SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-31299
MEDICAL STAFFING NETWORK HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0865171
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
901 Yamato Road
Suite 110
Boca Raton, Florida 33431
(Address of principal executive offices)
(Zip Code)
(561) 226-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ ] No [X]
The number of shares of shares outstanding of each class of the issuer's common
stock, as of May 30, 2002:
30,086,567 shares Common Stock, par value $0.01 par value
MEDICAL STAFFING NETWORK HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - March 31, 2002
(Unaudited) and December 30, 2001....................................3
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2002 (Unaudited) and April 1,
2001 (Unaudited).....................................................4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2002 (Unaudited) and April 1,
2001 (Unaudited).....................................................5
Notes to Condensed Consolidated Financial Statements -
March 31, 2002 (Unaudited)...........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.....................................................19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS......................................................21
SIGNATURE PAGE............................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, March 31,
2001 2002
------------------------------------
(Unaudited)
Assets
Current assets:
Cash $ 11,253,199 $ 492,353
Accounts receivable, net of allowance for doubtful accounts of $2,181,767
and $2,480,005 at December 30, 2001 and March 31, 2002, respectively 65,190,898 72,131,571
Prepaid expenses 5,032,378 3,784,960
Other current assets 1,014,641 1,130,348
------------------------------------
Total current assets 82,491,116 77,539,232
Furniture and equipment, net 7,315,574 8,509,182
Goodwill and other intangible assets, net of accumulated amortization of
$8,723,481 and $8,781,885 at December 30, 2001 and March 31, 2002, 68,289,316 68,230,912
respectively
Interest rate swap - 185,371
Other assets 3,923,288 3,932,862
------------------------------------
Total assets $162,019,294 $158,397,559
====================================
Liabilities, redeemable preferred stock and stockholders' deficit Current
liabilities:
Accounts payable $ 5,271,571 $ 2,222,998
Accrued payroll and related liabilities 8,948,662 10,123,228
Other current liabilities 3,186,974 1,879,601
Current portion of long-term debt 10,034,721 17,236
Current portion of capital lease obligations 329,922 738,283
------------------------------------
Total current liabilities 27,771,850 14,981,346
Long-term debt, net of current portion 105,000,000 108,000,000
Senior subordinated debt to related parties 59,319,327 59,319,327
Capital lease obligations, net of current portion 661,096 1,407,075
Other liabilities 2,371,960 4,815,229
------------------------------------
Total liabilities 195,124,233 188,522,977
Commitments and contingencies
Redeemable preferred stock 124,616,794 127,074,988
Common stockholders' equity:
Common stock, $.01 par value, 75,000,000 authorized, 26,547 issued and
outstanding 265 265
Additional paid-in-capital - -
Promissory notes due for purchases of common stock (4,550,877) (4,550,877)
Accumulated other comprehensive income - 182,071
Accumulated deficit (153,171,121) (152,831,865)
------------------------------------
Total common stockholders' deficit (157,721,733) (157,200,406)
------------------------------------
Total liabilities, redeemable preferred stock, and common stockholders' deficit $162,019,294 $158,397,559
====================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended
April 1, March 31,
2001 2002
------------------------------------
Service revenues $70,478,790 $103,228,153
Cost of services rendered 52,510,016 76,883,096
------------------------------------
Gross profit 17,968,774 26,345,057
Operating expenses:
Selling, general and administrative 9,012,471 14,503,008
Provision for doubtful accounts 291,490 540,720
Corporate general and administrative 1,392,516 1,665,966
Depreciation 423,761 794,405
Amortization 843,787 58,404
------------------------------------
Income from operations 6,004,749 8,782,554
Interest expense, net 2,909,362 4,039,606
------------------------------------
Income before provision for income taxes 3,095,387 4,742,948
Provision for income taxes 1,238,155 1,945,500
------------------------------------
Net income 1,857,232 2,797,448
Deduct required dividends on convertible preferred stock - 2,458,194
------------------------------------
Income available to common stockholders $ 1,857,232 $ 339,254
====================================
Earnings per share:
Basic earnings per share $ 0.24 $ 12.78
====================================
Diluted earnings per share $ 0.07 $ 0.13
====================================
Weighted average number of common shares outstanding
Basic 7,731,614 26,547
Diluted 28,110,241 21,969,582
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended
April 1, March 31,
2001 2002
--------------------------------
Operating activities
Net income $ 1,857,232 $ 2,797,448
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,267,548 852,809
Accretion of put warrants 800,000 -
Amortization of debt issuance cost 228,197 192,542
Deferred income taxes 55,876 498,465
Provision for doubtful accounts 291,490 540,720
Loss on derivative instrument - 9,677
Changes in operating assets and liabilities:
Accounts receivable (7,659,121) (7,481,393)
Prepaid expenses and other current assets 688,519 616,580
Other assets (32,924) (185,448)
Accounts payable (41,272) (3,048,573)
Accrued payroll and related liabilities 539,035 1,174,566
Other current liabilities 599,665 (1,307,373)
Other liabilities (9,858) 2,430,292
--------------------------------
Net cash used in operating activities (1,415,613) (2,909,688)
Investing activities
Purchases of furniture and equipment, net (379,920) (257,004)
Capitalized internal software costs (236,423) (437,112)
--------------------------------
Net cash used in investing activities (616,343) (694,116)
Financing activities
Principal payments under capital lease obligations (36,216) (139,558)
Net borrowings (payments) on revolving credit agreements 3,304,863 (7,000,000)
Principal payments on outstanding debt (1,011,650) (17,484)
--------------------------------
Net cash used in financing activities 2,256,997 (7,157,042)
--------------------------------
Net decrease in cash 225,041 (10,760,846)
Cash at beginning of period 204,915 11,253,199
--------------------------------
Cash at end of period $ 429,956 $ 492,353
================================
Supplemental disclosure of noncash investing and
financing activities
Purchases of equipment through capital leases $ 22,568 $ 1,293,898
================================
Supplemental disclosures of cash flow information
Interest paid $ 1,993,801 $ 2,584,002
================================
Income taxes paid $ 220,748 $ 70,100
================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medical Staffing Network Holdings, Inc. (or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 29, 2002.
The balance sheet at December 30, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-1
(File No. 333-82438).
Certain reclassifications have been made to the prior year amounts to conform to
the current year.
2 - RECAPITALIZATION OF THE COMPANY
On October 26, 2001, as contemplated by (i) an Agreement dated as of August 20,
2001, as amended on October 26, 2001 (the "Recapitalization Agreement"), by and
among Warburg Pincus Private Equity Fund VIII, L.P., a Delaware limited
partnership ("Warburg Pincus"), MSN Acquisition Corp., a wholly owned subsidiary
of Warburg Pincus, and the Company; and (ii) an Voting, Sale and Retention
Agreement, dated as of August 20, 2002 as amended October 26, 2001 (the
"Stockholders Agreement"), by and among Warburg Pincus, the Company and MSN
Acquisition Corp., a recapitalization of the Company was completed.
Pursuant to the terms of the Recapitalization Agreement, holders of the
Company's common and convertible preferred stock became entitled to receive
$6.06 per share. Certain of the stockholders, including executive officers,
elected to retain certain of their shares of common stock rather than to receive
the cash consideration for a portion of their shares. These retained shares were
then exchanged for the same securities that the Warburg Pincus-led investment
group (the "Investor Group") received.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
2 - RECAPITALIZATION OF THE COMPANY (continued)
Upon completion of the recapitalization, the Investor Group was issued
redeemable preferred stock, common stock and senior unsecured promissory notes,
together representing approximately 85% of the equity ownership in exchange for
cash consideration totaling approximately $157.0 million. In addition, a banking
syndicate extended a senior credit facility to the Company in the amount of
$120.0 million, of which $105.0 million was advanced to the Company at closing.
Together, these funds were used to pay the merger consideration to the former
stockholders, to retire approximately $82.0 million of the then outstanding debt
obligations, to pay transaction fees and expenses of approximately $7.0 million
and to provide the Company with working capital for operations.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company and, accordingly, the Company has retained its
historical cost basis of accounting. The shares repurchased by the Company have
been canceled.
The Company incurred approximately $3.7 million in debt issuance costs related
to these transactions. These costs have been capitalized as long-term assets and
are being amortized over the terms of the indebtedness.
3 - REDEEMABLE PREFERRED STOCK
During the first quarter of 2002, the Company had authorized 15,000,000 shares
of preferred stock, par value $.01, of which 7,000,000 shares had been
designated as Series I Convertible Preferred Stock. The Series I Convertible
Preferred Stock had a stated value of $18.60 and 6,602,865 shares were issued in
connection with the recapitalization. The holders of the Series I Convertible
Preferred Stock were entitled to receive dividends at a rate of 8% per annum of
the stated value compounded quarterly, which were cumulative and accrued whether
or not declared by the Board of Directors and were payable when and as declared
by the Board of Directors pursuant to certain restrictions as defined by the
Company's credit agreement. The Series I Convertible Preferred Stock could be
converted at any time, at the option of the holder on a one-for-one basis by the
holder upon written notice into fully paid and nonassessable shares of the
Company's common stock at an initial conversion price of $6.06, which is subject
to adjustment pursuant to anti-dilution provisions. Upon completion of a
Qualified Public Offering (as defined), each share of Series I Convertible
Preferred Stock was to be automatically converted into common stock at its then
effective conversion price. At any time after October 26, 2009, or upon
consummation of a Change in Control (as defined), the holders of the Series I
Convertible Preferred Stock could require the Company to redeem any or all of
the outstanding shares of the
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
3 - REDEEMABLE PREFERRED STOCK (continued)
Series I Convertible Preferred Stock at price in cash equal to the stated value
per share plus any accrued but unpaid dividends. As discussed in Note 9, the
outstanding shares of Series I Convertible Preferred Stock were converted into
21,075,645 shares of common stock in connection with the Company's initial
public offering on April 23, 2002.
The Company had a sufficient number of shares of common stock reserved for
issuance upon conversion of the Series I Convertible Preferred Stock. Cumulative
unpaid dividends were approximately $4.3 million at April 1, 2001. The aggregate
liquidation value of the Series I Convertible Preferred Stock at March 31, 2002
was $127,074,988.
4 - EARNINGS PER SHARE
Three months ended
-----------------------------------
April 1, March 31,
2001 2002
-----------------------------------
Numerator:
Net income before preferred stock dividend $ 1,857,232 $ 2,797,448
Less preferred stock dividends - 2,458,194
-----------------------------------
Numerator for basic earnings per share available to common
stockholders
$ 1,857,232 $ 339,254
===================================
Effective of dilutive securities:
Add back preferred stock dividend - 2,458,194
-----------------------------------
Numerator for dilutive earnings per share available to common
stockholders $ 1,857,232 $ 2,797,448
===================================
Denominator:
Denominator for basic earnings per share-weighted-average
shares
7,731,614 26,547
Effect of dilutive shares:
Restricted common shares 1,096,492 -
Employee stock options 179,091 1,175,926
Warrants 2,123,820 -
Convertible preferred stock 16,979,224 20,767,109
-----------------------------------
Dilutive potential common shares 20,378,626 21,943,035
-----------------------------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 28,110,241 21,969,582
===================================
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
4 - EARNINGS PER SHARE (continued)
Three months ended
-----------------------------------
April 1, March 31,
2001 2002
-----------------------------------
Basic earnings per share $ 0.24 $ 12.78
===================================
Diluted earnings per share $ 0.07 $ 0.13
===================================
5 - COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, COMPREHENSIVE
INCOME, requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. There are no other components of comprehensive income other than the
Company's consolidated net income and the accumulated derivative gain during the
three months ended April 1, 2001. The following table sets forth the computation
of comprehensive income for the periods indicated:
Three months ended
-----------------------------------
April 1, March 31,
2001 2002
-----------------------------------
Net income $1,857,232 $2,797,448
Other comprehensive income:
Unrealized gain on derivative - 182,071
-----------------------------------
Total comprehensive income $1,857,232 $2,979,519
===================================
6 - INTEREST RATE SWAP
The Company's senior credit facility requires that the Company maintain an
interest rate protection agreement to manage the impact of interest rate changes
on a portion of the Company's variable rate obligations. Effective December 24,
2001, the Company entered into an interest rate swap agreement (the Swap
Agreement) with a financial institution. The Swap Agreement involves the receipt
of floating interest rate payments based on the U.S. dollar London Interbank
Offered Rate, which is reset quarterly, and of fixed interest rate payments of
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
6 - INTEREST RATE SWAP (continued)
4.34% over the life of the Swap Agreement without an exchange of the underlying
notional amount, which is set at $50,000,000. In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, the Company has
recorded the fair value of this instrument as an asset of $185,371 separately
stated on the condensed consolidated balance sheets. Additionally, consolidated
shareholder's deficit has been reduced for the three months ended March 31, 2002
by $182,071 as a result of this interest rate swap, representing the unrealized
gain.
7 - LONG TERM DEBT
On October 26, 2001, in connection with the recapitalization discussed in Note
3, the Company entered into a $120.0 million senior credit facility. The senior
credit facility consists of (i) senior credit notes (Term A) in the amount of
$40.0 million due in October 2006 bearing interest at a variable rate based on
the Company's leverage ratio (as defined), with interest payable at least
quarterly and principal payable quarterly commencing on March 31, 2003; (ii)
senior credit notes (Term B) in the amount of $60.0 million due in October 2007
bearing interest at a variable rate based on the Company's leverage ratio (as
defined), with interest payable at least quarterly and principal payable
quarterly commencing on March 31, 2003; and (iii) up to $20.0 million of
revolving loans expiring on October 2006, bearing interest at a variable rate
payable at least quarterly.
The senior credit facility is secured by substantially all of the assets of the
Company and contains certain covenants that, among other things, limit the
payment of dividends and restrict additional indebtedness and obligations, and
require maintenance of certain financial ratios.
Also, in connection with the recapitalization, the Company issued Senior
Unsecured Promissory Notes ("Senior Unsecured Notes") to the Investor Group and
the previous stockholders (including officers) in the amount of approximating
$59.3 million. The Senior Unsecured Notes bore interest at 12% per annum
compounding quarterly, with principal and interest due on October 2009. The
holders of the Senior Unsecured Notes had the right to require the Company to
redeem the notes upon the consummation of (i) an underwritten public offering or
(ii) a Change of Control (as defined).
In connection with the Company's initial public offering completed April 23,
2002 and more fully described in Note 7, the Senior Unsecured Promissory Notes
were redeemed in full in the amount of $62.9 million and the senior credit
facility was repaid in the amount of $93.0 million.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under
the new rules, goodwill and other intangibles determined to have an infinite
life are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an infinite life will continue to
be amortized over their useful lives. The amortization provisions of SFAS No.
142 apply to goodwill and intangible assets acquired after June 30, 2001.
The Company adopted SFAS No. 142 as of December 31, 2001 and, accordingly, no
longer amortizes goodwill. The Company completed the transitional impairment
test of goodwill and intangible assets with an indefinite life during the first
quarter of 2002. Based on the results of this test, the Company determined that
there was no impairment of goodwill or intangible assets with an indefinite life
as of March 31, 2002. The adoption of SFAS No. 142 reduced amortization expense
by approximately $944,000 for the quarter ended March 31, 2002.
The following pro forma information presents the consolidated results of
operations of the Company as if the adoption of SFAS No. 142 had occurred on
January 1, 2001:
Three months ended
April 1, 2001
----------------------
Net income $ 2,405,694
Basic net income per share $ 0.31
Diluted net income per share $ 0.09
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The Company adopted SFAS No. 144
on December 31, 2001. The adoption did not affect the Company's financial
position or results of operations for the periods presented.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
MARCH 31, 2002
(UNAUDITED)
8 - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In February 2002, the Emerging Issues Task Force issued Topic Number D-103,
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred, which is effective for financial statements
beginning after December 31, 2001. Topic Number D-103 requires that
reimbursements received for out-of-pocket expenses incurred, generally, be
characterized as revenue in the statement of income. The Company has
historically recorded reimbursements for out-of-pocket expenses as net amounts
in cost of services rendered in the statement of income. The Company has adopted
Topic Number D-103 in its quarter ended March 31, 2002, and accordingly, has
classified all reimbursements received for out-of-pocket expenses incurred as
revenues for the quarter ended March 31, 2002. The adoption of Topic Number
D-103 did not affect the Company's net income, financial position or cash flows
for the periods presented. For the quarter ended April 1, 2001, the
reimbursement received for out-of-pocket expenses incurred were not material to
service revenues or cost of services rendered.
9 - SUBSEQUENT EVENT
On April 12, 2002, the Company approved an amendment to its Certificate of
Incorporation increasing the Company's authorized shares of common stock to
75,000,000 shares and a stock split in the form of a stock dividend of 3.069375
for 1, each of which took effect immediately prior to the closing of the
Company's initial public offering. The financial statements have been restated
to give retroactive recognition to the stock split in the prior periods,
including all references in the consolidated financial statements to number of
shares and per share amounts.
On April 23, 2002, the Company completed its initial public offering of
7,812,500 shares of common stock at $19.00 per share. Additionally, the
underwriters exercised the over-allotment option of 1,171,875 shares, bringing
the total number of shares issued to 8,984,375. Total proceeds received by the
Company, net of estimated expenses related to the initial public offering were
$155.0 million. The proceeds were used to repay $62.9 million of its outstanding
balance under the senior unsecured notes, and $93.0 million of the Company's
outstanding loans under the senior credit facility. Immediately prior to the
completion of the initial public offering, the outstanding shares of Series I
Preferred Stock were converted into 21,075,645 shares of common stock.
On May 9, 2002, the Company exercised its option to terminate the Swap Agreement
more fully described in Note 6. The cost of terminating the Swap Agreement was
approximately $460,000.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere herein. This
discussion and analysis contains statements that are forward-looking in nature.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," and similar expressions are
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results and
performance to be materially different from any future results or performance
expressed or implied by these forward-looking statements. These factors include
the following: our ability to attract and retain qualified nurses and other
healthcare personnel, the Company's ability to enter into contracts with
healthcare facility clients on terms attractive to the Company, the functioning
of our information systems, the effect of existing or future government
regulation and federal and state legislative and enforcement initiatives on our
business, our clients' ability to pay us for our services, the effect of
liabilities and other claims asserted against us, the effect of competition in
the markets we serve, the Company's ability to carry out its business strategy.
Although we believe that these statements are based upon reasonable assumptions,
we cannot guarantee future results. Given these uncertainties, the
forward-looking statements discussed herein might not occur.
The Company's condensed consolidated financial statements present a
consolidation of all its operations. This discussion supplements the detailed
information presented in the condensed consolidated financial statements and
notes thereto (which should be read in conjunction with the financial statements
and related notes contained in the Company's Registration Statement on Form S-1,
File No. 333-82438), and is intended to assist the reader in understanding the
financial results and condition of the Company.
The following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of total revenues:
Three months ended
----------------------------
April 1, March 31,
2001 2002
----------------------------
Service revenues 100% 100%
Cost of services revenues 74.5 74.5
Gross profit 25.5 25.5
Selling, general and administrative expenses(1) 13.2 14.6
Corporate and administrative expenses 2.0 1.6
EBITDA (2) 10.3 9.3
Depreciation and amortization expenses 1.8 0.8
Income from operations 8.5 8.5
Interest expense, net 4.1 3.9
Pre-tax income 4.4 4.6
Net income 2.6 2.7
13
(1) Includes provision for doubtful accounts.
(2) We define EBITDA as income before interest, income taxes, depreciation,
amortization and non-recurring recapitalization costs. EBITDA should not be
considered in isolation or as an alternative to net income, cash flows from
operations, investing or financing activities or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. EBITDA, as we define it, is not necessarily
comparable to other similarly titled captions of other companies.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE
MONTHS ENDED APRIL 1, 2001
SERVICE REVENUES. Our service revenues for the three months ended March 31, 2002
increased $32.7 million, or 46%, from $70.5 million for the three months ended
April 1, 2001 to $103.2 million for the three months ended March 31, 2002. The
majority of the increase in revenues for the three months ended March 31, 2002
was attributable to a $26.7 million, or 51%, increase in our per diem nurse
staffing revenues from $52.4 million for the three months ended April 1, 2001 to
$79.1 million for the three months ended March 31, 2002. Of this increase, $22.6
million, or 85%, was the result of year over year organic growth. The remaining
increase of our per diem nurse staffing revenues of $4.1 million, or 15%, came
from our 2001 acquisition.
Service revenues from our staffing divisions other than the per diem nurse
staffing division collectively increased $6.0 million, or 33%, from $18.1
million for the three months ended April 1, 2001 to $24.1 million for the three
months ended March 31, 2002.
An increase in volume accounted for 90% of our overall revenue growth for the
three months ended March 31, 2002 as compared to revenue for the three months
ended April 1, 2001, with the balance of the increase as a result of price
increases and a shift in mix towards higher billing specialties.
COST OF SERVICES RENDERED. Cost of services rendered increased $24.4 million, or
46%, from $52.5 million for the three months ended April 1, 2001 to $76.9
million for the three months ended March 31, 2002. The increase was attributable
to the 46% increase in service revenues.
GROSS PROFIT. Gross profit increased $8.4 million, or 47%, from $18.0 million
for the three months ended April 1, 2001 to $26.4 million for the three months
ended March 31, 2002, representing gross margin percentages of 25.5% for both
periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.7 million, or 61.7%, from $9.3 million for
the three months ended April 1, 2001 to $15.0 million for the three months ended
March 31, 2002. As a percentage of revenue, selling, general and administrative
expenses increased from 13.2% for the three months ended April 1, 2001 to 14.6%
for the three months ended March 31, 2002. This increase was due to the expenses
required to establish the infrastructure for our de novo branches opened in 2001
and 2002.
14
CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative expenses
increased $0.3 million, or 19.6%, from $1.4 million for the three months ended
April 1, 2001 to $1.7 million for the three months ended March 31, 2002. As a
percentage of revenue, corporate and administrative expenses decreased from 2.0%
for the three months ended April 1, 2001 to 1.6% for the three months ended
March 31, 2002. The decrease as a percentage of revenue was a result of
increased operating leverage.
EBITDA. As a result of the above, EBITDA increased $2.3 million, or 32% from
$7.3 million for the three months ended April 1, 2001 to $9.6 million for the
three months ended March 31, 2002. As a percentage of revenue, EBITDA decreased
from 10.3% for the three months ended April 1, 2001 to 9.3% for the three months
ended March 31, 2002.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense
decreased $0.4 million, or 33%, from $1.3 million for the three months ended
April 1, 2001 to $0.9 million for the three months ended March 31, 2002. The
decrease was due primarily to the adoption of FAS No. 142, Intangible Assets.
Included in the $1.3 million for the three months ended April 1, 2001 was
approximately $0.7 million of amortization not recorded in the current period as
a result of the adoption of FAS No. 142. This decrease was offset by an increase
in depreciation expense of approximately $0.3 million related to an increase in
fixed assets.
INCOME FROM OPERATIONS. As a result of the above, income from operations
increased $2.8 million, or 46%, from $6.0 million for the three months ended
April 1, 2001 to $8.8 million for the three months ended March 31, 2002. As a
percentage of revenue, income from operations was 8.5% for both the three months
ended April 1, 2001 and the three months ended March 31, 2002.
INTEREST EXPENSE, NET. Net interest expense increased $1.1 million, or 39% from
$2.9 million for the three months ended April 1, 2001 to $4.0 million for the
three months ended March 31, 2002. The increase is primarily the result of a
higher average outstanding debt balance in the current year quarter.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $1.6 million,
or 53%, from $3.1 million for the three months ended April 1, 2001 to $4.7
million for the three months ended March 31, 2002.
PROVISION FOR INCOME TAXES. Our provision for income taxes was $1.2 million for
the three months ended April 1, 2001 and $1.9 million for the three months ended
March 31, 2002 representing effective tax rates of 40% for the three months
ended April 1, 2001 and 41% for the three months ended March 31, 2002.
NET INCOME. Net income increased $0.9 million from net income of $1.9 million
for the three months ended April 1, 2001 to $2.8 million for the three months
ended March 31, 2002.
15
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In response to the SEC Release Number 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and SEC Release Number 33-8056,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations," We have identified the following critical
accounting policies that affect the more significant judgments and estimates
used in the preparation of our unaudited condensed consolidated financial
statements. The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect our reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to asset impairment, accruals for
self-insurance and compensation and related benefits, revenue recognition,
allowance for doubtful accounts, and contingencies and litigation. These
estimates are based on the information that is currently available to us and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results could vary from those estimates under different
assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the Company's
unaudited condensed consolidated financial statements:
o We have recorded goodwill and intangibles resulting from our
acquisitions through March 31, 2002. Through December 30, 2001,
goodwill and other intangibles were amortized on a straight-line basis
over their lives of 6 to 20 years. We evaluate the recovery of the
carrying amount of costs in excess of net tangible assets acquired by
determining if a permanent impairment has occurred. This evaluation is
done annually or more frequently if indicators of permanent impairment
arise. Indicators of a permanent impairment include duplication of
resources resulting from acquisitions, instances in which the
estimated undiscounted cash flows of the entity are less than the
remaining unamortized balance of the underlying intangible assets and
other factors. At such time as an impairment is determined, the
intangible assets are written off during that period. If we are
required to record an impairment charge in the future, it would have
an adverse impact on our results of operations.
o We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments, which results in a provision for bad debt expense. We
determine the adequacy of this allowance by continually evaluating
individual customer receivables, considering the customer's financial
condition, credit history and current economic conditions. If the
financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
may be required.
16
o We maintain an accrual for our health, workers compensation and
professional liability that are partially self-insured and are
classified in other current liabilities in our condensed consolidated
balance sheets. We determine the adequacy of these accruals by
periodically evaluating our historical experience and trends related
to health, workers compensation, and professional liability claims and
payments, based on Company specific actuarial computations and
industry experience and trends. If such information indicates that our
accruals are overstated or understated, we will adjust the assumptions
utilized in our methodologies and reduce or provide for additional
accruals as appropriate.
o We are subject to various claims and legal actions in the ordinary
course of our business. Some of these matters include professional
liability and employee-related matters. Our hospital and healthcare
facility clients may also become subject to claims, governmental
inquiries and investigations and legal actions to which we may become
a party relating to services provided by our professionals. From time
to time, and depending upon the particular facts and circumstances, we
may be subject to indemnification obligations under our contracts with
our hospital and healthcare facility clients relating to these
matters. Although we are currently not aware of any such pending or
threatened litigation that we believe is reasonably likely to have a
material adverse effect on us, if we become aware of such claims
against us, we will evaluate the probability of an adverse outcome and
provide accruals for such contingencies as necessary.
SEASONALITY
Due to the regional and seasonal fluctuations in the hospital patient census of
our hospital and healthcare facility clients and due to the seasonal preferences
for destinations by our temporary healthcare professionals, the number of
healthcare professionals on assignment, revenue and earnings are subject to
moderate seasonal fluctuations. Many of our hospital and healthcare facility
clients are located in areas that experience seasonal fluctuations in
population, particularly Florida, during the winter and summer months. These
facilities adjust their staffing levels to accommodate the change in this
seasonal demand and many of these facilities utilize temporary healthcare
professionals to satisfy these seasonal staffing needs.
Historically, the number of temporary healthcare professionals on assignment has
increased from December through March followed by declines or minimal growth
from April through November. As a result of all of these factors, results of any
one quarter are not necessarily indicative of the results to be expected for any
other quarter or for any year.
17
LIQUIDITY AND CAPITAL RESOURCES
In October 2001, an investment group led by Warburg Pincus acquired a majority
interest in our company in a recapitalization that provided us with the proceeds
from new equity and senior debt issuances totaling approximately $156.6 million
and advances from a new senior credit facility totaling $105.0 million.
Together, these funds were used to provide us with working capital for
operations, to retire then-outstanding debt obligations and accrued interest
totaling approximately $82.0 million, as consideration for the acquisition of
the former stockholders' equity interests for approximately $173.0 million, and
to pay recapitalization costs of approximately $7.2 million.
As of March 31, 2002, we had cash totaling approximately $0.5 million, working
capital totaling $62.6 million and unused availability under our committed
credit facility totaling $12.0 million. We used $2.9 million of cash from
operating activities during the three months ended March 31, 2002 compared to
cash use of $1.4 million from operating activities during the three months ended
April 1, 2001.
Cash flows from operating activities was positively impacted during the three
months ended March 31, 2002 due to improvements in earnings before non-cash
expenses and was negatively impacted due to cash required to fund our de novo
program. 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.
Our senior credit facility consists of a $100.0 million term loan arrangement
and allows us to borrow up to an additional $20.0 million under a revolving line
of credit. The term loan bears interest at variable effective interest rates
with a weighted average interest rate of 5.9% as of March 31, 2002, and is due
in quarterly installments beginning March 31, 2003 through its maturity in
October 2006 for tranche A in the amount of $40 million and October 2007 for
tranche B in the amount of $60 million. Our senior credit facility is
collateralized by substantially all of our assets and requires us to comply with
various quarterly financial covenants, including covenants for ratios of
leverage and fixed charges to EBITDA.
As the borrower under 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.
Our senior unsecured notes bore interest compounding quarterly at a rate of 12%
per annum and were due in October 2009. Interest was payable in full on the
maturity date. The senior unsecured notes were subordinated to amounts due under
the senior credit facility.
18
As of March 31, 2002, there was $108.0 million outstanding under our senior
credit facility, and $62.4 million of principal and accrued interest outstanding
under our senior unsecured notes. As of March 31, 2002, the weighted average
interest rate for the loans under our senior credit facility was approximately
5.9 %.
We used a portion of the proceeds of our initial public offering to redeem the
senior unsecured notes in full in the amount of approximately $62.9 million and
to repay $93.0 million of our loans under the senior credit facility, leaving an
outstanding balance on our senior credit facility of $15.0 million.
We believe that our current cash balances, together with our existing credit
lines and other available sources of liquidity and expected cash flows from our
operating activities, will be sufficient for us to meet our current and future
financial obligations, as well as to provide it with funds for working capital,
anticipated capital expenditures and other needs for at least the next 12
months. No assurance can be given, however, that this will be the case. In the
longer term, we may require additional equity and debt financing to meet our
working capital needs, or to fund acquisition activities, if any. There can be
no assurance that additional financing will be available when required or, if
available, will be available on satisfactory terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk arises principally from the variable rates
associated with our senior credit facility. On March 31, 2002, we had borrowings
of $108 million under our senior credit facility that were subject its variable
rates, with a blended rate of 5.9%. As of March 31, 2002, an adverse change of
1.0% in the interest rate of all such borrowings outstanding would have caused
us to incur an increase in interest expense of approximately $0.6 million on an
annual basis after considering the effect of the interest rate swap described
below. During the three months ended March 31, 2002, we were party to an
interest rate swap agreement with a notional amount of $50 million. Under the
swap agreement, the net settlement was computed on a quarterly basis as the
difference between the 90 day LIBOR and the fixed rate of 4.34%. This resulted
in a fixed interest rate on $50 million of borrowings under our credit facility
at 4.34% effective December 24, 2001, plus the applicable margin. The fair value
of the interest rate swap agreement at March 31, 2002 was approximately
$185,000. LIBOR at March 31, 2002 was 1.9%. The swap agreement was terminated on
May 9, 2002. In addition, during the three months ended March 31, 2002, there
was exposure to market risk associated with our senior unsecured notes which
bore interest at a fixed rate. The carrying amount of the senior unsecured notes
approximated fair value as the terms of the debt were based on similar terms,
maturities, and interest rates as other debt issues with similar risk factors
that are not traded on quoted market prices. Our senior unsecured notes were
redeemed in full with proceeds from our initial public offering.
19
INFLATION
We do not believe that inflation has had a material effect on our results of
operations in recent years and periods. There can be no assurance, however, that
our business will not be adversely affected by inflation in the future.
20
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Pursuant to a Registration Statement on Form S-1 (File No. 333-82438)
declared effective by the Securities and Exchange Commission on April 17, 2002,
the Company sold an aggregate of 8,984,375 shares of Common Stock (including
1,171,875 shares from the exercise of the over-allotment option), par value $.01
per share. The offering was completed on April 23, 2002 and all shares
registered in such offering were sold. The shares of Common Stock were offered
to the public at a price of $19.00 per share for an aggregate public offering
price of $170.7 million. The expenses incurred by the Company in connection with
the issuance and distribution of such shares were approximately $15.7 million.
None of such expenses were paid to directors or officers of the Company or their
associates or to persons owning 10% or more of the Common Stock of the Company.
The net offering proceeds to the Company were approximately $155.9 million. The
net proceeds were used to repay $62.9 million of its outstanding balance under
the senior unsecured notes, and $93.0 million of the Company's outstanding term
loans under the senior credit facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent in lieu of a special meeting, the stockholders of the Company
approved (i) amendments to the Company's certificate of incorporation and bylaws
in connection with the Company's initial public offering, to take effect upon
the consummation of the Company's public offering; (ii) the election of Joel
Ackerman as a Class I director, to commence upon the effectiveness of the
Company's Amended and Restated Certificate of Incorporation; and (iii)
amendments to the Company's Stock Incentive Plan and Amended and Restated Stock
Option Plan. Stockholders representing 93.6% of the then outstanding shares
approved these actions. Scott Hilinski continues to serve as Class II director
for the Company and Robert J. Adamson and David J. Wenstrup continue as Class
III directors.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MEDICAL STAFFING NETWORK
HOLDINGS, INC.
Dated: May 30, 2002 By: /s/ Robert J. Adamson
------------------------------
Robert J. Adamson
Chief Executive Officer and President
By: /s/ Kevin S. Little
------------------------------
Kevin S. Little
Chief Financial Officer
22