UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - November 22, 2002
MEDICAL STAFFING NETWORK HOLDINGS, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-31299 06-0865171
-------- ------- ----------
(State or other (Commission File (IRS Employer
jurisdiction Number) Identification
of incorporation) No.)
901 Yamato Road, Suite 110, Boca Raton, FL 33431
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 561-322-1301
------------
____________________
This amendment to the Current Report on 8-K originally dated November 22, 2002,
is being filed in order to provide the required financial
information for the Company.
Item 7. Financial Statements and Pro Forma Financial Information
(a) Financial Statements of Businesses Acquired
I. The following historical consolidated financial statements of Health Search
International, Inc. and Subsidiary are filed herewith:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets, June 30, 2002 and September 30, 2002 (Unaudited)
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
II. The following historical financial statements of Clinical Resource Services,
Inc. are filed herewith:
Report of Independent Certified Public Accountants
Balance Sheets, June 30, 2002 and September 30, 2002 (Unaudited)
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma consolidated financial statements of Medical
Staffing Network Holdings, Inc. are filed herewith:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 29,
2002
Notes to the Unaudited Pro Forma Condensed Consolidated Balance Sheet
Unaudited Pro Forma Condensed Consolidated Statements of Operations
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
(c) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
Date: January 21, 2003 By: /s/ Kevin S. Little
------------------------------
Kevin S. Little
Chief Financial Officer
Signing on behalf of the registrant and
as principal financial and accounting
officer
FINANCIAL STATEMENTS
Health Search International, Inc. and Subsidiary
For the year ended June 30, 2002
with Report of Independent Certified Public Accountants
Health Search International, Inc. and Subsidiary
Financial Statements
For the year ended June 30, 2002
Contents
Report of Independent Certified Public Accountants.............................1
Financial Statements
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................3
Consolidated Statements of Changes in Stockholders' Deficit....................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
Report of Independent Certified Public Accountants
Stockholders
Health Search International, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of Health Search
International, Inc. and Subsidiary as of June 30, 2002, and the related
consolidated statement of income, changes in stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Search
International, Inc. and Subsidiary at June 30, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Miami, Florida
October 23, 2002, except for
Note 10, as to which the
date is November 7, 2002
1
Health Search International, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, September 30,
2002 2002
---------- -------------
(Unaudited)
Assets
Current assets:
Cash $ 155,824 $ 241,807
Accounts receivable, net of allowance for doubtful
accounts of $4,500 and $22,851 at June 30, 2002
and September 30, 2002, respectively 616,177 482,304
Prepaid expenses and other current assets 54,566 51,924
---------- ----------
Total current assets 826,567 776,035
Furniture and equipment, net 115,946 127,775
Deposits 5,562 5,562
---------- ----------
Total assets $ 948,075 $ 909,372
========== ==========
Liabilities and stockholders' deficit
Current liabilities:
Line of credit $ 309,408 $ 296,386
Accounts payable 59,966 6,122
Accrued expenses 399,845 310,424
Due to Clinical Resource Services, Inc. 561,250 660,396
Due to Health-Pharm Management Corporation 55,336 34,199
---------- ----------
Total current liabilities 1,385,805 1,307,527
Commitments and contingencies
Stockholders' deficit:
Common stock; $1.00 par value; 5,000 shares authorized;
1,000 shares issued and outstanding at June 30,
2002 and September 30, 2002 1,000 1,000
Accumulated deficit (438,730) (399,155)
---------- ----------
Total stockholders' deficit (437,730) (398,155)
---------- ----------
Total liabilities and stockholders' deficit $ 948,075 $ 909,372
========== ==========
See accompanying notes.
2
Health Search International, Inc. and Subsidiary
Consolidated Statements of Income
Year ended Three months ended
June 30, September 30,
2002 2002 2001
----------- --------------------------
(Unaudited)
Service revenues $ 3,729,615 $ 701,099 $1,077,650
Costs of services rendered 1,837,040 308,086 647,748
----------- --------------------------
Gross profit 1,892,575 393,013 429,902
Operating expenses:
Selling, general, and administrative 874,175 149,854 206,100
Management fees to related party 123,498 32,700 29,049
Provision for doubtful accounts 335,912 31,772 108,957
Depreciation 48,637 14,700 12,090
----------- --------------------------
1,382,222 229,026 356,196
----------- --------------------------
Income from operations 510,353 163,987 73,706
Other income (expense)
Interest expense (21,613) (5,304) (6,938)
Interest income 1,340 204 465
Other income 1,983 -- --
----------- --------------------------
(18,290) (5,100) (6,473)
----------- --------------------------
Income from continuing operations 492,063 158,887 67,233
Income (loss) from discontinued
operations 13,850 (15,883) (49,858)
(Note 9)
----------- --------------------------
Net income $ 505,913 $ 143,004 $ 17,375
=========== ==========================
See accompanying notes.
3
Health Search International, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Deficit
For the year ended June 30, 2002 and the three
months ended September 30, 2002
Total
Common Common Accumulated Stockholders'
Shares Stock Deficit Deficit
--------------------------------------------------------
Balance, June 30, 2001 1,000 $ 1,000 $ 148,574 $ 149,574
Distributions to
stockholders -- -- (1,093,217) (1,093,217)
Net income -- -- 505,913 505,913
--------------------------------------------------------
Balance, June 30, 2002 1,000 1,000 (438,730) (437,730)
Distributions to
stockholders (unaudited) -- -- (103,429) (103,429)
Net income (unaudited) -- -- 143,004 143,004
--------------------------------------------------------
Balance, September 30, 2002 1,000 $ 1,000 $ (399,155) $ (398,155)
(unaudited)
========================================================
See accompanying notes.
4
Health Search International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year ended Three months ended
June 30, September 30,
2002 2002 2001
----------- ---------------------------
(Unaudited)
Operating activities
Income from continuing operations $ 492,063 $ 158,887 $ 67,233
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities:
Depreciation expense 48,637 14,700 12,090
Provision for doubtful accounts 335,912 31,772 108,957
Changes in operating assets and
liabilities:
Accounts receivable (251,385) 102,101 (351,141)
Prepaid expenses (23,700) 12,017 21,756
Due to Clinical Resource Services, Inc. 471,370 99,147 147,498
Due to Health-Pharm Management Corporation 88,835 (21,138) 17,580
Other current assets (9,929) (9,374) --
Accounts payable 35,381 (53,845) 11,192
Accrued expenses (69,152) (89,421) 222,429
----------- ---------------------------
Net cash provided by operating activities 1,118,032 244,846 257,594
Net cash used in discontinued operations (61,582) (15,883) (49,858)
Investing activity
Purchase of furniture and equipment (52,582) (26,529) (3,788)
----------- ---------------------------
Net cash used in investing activity (52,582) (26,529) (3,788)
Financing activities
Payments on line of credit (591) (13,022) --
Distributions to stockholders (1,093,217) (103,429) (289,500)
----------- ---------------------------
Net cash used in financing activities (1,093,808) (116,451) (289,500)
Net decrease in cash (89,940) 85,983 (85,552)
Cash and cash equivalents at beginning of year 245,764 155,824 245,764
----------- ---------------------------
Cash and cash equivalents at end of year $ 155,824 $ 241,807 $ 160,212
=========== ===========================
Supplemental disclosure of cash flow
information
Cash paid for interest $ 22,481 $ 5,637 $ 7,806
=========== ===========================
See accompanying notes.
5
Health Search International, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2002
1. Organization
Health Search International, Inc. (the Company), a Maryland S Corporation, was
organized in 1992 as a personnel placement firm specializing in permanent
placement services in the pharmaceutical industry. The Company is located in
Rockville, Maryland, and provides permanent placements throughout the United
States.
UltimIT Solution Services, Inc. (UltimIT), a Maryland S Corporation and
wholly-owned subsidiary of the Company, was organized in 1997 as a personnel
placement firm specializing in permanent placement and contract staffing
services in the information technology industry. UltimIT shares office space
with the Company and makes placements throughout the United States. On July 1,
2001, the Company discontinued the operations of UltimIT (see Note 9).
The accompanying consolidated interim financial statements (including notes to
the financial statements) of the Company at September 30, 2002 and for the three
months ended September 30, 2002 and 2001, are unaudited. In the opinion of
management, the accompanying unaudited consolidated interim financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company at September
30, 2002, and the consolidated results of their operations and their cash flows
for the three months ended September 30, 2002 and 2001.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, UltimIT. All material intercompany transactions and
balances have been eliminated in consolidation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk as defined by Statement of Financial Accounting Standard (SFAS) No.
105, Disclosure of Information About Financial Instruments With
Off-Balance-Sheet Risk and Financial Instruments With Concentrations of Credit
Risk, consist principally of accounts receivable. The Company's customers are
healthcare providers and accounts receivable represent amounts due from these
providers. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, does not require collateral. One customer
represents 10%
6
2. Summary of Significant Accounting Policies (continued)
of the Company's total gross receivable balance at June 30, 2002. In addition,
another customer represents 13% (unaudited) of the Company's total gross
receivable balance at September 30, 2002.
Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years.
Revenue Recognition
Revenues from contract assignments are recognized when services are rendered,
based on hours worked by the contract candidate placed by the Company. Permanent
placement revenues are recognized when employment candidates accept offers of
permanent employment. Allowances are established to estimate losses due to
placed candidates not remaining employed for the Company's guarantee period,
disputes over actual hours worked or other issues arising in the normal course
of business. The Company records reimbursements received for out-of-pocket
expenses, such as travel and relocation for permanent employees, as revenue in
the statement of income.
Approximately 24% and 49% (unaudited) of service revenues were earned from one
customer for the year ended June 30, 2002 and for the three months ended
September 30, 2001, respectively. In addition, approximately 14% (unaudited) of
service revenues were earned from another customer for the three months ended
September 30, 2002.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expense was
approximately $14,000, $2,500 (unaudited) and $2,400 (unaudited) for the year
ended June 30, 2002 and for the three months ended September 30, 2002 and 2001,
respectively.
Long-Lived Assets
The carrying value of long-lived assets is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
long-lived assets will not be recoverable, as determined using the undiscounted
cash flows method, the Company's carrying value of the long-lived assets will be
reduced by the amount by which carrying value exceeds fair value.
Income Taxes
The Company has elected S Corporation status under the Internal Revenue Code
and, as such, is not subject to taxation at the corporate level. All income,
losses, deductions and credits flow through the individual stockholders of the
Company for federal and state income tax reporting purposes.
7
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
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 components of comprehensive income other than
the Company's net income at and for the year ended June 30, 2002, at September
30, 2002 and for the three months ended September 30, 2002 and 2001.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Statements, requires
disclosure of the fair value of certain financial instruments. Management
believes the carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short maturity of the instruments and the
provision for what management believes to be adequate reserves for potential
losses. Management believes the fair value of its line of credit approximates
its carrying amount based on its rate of interest.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
other intangibles determined to have an indefinite life are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite 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. SFAS No. 142 eliminates the
current requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets. SFAS No. 142 will apply to goodwill and intangible assets arising from
transactions completed before and after the Statement's effective date. The
Company believes the adoption of these statements will not have a material
effect on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement
8
2. Summary of Significant Accounting Policies (continued)
of tangible long-lived assets and the associated asset retirement costs,
including legal obligations. The Company believes adoption of SFAS No. 143 will
not have a material effect on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the criteria required for classifying an
asset as held-for-sale have been significantly changed. Assets held-for-sale are
stated at the lower of their fair values or carrying amounts, and depreciation
is no longer recognized. In addition, the expected future operating losses from
discontinued operations will be displayed in discontinued operations in the
period in which the losses are incurred rather than as of the measurement date.
More dispositions will qualify for discontinued operations treatment in the
statement of income under the new rules. The Company believes the adoption of
SFAS No. 144 will not have a material effect on its financial position or
results of operations.
3. Furniture and Equipment
Furniture and equipment and accumulated depreciation consists of the following:
June 30, September
2002 30, 2002
-------------------------
(Unaudited)
Computer equipment and software $337,010 $363,539
Furniture and fixtures 53,880 53,880
Leasehold improvements 17,365 17,365
Office equipment 12,319 12,319
-------------------------
420,574 447,103
Less accumulated depreciation (304,628) (319,328)
-------------------------
$115,946 $127,775
=========================
4. Accrued Expenses
Accrued expenses consists of the following:
June 30, September
2002 30, 2002
-------------------------
(Unaudited)
Accrued salaries, commissions and $353,633 $262,807
payroll taxes
Accrued vacation 35,630 35,630
Retirement plan contribution payable 10,582 11,987
-------------------------
$399,845 $310,424
=========================
9
5. Line of Credit
The Company entered into a $500,000 line of credit agreement with a financial
institution. The line is collateralized by substantially all assets of the
Company and is cross-collateralized by the assets held by Clinical Resource
Services, Inc., (Clinical Resource) and Health-Pharm Management Corporation
(Health-Pharm), affiliated entities through common ownership. In addition, the
Company's stockholders personally guarantee payment of borrowings under the line
of credit.
Interest accrues daily on the outstanding balance at the prime rate plus 3/4
percent (effective rate of 5.5% at June 30, 2002). Outstanding balances on the
line of credit are due on demand. At June 30, 2002, the Company had $309,408
outstanding and $190,592 available under this line of credit.
The line of credit contains certain financial covenants regarding the Company's
ability to meet its operating costs and current obligations and certain other
covenants. At June 30, 2002, the Company was in compliance with the covenants of
the line of credit.
Clinical Resource entered into a separate $1,500,000 line of credit agreement
under the same terms and conditions which is cross-collateralized by the
Company's assets.
6. Employee Benefit Plan
The Company maintains a voluntary defined contribution 401(k) profit-sharing
plan covering all eligible employees as defined in the plan document. Plan
participants may elect to contribute up to a maximum of 15% of their
compensation, up to the maximum allowed by the Internal Revenue Service. The
plan provides for discretionary employer matching of 50% of the participant's
before-tax contributions that do not exceed 6% of eligible wages or
discretionary employer profit sharing contributions based on the Company's
determination made after the end of its tax year, or some combination of both.
Vesting of employer contributions occurs at a rate of 20% per year beginning the
second year of service (i.e., 100% vested after six years of service). The
Company's contributions to the plan were approximately $44,000 for the year
ended June 30, 2002.
7. Commitments and Contingencies
The Company conducts its operations from an office under an operating lease
expiring in May 2003. The lease provides for annual escalations of 3%, as well
as adjustments to the base rent for increases in the real estate taxes and
operating expenses. The monthly rental payment in effect at June 30, 2002 was
approximately $11,500.
The leased space is shared with Clinical Resource, an affiliated entity through
common ownership, under a sublease arrangement where rent expense is allocated
based on actual square footage used. The sublease agreement provides for annual
escalations of 3%, as well as adjustments to the base rent for a proportionate
portion of all other increases. The monthly sublease rental income in effect at
June 30, 2002 was approximately $5,700.
10
7. Commitments and Contingencies (continued)
Additionally, the Company entered into various leases for office equipment. The
equipment leases are shared with Clinical Resource under a sublease agreement.
Monthly payments for these leases range from $77 to $3,580 through August 2005.
Future minimum lease payments under the above lease arrangements are as follows:
Sublease
Lease Rental Net Lease
Years ending June 30 Commitment Income Commitment
---------------------------------------------------------------
2003 $193,309 $ 96,504 $ 96,805
2004 50,028 25,768 24,260
2005 42,960 21,477 21,483
2006 7,160 3,580 3,580
--------------------------------------
$293,457 $ 147,329 $ 146,128
======================================
Rent expense was $75,610, net of sublease rental income of $71,306, for the year
ended June 30, 2002.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the outcome of
these matters will not have a significant effect on the Company's financial
position or results of operations.
8. Related Party Transactions
The Company participates in transactions with its stockholders, officers, and
entities affiliated through common ownership and management. A summary of such
transactions and the amounts due from and to these related parties are listed
below:
For the For the three For the
year ended months ended three months
or as of or as of ended
June 30, September 30, September 30,
2002 2002 2001
----------------------------------------------
(Unaudited)
Management fees paid to
Health-Pharm $155,196 $32,700 $44,898
Sublease rental income from
Clinical Resource 71,306 17,420 17,516
Due to Clinical Resource 561,250 660,396
Due to Health-Pharm 55,336 34,199
On February 1, 1998, as amended on January 1, 1999 and 2000, the Company entered
into a management agreement with Health-Pharm, an affiliated entity through
common ownership. Pursuant to the management agreement, Health-Pharm provides to
the Company and several
11
8. Related Party Transactions (continued)
other companies that are affiliated through common ownership, daily management
and consulting services regarding the operations of the Company and the
management and supervision of personnel. In addition, Health-Pharm provides
personnel services including interviewing and hiring personnel, training for
personnel, consulting services regarding marketing, promotions and corporate
development as well as an annual review of the Company's performance. In
exchange for these services, the Company pays a management fee to Health-Pharm
based on a calculation set forth in the amended management agreement. The
Company incurred $155,196, $32,700 (unaudited) and $44,898 (unaudited), of
management fees of which $31,698, $ 0 (unaudited) and $15,849 (unaudited) are
included in income from discontinued operations for the year ended June 30, 2002
and for the three months ended September 30, 2002 and 2001, respectively.
The Company received financial and operational support from Clinical Resource
including operational funding of normal operating expenses. At June 30, 2002,
the Company had a due to Clinical Resource of $561,250, net of a due from
Clinical Resource balance of $36,369, which is due to UltimIT. At September 30,
2002, the Company had a due from Clinical Resource of $660,396, net of a due to
Clinical Resource balance of $32,604, which is due from UltimIT.
9. Discontinued Operations
On July 1, 2001, the Board of Directors approved a plan to discontinue the
operations of UltimIT due to changes within the industry. UltimIT will continue
to perform services for the existing contracts that are expected to conclude in
2002. No further operations are expected to occur subsequent to that date.
Revenues and income from discontinued operations from the measurement date to
June 30, 2002 was $328,167 and $13,850, respectively. Assets and liabilities
from discontinued operations were as follows:
June 30,
2002
----------
Current assets $65,376
Current liabilities (7,498)
----------
Net assets of discontinued operations $57,878
==========
These net assets are reflected in the respective balance sheet captions at June
30, 2002 as these account balances were deemed immaterial for reclassification
purposes.
10. Subsequent Event
On November 7, 2002, the consummation of the sale of substantially all of the
assets and the assumption of certain of the liabilities of the Company and of
Clinical Resource to another staffing business occurred for approximately
$13,800,000, plus an earn out amount based on future earnings of the acquired
businesses.
12
FINANCIAL STATEMENTS
Clinical Resource Services, Inc.
For the year ended June 30, 2002
with Report of Independent Certified Public Accountants
Clinical Resource Services, Inc.
Financial Statements
For the year ended June 30, 2002
Contents
Report of Independent Certified Public Accountants.............................1
Financial Statements
Balance Sheets.................................................................2
Statements of Income...........................................................3
Statements of Changes in Stockholders' Equity..................................4
Statements of Cash Flows.......................................................5
Notes to Financial Statements..................................................6
Report of Independent Certified Public Accountants
Stockholders
Clinical Resource Services, Inc.
We have audited the accompanying balance sheet of Clinical Resource Services,
Inc. as of June 30, 2002, and the related statements of income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clinical Resource Services,
Inc. at June 30, 2002, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States.
.. /s/ Ernst & Young LLP
Miami, Florida
October 23, 2002, except for
Note 10, as to which the date
is November 7, 2002
1
Clinical Resource Services, Inc.
Balance Sheets
June 30, September 30,
2002 2002
---------- ----------
(Unaudited)
Assets
Current assets:
Cash $ 579,398 $ 708,133
Accounts receivable, net of allowance for doubtful
accounts of $80,000 and $118,000 at June 30, 2002
and September 30, 2002, respectively 2,335,165 2,254,158
Due from Health Search International, Inc. 597,619 693,000
Prepaid expenses 115,284 96,878
Other current assets 28,877 26,043
---------- ----------
Total current assets 3,656,343 3,778,212
Furniture and equipment, net 22,000 20,215
Deposits 3,942 3,942
---------- ----------
$3,682,285 $3,802,369
========== ==========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 13,781 $ 1,923
Accrued expenses 618,973 589,504
Line of credit 329,943 329,943
Notes payable - stockholders 436,000 436,000
Due to Health-Pharm Management Corporation 11,470 59,599
Due to UltimIT Solution Services, Inc. 36,369 32,604
Other 3,187 --
---------- ----------
Total current liabilities 1,449,723 1,449,573
Commitments and contingencies
Stockholders' equity:
Common stock; $1.00 par value; 10,000 shares authorized;
2,000 shares issued and outstanding at June 30,
2002 and September 30, 2002 2,000 2,000
Retained earnings 2,230,562 2,350,796
---------- ----------
Total stockholders' equity 2,232,562 2,352,796
---------- ----------
Total liabilities and stockholders' equity $3,682,285 $3,802,369
========== ==========
See accompanying notes.
2
Clinical Resource Services, Inc.
Statements of Income
Year ended Three months ended
June 30, September 30,
2002 2002 2001
----------- ---------------------------
(Unaudited)
Service revenues $12,684,855 $ 3,027,812 $ 2,988,274
Costs of services rendered 8,824,239 2,263,193 1,919,608
----------- ----------- -----------
Gross profit 3,860,616 764,619 1,068,666
Operating expenses:
Selling, general, and administrative 1,958,293 484,189 428,710
Management fees to related party 417,798 113,400 95,499
Provision for doubtful accounts 76,830 38,835 33,273
Depreciation 6,925 1,785 6,105
----------- ----------- -----------
2,459,846 638,209 563,587
----------- ----------- -----------
Income from operations 1,400,770 126,410 505,079
Other income (expense):
Interest expense (50,701) (7,319) (5,022)
Interest income 5,883 1,143 1,475
Other income 16,932 -- 754
----------- ----------- -----------
(27,886) (6,176) (2,793)
----------- ----------- -----------
Net income $ 1,372,884 $ 120,234 $ 502,286
=========== =========== ===========
See accompanying notes.
3
Clinical Resource Services, Inc.
Statements of Changes in Stockholders' Equity
For the year ended June 30, 2002 and
the three months ended September 30, 2002
Total
Common Common Retained Stockholders'
Shares Stock Earnings Equity
--------------------------------------------
Balance, June 30, 2001 2,000 $2,000 $1,205,014 $1,207,014
Distributions to stockholders -- -- (347,336) (347,336)
Net income -- -- 1,372,884 1,372,884
--------------------------------------------
Balance, June 30, 2002 2,000 2,000 2,230,562 2,232,562
Net income (unaudited) -- -- 120,234 120,234
--------------------------------------------
Balance, September 30, 2002 (unaudited) 2,000 $2,000 $2,350,796 $2,352,796
============================================
See accompanying notes.
4
Clinical Resource Services, Inc.
Statements of Cash Flows
Year ended Three months ended
June 30, September 30,
2002 2002 2001
----------- ---------------------------
(Unaudited)
Operating activities
Net income $ 1,372,884 $ 120,234 $ 502,286
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 76,830 38,835 33,273
Depreciation 6,925 1,785 6,105
Changes in operating assets and liabilities:
Accounts receivable (617,002) 42,172 (312,197)
Due from Health Search International, Inc. (471,371) (95,381) (146,663)
Prepaid expenses (65,337) 18,406 (5,722)
Other current assets (34,664) 2,834 (6,223)
Due from Health-Pharm Management Corporation 214,804 48,129 35,499
Due to UltimIT Solution Services, Inc. (18,461) (3,765) (837)
Accounts payable 13,713 (11,858) 10,661
Accrued expenses 62,823 (32,656) 42,318
Income tax payable (70,100) -- --
----------- ---------------------------
Net cash provided by operating activities 471,044 128,735 158,500
Investing activity
Purchases of furniture and equipment (5,342) -- (2,788)
----------- ---------------------------
Net cash used in investing activity (5,342) -- (2,788)
Financing activities
Proceeds from line of credit 660,000 -- 580,000
Payments on line of credit (660,057) -- (580,000)
Distributions to stockholders (347,336) -- --
----------- ---------------------------
Net cash used in financing activities (347,393) -- --
Net increase in cash 118,309 128,735 155,712
Cash at beginning of the period 461,089 579,398 461,089
----------- ---------------------------
Cash at end of the period $ 579,398 $ 708,133 $ 616,801
=========== ===========================
Supplemental disclosures of cash flow
information
Cash paid for interest $ 26,867 $ 8,319 $ 5,187
=========== ===========================
Cash paid for income taxes $ 70,100 $ -- $ --
=========== ===========================
See accompanying notes.
5
Clinical Resource Services, Inc.
Notes to Financial Statements
June 30, 2002
1. Organization
Clinical Resource Services, Inc. (the Company), a Maryland S Corporation, was
organized in 1995 as a healthcare staffing business specializing in the
pharmaceutical industry. The Company operates from Rockville, Maryland and
provides temporary healthcare staffing throughout the United States.
The accompanying interim financial statements (including notes to the financial
statements) of the Company as of September 30, 2002 and for the three months
ended September 30, 2002 and 2001, are unaudited. In the opinion of management,
the accompanying unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company at September 30, 2002, and the results of its
operations and its cash flows for the three months ended September 30, 2002 and
2001.
2. Summary of Significant Accounting Policies
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk as defined by Statement of Financial Accounting Standard (SFAS) No.
105, Disclosure of Information About Financial Instruments With
Off-Balance-Sheet Risk and Financial Instruments With Concentrations of Credit
Risk, consist principally of accounts receivable. The Company's customers are
healthcare providers and accounts receivable represent amounts due from these
providers. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, does not require collateral. One customer
represents 15% and 12% (unaudited) of the Company's total gross receivable
balance at June 30, 2002 and September 30, 2002, respectively. In addition,
another customer represents 16% (unaudited) of the Company's total gross
receivable balance at September 30, 2002.
Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years.
6
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenues from contract assignments are recognized when services are rendered,
based on hours worked by the contract candidate placed by the Company. The
Company records reimbursements received for out-of-pocket expenses, such as
travel and housing for contract employees, as revenue in the statement of
income.
Approximately 13%, 13% (unaudited), and 14% (unaudited) of service revenues were
earned from one customer for the year ended June 30, 2002, for the three months
ended September 30, 2002, and for the three months ended September 30, 2001,
respectively. In addition, approximately 13% (unaudited) of services revenues
were earned from another customer for the three months ended September 30, 2002.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expense was
approximately $29,000, $8,600 (unaudited) and $0 (unaudited) for the year ended
June 30, 2002 and for the three months ended September 30, 2002 and 2001,
respectively.
Long-Lived Assets
The carrying value of long-lived assets is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
long-lived assets will not be recoverable, as determined using the undiscounted
cash flows method, the Company's carrying value of the long-lived assets will be
reduced by the amount by which carrying value exceeds fair value.
Income Taxes
Effective January 1, 1999, the Company, with the consent of its stockholders,
elected to be taxed as an S-Corporation under the Internal Revenue Code, which
provides that, in lieu of corporate income taxes, the stockholders account for
the Company's items of income, deductions, losses and credits on their
individual tax returns. The Company may be subject to income taxes at the
maximum corporate rate (built-in-gains tax) to the extent that gains, primarily
resulting from the difference between the cash basis of accounting for income
taxes and the accrual basis of accounting, not recognized for tax purposes at
the date of the election are realized within the ten-year period ending December
31, 2009. At June 30, 2000, the Company recorded a net deferred tax liability of
$70,100 representing the estimated income taxes that would be payable to the
extent these built-in-gains might be recognized. During the year ended June 30,
2002, the Company was subject to income taxes as a result of recognition of
these built-in-gains. During the year ended June 30, 2002, the Company paid the
$70,100 tax liability.
7
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
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 components of comprehensive income other than
the Company's net income as of and for the year ended June 30, 2002, as of
September 30, 2002 and for the three months ended September 30, 2002 and 2001.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Statements, requires
disclosure of the fair value of certain financial instruments. The carrying
amounts of cash, accounts receivable and accounts payable approximate fair value
due to the short maturity of the instruments and the provision for what
management believes to be adequate reserves for potential losses. Management
believes the fair value of the line of credit and notes payable to stockholders
approximate their respective carrying amounts based on their rate of interest.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and
other intangibles determined to have an indefinite life are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite 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. SFAS No. 142 eliminates the
current requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets. SFAS No. 142 will apply to goodwill and intangible assets arising from
transactions completed before and after the Statement's effective date. The
Company believes the adoption of these statements will not have a material
effect on its results of operations or financial position.
8
2. Summary of Significant Accounting Policies (continued)
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, including legal obligations. The Company believes
adoption of SFAS No. 143 will not have a material effect on its financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the criteria required for classifying an
asset as held-for-sale have been significantly changed. Assets held-for-sale are
stated at the lower of their fair values or carrying amounts, and depreciation
is no longer recognized. In addition, the expected future operating losses from
discontinued operations will be displayed in discontinued operations in the
period in which the losses are incurred rather than as of the measurement date.
More dispositions will qualify for discontinued operations treatment in the
statement of income under the new rules. The Company believes the adoption of
SFAS No. 144 will not have a material effect on its financial position or
results of operations.
3. Furniture and Equipment
At June 30, 2002, furniture and equipment consists of the following:
June 30, September 30,
2002 2002
------------------------
(Unaudited)
Computer equipment and software $32,107 $32,107
Furniture and fixtures 3,558 3,558
Office equipment 760 760
------------------------
36,425 36,425
Less accumulated depreciation (14,425) (16,210)
------------------------
$22,000 $20,215
========================
4. Accrued Expenses
At June 30, 2002, accrued expenses consists of the following:
June 30, September 30,
2002 2002
-----------------------------
(Unaudited)
Accrued salaries, commissions, and $483,211 $452,040
payroll taxes
Accrued vacation 99,326 98,747
Retirement plan contribution payable 19,872 21,143
Unearned revenue 16,564 17,574
-----------------------------
$618,973 $589,504
=============================
9
5. Line of Credit
On November 8, 2001, the Company entered into a $1,500,000 line of credit
agreement with a financial institution. The total amount of funds available to
the Company under the line is equal to the lesser of $1,500,000 or 80% of
eligible accounts receivable. The line is collateralized by substantially all
assets of the Company and is cross-collateralized by the assets held by Health
Search International, Inc. (Health Search) and Health-Pharm Management
Corporation (Health-Pharm), affiliated entities through common ownership. In
addition, the Company's stockholders personally guarantee payment of borrowings
under the line of credit. Interest accrues daily on the outstanding balance at
the prime rate plus 3/4 percent (effective rate of 5.5% at June 30, 2002).
Outstanding balances on the line of credit are due on demand. At June 30, 2002,
the Company had $329,943 outstanding and $1,170,057 available under this line of
credit.
The line of credit contains certain financial covenants regarding the Company's
ability to meet its operating costs and current obligations and certain other
covenants. At June 30, 2002, the Company was in compliance with the covenants of
the line of credit.
Health Search entered into a separate $500,000 line of credit agreement with the
same lender and under the same terms and conditions as the Company's existing
line of credit agreement whereby the Company's assets are cross-collateralized.
6. Notes Payable - Stockholders
The Company has a $200,000 note payable with each of its two stockholders. Both
notes have the same terms and conditions, whereby each is due upon demand,
accrues interest at 6% per annum and is unsecured. At June 30, 2002 and
September 30, 2002, the notes payable from stockholders amounted to $436,000,
which includes accrued interest of $36,000. The notes are subordinated to the
line of credit as described in Note 5.
7. Employee Benefit Plan
The Company maintains a voluntary defined contribution 401(k) profit-sharing
plan covering all eligible employees as defined in the plan document. Plan
participants may elect to contribute up to a maximum of 15% of their
compensation, up to the maximum allowed by the Internal Revenue Service. The
plan provides for discretionary employer matching of 50% of the participant's
before-tax contributions that do not exceed 6% of eligible wages or
discretionary employer profit sharing contributions based on the Company's
determination made after the end of its tax year, or some combination of both.
Vesting of employer contributions occurs at a rate of 20% per year beginning the
second year of service (i.e. 100% vested after six years of service). The
Company's contributions to the plan for the year ended June 30, 2002 were
approximately $73,000.
10
8. Commitments and Contingencies
The Company subleases office space under a sublease agreement with Health Search
that expires in May 2003. The monthly rental payment in effect at June 30, 2002
was approximately $5,700.
The Company also entered into several sublease agreements with an affiliated
entity for equipment leases. Future monthly payments range from $37 to $1,790
per month and continue through February 2006.
Future minimum rental payments associated with these sublease agreements are as
follows:
Amount
--------
Years ending June 30:
2003 $ 96,504
2004 25,768
2005 21,477
2006 3,580
--------
$147,329
========
The Company incurred rent expense under its operating leases of approximately
$71,000 for the year ended June 30, 2002.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the outcome of
these matters will not have a significant effect on the Company's financial
position or results of operations.
9. Related Party Transactions
The Company participates in transactions with its stockholders, officers, and
entities affiliated through common ownership and management. A summary of such
transactions and the amounts due from and to these related parties are listed
below:
For the For the three
three months
months ended or as For the three
ended or as of September months ended
of June 30, 30, September 30,
2002 2002 2001
----------- --------------------------------
(Unaudited)
Management fees paid to
Health-Pharm $417,798 $113,400 $ 95,499
Rent expense paid to Health
Search 71,306 17,420 17,516
Due from Health Search 597,619 693,000
Due from (to) Health-Pharm (11,470) (59,599)
Due to UltimIT Solution
Services, Inc. (36,369) (32,604)
11
9. Related Party Transactions (continued)
On February 1, 1998, as amended on January 1, 1999 and 2000, the Company entered
into a management agreement with Health-Pharm, an affiliated entity through
common ownership. Pursuant to the management agreement, Health-Pharm provides to
the Company and several other companies that are affiliated through common
ownership, daily management and consulting services regarding the operations of
the Company and the management and supervision of personnel. In addition,
Health-Pharm provides personnel services including interviewing and hiring
personnel, training for personnel, consulting services regarding marketing,
promotions and corporate development as well as an annual review of the
Company's performance. In exchange for these services, the Company pays a
management fee to Health-Pharm based on a calculation set forth in the amended
management agreement. The Company incurred $417,798, $113,400 (unaudited) and
$95,499 (unaudited) of management fees for the year ended June 30, 2002 and the
three months ended September 30, 2002 and 2001, respectively.
The Company provides financial and operational support to Health Search
including operational funding of normal operating expenses. At June 30, 2002 and
September 30, 2002, the Company had a due from Health Search of $597,619 and
$693,000, respectively.
10. Subsequent Event
On November 7, 2002, the consummation of the sale of substantially all of the
assets and the assumption of certain of the liabilities of the Company and of
Health Search to another staffing business occurred for approximately
$13,800,000, plus an earn out amount based on future earnings of the acquired
businesses.
12
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On November 7, 2002, Medical Staffing Networks, Inc. (MSN), our indirectly
wholly-owned subsidiary, consummated the purchase of substantially all of the
assets, and assumption of certain liabilities of Clinical Resource Services,
Inc. (Clinical Resource) and Health Search International, Inc. (HSI), both of
which operate healthcare staffing businesses under common control and ownership.
The acquisition of HSI did not include the assets or liabilities of its
wholly-owned subsidiary, UltimIT Solution Services, Inc. The unaudited pro forma
condensed consolidated statement of operations for the year ended December 30,
2001 gives effect to each of the acquisitions of Clinical Resource and HSI, the
acquisition of Excel Staffing Services, Inc. which occurred on June 10, 2001 and
our initial public offering which was completed in April 2002. The unaudited pro
forma condensed consolidated statement of operations for the year ended December
30, 2001 also gives effect to our recapitalization on October 26, 2001 that was
accounted for as a leveraged recapitalization whereby the Company retained the
historical cost basis of accounting, as if these events had occurred on January
1, 2001. The unaudited pro forma condensed consolidated statement of operations
for the nine months ended September 29, 2002 gives effect to each of the
acquisitions of Clinical Resource and HSI and the initial public offering, as if
these events had occurred on December 31, 2001, the beginning of our fiscal
year. The unaudited pro forma condensed consolidated balance sheet as of
September 29, 2002 gives effect to the acquisitions of Clinical Resource and HSI
as if they had acquired on such date.
The purchase price allocation to the assets acquired and liabilities
assumed was based on a preliminary estimate in determining their respective fair
values. Our management believes that the preliminary allocations set forth
herein are reasonable and are subject to revisions upon completion of an
independent valuation study.
The pro forma financial information is not necessarily indicative of the
actual results of operations or financial position that would have occurred had
the acquisitions or the other transactions occurred on the assumed dates nor do
they represent any indication of future performance. The pro forma adjustments
give effect to available information and assumptions that we believe are
reasonable. The pro forma condensed consolidated financial information should be
read in conjunction with our consolidated financial statements and the related
notes, as well as "Selected Consolidated Financial Data and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in our initial public offering on Form S-1 filing in April
2002 and our unaudited condensed consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2002.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 29, 2002
(in thousands)
Medical Historical (5)
Staffing -------------------
Network Clinical Pro Forma
Holdings, Inc. Resources HSI Adjustments Pro Forma
--------------------------------------------------- ---------
Assets
Current assets:
Cash $ 2,339 $ 708 $ 204 $ -- (1)
(912) (3) $ 2,339
Accounts receivable, net 85,350 2,254 448 (1,027) (3) 87,025
Due from Health Search -- 693 -- (693) (3) --
Due from UltimIT Solutions Services, Inc. -- -- 626 (626) (3) --
Prepaid expenses 2,167 97 43 (140) (3) 2,167
Other current assets 1,623 26 15 (41) (3) 1,623
------------------------------------------------------------------
Total current assets 91,479 3,778 1,336 (3,439) 93,154
Furniture and equipment, net 11,129 20 128 (127) (3) 11,150
Goodwill and other intangible assets, net 93,568 -- -- 11,937 (4)
600 (4) 106,105
Other assets 3,902 4 5 (9) (3) 3,902
------------------------------------------------------------------
Total assets $200,078 $ 3,802 $ 1,469 $ 8,962 $214,311
==================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,060 $ 2 $ 6 $ (8) (3) $ 3,060
Accrued payroll and related liabilities 8,989 589 344 (637) (3) 9,285
Other current liabilities 3,157 -- -- -- 3,157
Line of credit -- 330 296 (626) (3) --
Notes payable - stockholders -- 436 -- (436) (3) --
Due to Clinical Resource -- -- 693 (693) (3) --
Due to Health-Pharm Management Corporation -- 60 100 (160) (3) --
Due to UltimIT Solution Services, Inc. -- 32 -- (32) (3) --
Current portion of long-term debt 1,687 -- -- -- 1,687
Current portion of capital lease obligations 981 -- -- -- 981
------------------------------------------------------------------
Total current liabilities 17,874 1,449 1,439 (2,592) 18,170
Long-term debt, net of current portion 40,313 -- -- 13,937 (1)(2) 54,250
Capital lease obligations, net of current portion 1,383 -- -- -- 1,383
Other long-term obligations 3,476 -- -- -- 3,476
------------------------------------------------------------------
Total liabilities 63,046 1,449 1,439 11,345 77,279
Stockholders' equity:
Common stock 301 2 1 (3) (3) 301
Promissory notes due for purchases of common stock (4,551) -- -- -- (4,551)
Additional paid in capital 283,703 -- -- -- 283,703
Accumulated other comprehensive income (118) -- -- -- (118)
Retained (deficit) earnings (142,303) 2,351 29 (2,380) (3) (142,303)
------------------------------------------------------------------
Total common stockholders' equity 137,032 2,353 30 (2,383) 137,032
------------------------------------------------------------------
Total liabilities and common stockholders' equity $200,078 $ 3,802 $ 1,469 $ 8,962 $214,311
==================================================================
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF SEPTEMBER 29, 2002
(1) Changes in cash:
Total estimated cash consideration to Clinical Resource ($13,756,000)
and HSI stockholders
Estimated transaction costs (181,000)
Proceeds from borrowing under revolving line of credit 13,937,000
-------------
Net change in cash $ --
=============
Total transaction costs are estimated to be $181,000, which includes legal
fees, consulting fees and accounting fees.
(2) Total cash consideration and estimated transaction costs of $13.9 million
were financed by the revolving line of credit.
(3) Reflects the elimination of account balances of Clinical Resource and HSI
not acquired.
(4) Represents the allocation of the purchase price in excess of the fair value
of the net assets acquired from Clinical Resource and HSI to goodwill of
$11.9 million and the estimated fair value of covenant not to compete of
$600,000.
A summary of the allocation of purchase price is as follows:
Accounts receivable $ 1,675,000
Furniture and equipment 21,000
Covenant not to compete 600,000
Goodwill 11,937,000
Current liabilities (296,000)
-----------
Net assets acquired $13,937,000
===========
The purchase price allocation to the assets acquired and liabilities
assumed was based on a preliminary estimate in determining their respective
fair values. Our management believes that the preliminary allocations set
forth herein are reasonable and are subject to revisions upon completion of
an independent valuation study.
(5) The financial information for Clinical Resource and HSI is as of September
30, 2002.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2001
(in thousands, except share and per share data)
Medical
Staffing
Medical Network Historical (12)
Staffing Holdings, Inc.---------------- Pro Forma
Network Pro Forma Pro Forma Clinical Acquisition
Holdings, Inc. Adjustments As Adjusted Resources HSI Adjustments Pro Forma
------------------------------------------------------------ ----------- ---------
Service revenues $338,380 $ 6,458 (1) $344,838 $ 11,037 $3,724 $ -- $359,599
Cost of services rendered 252,089 4,914 (1) 257,003 7,634 1,942 -- 266,579
Selling, general and administrative expenses (2) 47,415 375 (1) 47,790 2,176 1,278 (348) (7) 50,896
Corporate general and administrative expenses 6,428 25 (1) 6,453 -- -- -- 6,453
Depreciation and amortization expenses 5,871 303 (1) 6,174 1 50 100 (8) 6,325
Recapitalization expenses 7,160 -- (1) 7,160 -- -- -- 7,160
------------------- ------------------------------ ------ --------
Income from operations 19,417 841 20,258 1,226 454 248 22,186
Interest expense, net 14,312 352 (1)
6,225 (3)
(12,148)(4)
(1,243)(4) 7,498 71 24 683 (9) 8,276
-------- ------- ------------------------------ ------ --------
Income before provision for income taxes 5,105 7,655 12,760 1,155 430 (435) 13,910
Income tax expense 3,679 196 (1)
(2,366)(5)
4,616 (5) 618 (10)
472 (5) 6,597 -- -- (170) (11) 7,045
-------- ------- ------------------------------ ------ --------
Income (loss) from continuing operations $ 1,426 $ 4,737 $ 6,163 $ 1,155 $ 430 $ (883) $ 6,865
======== ======= ============================== ====== ========
Basic (loss) income per share before
extraordinary loss $ (0.06)(6) $ 0.21 $ 0.23
Diluted (loss) income per share before
extraordinary loss $ (0.06)(6) $ 0.20 $ 0.22
Weighted average common shares
outstanding:
Basic 6,338,000 29,916,875 29,916,875
Diluted 6,338,000 31,368,875 31,368,875
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2001
(1) Represents the historical operating results of Excel Staffing Services,
Inc. for the period from January 1, 2001 through June 10, 2001, except for
depreciation and amortization expenses ($303,000) and interest expense
($352,000) from January 1, 2001 through the date of acquisition, which
represent pro forma adjustments to reflect amortization of goodwill and
intangibles and interest expense on the debt entered into to finance the
acquisition.
(2) Includes provision for doubtful accounts.
(3) Reflects the following related to the October 2001 recapitalization:
o Net incremental interest expense of approximately $5.2 million as a
result of the advances of $105 million on the $120 million senior
credit facility ($11.3 million) offset by a reduction of interest
expense ($6.1 million) related to the assumed repayment of
approximately $81.2 million of the revolving senior credit notes and
the 12% subordinated promissory note. The interest rates in effect at
December 30, 2001 were used to compute the pro forma incremental
interest expense.
o Increase in interest expense, net of $1.2 million related to the
interest rate swap agreement used to hedge certain cash flows related
to the $120 million senior credit facility. The fixed interest rate of
the interest rate swap (4.34%) offset by the variable interest rate in
effect at December 30, 2001 (1.799%) was used to compute the pro forma
interest expense.
o Net decrease in amortization expense of $200,000 related to debt
issuance costs and the debt discount on the $81.2 million revolving
senior credit facility ($760,000) and the net increase in amortization
expense on the $120 million senior credit facility ($560,000).
(4) Reflects the following related to the use of proceeds from the initial
public offering of approximately $156.3 million:
o Reduction in interest expense of approximately $7.4 million related to
the assumed repayment of $59.3 million of 12% senior unsecured notes
entered into in the recapitalization.
o Reduction in interest expense of approximately $4.7 million related to
the assumed repayment of $76.7 million of the $120 million senior
credit facility entered into in the recapitalization.
o Reduction in interest expense by approximately $1.2 million related to
the assumed repayment of $20.3 million of the $120 million senior
credit facility entered
into in the recapitalization, using proceeds from the underwriters'
exercise of the over-allotment option. The over-allotment was
exercised on April 17, 2002.
The interest rates in effect at December 30, 2001 were used to compute the
pro forma as adjusted interest expense.
(5) Reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the recapitalization of $2.4 million and initial
public officering of $5.1 million.
(6) Income from continuing operations was reduced by $1.8 million of dividends
accrued on the Series I Convertible Preferred Stock. As a result, all
potential common stock equivalents are antidilutive.
(7) In connection with the Clinical Resource and HSI acquisitions, a management
agreement that existed with the former stockholders was terminated and
replaced with an employment agreement that consists of the same services to
be provided. The management fee for the year ended December 31, 2001 was
approximately $500,000.
(8) Reflects incremental amortization expense related to the non-compete
agreement of $600,000 being amortized over 72 months.
(9) Reflects incremental interest expense associated with debt used to acquire
Clinical Resource and HSI of approximately $13.9 million at an effective
interest rate of 4.9%.
(10) Provision for income taxes for both Clinical Resource and HSI as if each
company were a C-Corporation.
(11) Reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the pro forma adjustments.
(12) The historical financial information for Clinical Resource and HSI is for
the year ended December 31, 2001.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(in thousands, except share and per share data)
Medical
Staffing
Medical Network Historical (9)
Staffing Holdings, Inc.------------------ Pro Forma
Network Pro Forma Pro Forma Clinical Acquisition
Holdings, Inc. Adjustments As Adjusted Resources HSI Adjustments Pro Forma
------------- ------------------------- ------------------ ----------- ---------
Service revenues $346,261 $ -- $346,261 $ 9,426 $2,427 $ -- $358,114
Cost of services rendered 258,660 -- 258,660 6,704 1,146 -- 266,510
Selling, general and administrative (8) 48,926 -- 48,926 1,961 830 (326) (3) 51,391
Corporate general and administrative 5,420 -- 5,420 -- -- -- 5,420
Depreciation and amortization 3,112 -- 3,112 9 60 75 (4) 3,256
-------- ------- -------- ------------------ ------ --------
Income from operations 30,143 -- 30,143 752 391 251 31,537
Interest expense, net 6,467 (4,149) (1) 2,318 14 14 512 (5) 2,858
-------- ------- -------- ------------------ ------ --------
Income before provision for income taxes 23,676 4,149 27,825 738 377 (261) 28,679
Income tax expense 9,709 1,701 (2) 11,410 435 (6)
(102) (7) 11,743
-------- ------- -------- ------------------ ------ --------
Net income $ 13,967 $ 2,448 $ 16,415 $ 738 $ 377 $ (594) $ 16,936
======== ======= ======== ================== ====== ========
Basic income per share $ 0.60 (10) $ 0.55 $ 0.56
Diluted income per share $ 0.50 (10) $ 0.52 $ 0.54
Weighted average common shares
outstanding:
Basic 18,199,429 29,985,169 29,985,169
Diluted 27,766,225 31,323,676 31,323,676
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(1) Reflects the following related to the use of proceeds from the initial
public offering of approximately $156.3 million:
o Reduction in interest expense of approximately $2.2 million related to
the assumed repayment of $59.3 million of 12% senior unsecured notes
entered into in the recapitalization.
o Reduction in interest expense of approximately $1.9 million related to
the assumed repayment of $97.0 million of the $120 million senior
credit facility entered into in the recapitalization.
The interest rates in effect on April 17, 2002 were used to compute the pro
forma as adjusted interest expense.
(2) Reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the initial public offering of $1.7 million.
(3) In connection with the Clinical Resources and HSI acquisitions, a
management agreement that existed with the former stockholders was
terminated and replaced with an employment agreement that consists of the
same services to be provided. The management fee for the nine months ended
September 30, 2002 was approximately $400,000.
(4) Reflects incremental amortization expenses related to the non-compete
agreement of $600,000 being amortized over 72 months.
(5) Reflects incremental interest expense associated with debt used to acquire
Clinical Resource and HSI of approximately $13.9 million at an effective
interest rate of 4.9%.
(6) Provision for income taxes for both Clinical Resources and HSI as if each
company were a C-Corporation.
(7) Reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the pro forma adjustments.
(8) Includes provision for doubtful accounts.
(9) The historical financial information for Clinical Resource and HSI is for
the nine months ended September 30, 2002.
(10) Net income was reduced by $3.1 million of dividends accrued on the Series I
Convertible Preferred Stock.