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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from____ to____
Commission File Number 0-11781
HOSPITAL STAFFING SERVICES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2150637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6245 North Federal Highway, Suite 500
Fort Lauderdale, Florida 33308-1900
(Address of principal executive offices)
(954) 771 - 0500
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of
Title of Each Class Name of each exchange on which registered
Common Stock $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of
the Act:
None
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at December 31, 1996 was $14,909,605.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
As of December 31, 1996, 6,359,770 shares of common stock, par value
$.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10 (Directors and Executive Officers
of the Company), 11 (Executive Compensation), 12 (Security Ownership of Certain
Beneficial Owners and Management) and 13 (Certain Relationships and Related
Transactions) will be set forth in the Proxy Statement of the Company relating
to the 1996 Annual Meeting of Stockholders and is incorporated herein by
reference.
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PART I
ITEM 1. BUSINESS
Hospital Staffing Services, Inc. and Subsidiaries (the "Company") is a
Florida corporation which was incorporated in 1981. The Company's principal
executive offices are located at 6245 North Federal Highway, Suite 500, Fort
Lauderdale, Florida 33308-1900.
General
The Company provides: (i) home health care and other in-home support
services through its "HSSI HomeCare Group"; (ii) interim staffing of nurses and
other medical personnel, primarily to hospitals through its "HSS Staffing Group"
(formerly referred to as Traveler Group); and (iii) rehabilitation services,
including physical, occupational, speech and other therapy services, primarily
to manufacturing enterprises, long-term care facilities, counties, school
boards, home care companies and through the Company's own clinics. These
services are offered through a pool of caregivers operating within the Company's
network which, as of November 30, 1996, 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 two clinics located in Georgia, one clinic located
in Tennessee, one clinic located in Rhode Island and two located in Florida.
Home Care Group
Services. The "HSSI HomeCare Group" offers a broad range of
professional health care and support services to meet the medical and personal
needs of individuals in their homes. These home care services provide an
alternative to institutional care. These services include specialized skilled
nursing services such as administration of infusion therapies (including
chemotherapy, antibiotics, enteral and parenteral feeding), medical social work,
standard skilled nursing services (such as changing of dressings, injections,
catheterization and administration of medication), physical therapy,
occupational therapy, speech therapy, home aide services (such as assistance
with personal hygiene, dressing and feeding), and homemaker services (such as
preparation of meals, light housecleaning and shopping). The home care services
provided by the HSSI HomeCare Group are available twenty-four hours per day,
seven days per week, on a live-in, hourly, shift or per visit basis.
Based on published industry information, the Company considers home
health care a rapidly growing and diverse industry. The industry has experienced
an estimated annual growth rate of approximately 13% since 1991. The primary
reasons for rapid growth in the home health care market include (i) the general
aging of the U.S. population; (ii) the realization of substantial cost savings
through treatment at home as an alternative to hospitalization; (iii) the fixed
amount of Medicare reimbursement to hospitals based upon a patient's diagnosis,
regardless of the cost of service, thereby providing hospitals with an incentive
to minimize the length of patient stays and requiring an alternative means of
patient care; (iv) advances in medical technology, which have enabled a growing
number of treatments to be provided in the home rather than requiring
hospitalization; (v) the general preference of patients to receive treatment in
a familiar environment; and (vi) the growing acceptance within the medical
profession of home health care.
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History and Recent Developments. The HSSI HomeCare Group began
operation in 1990 with the Company's acquisition of the home health care
division of Continental Health Affiliates, Inc. In 1991, the Company acquired
substantially all of the assets, exclusive of accounts receivable, of CarePoint
Personal Services d/b/a CarePoint Nursing Services. The Company has been
refining its operating strategy for HSSI HomeCare Group since the 1990
acquisition. The 1992 federal investigation into the Medicare practices of the
Company in Dade County, Florida, and the suspension of Medicare reimbursement to
the Company's South Florida Medicare providers, led the Company to close down
its South Florida Medicare operations (see "Dade County Investigation and
Related Matters" herein). The situation in South Florida resulted in decreased
revenue, cash flow pressure, and a diversion of resources and management's time
and focus. In response to the financial and management strain, the Company
evaluated the profitability of its various home care operations and decided to
focus its home care business in the New England operating region (including
Massachusetts, New Hampshire and Rhode Island) and the South Central operating
region (including Tennessee and Mississippi). In keeping with this strategy, in
August 1994, the Company sold its California, New York and Arizona home care
operations, and in early fiscal 1995, the Company sold its remaining South
Florida and Texas-based branches. The South Florida branch office was sold to
the Company's Chairman and Chief Executive Officer. See Notes 2 and 6 to the
accompanying consolidated financial statements for further discussion of the
acquisitions and sales of the Company and their financial impact on the Company.
The Company's current strategy anticipates focusing on smaller
acquisitions in the New England and South Central operating regions to build the
strength of the home care business in those regions. In addition, during 1996
the Company reentered the California geographic region with the establishment of
a Medicare Certified Home Health Agency located in Fresno, California and a Home
Care Support Services office located in Los Angeles, California. The Company
also entered the Connecticut market with the establishment of a Medicare
Certified Home Health Agency located in Hartford, Connecticut. The Company is
considering geographic expansion beyond those regions.
Branches. The home health care industry is a localized industry.
Patients and referral sources utilize home care services based in the immediate
geographic area in which the services are required. Therefore, the Company's
branch managers are responsible for the majority of the Company's home care
development and networking efforts. Additionally, the Company's computer systems
have been designed to allow the branches to handle certain administrative
functions, such as entering plans of treatment. The generation of claims,
invoices and payroll checks is performed at the regional level. This point of
service process eliminates duplicate corporate efforts with respect to those
functions and reduces the need for corporate personnel and overhead. Credit and
collections functions for private pay and insurance beneficiaries who have a
co-pay responsibility are all handled at the regional level.
As of November 30, 1996, HSSI HomeCare operated 28 branches located
within three regions: New England, encompassing Massachusetts, New Hampshire,
Connecticut and Rhode Island; South Central, encompassing Tennessee and
Mississippi; and Western, encompassing California. During fiscal 1995, the
"regionalization" of the Company's New England home care operations was
completed. Consequently, as of November 30, 1996, all of the Company's home
health care operations are fully independent with complete back office
capabilities.
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Development and Sales. While clients select their own home health
providers, they usually receive input from physicians, hospitals, nursing homes,
community resources, other home health care agencies, managed care programs
("HMO's"), and state programs (collectively, "primary referral sources").
Therefore, the Company's coordinating and liaising efforts are predominantly
directed at the primary referral sources. The Company believes the growth of its
business depends on its ability to maintain and enhance current working
relationships and establish and maintain new working relationships with these
primary referral sources.
Because the Company believes relationships with primary referral
sources must be established on a local basis, the Company spends considerable
resources in hiring branch clinical personnel and training such personnel in
coordinating and liaison skills. While coordinating and liaising are primarily
the responsibility of the branch office, members of the Company's senior
management (including regional managers) devote considerable time in assisting
the branch offices with these efforts.
Recruitment. The Company recruits personnel through its in-house
corporate recruiting department in Fort Lauderdale, Florida. That department
maintains a data base of registered and licensed practical nurses, nurses'
aides, home health aides and companions, and physical, speech and occupational
therapists available for assignment. The Company recruits its personnel
principally through referrals from its current personnel and through
advertisements and supplements its recruiting efforts with periodic direct mail
solicitations to nursing schools, therapy schools and certified aide training
programs. The Company conducts qualified educational training for its staff.
Management believes that the experience and reputation of the Company for
recruiting qualified medical personnel for its HSS Staffing Group have enhanced
the Company's ability to recruit home health care personnel for the HSSI
HomeCare Group. Demand for physical, occupational and speech therapists
typically exceeds supply. The HSSI HomeCare Group has occasionally been unable
to capitalize on opportunities due to the shortage of such therapists. The
Company has sought to address this shortage by offering attractive compensation
packages to needed therapists and by increasing its capabilities with respect to
the recruitment of such therapist.
Seasonality. Traditionally, the business of the HSSI HomeCare Group
has not been subject to material seasonal fluctuations.
Competition. The HSSI HomeCare Group faces competition from
freestanding, independently owned Medicare/Medicaid certified and non-certified
home health providers, hospital-based home health agencies, home care providers
owned by or affiliated with other proprietary chains, and a variety of public
and semi-public home care providers, such as home care divisions of state public
health departments and visiting nurse associations. Some of these entities or
their sponsoring organizations have capital resources substantially greater than
those of the Company.
Recent industry data published by NAHC indicates that there are in
excess of 17,500 home care agencies (including home health agencies, home care
aide organizations, and hospices) in the United States. The Company believes
that no one company controls more than 10% of the current home care market.
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Since most home health care business is generated through referrals
from primary referral sources, home care providers must compete to develop
relationships with these key referral sources. Home care providers also compete
to deliver high quality, accessible, cost effective services to their customers.
Furthermore, providers must compete for the most qualified caregivers and also
must strive to provide all of the home care services needed in the areas they
serve.
Customers. The HSSI HomeCare Group does not depend upon a single
customer or a group of customers, the loss of which would have a material
adverse effect on the Company's business.
HSS Staffing Group.
Services. The HSS Staffing Group provides registered nurses and other
professional medical personnel, often referred to as "Travelers", primarily to
client hospitals on a contractual basis for periods generally ranging from 8 to
52 weeks, with the average being approximately 17 weeks. (Standard assignments
are usually for durations of thirteen or twenty-six weeks). Clients utilize
Travelers to provide cost effective interim staff to meet predictable
fluctuations in staffing requirements. In addition, unlike daily or other very
short-term supplemental staff, Travelers serve the client for a long enough
period to function as permanent hospital staff. The ability of Travelers to
function as permanent staff improves the continuity and consistency of patient
care and reduces the overall administration, orientation and supervisory
requirements of the clients' permanent staff.
Each of the programs administered by the HSS Staffing Group includes
(i) recruitment and pre-screening of medical personnel to fill specific
positions; (ii) verification of valid state licenses, professional
qualifications and immigration status; (iii) preparation of applications and
other presentation materials; (iv) coordination of travel arrangements; and (v)
preliminary orientation of the Traveler. The Company typically employs its
Travelers on a full-time basis for the period of each assignment. The Company
also provides Travelers with housing (or a housing subsidy) while on assignment,
travel allowance, and other employee benefits, including malpractice, health and
dental insurance at little or no cost to the Traveler.
History and Recent Development. The Company has provided Travelers to
clients since 1981. All back office support for the HSS Staffing Group is
provided through the Corporate office. When the Company entered the home care
field in 1990, the Company shifted its primary focus to the development and
operation of the HSSI HomeCare Group. The Company has developed the strategy and
support for its home care operations and is now placing a renewed emphasis on
the HSS Staffing Group. During 1996, the Company increased its marketing efforts
for the HSS Staffing Group and continued efforts to expand and increase this
line of business. This marketing effort will reflect and respond to the
increasing consolidation among health care providers. The Company anticipates
that, while the increased marketing and expansionary efforts will result in
increases in the dollar volume of business, the HSS Staffing Group may
experience short term decreasing margins.
Clients and Marketing. As of November 30, 1996, active clients of the
HSS Staffing Group consisted of approximately 130 hospitals and other clients
located in 30 states and the
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U.S. Virgin Islands. Travelers serve both for-profit and not-for-profit entities
which range from small rural hospitals to major teaching and research
institutions. The Company's typical client is a hospital with approximately 250
beds which is located in or near a major metropolitan area. Approximately 9.9%
of HSS Staffing Group revenue for the fiscal year 1996 was from two hospitals
and two small nursing home clients located in the U.S. Virgin Islands. With
increased emphasis on domestic U.S. contracts, U.S. Virgin Island business and
revenue has decreased over the past year relative to total HSS Staffing Group
revenue.
During 1996, the Company opened up two "per diem" offices to support an
expanded service of providing per diem nurses, physical therapists, occupational
therapists and speech therapists under exclusive agreements to supplement
hospital staffing. Additional per diem offices are planned for the current year.
The Company markets Travelers principally through its corporate sales
department. The Company's marketing approach targets hospitals in major
metropolitan areas and in other areas which are attractive from a patient census
perspective and which also appeal geographically to Travelers. In addition, the
HSS Staffing Group targets niche markets, including home health agencies,
clinics and per diem staffing companies. Marketing activities are conducted
primarily by telephone contact, direct mail, attendance at national and regional
conventions, seminars, and direct contact with providers of healthcare services.
Through years of recruiting nurses and other medical personnel, the
Company has developed an extensive computer database of available, qualified
personnel, which data base enhances the Company's ability to match personnel
with a client's specific needs. The Company believes its database serves as a
competitive advantage in the interim staffing market.
Recruitment. The Company recruits personnel for its HSS Staffing Group
through its in-house corporate recruiting department. Recruiting methods include
national and local advertising, attendance at national and regional conventions,
personal and professional referrals and the sponsoring of local seminars in
selected cities throughout the United States and Canada. Approximately 30% of
the Company's current Travelers are recruited from Canada.
The aggregate database contains information on more than 20,000
pre-screened personnel classified by skill, experience, and choice of and
availability for assignments. The Company updates the database on a regular
basis. When called upon to fill an assignment, the Company's recruiters can
readily access this database to appropriately match a client's staffing needs
with available personnel. Nurses and other medical personnel listed in the
Company's database generally do not work exclusively for the Company.
The Company believes the traveling nurse program is attractive to
nurses because it provides an opportunity to combine work and travel. Demand for
medical professionals in the Traveler business is high. The HSS Staffing Group
has addressed this shortage by offering attractive compensation packages to
needed personnel, particularly physical, speech and occupational therapists. In
addition, the HSS Staffing Group has not been able to capitalize on all of its
opportunities due to the shortage of personnel which match assignment
opportunities.
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Seasonality. Historically, the Company's Traveler business in the U.S.
Virgin Islands has not been subject to material seasonal fluctuations. However,
the Traveler business in the rest of the United States has been seasonal, with
demand for Travelers being highest in the first and fourth quarters of the
fiscal year (September through February) and lowest in the third quarter of the
fiscal year (June through August). This is due largely to increased demand,
particularly during the peak tourist and winter home period in Florida, coupled
with an increase in the availability of nurses during the first and fourth
quarters of the Company's fiscal year.
Competition. The Company's HSS Staffing Group competes with other
professional medical recruitment organizations which offer the same or similar
services provided by the Company. The Company's management believes that the
Traveler portion of the supplemental staffing market is highly fragmented.
Management also estimates that the ten largest traveling nurse firms, which
includes the Company, account for approximately 60% of the market. Certain of
the Company's competitors have capital or other resources greater than those
available to the Company. Competition for hospital clients is generally based
upon the ability to provide qualified nurses and medical personnel on a timely
basis to a hospital in a cost-competitive manner. Location of assignment,
compensation and benefits are generally the principal factors considered by
nurses and other medical professionals when determining whether to become a
traveling professional. The Company believes that it can effectively compete in
the Traveler market because of its long-standing position in the industry and
established name recognition.
Rehabilitation Group
On February 15, 1995, the Company acquired certain assets of a therapy
company and in March, 1996, completed a second acquisition. The rehabilitation
services offered by the Company include physical, occupational, speech and other
therapy services, and are provided to manufacturing enterprises, long-term care
facilities, hospitals, school boards, home care companies and through the
Company's own clinics. The Company currently owns six clinics, two located in
Georgia, one located in Tennessee, one in Rhode Island and two located in
Florida.
Reimbursement and Payment Sources
Home Health Care and Rehabilitation Services.
General. Most of the revenues of the Company are derived from Medicare,
Medicaid, and other third-party payors, including local government health care
programs, commercial insurance carriers, managed care entities, and nursing
homes. The Company obtains an assignment of benefits from each patient which
enables the Company to be paid directly by third-party payors for the
reimbursable amounts of its charges. The Company's experience has been that
insurance carriers typically reimburse between 80% to 100% of the Company's
charges, and that the coverage policies may impose payment limitations. Where
coverage policies do not provide coverage for 100% of the Company's charges, the
balance of the Company's charges are the responsibility of the patient. Where
patients have more than one source of coverage, the portion of the Company's
charges that are not covered by a primary payor may be covered by a secondary
payor.
The Company reasonably expects to generate sufficient revenues from its
third-party payors to cover its expenses. However, third-party reimbursement and
coverage policies, and federal and state regulations, may change. Such
unanticipated changes may affect the Company's
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expectations. Significant changes may be made in Medicare and other third-party
payor programs, which changes could have a material impact on the Company's
financial condition.
Legislation has been or may be introduced in the Congress of the United
States which, if enacted, could affect the financial operations of the Company
by, for example, altering reimbursement by third-party payors such as Medicare
and Medicaid, or by encouraging the growth of managed care networks. One such
budget proposal would impose a prospective payment system applicable to
Medicare-reimbursed home health services, and would include a "fail-safe"
mechanism to automatically reduce all Medicare spending if certain federal
budget projections are not realized. It is impossible to predict whether these
or any other legislative or regulatory proposals will be enacted or promulgated,
and if so, whether such changes would affect the Company's ability to remain
competitive and/or the Company's level of reimbursement for medical services
rendered by the Company.
While occasional funding delays occur with respect to governmental
payor sources, the Company generally has had adequate external funds available
under its credit facility to finance temporary buildups in accounts receivable.
In the case of Medicare, which is a cost-reimbursement program, the interest
charges the Company incurs on outside borrowings are reimbursed to the Company
to the extent that such charges are within the Medicare allowable cost limits.
Medicare. A substantial portion of the revenues of the Company are
derived from the federal Medicare program. Title XVIII of the Social Security
Act authorizes Part A of the Medicare program, the health insurance program that
pays for home health care services for covered persons (generally, those aged 65
and older and the long-term disabled). Home health care providers, including the
Company, may participate in the Medicare program subject to certain conditions
of participation and upon acceptance of a provider agreement by the Secretary of
the Department of Health and Human Services. Only enumerated services, upon the
satisfaction of certain coverage criteria, are eligible for Medicare
reimbursement as a Medicare "provider".
Currently, Medicare Part A reimburses providers for certain costs for
certain home health care visits to eligible Medicare beneficiaries. There is no
limit to the number of home health visits a beneficiary may receive. Covered
services include part-time or intermittent skilled nursing care; physical,
occupational, or speech therapy; medical social services; part-time or
intermittent services of a home health aide; and certain medical supplies.
Reimbursement is made on a reasonable cost basis subject to
program-imposed cost per visit limitations applicable to each type of home
health service. Medicare reimbursement does not include a profit factor.
Medicare providers are subject to periodic audits of charges submitted for
reimbursement, which could result in recoupment of payments previously made to
the provider, or increases in payments to the provider.
Medicare providers are also subject to regulation by state health care
agencies, which award operating licenses and perform certain delegated
administrative functions including certification (See "Regulation"). Failure to
remain in compliance with any program requirements may subject the Medicare
provider to fines, suspensions, or termination from the Medicare program. The
Company is Medicare certified in its current home health care service areas.
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Management of the Company believes it is in material compliance with all
relevant licensure and certification requirements imposed by those states. In
areas where the Company is not certified as a Medicare provider, it may provide
home health personnel on a subcontract basis to certified home health care
providers, who in turn receive Medicare reimbursement.
The Company closed its South Florida Medicare home health operations
subsequent to fiscal year 1992 as a result of a suspension of Medicare payments
relative to the South Florida operation. While the suspension of Medicare
payments applied to all South Florida Medicare home health operations, to the
best of the Company's knowledge, the related federal investigation did not
involve any of the Company's operations outside of Dade County, Florida (See
"Dade County Investigation and Related Matters"). As a result of the sale or
nonrenewal of certain of the Company's Medicare certifications, the Company is
no longer Medicare certified in Dade, Broward, and Palm Beach Counties, Florida
(See "Regulation").
Medicaid. The Company derives a portion of its revenue from Medicaid
reimbursement. Pursuant to the Medicaid program, the federal Government
supplements funds provided by the various states for medical assistance to the
indigent. Payment for home health care services rendered to eligible Medicaid
recipients is made in an amount determined in accordance with procedures and
standards established by state law under federal guidelines. States differ as to
reimbursement policies and rates. However, in all states where the Company
currently provides home health care services to Medicaid recipients, the Company
is reimbursed on a fee schedule or prospective charge rate for its services.
Medicaid reimbursement rates may be reduced in response to state economic and
budgetary constraints.
HSS Staffing Group.
The HSS Staffing Group's services are paid for directly by clients.
Since the Company's inception in 1981, the Company has not experienced
significant delays in collecting its accounts receivable in a timely manner from
its client hospitals other than those in the U.S. Virgin Islands. The Company's
accounts receivable from the U.S. Virgin Islands was approximately $4.5 million
as of November 30, 1996 (see Note 11 to the accompanying consolidated financial
statements). As of January 31, 1997, approximately $2.3 million of the November
30, 1996 outstanding receivable balance from these customers remained unpaid, of
which approximately $937,000 has been outstanding for greater than 180 days.
Delayed receipts from the U.S. Virgin Islands sometimes requires the Company to
delay payment to its vendors.
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Net Revenue by Payor Source. While the Company does not, in all cases,
track revenue by payor source, the following chart sets forth the Company's
estimated percentage breakdown of net revenue by payor source for the five years
ended November 30, 1996:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Home Health Care
<S> <C> <C> <C> <C> <C>
Medicare .......................... 60% 59% 49% 44% 53%
Medicaid2 ......................... 4% 5% 15% 14% 10%
Insurance Carriers ................ 8% 3% 5% 6% 6%
Private (Individuals) ............. 3% 6% 6% 6% 7%
Contract .......................... 1% 5% 7% 9% 6%
Management Fees3 .................. -- -- 1% -- --
------ ------ ----- ------ ------
Total ............................. 76% 78% 83% 79% 82%
HSS Staffing ...................... 20% 20% 17% 21% 18%
- - ------------
Rehabilitation .................... 3% 2% -- -- --
- - --------------
Health Initiatives ................ 1% -- -- -- --
- - ------------------ -------- ------ ------ ------ ------
100% 100% 100% 100% 100%
==== ==== ==== ==== ====
<FN>
(1) During the fiscal year ended November 30, 1993, revenue was decreased
by $6.9 million as a result of providing for estimated Medicare
reimbursement disallowances related primarily to potentially
non-reimbursable costs which were incurred during fiscal years 1991 and
1992 on subcontracted staffing for the Company's now closed Dade County
Medicare offices. See Note 7 for further discussion.
(2) Medicaid revenue declined in fiscal 1995 as a result of the sale by the
Company of its California and New York home health care operations in
August 1994, and the Company's remaining Florida home health care
operations in January 1995.
(3) Represents management services to third-party owned home health
agencies.
</FN>
</TABLE>
Regulation
The Company is subject to various city, county and state payroll,
occupational and professional licensing laws that apply to medical
professionals. Many states have laws requiring training, monitoring and
regulating of medical professionals. The nature of the services provided by the
Company potentially exposes the Company to greater risks of liability for acts
or omissions than are posed by other non-medical personnel service businesses.
The Company maintains public liability and malpractice insurance in amounts
which it deems adequate to protect against this potential risk.
The federal government and all states in which the Company currently
operates regulate various aspects of the Company's home health care business.
Home health agency certification by the Health Care Financing Administration
("HCFA") is required to enable the Company to receive reimbursement for patient
care services and supplies provided to Medicare beneficiaries. The Company has
26 branches which provide services covered by Medicare. As conditions of
participation as a home health agency in the Medicare program, HCFA requires,
among other things, satisfaction of certain standards with respect to personnel,
services and supervision, the preparation of annual budgets, cost reports and
capital expenditure plans, and the establishment
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of a professional advisory group that includes at least one practicing
physician, one registered nurse and other representatives from related
disciplines and consumer groups. The Medicare and Medicaid Patient and Program
Protection Act of 1987 authorized the Office of Inspector General ("OIG") to
exclude from the Medicare and Medicaid programs persons who engage in certain
activities. The OIG has been given authority to exclude individuals and entities
on any one of several grounds, such as criminal convictions relating to health
programs and engaging in activities subject to criminal and civil penalties
under the Social Security Act. The OIG has also authorized permissive exclusions
derived from a criminal conviction, including convictions relating to fraud,
license revocation or suspension, prior suspension or exclusion, failure to make
certain disclosures, failure to grant immediate access and failure to take
certain corrective actions. The exclusion may be for a period of three years,
but the OIG has the authority to increase or decrease the period based on the
existence of aggravating or mitigating circumstances, the degree of culpability,
prior history of sanctions or offenses and other factors as justice may require.
The regulations do not establish a precise time period for non-derivative
permissive exclusions. Rather, the OIG considers aggravating and mitigating
circumstances.
Some states have enacted Certificate of Need ("CON") legislation
requiring a provider to file an application that must be approved by the
appropriate state authority before certain health care services can be provided
in an area. Approval is dependent upon a demonstration that the need exists for
such services in the area. In states having a CON requirement, HCFA will grant
Medicare certification only to providers which have obtained a CON. As of
November 30, 1996, of the seven states in which the HSSI HomeCare Group
operates, three have CON requirements. The Company operates in compliance with
these requirements. To the extent that a provider has not obtained a CON with
respect to a geographic service area in a state which requires one, the provider
is unable to bill directly for services to Medicare-covered patients in that
geographic service area. CONs limit the access of providers to markets and
impose costs, because providers who wish to serve an area subject to CON
legislation must be approved for a CON or purchase the CON of a qualified
provider. Other providers will be unable to enter that market and bill for care
to Medicare patients without obtaining a CON. As a result of the 1992 Dade
County investigation (see below), the Company sold its CONs in Broward and Palm
Beach Counties, Florida, and the CON in Dade County, Florida, was not renewed.
The Corporation is also subject to various local, state and federal
environmental laws and regulations which regulate the discharge of materials
into the environment or are otherwise designed to protect the environment.
Management of the Company does not project that any material capital
expenditures will be necessary for the Company to comply with such environmental
laws and regulations.
Dade County, Florida Investigation and Related Matters
As reflected in prior annual and quarterly reports of the Company, the
Company is involved in a federal investigation concerning the propriety of
certain of its Florida Medicare claims. On December 3, 1992, in connection with
a federal investigation into Medicare practices by health care providers in
South Florida, the Company was served with federal search warrants. In response
to the issuance of the federal search warrants, the Company engaged legal
counsel who initiated and directed an internal investigation into its Medicare
claims processing system. The internal investigation focused on a review of the
Company's compliance with applicable Medicare laws and regulations.
13
<PAGE>
On December 15, 1992, HCFA (through its fiscal intermediary) notified
the Company of its decision to suspend reimbursement to the Company's South
Florida Medicare providers. Such suspension of Medicare payments in South
Florida was based, in part, upon allegations of fraud arising from a federal
investigation into claims that were submitted to Medicare for services not
rendered. Management believes that the alleged violations and investigation
relate to services performed by the Company's Dade County 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 any 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 curtailed its operations in
Dade, Broward and Monroe Counties, Florida, terminated its subcontracting
relationships with staffing providers in South Florida, and ultimately ceased
operations in these counties.
Subsequent to December 1992, the Company continued to operate its
Medicare provider 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 payment 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 branch. The Company currently has no Medicare
Home Care operations in Florida.
As of November 30, 1992, based on information available to management
at that time, the Company provided for estimated Medicare reimbursement
disallowances for potentially non-reimbursable costs incurred in South Florida
in fiscal years 1991 and 1992. 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 counsel
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 untimely filing. While the
majority of fiscal years 1991 and 1992 claims were billed to the Medicare
program, 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 results of operations, financial condition or
cash flow as effected in its consolidated financial statements.
The estimated Medicare settlement amounts payable to the Company as
reflected in the accompanying consolidated balance sheets, as well as net
revenue from services presented in the accompanying consolidated 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 estimated settlements due from Medicare as of November 30, 1996, is
approximately $2.7
14
<PAGE>
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 estimated settlements
due from Medicare as recorded in the Company's consolidated balance sheet as of
November 30, 1996, are realizable at their recorded amount.
In December 1992, as a result of the South Florida Medicare
investigation, the Company's Board of Directors appointed a special committee of
its Board of Directors to work with legal counsel to oversee the defense of the
federal investigation, and to otherwise review the Company's Medicare operations
in South Florida. The special committee had the responsibility of conducting,
through counsel, an internal investigation into the underlying facts and
circumstances which gave rise to the execution of the search warrants. While the
special committee received information suggesting that employees of the Company
may have been involved in Medicare improprieties, such information has neither
been substantiated nor disproved. Future action by the Board of Directors could
include consideration of legal action against any individuals or entities whose
actions adversely affected the Company.
As of February 1997, four years and two 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 recently been
engaged in more active discussions with representatives from the United States
Attorney's Office for the Southern District of Florida concerning the possible
resolution of the Medicare investigation and allegations as they might affect
the Company directly. There are no assurances that these discussions will result
in a successful resolution of these matters or in a resolution that would not be
materially adverse to the Company. Even if the Company is successful in
resolving the Medicare investigation with the federal government, in accordance
with its indemnification obligations under its Articles of Incorporation and
Bylaws, the Company may continue to incur legal expenses on behalf of certain of
its existing and former employees who are individually the subject of such
investigation. In addition, the Company had been the subject of a staff inquiry
by the Securities and Exchange Commission ("SEC") relating to the Medicare
investigation by the United States Attorney. In July 1996, the SEC notified the
Company that they had terminated their inquiry and that at that time no
enforcement actions had been recommended to the SEC.
15
<PAGE>
Backlog of Orders
The Company does not have a waiting list for its home care or
rehabilitation services. The Company's HSS Staffing Group has a backlog since it
is sometimes unable to immediately match a medical professional with the medical
skills or location required by the assignment.
Employees
Exclusive of medical personnel (caregivers), as of November 30, 1996,
the Company had approximately 315 full-time employees. For the week ending
November 30, 1996, the Company employed approximately 1,400 caregivers for the
HSSI HomeCare Group, the HSS Staffing Group and its rehabilitation services.
These caregivers do not necessarily work full-time shifts. The Company's
employees are not represented by a union and the management of the Company
considers relations with employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's headquarters are in office facilities at 6245 North
Federal Highway, Suite 500, Fort Lauderdale, Florida. Leased headquarter offices
consist of approximately 15,000 square feet. Leases expire in January, 2000,
subject to one five-year renewal period, and provide for an annual base rental
of approximately $200,000. In addition, the Company leases all of its branch
office locations with terms generally from one to three years.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, is subject to certain
claims and lawsuits. The Company maintains insurance in such amounts and with
such coverages and deductibles as management believes are reasonable and
prudent. The principal risks that the Company insures against are workers'
compensation, director and officer liability, personal injury, bodily injury and
professional malpractice. There is no assurance that the Company's insurance
coverage will be sufficient to cover the liabilities resulting from claims
brought against the Company.
As of November 30, 1996 the Company was not involved in any legal
proceedings expected by management to have a material impact on the Company.
For information with respect to the federal investigation of South
Florida Medicare practices and HCFA suspension, see "Regulation" and "Dade
County, Florida, Investigation and Related Matters".
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1995 Annual Meeting of Shareholders of the Company was held in Fort
Lauderdale, Florida on June 4, 1996. The following individuals were elected as
directors to hold office until the next annual meeting of shareholders or until
their successors have been elected and duly qualified:
<TABLE>
<CAPTION>
Director Shares For Shares Withheld
-------- ---------- ---------------
<S> <C> <C>
Ronald A. Cass ............................... 4,194,573 919,856
Robert B. Fields ............................. 4,207,353 907,076
William F. McConnell ......................... 4,207,153 907,276
Hector L. Ziperovich, M.D ................... 4,205,793 908,636
M.D ..........................................
</TABLE>
Shareholders also acted upon the following proposal at the Annual
Meeting:
Ratified the appointment of Arthur Andersen LLP as independent auditors
of the Company for the fiscal year ending November 30, 1996. Votes totaled
5,052,328 for; 32,561 against; and 29,540 abstentions.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
The Company has never declared or paid cash dividends on its common
stock. The Company presently intends to retain all future earnings, if any, for
the operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. In addition, the Company's credit agreement
precludes the Company from paying any dividends or purchasing, redeeming or
retiring any of its capital stock without the prior written consent of the
lender. Notwithstanding the above, holders of the Company's common stock are
entitled to receive such dividends as may be declared from time to time by the
Board of Directors and paid out of funds legally available therefore. Any future
determination as to the payment of cash dividends will depend upon the Company's
results of operations, financial condition, capital requirements and lender
restrictions, if any, as well as such other factors as the Company's Board of
Directors may consider. As of December 31, 1996, there were 2,673 holders of the
Company Common Stock and approximately 3,000 beneficial holders.
The Company's common stock trades on the New York Stock Exchange, Inc.
("NYSE") under the symbol HSS. The following table sets forth, for the period
indicated, the high and low closing sales prices for the Company's common stock
as reported on the NYSE.
<TABLE>
<CAPTION>
High Low
Fiscal Year 1996
<S> <C> <C>
First Quarter ............................ $2 7/8 $1 5/8
Second Quarter ........................... 4 3/8 2 5/8
Third Quarter ............................ 4 1/8 2
Fourth Quarter ........................... 3 3/8 2 1/8
<CAPTION>
Fiscal Year 1995
<S> <C> <C>
First Quarter ............................ $1 3/4 $1 1/8
Second Quarter ........................... 2 1/4 15/16
Third Quarter ............................ 2 1/2 1 5/8
Fourth Quarter ........................... 2 3/8 1 3/4
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended November
30, 1996 have been compiled by the Company from its consolidated financial
statements which have been audited by independent certified public accountants.
18
<PAGE>
<TABLE>
<CAPTION>
(In Thousands, except per share amounts)
Years Ended November 30,
Selected Financial 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue from services ... $62,234 $56,186 $78,624 $84,061 $120,591
Cost of services ............ $38,045 $33,626 $50,703 $56,934 $ 79,848
Gross margin ................ $24,049 $22,560 $27,921 $27,127 $ 40,743
Selling, general and administrative
expenses .................... $23,416 $21,113 $36,970 $33,860 $ 45,978
Income (loss) before income taxes and
cumulative effect of change in
accounting principle ...... $ 482 $ 1,202 ($8,896) ($6,454) ($4,824)
Income (loss) from continuing
effect of change in accounting
principle ................. $ 484 $ 1,903 ($11,417) ($5,858) ($ 3,185)
Primary earnings (loss) from continuing
operations per common and
common share equivalents
before cumulative effect of
change in accounting principle $ 0.04 $ 0.32 ($ 2.02) ($ 1.04) ($ 0.58)
</TABLE>
<TABLE>
<CAPTION>
November 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total Assets ................ $26,411 $23,371 $24,413 $34,690 $ 45,785
Long-term debt, including current
portion ..................... $ 519 $ 1,173 -- -- --
Notes Payable - Severance
Obligations ................. $ 546 $ 1,017 $ 1,000 -- --
Stockholders' equity ........ $11,328 $11,075 $ 8,035 $19,276 $ 24,905
</TABLE>
1 On August 31, 1994, the Company sold its California, New York, and
Arizona home health care operations. In January and March of fiscal 1995 the
Company sold its Florida and Texas home care operations. These sold operations
contributed approximately $25.5 million to net revenues in fiscal 1994. During
fiscal 1995, the Company was able to maintain its ongoing revenue base in its
home health care operations and experienced modest growth in select areas.
2 During the fiscal year ended November 30, 1993, revenue was decreased
by $6.9 million as a result of providing for estimated Medicare reimbursement
disallowances related primarily to potentially non-reimbursable costs which were
incurred during fiscal years 1991 and 1992 on subcontracted staffing for the
Company's now closed Dade County Medicare offices. See Note 7 for further
discussion.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 fiscal 1996 and fiscal 1995. It should be read in conjunction with
accompanying consolidated 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 climate;
resolution of the Company's Dade County, Florida, operations; and the other risk
factors listed from time to time by the Company in reports filed with the
Securities and Exchange Commission, including Exhibit 99.01 hereto.
General
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
November 30, 1996 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 two clinics located in Georgia, one clinic located in Tennessee,
one in Rhode Island and two in Florida.
On August 31, 1994, the Company sold its California, New York, and
Arizona home health care operations. In January and March of fiscal 1995 the
Company sold its Florida and Texas home care operations. These sold operations
contributed approximately $25.5 million to net revenues in fiscal 1994 and
$500,000 in 1995. During fiscal 1996, the Company was able to increase its
revenue base in its home health care operations and experienced modest growth in
all areas as discussed below.
On February 15, 1995, a wholly-owned subsidiary of the Company acquired
certain fixed and intangible assets of a therapy company. The purchase price
included the forgiveness of trade accounts receivable owed to the Company and
the issuance of a promissory note with the balance due in equal annual payments
over the next five years.
In March 1996, the Company's Rehabilitation Service Group acquired the
assets and liabilities of a therapy company for an aggregate purchase price of
approximately $60,000 resulting in additions to intangibles of $98,012. In
addition, during 1996 the Group opened two therapy clinics in Florida, one in
Tennessee and one in Rhode Island. The Company's primary investments in these
clinics are short term, one year leases.
20
<PAGE>
In July 1996 the Company, through a subsidiary, completed an agreement
to provide billing, accounting and cost reimbursement support services to two
management companies in California. Currently the management companies have five
homecare agencies under contract.
Results of Operations
The following table sets forth for the periods indicated the net
revenue by operating group in the Company's statement of operations:
<TABLE>
<CAPTION>
(In Millions)
Fiscal Years Ended November 30,
Operating Group: 1996 1995 1994
- - ----------------
----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home Care Group ...................... $ 46.6 75% $ 43.9 78% $ 65.6 83%
HSS Staffing Group ................... $ 13.2 21% $ 10.9 20% $ 13.0 17%
Management Services Group ............ $ 0.6 1% -- --% -- --%
Rehabilitation Group (Therapy) ....... $ 1.8 3% $ 1.4 2% -- --%
----------------------------------------
Total Net Revenue ........... $ 62.2 100% $ 56.2 100% $ 78.6 100%
</TABLE>
The following table sets forth certain items included in the Company's
Consolidated Statements of Operations as a percentage of the Company's revenue
for the periods indicated:
<TABLE>
<CAPTION>
Percentage of Revenue
Years Ended November 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenue from services ......................... 100.0% 100.0% 100.0%
Cost of services .................................. 61.1% 59.8% 64.5%
Gross margin ...................................... 38.9% 40.2% 35.5%
Selling, general and administrative expenses ...... 37.6% 37.6% 47.0%
Other income/(expense), net ....................... (0.5)% (0.4)% 0.2%
Net income/(loss) before income taxes,
extraordinary loss on early
extinguishment of debt and
cumulative effect of change in
accounting principle ............................. 0.8% 2.1% (11.3)%
Net income/(loss) ................................. 0.4% 3.4% (14.3)%
</TABLE>
21
<PAGE>
The following unaudited selected proforma financial data represents
ongoing operations net of sold operations described above for 1995 and 1994, the
only years affected for data presented, and should be read in conjunction with
the consolidated financial statements and related notes herein:
<TABLE>
<CAPTION>
(In Millions)
Years Ended Nov. 30,
1995 1994
------ -----
<S> <C> <C> <C> <C>
Net Revenue from Services ........ $ 55.7 100.0% $ 53.1 100.0%
Cost of Services ................. $ 33.1 59.4% $ 32.5 61.2%
Gross Margin ..................... $ 22.6 40.6% $ 20.6 38.8%
</TABLE>
Comparison of 1996 to 1995
Net Revenues. Consolidated net revenues increased approximately $6.0
million or 10.8% from $56.2 million in fiscal 1995 to $62.2 million for the year
ended November 30, 1996. While revenues increased in all areas of the Company's
operations, the primary growth, in dollars, was in the HomeCare and HSS Staffing
Groups.
Net revenues of the Home Care Group increased approximately $2.7
million, or 6.2%, from $43.9 million in fiscal 1995 to $46.6 million for fiscal
1996. Volume was the primary factor, as visits increased from approximately
558,000 to 585,000 for the years ended November 30, 1995 and 1996, respectively.
Additionally, an improved mix of higher skill services contributed to higher
proprietary revenues. The mix of proprietary and Medicare visits remained
relatively the same and the resulting rates per visit remained stable as well.
Net revenues of the HSS Staffing Group increased approximately $2.3
million, or 20.7%, from $10.9 million in fiscal 1995 to $13.2 million for the
year ended November 30, 1996. With hourly revenue rates only increasing
marginally, the increase in revenue is largely attributable to an increase in
hours billed.
With the acquisition of a therapy company in the second quarter of 1996
and the opening of four (4) clinics, as previously discussed, net revenues from
the Company's Rehabilitation Services Group increased by approximately $413,000,
or 30.2%, from $1.4 million to $1.8 million for the years ended November 30,
1995 and 1996, respectively. Not included in their net revenues are the common
patients and other synergies created with the HomeCare Group.
The Company's Management Services Group, established during 1996,
generated net revenues of approximately $653,000 for its first partial year of
operations.
Cost of Services. Direct expenses of the HomeCare Group increased by
6.2%, the same rate of increase as for net revenues, from $23.8 million to $25.3
million, an increase of $1.5 million from fiscal year 1995 to fiscal year 1996,
respectively.
Cost of services for the HSS Staffing Group increased by $1.9 million,
or 20.9%, from $8.9 million to $10.8 million, for fiscal 1995 and fiscal 1996,
respectively. This rate of increase is comparable to the 20.7% rate of increase
for net revenues.
22
<PAGE>
The Rehabilitation Services Group experienced increases in direct
expenses, primarily salaries and benefits, in excess of its increases in net
revenue. Direct expenses increased approximately $889,000, or 104.8%, from
$848,000 to $1,736,000 for the fiscal years ended November 30, 1995 and 1996,
respectively. The increases are directly attributable to the newly opened
clinics and the therapy company acquisition.
Much of the costs of support services for the Management Services Group
were furnished by existing Company support services functions, such as
accounting, reimbursement and payroll and, therefore, was absorbed into
corporate overhead. The Group did, however, incur additional incremental direct
costs of approximately $185,000.
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 and other
direct expenses the Company pays to its medical personnel or to support service
personnel in the case of the Management Services Group.
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 overall gross margin increased by $1.6 million, or 7.2%,
from $22.6 million to $24.2 million for the fiscal years ended 1995 and 1996,
respectively. The gross margin as a percentage of net revenue, however,
decreased from 40.2% to 38.9%. Although confronted with significant downward
pressures on margins experienced throughout the healthcare industry, the Company
managed to maintain its gross margins in all areas except for Rehabilitation
Services. Due to lower than expected revenues and significant declines in
productivity, the gross margin from the Rehabilitation Group fell from
approximately $520,000 to $45,000 in fiscal 1995 and 1996, respectively. Without
the impact of the Rehabilitation Services Group, the Company's gross margin
percentage would have remained the same for fiscal 1995 to fiscal 1996.
Selling, General and Administration Expense. Selling, general and
administration expenses increased by $2.3 million, or 10.9%, from $21.1 million
to $23.4 million for the years ended November 30, 1995 and 1996, respectively.
The increase is due primarily to the expansion of services and growth throughout
the Company mitigated somewhat by lower litigation and legal and other
professional fees.
Interest and Other Income (Expense). The net expense increased by
$46,000 from $245,000 to $291,000 from fiscal 1995 to 1996, respectively, due to
increased interest expense of $281,000 on an expanded line of credit largely
offset by collection of receivables from sold operations.
Pre-tax Net Income. Pre-tax net income decreased from approximately
$1,202,000 to approximately $482,000 due to losses incurred in the
Rehabilitation Services Group offset by income generated in the Management
Services Group.
Income Taxes. For fiscal 1996, the Company recognized a benefit for
income taxes of $2,705. Such benefit is primarily the result of recognizing the
current defined tax benefit associated with the turnaround of temporary
differences in the current year, offset partially by an increase in the
valuation allowance.
23
<PAGE>
Extraordinary Item. 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.
Comparison of 1995 to 1994
Net Revenues. Net revenues decreased approximately $22.4 million, or
28.5%, from $78.6 million in Fiscal 1994 to $56.2 million for the year ended
November 30, 1995. This decrease is directly attributable to the sale of the
Company's home health care operations in California, New York, and Arizona on
August 31, 1994 and the sale of its Florida and Texas operations in January and
March of Fiscal 1995. In Fiscal 1994, these sold operations contributed in
excess of $25.5 million to consolidated revenue.
Net revenues from services provided by the Company's HomeCare Group
decreased approximately $21.7 million, or 33.1%, to $43.9 million for the year
ended November 30, 1995, from approximately $65.6 million for the year ended
November 30, 1994. These decreases in revenues are principally due to the sale
of certain Company operations previously discussed, offset by an increase in net
revenues within ongoing HomeCare operations of approximately $2.4 million, or
5.9%, from $41.0 million to $43.4 million for the fiscal years ended November
30, 1994 and 1995, respectively. The growth is attributed to increased Medicare
business within remaining HomeCare operations.
The revenues for the Company's HSS Staffing Group were down
approximately $2.1 million, or 16.0%, from $13.0 million in Fiscal 1994 to $10.9
million in Fiscal 1995 due primarily to reduced demand for contract nursing
staff in serviced hospitals.
Since the acquisition, during its first nine months of operations in
fiscal 1995, the Company's rehabilitative service business generated net
revenues of approximately $1.4 million. The focus of this group will be on
hospital rehabilitation facility management, providing therapy services to other
home care companies, and expansion of its existing clinics in Georgia and
Tennessee.
Cost of Services. The cost of services for the HomeCare Group decreased
approximately $16.4 million, or 40.8%, from approximately $40.2 million to
approximately $23.8 million for the fiscal years ended November 30, 1994 and
1995, respectively. The primary reasons for this reduction are the sale of
certain HomeCare operations, discussed earlier, and lower estimated litigation
losses based upon favorable trends in the resolution of certain independent
contractor claims related to the Dade County operations as discussed in Part I.
This reduction in estimated litigation losses resulted in decreased cost of
services in the fourth quarter by approximately $715,000.
Cost of services from the HSS Staffing Group decreased to $8.9 million
in the year ended November 30, 1995 from $10.5 million in the year ended
November 30, 1994. The decrease in cost of services are attributable to a
reduction in contracts primarily due to cutbacks of open positions (less demand
for nurses) at various hospitals within the current services areas.
The cost of services for the Company's rehabilitative services group
were approximately $848,000 during its first nine months of operation in fiscal
1995.
24
<PAGE>
Gross Margin. The Company's gross margin decreased approximately $5.3
million, or 19.0%, from $27.9 million in fiscal 1994 to approximately $22.6
million in fiscal 1995. This resulted from the sale of certain Company
operations previously discussed. As a percentage of revenue, gross margin
increased from 35.5% to approximately 40.2% for the years ended November 30,
1994 and 1995. This increase resulted from the sale of low performing
operations, the improvement of the expected settlement of certain claims
discussed above, and a general improvement in operations.
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased from approximately $37.0 million, or 47.0% of
net revenue, during 1994 to approximately $21.1 million, or 37.5% of net
revenue, during 1995. The 1995 decrease is attributable to operations of the
Company being sold in late 1994 and early 1995, offset by certain employee
severance costs and litigation settlements. Bad debt expense decreased $1.8
million, from $2.4 million or 3.1% of net revenues, in fiscal 1994 to
approximately $553,000, or 1.0% of net revenues, in fiscal 1995. The principal
reason for this is the additional reserves required, in fiscal 1994, related to
the accounts receivable from sold operations.
Interest and Other Income (Expense). The net amount of interest and
other income/(expense), changed from net income of $153,049 in 1994 to expense
of $245,319 in 1995. This change resulted primarily from the recognition of the
gain on the Company's sale of its California, New York, and Arizona home health
care operations in the amount of $300,000 in fiscal 1994. Interest costs were
lower in 1995 due to average outstanding borrowings being less than they had
been in 1994.
Pre-tax Net Income. Pre-tax net income increased by approximately $10.1
million from approximately ($8.9) million for the fiscal year ended 1994 to
approximately $1.2 million for the fiscal year ended 1995, and increased as a
percentage of revenue from (11.3)% to 2.1%.
Income Taxes. The Company recognized a net benefit for income taxes for
the fiscal year ended November 30, 1995 of approximately $701,000 primarily as a
result of certain tax deductible legal settlements which can be carried back to
recover income taxes previously paid by the Company. The provision (benefit) for
income taxes from 1995 to 1994 changed significantly as a result of the
recognition of certain deferred tax assets which were fully reserved in fiscal
1994. See Note 8 to the Consolidated Financial Statements.
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 expects to meet short-term liquidity needs through cash
flow and borrowings available under its credit facility as discussed below.
Prior Line of Credit. At November 30, 1995, under an arrangement with a
commercial finance company, the Company had a $15 million uncommitted revolving
line of credit, of which $2.0 million was reserved to support a standby letter
of credit for the benefit of the Company's workers' compensation insurance
carrier.
25
<PAGE>
Line of Credit. In February 1996, under an arrangement with a
commercial finance company, the Company entered into an $8 million uncommitted
revolving line of credit, of which $2.0 million was reserved to support a
standby letter of credit for the benefit of the Company's workers' compensation
insurance carrier. At November 30, 1996, the letter of credit was at $1.6
million. The amount of the Line of Credit available to the Company at any time
is determined primarily by the eligible accounts receivable, as defined. Prior
to November 30, 1996, the Company obtained a verbal agreement, to be followed
with a revised written commitment, to increase the line to $14 million.
Negotiations are in progress on the written commitment.
Loan activity (exclusive of the $1.6 million reserved to support the
standby letter of credit for the Company's workers' compensation insurance
carrier) for the two years ended November 30 was as follows:
<TABLE>
<CAPTION>
(In Millions, except percentages)
1996 1995
<S> <C> <C>
Maximum outstanding .................................. $ 7.0 $ 2.1
Borrowings outstanding at November 30 ................ $ 6.5 $ 0.8
Amount available for additional borrowing ............ $ 0.3 $ 0.4
Weighted average interest rate ....................... 14.5% 21.0%
</TABLE>
Early retirement of the prior line of credit resulted in the Company
incurring a penalty of approximately $150,000 and a write-off of unamortized
loan costs in the amount of approximately $144,000, the aggregate of which was
recorded as an extraordinary charge in the first quarter of 1996.
Restrictive Covenants under the Line of Credit. The Company's Line of
Credit contains certain restrictive covenants precluding the Company from paying
any dividends, other than stock dividends, or purchasing, redeeming or retiring
any of the Company's capital stock. In addition, written contracts with the
government agencies operating the two hospitals in the U.S. Virgin Islands to
which the Company provides Traveler services are required. If the Company fails
to have such written contracts in place, the commercial finance company
providing the Line of Credit may restrict the definition of those eligible
accounts receivable, so that no U.S. Virgin Island accounts receivable are
included. Currently written contracts are in place with expiration dates in
September and November 1997.
Trade Accounts Receivable. At November 30, 1996 and 1995, the Company
had outstanding accounts receivables, net of allowances for doubtful accounts,
of approximately $9.6 million and $6.1 million, respectively. For the fiscal
year ended November 30, 1996, turnover of accounts receivable decreased from
3.54 to 3.20 times per year and average days outstanding increased from 103 days
to 114 days. The resulting decreases in cash collections makes up approximately
$2 million of the increases in borrowing under our line of credit. The Company's
U.S. Virgin Island clients are historically slow-paying. At November 30, 1996
and 1995, the average days outstanding for the U.S. Virgin Island accounts were
208 and 198 days, respectively.
During the third and fourth quarters of 1995, all outstanding accounts
receivables relating to sold operations were written off as uncollectible. These
outstanding accounts receivables amounted to approximately $1,200,000 and were
fully reserved at November 30, 1994. Cash recoveries of these write-offs,
subsequent to year end 1995, were approximately $199,600. Minimal future
recoveries are expected.
26
<PAGE>
Settlements due to and due from Medicare. Periodically, the Company
estimates settlements due to the Medicare Program. The estimated settlement
amounts due 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 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, or 3) using proceeds from additional capital that may be raised.
However, there are no assurances that the Company will be able to successfully
utilize any of these three funding options. For the twelve months ended November
30, 1995, the Company had received notification from the Medicare program's
fiscal intermediaries of approximately $3,132,000 due to Medicare. Through
February 1997, approximately $364,000 of this amount has been repaid under
Medicare approved repayment plans. Included in the $3,132,000 is approximately
$1,024,000 which the Medicare intermediaries are not pursuing in anticipation of
the settlement of certain provider cost reports with amounts due to the Company
in excess of the $1,024,000.
Cash Position. Net cash generated by (used in) operating activities was
($6,693,344), $109,552 and ($630,475) in fiscal years 1996, 1995 and 1994,
respectively. In addition to cash flow from operating activities, the Company's
overall cash position can be significantly affected by its investing and
financing activities. Significant investing activities for the twelve months
ended November 30, 1996 consisted of capital expenditures and acquisitions of
therapy company. The Company's principal financing activities for the fiscal
year ended November 30, 1996 consisted of net borrowings under the line of
credit.
Net Working Capital. As of November 30, 1996, the Company had current
assets of approximately $23.2 million and current liabilities of approximately
$14.4 million, resulting in net working capital of approximately $8.8 million
and a current ratio of 1:6x. This compares to working capital of approximately
$8.8 million and a current ratio of 1:8x at November 30, 1995. Cash and cash
equivalents were approximately $0.1 million at fiscal year ended November 30,
1996.
As of November 30, 1996, the Company's commitments that would require large or
unusual amounts of cash, consisted of office rents, repayments to the Medicare
program, the severance obligation to a former officer and an amount due its
current Chairman and Chief Executive Officer (See Notes 6 and 7).
Seasonality
Historically, the Company's Traveler business in the U.S. Virgin
Islands has not been subject to material seasonal fluctuations. However, the
Traveler business in the rest of the United States has been seasonal, with
demand for Travelers being highest in the first and fourth quarters of the
fiscal year (September through February) and lowest in the third quarter of the
fiscal year (June through August). This is due largely to increased demand,
particularly during the peak tourist and winter retirement home period in
Florida, coupled with an increase in the availability of nurses during the first
and fourth quarters of the Company's fiscal year. The Company's HomeCare
business has not been subject to material seasonal fluctuations.
27
<PAGE>
Impact of Inflation
Inflation, while moderate, continues to increase the cost of goods and
services purchased by the Company. Inflation is considered in all contract
proposals developed for hospital and home care clients. Historically, inflation
has not had a significant impact on the operations of the Company.
Statement of Financial Accounting Standards SFAS No. 109
Effective December 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No.
109 required, among other things, recognition of future tax benefits as an
asset.
During 1994, the Company determined that, due to recurring losses in
prior years and other factors, realization of the net deferred tax asset did not
meet the "more likely than not" criteria of SFAS No. 109. Consequently, at
November 30, 1994, the valuation allowance was increased so that the net
deferred tax asset was fully reserved. As a result of pre-tax income generated
in 1995 and 1996, the Company realized certain deferred tax assets previously
reserved. Additionally, the Company has recognized approximately $310,000 and
$146,000 of its net operating loss carryforwards generated in fiscal 1995 and
1996, respectively, as management believes that it is more likely than not the
Company will generate sufficient future taxable income to realize this asset.
The valuation allowance is subject to continual review and, as such, may be
decreased in the future as substantive information becomes available about the
Company's ability to generate sufficient future taxable income to realize the
net deferred tax asset (See Note 8).
The effective tax rate for the provision (benefit) for income taxes
during the fiscal years ended 1996, 1995 and 1994 differ from the statutory tax
rate. This is primarily due to adjustments to the valuation allowance, as noted
above, and the Company's inability to derive a benefit from its net operating
loss carryforwards in 1994 and 1993 and due to the increase in the valuation
allowance discussed above.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page Number
Consolidated Balance Sheets .............................................29
Consolidated Statements of Operations ...................................30
Consolidated Statements of Stockholders' Equity .........................31
Consolidated Statements of Cash Flows ...................................32
Notes to Consolidated Financial Statements ..............................33 - 46
Report of Independent Certified Public Accountants ......................47
29
<PAGE>
<TABLE>
<CAPTION>
Hospital Staffing Services, Inc. and Subsidiaries
Consolidated Balance Sheets
November 30,
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
-------------- -----------------------------------------
1996 1995 1996 1995
---------- ----------- ----------- -----------
CURRENT ASSETS: CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $145,247 $1,697,804 Accounts payable $2,470,506 $2,577,470
Short-term investments 12,145 11,620 Line of credit payable (Note 4) 6,540,793 767,115
Trade accounts receivable, less Accrued payroll and benefits 2,130,053 2,240,404
allowance for doubtful accounts of Accrued expenses (Note 12) 2,539,016 4,224,210
$559,251 and $599,599,
respectively 9,622,122 6,129,371 Income taxes payable 216,096 296,000
Settlements due from Medicare 12,201,367 10,372,741 Capital leases 17,522 7,131
Amounts due from officers/directors 71,377 40,392 Notes payable (Notes 2, 6 &7) 503,678 1,255,130
Current and deferred income
taxes receivable 587,215 1,149,634
Prepaid expense and other current
assets 599,062 762,817
---------- ----------- ----------- -----------
Total current assets 23,238,535 20,164,379 Total current liabilities 14,417,664 11,367,460
---------- ----------- ----------- -----------
NON-CURRENT ASSETS: NON-CURRENT LIABILITIES:
Notes payable (Notes 2, 6 &7) 510,728 882,965
Capital leases 80,881 45,304
Other 73,999
----------- -----------
Net property and equipment (Note 3) 879,735 986,592 Total non-current liabilities 665,608 928,269
---------- ----------- ----------- -----------
----------- -----------
Total liabilities 15,083,272 12,295,729
----------- -----------
Intangibles related to businesses COMMITMENTS AND CONTINGENCIES (Notes 4, 5 & 7)
acquired 2,258,028 2,160,016
Non-competition agreements 479,426 479,426 STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value;
---------- -----------
Total intangibles 2,737,454 2,639,442 authorized 5,000,000 shares;
Less: Accumulated amortization (785,133) (664,418) none issued or outstanding - -
---------- -----------
Net intangibles 1,952,321 1,975,024 Common stock- $.001 par value;
---------- -----------
authorized 20,000,000 shares;
6,359,770 and 6,349,770 shares
issued and outstanding;
respectively 6,360 6,350
Deposits and other assets 340,836 244,826
Additional paid-in capital 22,452,627 22,428,887
Accumulated deficit (11,130,832) (11,360,145)
---------- -----------
----------- -----------
Total non-current assets 3,172,892 3,206,442 Total stockholders' equity 11,328,155 11,075,092
---------- ----------- ----------- -----------
Total liabilities and
Total assets $26,411,427 $23,370,821 stockholders' equity $26,411,427 $23,370,821
========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these consolidated balance
sheets.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Hospital Staffing Services, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended November 30,
1996 1995 1994
--------------------- -------------------- ---------------
<S> <C> <C> <C>
Net revenue from services ............................ $62,234,015 $56,185,723 $78,624,465
--------------------- -------------------- ---------------
Cost of services:
Professional salaries and benefits ................... 31,992,511 28,231,790 44,531,227
Other professional expenses .......................... 6,053,002 5,393,817 6,172,436
--------------------- -------------------- ---------------
Total cost of services ............................... 38,045,513 33,625,607 50,703,663
--------------------- -------------------- ---------------
Gross margin ......................................... 24,188,502 22,560,116 27,920,802
--------------------- -------------------- ---------------
Selling, general and administrative expenses:
Salaries and benefits ................................ 13,149,216 11,891,179 15,743,219
Legal expenses ....................................... 201,817 1,040,019 2,106,442
Severance obligations (Note 6) ....................... 552,316 646,724 1,387,480
Litigation settlements (Note 7) ...................... 12,500 135,000 1,887,500
All other expenses ................................... 9,500,001 7,399,767 15,845,168
--------------------- -------------------- ---------------
Total selling, general and administrative expenses ... 23,415,850 21,112,689 36,969,809
--------------------- -------------------- ---------------
Income (loss) from operations ........................ 772,652 1,447,427 (9,049,007)
--------------------- -------------------- ---------------
Interest and other income (expense):
Interest expense ..................................... (554,362) (273,027) (398,590)
Interest income ...................................... 64,165 71,523 63,318
Other income (expense), net .......................... 199,108 (43,815) 488,321
--------------------- -------------------- ---------------
Total interest and other income (expense) ............ (291,089) (245,319) 153,049
--------------------- -------------------- ----------------
Income (loss) before (provision) benefit for income taxes 481,563 1,202,108 (8,895,958)
(Provision) benefit for income taxes (Note 8) ........ 2,705 700,570 (2,520,565)
--------------------- -------------------- ----------------
Income (loss) before extraordinary item and cumulative effect of
change in accounting principle ....................... 484,268 1,902,678 (11,416,523)
Extraordinary loss on early extinguishment of debt (Note 4) (254,955) -- --
--------------------- -------------------- ---------------
Income (loss) before cumulative effect of change in accounting princi 229,313 1,902,678 (11,416,523)
Cumulative effect of change in accounting principle .. -- -- 162,000
--------------------- -------------------- ---------------
Net income (loss) .................................... $ 229,313 $ 1,902,678 ($11,254,523)
===================== ==================== ===============
Income (loss) per common share:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle ............. $ 0.08 $ 0.32 ($ 2.02)
Extraordinary loss on early extinguishment of debt ... (0.04) -- --
Cumulative effect of change in accounting principle .. -- -- 0.03
--------------------- -------------------- ---------------
Net income (loss) per common share ................... $ 0.04 $ 0.32 ($ 1.99)
===================== ==================== ================
Weighted average common shares outstanding: .......... 6,353,868 5,922,213 5,649,770
===================== ==================== ================
<FN>
The accompanying notes are an integral
part of these consolidated balance
sheets.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Hospital Staffing Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
---------------------------
Number of Additional
Shares Paid-In Retained
Outstanding Amount Capital Earnings (Deficit)
----------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1993 .................... 5,646,020 $ 5,646 $21,278,966 ($2,008,300)
Exercise of Warrants .......................... 3,750 4 13,121 --
Net Loss ...................................... -- -- -- (11,254,523)
----------- ----------- ------------ -----------------
BALANCE, November 30, 1994 .................... 5,649,770 5,650 21,292,087 (13,262,823)
Litigation Settlement (Note 7) ................ 700,000 700 1,136,800 --
Net Income .................................... -- -- -- 1,902,678
----------- ----------- ------------ -----------------
BALANCE, November 30, 1995 .................... 6,349,770 6,350 22,428,887 (11,360,145)
Stock Options Exercised ....................... 10,000 10 23,740 --
Net Income .................................... -- -- -- 229,313
----------- ------------ ------------ -------------
BALANCE, November 30, 1996 .................... 6,359,770 $ 6,360 $22,452,627 ($11,130,832)
=========== ============ ============ =============
<FN>
The accompanying notes are an integral
part of these consolidated balance
sheets.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Hospital Staffing Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended November 30,
1996 1995 1994
---------- ------------ -------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ................................................................. $ 229,313 $1,902,678 ($11,254,523)
---------- ------------ -------------
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Severance obligations ............................................................. -- 630,000 1,310,000
Depreciation and amortization ..................................................... 621,560 989,741 1,340,748
Cumulative effect of change in accounting principle ............................... -- -- (162,000)
Provision for losses on trade accounts receivable ................................. 248,422 552,663 2,382,948
Gain on sale of home health operations ............................................ -- -- (299,492)
Extraordinary loss on early extinguishment of debt (Note 4) ....................... 99,955 -- --
Loss on disposal and retirement of intangibles, property and equipment ............ 129,541 10,611
Write-off of intangibles related to businesses acquired, net ...................... -- -- 133,505
Deferred income tax provision (benefit), net of increase in valuation
allowances ........................................................................ (146,466 (309,532) 2,120,655
Changes in assets and liabilities:
(Increase) decrease in assets-
Trade accounts receivable ......................................................... (3,519,553) 797,122 1,920,683
Settlements due from Medicare ..................................................... (1,644,222) (252,523) (3,022,514)
Prepaid expenses and other current assets ......................................... (80,636) (168,431) (171,622)
Amounts due from officers/directors ............................................... (45,635) 77,749 32,897
Current and deferred income taxes receivable ...................................... 708,885 (628,061) 1,850,802
Deposits and other assets ......................................................... (236,526) 263,705 204,304
Increase (decrease) in liabilities -
Accounts payable .................................................................. (127,281) (2,006,662) 1,874,055
Accrued payroll and benefits ...................................................... (342,962) (233,239) (1,534,022)
Accrued expenses .................................................................. (2,378,335) (1,369,954) 1,777,733
Other liabilities ................................................................. -- -- 293,512
Income taxes payable .............................................................. (79,904) (265,245) 561,245
------------- ------------ -------------
Total adjustments ................................................................. (6,922,698) (1,793,126) 10,624,048
------------- ------------ -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES .................................. (6,693,385) 109,552 (630,475)
------------- ------------ -------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Issuance of notes receivable ...................................................... (101,933) -- --
Minority interest in limited partnership .......................................... 73,999 -- --
Sale (purchase) of short-term investments, net .................................... (525) 1,137,109 (148,729)
Capital expenditures .............................................................. (204,287) (369,775) (130,205)
Acquisition of therapy company .................................................... (60,000) -- --
Proceeds from disposal of property and equipment .................................. -- 9,500 22,071
Proceeds from sale of home health operations (Note 2) ............................. 145,782 160,000 3,492,993
------------- ------------ -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES .................................. (146,964) 936,834 3,236,130
------------- ------------ -------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Line of credit borrowings (repayments) ............................................ 5,773,678 462,203 (3,012,794)
Payments under notes payable ...................................................... (506,234) (327,555) --
Payments under capital leases ..................................................... (3,402) -- --
Exercise of Warrants .............................................................. -- -- 13,125
Exercise of Stock Options ......................................................... 23,750 -- --
------------- ------------ -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .................................. 5,287,792 134,648 (2,999,669)
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. (1,552,557) 1,181,034 (394,014)
Cash and cash equivalents at beginning of period .................................. 1,697,804 516,770 910,784
------------- ------------ -------------
------------- ------------ -------------
Cash and cash equivalents at end of period ........................................ $ 145,247 $1,697,804 $ 516,770
------------- ------------ -------------
Supplemental Cash Flow Disclosures:
Cash paid: Income Taxes $ 240,243 $ 499,139 $ 661,793
Interest $ 554,362 $ 276,816 $ 396,448
Cash Received: Income Tax Refunds $ 704,044 - $ 2,644,910
<FN>
The accompanying notes are an integral part of
these consolidated statements.
</FN>
</TABLE>
33
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Organization and Purpose: Hospital Staffing Services, Inc. and subsidiaries (the
"Company" or "HSSI") provides (i) home health care and other in-home support
services through its "HSSI HomeCare Group", (ii) interim staffing of nurses and
other medical personnel, primarily to hospitals through its "HSS Staffing
Group", and (iii) rehabilitation services, including physical, occupational, and
speech therapy services to patients in the home, other healthcare facilities,
and through its own clinics. These services are provided through a pool of
caregivers operating within the Company's network of 28 home health care branch
offices in seven states, 130 hospitals in 30 states and the U.S. Virgin Islands
and six rehabilitative clinics in four states.
Basis of Consolidation: The accompanying consolidated financial statements
include the accounts of Hospital Staffing Services, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Revenue Recognition Policy: Gross revenue is recorded on an accrual basis based
upon the date of service at amounts equal to the Company's established rates or
estimated cost reimbursement rates, as applicable. Allowances and contractual
adjustments representing the difference between the established rates or
estimated cost reimbursement rates for covered services and the amounts
estimated to be paid by third parties are also recorded on an accrual basis and
deducted from gross revenue to determine net revenue from services. The Company
provides certain care to charity patients, based upon need, but these unbilled
revenues and related costs are immaterial.
Cash and Cash Equivalents: The Company classifies as cash and cash equivalents
all highly liquid investments with maturities of three months or less. At
November 30, 1996 and 1995, cash equivalents were composed primarily of
investments in money market funds and are reflected at their approximate fair
value.
Trade Accounts Receivable: All Company services, other than to patients covered
by the Medicare program, are recorded at established rates as trade accounts
receivable on an accrual basis. Provisions for estimated uncollectible accounts
are reported as selling, general and administrative expenses in the financial
statements in the period that services are rendered.
The Company is subject to losses which may be incurred from Accounts Receivable
that may be uncollectible in excess of its established reserves. The provision
(credit) for doubtful accounts included in operations was approximately
($218,000) in 1996, $553,000 in 1995, and $2,400,000 in 1994.
Settlements Due From Medicare: The Company is a provider of home health care
services to patients covered by the Medicare program. Reimbursement for covered
services is based on cost reimbursed rates. Final reimbursement is determined
after submission of annual cost reports and audits thereof by the fiscal
intermediaries. The settlement amounts due the Company as reflected in the
accompanying
34
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
consolidated balance sheets and the net revenue from services as reflected in
the accompanying consolidated statements of operations are presented net of
estimated reimbursement disallowances.
Property and Equipment: Property and equipment, consisting primarily of
furniture, fixtures, office and computer equipment, and leasehold improvements
are recorded at cost. Depreciation expense is calculated using the straight-line
method over the estimated useful lives of the depreciable assets (3 - 7 years).
Betterments, renewals and extraordinary repairs that extend the useful life of
the asset are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income (expense).
Included in property and equipment are capitalized leases which consist
primarily of computer equipment. Capital leases are recorded at the present
value of the future rentals at lease inception and are amortized over the lesser
of the applicable lease term or the useful life of the equipment (See Note 3).
Intangible Assets: Intangible assets, primarily goodwill, represent the excess
of the purchase price of acquisitions over the fair value of net assets
acquired. Such costs are being amortized over various periods not exceeding
forty years. Amortization expense was approximately $396,000 in 1996, $345,000
in 1995, and $740,000 in 1994. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company measures the
potential impairment of recorded goodwill by the undiscounted value of expected
future operating cash flows in relation to its net capital investment. Based on
its review, the Company does not believe that an impairment of its goodwill has
occurred.
Non-Competition Agreements: Non-competition agreements are amortized on a
straight-line basis over the estimated period to be benefited, usually three to
five years.
Income Taxes: The Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109) effective the
beginning of fiscal 1994 which decreased the net loss by $162,000 for that year.
Under SFAS No. 109, deferred tax assets and liabilities are computed based upon
differences between financial reporting and tax bases of assets and liabilities.
(See Note 8 for additional information related to income taxes).
Income (Loss) Per Common Share: Income (loss) per common share is computed based
on the weighted average of common shares and common share equivalents
outstanding during the periods. Fully diluted income (loss) per share has not
been presented as it would be antidilutive.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.Actual results could differ from those estimates.
Accounting Pronouncements: In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
adoption by the Company in fiscal 1997. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill
35
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed. The Company believes the
adoption of SFAS No. 121 will not have a material effect on the Company's
financial condition or results of operations. In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires adoption by the Company in fiscal 1997. SFAS No.
123 requires that the Company's financial statements include certain disclosures
about stock-based employee compensation arrangements and permits the adoption of
a change in accounting for such arrangements. Changes in accounting for
stock-based compensation are optional and the Company plans to adopt only the
disclosure requirements in 1997.
NOTE 2: ACQUISITIONS AND DIVESTITURES -
In 1994, the Company sold certain assets of its home health care
operations in California, New York and Arizona to a national home health care
provider. In connection with the sale, the Company placed $500,000 of the
purchase price into an escrow account; $100,000 to be released on November 1,
1995 and the remaining $400,000 to be released upon the Company demonstrating
its ability to collect certain specified accounts receivable. In September 1995,
the initial $100,000, plus interest, was released to the Company. Subsequent to
November 30, 1995, the Company received approximately $145,000 of the remaining
$400,000 outstanding and the Company believes that issues related to the
remaining $255,000 will be resolved and that losses, if any, in excess of
established reserves will not be material.
In 1995, operations in Texas were sold for $60,000.
On January 13, 1995, all the fixed assets and certain intangible assets
of the Company's Broward County, Florida private duty home health agency were
sold to the Company's Chairman and Chief Executive Officer. The assets were sold
at their fair market value of $185,000.
On February 15, 1995, a wholly-owned subsidiary of the Company acquired
certain assets of a therapy company for an aggregate purchase price of
approximately $496,000, representing approximately $96,000 in fixed assets and
approximately $400,000 in certain intangibles. The purchase price is being
satisfied by the forgiveness of a $75,000 trade accounts receivable that the
therapy company owed the Company for therapy services provided by the Company
prior to the acquisition date and through the issuance of a promissory note of
$420,650 with the balance due in equal annual payments of $84,130 for five
years.
In March 1996, the Company's Rehabilitation Service Group acquired the
assets and liabilities of a therapy company for an aggregate purchase price of
approximately $60,000 resulting in additions to intangibles of $98,012. In
addition, during 1996 the Group opened two therapy clinics in Florida, one in
Tennessee and one in Rhode Island. The Company's primary investments in these
clinics are short term, one year leases. In July 1996 the Company through a
subsidiary, completed an agreement to provide billing, accounting and cost
reimbursement support services to management companies in California. Currently
the management companies have five HomeCare agencies under contract.
36
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
NOTE 3: NET PROPERTY AND EQUIPMENT -
Net Property and Equipment at November 30 consist of assets owned or
leased under capital lease arrangements and were approximately as follows:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Furniture and Fixtures ..................... $ 462,000 $ 400,000
Clinical and Office Equipment .............. 1,242,000 687,000
Computer Equipment ......................... 364,000 918,000
Capitalized Software ....................... 357,000 723,000
--------------- -----------
2,425,000 2,728,000
Less Accumulated Depreciation .............. (1,545,000) (1,741,000)
--------------- -----------
Net Property and Equipment ................... $880,000 $987,000
======== ========
<FN>
Depreciation expense was approximately $494,000 in 1996, $645,000 in 1995, and
$765,000 in 1994.
</FN>
</TABLE>
NOTE 4: DEBT -
In February 1996, the Company entered into a two-year $8 million
uncommitted revolving line of credit with a commercial finance company. The line
was increased to $14 million with a verbal commitment prior to November 30,
1996. Negotiations are in progress on a written commitment.
The credit facility bears interest at prime plus two percent per annum,
payable monthly, is secured by substantially all assets of the Company and
requires adherence to certain financial covenants. Borrowing is based on the
Company's eligible accounts receivable as defined. A portion of the proceeds
from this new credit facility was used to retire the remaining outstanding
indebtedness with the Company's prior lender.
The new credit facility includes up to $2.0 million securing a standby
letter of credit required by the insurance carrier for the Company's workers'
compensation coverage. As of November 30, 1996, 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.
Borrowing throughout fiscal 1996 had a weighted average interest rate
of approximately 14.5%, inclusive of the unused line of credit and other fees.
The maximum amount outstanding during the fiscal year under the line of credit
was approximately $7.0 million. In retiring the old line of credit, the Company
incurred a penalty of approximately $150,000 and wrote off approximately
$144,000 of unamortized loan costs, the aggregate of which was recorded as an
extraordinary charge in the first fiscal quarter of 1996.
The new line of credit contains a number of covenants some of which
could affect the Company's operations. The more significant of those 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
37
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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.
NOTE 5: STOCK OPTION PLANS -
1983 Stock Option Plan
The Company's 1983 Incentive Stock Option Plan, as amended (the "1983
Plan"), provided for the grant of options to purchase up to 300,000 shares of
common stock at an exercise price of not less than 100% of the fair market value
of the Company's Common Stock on the date of grant (110% of fair market value in
the case of an optionee who is the owner of greater than 10% of the outstanding
shares).
During the three fiscal years ended November 30, 1996, no options were
granted or exercised under the 1983 Plan and none expired. At November 30, 1996,
options to purchase 15,000 shares were outstanding at an exercise price of
$5.875 per share. These options are exercisable for up to ten years from the
date of grant. No options will be granted under the 1983 Plan in the future.
1990 Stock Option Plan
In 1989, the Company adopted the 1990 Stock Option Plan (the "1990
Plan") which provides that options may be granted to purchase up to 770,000
shares of common stock. Options granted under the 1990 Plan are in the form of
either an incentive stock option ("ISO") qualified under Section 422 of the
Internal Revenue Code, a non-qualified stock option ("NSO") or a reload option
(a newly issued option to purchase shares of common stock equal in number to the
shares of common stock which may be tendered, in lieu of cash, to pay for the
exercise of options previously granted). The Company's Stock Option Committee
determines which employees are awarded options under the 1990 Plan and the terms
and vesting provisions of such options.
38
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
At November 30, 1996, options to purchase 241,550 shares of common
stock were outstanding under the 1990 Plan with exercise prices ranging from
$1.750 to $13.500 per share. These options are exercisable for periods ranging
up to six years from vesting dates. As of November 30, 1996, 518,450 options
were available to be granted under the 1990 Plan.
<TABLE>
<CAPTION>
SHARES
1990 PLAN UNDER OPTIONS PRICE PER SHARE
- - --------- ------------ ----------------
<S> <C> <C>
Outstanding, December 1, 1993 .......... 360,800 $3.000 to $14.125
Expired ................................ (168,000) $3.000 to $14.125
-----------
Outstanding, November 30, 1994 ......... 192,800 $3.000 to $13.500
Granted ................................ 90,000 $1.750 to $3.000
Expired ................................ (51,000) $3.000 to $13.500
Terminated ............................. (7,500) $ 13.500
-----------
Outstanding, November 30, 1995 ......... 224,300 $1.750 to $13.500
Granted ................................ 42,500 $ 3.000
Exercised .............................. (10,000) $ 2,375
Terminated ............................. (15,250) $3.000 to $13.500
------------
Outstanding, November 30, 1996 ......... 241,550 $1.750 to $13.500
============
</TABLE>
The weighted average exercise price of the options outstanding at
November 30, 1996 under the 1990 plan was approximately $3.121 per share.
Warrants
During fiscal 1994, the Company issued warrants to acquire 3,750 shares
of common stock with an exercise price of $.01 to a non-employee in exchange for
services to the Company. These warrants were exercised in August 1994. During
1991, the Company issued warrants to acquire 10,000 shares of common stock with
an exercise price of $7.75 in exchange for services to the Company. These
warrants have not been exercised.
Other Options
Prior to 1994, the Company granted options to purchase common stock to
consultants or other individuals which were not under the 1983 or 1990 plans. At
November 30, 1996, options to purchase 255,000 shares of common stock were
outstanding pursuant to these grants with exercise prices from $3.000 to $3.375
per share and a weighted average price of $3.270.
NOTE 6: SEVERANCE OBLIGATIONS -
In May 1994, the Company incurred a severance obligation to a previous
officer of approximately $310,000. Such amount was expensed as of the date of
the May termination. As of November 30, 1995, the Company's obligation to the
officer was satisfied in its entirety.
39
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
On December 30, 1994, the Company and its Chairman and Chief Executive
Officer entered into an agreement to modify the Termination and Benefits
Agreement dated June 1, 1991. The Company and the Chief Executive Officer agreed
to currently settle the future obligation for $1 million. Such amount was
charged to expense in the fiscal year ended November 30, 1994.
In connection with the January 13, 1995 sale of the Broward County home
health agency to the Chief Executive Officer (see Note 2), $185,000 of the $1
million obligation was satisfied as an offset to the purchase price of the
Broward agency. Additionally, $100,000 of the $1 million obligation was
satisfied as settlement of the amounts advanced from the Company to the Chief
Executive Officer in prior years. As of November 30, 1996, the Company's
remaining future obligation to the officer was approximately $414,000 and is
being satisfied under a note payable at prime rate (8.25% at November 30, 1996)
with monthly payments of $13,000.
As part of a severance agreement with the Company's former Chief
Financial Officer, approximately $647,000 was expensed in 1995. As of November
30, 1996, the Company's remaining liability was approximately $131,000 payable
under a promissory note with a payment of $26,250 per month.
NOTE 7: COMMITMENTS AND CONTINGENCIES -
Dade County Medicare Investigation:
On December 3, 1992, in connection with a federal investigation into
Medicare practices by health care providers in South Florida, the Company was
served with federal search warrants. In response to the issuance of the federal
search warrants, the Company engaged counsel who initiated a lawyer-directed
internal investigation into its Medicare claims processing system. This internal
investigation focused on a review of the compliance of the Company's Medicare
practices with applicable laws and regulations.
On December 15, 1992, 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 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 and terminated its
subcontracting relationships with staffing providers in South Florida.
40
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
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 payment 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 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. 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.
The estimated settlement amounts due to the Company as reflected in the
accompanying consolidated balance sheets, as well as net revenue from services
presented in the accompanying consolidated 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
estimated settlements due from Medicare as of November 30, 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 estimated
settlements due from Medicare as recorded in the Company's consolidated balance
sheet as of November 30, 1996 are realizable at their recorded amount.
As of February 1997, four years and two months have passed since
execution of the search warrants, and no charges have been brought against the
Company or any of its officers or employees. The Company has been engaged in
discussions with representatives from the United States Attorney's Office for
the Southern District of Florida concerning the possible resolution of the
Medicare investigation and allegations as they might affect the Company
directly. There are no assurances that these discussions will result in a
successful resolution of these matters or in a resolution that would not be
materially adverse to the Company. Even if the Company is successful in
resolving the Medicare investigation with the federal government, in accordance
with its indemnification obligations under its Articles of Incorporation and
Bylaws, the Company may continue to incur legal expenses on behalf of certain of
its existing and former employees who are individually the subject of such
investigation. In addition, the Company had been the subject of 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 SEC.
41
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Settled Shareholder Class Action Suits:
In October 1992, plaintiffs filed a proposed class action alleging, in
general, that the Company and certain of its officers and directors and the
Company's independent certified public accountants violated provisions of the
Securities and Exchange Act of 1934 by issuing alleged false and misleading
financial statements during the period February 19, 1991 through July 15, 1992.
On October 29, 1994, the Company's Board of Directors, after evaluating
the economic merits of the continuing legal costs required to defend this class
action, as well as its potential exposure to adverse judgment, versus the
settlement amount sought by the plaintiff class, agreed to a settlement between
the Company and plaintiff class. Based on the value of the common stock issued
and the cash payment, the Company recorded a charge totaling approximately $1.9
million in its fiscal year ended November 30, 1994 consolidated statement of
operations to accrue the estimated settlement liability. At a June 30, 1995
hearing, the court approved the settlement and ordered the dismissal of the
claims of all class members against the Company and the other defendants as
described in the Stipulation of Settlement. The court's judgment is now final
and the required cash payment plus the shares of common stock have been
deposited with the escrow agent.
In November 1993, a proposed class action with nearly identical
allegations as those set forth above was filed against the Company, certain of
its officers and directors, and the Company's independent certified public
accountants. On October 30, 1995, an Order of Dismissal was entered by the Court
discharging this proposed class action.
The Company received $900,000 of directors and officers insurance
proceeds during 1993 to fund legal fees with respect to these matters. Such
proceeds were included in Other Income (Expense), in the consolidated statement
of operations.
Other Litigation, Claims and Assessments:
In the ordinary course of business, the Company is exposed to various
claims, incidents which may lead to claims, and legal proceedings other than
those items discussed above. In management's opinion, the outcome of such
matters will not have a material impact upon the Company's consolidated
financial position, results of operations and cash flows.
Lease Commitments:
The Company leases its corporate office and substantially all of its
branch offices under certain non-cancelable long-term operating leases which
expire at various dates. Certain of these leases require additional payments for
taxes, insurance, common area maintenance, and in most cases provide for renewal
options. Generally, terms are from one to three years.
42
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
<TABLE>
<CAPTION>
The following is a schedule of future minimum lease payments as of November 30,
1996:
Fiscal Year Dollar Amount
----------- -------------
<S> <C> <C>
1997 1,555,000
1998 1,189,000
1999 932,000
2000 548,000
2001 211,000
</TABLE>
Total rent expense under operative leases for the years ended November
30, 1996, 1995, and 1994, including the Corporate office, branch facilities and
nurses' housing for the HSS Staffing Group was approximately $3,294,000,
$3,452,000 and $4,514,000, respectively.
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 $580,500 as of November 30, 1996.
Self-Funded Insurance Plans:
The Company self-funds its health and workers' compensation programs up
to policy limits, as defined. Claims in excess of such limits are insured by
third party reinsurers. The Company's estimate of its liability for both
outstanding as well as incurred but not reported claims is based upon its
historical loss experience. As of November 30, 1996 and 1995, such reserves
totaled approximately $1.8 million and $2.6 million, respectively, and are
included as a component of accrued expenses in the accompanying consolidated
balance sheets (See Note 12). Differences between actual losses and reserve
estimates are recognized in the period when such differences become known.
Management believes that the differences between actual losses to be incurred
after November 30, 1996 related hereto and its recorded reserve estimates will
not be material.
43
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
Directors Indemnification Fund:
On October 29, 1994, the Company's Board of Directors approved the
creation of an indemnification fund for up to $2 million for any potential
future expenses which may be incurred by the directors as a result of any future
action against them resulting from their services to the Company. Such
indemnification fund would, if funded, supplement proceeds which may be
available to the directors under the Company's Directors and Officers insurance
policy. As of November 30, 1996, no funding has occurred; however, at the
director's discretion and based upon the Company's future cash position and
other factors as need be considered, such funding may take place. On April 3,
1995, the Company's Board of Directors approved the inclusion of the Company's
past directors, and current and past officers, in the indemnity fund.
NOTE 8: INCOME TAXES -
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Years Ended November 30,
-------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Current:
Federal .................... $ -- $(780,000) $ --
State ...................... 64,797 247,000 115,000
Foreign .................... 78,964 141,188 284,910
--------- ---------- --------
143,761 (391,812) 399,910
--------- ---------- --------
Deferred:
Federal .................... (177,073) 890,000 (2,673,193)
State ...................... 3,313 141,000 (394,000)
Foreign .................... 9,338 (285,000) (284,910)
--------- ---------- -----------
164,422 1,316,000 (3,352,103)
--------- ---------- -----------
Increase (decrease) in
valuation allowance ........ 17,956 (1,624,758) 5,472,758
--------- ---------- ------------
$2,705 $(700,570) $2,520,565
========= ========== ============
</TABLE>
44
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The significant components of deferred tax assets (liabilities) which are
included in the accompanying consolidated balance sheets at November 30 are:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Self insurance reserve ....................... $ 705,752 $ 994,344
Accrued legal and accounting fees ............ 150,602 406,767
Accrued severance, compensation & benefits .. 250,745 544,185
Depreciation and amortization ................ (76,524) (146,655)
Bad debt reserve ............................. 340,580 212,648
Net operating loss carryforwards ............. 3,931,919 3,027,540
Other, net ................................... 68,780 168,703
---------- -----------
5,371,954 5,207,532
Valuation allowance (4,915,956) (4,898,000)
---------- -----------
$455,998 $309,532
========== ==========
</TABLE>
As of November 30, 1996, the Company has available Federal and State
net operating loss carryforwards totaling approximately $9.5 million and $20.4
million, respectively, expiring through 2011.
45
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
The effective income tax provision (benefit) on pre-tax income (loss)
differed from the provision (benefit) computed at the U.S. Federal statutory
rate for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) computed at
Federal statutory rate of 34% ...... $77,047 $408,717 ($3,024,626)
Effect of current tax benefit (229,467)
Effect of state income taxes ....... 44,953 213,000 (279,000)
Foreign tax effects ................ 58,283 130,000 --
Non-deductible meal expenses ....... 23,224 148,447 307,194
Increase (decrease) in valuation
allowance .......................... 17,956 (1,624,758) 5,472,758
Other .............................. 5,299 24,024 44,239
--------- ---------- ----------
Provision (benefit) for income taxes ($2,705) $700,570 2,520,565
========= ========== =========
</TABLE>
In fiscal 1996, the Company recognized a benefit for income taxes of
$2,705. Such benefit is primarily the result of recognizing the current deferred
tax benefit associated with the turnaround of temporary differences in the
current year, offset partially by an increase in the valuation allowance.
In fiscal 1995, the Company recognized a benefit for income taxes of
$700,570. Such benefit is primarily a result of certain tax deductible legal
settlements which were carried back to recover income taxes previously paid by
the Company, as well as, the recognition of certain deferred tax assets
previously reserved by the Company, as discussed below.
During 1994, the Company determined that, due to recurring losses in
prior years and other factors, realization of the net deferred tax asset did not
meet the "more likely than not" criteria of SFAS No. 109. Consequently, at
November 30, 1994, the valuation allowance was increased so that the net
deferred tax asset was fully reserved. As a result of pre-tax income generated
in 1995 and 1996, the Company has realized certain deferred tax assets
previously reserved. Additionally, the Company has recognized approximately
$310,000 of its net operating loss carryforward generated in fiscal 1995 as
management believes that it is more likely than not the Company will generate
sufficient future taxable income to realize this asset. The valuation allowance
is subject to continual review and, as such, may be decreased in the future as
substantive information becomes available about the Company's ability to
generate sufficient future taxable income to realize the net deferred tax asset.
NOTE 9: RELATED PARTY TRANSACTIONS -
Starting in 1994, the Company has utilized the services of an outside
director as a consultant. Such services included shareholder relations,
evaluation of strategic alternatives for the Company and other duties as
assigned by the Chief Executive Officer. The fees for such services were
approximately $6,000 in 1996 and $32,000 in 1995 and $173,000 in 1994.
46
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
During 1995 and 1996, the Company utilized the services of an outside
director as its National Medical Director to provide services including
utilization review, quality assurance, medical guidance, and compliance with all
Federal and State regulations. The services agreement was terminated in 1996.
For the fiscal years 1995 and 1996, the fees for such services were
approximately $42,000 and $30,000 respectively.
During 1995, the Company also received consulting services from two
former officers of the Company. Fees for those services were approximately
$28,000.
See Note 2 and Note 6 for a description of the sale of the Company's
Broward County, Florida home health agency to the Company's Chairman and Chief
Executive Officer.
NOTE 10: DEFINED CONTRIBUTION PLAN -
The Company has a defined contribution plan under Section 401(K) of the
Internal Revenue Code (the "Plan"). The Plan is available to all full-time
employees. Participants can contribute from 1% up to 15% of their annual
compensation to the Plan. Additional discretionary contributions may be made by
the Company. Since inception of the Plan, no discretionary contributions have
been made.
NOTE 11: 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 9.9% and 9.6% of consolidated net revenue from services for the
fiscal years ended November 30, 1996 and 1995, respectively. Outstanding
accounts receivable were approximately $4.5 million and $3.0 million as of
November 30, 1996 and 1995, respectively, and are included in trade accounts
receivable in the accompanying consolidated balance sheets. As of January 31,
1997, approximately $2.3 million of the November 30, 1996 outstanding receivable
balance from these facilities remained unpaid. Approximately $937,000 of this
amount has been outstanding for 180 days or greater. Collections from customers
located in the U.S. Virgin Islands are generally slower than the Company's
domestic customer base. Management believes the November 30, 1996 balances due
are realizable at their recorded amounts primarily because 100% of all prior
amounts due the Company for services rendered since the inception of these
contracts have been paid in full by the government agencies. The government
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.
47
<PAGE>
HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
NOTE 12: ACCRUED EXPENSES
Accrued expenses consisted of the following approximate amounts at
November 30:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Workers' compensation insurance .............. $1,439,600 $2,088,000
Health insurance ............................. 375,500 527,800
Litigation services .......................... 373,600 661,000
Professional fees ............................ 132,500 334,800
Termination costs-sold operations ............ -- 27,500
Other ........................................ 217,800 585,100
---------- -----------
Total $2,539,000 $4,224,200
========== ==========
</TABLE>
48
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Hospital Staffing Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Hospital Staffing Services, Inc. (a Florida Corporation) and subsidiaries ("the
Company") as of November 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended November 30, 1996. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hospital Staffing
Services, Inc. and subsidiaries as of November 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements,
effective December 1, 1993, the Company changed its method of accounting for
income taxes.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Part IV, Item 14.2
of this Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/Arthur Andersen LLP
Fort Lauderdale, Florida,
February 27, 1997.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item will be set forth in the Proxy
Statement of the Company relating to the 1996 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy
Statement of the Company relating to the 1996 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item will be set forth in the Proxy
Statement of the Company relating to the 1996 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the Proxy
Statement of the Company relating to the 1996 Annual Meeting of Stockholders and
is incorporated herein by reference.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
1. Financial Statements
(i) Report of Independent Certified Public Accountants;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Operations;
(iv) Consolidated Statements of Changes in Stockholders'
Equity;
(v) Consolidated Statements of Cash Flows;
(vi) Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
(i) Valuation and Qualifying Accounts.
3. Exhibits
(i) Reports on Form 8-K
None
(ii) Exhibits Required by Item 601 of Regulation S-K
Exhibit No.
2.1 Purchase Agreement dated September 2, 1994 and effective as of August
31, 1994 between Hospital Staffing Services, Inc., Hospital Staffing Services of
California, Inc., Cura Care, Inc. of Arizona, and HSSI Acquisition Corp. as
seller and Interim Healthcare of New York Inc., and Interim Healthcare Inc. as
buyer. (Incorporated by reference to Exhibit 10.31 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1994).
2.2 Purchase Agreement dated December 30, 1994 and effective January 1,
1995 between Hospital Staffing Services, Inc. and Cardinal Nursing and Home
Care, Inc. as sellers and Ronald A. Cass as buyer. (Incorporated by reference to
Exhibit 2.2 to registrant's Annual Report on Form 10-K for the fiscal year ended
November 30, 1995).
2.3 Purchase Agreement dated and effective as of February 15, 1995 between
Tri Therapy, Inc., as seller and HSSI of Georgia, Inc. as buyer. (Incorporated
by reference to Exhibit 2.3 to registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(Incorporated by reference to an exhibit to the Registration Statement on Form
S-18 (No. 2-87290-A) filed with the Securities and Exchange Commission on
October 19, 1983, amended on November 23, 1983 and December 5, 1983 and declared
effective on December 6, 1983 ("Form S-18 (No. 2-87290-A)")).
52
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3.2 Articles of Amendment to Articles of Incorporation (Incorporated by
reference to an exhibit to the Registration Statement on Form S-1 (No. 33-42640)
filed with the Securities and Exchange Commission on September 6, 1991, amended
on October 4, 1991 and declared effective on October 4, 1991 ("Form S-1 (No.
33-42640)").
3.3 Articles of Amendment to Articles of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.4 filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended November 30, 1993).
3.4 By-Laws of the Registrant, as amended (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 30, 1991 filed August 1,
1991).
4.1 Form of Common Share Certificate (Incorporated by reference to an
exhibit to the Registration Statement on Form S-18 (No. 2-87290-A)).
10.1 Incentive Stock Option Plan, as amended (Incorporated by reference to
Exhibit A(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1989).
10.2 Amended and Restated 1990 Stock Option Plan (Incorporated by reference
to Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 on
May 17, 1991).
10.3 Second Amended and Restated 1990 Stock Option Plan (Incorporated by
reference to Exhibit 4 filed with the Registrant's Registration Statement on
Form S-8 on June 26, 1992).
10.4 Alternative Deferred Compensation Plan approved January 19, 1994.
(Incorporated by reference to Exhibit 10.26 filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended November 30, 1993).
10.5 Agreement for Lease between Registrant and 62nd Street Partners, dated
July 29, 1989 for Registrant's office in Fort Lauderdale, Florida (Incorporated
by reference to Exhibit A(ii) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 31, 1989).
10.6 Addendum to Lease Agreement dated October 31, 1994. (Incorporated by
reference to Exhibit 10.6 to registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1995).
10.7 Second Addendum to Lease Agreement dated November 1, 1995, and related
Promissory Note dated December 1, 1995. (Incorporated by reference to Exhibit
10.7 to registrant's Annual Report on Form 10-K for the fiscal year ended
November 30, 1995).
10.8 Termination and Benefits Agreement with Warren Marmorstein dated
November 1, 1993. (Incorporated by reference to Exhibit 10.25 filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended November 30,
1993).
10.9 Termination Agreement with Brian M. Lechner dated June 1, 1994.
(Incorporated by reference to Exhibit 10.29 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1994).
10.10Settlement Agreement with Ronald A. Cass dated January 1, 1995.
(Incorporated by reference to Exhibit 10.10 to registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995).
10.11Employment Agreement with Jay Gershberg dated September 1, 1995.
(Incorporated by reference to Exhibit 10.11 to registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995).
10.12Employment Agreement with Jeffrey A. Barnhill dated September 1, 1995.
(Incorporated by reference to Exhibit 10.12 to registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995).
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10.13Employment Agreement with Ronald Huneycutt dated February 1, 1996.
(Incorporated by reference to Exhibit 10.13 to registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1995).
10.14Loan and Security Agreement with Congress Financial Corporation
(Florida) dated August 23, 1993. (Incorporated by reference to Exhibit 10.24
filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993).
10.15Amendment No. 1 to Loan and Security Agreement with Congress Financial
Corporation (Florida) dated January 27, 1994. (Incorporated by reference to
Exhibit 10.27 filed with the Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993).
10.16Amendment No. 2 to Loan and Security Agreement with Congress Financial
Corporation (Florida) dated March 15, 1994. (Incorporated by reference to
Exhibit 10.28 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1994.)
10.17Management Agreement between Hospital Staffing Services, Inc. and its
wholly-owned subsidiaries dated June 13, 1994, effective December 1, 1990.
(Incorporated by reference to Exhibit 10.30 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1994.)
10.18Loan and Security Agreement with Capital Healthcare Financing dated
February 7, 1996. (Incorporated by reference to Exhibit 10.18 to registrant's
Annual Report on Form 10-K for the fiscal year ended November 30, 1995).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP - filed herewith.
99.01 Risk Factors
54
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HOSPITAL STAFFING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Hospital Staffing Services, Inc. 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 and President
Date: February 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/Ronald A. Cass Chairman of the Board, Chief 2/27/97
Ronald A. Cass Executive Officer and President,
(Principal Executive Officer)
/s/Ronald G. Huneycutt Vice President Finance and Chief 2/27/97
Ronald G. Huneycutt Financial Officer
/s/Lawrence W. Cappel Director 2/27/97
Lawrence W. Cappel
/s/Robert B. Fields Director 2/27/97
Robert B. Fields
/s/William F. McConnell Director 2/27/97
William F. McConnell
/s/Hector L. Ziperovich Director 2/27/97
Hector L. Ziperovich, M.D.
55
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statements on Forms S-8, File Nos. 33-40658 and
2-92689.
ARTHUR ANDERSEN LLP
/s/Arthur Andersen LLP
Fort Lauderdale, Florida,
February 27, 1997.
56
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EXHIBIT INDEX
Filing Exhibit
Method No.
p 2.1 Purchase Agreement dated September 2, 1994 and effective as of August
31, 1994 between Hospital Staffing Services, Inc., Hospital Staffing
Services of California, Inc., Cura Care, Inc. of Arizona, and HSSI
Acquisition Corp. as seller and Interim Healthcare of New York Inc., and
Interim Healthcare Inc. as buyer. (Incorporated by reference to Exhibit
10.31 to Registrant's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1994).
P 2.2 Purchase Agreement dated December 30, 1994 and effective January 1,
1995 between Hospital Staffing Services, Inc. and Cardinal Nursing and Home
Care, Inc. as sellers and Ronald A. Cass as buyer.
P 2.3 Purchase Agreement dated and effective as of February 15, 1995 between
Tri Therapy, Inc., as seller and HSSI of Georgia, Inc. as buyer.
P 3.1 Amended and Restated Articles of Incorporation of the Registrant
(Incorporated by reference to an exhibit to the Registration Statement on
Form S-18 (No. 2-87290-A) filed with the Securities and Exchange Commission
on October 19, 1983, amended on November 23, 1983 and December 5, 1983 and
declared effective on December 6, 1983 ("Form S-18 (No. 2-87290-A)")).
P 3.2 Articles of Amendment to Articles of Incorporation (Incorporated by
reference to an exhibit to the Registration Statement on Form S-1 (No.
33-42640) filed with the Securities and Exchange Commission on September 6,
1991, amended on October 4, 1991 and declared effective on October 4, 1991
("Form S-1 (No. 33-42640)").
P 3.3 Articles of Amendment to Articles of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.4 filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended November 30, 1993).
P 3.4 By-Laws of the Registrant, as amended (Incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 30, 1991 filed August 1,
1991).
P 4.1 Form of Common Share Certificate (Incorporated by reference to an
exhibit to the Registration Statement on Form S-18 (No. 2-87290-A)).
57
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P 10.1 Incentive Stock Option Plan, as amended (Incorporated by reference to
Exhibit A(i) to Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1989).
P 10.2 Amended and Restated 1990 Stock Option Plan (Incorporated by reference
to Exhibit 4 filed with the Registrant's Registration Statement on Form S-8
on May 17, 1991).
P 10.3 Second Amended and Restated 1990 Stock Option Plan (Incorporated by
reference to Exhibit 4 filed with the Registrant's Registration Statement
on Form S-8 on June 26, 1992).
P 10.4 Alternative Deferred Compensation Plan approved January 19, 1994.
(Incorporated by reference to Exhibit 10.26 filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended November 30, 1993).
P 10.5 Agreement for Lease between Registrant and 62nd Street Partners, dated
July 29, 1989 for Registrant's office in Fort Lauderdale, Florida
(Incorporated by reference to Exhibit A(ii) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1989).
P 10.6 Addendum to Lease Agreement dated October 31, 1994.
P 10.7 Second Addendum to Lease Agreement dated November 1, 1995, and related
Promissory Note dated December 1, 1995.
P 10.8 Termination and Benefits Agreement with Warren Marmorstein dated
November 1, 1993. (Incorporated by reference to Exhibit 10.25 filed with
the Registrant's Annual Report on Form 10-K for the fiscal year ended
November 30, 1993).
P 10.9 Termination Agreement with Brian M. Lechner dated June 1, 1994.
(Incorporated by reference to Exhibit 10.29 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1994).
P 10.10 Settlement Agreement with Ronald A. Cass dated January 1, 1995.
P 10.11 Employment Agreement with Jay Gershberg dated September 1, 1995.
P 10.12 Employment Agreement with Jeffrey A. Barnhill dated September 1,
1995.
P 10.13 Employment Agreement with Ronald Huneycutt dated February 1, 1996.
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P 10.14 Loan and Security Agreement with Congress Financial Corporation
(Florida) dated August 23, 1993. (Incorporated by reference to Exhibit
10.24 filed with the Registrant's Annual Report on Form 10-K for the fiscal
year ended November 30, 1993).
P 10.15 Amendment No. 1 to Loan and Security Agreement with Congress
Financial Corporation (Florida) dated January 27, 1994. (Incorporated by
reference to Exhibit 10.27 filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended November 30, 1993).
P 10.16 Amendment No. 2 to Loan and Security Agreement with Congress
Financial Corporation (Florida) dated March 15, 1994. (Incorporated by
reference to Exhibit 10.28 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended May 31, 1994.)
P 10.17 Management Agreement between Hospital Staffing Services, Inc. and its
wholly-owned subsidiaries dated June 13, 1994, effective December 1, 1990.
(Incorporated by reference to Exhibit 10.30 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1994.)
P 10.18 Loan and Security Agreement with Capital Healthcare Financing dated
February 7, 1996.
DT 21.1 Subsidiaries of the Registrant.
DT 23.1 Consent of Arthur Andersen LLP - filed herewith.
DT 99.01 Risk Factors.
59
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EXHIBIT 99.01
RISK FACTORS
Set forth below is a discussion of certain risk factors to which the
Company and its operations are subject:
Reliance on Management. The Company's business is dependent upon Ronald A.
Cass, the Company's founder, Chief Executive Officer and President; and Jeffrey
A. Barnhill, the Company's Senior Vice President, Health Services. The loss of
Ronald A. Cass or Jeffrey A. Barnhill could have a material adverse effect on
the Company. The Company does not presently maintain key man insurance on the
life of any member of management.
Reimbursement and Payment Sources. Substantially all the revenues of
HSSI HomeCare are attributable to reimbursements or payments received from
third-party payors, such as insurance companies or governmental programs
including the Medicare and Medicaid programs. The levels of revenues and
profitability of the Company, like those of other health care companies, are
affected by the continuing efforts of third-party payors to contain or reduce
the costs of health care by lowering reimbursement or payment rates, increasing
case management review of services and negotiating reduced contract pricing.
Home health care organizations, which generally provide less costly alternatives
to third-party payors than hospital-based care, have benefitted from those cost
containment objectives. However, as expenditures in the home health care market
continue to grow, initiatives aimed at reducing the costs of health care
delivery at non-hospital sites will increase. A significant change in coverage
or a reduction in payment rates by third-party payors would have a material
adverse effect upon the Company's business and financial condition. In addition,
government reimbursed charges of certified expenses through programs such as
Medicare and Medicaid are subject to audit. Audits may result in either
decreases or increases in payments the Company has previously received.
Regulation. Health care is an area of extensive and dynamic regulatory
change. Changes in the law or new interpretations of existing laws can have a
dramatic effect on permissible activities, the relative costs of doing business
and the amount of reimbursement by government and private third-party payors.
Laws and regulations often are adopted to regulate new products, services and
industries. Federal laws changing coverage and reimbursement requirements are
considered frequently and there can be no assurance that federal or state
governments will not impose additional restrictions upon all or a portion of the
Company's activities which might adversely affect the Company's business.
Competition. The home health care industry and staffing industry are
highly competitive. The Company competes with other health care companies,
hospitals, nursing homes, temporary employment companies and other
organizations, some of which are larger and more established companies with
significantly greater resources and access to capital than the Company.
Potential Liability and Insurance. In recent years, physicians,
hospitals and other participants in the health care market have become subject
to an increasing number of lawsuits alleging malpractice, negligence or related
legal theories, many of which involve large claims and significant defense
costs. The Company has not experienced any material liability claims relating to
its services and management is not aware of any basis for any material claims.
Further, the Company believes that its exposure to
60
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liability is reduced since the Company's nursing and other support personnel
perform services in accordance with treatments prescribed by third-party
physicians or under hospital supervision. The Company has in force general and
professional liability insurance policies with coverage limits on an occurrence
basis of $1 million and $3 million, respectively, per claim, and $1 million and
$5 million, respectively, in the aggregate, which coverage the Company believes
is adequate. The Company believes that insurance coverage will continue to be
available for the foreseeable future at acceptable rates. There can be no
assurance, however, that material claims will not be asserted against the
Company in the future, or that if asserted, such claims will be fully covered by
the Company's insurance limits.
Relationships with Referral Sources. The Company's business is
dependent on its ability to establish close working relationships with
hospitals, clinics, nursing homes, physician groups, health maintenance
organizations, and other health care providers. Although the Company has
established such relationships in the markets in which it operates, there is no
assurance that existing relationships can be maintained or that additional
relationships can be successfully developed in future markets.
Availability of Medical Personnel. The Company's business is dependent
in large part upon its ability to recruit and retain qualified registered nurses
and other professional and medical support personnel to fill positions in a
timely manner. There is a high level of demand for such personnel by other
companies which provide services similar to those of the Company as well as by
health care facilities themselves. The success and growth of such business may
therefore be constrained by the number of such available personnel.
Uncertainty Due to Potential Changes in National and State Health Care
Policies. The Clinton administration and members of Congress have proposed
reforms to the system of health care delivery in the United States. The process
by which the administration or Congress will pursue proposals for national
health care reform and the precise nature of any such proposals are unclear at
this time. In addition, several states are considering various health care
reforms, including reforms through Medicaid managed care demonstration projects.
It is not possible to predict what reforms of the health care system will be
adopted or the effect, if any, such reforms may have on the Company's business
and its results of operations.
61
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<TABLE>
<CAPTION>
Hospital Staffing Services, Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts
For the Years Ended November 30, 1996, 1995, and 1994
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Description Amount Period
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended
November 30, 1996
Deducted from the Balance
Sheet Caption "Trade Uncollectible
Accounts Receivable" Accounts
Allowance for Doubtful Charged Against
Accounts $599,599 $248,422 $0 Allowance $288,770 $559,251
--------------------------------------------------------------------------------------------
For the Year Ended
November 30, 1995
Deducted from the Balance
Sheet Caption "Trade Uncollectible
Accounts Receivable" Accounts
Allowance for Doubtful Charged Against
Accounts $2,345,598 $552,663 $0 Allowance $2,298,662 $599,599
--------------------------------------------------------------------------------------------
For the Year Ended
November 30, 1994
Deducted from the Balance
Sheet Caption "Trade Uncollectible
Accounts Receivable" Accounts
Allowance for Doubtful Charged Against
Accounts $1,724,655 $2,382,948 $608,166 (1)Allowance $2,370,171 $2,345,598
--------------------------------------------------------------------------------------------
<FN>
(1) Reclassifications between Accounts Receivable and Allowance Account
</FN>
</TABLE>
