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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-31299
MEDICAL STAFFING NETWORK HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0865171
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
901 Yamato Road
Suite 110
Boca Raton, Florida 33431
(Address of principal executive offices)
(Zip Code)
(561) 226-9000
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of each class of the issuer's common stock, as
of November 11, 2002:
30,091,045 shares Common Stock, par value $0.01 par value
MEDICAL STAFFING NETWORK HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - December
30, 2001 and September 29, 2002 (Unaudited)............... 3
Condensed Consolidated Statements of Income - for
the Three Months and Nine Months Ended September
30, 2001 (Unaudited) and September 29, 2002
(Unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows -
for the Nine Months Ended September 30, 2001
(Unaudited) and September 29, 2002 (Unaudited)............ 5
Notes to Condensed Consolidated Financial
Statements - September 29, 2002 (Unaudited)............... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.. 26
ITEM 4. CONTROLS AND PROCEDURES.................................... 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 27
SIGNATURES.......................................................... 28
CERTIFICATIONS...................................................... 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, September 29,
2001 2002
---------------------------
(Unaudited)
Assets
Current assets:
Cash $11,253,199 $ 2,338,982
Accounts receivable, net of allowance for
doubtful accounts of $2,181,767 and $2,756,897
at December 30, 2001 and September 29, 2002,
respectively 65,190,898 85,350,246
Prepaid expenses 5,032,378 2,167,220
Other current assets 1,014,641 1,622,444
----------------------------
Total current assets 82,491,116 91,478,892
Furniture and equipment, net 7,315,574 11,129,007
Goodwill and other intangible assets, net of
accumulated amortization of $8,723,481 and
$8,935,776 at December 30, 2001 and
September 29, 2002, respectively 68,289,316 93,568,021
Other assets 3,923,288 3,902,378
----------------------------
Total assets $162,019,294 $200,078,298
============================
Liabilities, redeemable preferred stock and
stockholders' (deficit) equity
Current liabilities:
Accounts payable $ 5,271,571 $3,059,889
Accrued payroll and related liabilities 8,948,662 8,989,286
Other current liabilities 3,186,974 3,156,667
Current portion of long-term debt 10,034,721 1,687,500
Current portion of capital lease obligations 329,922 980,870
----------------------------
Total current liabilities 27,771,850 17,874,212
Long-term debt, net of current portion 105,000,000 40,312,500
Senior subordinated debt to related
parties 59,319,327 -
Capital lease obligations, net of
current portion 661,096 1,383,251
Other liabilities 2,371,960 3,475,846
----------------------------
Total liabilities 195,124,233 63,045,809
Commitments and contingencies
Redeemable preferred stock 124,616,794 -
Common stockholders' (deficit) equity:
Common stock, $.01 par value, 75,000,000
authorized: 26,547 and 30,091,045 issued and
outstanding at December 30, 2001 and
September 29, 2002, respectively 265 300,910
Additional paid-in-capital - 283,703,397
Promissory notes due for purchases of common
stock (4,550,877) (4,550,877)
Accumulated other comprehensive loss, net of
tax - (118,246)
Accumulated deficit (153,171,121) (142,302,695)
----------------------------
Total common stockholders' (deficit) equity (157,721,733) 137,032,489
----------------------------
Total liabilities, redeemable preferred stock,
and common stockholders' (deficit) equity $162,019,294 $200,078,298
============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended
September 30, September 29, September 30, September 29,
2001 2002 2001 2002
Service revenues $94,344,433 $127,520,926 $248,032,727 $346,261,249
Cost of services rendered 70,661,655 95,550,157 185,577,866 258,659,868
------------------------- ----------------------------
Gross profit 23,682,778 31,970,769 62,454,861 87,601,381
Operating expenses:
Selling, general and
administrative 12,796,931 16,539,706 32,576,959 46,420,180
Provision for doubtful
accounts 586,101 1,115,422 1,235,063 2,506,013
Corporate general and
administrative 1,744,079 1,972,771 4,844,160 5,420,019
Recapitalization
transaction fee 319,652 - 319,652 -
Depreciation 563,511 1,172,718 1,494,612 2,899,945
Amortization 944,282 95,488 2,650,771 212,296
------------------------- ----------------------------
Income from operations 6,728,222 11,074,664 19,333,644 30,142,928
Interest expense, net 3,521,017 808,389 9,905,210 6,467,210
------------------------- ----------------------------
Income before provision
for income taxes 3,207,205 10,266,275 9,428,434 23,675,718
Provision for income taxes 1,282,882 4,209,000 3,771,374 9,708,500
------------------------- ----------------------------
Net income 1,924,323 6,057,275 5,657,060 13,967,218
Deduct required dividends
on convertible preferred
stock - - - 3,098,792
Income available to common
stockholders $1,924,323 $6,057,275 $5,657,060 $10,868,426
=======================================================
Earnings per share:
Basic earnings per share $ 0.25 $ 0.20 $ 0.73 $ 0.60
=======================================================
Diluted earnings per
share $ 0.07 $ 0.19 $ 0.20 $ 0.50
=======================================================
Weighted average number of
common shares outstanding:
Basic 7,731,614 30,090,343 7,731,614 18,199,429
Diluted 29,215,916 31,402,107 28,720,704 27,766,225
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended
September 30, September 29,
2001 2002
------------------------------
Operating activities
Net income $ 5,657,060 $ 13,967,218
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,145,383 3,112,241
Accretion of put warrants 3,800,000 -
Amortization of debt issuance costs 683,805 601,668
Deferred income taxes 120,864 1,518,797
Provision for doubtful accounts 1,235,063 2,506,013
Loss on derivative instrument - 350,876
Changes in operating assets and liabilities:
Accounts receivable (21,591,927) (20,845,938)
Prepaid expenses and other current assets (1,515,883) 671,894
Other assets (167,185) (514,180)
Accounts payable 631,778 (2,817,827)
Accrued payroll and related liabilities 5,900,093 40,624
Other current liabilities 370,212 (1,262,400)
Other liabilities 192,617 995,300
-----------------------------
Net cash used in operating activities (538,120) (1,675,714)
Investing activities
Cash paid for acquisitions, net of cash
acquired (9,769,750) (26,278,012)
Purchases of furniture and equipment, net (1,981,681) (2,747,281)
Capitalized internal software costs (877,832) (1,506,685)
-----------------------------
Net cash used in investing activities (12,629,263) (30,531,978)
Financing activities
Net proceeds from issuance of common stock - 156,279,090
Exercise of stock options - 9,366
Principal payments under capital lease
obligations (130,520) (640,933)
Payment of debt issuance costs - (356,801)
Net borrowings (payments) on outstanding debt 13,459,732 (131,997,247)
-----------------------------
Net cash provided by financing activities 13,329,212 23,293,475
Net increase (decrease) in cash 161,829 (8,914,217)
-----------------------------
Cash at beginning of period 204,915 11,253,199
=============================
Cash at end of period $ 366,744 $ 2,338,982
Supplemental disclosure of noncash investing
and financing activities =============================
Purchases of equipment through capital leases $ 323,004 $ 1,976,422
Supplemental disclosures of cash flow
information =============================
Interest paid $ 5,246,377 $ 4,070,933
=============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medical Staffing Network Holdings, Inc. (or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended September 29, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 29, 2002.
The balance sheet at December 30, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-1
(File No. 333-82438).
Certain reclassifications have been made to the prior period amounts to conform
to the current period's presentation.
2 - STOCKHOLDERS EQUITY
On April 12, 2002, the Company approved an amendment to its Certificate of
Incorporation increasing the Company's authorized shares of common stock to
75,000,000 shares and a stock split in the form of a stock dividend of 3.069375
for 1, each of which took effect immediately prior to the closing of the
Company's initial public offering. The financial statements have been restated
to give retroactive recognition to the stock split in the prior periods,
including all references in the condensed consolidated financial statements to
number of shares and per share amounts.
On April 23, 2002, the Company completed its initial public offering of
7,812,500 shares of common stock at $19.00 per share. Additionally, the
underwriters exercised the over-allotment option of 1,171,875 shares, bringing
the total number of shares issued to 8,984,375. Total proceeds received by the
Company, net of estimated expenses related to the initial public offering were
$156.3 million. The proceeds were used to repay $62.9 million of its outstanding
balance under the senior unsecured notes, and approximately $93.4 million of the
Company's outstanding loans under the senior credit facility. Immediately prior
to the completion of the initial public offering, the outstanding shares of
Series I Preferred Stock were converted into 21,075,645 shares of common stock.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
3 - RECAPITALIZATION OF THE COMPANY
On October 26, 2001, as contemplated by (i) an Agreement dated as of August 20,
2001, as amended on October 26, 2001 (the "Recapitalization Agreement"), by and
among Warburg Pincus Private Equity Fund VIII, L.P., a Delaware limited
partnership ("Warburg Pincus"), MSN Acquisition Corp., a wholly owned subsidiary
of Warburg Pincus, and the Company, and (ii) a Voting, Sale and Retention
Agreement, dated as of August 20, 2001, as amended October 26, 2001 (the
"Stockholders Agreement"), by and among Warburg Pincus, the Company and MSN
Acquisition Corp., a recapitalization of the Company was completed.
Pursuant to the terms of the Recapitalization Agreement, holders of the
Company's common and convertible preferred stock became entitled to receive
$6.06 per share. Certain of the stockholders, including executive officers,
elected to retain certain of their shares of common stock rather than to receive
the cash consideration for a portion of their shares. These retained shares were
then exchanged for the same securities that the Warburg Pincus-led investment
group (the "Investor Group") received.
Upon completion of the recapitalization, the Investor Group was issued
redeemable preferred stock, common stock and senior unsecured promissory notes,
together representing approximately 85% of the equity ownership in exchange for
cash consideration totaling approximately $156.6 million. In addition, a banking
syndicate extended a senior credit facility to the Company in the amount of
$120.0 million, of which $105.0 million was advanced to the Company at closing.
Together, these funds were used to pay the merger consideration to the former
stockholders, to retire approximately $82.0 million of the then outstanding debt
obligations, to pay transaction fees and expenses of approximately $7.2 million
and to provide the Company with working capital for operations.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company and, accordingly, the Company has retained its
historical cost basis of accounting. The shares repurchased by the Company have
been canceled.
The Company incurred approximately $3.7 million in debt issuance costs related
to these transactions. These costs have been capitalized as long-term assets and
are being amortized over the terms of the indebtedness.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
4 - REDEEMABLE PREFERRED STOCK
During the first quarter of 2002, the Company had authorized 15,000,000 shares
of preferred stock, par value $.01, of which 7,000,000 shares had been
designated as Series I Convertible Preferred Stock. The Series I Convertible
Preferred Stock had a stated value of $18.60 and 6,602,865 shares were issued in
connection with the recapitalization. The holders of the Series I Convertible
Preferred Stock were entitled to receive dividends at a rate of 8% per annum of
the stated value compounded quarterly, which were cumulative and accrued whether
or not declared by the Board of Directors and were payable when and as declared
by the Board of Directors pursuant to certain restrictions as defined by the
Company's credit agreement. The Series I Convertible Preferred Stock could be
converted at any time, at the option of the holder on a one-for-one basis by the
holder upon written notice into fully paid and nonassessable shares of the
Company's common stock at an initial conversion price of $6.06, which is subject
to adjustment pursuant to anti-dilution provisions. Upon completion of a
Qualified Public Offering (as defined), each share of Series I Convertible
Preferred Stock was to be automatically converted into common stock at its then
effective conversion price. At any time after October 26, 2009, or upon
consummation of a Change in Control (as defined), the holders of the Series I
Convertible Preferred Stock could require the Company to redeem any or all of
the outstanding shares of the Series I Convertible Preferred Stock at price in
cash equal to the stated value per share plus any accrued but unpaid dividends.
As discussed in Note 2, the outstanding shares of Series I Convertible Preferred
Stock were converted into 21,075,645 shares of common stock in connection with
the completion of the Company's initial public offering on April 23, 2002.
5 - EARNINGS PER SHARE
Basic earnings per share (EPS) excludes dilution and is computed by dividing net
income or loss attributable to common stockholders by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants to purchase stock, restricted common
stock and common stock options using the treasury stock method) were exercised
or converted into common stock. Certain shares of common stock that are issuable
upon the exercise of options have been excluded from the EPS calculation because
their effect would have been anti-dilutive.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
The table sets forth, for the period indicated, the computation of basic and
diluted EPS:
Three months ended Nine months ended
September 30, September 29, September 30, September 29,
2001 2002 2001 2002
---------------------------- ----------------------------
Numerator:
Net income before preferred
stock dividends $ 1,924,323 $ 6,057,275 $ 5,657,060 $13,967,218
Less preferred stock
dividends - - - 3,098,792
---------------------------- ----------------------------
Numerator for basic
earnings per share
available to common
stockholders $ 1,924,323 $ 6,057,275 $ 5,657,060 $10,868,426
============================ ============================
Effect of dilutive securities:
Add back preferred stock
dividends - - - 3,098,792
---------------------------- ----------------------------
Numerator for dilutive
earnings per share
available to common
stockholders $ 1,924,323 $ 6,057,275 $ 5,657,060 $13,967,218
============================ ============================
Three months ended Nine months ended
September 30, September 29, September 30, September 29,
2001 2002 2001 2002
---------------------------- ----------------------------
Denominator:
Denominator for basic
earnings per share-
weighted-average shares 7,731,614 30,090,343 7,731,614 18,199,429
Effect of dilutive shares:
Restricted common shares 1,803,804 - 1,484,876 -
Employee stock options 393,658 1,311,764 299,894 1,338,606
Warrants 2,307,616 - 2,225,096 -
Convertible preferred
stock 16,979,224 - 16,979,224 8,228,190
--------------------------- ----------------------------
Dilutive potential common
shares 21,484,302 1,311,764 20,989,090 9,566,796
--------------------------- ----------------------------
Denominator for diluted
earnings per
share-adjusted
weighted-average shares
and assumed conversions 29,215,916 31,402,107 28,720,704 27,766,225
=========================== ===========================
Basic earnings per share $ 0.25 $ 0.20 $ 0.73 $ 0.60
=========================== ===========================
Diluted earnings per share $ 0.07 $ 0.19 $ 0.20 $ 0.50
=========================== ===========================
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
6 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, COMPREHENSIVE
INCOME, requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. There are no other components of comprehensive income other than the
Company's consolidated net income and accumulated unrealized gain (loss) on the
derivative instrument during the three and nine month periods ended September
29, 2002. The following table sets forth the computation of comprehensive income
for the periods indicated:
Three months ended Nine months ended
------------------------------------------
September September September September
30, 2001 29, 2002 30, 2001 29, 2002
------------------------------------------------
Net income $1,924,323 $6,057,275 $5,657,060 $13,967,218
Other comprehensive income:
Unrealized gain/(loss) on
derivative, net of tax - 13,138 - (118,246)
-------------------------------------------------
Total comprehensive income $1,924,323 $6,070,413 $5,657,060 $13,848,972
=================================================
7 - LONG TERM DEBT
On October 26, 2001, in connection with the recapitalization discussed in Note
3, the Company entered into a $120.0 million senior credit facility. The senior
credit facility consisted of (i) senior credit notes (Term A) in the amount of
$40.0 million due in October 2006 bearing interest at a variable rate based on
the Company's leverage ratio (as defined), with interest payable at least
quarterly and principal payable quarterly commencing on March 31, 2003; (ii)
senior credit notes (Term B) in the amount of $60.0 million due in October 2007
bearing interest at a variable rate based on the Company's leverage ratio (as
defined), with interest payable at least quarterly and principal payable
quarterly commencing on March 31, 2003; and (iii) up to $20.0 million of
revolving loans expiring on October 2006, bearing interest at a variable rate
payable at least quarterly.
The senior credit facility is secured by substantially all of the assets of the
Company and contains certain covenants that, among other things, limit the
payment of dividends and restrict additional indebtedness and obligations, and
require maintenance of certain financial ratios.
Also, in connection with the recapitalization, the Company issued Senior
Unsecured Promissory Notes ("Senior Unsecured Notes") to the Investor Group and
the previous stockholders (including officers) in the amount of approximating
$59.3 million. The Senior Unsecured Notes bore interest at 12% per annum
compounding quarterly, with principal and interest due in October 2009. The
holders of the Senior Unsecured Notes had the right to require the Company
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
to redeem the Senior Unsecured Notes upon the consummation of (i) an
underwritten public offering or (ii) a Change of Control (as defined).
In connection with the Company's initial public offering completed April 23,
2002 as more fully described in Note 2, the Senior Unsecured Notes were redeemed
in full in the amount of $62.9 million and the senior credit facility was repaid
in the amount of approximately $93.4 million.
On July 3, 2002, the Company amended the terms of its senior credit facility and
entered into a $25 million note with terms and rights identical to its previous
Term A note. In accordance with the amendment, the remaining balance on the
existing Term A and Term B notes were paid off.
As of September 29, 2002, the Company has $3 million available under the
revolving credit facility.
8 - AQUISITIONS
In July 2002, the Company acquired certain assets of three per diem nursing
companies, STAT Medical Services, Inc., Medical Staffing Services, Inc. and Pro
Med, Inc. for an aggregate cash purchase consideration of approximately $16
million. Approximately $14 million was allocated to goodwill, which is not
subject to amortization under the provisions of Financial Accounting Standards
Board (FASB) Statement No. 142, as more fully described in Note 9. All three
acquisitions were accounted for in accordance with FASB Statement No. 141 and,
accordingly, their results of operations have been included in the condensed
consolidated statement of income beginning from their respective dates of
acquisition.
In August 2002, the Company acquired certain assets of Pharmstaff, Ltd., a
provider of temporary pharmacists and pharmacy technicians to hospitals and
other facilities, for an aggregate cash purchase consideration of approximately
$9 million. Approximately $8.5 million was allocated to goodwill, which is not
subject to amortization under the provisions of FASB Statement No. 142. The
acquisition was accounted for in accordance with FASB Statement No. 141 and,
accordingly, the results of operations have been included in the condensed
consolidated statement of income from its date of acquisition.
9 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. Under the new rules, goodwill and other
intangibles determined to have an infinite life are no longer amortized but are
reviewed annually for impairment. Separable intangible assets that are not
deemed to have an infinite life will continue to be amortized over their useful
lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The Company adopted SFAS No. 142 as of December 31, 2001 and, accordingly, no
longer amortizes goodwill. The Company completed the transitional impairment
test of goodwill and intangible assets with an indefinite life during the first
quarter of 2002. Based on the results of this test, the Company determined that
there was no impairment of goodwill or intangible assets with an indefinite life
as of the transition date, December 31, 2001. The adoption of SFAS No. 142
reduced amortization expense by approximately $850,000 and $2,440,000 for the
three and nine months ended September 29, 2002, respectively.
The following pro forma information presents net income and basic and diluted
earnings per share, adjusted to exclude amounts no longer being amortized, as if
the adoption of SFAS No. 142 had occurred on January 1, 2001:
Three months Nine months
ended ended
September September
30, 2001 30, 2001
------------ -------------
Net income $ 2,434,323 $7,121,060
Basic net income per share $ 0.31 $ 0.92
Diluted net income per share $ 0.08 $ 0.25
Acquired intangible assets subject to amortization all relate to non-compete
agreements with a gross carrying value of $2,399,000 and related accumulated
amortization of $390,295 as of September 29, 2002.
For the three and nine months ended September 29, 2002, amortization expense for
intangible assets was $95,488 and $212,296, respectively. The estimated annual
amortization expense for intangible assets for the current and next five fiscal
years is as follows:
2002................................................... $ 307,782
2003................................................... 381,949
2004................................................... 377,199
2005................................................... 362,949
2006................................................... 362,949
2007................................................... 354,006
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30 (APB No. 30), Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The
Company adopted SFAS No. 144 on December 31, 2001. The adoption did not affect
the Company's financial position or results of operations for the periods
presented.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 will rescind SFAS No. 4 which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of SFAS No.
145, the criteria in APB No. 30, will now be used to classify those gains and
losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS
No. 4 has been rescinded. Upon adoption of SFAS No. 145 on December 30, 2002 the
Company will be required to reclassify its extraordinary loss on early
extinguishment of debt of $2,731,790 net of tax benefit of $1,648,184 related to
the October 2001 recapitalization transaction into income from continuing
operations.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred rather than when a
commitment to an exit plan is made. It is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of SFAS 146 will not affect the Company's financial position or results
of operations.
In February 2002, the EITF issued Topic Number D-103 "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred," which is effective for financial statements beginning after December
31, 2001. Topic Number D-103 requires that reimbursements received for
out-of-pocket expenses incurred, generally, be characterized as revenue in the
statement of operations. The Company has adopted Topic Number D-103 in its
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
quarter ended June 30, 2002. The Company has historically recorded
reimbursements for out-of-pocket expenses as net amounts in cost of services
rendered in the statement of income. In accordance with the transition guidance
included in Topic Number D-103, the Company's adoption required the
reclassification of financial statements for prior periods presented for
comparative purposes. The adoption of Topic Number D-103 did not affect the
Company's net income, financial position or cash flows. The reclassification did
affect the presentation of certain revenue and cost of services rendered items
contained within the Company's financial statements.
Service revenues for the three and nine month period ended September 30, 2001
are presented as follows along with reimbursable expenses that have been
reclassified from cost of services rendered to service revenues in accordance
with Topic Number D-103:
Three months Nine months
ended ended
September 30, September 30,
2001 2001
-----------------------------
Service revenues (as historically
presented) $93,005,062 $244,649,745
Impact of Topic Number D-103 1,339,371 3,382,982
-----------------------------
Service revenues (as currently
presented) $94,344,433 $248,032,727
=============================
Cost of service revenues are presented as follows:
Three months Nine months
ended ended
September 30, September 30,
2001 2001
-----------------------------
Cost of services rendered (as
historically presented) $69,322,284 $182,194,884
Impact of Topic Number D-103 1,339,371 3,382,982
-----------------------------
Cost of services rendered (as
currently presented $70,661,655 $185,577,866
============================
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2002
(UNAUDITED)
10 - SUBSEQUENT EVENTS
On October 3, 2002, the Company amended the terms of its senior credit facility
(see Note 7) and entered into a $65 million note with terms and rights identical
to its previous Term A notes and reduced the borrowing capacity of its revolving
loan from $20 million to $15 million. Upon execution of the amendment, the
Company had fully drawn the new $65 million Term A note and had no outstanding
balance on the $15 million revolving loan.
In October 2002, the Company acquired certain assets of three healthcare
staffing companies, B&G Registry, Inc., Health Search International, Inc. and
Clinical Resource Services, Inc., for an aggregate cash purchase consideration
of approximately $22 million.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere herein. This
discussion and analysis contains statements that are forward-looking in nature.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," and similar expressions are
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results and
performance to be materially different from any future results or performance
expressed or implied by these forward-looking statements. These factors include
the following: our ability to attract and retain qualified nurses and other
healthcare personnel, the company's ability to enter into contracts with
healthcare facility clients on terms attractive to the company, the functioning
of our information systems, the effect of existing or future government
regulation and federal and state legislative and enforcement initiatives on our
business, our clients' ability to pay us for our services, the effect of
liabilities and other claims asserted against us, the effect of competition in
the markets we serve, the company's ability to carry out its business strategy.
Although we believe that these statements are based upon reasonable assumptions,
we cannot guarantee future results. Given these uncertainties, the
forward-looking statements discussed herein might not occur.
The Company's condensed consolidated financial statements present a
consolidation of all its operations. This discussion supplements the detailed
information presented in the condensed consolidated financial statements and
notes thereto (which should be read in conjunction with the consolidated
financial statements and related notes contained in the Company's Registration
Statement on Form S-1, File No. 333-82438), and is intended to assist the reader
in understanding the financial results and condition of the Company.
The following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of total revenues:
Three months ended Nine months ended
-------------------------------------------
Sept. 30, Sept.29, Sept. 30, Sept.29,
2001 2002 2001 2002
-------------------------------------------
Service revenues 100.0% 100.0% 100.0% 100.0%
Cost of services rendered 74.9 74.9 74.8 74.7
Gross profit 25.1 25.1 25.2 25.3
Selling, general and administrative
expenses (1) 14.2 13.8 13.6 14.1
Corporate and administrative expenses 1.8 1.5 2.0 1.6
EBITDA (2) 9.1 9.7 9.6 9.6
Depreciation and amortization
expenses 1.6 1.0 1.7 0.9
Recapitalization transaction fees 0.4 0.0 0.1 0.0
Income from operations 7.1 8.7 7.8 8.7
Interest expense, net 3.7 0.6 4.0 1.9
16
Pre-tax income 3.4 8.1 3.8 6.8
Net income 2.0 4.8 2.3 4.0
(1) Includes provision for doubtful accounts.
(2) We define EBITDA as income before interest, income taxes, depreciation,
amortization and non-recurring recapitalization costs. EBITDA should not be
considered in isolation or as an alternative to net income, cash flows from
operations, investing or financing activities or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. EBITDA, as we define it, is not necessarily comparable to other
similarly titled captions of other companies.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2001
SERVICE REVENUES. Our service revenues for the three months ended September 29,
2002 increased $33.2 million, or 35%, from $94.3 million for the three months
ended September 30, 2001 to $127.5 million for the three months ended September
29, 2002. The majority of the increase in revenues for the three months ended
September 29, 2002 was attributable to a $28.6 million, or 41%, increase in our
per diem nurse staffing revenues from $70.3 million for the three months ended
September 30, 2001 to $98.9 million for the three months ended September 29,
2002. Of this increase, $22.9 million, or 80%, was the result of year over year
organic growth. The remaining increase of our per diem nurse staffing revenues
of $5.7 million, or 20%, came from our 2002 per diem nursing acquisitions.
Service revenues from our staffing divisions other than the per diem nurse
staffing division collectively increased $4.6 million, or 19%, from $24.0
million for the three months ended September 30, 2001 to $28.6 million for the
three months ended September 29, 2002. Of this increase, $4.3 million, or 93%,
was the result of year over year organic growth. The remaining increase in
revenues from our staffing divisions other than the per diem nurse staffing
division came from our 2002 acquisition of Pharmstaff, Ltd.
An increase in volume and a shift in mix towards higher billing specialties
accounted for approximately 95% of our overall revenue growth for the three
months ended September 29, 2002 as compared to revenue for the three months
ended September 30, 2001, with the balance of the increase a result of price
increases.
COST OF SERVICES RENDERED. Cost of services rendered increased $24.9 million, or
35%, from $70.6 million for the three months ended September 30, 2001 to $95.5
million for the three months ended September 29, 2002. The increase was
attributable to the 35% increase in service revenues.
GROSS PROFIT. Gross profit increased $8.3 million, or 35%, from $23.7 million
for the three months ended September 30, 2001 to $32.0 million for the three
months ended September 29, 2002, representing gross margin percentages of 25.1%
for both periods.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.3 million, or 32%, from $13.4 million for
the three months ended September 30, 2001 to $17.7 million for the three months
ended September 29, 2002. As a percentage of revenue, selling, general and
administrative expenses decreased from 14.2% for the three months ended
September 30, 2001 to 13.8% for the three months ended September 29, 2002. The
decrease is primarily the result of the continued growth and maturation of our
de novo offices opened in the past two years which allows for increased leverage
of overhead costs.
CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative expenses
increased $0.3 million, or 13%, from $1.7 million for the three months ended
September 30, 2001 to $2.0 million for the three months ended September 29,
2002. As a percentage of revenue, corporate and administrative expenses
decreased from 1.8% for the three months ended September 30, 2001 to 1.5% for
the three months ended September 29, 2002. The decrease as a percentage of
revenue was a result of increased operating leverage.
RECAPITALIZATION TRANSACTION FEES. The Company incurred $0.3 million of
non-recurring fees in the three months ended September 30, 2001 related to the
recapitalization of the Company in 2001.
EBITDA. As a result of the above, EBITDA increased $3.8 million, or 44% from
$8.5 million for the three months ended September 30, 2001 to $12.3 million for
the three months ended September 29, 2002. As a percentage of revenue, EBITDA
increased from 9.1% for the three months ended September 30, 2001 to 9.7% for
the three months ended September 29, 2002.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense
decreased $0.2 million, or 16%, from $1.5 million for the three months ended
September 30, 2001 to $1.3 million for the three months ended September 29,
2002. The decrease was due to the adoption of FAS No. 142, Goodwill and Other
Intangible Assets. Included in the $1.5 million for the three months ended
September 30, 2001 was approximately $0.8 million of amortization not recorded
in the current period as a result of the adoption of FAS No. 142. This decrease
was offset by an increase in depreciation expense of approximately $0.6 million
related to an increase in fixed assets.
INCOME FROM OPERATIONS. As a result of the above, income from operations
increased $4.4 million, or 65%, from $6.7 million for the three months ended
September 30, 2001 to $11.1 million for the three months ended September 29,
2002. As a percentage of revenue, income from operations was 7.1% for the three
months ended September 30, 2001 and 8.7% for the three months ended September
29, 2002.
INTEREST EXPENSE, NET. Net interest expense decreased $2.7 million, or 77% from
$3.5 million for the three months ended September 30, 2001 to $0.8 million for
the
18
three months ended September 29, 2002. The decrease is primarily the result of a
lower average outstanding debt balance due to the use of the proceeds from our
initial public offering to pay down outstanding debt.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $7.1 million,
or 220%, from $3.2 million for the three months ended September 30, 2001 to
$10.3 million for the three months ended September 29, 2002.
PROVISION FOR INCOME TAXES. Our provision for income taxes was $1.3 million for
the three months ended September 30, 2001 and $4.2 million for the three months
ended September 29, 2002 representing effective tax rates of 40% for the three
months ended September 30, 2001 and 41% for the three months ended September 29,
2002.
NET INCOME. Net income increased $4.2 million, or 215%, from net income of $1.9
million for the three months ended September 30, 2001 to $6.1 million for the
three months ended September 30, 2002.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2001
SERVICE REVENUES. Our service revenues for the nine months ended September 29,
2002 increased $98.3 million, or 40%, from $248.0 million for the nine months
ended September 30, 2001 to $346.3 million for the nine months ended September
29, 2002. The majority of the increase in revenues for the nine months ended
September 29, 2002 was attributable to a $81.8 million, or 45%, increase in our
per diem nurse staffing revenues from $182.6 million for the nine months ended
September 30, 2001 to $264.4 million for the nine months ended September 29,
2002. Of this increase, $67.9 million, or 83%, was the result of year over year
organic growth. The remaining increase of our per diem nurse staffing revenues
of $13.9 million, or 17%, came from our 2001 and 2002 per diem nursing
acquisitions.
Service revenues from our staffing divisions other than the per diem nurse
staffing division collectively increased $16.4 million, or 20%, from $65.4
million for the nine months ended September 30, 2001 to $81.8 million for the
nine months ended September 29, 2002. Of this increase, $16.1 million, or 98%,
was the result of year over year organic growth. The remaining increase in
revenues from our staffing divisions other than the per diem nurse staffing
division came from our 2002 acquisition of Pharmstaff, Ltd.
An increase in volume and a shift in mix towards higher billing specialties
accounted for approximately 94% of our overall revenue growth for the nine
months ended September 29, 2002 as compared to revenue for the nine months ended
September 30, 2001, with the balance of the increase a result of price
increases.
19
COST OF SERVICES RENDERED. Cost of services rendered increased $73.1 million, or
39%, from $185.6 million for the nine months ended September 30, 2001 to $258.7
million for the nine months ended September 29, 2002. The increase was
attributable to the 40% increase in service revenues.
GROSS PROFIT. Gross profit increased $25.1 million, or 40%, from $62.5 million
for the nine months ended September 30, 2001 to $87.6 million for the nine
months ended September 29, 2002, representing gross margin percentages of 25.2%
for the nine months ended September 30, 2001 and 25.3% for the nine months ended
September 29, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $15.1 million, or 45%, from $33.8 million for
the nine months ended September 30, 2001 to $48.9 million for the nine months
ended September 29, 2002. As a percentage of revenue, selling, general and
administrative expenses increased from 13.6% for the nine months ended September
30, 2001 to 14.1% for the nine months ended September 29, 2002. This increase
was due to the expenses required to establish the infrastructure for our de novo
branches opened in 2001 and 2002.
CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative expenses
increased $0.5 million, or 12%, from $4.9 million for the nine months ended
September 30, 2001 to $5.4 million for the nine months ended September 29, 2002.
As a percentage of revenue, corporate and administrative expenses decreased from
2.0% for the nine months ended September 30, 2001 to 1.6% for the nine months
ended September 29, 2002. The decrease as a percentage of revenue was a result
of increased operating leverage.
RECAPITALIZATION TRANSACTION FEES. The Company incurred $0.3 million of
non-recurring fees in the nine months ended September 30, 2001 related to the
recapitalization of the Company in 2001.
EBITDA. As a result of the above, EBITDA increased $9.5 million, or 40% from
$23.8 million for the nine months ended September 30, 2001 to $33.3 million for
the nine months ended September 29, 2002. As a percentage of revenue, EBITDA was
9.6% for both periods.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense
decreased $1.0 million, or 25%, from $4.1 million for the nine months ended
September 30, 2001 to $3.1 million for the nine months ended September 29, 2002.
The decrease was due primarily to the adoption of SFAS No. 142, Goodwill and
Other Intangible Assets. Included in the $4.1 million for the nine months ended
September 30, 2001 was approximately $2.4 million of amortization not recorded
in the current period as a result of the adoption of FAS No. 142. This decrease
was offset by an increase in depreciation expense of approximately $1.4 million
related to an increase in fixed assets.
20
INCOME FROM OPERATIONS. As a result of the above, income from operations
increased $10.8 million, or 56%, from $19.3 million for the nine months ended
September 30, 2001 to $30.1 million for the nine months ended September 29,
2002. As a percentage of revenue, income from operations was 7.8% for the nine
months ended September 30, 2001 and 8.7% for the nine months ended September 29,
2002.
INTEREST EXPENSE, NET. Net interest expense decreased $3.4 million, or 35% from
$9.9 million for the nine months ended September 30, 2001 to $6.5 million for
the nine months ended September 29, 2002. The decrease is primarily the result
of a lower average outstanding debt balance due to the use of the proceeds from
our initial public offering to pay down outstanding debt.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $14.3 million,
or 151%, from $9.4 million for the nine months ended September 30, 2001 to $23.7
million for the nine months ended September 29, 2002.
PROVISION FOR INCOME TAXES. Our provision for income taxes was $3.8 million for
the nine months ended September 30, 2001 and $9.7 million for the nine months
ended September 29, 2002 representing effective tax rates of 40% for the nine
months ended September 30, 2001 and 41% for the nine months ended September 29,
2002.
NET INCOME. Net income increased $8.3 million, or 147%, from net income of $5.7
million for the nine months ended September 30, 2001 to $14.0 million for the
nine months ended September 29, 2002.
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In response to the SEC Release Number 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and SEC Release Number 33-8056,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations," We have identified the following critical
accounting policies that affect the more significant judgments and estimates
used in the preparation of our unaudited condensed consolidated financial
statements. The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect our reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to asset impairment, accruals for
self-insurance and compensation and related benefits, revenue recognition,
allowance for doubtful accounts, and contingencies and litigation. These
estimates are based on the information that is currently available to us and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results could vary from those estimates under different
assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Company's
unaudited condensed consolidated financial statements:
o Revenue from services consists of temporary staffing revenues. Revenues
are recognized when services are rendered. Reimbursements for
out-of-pocket expenses incurred are characterized as revenue in the
statement of operations.
o We have recorded goodwill and other intangibles resulting from our
acquisitions through September 29, 2002. Through December 30, 2001,
goodwill and other intangibles were amortized on a straight-line basis
over their lives of 6 to 20 years. We evaluate the recovery of the
carrying amount of costs in excess of net tangible assets acquired by
determining if a permanent impairment has occurred. This evaluation is
done annually or more frequently if indicators of permanent impairment
arise. Indicators of a permanent impairment include duplication of
resources resulting from acquisitions, instances in which the estimated
undiscounted cash flows of the entity are less than the remaining
unamortized balance of the underlying intangible assets and other
factors. At such time as an impairment is determined, the intangible
assets are written off during that period. If we are required to record
an impairment charge in the future, it would have an adverse impact on
our results of operations.
o We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments,
which results in a provision for bad debt expense. We determine the
adequacy of this allowance by continually evaluating individual customer
receivables, considering the
22
customer's financial condition, credit history and current economic
conditions. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
o We maintain an accrual for our health, workers compensation and
professional liability that are partially self-insured and are classified
in other current liabilities in our condensed consolidated balance
sheets. We determine the adequacy of these accruals by periodically
evaluating our historical experience and trends related to health,
workers compensation, and professional liability claims and payments,
based on Company specific actuarial computations and industry experience
and trends. If such information indicates that our accruals are
overstated or understated, we will adjust the assumptions utilized in our
methodologies and reduce or provide for additional accruals as
appropriate.
o We are subject to various claims and legal actions in the ordinary course
of our business. Some of these matters include professional liability and
employee-related matters. Our hospital and healthcare facility clients
may also become subject to claims, governmental inquiries and
investigations and legal actions to which we may become a party relating
to services provided by our professionals. From time to time, and
depending upon the particular facts and circumstances, we may be subject
to indemnification obligations under our contracts with our hospital and
healthcare facility clients relating to these matters. Although we are
currently not aware of any such pending or threatened litigation that we
believe is reasonably likely to have a material adverse effect on us, if
we become aware of such claims against us, we will evaluate the
probability of an adverse outcome and provide accruals for such
contingencies as necessary.
SEASONALITY
Due to the regional and seasonal fluctuations in the hospital patient census of
our hospital and healthcare facility clients and due to the seasonal preferences
for destinations by our temporary healthcare professionals, the number of
healthcare professionals on assignment, revenue and earnings are subject to
moderate seasonal fluctuations. Many of our hospital and healthcare facility
clients are located in areas that experience seasonal fluctuations in
population, particularly Florida, during the winter and summer months. These
facilities adjust their staffing levels to accommodate the change in this
seasonal demand and many of these facilities utilize temporary healthcare
professionals to satisfy these seasonal staffing needs.
Historically, the number of temporary healthcare professionals on assignment has
increased from December through March followed by declines or minimal growth
from April through November. As a result of all of these factors, results of any
one quarter are not necessarily indicative of the results to be expected for any
other quarter or for any year.
23
LIQUIDITY AND CAPITAL RESOURCES
In October 2001, an investment group led by Warburg Pincus acquired a majority
interest in our company in a recapitalization that provided us with the proceeds
from new equity and senior debt issuances totaling approximately $156.6 million
and advances from a new senior credit facility totaling $105.0 million.
Together, these funds were used to provide us with working capital for
operations, to retire then-outstanding debt obligations and accrued interest
totaling approximately $82.0 million, as consideration for the acquisition of
the former stockholders' equity interests for approximately $173.0 million, and
to pay recapitalization costs of approximately $7.2 million.
As of September 29, 2002, we had cash totaling approximately $2.3 million,
working capital totaling $73.6 million and unused availability under our
revolving credit facility totaling $3.0 million. We used $1.7 million of cash
from operating activities during the nine months ended September 29, 2002
compared to cash use of $0.5 million from operating activities during the nine
months ended September 30, 2001.
Cash flows from operating activities was positively impacted during the nine
months ended September 29, 2002 due to improvements in earnings before non-cash
expenses and was negatively impacted due to cash required to fund our de novo
program and working capital requirements of our recently completed acquisitions.
Because we rely on cash flow from operations as a source of liquidity, we are
subject to the risk that a decrease in the demand for our staffing services
could have an adverse impact on our liquidity. Decreased demand for our staffing
services could result from an inability to attract qualified healthcare
professionals, fluctuations in patient occupancy at our hospital and healthcare
facility clients and changes in state and federal regulations relating to our
business.
As of September 29, 2002 our senior credit facility consists of a $25.0 million
term loan arrangement and allows us to borrow up to an additional $20.0 million
under a revolving line of credit. The term loan bears interest at variable
effective interest rates with a weighted average interest rate of 5.7% as of
September 29, 2002, and is due in quarterly installments beginning March 31,
2003 through its maturity in October 2006 in the amount of $25.0 million. Our
senior credit facility is collateralized by substantially all of our assets and
requires us to comply with various quarterly financial covenants, including
covenants for ratios of leverage and fixed charges to EBITDA.
As of September 29, 2002, there was $42.0 million outstanding under our senior
credit facility. As of September 29, 2002, the weighted average interest rate
for the loans under our senior credit facility was approximately 5.7 %.
As the borrower under the senior credit facility, our subsidiary, Medical
Staffing Network, Inc., may only pay dividends or make other distributions to us
in the amount of $250,000 in any fiscal year to pay our operating expenses. This
limitation on our subsidiary's ability to distribute cash to us will limit our
ability to obtain and service any
24
additional debt at the holding company level. In addition, our subsidiary is
subject to restrictions under the senior credit facility against incurring
additional indebtedness.
Our senior unsecured notes bore interest compounding quarterly at a rate of 12%
per annum and were due in October 2009. Interest was payable in full on the
maturity date. The senior unsecured notes were subordinated to amounts due under
the senior credit facility.
We used a portion of the proceeds of our initial public offering to redeem the
senior unsecured notes in full in the amount of approximately $62.9 million and
to repay approximately $93.4 million of our loans under the senior credit
facility, leaving an outstanding balance on our senior credit facility of $11.0
million.
We believe that our current cash balances, together with our existing credit
lines and other available sources of liquidity and expected cash flows from our
operating activities, will be sufficient for us to meet our current and future
financial obligations, as well as to provide us with funds for working capital,
anticipated capital expenditures and other needs for at least the next 12
months. No assurance can be given, however, that this will be the case. In the
longer term, we may require additional equity and debt financing to meet our
working capital needs, or to fund acquisition activities, if any. There can be
no assurance that additional financing will be available when required or, if
available, will be available on satisfactory terms.
INFLATION
We do not believe that inflation has had a material effect on our results of
operations in recent years and periods. There can be no assurance, however, that
our business will not be adversely affected by inflation in the future.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk arises principally from the variable rates
associated with our senior credit facility. On September 29, 2002, we had
borrowings of $25.0 million under our senior credit facility that were subject
its variable rates, with a blended rate of 5.7%. As of September 29, 2002, an
adverse change of 1.0% in the interest rate of all such borrowings outstanding
would have caused us to incur an increase in interest expense of approximately
$0.3 million on an annual basis after considering the effect of the interest
rate swap described below. During the nine months ended September 29,2002, we
were party to an interest rate swap agreement with a notional amount of $50
million. Under the swap agreement, the net settlement was computed on a
quarterly basis as the difference between the 90-day LIBOR and the fixed rate of
4.34%. This resulted in a fixed interest rate on $50 million of borrowings under
our credit facility at 4.34% effective December 24, 2001, plus the applicable
margin. The swap agreement was terminated on May 9, 2002 for approximately
$460,000. In addition, during the nine months ended September 29, 2002, there
was exposure to market risk associated with our senior unsecured notes which
bore interest at a fixed rate. The carrying amount of the senior unsecured notes
approximated fair value as the terms of the debt were based on similar terms,
maturities, and interest rates as other debt issues with similar risk factors
that are not traded on quoted market prices. Our senior unsecured notes were
redeemed in full with proceeds from our initial public offering.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-Q, the Chief
Executive Officer and President, Robert J. Adamson, and the Chief Financial
Officer, Kevin S. Little, have concluded that the disclosure controls and
procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
the Company's most recent evaluation thereof.
26
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Robert J. Adamson, Chief Executive Officer of Medical
Staffing Network, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Kevin S. Little, Chief Financial Officer of Medical
Staffing Network, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MEDICAL STAFFING NETWORK
HOLDINGS, INC.
Dated: November 13, 2002 By:/s/ Robert J. Adamson
--------------------------------------
Chief Executive Officer and President
By:/s/ Kevin S. Little
--------------------------------------
Chief Financial Officer
28
CERTIFICATIONS
I, Robert J. Adamson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Medical Staffing
Network Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
29
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Robert J. Adamson
-------------------------------------------
Robert J. Adamson
Chief Executive Officer
and President
30
I, Kevin S. Little, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Medical Staffing
Network Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in
31
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Kevin S. Little
------------------------------------------
Kevin S. Little
Chief Financial Officer
32
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medical Staffing Network Holdings,
Inc. (the "Company") on Form 10-Q for the period ending September 29, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert J. Adamson, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Robert J. Adamson
- -----------------------------------
Robert J. Adamson
Chief Executive Officer and President
November 13, 2002
33
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medical Staffing Network Holdings,
Inc. (the "Company") on Form 10-Q for the period ending September 29, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Kevin S. Little, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Kevin S. Little
- -----------------------------------
Kevin S. Little
Chief Financial Officer
November 13, 2002
34