SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 250549

 

FORM 10-Q

 

 

MEDICAL STAFFING NETWORK HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

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  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act).  Yes  ý  No  o

 

The number of shares of shares outstanding of each class of the issuer’s common stock, as of August 8, 2003: 30,193,930 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 as of June 29, 2003 and December 29, 2002 (Unaudited)
	Condensed Consolidated Statements of Income (Unaudited) for the three months and six months ended June 29, 2003 and June 30, 2002
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 29, 2003 and June 30, 2002
	Notes to Condensed Consolidated Financial Statements (Unaudited)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1. - FINANCIAL STATEMENTS

 

MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 29, 2003			Dec. 29, 2002
		(unaudited)
		(in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	4,883		$	4,595
Accounts receivable, net of allowance for doubtful accounts of $3,118 and $2,757 at June 29, 2003 and December 29, 2002, respectively		92,126			93,780
Prepaid expenses		6,494			5,363
Other current assets		4,497			4,858
Total current assets		108,000			108,596
Furniture and equipment, net		13,188			12,643
Goodwill, net of accumulated amortization of $8,545 at June 29, 2003 and December 29, 2002, respectively		124,792			114,437
Intangible assets, net of accumulated amortization of $847 and $521 at June 29, 2003 and December 29, 2002, respectively		3,514			3,840
Other assets		8,328			8,567
Total assets		$	257,822		$	248,083
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,669		$	5,149
Accrued payroll and related liabilities		8,599			9,366
Other current liabilities		2,570			3,105
Current portion of long-term debt		13,283			8,775
Current portion of capital lease obligations		1,085			1,055
Total current liabilities		28,206			27,450
Long-term debt, net of current portion		71,119			69,225
Capital lease obligations, net of current portion		1,031			1,343
Other liabilities		5,928			4,397
Total liabilities		106,284			102,415
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 75,000 authorized: 30,194 and 30,119 issued and outstanding at June 29, 2003 and December 29, 2002, respectively		302			301
Additional paid-in-capital		284,150			283,848
Accumulated other comprehensive loss, net of taxes		(79		)	(105		)
Accumulated deficit		(132,835		)	(138,376		)
Total stockholders’ equity		151,538			145,668
Total liabilities and stockholders’ equity		$	257,822		$	248,083

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
		(in thousands, except per share amounts)
Service revenues		$	137,455		$	114,126		$	281,468		$	216,055
Cost of services rendered		107,963			85,137			217,405			161,117
Gross profit		29,492			28,989			64,063			54,938
Operating expenses:
Selling, general and administrative		22,230			15,960			42,871			30,825
Corporate and administrative		3,089			1,781			5,388			3,447
Depreciation and amortization		1,701			991			3,325			1,843
Income from operations		2,472			10,257			12,479			18,823
Interest expense, net		1,243			1,619			2,402			5,659
Income before provision for income taxes and discontinued operations		1,229			8,638			10,077			13,164
Provision for income taxes		492			3,542			4,030			5,399
Income before discontinued operations		737			5,096			6,047			7,765
Income (loss) from discontinued operations, net of taxes		(402		)	17			(506		)	145
Net income		$	335		$	5,113		$	5,541		$	7,910
Deduct required dividends on convertible preferred stock		—			641			—			3,099
Income available to common stockholders		$	335		$	4,472		$	5,541		$	4,811
Income (loss) per share – basic:
Income before discontinued operations		$	0.02		$	0.18		$	0.20		$	0.38
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Basic net income per share		$	0.01		$	0.18		$	0.18		$	0.39
Income (loss) per share – diluted:
Income before discontinued operations		$	0.02		$	0.17		$	0.20		$	0.29
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Diluted net income per share		$	0.01		$	0.17		$	0.18		$	0.30
Weighted average number of common shares outstanding:
Basic		30,191			24,481			30,176			12,254
Diluted		30,668			29,927			30,915			25,948

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 29, 2003			June 30, 2002
		(in thousands)
Operating activities
Net income		$	5,541		$	7,910
Loss (income) from discontinued operations, net of taxes		506			(145		)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		3,325			1,843
Amortization of debt issuance costs		526			388
Deferred income taxes		1,555			1,035
Provision for doubtful accounts		1,901			1,374
Loss on derivative instrument		26			338
Loss on termination of capital leases		38			—
Changes in operating assets and liabilities:
Accounts receivable		319			(11,641		)
Prepaid expenses and other current assets		(808		)	495
Other assets		(237		)	(210		)
Accounts payable		(2,520		)	(2,527		)
Accrued payroll and related liabilities		(805		)	931
Other current liabilities		(633		)	(935		)
Other liabilities		(36		)	(162		)
Cash provided by (used in) continuing operations		8,698			(1,306		)
Cash provided by (used in) discontinued operations		(500		)	163
Cash provided by (used in) operating activities		8,198			(1,143		)
Investing activities
Cash paid for acquisitions, net of cash acquired		(10,803		)	—
Purchases of furniture and equipment		(2,587		)	(1,545		)
Capitalized internal software costs		(729		)	(998		)
Cash used in investing activities		(14,119		)	(2,543		)
Financing activities
Net proceeds from issuance of common stock		—			156,279
Principal payments under capital lease obligations		(495		)	(411		)
Proceeds from borrowings on senior credit facility		16,500			4,000
Principal payments on long-term debt		(10,099		)	(167,354		)
Proceeds from exercise of stock options		303			5
Cash provided by (used in) financing activities		6,209			(7,481		)
Net increase (decrease) in cash and cash equivalents		288			(11,167		)
Cash and cash equivalents at beginning of period		4,595			11,253
Cash and cash equivalents at end of period		$	4,883		$	86
Supplemental disclosure of noncash investing and financing activities:
Purchase of equipment through capital leases		$	1,845		$	1,930
Supplemental disclosures of cash flow information:
Interest paid		$	1,944		$	3,676
Income taxes paid		$	2,960		$	1,950

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Medical Staffing Network Holdings, Inc. (the “Company”), a Delaware corporation, is a provider of healthcare staffing services in the United States. The Company’s per diem staffing assignments place professionals, predominately nurses, at hospitals and other healthcare facilities to solve temporary staffing needs. The Company also provides staffing of allied health professionals such as specialized radiology and diagnostic imaging specialists and clinical laboratory technicians. The Company’s client base includes profit and non-profit hospitals, teaching hospitals, and regional healthcare providers. The Company considers the different services described above to be one segment as each of these services relate solely to providing healthcare staffing to customers that are healthcare providers and the Company utilizes similar distribution methods, common systems, databases, procedures, processes and similar methods of identifying and serving these customers. The operating results of the services provided within this segment are reviewed in the aggregate by the Company’s chief operating decision maker when making resource allocation decisions and assessing performance of the individual components. The Company does not prepare financial information other than limited information on a branch by branch basis, and as such the chief operating decision maker generally does not review information at any level other than the healthcare staffing business in total. These healthcare staffing services represent 100% of the Company’s consolidated revenue for each of the three months and six months ended June 29, 2003 and June 30, 2002.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of 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 months and six months ended June 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 28, 2003.

 

The condensed consolidated balance sheet at December 29, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

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For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 29, 2002 (File No. 001-31299).

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

 

Exit or Disposal Activity Costs

 

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146), which 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, with early application encouraged. The adoption of this new accounting standard may delay the period or periods in which any future restructuring costs are recognized. The Company adopted the provisions of SFAS No. 146 as of December 30, 2002 and there was no impact on the Company’s consolidated financial statements.

 

Stock-Based Compensation

 

In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (SFAS No. 148). This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Statement is effective for fiscal years ending after December 15, 2002. Pursuant to the provisions of SFAS No. 148, the Company has added the required disclosures below.

 

The Company grants stock options for a fixed number of common shares to employees and directors from time to time. The Company accounts for employee stock options using the intrinsic value method as prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock option grants when the exercise price of the options equals, or is greater than, the market value of the underlying stock on the date of grant. Accordingly, the Company did not recognize any compensation cost during the three months and six months ended June 29, 2003 and June 30, 2002 for stock-based employee compensation awards.

 

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Application of the fair value method prescribed by SFAS No. 123 to the Company’s options would require the Company to record the following pro forma net income and net income per share amounts:

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
		(in thousands except per share amounts)
Net income as reported		$	335		$	5,113		$	5,541		$	7,910
Stock based compensation expense, net of taxes		(238		)	(259		)	(562		)	(518		)
Pro forma net income		$	97		$	4,854		$	4,979		$	7,392
As reported basic income before discontinued operations		$	0.02		$	0.18		$	0.20		$	0.38
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
As reported basic income per share		$	0.01		$	0.18		$	0.18		$	0.39
As reported diluted income before discontinued operations		$	0.02		$	0.17		$	0.20		$	0.29
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
As reported diluted income per share		$	0.01		$	0.17		$	0.18		$	0.30
Pro forma basic income before discontinued operations		$	0.01		$	0.17		$	0.18		$	0.34
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Pro forma basic income per share		$	—		$	0.17		$	0.16		$	0.35
Pro forma diluted income before discontinued operations		$	0.01		$	0.17		$	0.18		$	0.29
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Pro forma diluted income per share		$	—		$	0.17		$	0.16		$	0.30

 

Pro forma information regarding net income or loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

		Three Months Ended				Six Months Ended
		June 29, 2003		June 30, 2002		June 29, 2003		June 30, 2002
Expected life in years		3 – 8		5 – 8		3 – 8		5 – 8
Risk-free interest rate		2.02 - 3.68	%	3.76 - 4.91	%	2.02 - 3.68	%	3.76 - 4.91	%
Volatility		77	%	60	%	77	%	60	%
Dividend yield		0	%	0	%	0	%	0	%

 

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Accounting for Financial Instruments with Characteristics of both Liabilities and Equity

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. There was no impact to the Company’s consolidated financial statements upon the adoption of the provisions of SFAS No. 150.

 

Variable Interest Entities

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46). FIN No. 46 requires companies to make certain disclosures about variable interest entities (VIEs) with which it has involvement, if it is reasonably possible that it will consolidate or disclose information about the variable interest entity when FIN No. 46 becomes effective in July 2003. The disclosure requirements are effective to all financial statements issued after January 31, 2003. The Company has no VIEs so no additional disclosures have been provided, nor will any entities become consolidated upon full adoption.

 

3. DISCONTINUED OPERATIONS

 

The Company discontinued its physician staffing services in the second quarter of 2003. Pursuant to the provisions of the SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, income (loss) from discontinued operations, net of taxes, in the Company’s consolidated statements of income for the three months and six months ended June 29, 2003 and June 30, 2002. Net assets of the discontinued operations were approximately $10,000 at June 29, 2003 and consisted solely of current assets. Net assets of the discontinued operations were approximately $0.6 million at December 29, 2002 and was comprised of $0.7 million of current assets and $0.1 million of current liabilities. No reclassification of current or prior year balance sheet presentation was made to reflect the net assets of the discontinued operations, due to immateriality.

 

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Service revenues, cost of services, gross profit (loss) and income (loss) from discontinued operations, net of taxes, are as follows (in thousands):

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
Service revenues		$	88		$	1,387		$	495		$	2,685
Cost of service revenues		(644		)	1,090			(1,095		)	1,993
Gross profit (loss)		$	(556	)	$	297		$	(600	)	$	692
Income (loss) before benefit of (provision for) income taxes		$	(672	)	$	29		$	(845	)	$	245
Benefit of (provision for) income taxes		270			(12		)	339			(100		)
Income (loss) from discontinued operations, net of taxes		$	(402	)	$	17		$	(506	)	$	145

 

4. RESTRUCTURING CHARGE

 

As announced on June 16, 2003, the Company completed its plan to restructure its operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure the Company had put in place to support multiple growth initiatives and reflects the near term softening in demand for its services. The restructuring resulted in minimal loss of revenues and is expected to be a catalyst for improved profitability for the balance of the year. Approximately 130 branch staff and corporate employees were terminated as part of the restructuring.  As a result, the Company recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income for the three and six months ended June 29, 2003. No amounts are expected to be incurred or paid in subsequent quarters relating to this restructuring.  A breakdown of the restructuring charge is as follows (in thousands):

 

Lease termination costs		$	390
Office closing costs		164
Employee termination costs		158
Miscellaneous		51
Total		$	763

 

5. ACQUISITION

 

In March 2003, the Company acquired certain assets of Saber-Salisbury Group (SSG), a temporary healthcare staffing company, for approximately $10.8 million in cash, of which approximately $2.2 million was held in escrow and the potential for additional consideration contingent upon SSG achieving certain financial results. Approximately $10.4 million of the purchase price was allocated to goodwill. The primary reason for the acquisition was to expand service offerings within the temporary healthcare industry. The acquisition was accounted for in

 

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accordance with SFAS No. 141, Business Combinations (SFAS No. 141), and, accordingly, the results of operations have been included in the condensed consolidated statement of income beginning from March 1, 2003, the date when the Company assumed substantial control over SSG.

 

The allocation of purchase price related to the SSG acquisition is based on preliminary assessments of the assets acquired and liabilities assumed and could be subject to adjustment based on the ultimate resolution of such assessments.

 

6. LONG-TERM DEBT

 

On October 26, 2001, 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), interest is payable at least quarterly and principal payments are payable quarterly commencing on March 31, 2003; (ii) senior credit notes (Term B) in the amount of $60.0 million which were due in October 2007 and bore interest at a variable rate based on the Company’s leverage ratio (as defined) with interest payable at least quarterly and principal payments 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.

 

In connection with the Company’s initial public offering completed on April 23, 2002 (Note 8), approximately $93.4 million of the senior credit facility was repaid. On July 3, 2002, the Company amended the terms of its senior credit facility and entered into a $25.0 million note with terms and rights identical to its previous Term A notes. In accordance with the amendment, the remaining balance on the existing Term A and Term B notes were paid off. On October 3, 2002, the Company amended the terms of its senior credit facility and entered into a $65.0 million note with terms and rights identical to its previous Term A notes and reduced the borrowing capacity of its revolving loan from $20.0 million to $15.0 million.

 

On March 21, 2003, the Company amended the terms of its senior credit facility as follows: (i) Term A notes were increased to $77.0 million (Tranche A-1) with terms and rights identical to its previous Term A note, (ii) Tranche A-2 term loans (Tranche A-2) provide for up to $13.0 million of borrowings prior to December 31, 2003, with a minimum initial borrowing of $5.0 million and in integral multiples of $1.0 million thereafter. Tranche A-2 loans cannot be reborrowed once repaid, are due in October 2006 and bear interest at a variable rate based on the Company’s leverage ratio (as defined) with interest payable at least quarterly and principal payments payable quarterly commencing on March 31, 2004. The amendment did not affect the revolving loan’s $15.0 million borrowing capacity. As of June 29, 2003, the Company had the full $13.0 million available for borrowing on Tranche A-2. As of June 29, 2003, the Company had drawn $10.0 million and had $5.0 million available for borrowing on the revolving line of credit.

 

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7. COMPREHENSIVE INCOME

 

SFAS No. 130, Comprehensive Income (SFAS No. 130), 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. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities and the effective portion of certain derivative instruments. There are no components of comprehensive income other than the Company’s net income and accumulated unrealized loss on the derivative instrument for the three months and six months ended June 29, 2003 and June 30, 2002.

 

The following table sets forth the computation of comprehensive income for the periods indicated:

 

 

		Three Months Ended						Six Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
		(in thousands)
Net income		$	335		$	5,113		$	5,541		$	7,910
Other comprehensive loss:
Unrealized loss on derivative, net of taxes		(13		)	(314		)	(26		)	(131		)
Total comprehensive income		$	322		$	4,799		$	5,515		$	7,779

 

8. 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. 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 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.

 

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9. 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 was 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 a price in cash equal to the stated value per share plus any accrued but unpaid dividends. As discussed in Note 8, 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.

 

10. RELATED PARTY TRANSACTION

 

One of the Company’s recently appointed directors is the Chief Executive of a healthcare delivery system that utilizes the Company’s services in the ordinary course of business. During the three and six months ended June 29, 2003, the related party paid the Company approximately $272,000 and $292,000, respectively.

 

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11. EARNINGS PER SHARE

 

		Three Months Ended						Three Months Ended
		June 29, 2003			June 30, 2002			June 29, 2003			June 30, 2002
		(in thousands except per share amounts)
Numerator:
Net income before preferred stock dividend		$	335		$	5,113		$	5,541		$	7,910
Less preferred stock dividends		—			641			—			3,099
Numerator for basic earnings per share-available to common stockholders			335			4,472			5,541		4,811
Effect of dilutive securities:
Add back preferred stock dividends		—			641			—			3,099
Numerator for diluted earnings per share-available to common stockholders		$	335		$	5,113		$	5,541		$	7,910
Denominator:
Denominator for basic earnings per share-weighted average shares		30,191			24,481			30,176			12,254
Effect of dilutive shares:
Employee stock options		477			1,528			739			1,352
Convertible preferred stock		—			3,918			—			12,342
Dilutive potential common shares		477			5,446			739			13,694
Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions		30,668			29,927			30,915			25,948
Income (loss) per share – basic:
Income before discontinued operations		$	0.02		$	0.18		$	0.20		$	0.38
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Basic net income per share		$	0.01		$	0.18		$	0.18		$	0.39
Income (loss) per share – diluted:
Income before discontinued operations		$	0.02		$	0.17		$	0.20		$	0.29
Discontinued operations, net of taxes		(0.01		)	—			(0.02		)	0.01
Diluted net income per share		$	0.01		$	0.17		$	0.18		$	0.30

 

For the three months and six months ended June 29, 2003, 193,000 and 218,375 incremental options were excluded from the denominator for diluted earnings per share as their impact is anti-dilutive.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying condensed consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:

 

•                  Overview.  This section provides a general description of our business, as well as significant transactions that have occurred that we believe are important in understanding our financial condition and results of operations.

 

•                  Recent accounting pronouncements.  This section provides an analysis of relevant recent accounting pronouncements issued by the Financial Accounting Standards Board (FASB) and the effect of those pronouncements.

 

•                  Results of operations.  This section provides an analysis of our results of operations for the three months and six months ended June 29, 2003 relative to the three months and six months ended June 30, 2002 presented in the accompanying condensed consolidated statements of income.

 

•                  Liquidity and capital resources.  This section provides an analysis of our cash flows, as well as a discussion of our outstanding debt and commitments that existed as of June 29, 2003.

 

•                  Critical accounting policies.  This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application.

 

•                  Caution concerning forward-looking statements.  This section discusses how certain forward-looking statements made by us throughout this discussion and analysis are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstance.

 

Overview

 

Description of Business

 

We are a leading healthcare staffing company and the largest provider of per diem nurse staffing services in the United States as measured by revenues. More than two-thirds of our clients are acute care hospitals, clinics and surgical and ambulatory care centers. We serve both for-profit and not-for-profit organizations that range in scope from one facility to national chains with over 100 facilities. Our clients pay us directly. We do not receive a material portion of our revenues from Medicare or Medicaid reimbursements or similar state reimbursement programs.

 

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Our per diem nurse staffing division currently operates in an integrated network of branches that are organized into several geographic regions. These branches serve as our direct contact with our healthcare professionals and clients. The cost structure of a typical branch is primarily fixed, consisting of limited personnel, office space rent, information systems infrastructure and office supplies. We have been able to develop a highly efficient branch management model that is easily scalable. Over the past few years, we have been active in growing our “branch-in-branch” concept. The branch-in-branch (BiB) concept leverages off of the infrastructure currently in place at our branches, enabling us to offer different healthcare staffing disciplines through our existing branches with minimal additional resources required.

 

Service Revenues

 

All of our revenues are derived from providing healthcare staffing services. Approximately 71% of our revenues for both the three months and six months ended June 29, 2003 were derived from per diem nurse staffing. Allied healthcare professional staffing, which includes various non-nursing specialties such as, radiology and diagnostic imaging specialists and clinical laboratory technicians, represented approximately 17% of our revenues for both the three months and six months ended June 29, 2003. Travel nurse staffing (assignments lasting more than four weeks) represented approximately 12% of our revenues for both the three months and six months ended June 29, 2003. Physician staffing (which was discontinued in the second quarter of 2003) represented less than 1% of our revenues for both the three months and six months ended June 29, 2003.

 

Acquisitions

 

During the six months ended June 29, 2003, we purchased substantially all of the assets of one healthcare staffing company for an aggregate purchase price of $10.8 million. During the three months and six months ended June 30, 2002, we did not make any acquisitions. For the year ended December 29, 2002, we purchased substantially all of the assets of seven healthcare staffing companies for an aggregate purchase price of $56.4 million. All such acquisitions were accounted for as purchases and, accordingly, the results of these acquired businesses are included in our condensed consolidated financial statements from the date we assumed substantial control or the date of acquisition.

 

Initial Public Offering

 

On April 23, 2002, we completed our 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 us, net of expenses related to the initial public offering were $156.3 million. The proceeds were used to repay $62.9 million of our outstanding balance under the senior unsecured notes, and approximately $93.4 million of our 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.

 

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Discontinued Operations

 

We discontinued our physician staffing services in the second quarter of 2003. Pursuant to the provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, income (loss) from discontinued operations, net of taxes, in our condensed consolidated statements of income. For the three months and six months ended June 29, 2003, we had a loss from discontinued operations, net of taxes, of approximately $0.4 million and $0.5 million, respectively. For the three months and six months ended June 30, 2002, we had income from discontinued operations, net of taxes, of approximately $17,000 and $0.1 million, respectively. Net assets of the discontinued operations were approximately $10,000 at June 29, 2003 and consisted solely of current assets. Net assets of the discontinued operations were approximately $0.6 million at December 29, 2002 and was comprised of $0.7 million of current assets and $0.1 million of current liabilities. No reclassification of current or prior year balance sheet presentation was made to reflect the net assets of the discontinued operations, due to immateriality.

 

Restructuring Charge

 

As announced on June 16, 2003, we completed our plan to restructure our operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure we had put in place to support multiple growth initiatives and reflects the near term softening in demand for our services. The restructuring resulted in minimal loss of revenues and is expected to be a catalyst for improved profitability for the balance of the year. As a result, we recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in our condensed consolidated statements of income for the three and six months ended June 29, 2003. No amounts are expected to be incurred of paid in subsequent quarters relating to this restructuring.

 

Recent Accounting Pronouncements

 

Exit or Disposal Activity Costs

 

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146), which 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, with early application encouraged. The adoption of this new accounting standard may delay the period or periods in which any future restructuring costs are recognized. We adopted the provisions of SFAS No. 146 as of December 30, 2002 and there was no impact on our consolidated financial statements.

 

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Stock-Based Compensation

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (SFAS No. 148). This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Statement is effective for fiscal years ending after December 15, 2002 and its provisions were adopted as of December 29, 2002.

 

Accounting for Financial Instruments with Characteristics of both Liabilities and Equity

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. There was no impact to our financial statements upon the adoption of the provisions of SFAS No. 150.

 

Variable Interest Entities

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN No. 46). FIN No. 46 requires companies to make certain disclosures about variable interest entities (VIEs) with which it has involvement, if it is reasonably possible that it will consolidate or disclose information about the variable interest entity when FIN No. 46 becomes effective in July 2003. The disclosure requirements are effective to all financial statements issued after January 31, 2003. We have no VIEs so no additional disclosures are needed, nor will we have any entities to consolidate upon full adoption.

 

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Results of Operations

 

The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of total revenues:

 

		Three Months Ended				Six Months Ended
		June 29, 2003		June 30, 2002		June 29, 2003		June 30, 2002
Service revenues		100.0	%	100.0	%	100.0	%	100.0	%
Cost of services rendered		78.5		74.6		77.2		74.6
Gross profit		21.5		25.4		22.8		25.4
Selling, general and administrative expenses		16.2		14.0		15.2		14.3
Corporate and administrative expenses		2.2		1.6		1.9		1.6
Depreciation and amortization expenses		1.3		0.8		1.3		0.8
Income from operations		1.8		9.0		4.4		8.7
Interest expense, net		0.9		1.4		0.8		2.6
Income before provision for income taxes and discontinued operations		0.9		7.6		3.6		6.1
Provision for income taxes		0.4		3.1		1.4		2.5
Income before discontinued operations		0.5		4.5		2.2		3.6
Income (loss) from discontinued operations, net of taxes		(0.3	)	—		(0.2	)	0.1
Net income		0.2		4.5		2.0		3.7

 

Comparison of Three Months Ended June 29, 2003 to Three Months Ended June 30, 2002

 

Service Revenues.  Our service revenues increased $23.4 million, or 20.4%, from $114.1 million for the three months ended June 30, 2002 to $137.5 million for the three months ended June 29, 2003. All of our revenue growth for the three months ended June 29, 2003 was the result of acquisitions, which offset an organic decline of less than one percent. This organic decline was primarily attributable to the 29 locations which were closed during the restructuring plan that was completed in the second quarter of 2003. For the three months ended June 29, 2003, organic growth for our continuing locations was approximately one percent. For the three months ended June 29, 2003, price rates increased less than one percent over the same period in 2002. The majority of the increase in revenues for the three months ended June 29, 2003 was attributable to an $11.3 million, or 13.1% increase in our per diem nurse staffing revenues from $86.4 million for the three months ended June 30, 2002 to $97.7 million for the three months ended June 29, 2003.

 

Of the increase of $11.3 million in per diem nurse staffing revenues, growth from acquisitions completed in 2002 and 2003 contributed $13.2 million, organic growth from continuing locations contributed $0.2 million, offset by an organic decline of $2.1 million attributable to the locations closed in the second quarter restructuring.

 

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Service revenues from our staffing divisions other than the per diem nurse staffing division collectively increased $12.1 million, or 43.4%, from $27.7 million for the three months ended June 30, 2002 to $39.8 million for the three months ended June 29, 2003. The growth for the three months ended June 29, 2003 came from organic growth of $1.3 million and acquisitions completed in 2002 and 2003 of $10.8 million.

 

Cost of Services Rendered.  Cost of services rendered increased $22.9 million, or 26.8%, from $85.1 million for the three months ended June 30, 2002 to $108.0 million for the three months ended June 29, 2003. The increase was attributable to the increase in service revenues and higher compensation, benefits and insurance costs associated with our healthcare professionals.

 

Gross Profit.  Gross profit increased $0.5 million, or 1.7%, from $29.0 million for the three months ended June 30, 2002 to $29.5 million for the three months ended June 29, 2003, driven primarily by the growth in service revenues, partially offset by higher compensation, benefits and insurance costs associated with our healthcare professionals and other direct costs.  This resulted in a gross margin percentage of 21.5% for the three months ended June 29, 2003, as compared to 25.4% for the three months ended June 30, 2002.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $6.2 million, or 39.3%, from $16.0 million for the three months ended June 30, 2002 to $22.2 million for the three months ended June 29, 2003. As a percentage of revenue, selling, general and administrative expenses increased from 14.0% for the three months ended June 30, 2002 to 16.2% for the three months ended June 29, 2003. The increase is primarily attributable to the restructuring initiative completed during the second quarter, the opening of 44 BiB locations in the first four months of 2003, and the eight acquisitions that the Company made from July 2002 through March 2003.

 

Corporate and Administrative Expenses.  Corporate and administrative expenses increased $1.3 million, or 73.4%, from $1.8 million for the three months ended June 30, 2002 to $3.1 million for the three months ended June 29, 2003. The increase was primarily due to increased infrastructure associated with the aforementioned acquisitions and expansion of the BiB program, and increased costs associated with being a public company. As a percentage of revenue, corporate and administrative expenses were 1.6% and 2.2% for the three months ended June 30, 2002 and June 29, 2003, respectively.

 

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Depreciation and Amortization Expense.  Depreciation and amortization expense increased $0.7 million, or 71.6%, from $1.0 million for the three months ended June 30, 2002 to $1.7 million for the three months ended June 29, 2003. The increase was attributable to an increase in depreciation expense of $0.6 million related to depreciation on prior year fixed asset additions and an increase in amortization expense of $0.1 million related to certain intangibles acquired in acquisitions.

 

Income from Operations.  As a result of the above, income from operations decreased $7.8 million, or 75.9%, from $10.3 million for the three months ended June 30, 2002 to $2.5 million for the three months ended June 29, 2003. As a percentage of revenue, income from operations decreased from 9.0% for the three months ended June 30, 2002 to 1.8% for the three months ended June 29, 2003.

 

Interest Expense, Net.  Interest expense, net, decreased $0.4 million, or 23.2% from $1.6 million for the three months ended June 30, 2002 to $1.2 million for the three months ended June 29, 2003. The decrease was attributable to lower interest rates for the three months ended June 29, 2003 as compared to comparable period of 2002.

 

Income Before Provision for Income Taxes and Discontinued Operations.  As a result of the above, income before provision for income taxes and discontinued operations decreased $7.4 million, or 85.8%, from $8.6 million for the three months ended June 30, 2002 to $1.2 million for the three months ended June 29, 2003.

 

Provision for Income Taxes.  Our provision for income taxes was $3.5 million for the three months ended June 30, 2002 and $0.5 million for the three months ended June 29, 2003 representing effective tax rates of 41.0% for the three months ended June 30, 2002 and 40.0% for the three months ended June 29, 2003.

 

Income Before Discontinued Operations.  As a result of the above, income before discontinued operations decreased $4.4 million, or 85.5%, from $5.1 million for the three months ended June 30, 2002 to $0.7 million for the three months ended June 29, 2003.

 

Income (Loss) from Discontinued Operations, Net of Taxes.  Income (loss) from discontinued operations, net of taxes, was income of $17,000 for the three months ended June 30, 2002 as compared to a loss of $0.4 million for the three months ended June 29, 2003.

 

Net Income.  As a result of the above, net income decreased $4.8 million, or 93.4%, from $5.1 million for the three months ended June 30, 2002 to $0.3 million for the three months ended June 29, 2003.

 

Comparison of Six Months Ended June 29, 2003 to Six Months Ended June 30, 2002

 

Service Revenues.  Our service revenues increased $65.4 million, or 30.3%, from $216.1 million for the six months ended June 30, 2002 to $281.5 million for the six months ended June 29, 2003. Our organic revenue growth was approximately 8.2% (9.7% for continuing locations) for the six months ended June 29, 2003 and was the result of increased volume and a favorable shift in the mix of services we rendered with the balance the result of acquisitions and

 

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increased pricing. For the six months ended June 29, 2003, price rates increased approximately 2% over the same period in 2002. The majority of the increase in revenues for the six months ended June 29, 2003 was attributable to a $34.9 million, or 21.1% increase in our per diem nurse staffing revenues from $165.5 million for the six months ended June 30, 2002 to $200.4 million for the six months ended June 29, 2003.

 

Of the increase of $34.9 million in per diem nurse staffing revenues, growth from acquisitions completed in 2002 and 2003 contributed $24.5 million, organic growth from continuing locations contributed $12.9 million, offset by an organic decline of $2.5 million attributable to the locations closed in the second quarter restructuring.

 

Service revenues from our staffing divisions other than the per diem nurse staffing division collectively increased $30.5 million, or 60.4%, from $50.6 million for the six months ended March 31, 2002 to $81.1 million for the six months ended June 29, 2003. Of the increase of $30.5 million, organic growth contributed $7.4 million and acquisitions completed in 2002 and 2003 contributed $23.1 million.

 

Cost of Services Rendered.  Cost of services rendered increased $56.3 million, or 34.9%, from $161.1 million for the six months ended June 30, 2002 to $217.4 million for the six months ended June 29, 2003. The increase was attributable to the increase in service revenues and higher compensation, benefits and insurance costs associated with our healthcare professionals.

 

Gross Profit.  Gross profit increased $9.2 million, or 16.6%, from $54.9 million for the six months ended June 30, 2002 to $64.1 million for the six months ended June 29, 2003, driven primarily by the growth in service revenues, partially offset by higher compensation, benefits and insurance costs associated with our healthcare professionals and other direct costs.  This resulted in a gross margin percentage of 22.8% for the six months ended June 29, 2003, as compared to 25.4% for the six months ended June 30, 2002.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $12.1 million, or 39.1%, from $30.8 million for the six months ended June 30, 2002 to $42.9 million for the six months ended June 29, 2003. As a percentage of revenue, selling, general and administrative expenses increased from 14.3% for the six months ended June 30, 2002 to 15.2% for the six months ended June 29, 2003. The increase is primarily attributable to the restructuring initiative completed during the second quarter, the opening of 44 BiB locations in the first four months of 2003, and the eight acquisitions that the Company made from July 2002 through March 2003.

 

Corporate and Administrative Expenses.  Corporate and administrative expenses increased $2.0 million, or 56.3%, from $3.4 million for the six months ended June 30, 2002 to $5.4 million for the six months ended June 29, 2003. The increase was primarily due to increased infrastructure associated with the aforementioned acquisitions and expansion of the BiB program, and increased costs associated with being a public company. As a percentage of revenue, corporate and administrative expenses were 1.6% and 1.9% for the six months ended June 30, 2002 and June 29, 2003, respectively.

 

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Depreciation and Amortization Expense.  Depreciation and amortization expense increased $1.5 million, or 80.4%, from $1.8 million for the six months ended June 30, 2002 to $3.3 million for the six months ended June 29, 2003. The increase was attributable to an increase in depreciation expense of $1.3 million related to depreciation on prior year fixed asset additions and an increase in amortization expense of $0.2 million related to certain intangibles acquired in acquisitions.

 

Income from Operations.  As a result of the above, income from operations decreased $6.3 million, or 33.7%, from $18.8 million for the six months ended June 30, 2002 to $12.5 million for the six months ended June 29, 2003. As a percentage of revenue, income from operations decreased from 8.7% for the six months ended June 30, 2002 to 4.4% for the six months ended June 29, 2003.

 

Interest Expense, Net.  Interest expense, net, decreased $3.3 million, or 57.6%, from $5.7 million for the six months ended June 30, 2002 to $2.4 million for the six months ended June 29, 2003. The decrease was attributable to lower average debt levels and lower interest rates for the six months ended June 29, 2003 as compared to comparable period of 2002. The average debt balance decreased as the proceeds from our initial public offering, which was completed on April 23, 2002, was used to pay down a portion of our outstanding debt.

 

Income Before Provision for Income Taxes and Discontinued Operations.  As a result of the above, income before provision for income taxes and discontinued operations decreased $3.1 million, or 23.5%, from $13.2 million for the six months ended June 30, 2002 to $10.1 million for the six months ended June 29, 2003.

 

Provision for Income Taxes.  Our provision for income taxes was $5.4 million for the six months ended June 30, 2002 and $4.0 million for the six months ended June 29, 2003 representing effective tax rates of 41.0% for the six months ended June 30, 2002 and 40.0% for the six months ended June 29, 2003.

 

Income Before Discontinued Operations.  As a result of the above, income before discontinued operations decreased $1.8 million, or 22.1%, from $7.8 million for the six months ended June 30, 2002 to $6.0 million for the six months ended June 29, 2003.

 

Income (Loss) from Discontinued Operations, Net of Taxes.  Income (loss) from discontinued operations, net of taxes, was income of $0.1 million for the six months ended June 30, 2002, as compared to a loss of $0.5 million for the six months ended June 29, 2003.

 

Net Income.  As a result of above, net income decreased $2.4 million, or 29.9%, from $7.9 million for the six months ended June 30, 2002 to $5.5 million for the six months ended June 29, 2003.

 

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,

 

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revenue and earnings are subject to seasonal fluctuations. Many of our hospital and healthcare facility clients are located in areas, particularly Florida, that experience seasonal fluctuations in population, 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.

 

Liquidity and Capital Resources

 

Since our inception, we have funded our cash needs through various equity and debt issuances and through cash flow from operations. Currently, we have no commitments to make any material capital expenditures.

 

On April 23, 2002, we completed our 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 us, net of expenses related to the initial public offering were $156.3 million. The proceeds were used to repay $62.9 million of our outstanding balance under the senior unsecured notes, and approximately $93.4 million of our 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.

 

At June 29, 2003, we had cash totaling $4.9 million, working capital totaling $79.8 million and unused availability under our committed credit facility totaling $18.0 million, compared to cash totaling $4.6 million, working capital totaling $81.1 million and unused capacity under our committed credit facility totaling $2.0 million at December 29, 2002. Cash provided by operating activities was $8.2 million during the six months ended June 29, 2003 compared to cash used in operating activities of $1.1 million during the six months ended June 30, 2002. Cash provided by continuing operations was $8.7 million during the six months ended June 29, 2003 compared to cash used in continuing operations of $1.3 million during the six months ended June 30, 2002. Cash used by discontinued operations was $0.5 million during the six months ended June 29, 2003 as compared to cash provided by discontinued operations of $0.2 million during the six months ended June 30, 2002.

 

Cash flows from operating activities was positively impacted during the six months ended June 29, 2003, as there were fewer de novo branches opened in the first six months of 2003 (four as compared to 21 in the comparable period of 2002). As such, less cash was required to fund our de novo branches. 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 hospitals and healthcare facility clients and changes in state and federal regulations relating to our business.

 

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We have a senior credit facility which consists of a term loan arrangement and a revolving line of credit. On July 3, 2002, we amended the terms of the senior credit facility and entered into a $25.0 million note. In accordance with the amendment, the remaining balance on the existing senior credit facility was paid off. On October 3, 2002, we amended the terms of the senior credit facility and entered into a $65.0 million note with terms and rights identical to the previous Term A notes and reduced the borrowing capacity of the revolving loan from $20.0 million to $15.0 million. On March 21, 2003, we amended the terms of our senior credit facility as follows: (i) Term A notes were increased to $77.0 million (Tranche A-1) with terms and rights identical to its previous Term A notes, (ii) Tranche A-2 term loans (Tranche A-2) provide for up to $13.0 million of borrowings prior to December 31, 2003, with a minimum initial borrowing of $5.0 million and in integral multiples of $1.0 million thereafter. Tranche A-2 loans cannot be reborrowed once repaid, are due in October 2006 and bear interest at a variable rate based on our leverage ratio with interest payable at least quarterly and principal payments payable quarterly commencing on March 31, 2004. The amendment did not affect the revolving loan’s $15.0 million borrowing capacity.

 

As of June 29, 2003, we had the full $13.0 million available for borrowing on Tranche A-2 and we had drawn $10.0 million and had $5.0 million available for borrowing on the revolving line of credit. As of June 29, 2003, the weighted average interest rate for the loans under our senior credit facility was 4.7%.

 

As the borrower under our 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 additional debt at the holding company level. In addition, our subsidiary is subject to restrictions under the senior credit facility against incurring additional indebtedness.

 

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 twelve 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 our 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.

 

Critical Accounting Policies

 

In response to the Security and Exchange Commission Release Number 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and 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 consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and judgments that affect the reported amounts of assets and

 

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liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on going basis, we will evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, 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. For a summary of all our significant accounting policies, including the critical accounting policies discussed below, see Note 1 to the consolidated financial statements included in the Form 10-K for the year ended December 29, 2002.

 

We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

•                  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. The adequacy of this allowance is determined by continually evaluating customer receivables, considering the customers’ 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.

 

•                  We have recorded goodwill and other intangibles resulting from our acquisitions through June 29, 2003. Through December 30, 2001, goodwill and other intangibles were amortized on a straight-line basis over their lives of six to 20 years. Pursuant to the provisions of SFAS No. 142, which we adopted in 2002, goodwill and intangible assets deemed to have an indefinite life are no longer amortized. We evaluate the recovery of the carrying amount of costs in excess of net tangible assets acquired by determining if an impairment has occurred. This evaluation is done annually or more frequently if indicators of an impairment arise. Indicators of an 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 that 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.

 

•                  We maintain an accrual for our health, workers compensation and professional liability that are either self-insured or partially self-insured and are classified in accounts payable. The adequacy of these accruals are determined 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 the accruals are overstated or understated, we will adjust the assumptions utilized in its methodologies and reduce or provide for additional accruals as appropriate.

 

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•                  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. 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 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 our financial condition or results of operations, 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.

 

Caution Concerning Forward-Looking Statements

 

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment disclosures. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, and cash flow. 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;

 

•                  Our ability to enter into contracts with healthcare facility clients on terms attractive to us;

 

•                  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 for services;

 

•                  The effect of liabilities and other claims asserted against us;

 

•                  The effect of competition in the markets we serve; and

 

•                  Our ability to carry out our 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.

 

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ITEM 3.                                                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our exposure to interest rate risk arises principally from the variable rates associated with our senior credit facility. On June 29, 2003, we had borrowings of $84.4 million under our senior credit facility that were subject its variable rates, with a blended rate of 4.6%. As of June 29, 2003, an adverse change of 1% in the interest rate of all such borrowings outstanding would have caused us to incur an increase in interest expense of approximately $0.8 million on an annualized basis.

 

Foreign Currency Risk

 

We have no foreign currency risk as we have no revenue outside the United States and all of our revenues are in U.S. dollars.

 

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 we will not be adversely affected by inflation in the future.

 

ITEM 4.                                                     CONTROLS AND PROCEDURES

 

As of the end of the period covered by this quarterly report, based on an evaluation of our disclosure controls and procedures, Chairman and Chief Executive Officer, Robert J. Adamson, and 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 our most recent evaluation thereof.

 

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PART II - OTHER INFORMATION

 

ITEM 4.                                                     SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

 

On June 17, 2003 we held our Annual Meeting of Stockholders, at which two propsals were voted on: (i) election of three directors to serve until our 2006 Annual Meeting, and (ii) approval of an amendment to our 2001 Stock Incentive Plan to increase the number of shares of our common stock thereunder.

 

Our stockholders voted to elect the following Class II directors to serve until our 2006 Annual Meeting:

 

Nominee		In Favor		Against		Abstain
Scott F. Hilinski		27,571,369		907,394		2,327
Anne Boykin		27,571,369		907,394		2,327
Philip A. Incarnati		27,571,369		907,394		2,327

 

Our directors who continued in office after the meeting are Joel Ackerman and Thomas Timbie, who are Class I directors whose term expires in 2005, and Robert J. Adamson and David J. Wenstrup, who are Class III directors whose term expires in 2004.

 

Our Stockholders voted to approve the amendment to our 2001 Stock Incentive Plan, with 27,571,369 votes in favor, 907,394 votes against, and 2,327 abstentions.

 

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 Holdings, 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 Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reports on Form 8-K

 

The following reports on Form 8-K were filed by Medical Staffing Network Holdings, Inc. during the quarter ended June 29, 2003:

 

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Report on Form 8-K providing notice of the issuance by Medical Staffing Network Holdings, Inc. of a press release dated April 23, 2003, under Item 9, furnished on April 23, 2003.

 

Report on Form 8-K providing notice of the issuance by Medical Staffing Network Holdings, Inc. of a press release dated May 12, 2003, under Item 9, furnished on May 13, 2003.

 

Report on Form 8-K providing notice of the issuance by Medical Staffing Network Holdings, Inc. of a press release dated June 6, 2003, under Item 9, furnished on June 6, 2003.

 

Report on Form 8-K providing notice of the issuance by Medical Staffing Network Holdings, Inc. of a press release dated June 16, 2003, under Item 9, furnished on June 16, 2003.

 

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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:  August 12, 2003	By:	/s/ Robert J. Adamson
		Chairman and Chief Executive Officer
	By:	/s/ Kevin S. Little
		Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Kevin S. Little, Chief Executive Officer of Medical Staffing Network Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Kevin S. Little, Chief Financial Officer of Medical Staffing Network Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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