UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2003. |
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OR |
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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)
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Delaware |
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65-0865171 |
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(State or other jurisdiction |
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(I.R.S. Employer Identification No.) |
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901
Yamato Road |
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(Address of principal executive offices) |
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(561) 322-1300 |
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(Registrant’s telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 30,207,054 shares of Common Stock, par value $0.01 per share, were outstanding as of November 7, 2003.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
INDEX
2
MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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Sept. 28, 2003 |
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Dec. 29, 2002 |
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(unaudited) |
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(in thousands, except per share amounts) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8,851 |
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$ |
4,595 |
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Accounts receivable, net of allowance for doubtful accounts of $2,762 and $2,757 at September 28, 2003 and December 29, 2002, respectively |
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79,033 |
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93,780 |
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Prepaid expenses |
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7,571 |
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5,363 |
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Other current assets |
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3,532 |
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4,858 |
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Total current assets |
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98,987 |
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108,596 |
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Furniture and equipment, net |
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12,299 |
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12,643 |
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Goodwill, net of accumulated amortization of $8,545 at both September 28, 2003 and December 29, 2002 |
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124,792 |
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114,437 |
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Intangible assets, net of
accumulated amortization of $1,011 and $521 at |
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3,350 |
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3,840 |
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Other assets |
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8,244 |
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8,567 |
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Total assets |
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$ |
247,672 |
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$ |
248,083 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,974 |
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$ |
5,149 |
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Accrued payroll and related liabilities |
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8,401 |
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9,366 |
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Other current liabilities |
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3,364 |
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3,105 |
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Current portion of long-term debt |
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16,170 |
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8,775 |
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Current portion of capital lease obligations |
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1,066 |
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1,055 |
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Total current liabilities |
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31,975 |
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27,450 |
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Long-term debt, net of current portion |
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55,633 |
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69,225 |
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Capital lease obligations, net of current portion |
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722 |
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1,343 |
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Other liabilities |
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6,644 |
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4,397 |
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Total liabilities |
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94,974 |
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102,415 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, $0.01 par value, 75,000 authorized: 30,207 and 30,119 issued and outstanding at September 28, 2003 and December 29, 2002, respectively |
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302 |
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301 |
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Additional paid-in-capital |
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284,200 |
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283,848 |
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Accumulated other comprehensive loss, net of taxes |
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(66 |
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(105 |
) |
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Accumulated deficit |
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(131,738 |
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(138,376 |
) |
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Total stockholders’ equity |
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152,698 |
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145,668 |
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Total liabilities and stockholders’ equity |
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$ |
247,672 |
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$ |
248,083 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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Sept. 28, |
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Sept. 29, |
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Sept. 28, |
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Sept. 29, |
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(in thousands, except per share amounts) |
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Service revenues |
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$ |
123,686 |
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$ |
126,264 |
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$ |
405,154 |
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$ |
342,319 |
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Cost of services rendered |
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97,147 |
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94,528 |
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314,552 |
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255,645 |
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Gross profit |
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26,539 |
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31,736 |
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90,602 |
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86,674 |
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Operating expenses: |
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Selling, general and administrative |
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18,733 |
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17,421 |
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61,604 |
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48,246 |
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Corporate and administrative |
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3,112 |
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1,973 |
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8,500 |
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5,420 |
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Depreciation and amortization |
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1,757 |
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1,267 |
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5,082 |
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3,110 |
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Income from operations |
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2,937 |
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11,075 |
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15,416 |
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29,898 |
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Interest expense, net |
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1,147 |
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808 |
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3,549 |
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6,467 |
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Income before provision for income taxes and discontinued operations |
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1,790 |
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10,267 |
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11,867 |
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23,431 |
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Provision for income taxes |
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693 |
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4,210 |
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4,723 |
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9,609 |
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Income before discontinued operations |
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1,097 |
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6,057 |
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7,144 |
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13,822 |
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Income (loss) from discontinued operations, net of taxes |
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— |
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— |
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(506 |
) |
145 |
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Net income |
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$ |
1,097 |
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$ |
6,057 |
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$ |
6,638 |
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$ |
13,967 |
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Deduct required dividends on convertible preferred stock |
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— |
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— |
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— |
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3,099 |
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Income available to common stockholders |
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$ |
1,097 |
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$ |
6,057 |
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$ |
6,638 |
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$ |
10,868 |
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Income (loss) per share – basic: |
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Income before discontinued operations |
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$ |
0.04 |
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$ |
0.20 |
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$ |
0.24 |
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$ |
0.59 |
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Discontinued operations, net of taxes |
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— |
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— |
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(0.02 |
) |
0.01 |
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Basic net income per share |
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$ |
0.04 |
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$ |
0.20 |
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$ |
0.22 |
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$ |
0.60 |
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Income (loss) per share – diluted: |
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Income before discontinued operations |
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$ |
0.04 |
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$ |
0.19 |
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$ |
0.24 |
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$ |
0.49 |
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Discontinued operations, net of taxes |
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— |
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— |
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(0.02 |
) |
0.01 |
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Diluted net income per share |
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$ |
0.04 |
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$ |
0.19 |
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$ |
0.22 |
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$ |
0.50 |
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Weighted average number of common shares outstanding: |
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Basic |
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30,199 |
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30,090 |
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30,184 |
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18,199 |
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Diluted |
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30,618 |
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31,402 |
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30,816 |
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27,766 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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Sept. 28, 2003 |
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Sept. 29, 2002 |
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(in thousands) |
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Operating activities |
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Net income |
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$ |
6,638 |
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$ |
13,967 |
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Loss (income) from discontinued operations, net of taxes |
|
506 |
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(145 |
) |
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Adjustments to reconcile net income to cash provided by (used in) operating activities: |
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Depreciation and amortization |
|
5,082 |
|
3,110 |
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Amortization of debt issuance costs |
|
811 |
|
602 |
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Deferred income taxes |
|
3,716 |
|
1,519 |
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Provision for doubtful accounts |
|
2,714 |
|
2,475 |
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Loss on derivative instrument |
|
39 |
|
351 |
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Loss on termination of capital leases |
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38 |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
|
12,599 |
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(20,846 |
) |
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Prepaid expenses and other current assets |
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(2,396 |
) |
672 |
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Other assets |
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(413 |
) |
(514 |
) |
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Accounts payable |
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(2,215 |
) |
(2,818 |
) |
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Accrued payroll and related liabilities |
|
(1,003 |
) |
41 |
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Other current liabilities |
|
161 |
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(1,263 |
) |
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Other liabilities |
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(29 |
) |
995 |
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Cash provided by (used in) continuing operations |
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26,248 |
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(1,854 |
) |
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Cash (used in) provided by discontinued operations |
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(500 |
) |
178 |
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Cash provided by (used in) operating activities |
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25,748 |
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(1,676 |
) |
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Investing activities |
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Cash paid for acquisitions, net of cash acquired |
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(10,803 |
) |
(26,278 |
) |
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Purchases of furniture and equipment |
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(3,126 |
) |
(2,747 |
) |
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Capitalized internal software costs |
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(895 |
) |
(1,507 |
) |
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Cash used in investing activities |
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(14,824 |
) |
(30,532 |
) |
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Financing activities |
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Net proceeds from issuance of common stock |
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— |
|
156,279 |
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Principal payments under capital lease obligations |
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(824 |
) |
(640 |
) |
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Proceeds from borrowings on senior credit facility |
|
16,500 |
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37,000 |
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Principal payments on long-term debt |
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(22,697 |
) |
(169,354 |
) |
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Proceeds from exercise of stock options |
|
353 |
|
9 |
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Cash (used in) provided by financing activities |
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(6,668 |
) |
23,294 |
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Net increase (decrease) in cash and cash equivalents |
|
4,256 |
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(8,914 |
) |
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Cash and cash equivalents at beginning of period |
|
4,595 |
|
11,253 |
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Cash and cash equivalents at end of period |
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$ |
8,851 |
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$ |
2,339 |
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Supplemental disclosure of noncash investing and financing activities: |
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Purchase of equipment through capital leases |
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$ |
185 |
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$ |
1,976 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
2,884 |
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$ |
4,071 |
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Income taxes paid |
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$ |
3,244 |
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$ |
1,950 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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 nine months ended September 28, 2003 and September 29, 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 nine months ended September 28, 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.
6
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
Accounting for Financial Instruments with Characteristics of both Liabilities and Equity
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 or December 2003 if certain criteria are met. The disclosure requirements are effective to all financial statements issued after January 31, 2003. The Company has no VIEs so no entities have been consolidated and no additional disclosures have been provided.
3. STOCK BASED COMPENSATION PLANS
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 nine months ended September 28, 2003 and September 29, 2002 for stock-based employee compensation awards.
7
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:
|
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Three Months Ended |
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Nine Months Ended |
|
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|
|
|
Sept. 28, |
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Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
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|
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(in thousands except per share amounts) |
|
||||||||||
|
Net income as reported |
|
$ |
1,097 |
|
$ |
6,057 |
|
$ |
6,638 |
|
$ |
13,967 |
|
|
Stock based compensation expense, net of taxes |
|
(335 |
) |
(293 |
) |
(897 |
) |
(811 |
) |
||||
|
Pro forma net income |
|
$ |
762 |
|
$ |
5,764 |
|
$ |
5,741 |
|
$ |
13,156 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
As reported basic income before discontinued operations |
|
$ |
0.04 |
|
$ |
0.20 |
|
$ |
0.24 |
|
$ |
0.59 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
As reported basic income per share |
|
$ |
0.04 |
|
$ |
0.20 |
|
$ |
0.22 |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
As reported diluted income before discontinued operations |
|
$ |
0.04 |
|
$ |
0.19 |
|
$ |
0.24 |
|
$ |
0.49 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
As reported diluted income per share |
|
$ |
0.04 |
|
$ |
0.19 |
|
$ |
0.22 |
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
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|
||||
|
Pro forma basic income before discontinued operations |
|
$ |
0.03 |
|
$ |
0.19 |
|
$ |
0.21 |
|
$ |
0.54 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
Pro forma basic income per share |
|
$ |
0.03 |
|
$ |
0.19 |
|
$ |
0.19 |
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma diluted income before discontinued operations |
|
$ |
0.03 |
|
$ |
0.19 |
|
$ |
0.21 |
|
$ |
0.49 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
Pro forma diluted income per share |
|
$ |
0.03 |
|
$ |
0.19 |
|
$ |
0.19 |
|
$ |
0.50 |
|
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 |
|
Nine Months Ended |
|
||||
|
|
|
Sept. 28, |
|
Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
|
|
|
|
|
|
|
|
|
|
|
|
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% |
|
8
4. 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 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 condensed consolidated statements of income for the three months and nine months ended September 28, 2003 and September 29, 2002. Net assets of the discontinued operations were less than $10,000 at September 28, 2003 and consisted solely of current assets. Net assets of the discontinued operations were approximately $0.6 million at December 29, 2002 and were 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.
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 |
|
Nine Months Ended |
|
||||||||
|
|
|
Sept. 28, |
|
Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
||||
|
Service revenues |
|
$ |
— |
|
$ |
1,257 |
|
$ |
495 |
|
$ |
3,942 |
|
|
Cost of service revenues |
|
— |
|
1,022 |
|
1,095 |
|
3,015 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit (loss) |
|
$ |
— |
|
$ |
235 |
|
$ |
(600 |
) |
$ |
927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before benefit of (provision for) income taxes |
|
$ |
— |
|
$ |
— |
|
$ |
(845 |
) |
$ |
245 |
|
|
Benefit of (provision for) income taxes |
|
— |
|
— |
|
339 |
|
(100 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) from discontinued operations, net of taxes |
|
$ |
— |
|
$ |
— |
|
$ |
(506 |
) |
$ |
145 |
|
5. 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, in the second quarter of 2003, 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 nine months ended September 28, 2003. No amounts are expected to be incurred or paid in subsequent quarters relating to this restructuring.
9
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 |
|
6. ACQUISITIONS
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 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.
In July 2002, the Company acquired substantially all of the assets and certain of the liabilities of STAT Medical Services, Inc. (STAT), a temporary healthcare staffing company, for approximately $10.3 million in cash, of which approximately $2.0 million was held in escrow and the potential for additional consideration contingent upon STAT achieving certain financial results. Approximately $8.9 million was allocated to goodwill. The primary reason for the acquisition was to expand our geographic scope of services. The acquisition was accounted for in accordance with SFAS No. 141 and, accordingly, the results of operations have been included in the condensed consolidated statement of income beginning from the date of acquisition.
In July 2002, the Company acquired substantially all of the assets and certain of the liabilities of Medical Staffing Services, Inc. (MSS), a temporary healthcare staffing company, for approximately $0.8 million in cash, of which $0.2 million was held in escrow and the potential for additional consideration contingent upon MSS achieving certain financial results. Approximately $0.7 million was allocated to goodwill. The primary reason for the acquisition was to expand our geographic scope of services and market penetration within the temporary healthcare industry. The acquisition was accounted for in accordance with SFAS No. 141 and, accordingly, the results of operations have been included in the condensed consolidated statement of income beginning from the date of acquisition.
10
In July 2002, the Company acquired certain assets and liabilities of Pro Med, Inc. (Pro Med), a temporary healthcare staffing company, for approximately $5.1 million in cash, of which approximately $0.5 million was held in escrow and the potential for additional consideration contingent upon Pro Med achieving certain financial results. Approximately $4.8 million was allocated to goodwill. The primary reason for the acquisition was to expand our geographic scope of services. The acquisition was accounted for in accordance with SFAS No. 141 and, accordingly, the results of operations have been included in the condensed consolidated statement of income beginning from the date of acquisition.
In August 2002, the Company acquired certain assets and liabilities of Pharmstaff, Ltd., a provider of temporary pharmacists and pharmacy technicians to hospitals and other facilities, for approximately $8.5 million in cash, of which approximately $0.4 million was held in escrow and the potential for additional consideration contingent upon Pharmstaff achieving certain financial results. Approximately $8.5 million was allocated to goodwill. The primary reason for the acquisition was to expand our service offerings within the temporary healthcare industry. The acquisition was accounted for in accordance with SFAS No. 141 and, accordingly, the results of operations have been included in the condensed consolidated statement of income from the date of acquisition.
7. 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 9), 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.
11
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 September 28, 2003, the Company had $13.0 million available for borrowing on Tranche A-2. As of September 28, 2003, the Company had the full $15.0 million available for borrowing on the revolving line of credit. As discussed in more detail in Note 13, on November 5, 2003, the Company agreed, in principle, to refinance its existing credit facility.
8. 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 gain (loss) on the derivative instrument for the three months and nine months ended September 28, 2003 and September 29, 2002.
The following table sets forth the computation of comprehensive income for the periods indicated (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|||||||||
|
|
|
Sept. 28, |
|
Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
|||||
|
Net income |
|
$ |
1,097 |
|
$ |
6,057 |
|
$ |
6,638 |
|
$ |
13,967 |
|
|
|
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
|
|
|||||
|
Unrealized gain (loss) on derivative, net of taxes |
|
(13 |
) |
13 |
|
(39 |
) |
(118 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total comprehensive income |
|
$ |
1,084 |
|
$ |
6,070 |
|
$ |
6,599 |
|
$ |
13,849 |
|
|
12
9. 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 75.0 million 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 7.8 million shares of common stock at $19.00 per share. Additionally, the underwriters exercised the over-allotment option of 1.2 million shares, bringing the total number of shares issued to 9.0 million. 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 21.1 million shares of common stock.
10. REDEEMABLE PREFERRED STOCK
During the first quarter of 2002, the Company authorized 15.0 million shares of preferred stock, par value $.01 per share, of which 7.0 million shares had been designated as Series I Convertible Preferred Stock. The Series I Convertible Preferred Stock had a stated value of $18.60 per share and 6.6 million 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 per share, 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 9, the outstanding shares of Series I Convertible Preferred Stock were converted into 21.1 million shares of common stock in connection with the completion of the Company’s initial public offering on April 23, 2002.
11. RELATED PARTY TRANSACTION
One of the Company’s directors, Philip A. Incarnati, 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 nine months ended September 28, 2003, that healthcare delivery system paid the Company approximately $0.4 million and $0.7 million, respectively.
13
12. EARNINGS PER SHARE
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
Sept. 28, |
|
Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
||||
|
|
|
(in thousands except per share amounts) |
|
||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
||||
|
Net income before preferred stock dividend |
|
$ |
1,097 |
|
$ |
6,057 |
|
$ |
6,638 |
|
$ |
13,967 |
|
|
Less preferred stock dividends |
|
— |
|
— |
|
— |
|
3,099 |
|
||||
|
Numerator for basic earnings per share-available to common stockholders |
|
1,097 |
|
6,057 |
|
6,638 |
|
10,868 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
|
Add back preferred stock dividends |
|
— |
|
— |
|
— |
|
3,099 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Numerator for diluted earnings per share-available to common stockholders |
|
$ |
1,097 |
|
$ |
6,057 |
|
$ |
6,638 |
|
$ |
13,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
||||
|
Denominator for basic earnings per share-weighted average shares |
|
30,199 |
|
30,090 |
|
30,184 |
|
18,199 |
|
||||
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
||||
|
Employee stock options |
|
419 |
|
1,312 |
|
632 |
|
1,339 |
|
||||
|
Convertible preferred stock |
|
— |
|
— |
|
— |
|
8,228 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Dilutive potential common shares |
|
419 |
|
1,312 |
|
632 |
|
9,567 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions |
|
30,618 |
|
31,402 |
|
30,816 |
|
27,766 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) per share – basic: |
|
|
|
|
|
|
|
|
|
||||
|
Income before discontinued operations |
|
$ |
0.04 |
|
$ |
0.20 |
|
$ |
0.24 |
|
$ |
0.59 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
Basic net income per share |
|
$ |
0.04 |
|
$ |
0.20 |
|
$ |
0.22 |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share – diluted: |
|
|
|
|
|
|
|
|
|
||||
|
Income before discontinued operations |
|
$ |
0.04 |
|
$ |
0.19 |
|
$ |
0.24 |
|
$ |
0.49 |
|
|
Discontinued operations, net of taxes |
|
— |
|
— |
|
(0.02 |
) |
0.01 |
|
||||
|
Diluted net income per share |
|
$ |
0.04 |
|
$ |
0.19 |
|
$ |
0.22 |
|
$ |
0.50 |
|
For the three months and nine months ended September 28, 2003, approximately 314,000 and 250,000 incremental options were excluded from the denominator for diluted earnings per share as their impact is anti-dilutive.
14
13. SUBSEQUENT EVENT
On November 5, 2003, we agreed, in principle, to enter into a new credit facility. We plan to refinance the existing facility as it was entered into when we were a privately-held company operating in more robust economic environment and its term and covenants do not reflect the current difficult economic and industry-specific conditions. The planned new facility would be comprised of a revolver and a second lien term loan. The proceeds of the new credit facility would be used to extinguish the entire outstanding balance under our existing credit facility. As a result of the planned refinancing of the credit facility, we would record a non-cash charge of approximately $3.6 million in the fourth quarter of 2003 to write off the remaining debt issuance cost of the extinguished facility. In the unlikely event that we are unable to complete the refinancing transaction, it is probable that, at the end of the fourth quarter of 2003, we would be in violation of certain financial covenants of our existing credit facility.
15
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 nine months ended September 28, 2003 relative to the three months and nine months ended September 29, 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 September 28, 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.
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.
16
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” (BiB) concept. The 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 72% and 71% of our revenues for the three months and nine months ended September 28, 2003, respectively 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 nine months ended September 28, 2003. Travel nurse staffing (assignments lasting more than four weeks) represented approximately 11% and 12% of our revenues for the three months and nine months ended September 28, 2003, respectively. Physician staffing (which was discontinued in the second quarter of 2003) represented less than 1% of our revenues for the nine months ended September 28, 2003.
During the nine months ended September 28, 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 nine months ended September 29, 2002, we purchased substantially all of the assets of four healthcare staffing companies for an aggregate purchase price of $24.7 million. 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.
On April 23, 2002, we completed our initial public offering of 7.8 million shares of common stock at $19.00 per share. Additionally, the underwriters exercised the over-allotment option of 1.2 million shares, bringing the total number of shares issued to 9.0 million. 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 21.1 million shares of common stock.
17
We discontinued our physician staffing services in the second quarter of 2003. Pursuant to the provisions of the FASB Statements 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 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 both the three months ended September 28, 2003 and September 29, 2002, we had no income (loss) from discontinued operations, net of taxes. For the nine months ended September 28, 2003, we had a loss from discontinued operations, net of taxes, of approximately $0.5 million. For the nine months ended September 29, 2002, we had income from discontinued operations of approximately $0.1 million. Net assets of the discontinued operations were less than $10,000 at September 28, 2003 and consisted solely of current assets. Net assets of the discontinued operations were approximately $0.6 million at December 29, 2002 and were 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.
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, in the second quarter of 2003, 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 nine months ended September 28, 2003. No amounts have been or are expected to be incurred or paid in subsequent quarters relating to this restructuring.
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.
18
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 or December 2003 if certain criteria are met. The disclosure requirements are effective to all financial statements issued after January 31, 2003. We have no VIEs so no entities have been consolidated and no additional disclosures have been provided.
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 |
|
Nine Months Ended |
|
||||
|
|
|
Sept. 28, |
|
Sept. 29, |
|
Sept. 28, |
|
Sept. 29, |
|
|
Service revenues |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of services rendered |
|
78.5 |
|
74.9 |
|
77.6 |
|
74.7 |
|
|
Gross profit |
|
21.5 |
|
25.1 |
|
22.4 |
|
25.3 |
|
|
Selling, general and administrative expenses |
|
15.2 |
|
13.8 |
|
15.2 |
|
14.1 |
|
|
Corporate and administrative expenses |
|
2.5 |
|
1.6 |
|
2.1 |
|
1.6 |
|
|
Depreciation and amortization expenses |
|
1.4 |
|
0.9 |
|
1.3 |
|
0.9 |
|
|
Income from operations |
|
2.4 |
|
8.8 |
|
3.8 |
|
8.7 |
|
|
Interest expense, net |
|
1.0 |
|
0.7 |
|
0.9 |
|
1.9 |
|
|
Income before provision for income taxes and discontinued operations |
|
1.4 |
|
8.1 |
|
2.9 |
|
6.8 |
|
|
Provision for income taxes |
|
0.5 |
|
3.3 |
|
1.1 |
|
2.8 |
|
|
Income before discontinued operations |
|
0.9 |
|
4.8 |
|
1.8 |
|
4.0 |
|
|
Income (loss) from discontinued operations, net of taxes |
|
— |
|
— |
|
(0.2 |
) |
0.1 |
|
|
Net income |
|
0.9 |
|
4.8 |
|
1.6 |
|
4.1 |
|
Service Revenues. Our service revenues decreased $2.6 million, or 2.0%, from $126.3 million for the three months ended September 29, 2002 to $123.7 million for the three months ended September 28, 2003. The decrease in revenues was the result of an organic decline of 14.8%, partially offset by an increase from acquisitions made over the past twelve months. This organic decline was primarily attributable to the decrease in the number of hours worked by professionals due to a short-term lessening in demand for temporary healthcare staffing, in addition 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 September 28, 2003, price rates increased less than one percent over the same period in 2002.
19
Per diem nurse staffing revenues decreased $9.6 million, or 9.7%, from $98.9 million for the three months ended September 29, 2002 to $89.3 million for the three months ended September 28, 2003. Of the decrease of $9.6 million in per diem nurse staffing revenues, organic decline from continuing locations accounted for $12.5 million, organic decline attributable to the locations closed in the second quarter restructuring accounted for $4.9 million, partially offset by growth from acquisitions completed in 2002 and 2003, which contributed $7.8 million.
Service revenues from our staffing divisions other than the per diem nurse staffing division collectively increased $7.0 million, or 25.8%, from $27.4 million for the three months ended September 28, 2002 to $34.4 million for the three months ended September 28, 2003. The increase for the three months ended September 28, 2003 came from acquisitions completed in 2002 and 2003 of $8.2 million, partially offset by an organic decline of $1.2 million.
Cost of Services Rendered. Cost of services rendered increased $2.6 million, or 2.8%, from $94.6 million for the three months ended September 29, 2002 to $97.2 million for the three months ended September 28, 2003. The increase was attributable to higher compensation, benefits and insurance costs associated with our healthcare professionals.
Gross Profit. Gross profit decreased $5.2 million, or 16.4%, from $31.7 million for the three months ended September 29, 2002 to $26.5 million for the three months ended September 28, 2003, driven primarily by the decline in service revenues, as well as 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 September 28, 2003, as compared to 25.1% for the three months ended September 29, 2002.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.3 million, or 7.5%, from $17.4 million for the three months ended September 29, 2002 to $18.7 million for the three months ended September 28, 2003. As a percentage of revenue, selling, general and administrative expenses increased from 13.8% for the three months ended September 29, 2002 to 15.2% for the three months ended September 28, 2003. The increase is primarily attributable to the opening of 44 BiB locations in the first four months of 2003, acquisitions that we made over the past twelve months and the decrease in service revenues, partially offset by the locations closed during the restructuring initiative completed in the second quarter of 2003.
Corporate and Administrative Expenses. Corporate and administrative expenses increased $1.2 million, or 57.7%, from $1.9 million for the three months ended September 29, 2002 to $3.1 million for the three months ended September 28, 2003. As a percentage of revenue, corporate and administrative expenses were 1.6% and 2.5% for the three months ended September 29, 2002 and September 28, 2003, respectively. The increase was primarily due to increased infrastructure associated with the aforementioned acquisitions and expansion of the BiB program, and the decrease in service revenues.
20
Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.5 million, or 38.7%, from $1.3 million for the three months ended September 29, 2002 to $1.8 million for the three months ended September 28, 2003. The increase was attributable to an increase in depreciation expense of $0.4 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 $8.2 million, or 73.5%, from $11.1 million for the three months ended September 29, 2002 to $2.9 million for the three months ended September 28, 2003. As a percentage of revenue, income from operations decreased from 8.8% for the three months ended September 29, 2002 to 2.4% for the three months ended September 28, 2003.
Interest Expense, Net. Interest expense, net, increased $0.3 million, or 42.0% from $0.8 million for the three months ended September 29, 2002 to $1.1 million for the three months ended September 28, 2003. The increase was attributable to higher average debt levels partially offset by lower interest rates for the three months ended September 28, 2003 as compared to the 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 $8.5 million, or 82.6%, from $10.3 million for the three months ended September 29, 2002 to $1.8 million for the three months ended September 28, 2003.
Provision for Income Taxes. Our provision for income taxes was $4.2 million for the three months ended September 29, 2002 and $0.7 million for the three months ended September 28, 2003 representing effective tax rates of 41.0% for the three months ended September 29, 2002 and 38.7% for the three months ended September 28, 2003. The decrease in our effective tax rate is attributable to lower expected state tax expense.
Income Before Discontinued Operations. As a result of the above, income before discontinued operations decreased $5.0 million, or 81.9%, from $6.1 million for the three months ended September 29, 2002 to $1.1 million for the three months ended September 28, 2003.
Income (Loss) from Discontinued Operations, Net of Taxes. There was no income (loss) from discontinued operations, net of taxes, for either the three months ended September 29, 2002 or September 28, 2003.
Net Income. As a result of the above, net income decreased $5.0 million, or 81.9%, from $6.1 million for the three months ended September 29, 2002 to $1.1 million for the three months ended September 28, 2003.
21
Service Revenues. Our service revenues increased $62.9 million, or 18.4%, from $342.3 million for the nine months ended September 29, 2002 to $405.2 million for the nine months ended September 28, 2003. All of our revenue growth for the nine months ended September 28, 2003 was the result of acquisitions, which offset an organic decline of 0.3%. For the nine months ended September 28, 2003, organic growth for our continuing locations was 2.1%. For the nine months ended September 28, 2003, price rates increased approximately 1% over the same period in 2002.
A portion of the increase in revenues for the nine months ended September 28, 2003 was attributable to a $25.2 million, or 9.5% increase in our per diem nurse staffing revenues from $264.4 million for the nine months ended September 29, 2002 to $289.6 million for the nine months ended September 28, 2003. Of the increase of $25.2 million in per diem nurse staffing revenues, growth from acquisitions completed in 2002 and 2003 contributed $31.8 million, organic growth from continuing locations contributed $1.4 million, offset by an organic decline of $8.0 million attributable to the locations closed in the second quarter restructuring.
The remainder of the increase in service revenues is from our staffing divisions other than the per diem nurse staffing division, which collectively increased $37.7 million, or 48.2%, from $77.9 million for the nine months ended September 29, 2002 to $115.6 million for the nine months ended September 28, 2003. Of the increase of $37.7 million, organic growth contributed $5.6 million and acquisitions completed in 2002 and 2003 contributed $32.1 million.
Cost of Services Rendered. Cost of services rendered increased $59.0 million, or 23.0%, from $255.6 million for the nine months ended September 29, 2002 to $314.6 million for the nine months ended September 28, 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 $3.9 million, or 4.5%, from $86.7 million for the nine months ended September 29, 2002 to $90.6 million for the nine months ended September 28, 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 22.4% for the nine months ended September 28, 2003, as compared to 25.3% for the nine months ended September 29, 2002.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $13.3 million, or 27.7%, from $48.3 million for the nine months ended September 29, 2002 to $61.6 million for the nine months ended September 28, 2003. As a percentage of revenue, selling, general and administrative expenses increased from 14.1% for the nine months ended September 29, 2002 to 15.2% for the nine months ended September 28, 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 acquisitions
22
that we made over the prior twelve months, partially offset by the locations closed during the restructuring initiative completed in the second quarter of 2003.
Corporate and Administrative Expenses. Corporate and administrative expenses increased $3.1 million, or 56.8%, from $5.4 million for the nine months ended September 29, 2002 to $8.5 million for the nine months ended September 28, 2003. As a percentage of revenue, corporate and administrative expenses were 1.6% and 2.1% for the nine months ended September 29, 2002 and September 28, 2003, respectively. 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.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $2.0 million, or 63.4%, from $3.1 million for the nine months ended September 29, 2002 to $5.1 million for the nine months ended September 28, 2003. The increase was attributable to an increase in depreciation expense of $1.7 million related to depreciation on prior year fixed asset additions and an increase in amortization expense of $0.3 million related to certain intangibles acquired in acquisitions.
Income from Operations. As a result of the above, income from operations decreased $14.5 million, or 48.4%, from $29.9 million for the nine months ended September 29, 2002 to $15.4 million for the nine months ended September 28, 2003. As a percentage of revenue, income from operations decreased from 8.7% for the nine months ended September 29, 2002 to 3.8% for the nine months ended September 28, 2003.
Interest Expense, Net. Interest expense, net, decreased $3.0 million, or 45.1%, from $6.5 million for the nine months ended September 29, 2002 to $3.5 million for the nine months ended September 28, 2003. The decrease was attributable to lower average debt levels and lower interest rates for the nine months ended September 28, 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 $11.5 million, or 49.4%, from $23.4 million for the nine months ended September 29, 2002 to $11.9 million for the nine months ended September 28, 2003.
Provision for Income Taxes. Our provision for income taxes was $9.6 million for the nine months ended September 29, 2002 and $4.7 million for the nine months ended September 28, 2003 representing effective tax rates of 41.0% for the nine months ended September 29, 2002 and 39.8% for the nine months ended September 28, 2003. The decrease in our effective tax rate is attributable to lower expected state tax expense.
Income Before Discontinued Operations. As a result of the above, income before discontinued operations decreased $6.6 million, or 48.3%, from $13.8 million for the nine months ended September 29 2002 to $7.2 million for the nine months ended September 28, 2003.
23
Income (Loss) from Discontinued Operations, Net of Taxes. Income (loss) from discontinued operations, net of taxes, was income of $0.2 million for the nine months ended September 29, 2002, as compared to a loss of $0.5 million for the nine months ended September 28, 2003.
Net Income. As a result of above, net income decreased $7.4 million, or 52.5%, from $14.0 million for the nine months ended September 29, 2002 to $6.6 million for the nine months ended September 28, 2003.
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 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.
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 7.8 million shares of common stock at $19.00 per share. Additionally, the underwriters exercised the over-allotment option of 1.2 million shares, bringing the total number of shares issued to 9.0 million. 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 21.1 million shares of common stock.
At September 28, 2003, we had cash totaling $8.9 million, working capital totaling $67.0 million and unused availability under our committed credit facility totaling $15.0 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 $25.7 million during the nine months ended September 28, 2003 compared to cash used in operating activities of $1.7 million during the nine months ended
24
September 29, 2002. Cash provided by continuing operations was $26.2 million during the nine months ended September 28, 2003 compared to cash used in continuing operations of $1.9 million during the nine months ended September 29, 2002. Cash used by discontinued operations was $0.5 million during the nine months ended September 28, 2003 as compared to cash provided by discontinued operations of $0.2 million during the nine months ended September 29, 2002.
Cash flows from operating activities was positively impacted during the nine months ended September 28, 2003, primarily the result of a lower accounts receivable balance due to improved collections, the closure of 29 cash using offices in the restructuring completed during the second quarter of 2003, and the opening of fewer de novo branches in the first nine months of 2003 (five as compared to 31 in the comparable period of 2002). 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.
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 September 28, 2003, we had the full $13.0 million available for borrowing on Tranche A-2 and we had the full $15.0 million available for borrowing on the revolving line of credit. As of September 28, 2003, the weighted average interest rate for the loans under our senior credit facility was 4.62%.
On November 5, 2003, we agreed, in principle, to enter into a new credit facility. We plan to refinance the existing facility as it was entered into when we were a privately-held company operating in a more robust economic environment and its terms and covenants do not reflect the current difficult economic and industry-specific conditions. The planned new facility would be comprised of a revolver and a second lien term loan. The proceeds of the new credit facility would be used to extinguish the entire outstanding balance under our existing credit facility. As a result of the planned refinancing of the credit facility, we would record a non-cash charge of approximately $3.6 million in the fourth quarter of 2003 to write off the remaining debt issuance
25
costs of the extinguished facility. In the unlikely event that we are unable to complete the refinancing transaction, it is probable that, at the end of the fourth quarter of 2003, we would be in violation of certain financial covenants of our existing credit facility.
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.
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 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
26
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 September 28, 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 is 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. As a result of favorable claims experience and based on actuarial estimations completed during the quarter, the Company recorded a workers’ compensation expense benefit of approximately $0.3 million during the third quarter of 2003.
• 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.
27
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.
28
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 September 28, 2003, we had borrowings of $71.8 million under our senior credit facility that were subject its variable rates, with a blended rate of 4.36%. As of September 28, 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 $0.7 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 our 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.
29
PART II - - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) |
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Exhibits |
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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. |
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31.2 |
Certification of Kevin S. Little, Chief Financial Officer of Medical Staffing Network Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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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. |
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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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(b) |
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Reports on Form 8-K |
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The following reports on Form 8-K were filed by Medical Staffing Network Holdings, Inc. during the quarter ended September 28, 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 July 17, 2003, under Item 9, furnished on July 17, 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 August 6, 2003, under Item 12, furnished on August 6, 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 September 15, 2003, under Item 9, furnished on September 15, 2003. |
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Report on Form 8-K providing notice of the Slide presentation given by Medical Staffing Network Holdings, Inc. on September 22, 2003, under Item 9, furnished on September 22, 2003. |
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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.
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MEDICAL
STAFFING NETWORK |
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Dated: November 12, 2003 |
By: |
/s/ Robert J. Adamson |
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Chairman and Chief Executive Officer |
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By: |
/s/ Kevin S. Little |
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Chief Financial Officer |
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31
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Exhibit No. |
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Description |
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31.1 |
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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. |
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31.2 |
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Certification of Kevin S. Little, Chief Financial Officer of Medical Staffing Network Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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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. |
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32.2 |
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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. |
32