disclosure requirements. Such adoption will be made at the end of the current
fiscal year.
On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," effective for fiscal years ending after December
15, 1997. When adopted, it will require restatement of prior years' earnings per
share. This statement would have no effect on the Company's financial statements
were it adopted as of the three or nine months ended August 31, 1997 as
presented herein.
In February of this year, the Financial Accounting Standards Board
issued SFAS No. 129, "Disclosures of Information about Capital Structure,"
effective for fiscal years ending after December 15, 1997. This statement
establishes standards for disclosing information about a Company's capital
structure and is not anticipated to have an impact on the Company's financial
statement disclosures.
17
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
August 31, 1997
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Notes to Consolidated Condensed
Financial Statements. See also "Item 3 - Legal
Proceedings" which is incorporated by reference from
the Company's Annual Report in Form 10-K for the
fiscal year ended November 30, 1996 filed with the
Securities and Exchange Commission on February 28,
1997.
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. AND SUBSIDIARIES
SIGNATURES
August 31, 1997
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 G. Huneycutt Ronald G. Huneycutt, Vice President
Ronald G.Huneycutt of Finance, Chief Financial Officer
(principal accounting officer)
Date: October 15, 1997
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOSPITAL STAFFING SERVICES, INC. FOR THE NINE MONTHS
ENDED AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 138,398
<SECURITIES> 11,186
<RECEIVABLES> 8,540,193
<ALLOWANCES> 719,497
<INVENTORY> 0
<CURRENT-ASSETS> 19,835,358
<PP&E> 2,517,697
<DEPRECIATION> 1,777,773
<TOTAL-ASSETS> 22,768,620
<CURRENT-LIABILITIES> 15,943,168
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<COMMON> 6,360
<OTHER-SE> 6,253,693
<TOTAL-LIABILITY-AND-EQUITY> 22,768,620
<SALES> 45,255,043
<TOTAL-REVENUES> 45,255,043
<CGS> 30,479,676
<TOTAL-COSTS> 30,479,676
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<LOSS-PROVISION> 462,774
<INTEREST-EXPENSE> 770,190
<INCOME-PRETAX> (5,051,102)
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