UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 25, 2005 | |
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OR | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to | |
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Commission File No. 001-31299 | |
MEDICAL STAFFING NETWORK HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 65-0865171 |
(State or other jurisdiction |
| (I.R.S. Employer Identification No.) |
of incorporation or organization) |
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901 Yamato Road
Suite 110
Boca Raton, Florida 33431
(Address of principal executive offices)
(Zip Code)
(561) 322-1300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes 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. 30,235,099 shares of common stock, par value $0.01 per share, were outstanding as of November 1, 2005.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
INDEX
2
PART I - - FINANCIAL INFORMATION
MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| September 25, |
| December 26, |
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(in thousands, except per share amounts) |
| 2005 |
| 2004 |
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| (unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 254 |
| $ | 345 |
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Accounts receivable, net of allowance for doubtful accounts of $920 and $1,064 at September 25, 2005 and December 26, 2004, respectively |
| 57,725 |
| 57,478 |
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Prepaid expenses |
| 3,268 |
| 6,406 |
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Other current assets |
| 3,226 |
| 4,758 |
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Total current assets |
| 64,473 |
| 68,987 |
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Furniture and equipment, net of accumulated depreciation of $21,709 and $18,650 at September 25, 2005 and December 26, 2004, respectively |
| 7,585 |
| 8,481 |
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Goodwill, net of accumulated amortization of $8,545 at both September 25, 2005 and December 26, 2004 |
| 129,878 |
| 129,474 |
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Intangible assets, net of accumulated amortization of $2,202 and $1,663 at September 25, 2005 and December 26, 2004, respectively |
| 2,343 |
| 2,438 |
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Other assets |
| 1,112 |
| 1,523 |
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Total assets |
| $ | 205,391 |
| $ | 210,903 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
| $ | 13,017 |
| $ | 12,072 |
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Accrued payroll and related liabilities |
| 7,715 |
| 6,597 |
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Current portion of capital lease obligations |
| 74 |
| 385 |
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Total current liabilities |
| 20,806 |
| 19,054 |
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Long-term debt |
| 25,627 |
| 31,760 |
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Deferred income taxes |
| 9,050 |
| 9,808 |
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Capital lease obligations, net of current portion |
| 6 |
| 33 |
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Other liabilities |
| 367 |
| 222 |
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Total liabilities |
| 55,856 |
| 60,877 |
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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 shares authorized: 30,235 and 30,231 shares issued and outstanding at September 25, 2005 and December 26, 2004, respectively |
| 302 |
| 302 |
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Additional paid-in capital |
| 284,427 |
| 284,411 |
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Accumulated deficit |
| (135,194 | ) | (134,687 | ) | ||
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Total stockholders’ equity |
| 149,535 |
| 150,026 |
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Total liabilities and stockholders’ equity |
| $ | 205,391 |
| $ | 210,903 |
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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 OPERATIONS
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 25, |
| Sept. 26, |
| Sept. 25, |
| Sept. 26, |
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(in thousands, except per share amounts) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Service revenues |
| $ | 102,408 |
| $ | 106,204 |
| $ | 304,856 |
| $ | 318,599 |
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Cost of services rendered |
| 79,936 |
| 83,167 |
| 238,116 |
| 250,715 |
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Gross profit |
| 22,472 |
| 23,037 |
| 66,740 |
| 67,884 |
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Operating expenses: |
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Selling, general and administrative |
| 19,696 |
| 19,944 |
| 60,945 |
| 61,823 |
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Depreciation and amortization |
| 1,241 |
| 1,615 |
| 4,083 |
| 4,912 |
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Other |
| 512 |
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| 512 |
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Income from operations |
| 1,023 |
| 1,478 |
| 1,200 |
| 1,149 |
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Interest expense, net |
| 653 |
| 780 |
| 2,105 |
| 2,751 |
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Income (loss) before provision for (benefit from) income taxes |
| 370 |
| 698 |
| (905 | ) | (1,602 | ) | ||||
Provision for (benefit from) income taxes |
| 150 |
| 410 |
| (398 | ) | (354 | ) | ||||
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Net income (loss) |
| $ | 220 |
| $ | 288 |
| $ | (507 | ) | $ | (1,248 | ) |
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Basic and diluted net income (loss) per share |
| $ | 0.01 |
| $ | 0.01 |
| $ | (0.02 | ) | $ | (0.04 | ) |
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Weighted average number of common shares outstanding: |
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Basic |
| 30,234 |
| 30,231 |
| 30,233 |
| 30,227 |
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Diluted |
| 30,292 |
| 30,326 |
| 30,233 |
| 30,227 |
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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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(in thousands) |
| Sept. 25, 2005 |
| Sept. 26, 2004 |
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Operating activities |
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Net loss |
| $ | (507 | ) | $ | (1,248 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
| 4,083 |
| 4,912 |
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Amortization of debt issuance cost |
| 482 |
| 507 |
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Deferred income taxes |
| (153 | ) | 2,603 |
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Provision for doubtful accounts |
| 477 |
| 703 |
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Other |
| — |
| 55 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
| (324 | ) | 7,049 |
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Prepaid expenses and other current assets |
| 3,796 |
| 1,912 |
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Other assets |
| (19 | ) | (185 | ) | ||
Accounts payable and accrued expenses |
| 892 |
| 5,957 |
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Accrued payroll and related liabilities |
| 1,118 |
| 2,740 |
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Other liabilities |
| 145 |
| (99 | ) | ||
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Cash provided by operating activities |
| 9,990 |
| 24,906 |
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Investing activities |
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Cash paid for acquisitions, net of cash acquired |
| (1,000 | ) | (24 | ) | ||
Purchases of furniture and equipment |
| (1,608 | ) | (1,082 | ) | ||
Capitalized internal software costs |
| (1,019 | ) | (930 | ) | ||
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Cash used in investing activities |
| (3,627 | ) | (2,036 | ) | ||
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Financing activities |
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Repayments of term note |
| (6,000 | ) | (5,000 | ) | ||
Net repayments under revolving credit facility |
| (133 | ) | (17,509 | ) | ||
Principal payments under capital lease obligations |
| (338 | ) | (837 | ) | ||
Proceeds from exercise of stock options |
| 17 |
| 48 |
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Cash used in financing activities |
| (6,454 | ) | (23,298 | ) | ||
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Net decrease in cash and cash equivalents |
| (91 | ) | (428 | ) | ||
Cash and cash equivalents at beginning of period |
| 345 |
| 825 |
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Cash and cash equivalents at end of period |
| $ | 254 |
| $ | 397 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
| $ | 18 |
| $ | 13 |
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Income taxes refunded, net |
| $ | (3,902 | ) | $ | (4,444 | ) |
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 temporary staffing services in the United States. The Company’s per diem healthcare 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. During 2004, the Company expanded its services to provide temporary general staffing. The Company’s general staffing assignments place individuals in a variety of areas including clerical, janitorial and food services. The Company’s temporary healthcare staffing client base includes profit and non-profit hospitals, teaching hospitals, and regional healthcare providers. Pursuant to the provisions of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company considers the different services described above to aggregate into one segment. Temporary staffing services represent 100% of the Company’s consolidated revenue for the three and nine months ended September 25, 2005 and September 26, 2004.
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 and nine months ended September 25, 2005 are not necessarily indicative of the results that may be expected for the year ending December 25, 2005.
The condensed consolidated balance sheet as of December 26, 2004 has been derived from the audited financial statements as of 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
The Company is currently evaluating its determination of operating segments, which could change the reporting unit level at which it tests for goodwill impairment. Any change in the reporting unit level would occur in the future when the Company completes the evaluation and could result in a noncash impairment charge to earnings, based on the results of the testing performed. If the Company is required to record an impairment charge in the future, it would have an adverse impact on results of operations.
Certain reclassifications have been made to the 2004 condensed consolidated financial statements to conform to the 2005 presentation.
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 26, 2004 (File No. 001-31299).
2. RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Additionally, SFAS No. 123(R) amends the presentation of the statement of cash flows and requires additional annual disclosures. SFAS No. 123(R) is effective for public companies beginning with the first interim period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a new rule that postponed the effective date for SFAS No. 123(R) to the fiscal year beginning after June 15, 2005. The Company expects to adopt SFAS No. 123(R) on December 26, 2005, but has not yet determined if it will use the modified prospective method or one of the modified-retrospective methods. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the intrinsic value method in accordance with the recognition and measurement principles of APB No. 25, and, as such, generally recognizes no compensation cost for employee stock options, as options granted under the Company’s plans have an exercise price equal to or greater than the fair value of the underlying common stock on the date of grant. The impact of adoption of SFAS No. 123(R), which may be material, cannot be predicted at this time because it will depend on levels of share-based compensation granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, its impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and net income (loss) per share in Stock-Based Compensation Plans (see Note 3).
7
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 Accounting Principles Board 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 and nine months ended September 25, 2005 and September 26, 2004 for stock-based employee compensation awards.
Application of the fair value method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to the Company’s options would require the Company to record the following pro forma net income (loss) and net income (loss) per share amounts (in thousands, except per share amounts):
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 25, |
| Sept. 26, |
| Sept. 25, |
| Sept. 26, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Net income (loss) as reported |
| $ | 220 |
| $ | 288 |
| $ | (507 | ) | $ | (1,248 | ) |
Fair value method of stock based compensation, net of taxes |
| (195 | ) | (339 | ) | (497 | ) | (884 | ) | ||||
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Pro forma net income (loss) |
| $ | 25 |
| $ | (51 | ) | $ | (1,004 | ) | $ | (2,132 | ) |
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As reported: |
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Basic and diluted net income (loss) |
| $ | 0.01 |
| $ | 0.01 |
| $ | (0.02 | ) | $ | (0.04 | ) |
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Pro forma: |
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Basic and diluted net income (loss) |
| $ | — |
| $ | — |
| $ | (0.03 | ) | $ | (0.07 | ) |
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 that statement. The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 25, |
| Sept. 26, |
| Sept. 25, |
| Sept. 26, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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Expected life in years |
| 3 – 8 |
| 3 – 8 |
| 3 – 8 |
| 3 – 8 |
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Risk-free interest rate |
| 4.47% |
| 3.25% – 4.40% |
| 4.05% – 4.47% |
| 3.25% – 4.40% |
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Volatility |
| 59% |
| 65% |
| 59% |
| 65% |
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Dividend yield |
| 0% |
| 0% |
| 0% |
| 0% |
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8
4. ACQUISITION
On March 31, 2005, the Company acquired certain assets of Quality Medical Professionals (QMP), a California based temporary allied healthcare staffing company, for approximately $1.0 million in cash, of which approximately $0.1 million was held in escrow, and the potential for additional consideration contingent upon QMP achieving certain financial results in the future. Approximately $0.4 million, $0.2 million, $0.1 million and $0.1 million of the purchase price was allocated to goodwill, customer contracts (two-year useful life), contractor databases (five-year useful life) and a noncompete agreement (six-year useful life), respectively. 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, and, accordingly, the results of operations have been included in the condensed consolidated statement of operations beginning from April 1, 2005, the date when the Company assumed control.
5. LONG-TERM DEBT
On December 22, 2003, the Company entered into a senior credit facility (the Senior Credit Facility) which replaced the previous facility. The Senior Credit Facility provided a $65.0 million revolving credit facility (the Revolver) which expires in December 2006 and a $17.0 million term loan (the Term Loan) which was originally due in December 2005.
On June 25, 2004, the Company amended the Senior Credit Facility to reduce the Revolver capacity from $65.0 million to $60.0 million. The amendment also favorably modified certain financial covenants while increasing the applicable margin on the Revolver by 0.5% and on the Term Note by 1.0%. In conjunction with the amendment, on July 1, 2004, the Company repaid $5.0 million of borrowings under the Term Loan. The $5.0 million can not be re-borrowed under the terms of the Term Loan. The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and a $7.0 million availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver.
On February 24, 2005, the Company amended the terms of the Senior Credit Facility whereby the Term Loan was reduced to $6.0 million, the applicable margin for the Term Loan was reduced, the maturity of the Term Loan was extended to December 2006 and certain financial covenants were favorably amended. The $6.0 million Term Loan repayment was funded with borrowings under the Revolver.
On September 24, 2005, the Company amended the terms of the Senior Credit Facility whereby certain financial covenants were favorably amended.
The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and an availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver. The Revolver bears interest at either prime rate or LIBOR plus an applicable margin (6.4% at September 25, 2005) with interest payable monthly or as interest rate contracts expire. The Term Loan bears interest at LIBOR plus an applicable margin (8.5% at September 25, 2005) with interest payable as interest rate contracts expire. Unused capacity under the Revolver bears
9
interest at 0.5% and is payable monthly. The Senior Credit Facility is secured by substantially all of the Company’s assets and contains certain covenants that, among other things, limit the payment of dividends, restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. As of September 25, 2005, the Company was in compliance with all covenants.
As of September 25, 2005, $6.0 million was outstanding on the Term Loan and $19.6 million was outstanding under the Revolver and an additional $21.0 million was immediately available for borrowing under the Revolver.
6. COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Comprehensive Income, requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. 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. The Company’s results of operations were the sole component of comprehensive income (loss) for the three and nine months ended September 25, 2005 and September 26, 2004.
7. INCOME (LOSS) PER SHARE
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| Three Months Ended |
| Nine Months Ended |
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| Sept. 25, |
| Sept. 26, |
| Sept. 25, |
| Sept. 26, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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| (in thousands, except per share amounts) |
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Numerator: |
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Numerator for basic and diluted income (loss) per share |
| $ | 220 |
| $ | 288 |
| $ | (507 | ) | $ | (1,248 | ) |
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Denominator: |
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Denominator for basic and diluted income (loss) per share |
| 30,234 |
| 30,231 |
| 30,233 |
| 30,227 |
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Effect of dilutive shares: |
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Employee stock options |
| 58 |
| 95 |
| — |
| — |
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Denominator for diluted income (loss) per share-adjusted weighted average shares and assumed conversions |
| 30,292 |
| 30,326 |
| 30,233 |
| 30,227 |
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Basic and diluted net income (loss) per share |
| $ | 0.01 |
| $ | 0.01 |
| $ | (0.02 | ) | $ | (0.04 | ) |
For the three months ended September 25, 2005 and September 26, 2004, 2.0 million and 0.4 million incremental options, respectively, were excluded from the denominator for diluted income (loss) per share as the impact of conversion is anti-dilutive. For the nine months ended September 25, 2005 and September 26, 2004, 1.3 million and 1.9 million options, respectively, were excluded in the calculation of diluted shares as the impact of their conversion was anti-dilutive due to the net losses.
10
8. RELATED PARTY TRANSACTIONS
The Company provides staffing services to a healthcare system of which one of the Company’s directors, Philip A. Incarnati, is the President and Chief Executive Officer. During each of the three months ended September 25, 2005 and September 26, 2004, the Company billed approximately $0.7 million and $0.8 million, respectively, for its services. During each of the nine months ended September 25, 2005 and September 26, 2004, the Company billed approximately $2.1 million and $2.5 million, respectively, for its services. The Company had a receivable balance from the healthcare system of approximately $0.3 million at both September 25, 2005 and December 26, 2004, respectively.
The Company provides staffing services to a healthcare system of which one of the Company’s directors, David Wester, is the President. During each of the three months ended September 25, 2005 and September 26, 2004, the Company billed approximately $0.1 million for its services. During the nine months ended September 25, 2005 and September 26, 2004, the Company billed approximately $0.2 million and $0.3 million, respectively, for its services. The Company had a receivable balance from the healthcare system of approximately $0.1 million at both September 25, 2005 and December 26, 2004, respectively.
The Company paid less than $0.1 million during each of the three and nine months ended September 25, 2005 and September 26, 2004, to Florida Atlantic University (FAU) in connection with a continuing education program for the Company’s nurses. One of the Company’s directors, Dr. Anne Boykin, is the Dean of the College of Nursing at FAU, a university located in Boca Raton, Florida.
9. CONTINGENCIES
On February 20, 2004, Joseph and Patricia Marrari, and on April 16, 2004, Tommie Williams, filed class action lawsuits against the Company in the United States District Court for the Southern District of Florida, on behalf of themselves and purchasers of the Company’s common stock pursuant to or traceable to the Company’s initial public offering in April 2002. These lawsuits also named as defendants certain of the Company’s directors and executive officers (collectively with the Company, the Defendants). The complaints allege that certain disclosures in the Registration Statement/Prospectus filed in connection with the Company’s initial public offering on April 17, 2002 were materially false and misleading in violation of the Securities Act of 1933 (the Securities Act). The complaints seek compensatory damages as well as costs and attorney fees.
On March 29, 2004, a third class action lawsuit brought on behalf of the same class of the Company’s stockholders, making claims under the Securities Act similar to those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants removed this case to the United States District Court for the Southern District of Florida and Plaintiff moved to remand the case back to the Florida Circuit Court of the Fifteenth Judicial Circuit, which motion Defendants opposed. On September 16, 2004 the federal district court entered an order granting Plaintiff’s motion to remand. On
11
January 6, 2005, the state court stayed the state court proceedings until further order of the court. The Zia complaint seeks rescission or damages as well as certain equitable relief and costs and attorney fees.
On March 2, 2004, another class action complaint was filed against the Company and certain of its directors and executive officers in the United States District Court for the Southern District of Florida by Jerome Gould, individually and on behalf of a class of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003. The complaint alleges that certain of the Company’s public disclosures during the class period were materially false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), and Rule 10b-5 promulgated thereunder. The complaint seeks compensatory damages, costs and attorney fees.
On July 2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated, although, as noted above, the Zia action was subsequently remanded to state court. Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed Lead Counsel for Plaintiffs. On September 1, 2004, Lead Plaintiff filed his consolidated amended class action complaint (the Complaint). The Complaint makes allegations on behalf of a class consisting of purchasers of the Company’s common stock pursuant to or traceable to the Company’s initial public offering in April 2002, for purposes of the Securities Act claims, and on behalf of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003, for purposes of the Exchange Act claims. The Complaint alleges that certain of the Company’s public disclosures during the class period were materially false and misleading in violation of Section 11 of the Securities Act and Section 10(b) of the Exchange Act. The Complaint seeks compensatory damages as well as costs and attorney fees. Defendants filed a motion to dismiss the Complaint, which on September 27, 2005, was granted in part as to those portions of the Plaintiff’s Section 10(b) and 20(a) claims concerning statements or omissions prior to October 29, 2002 and denied as to the remaining claims. The litigation is now proceeding as to those portions of the Complaint that were not dismissed.
The Company believes that these lawsuits are without merit and it intends to defend itself against them vigorously. Due to their preliminary status, the Company is unable to predict the outcome of these lawsuits or reasonably estimate a range of possible loss.
From time to time, the Company is subject to lawsuits and claims that arise out of its operations in the normal course of business. The Company is a plaintiff or a defendant in various litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. The Company believes that the disposition of any claims that arise out of operations in the normal course of business will not have a material adverse effect on the Company’s financial position or results of operations.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our condensed consolidated financial statements and accompanying notes 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, trends in our industry, 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 and nine months ended September 25, 2005 relative to the three and nine months ended September 26, 2004 presented in the accompanying condensed consolidated statements of operations.
• Liquidity and capital resources. This section provides an analysis of our cash flows, capital resources, off-balance sheet arrangements and our outstanding debt and commitments as of September 25, 2005.
• Critical accounting policies. This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application.
• Caution concerning forward-looking statements. This section discusses how certain forward-looking statements made by us throughout this discussion and analysis are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstance.
Overview
Business Description
We are a leading temporary 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.
13
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 substantially 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. During 2004, we expanded our services to provide temporary general staffing. Our general staffing assignments place individuals in a variety of areas including clerical, janitorial and food services. We believe that general staffing compliments our temporary healthcare staffing and makes us a full service provider to our existing clients.
Industry Trends
Service revenues and gross profit margins have been under pressure as demand for temporary nurses has been in a period of contraction. Due to the current difficult economic times, the unemployment rate, while slightly improved over the past year, remains high. We believe this has resulted in nurses in many households becoming a primary wage earner, which is causing such nurses to seek more traditional full-time employment, further adding to the already challenging task of recruitment. Additionally, hospitals are experiencing sluggish admissions trends and continue to place greater reliance on existing full-time staff, resulting in increased overtime and nurse-patient loads.
We cannot predict when conditions will reverse, but we are confident in the long-term growth of the industry. In a January 13, 2000 report, the U.S. Census Bureau, Population Projections Bureau, projected that the number of Americans over 65 years of age is expected to grow from 34.5 million in 2000 to 53.7 million in 2020. In a July 2002 report, the U.S. Department of Health and Human Services stated that the national supply of full-time equivalent registered nurses was approximately 1.9 million while demand was approximately 2.0 million. This gap between supply and demand for nurses is expected to grow from 0.1 million in 2000 to 0.8 million by 2020. Additionally, there is a growing trend to restrict mandatory healthcare worker overtime requirements by employers and to establish nurse-patient ratios. Several states have enacted legislation prohibiting mandatory overtime and other states have similar legislation pending. In conjunction with the aforementioned factors, as the economy rebounds, the prospects for the healthcare staffing industry should improve as hospitals experience higher census levels and increasing shortages of healthcare workers.
Acquisition
In the first nine months of 2005, we purchased certain assets of one healthcare staffing company for an aggregate purchase price of $1.0 million. The acquisition was accounted for as a purchase and, accordingly, the results of the acquired business were included in our condensed consolidated financial statements from the date we assumed control. In the first nine months of 2004, we made no acquisitions.
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Service Revenues
Our temporary staffing services represent 100% of our consolidated revenue for the three and nine months ended September 25, 2005 and September 26, 2004. Approximately 73% and 75% of our revenues for the nine months ended September 25, 2005 and September 26, 2004, was derived from per diem nurse staffing, respectively. Allied healthcare professional staffing, which includes various non-nursing specialties such as, radiology and diagnostic imaging specialists and clinical laboratory technicians, represented approximately 20% and 16% of our revenues for the nine months ended September 25, 2005 and September 26, 2004, respectively. Travel nurse staffing (assignments typically lasting thirteen weeks) represented approximately 6% and 9% of our revenues for the nine months ended September 25, 2005 and September 26, 2004, respectively. General staffing represented approximately 1% and less than 1% of our revenues for the nine months ended September 25, 2005 and September 26, 2004, respectively.
Recent Accounting Pronouncements
Stock-Based Compensation
In December 2004, FASB issued Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Statement 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Additionally, SFAS No. 123(R) amends the presentation of the statement of cash flows and requires additional annual disclosures. SFAS No. 123(R) is effective for public companies beginning with the first interim period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a new rule that postponed the effective date for SFAS No. 123(R) to the fiscal year beginning after June 15, 2005. We expect to adopt SFAS No. 123(R) on December 26, 2005, but have not yet determined if we will use the modified prospective method or one of the modified-retrospective methods. As permitted by SFAS No. 123, we currently account for share-based payments to employees using the intrinsic value method in accordance with the recognition and measurement principles of APB No. 25, and, as such, generally recognize no compensation cost for employee stock options, as options granted under our plans have an exercise price equal to or greater than the fair value of the underlying common stock on the date of grant. The impact of adoption of SFAS No. 123(R), which may be material, cannot be predicted at this time because it will depend on levels of share-based compensation granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, its impact would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and net income (loss) per share in Stock-Based Compensation Plans (see Note 3 to the condensed consolidated financial statements).
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Results of Operations
The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of service revenues:
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| Sept. 25, |
| Sept. 26, |
| Sept. 25, |
| Sept. 26, |
|
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
Service revenues |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of services rendered |
| 78.1 |
| 78.3 |
| 78.1 |
| 78.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| 21.9 |
| 21.7 |
| 21.9 |
| 21.3 |
|
Selling, general and administrative |
| 19.2 |
| 18.8 |
| 20.0 |
| 19.4 |
|
Depreciation and amortization |
| 1.2 |
| 1.5 |
| 1.3 |
| 1.5 |
|
Other |
| 0.5 |
| — |
| 0.2 |
| — |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
| 1.0 |
| 1.4 |
| 0.4 |
| 0.4 |
|
Interest expense, net |
| 0.6 |
| 0.7 |
| 0.7 |
| 0.9 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for (benefit from) income taxes |
| 0.4 |
| 0.7 |
| (0.3 | ) | (0.5 | ) |
Provision for (benefit from) income taxes |
| 0.1 |
| 0.4 |
| (0.1 | ) | (0.1 | ) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| 0.3 |
| 0.3 |
| (0.2 | ) | (0.4 | ) |
Comparison of Three Months Ended September 25, 2005 to Three Months Ended September 26, 2004
Service Revenues. Service revenues decreased $3.8 million, or 3.6%, to $102.4 million for the three months ended September 25, 2005 as compared to $106.2 million for the comparable prior year period. The decrease was due to a lower number of hours worked by healthcare professionals caused by unfilled open orders resulting from the current supply constrained environment, which was offset, in part, with an increase in general staffing revenue. Average hourly billing rates for healthcare staffing have remained relatively consistent with those in the comparable prior year period. The increase in general staffing revenue as a component of our product mix has caused a decrease in the overall average billing rate as general staffing billing rates are significantly lower.
Per diem nurse staffing revenues decreased $4.9 million, or 6.1%, to $74.3 million for the three months ended September 25, 2005 as compared to $79.2 million for the comparable prior year period. The decrease was primarily due to a decrease in the number of hours worked by healthcare professionals.
Revenues from other than per diem nurse staffing collectively increased $1.1 million, or 4.0%, to $28.1 million for the three months ended September 25, 2005 as compared to $27.0 million for the comparable prior year period. The increase was primarily due to an increase in revenues from general staffing which we began to provide to our clients in the third quarter of 2004.
Cost of Services Rendered. Cost of services rendered decreased $3.3 million, or 3.9%, to $79.9 million for the three months ended September 25, 2005 as compared to $83.2 million for the comparable prior year period. The decrease was primarily due to a lower number of hours worked coupled with a reduction in the average overall pay rate as general staffing became a larger component of our product mix and pay rates for general staffing are significantly lower.
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Gross Profit. Gross profit decreased $0.5 million, or 2.5%, to $22.5 million for the three months ended September 25, 2005 as compared to $23.0 million for the comparable prior year period. The decrease was primarily due to a reduction in service revenues. Gross margin for the three months ended September 25, 2005 was 21.9% which was consistent with 21.7% for the comparable prior year period.
Selling, General and Administrative. Selling, general and administrative expenses decreased to $19.7 million, or 19.2% of revenues for the three months ended September 25, 2005, as compared to $19.9 million, or 18.8% of revenues for the comparable prior year period. The decrease was primarily due to expense reduction measures.
Depreciation and Amortization. Depreciation and amortization for the three months ended September 25, 2005 was $1.2 million, as compared to $1.6 million for the comparable prior year period. The decrease is due to more assets becoming fully depreciated.
Other. Other represents legal and professional fees and other expenses associated with due diligence performed related to a potential acquisition that was ultimately not completed.
Interest Expense, Net. Interest expense, net, decreased to $0.7 million for the three months ended September 25, 2005, as compared to $0.8 million for the comparable prior year quarter. The decrease was primarily due to lower average outstanding borrowings.
Provision for Income Taxes. Our effective income tax rate for the three months ended September 25, 2005 was 40.5% as compared to an effective income tax benefit rate of 58.7% in the comparable prior year period. The 40.5% tax rate for the three months ended September 25, 2005, represents the quarterly tax rate required to arrive at our expected blended state and federal tax rate for the entire year of 44.0%. The decrease in the effective tax rate is due to nondeductible items having a smaller percentage impact on the rate than on the actual tax dollar amount.
Net Income. As a result of the above, net income was $0.2 million for the three months ended September 25, 2005 as compared to $0.3 million for the comparable prior year period.
Comparison of Nine Months Ended September 25, 2005 to Nine Months Ended September 26, 2004
Service Revenues. Service revenues decreased $13.7 million, or 4.3%, to $304.9 million for the nine months ended September 25, 2005 as compared to $318.6 million for the comparable prior year period. The decrease was due to a lower number of hours worked by professionals caused by unfilled open orders resulting from the current supply constrained environment. Average hourly billing rates remained relatively consistent with those in the comparable prior year period.
Per diem nurse staffing revenues decreased $15.5 million, or 6.5%, to $222.5 million for the nine months ended September 25, 2005 as compared to $238.0 million for the comparable prior year period. The decrease was primarily due to a decrease in the number of hours worked by professionals.
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Revenues from other than per diem nurse staffing collectively increased $1.8 million, or 2.2%, to $82.3 million for the nine months ended September 25, 2005 as compared to $80.6 million for the comparable prior year period. The increase was the result of revenues from the acquisition we made during the second quarter of 2005 and revenues from general staffing which we began to provide to our clients during the third quarter of 2004, partially offset by a lower number of hours worked by professionals.
Cost of Services Rendered. Cost of services rendered decreased $12.6 million, or 5.0%, to $238.1 million for the nine months ended September 25, 2005 as compared to $250.7 million for the comparable prior year period. The decrease was primarily due to a lower number of hours worked by professionals, partially offset by improved self insurance claims experience.
Gross Profit. Gross profit decreased $1.2 million, or 1.7%, to $66.7 million for the nine months ended September 25, 2005 as compared to $67.9 million for the comparable prior year period. The decrease was primarily due to the reduction in service revenues, partially offset by an increase in gross margin. Gross margin for the nine months ended September 25, 2005 was 21.9% as compared with 21.3% for the comparable prior year period. The increase was primarily due to improved self insurance claims experience.
Selling, General and Administrative. Selling, general and administrative expenses decreased to $60.9 million, or 20.0% of revenues for the nine months ended September 25, 2005, as compared to $61.8 million, or 19.4% of revenues for the comparable prior year period. The decrease was primarily due to a $0.7 million charge associated with executive severance and search costs recorded in the second quarter of 2004 and other expense reduction measures.
Depreciation and Amortization. Depreciation and amortization for the nine months ended September 25, 2005 was $4.1 million, as compared to $4.9 million for the comparable prior year period. The decrease is due to more assets becoming fully depreciated.
Other. Other represents legal and professional fees and other expenses associated with due diligence performed related to a potential acquisition that was ultimately not completed.
Interest Expense, Net. Interest expense, net, decreased to $2.1 million for the nine months ended September 25, 2005, as compared to $2.8 million for the comparable prior year quarter. The decrease was primarily due to lower average outstanding borrowings.
Benefit from Income Taxes. Our effective income tax benefit rate for the nine months ended September 25, 2005 was 44.0% as compared to 22.1% in the comparable prior year period. The increase in the effective tax benefit rate is due to nondeductible items having a larger percentage impact on the rate than on the actual tax dollar amount.
Net Loss. As a result of the above, net loss decreased to $0.5 million for the nine months ended September 25, 2005 as compared to net loss of $1.2 million for the comparable prior year period.
18
Seasonality
Due to the regional and seasonal fluctuations in the hospital patient census of our hospital and healthcare facility clients and due to the seasonal preferences for destinations by our temporary healthcare professionals, the number of healthcare professionals on assignment, revenue and earnings are subject to moderate seasonal fluctuations. Many of our hospital and healthcare facility clients are located in areas, 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. This trend may or may not continue in the future. As a result of all of these factors, results of any one quarter are not necessarily indicative of the results to be expected for any other quarter or for any year.
Liquidity and Capital Resources
Discussion on Liquidity and Capital Resources
Our historical capital resource requirements have been the funding of working capital, debt service, capital expenditures and acquisitions. We have historically funded these requirements from a combination of cash flow from operations, equity issuances and borrowings under our credit facilities.
Cash flow from operations was $10.0 million for the nine months ended September 25, 2005 as compared to $24.9 million for the nine months ended September 26, 2004. The decrease in cash flow from operations was primarily due to a smaller decrease in accounts receivable and a smaller increase in accounts payable and accrued expenses as compared to the comparable period in 2004. During the nine months ended September 25, 2005, we used cash generated from operations to repay $6.4 million of borrowings under our senior credit facility and capital lease obligations, $2.6 million to fund capital expenditures and $1.0 million to fund an acquisition.
As of September 25, 2005, we had net working capital of $43.7 million as compared to $49.9 million as of December 26, 2004.
Available borrowings under our senior credit facility is an important component of our liquidity. On December 22, 2003, we entered into a new senior credit facility (the Senior Credit Facility) which replaced the previous facility. The Senior Credit Facility provided a $65.0 million revolving credit facility (the Revolver) which expires in December 2006 and a $17.0 million term loan (the Term Loan) which was originally due in December 2005.
On June 25, 2004, we amended the Senior Credit Facility to reduce the Revolver capacity from $65.0 million to $60.0 million. The amendment also favorably modified certain financial covenants while increasing the applicable margin on the Revolver by 0.5% and on the Term Loan by 1.0%. In conjunction with the amendment, on July 1, 2004, we repaid $5.0 million of borrowings under the Term Loan. The $5.0 million can not be re-borrowed under the terms of the Term Loan. The impact of repaying the higher average interest rate borrowings under the
19
Term Loan, offset partially by the marginally higher interest rates, will reduce the overall cost of capital under the Senior Credit Facility going forward.
On February 24, 2005, we amended the terms of the Senior Credit Facility whereby the Term Loan was reduced to $6.0 million, the applicable margin for the Term Loan was reduced, the maturity of the Term Loan was extended to December 2006 and certain financial covenants were favorably amended. The $6.0 million Term Loan repayment was funded with borrowings under the Revolver.
On September 24, 2005, we amended the terms of the Senior Credit Facility whereby certain financial covenants were favorably amended.
The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and an availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver. The Revolver bears interest at either prime rate or LIBOR plus an applicable margin (6.4% at September 25, 2005) with interest payable monthly or as interest rate contracts expire. The Term Loan bears interest at LIBOR plus an applicable margin (8.5% at September 26, 2005) with interest payable as interest rate contracts expire. Unused capacity under the Revolver bears interest at 0.5% and is payable monthly. The Senior Credit Facility is secured by substantially all of our assets and contains certain covenants that, among other things, limit the payment of dividends, restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. As of September 25, 2005, we were in compliance with all covenants.
As the borrower under the Senior Credit Facility, our subsidiary, Medical Staffing Network, Inc., may only pay dividends or make other distributions to us in the amount of $500,000 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.
For the nine months ended September 25, 2005, the weighted average interest rate for the loans under the Senior Credit Facility was 6.6%. As of September 25, 2005, the blended rate for loans outstanding under the Senior Credit Facility was 6.9%.
As of September 25, 2005, $6.0 million was outstanding on the Term Loan and $19.6 million was outstanding under the Revolver. As of September 25, 2005, an additional $21.0 million was immediately available for borrowing under the Revolver and we had cash and cash equivalents of $0.3 million.
Capital expenditures were $2.6 million for the nine months ended September 25, 2005 and $2.0 million for the comparable prior year period. The expenditures primarily relate to the upgrade or replacement of various computer systems including hardware, and purchased and internally developed software. We expect a similar rate and type of capital expenditures on a going forward basis.
During the nine months ended September 25, 2005, we used $1.0 million of cash to fund an acquisition. The Company will continue to pursue acquisitions as part of its overall growth
20
strategy. Future acquisitions would likely be funded through available borrowings and other available sources of capital.
Because we rely on cash flow from operations as a source of liquidity, we are subject to the risk that a decrease in the demand for our staffing services could have an adverse impact on our liquidity. Decreased demand for our staffing services could result from an inability to attract qualified healthcare professionals, fluctuations in patient occupancy at our hospital and healthcare facility clients and changes in state and federal regulations relating to our business.
We believe that our current cash balances, together with borrowing capacity under the Senior Credit Facility and other available sources of liquidity, 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.
Contractual Obligations
The following table reflects our significant contractual obligations and other commitments as of December 26, 2004 (in thousands):
|
| Payments due by period |
| |||||||||||||
|
|
|
| Less than |
| 2-3 |
| 4-5 |
| After |
| |||||
|
| Total |
| 1 year |
| years |
| years |
| 5 years |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt obligations |
| $ | 31,760 |
| $ | — |
| $ | 31,760 |
| $ | — |
| $ | — |
|
Operating leases |
| 17,377 |
| 4,753 |
| 5,432 |
| 2,591 |
| 4,601 |
| |||||
Capital lease obligations |
| 418 |
| 385 |
| 33 |
| — |
| — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 49,555 |
| $ | 5,138 |
| $ | 37,225 |
| $ | 2,591 |
| $ | 4,601 |
|
Long-term debt obligations have decreased to $25.6 million as of September 26, 2005 since we repaid $6.1 million during the first nine months of 2005. Other than the operating lease we entered into in Warrenville, Illinois, no material changes have occurred with regards to operating leases and capital lease obligations since December 26, 2004.
Critical Accounting Policies
In response to the Security and Exchange Commission (SEC) Release Number 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and SEC Release Number 33-8056, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have identified the following critical
21
accounting policies that affect the more significant judgments and estimates used in the preparation of the 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 26, 2004.
We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
• We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. The adequacy of this allowance is determined by continually evaluating customer receivables, considering the customers’ financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.
• We have recorded goodwill and other intangibles resulting from our acquisitions. Through December 30, 2001, goodwill and other intangibles were amortized on a straight-line basis over their lives of 6 to 20 years. Pursuant to the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, 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. We are currently evaluating our determination of operating segments, which could change the reporting unit level at which we test for goodwill impairment. Any change in the reporting unit level would occur in the future when we complete the evaluation and could result in a noncash impairment charge to earnings, based on the results of the testing performed. If we are required to record an impairment charge in the future, it would have an adverse impact on results of operations.
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• We maintain an accrual for our health, workers compensation and professional liability that are either self-insured or partially self-insured and are classified in accounts payable and accrued expenses. The adequacy of these accruals is 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 the methodologies and reduce or provide for additional accruals as appropriate.
• We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include professional liability and employee-related matters. Hospital and healthcare facility clients may also become subject to claims, governmental inquiries and investigations and legal actions to which we may become a party relating to services provided by our professionals. From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with hospital and healthcare facility clients relating to these matters. Although we are currently not aware of any such pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on our financial condition or results of operations, if we become aware of such claims against us, we will evaluate the probability of an adverse outcome and provide accruals for such contingencies as necessary.
Caution Concerning Forward-Looking Statements
The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. 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, operating income 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 increase revenues or market share;
• Our ability to continue to generate significant amounts of cash flow from operations;
• Our ability to further reduce operating expenses;
• Our ability to sustain the improved self insurance claims experience;
• Our ability to attract and retain qualified nurses and other healthcare personnel;
• The overall level of demand for services provided by temporary nurses;
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• Our ability to enter into contracts with hospital and healthcare facility clients on terms attractive to us;
• The willingness of hospital and healthcare facility clients to utilize temporary healthcare staffing services;
• The general level of patient occupancy at hospital and healthcare facility clients;
• 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;
• Our ability to successfully implement our acquisition and integration strategies;
• The effect of liabilities and other claims asserted against us;
• The effect of competition in the markets we serve; and
• Our ability to carry out our business strategy.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed herein might not occur.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk arises principally from the variable rates associated with our senior credit facility. On September 25, 2005, we had borrowings of $25.6 million under our credit facility that were subject to variable rates, with a blended rate of 6.9%. As of September 25, 2005, an adverse change of 1.0% in the interest rate of all such borrowings outstanding would have caused us to incur an increase in interest expense of approximately $0.3 million on an annualized basis.
&n bsp;
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
We carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board of Directors and Chief Executive Officer, Robert J. Adamson, and Chief Financial Officer, N. Larry McPherson, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report on Form 10-Q, were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange C ommission’s rules and forms.
There were no changes in our internal control over financial reporting or in other factors that occurred during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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On February 20, 2004, Joseph and Patricia Marrari, and on April 16, 2004, Tommie Williams, filed class action lawsuits against Medical Staffing Network in the United States District Court for the Southern District of Florida, on behalf of themselves and purchasers of our common stock pursuant to or traceable to our initial public offering in April 2002. These lawsuits also named as defendants certain of our directors and executive officers (collectively with Medical Staffing Network, the Defendants). The complaints allege that certain disclosures in the Registration Statement/Prospectus filed in connection with our initial public offering on April 17, 2002 were materially false and misleading in violation of the Securities Act of 1933 (the Securities Act). The complaints seek compensatory damages as well as costs and attorney fees.
On March 29, 2004, a third class action lawsuit brought on behalf of the same class of our stockholders, making claims under the Securities Act similar to those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants removed this case to the United States District Court for the Southern District of Florida and Plaintiff moved to remand the case back to the Florida Circuit Court of the Fifteenth Judicial Circuit, which motion Defendants opposed. On September 16, 2004 the federal district court entered an order granting Plaintiff’s motion to remand. On January 6, 2005, the state court stayed the state court proceedings until further order of the court. The Zia complaint seeks rescission or damages as well as certain equitable relief and costs and attorney fees.
On March 2, 2004, another class action complaint was filed against Medical Staffing Network and certain of our directors and executive officers in the United States District Court for the Southern District of Florida by Jerome Gould, individually and on behalf of a class of Medical Staffing Network’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003. The complaint alleges that certain of our public disclosures during the class period were materially false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), and Rule 10b-5 promulgated thereunder. The complaint seeks compensatory damages, costs and attorney fees.
On July 2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated, although, as noted above, the Zia action was subsequently remanded to state court. Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed Lead Counsel for Plaintiffs. On September 1, 2004, Lead Plaintiff filed his consolidated amended class action complaint (the Complaint). The Complaint makes allegations on behalf of a class consisting of purchasers of our common stock pursuant to or traceable to our initial public offering in April 2002, for purposes of the Securities Act claims, and on behalf of Medical Staffing Network’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003, for purposes of the Exchange Act claims. The Complaint alleges that certain of our public disclosures during
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the class period were materially false and misleading in violation of Section 11 of the Securities Act and Section 10(b) of the Exchange Act. The Complaint seeks compensatory damages as well as costs and attorney fees. Defendants filed a motion to dismiss the Complaint, which on September 27, 2005, was granted in part as to those portions of the Plaintiff’s Section 10(b) and 20(a) claims concerning statements or omissions prior to October 29, 2002 and denied as to the remaining claims. The litigation is now proceeding as to those portions of the Complaint that were not dismissed.
We believe that these lawsuits are without merit and we intend to defend ourselves against them vigorously. Due to their preliminary status, we are unable to predict the outcome of these lawsuits or reasonably estimate a range of possible loss.
From time to time, we are subject to lawsuits and claims that arise out of our operations in the normal course of business. We are plaintiffs or defendants in various litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. We believe that the disposition of any claims that arise out of operations in the normal course of business will not have a material adverse effect on our financial position or results of operations.
The following exhibits are included herewith:
10.1 Blanket Purchase Agreement, dated as of September 6, 2005, between Medical Staffing Network Holdings, Inc. and the United States Department of Health and Human Services.
31.1 Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of N. Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of N. Larry McPherson, 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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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MEDICAL STAFFING NETWORK | ||
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| ||
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Dated: November 4, 2005 | By: | /s/ Robert J. Adamson |
|
| Robert J. Adamson | ||
| Chairman of the Board of Directors and | ||
| Chief Executive Officer | ||
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| ||
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| ||
Dated: November 4, 2005 | By: | /s/ N. Larry McPherson |
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| N. Larry McPherson | ||
| Chief Financial Officer | ||
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EXHIBIT INDEX
Exhibit No. |
| Description |
|
|
|
10.1 |
| Blanket Purchase Agreement, dated as of September 6, 2005, between Medical Staffing Network Holdings, Inc. and the United States Department of Health and Human Services. |
|
|
|
31.1 |
| Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
| Certification of N. Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
| Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
| Certification of N. Larry McPherson, 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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