<Page>
AS FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-82438
PROSPECTUS
7,812,500 SHARES
[LOGO]
COMMON STOCK
----------------------------------------------------------------------
We are offering 7,812,500 shares of common stock in this initial public
offering. No public market currently exists for our common stock.
We have been approved to list our shares on the New York Stock Exchange under
the symbol "MRN."
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8.
<Table>
<Caption>
PER
SHARE TOTAL
-------- ------------
Public Offering Price....................................... $19.00 $148,437,500
Underwriting Discount....................................... $ 1.33 $ 10,390,625
Proceeds to Medical Staffing Network Holdings, Inc.......... $17.67 $138,046,875
</Table>
We have granted the underwriters a 30-day option to purchase up to 1,171,875
additional shares of common stock to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers and Deutsche Bank Securities, on behalf of the underwriters,
expect to deliver the shares on or about April 23, 2002.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS DEUTSCHE BANK SECURITIES
----------------
CREDIT SUISSE FIRST BOSTON JPMORGAN
April 17, 2002
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
Prospectus Summary.................... 1
Risk Factors.......................... 8
Forward-Looking Statements............ 15
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 19
Selected Consolidated Financial Data
and Other Data...................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 32
</Table>
<Table>
<Caption>
PAGE
--------
Management............................ 41
Employment Agreements................. 45
Certain Transactions.................. 51
Principal Stockholders................ 53
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 59
Underwriting.......................... 61
Legal Matters......................... 65
Experts............................... 65
Where You Can Find More
Information......................... 65
Index to Consolidated Financial
Statements.......................... F-1
</Table>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. This prospectus is not an offer to sell
or a solicitation of an offer to buy shares in any jurisdiction where such offer
or any sale of shares would be unlawful. The information in this prospectus is
complete and accurate only as of the date on the front cover regardless of the
time of delivery of this prospectus or of any sale of shares.
Until May 12, 2002, 25 days after the date of this offering, all dealers
that effect transactions in our shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. YOU SHOULD READ CAREFULLY THIS SUMMARY TOGETHER WITH THE
MORE DETAILED INFORMATION, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED
NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR CONVENIENCE IN THIS
PROSPECTUS, "MEDICAL STAFFING NETWORK," "WE," "US," "THE COMPANY" AND "OUR"
REFER TO MEDICAL STAFFING NETWORK HOLDINGS, INC. AND OUR SUBSIDIARIES, TAKEN AS
A WHOLE.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
OUR COMPANY
We are a leading medical staffing company and the largest provider of per
diem nurse staffing services (staffing assignments of less than 13 weeks in
duration) in the United States as measured by revenues. Our per diem staffing
assignments place our professionals, predominately nurses, at hospitals and
other healthcare facilities to solve our clients' temporary staffing needs. In
2000, the temporary medical staffing industry generated $7.2 billion in
revenues, 57% (or approximately $4.1 billion) of which was generated by the per
diem nurse staffing industry. In 2001, approximately 75% of our revenues were
derived from per diem nurse staffing. We believe we are also a leading provider
of specialized radiology and diagnostic imaging technicians and clinical
laboratory technicians, or "allied health" professionals, as measured by
revenues. We serve our clients through what we believe to be the largest
temporary medical staffing network in the United States, which, as of
December 30, 2001, is comprised of 136 branches that provide nurse staffing on a
per diem basis in 43 states. Our extensive client base includes over 7,000
healthcare facilities, including leading for-profit and not-for-profit
hospitals, leading teaching hospitals and regional healthcare providers. As of
December 30, 2001, our database contained profiles of over 25,000 active
professionals who we place on temporary assignment in healthcare facilities, up
89% compounded annually from 7,000 on December 31, 1999.
Our business has grown significantly since our founding in 1998. Over 70% of
our revenue growth in 2001 was derived from organic sources with the remainder
coming from acquisitions. The organic growth was comprised of same-store revenue
growth (defined as revenue growth from our branches that have been open more
than two years) and growth from branches opened in 2000 and 2001. Our same-store
revenue growth has been the result of our ability to leverage our national
network and leading brand name, successfully recruit nurses and cross-sell our
services. Branches that we have opened, which we call our "de novo" branches,
generated rapid revenue growth and typically achieved positive EBITDA within six
months of operation. We opened 30 de novo branches in 2000 and 64 de novo
branches in 2001. Due to our ability to leverage the fixed costs within our
branches and our corporate overhead, our EBITDA has increased substantially from
$7.1 million in 1999 to $32.4 million in 2001, and our EBITDA margin increased
from 7.4% to 9.6% during the same period. In 2001, we experienced a net loss
available to common stockholders of approximately $3.1 million and used
approximately $1.7 million of net cash flow in operating activities.
We believe the flexibility of our service offerings provides substantial
value to our clients and professionals. We provide our clients with significant
assistance in managing their profitability by giving them a high degree of
control in managing their labor costs without sacrificing clinical expertise. In
addition, working on a per diem basis allows our professionals substantial
flexibility in balancing their careers with their lifestyle objectives.
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INDUSTRY OVERVIEW
According to THE STAFFING INDUSTRY REPORT, the temporary medical staffing
industry was projected to grow to an $8.7 billion industry in 2001, representing
a growth rate of 21%. The following factors are expected to drive the growth of
the temporary medical staffing industry:
- INCREASED UTILIZATION OF HEALTHCARE SERVICES. We expect healthcare needs
of aging baby boomers and a projected increase in the utilization of
higher acuity treatments to contribute to an increase in demand for
healthcare services.
- INTENSIFYING SHORTAGE OF NURSES INCREASES NEED FOR MEDICAL STAFFING
SERVICES. The population of nurses is expected to continue to contract due
to a decline in nursing school enrollments, an increase in the average age
of nurses and the appeal to nurses of less demanding positions in lower
acuity environments. This contraction has contributed to a shortage of
nurses, which has required healthcare providers to increase their use of
temporary medical services to meet their staffing needs.
- WORKING ON A PER DIEM BASIS APPEALS TO NURSES. Working on a per diem basis
provides a nurse with improved compensation levels and alternatives
regarding work schedules and working conditions.
- COST CONTAINMENT PRESSURES DRIVE PROVIDERS TO VARIABLE STAFFING MODELS. As
healthcare providers have faced reductions in reimbursement rates and
other cost containment pressures from payors, they have increasingly
relied on temporary medical staffing as a means to improve their
profitability.
- INCREASED STAFFING REQUIRED DUE TO NEW LEGISLATION. Several states have
enacted or are considering legislation that could have the effect of
increasing demand for temporary healthcare services.
COMPETITIVE CONSIDERATIONS
We believe the following competitive strengths will allow us to continue our
growth and to benefit from the favorable industry trends we are facing:
- NATIONAL NETWORK AND LEADING BRAND NAME. We operate the largest per diem
healthcare staffing network in the United States with 136 per diem
branches in 43 states. This substantial market presence and the quality of
the services we provide have allowed us to build the Medical Staffing
Network name into a respected brand that is widely recognized by
healthcare providers and professionals alike, both on a national and local
basis. Furthermore, this network of branches provides a platform from
which we can provide additional services to our clients.
- SUCCESSFUL DE NOVO PROGRAM. We make extensive use of our carefully
developed program for opening new branches, which we call our de novo
program. Since 1998, we have opened 100 new branches using this program,
including 64 in 2001. This strategy has enabled us to expand our U.S.
presence and quickly and efficiently enter new markets. These branches
have generated attractive financial results, including high growth, rapid
EBITDA profitability and significant return on investment. We opened 30 de
novo branches in 2000, which generated $48.9 million in revenues in 2001.
- EXTENSIVE RECRUITING AND RETENTION EXPERTISE. We have developed a
successful program for recruiting and retaining a pool of talented and
highly credentialed healthcare professionals. A significant percentage of
our recruiting is generated through word-of-mouth from our active pool of
professionals. We attribute our success in this area to offering our
professionals:
-- flexible staffing assignments;
-- competitive benefits packages;
2
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-- choice of pay frequency (including daily); and
-- leading continuing education programs available through the Internet.
- ADVANCED INFORMATION SYSTEMS CAPABILITY ENHANCES RELATIONSHIPS WITH
PROFESSIONALS AND CLIENTS. Our information systems provide us with several
key advantages in our interactions with professionals and clients,
including the ability to pay our professionals as frequently as daily, the
ability of our clients to view on-line their account history, status, and
staff credentials and the ability to efficiently administer staffing
assignments. We believe that, in addition to providing benefits that
professionals and clients value, our systems create valuable opportunities
for our branch staff to maintain an active dialogue with our professionals
and clients and foster unique relationships that distinguish us from our
competitors. In addition, our systems maintain a detailed profile for each
professional, enabling our branch staff to place professionals
systematically according to their past experiences and expressed
preferences. These capabilities lead our professionals to view us as an
employer of choice.
- SIGNIFICANT LOCAL PRESENCE FOSTERS STRONG CLIENT RELATIONSHIPS. Due to the
immediate nature of the need for per diem staffing, it is necessary to
maintain branch offices that are close to our clients' facilities. Our
local branches are staffed to receive calls 24 hours a day, 365 days a
year from our clients. We believe this level of service and responsiveness
creates a highly differentiated and valued service for our clients.
- MANAGEMENT EXPERTISE AND WELL-DEVELOPED, SCALEABLE INFRASTRUCTURE. We
believe that our management expertise in the medical staffing industry,
our extensive network of local branches, and our integrated and scalable
information systems position us well for future growth. Approximately 80%
of our senior managers have clinical backgrounds and, as a group, average
15 years of experience in the healthcare industry. Our customized
information systems can be installed in new branches at low cost and allow
our managers to be highly efficient. As a result, our infrastructure
serves as a powerful vehicle for growth.
However, the temporary medical staffing industry is highly competitive and
some of our competitors have greater resources than we do. If our competitors
seek to gain or retain market share by reducing prices or increasing marketing
expenditures, if we are unable for any reason to attract temporary healthcare
professional employees, or if we are unable to acquire or open branches in
attractive markets, we could lose revenues or hospital and healthcare facility
clients and our margins could decline, which could seriously harm our operating
results.
GROWTH STRATEGY
We seek to continue our rapid growth by pursuing the following strategies:
- FURTHER EXPAND OUR LEADERSHIP POSITION IN THE PER DIEM MEDICAL STAFFING
INDUSTRY. We intend to maintain and grow our leadership position in the
per diem medical staffing industry. By continuing to offer our clients and
professionals highly attractive solutions and alternatives, we believe we
can maintain and expand our leadership position.
- DRIVE SAME-STORE REVENUE GROWTH. We intend to foster continued same-store
revenue growth by increasing the number of professionals we recruit and
staff, by increasing the number of facilities with which we work and by
improving our staffing penetration at those facilities.
- CONTINUE OUR DE NOVO DEVELOPMENT PROGRAM. We will continue to foster
growth through new and existing de novo branches and to enter attractive
new markets that demonstrate high demand for temporary medical staffing
and complement our existing infrastructure.
- EXPAND OUR SERVICE OFFERINGS TO OUR HEALTHCARE CLIENTS. We intend to
leverage our local infrastructure and relationships with healthcare
facilities to promote cross-selling opportunities.
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- PURSUE SELECTIVE ACQUISITIONS. We intend to continue to use acquisitions
to expand our U.S. presence and to add complementary service offerings.
However, we do not have any commitments or agreements for any material
acquisitions.
CORPORATE INFORMATION
We were incorporated in Delaware in 1998. Our principal executive offices
are located at 901 Yamato Road, Suite 110, Boca Raton, FL 33431, and our
telephone number is (561) 226-9000. Our website is located at www.msnhealth.com.
Our website is not part of this prospectus.
4
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THE OFFERING
<Table>
Common Stock Offered......................... 7,812,500 shares
Common Stock Outstanding After the
Offering................................... 28,914,692 shares
Use of Proceeds.............................. We intend to use the proceeds from the
offering to repay principal and accrued
interest in the amount of approximately
$62.4 million under our outstanding senior
unsecured notes and approximately
$73.6 million of outstanding indebtedness
under the senior credit facility of our
subsidiary, Medical Staffing Network, Inc.
See "Use of Proceeds."
New York Stock Exchange Symbol............... "MRN"
</Table>
Except as otherwise noted, the outstanding share information in this prospectus
excludes:
- 2,033,080 shares of our common stock that we may issue upon the exercise
of outstanding options as of December 30, 2001 at a weighted average
exercise price of $5.55 per share; and
- 813,833 shares of our common stock available for future issuance under our
option plans as of December 30, 2001.
Except as otherwise noted, all information in this prospectus:
- assumes no exercise of the underwriters' over-allotment option;
- assumes the conversion of all outstanding shares of preferred stock,
including accrued dividends thereon through April 23, 2002 (the
anticipated closing date for the offering), into 21,075,645 shares of
common stock;
- reflects the 3.069375 for 1 stock split that will occur prior to the
closing of the offering; and
- assumes the filing of our amended and restated certificate of
incorporation, which will occur simultaneously with the closing of the
offering.
5
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary consolidated financial data derived
from our consolidated financial statements. The summary consolidated financial
data below should be read in conjunction with the consolidated financial
statements and related notes as well as the sections titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Use of Proceeds" included elsewhere in this prospectus.
The pro forma as adjusted consolidated income statement and other data for
the year ended December 30, 2001 reflect the acquisition of Excel Staffing
Services, Inc. and the recapitalization that occurred in October 2001, and are
as adjusted for this offering and the expected use of proceeds as if these
events occurred on January 1, 2001. The pro forma as adjusted consolidated
balance sheet data as of December 30, 2001 gives effect to this offering as of
December 30, 2001. The pro forma information is not necessarily indicative of
the actual results of operations that would have occurred had the acquisition of
Excel Staffing Services, Inc., the October 2001 recapitalization, and this
offering occurred on January 1, 2001 nor do they represent any indication of
future performance.
<Table>
<Caption>
PREDECESSOR
JUNE 5, 1997 PRO FORMA
(INCEPTION) AS ADJUSTED
THROUGH FISCAL YEAR ENDED YEAR ENDED
DECEMBER 31, ----------------------------------------------------- DECEMBER 30,
1997(1) 1998 (1) 1999 2000 2001 2001 (2)
------------ ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Service revenues........................ $ 2,744 $ 33,097 $ 96,456 $ 182,045 $ 338,380 $ 344,838
Cost of services rendered............... 2,020 25,066 72,922 135,971 252,089 257,003
---------- ----------- ----------- ----------- ----------- -----------
Gross profit............................ 724 8,031 23,534 46,074 86,291 87,835
Selling, general and administrative
expenses (3).......................... 1,058 6,548 13,809 26,997 47,415 47,790
Corporate and administrative expenses... -- 1,324 2,578 4,711 6,428 6,453
Depreciation and amortization
expenses.............................. 78 757 2,114 3,797 5,871 6,174
Recapitalization expenses............... -- -- -- -- 7,160 7,160
---------- ----------- ----------- ----------- ----------- -----------
(Loss) income from operations........... (412) (598) 5,032 10,569 19,417 20,258
Interest expense, net................... 11 518 1,867 5,007 14,312 8,741
---------- ----------- ----------- ----------- ----------- -----------
(Loss) income before provision for
income taxes and extraordinary item... (423) (1,116) 3,165 5,562 5,105 11,517
Extraordinary loss, net (4)............. -- -- -- -- (2,732) --
Net (loss) income....................... (423) (1,116) 2,375 3,520 (1,306) 5,392
Deduct required dividends on convertible
preferred stock (5)................... -- -- -- -- 1,804 --
---------- ----------- ----------- ----------- ----------- -----------
(Loss) income available to common
stockholders.......................... (423) (1,116) 2,375 3,520 (3,110) 5,392
Net (loss) income per share:
Basic (6)........................... $ (0.09) $ (0.15) $ 0.32 $ 0.46 $ (0.49) $ 0.19
Diluted (6)......................... $ (0.09) $ (0.15) $ 0.09 $ 0.13 $ (0.49) $ 0.18
Weighted average common shares
outstanding:
Basic (6)........................... 4,822,000 7,247,000 7,498,000 7,581,000 6,338,000 28,745,000
Diluted (6)......................... 4,822,000 7,247,000 25,586,000 26,817,000 6,338,000 30,197,000
OTHER DATA:
EBITDA (7).............................. (334) 159 7,147 14,366 32,448 33,592
EBITDA % of revenue..................... NM 0.5% 7.4% 7.9% 9.6% 9.7%
Number of per diem branches............. 1 26 34 74 136 136
Net cash flow used in operating
activities............................ $ (19) $ (2,925) $ (2,219) $ (9,009) $ (1,654)
Net cash flow used in investing
activities............................ $ (4,293) $ (28,908) $ (20,939) $ (23,738) $ (14,611)
Net cash flow provided by financing
activities............................ $ 4,590 $ 31,927 $ 23,101 $ 32,638 $ 27,313
</Table>
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<Table>
<Caption>
AS OF DECEMBER 30, 2001
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED (8)
--------- ----------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash........................................................ $ 11,253 $ 11,253
Total assets................................................ 162,019 162,019
Total long term obligations and redeemable preferred
stock..................................................... 291,970 30,916
Total stockholders' (deficit) equity........................ (157,722) 102,942
</Table>
- ------------------------------
(1) On March 1, 1998, we entered into a merger agreement with Southeast Staffing
Partners, Inc., which for accounting and reporting purposes is our
predecessor. Financial data prior to March 1, 1998 is that of our
predecessor. The 1998 financial data include the January and February 1998
results of our predecessor, which were not significant.
(2) Reflects the following adjustments as if the acquisition of Excel
Staffing, Inc., the October 2001 recapitalization and this offering had
occurred on January 1, 2001: (a) the operating results of Excel Staffing
Services, Inc. of approximately $841,000 for the period from January 1, 2001
to the acquisition date, including additional amortization expense of
approximately $303,000 related to $9.7 million of goodwill and other
intangibles acquired in the Excel acquisition; (b) net decrease in interest
expense of approximately $5.6 million as a result of the following:
(i) reduction of approximately $5.8 million resulting from the repayment of
approximately $81.2 million of revolving senior credit notes and a 12%
subordinated promissory note; (ii) net incremental interest expense of
approximately $0.5 million related to advances of $105 million on the
$120 million senior credit facility entered into in connection with the
October 2001 recapitalization, of which $76.7 million was repaid with
proceeds from this offering; (iii) reduction in interest expense of
approximately $1.3 million related to the 12% senior unsecured notes of
approximately $59.3 million entered into in connection with the
October 2001 recapitalization and repaid with the proceeds from this
offering; (iv) 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 and the net increase in amortization on the
$120 million senior credit facility; and (v) incremental interest expense of
approximately $1.2 million related to the interest rate swap agreement used
to hedge certain cash flows related to the $120 million senior credit
facility; and (c) additional income taxes of approximately $2.4 million,
related to the above adjustments.
(3) Includes provision for doubtful accounts.
(4) Reflects the charges related to the early extinguishment of debt in
connection with the October 2001 recapitalization.
(5) Reflects 8% dividends accrued on Series I Convertible Preferred Stock issued
in connection with the October 2001 recapitalization. The Series I
Convertible Preferred Stock will be converted into common stock upon
completion of the offering.
(6) In calculating pro forma basic and diluted net income per share, we have
given effect to the conversion of all of our outstanding redeemable
preferred stock and accrued dividends thereon into common stock as if the
conversion occurred at the beginning of the period. We will use
approximately $136.0 million of the proceeds of the offering to repay
outstanding debt.
(7) EBITDA consists of net (loss) income excluding net interest, taxes,
depreciation, amortization, and non-recurring recapitalization expenses.
EBITDA is provided as a measure of financial performance commonly used as an
indicator of a company's historical ability to service debt. EBITDA is
presented because we believe it is a widely accepted financial indicator
used by certain investors and securities analysts to analyze and compare
companies on the basis of operating performance. EBITDA is not intended as
an alternative to operating income as an indicator of operating performance
or cash flows from operating activities as a measure of liquidity determined
in accordance with GAAP. EBITDA, as we define it, is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation. For further
information, see our consolidated financial statements and related notes
elsewhere in this prospectus.
(8) Reflects the following adjustments as if the offering had occurred on
December 30, 2001: (a) increase in stockholders' equity of $260.7 million as
follows: (i) conversion of the Series I Convertible Preferred Stock into
common stock ($124.6 million); and (ii) new issuances of common stock
($136.0 million); and (b) repayment of $75.4 million under our senior credit
facility and $60.6 million of principal and accrued interest under our
senior unsecured notes.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK REPRESENTS A HIGH DEGREE OF RISK. THERE
ARE A NUMBER OF FACTORS, INCLUDING THOSE SPECIFIED BELOW, WHICH MAY ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL RESULTS OR STOCK PRICE. ADDITIONAL RISKS THAT WE
DO NOT KNOW ABOUT OR THAT WE CURRENTLY VIEW AS IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OR ADVERSELY IMPACT OUR FINANCIAL RESULTS OR STOCK PRICE. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE MAKING A DECISION TO INVEST IN OUR COMMON
STOCK.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
IF WE ARE UNABLE TO ATTRACT QUALIFIED NURSES AND ALLIED HEALTHCARE PROFESSIONALS
FOR OUR HEALTHCARE STAFFING BUSINESS, OUR BUSINESS COULD BE NEGATIVELY IMPACTED.
We rely significantly on our ability to attract and retain nurses and allied
healthcare professionals who possess the skills, experience and licenses
necessary to meet the requirements of our hospital and healthcare facility
clients. We compete for healthcare staffing personnel with other temporary
healthcare staffing companies and with hospitals and healthcare facilities. We
must continually evaluate and expand our temporary healthcare professional
network to keep pace with our hospital and healthcare facility clients' needs.
Currently, there is a shortage of qualified nurses in most areas of the United
States, competition for nursing personnel is increasing, and salaries and
benefits have risen. We may be unable to continue to increase the number of
temporary healthcare professionals that we recruit, decreasing the potential for
growth of our business. Our ability to attract and retain temporary healthcare
professionals depends on several factors, including our ability to provide
temporary healthcare professionals with assignments that they view as attractive
and to provide them with competitive benefits and wages. We cannot assure you
that we will be successful in any of these areas. The cost of attracting
temporary healthcare professionals and providing them with attractive benefit
packages may be higher than we anticipate and, as a result, if we are unable to
pass these costs on to our hospital and healthcare facility clients, our
profitability could decline. Moreover, if we are unable to attract and retain
temporary healthcare professionals, the quality of our services to our hospital
and healthcare facility clients may decline and, as a result, we could lose
clients.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND OUR SUCCESS DEPENDS ON OUR ABILITY
TO REMAIN COMPETITIVE IN OBTAINING AND RETAINING HOSPITAL AND HEALTHCARE
FACILITY CLIENTS AND TEMPORARY HEALTHCARE PROFESSIONALS.
The temporary medical staffing business is highly competitive. We compete in
national, regional and local markets with full-service staffing companies and
with specialized temporary staffing agencies. Some of our competitors in the
temporary nurse staffing sector include AMN Healthcare Services, Inc., Cross
Country, Inc. and RehabCare Group, Inc. Some of these companies may have greater
marketing and financial resources than we do. Competition for hospital and
healthcare facility clients and temporary healthcare professionals may increase
in the future and, as a result, we may not be able to remain competitive. To the
extent competitors seek to gain or retain market share by reducing prices or
increasing marketing expenditures, we could lose revenues or hospital and
healthcare facility clients and our margins could decline, which could seriously
harm our operating results and cause the price of our stock to decline. In
addition, the development of alternative recruitment channels could lead our
hospital and healthcare facility clients to bypass our services, which would
also cause our revenues and margins to decline.
OUR BUSINESS DEPENDS UPON OUR CONTINUED ABILITY TO SECURE AND FILL NEW ORDERS
FROM OUR HOSPITAL AND HEALTHCARE FACILITY CLIENTS, BECAUSE WE DO NOT HAVE
LONG-TERM AGREEMENTS OR EXCLUSIVE CONTRACTS WITH THEM.
We do not have long-term agreements or exclusive guaranteed order contracts
with our hospital and healthcare facility clients. The success of our business
depends upon our ability to continually secure new orders from hospitals and
other healthcare facilities and to fill those orders with our temporary
healthcare professionals. Our hospital and healthcare facility clients are free
to place orders
8
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with our competitors and may choose to use temporary healthcare professionals
that our competitors offer them. Therefore, we must maintain positive
relationships with our hospital and healthcare facility clients. If we fail to
maintain positive relationships with our hospital and healthcare facility
clients, we may be unable to generate new temporary healthcare professional
orders and our business may be adversely affected.
AN IMPORTANT PART OF OUR STRATEGY IS THE EXPANSION OF OUR BUSINESS THROUGH THE
OPENING AND DEVELOPMENT OF DE NOVO BRANCHES. THE SUCCESS OF THIS EXPANSION
DEPENDS ON OUR ABILITY TO CONTINUE TO IDENTIFY AND RETAIN LOCAL MANAGEMENT AND
TO SECURE GOOD LOCATIONS.
Since our founding in 1998, we have opened 100 de novo branches, including
64 de novo branches in 2001. This expansion activity has contributed
substantially to our operating results and is an important part of our business
strategy. Our ability to continue to open de novo branches depends on a number
of factors, including identifying, attracting and retaining local management and
securing good locations on acceptable terms. If our ability to continue to open
de novo branches is impaired, our revenue growth may be adversely affected. In
addition, if our existing de novo branches do not develop as quickly as we
anticipate, or if we fail to integrate de novo branches effectively into our
national network, our results of operations may be adversely affected.
FLUCTUATIONS IN PATIENT OCCUPANCY AT OUR CLIENTS' HOSPITALS AND HEALTHCARE
FACILITIES MAY ADVERSELY AFFECT THE DEMAND FOR OUR SERVICES AND THEREFORE THE
PROFITABILITY OF OUR BUSINESS.
Demand for our temporary healthcare staffing services is significantly
affected by the general level of patient occupancy at our hospital and
healthcare clients' facilities. When occupancy increases, hospitals and other
healthcare facilities often add temporary employees before full-time employees
are hired. As occupancy decreases, hospitals and other healthcare facilities
typically reduce their use of temporary employees before undertaking layoffs of
their regular employees. In addition, we may experience more competitive pricing
pressure during periods of occupancy downturn. Occupancy at our clients'
hospitals and healthcare facilities also fluctuates due to the seasonality of
some elective procedures. We are unable to predict the level of patient
occupancy at any particular time and its effect on our revenues and earnings.
HEALTHCARE REFORM COULD NEGATIVELY IMPACT OUR BUSINESS OPPORTUNITIES, REVENUES
AND MARGINS.
The U.S. government has undertaken efforts to control increasing healthcare
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the recent past, the U.S. Congress has
considered several comprehensive healthcare reform proposals. The proposals were
generally intended to expand healthcare coverage for the uninsured and reduce
the growth of total healthcare expenditures. While the U.S. Congress did not
adopt any comprehensive reform proposals, members of Congress may raise similar
proposals in the future. If any of these proposals are approved, hospitals and
other healthcare facilities may react by spending less on healthcare staffing,
including nurses. If this were to occur, we would have fewer business
opportunities, which could seriously harm our business.
State governments have also attempted to control increasing healthcare
costs. For example, the state of Massachusetts has recently implemented a
regulation that limits the hourly rate payable to temporary nursing agencies for
registered nurses, licensed practical nurses and certified nurses' aides. The
state of Minnesota has also implemented a statute that limits the amount that
nursing agencies may charge nursing homes. Other states have also proposed
legislation that would limit the amounts that temporary staffing companies may
charge. Any such current or proposed laws could seriously harm our business,
revenues and margins.
Furthermore, third party payors, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by hospitals
and other healthcare facilities to obtain full
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reimbursement from those third party payors could reduce the demand or the price
paid for our staffing services.
WE OPERATE IN A REGULATED INDUSTRY AND CHANGES IN REGULATIONS OR VIOLATIONS OF
REGULATIONS MAY RESULT IN INCREASED COSTS OR SANCTIONS THAT COULD REDUCE OUR
REVENUES AND PROFITABILITY.
The healthcare industry is subject to extensive and complex federal and
state laws and regulations related to professional licensure, conduct of
operations, payment for services and payment for referrals. If we fail to comply
with the laws and regulations that are directly applicable to our business, we
could suffer civil and/or criminal penalties or be subject to injunctions or
cease and desist orders.
The extensive and complex laws that apply to our hospital and healthcare
facility clients, including laws related to Medicare, Medicaid and other federal
and state healthcare programs, could indirectly affect the demand or the prices
paid for our services. For example, our hospital and healthcare facility clients
could suffer civil and/or criminal penalties and/or be excluded from
participating in Medicare, Medicaid and other healthcare programs if they fail
to comply with the laws and regulations applicable to their businesses. In
addition, our hospital and healthcare facility clients could receive reduced
reimbursements, or be excluded from coverage, because of a change in the rates
or conditions set by federal or state governments. In turn, violations of or
changes to these laws and regulations that adversely affect our hospital and
healthcare facility clients could also adversely affect the prices that these
clients are willing or able to pay for our services.
WE ARE DEPENDENT ON THE PROPER FUNCTIONING OF OUR INFORMATION SYSTEMS.
Our company is dependent on the proper functioning of our information
system, which we refer to as MSN HealthWorks, in operating our business.
Critical information systems used in daily operations identify and match
staffing resources and client assignments and regulatory credentialing
scheduling and perform billing and accounts receivable functions. Our
information systems are vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and similar events.
If our information systems fail or are otherwise unavailable, these functions
would have to be accomplished manually, which could impact our ability to
identify business opportunities quickly, to maintain billing and clinical
records reliably, to pay our staff in a timely fashion and to bill for services
efficiently.
COMPETITION FOR ACQUISITION OPPORTUNITIES MAY RESTRICT OUR FUTURE GROWTH BY
LIMITING OUR ABILITY TO MAKE ACQUISITIONS AT REASONABLE VALUATIONS.
Since our founding in 1998, we have completed 18 acquisitions. Our business
strategy includes increasing our market share and presence in the temporary
healthcare staffing industry through strategic acquisitions of companies that
complement or enhance our business. We have historically faced competition for
acquisitions. In the future, this could limit our ability to grow by
acquisitions or could raise the prices of acquisitions and make them less
accretive to us. In addition, restrictive covenants in our credit facility,
including a covenant that requires us to obtain bank approval for any
acquisition over $10 million, may limit our ability to complete desirable
acquisitions. If we are unable to secure necessary financing under our credit
facility or otherwise, we may be unable to complete desirable acquisitions.
WE MAY FACE DIFFICULTIES INTEGRATING OUR ACQUISITIONS INTO OUR OPERATIONS AND
OUR ACQUISITIONS MAY BE UNSUCCESSFUL, INVOLVE SIGNIFICANT CASH EXPENDITURES OR
EXPOSE US TO UNFORESEEN LIABILITIES.
We continually evaluate opportunities to acquire healthcare staffing
companies that complement or enhance our business and frequently have
preliminary acquisition discussions with some of these companies.
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These acquisitions involve numerous risks, including:
- potential loss of key employees or clients of acquired companies;
- difficulties integrating acquired personnel and distinct cultures into our
business;
- difficulties integrating acquired companies into our operating, financial
planning and financial reporting systems;
- diversion of management attention from existing operations; and
- assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply with
healthcare regulations.
These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could seriously harm our financial
condition and results of operations. Any acquisition may ultimately have a
negative impact on our business and financial condition.
SIGNIFICANT LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES.
In recent years, healthcare providers have become subject to an increasing
number of legal actions alleging malpractice, product liability or related legal
theories. Many of these actions involve large claims and significant defense
costs. In addition, we may be subject to claims related to torts or crimes
committed by our employees or temporary healthcare professionals. In some
instances, we are required to indemnify our clients against some or all of these
risks. A failure of any of our employees or healthcare professionals to observe
our policies and guidelines intended to reduce these risks, relevant client
policies and guidelines or applicable federal, state or local laws, rules and
regulations could result in negative publicity, payment of fines or other
damages. Our professional malpractice liability insurance and general liability
insurance coverage may not cover all claims against us or continue to be
available to us at a reasonable cost. If we are unable to maintain adequate
insurance coverage or if our insurers deny coverage we may be exposed to
substantial liabilities.
WE MAY BE LEGALLY LIABLE FOR DAMAGES RESULTING FROM OUR HOSPITAL AND HEALTHCARE
FACILITY CLIENTS' MISTREATMENT OF OUR HEALTHCARE PERSONNEL.
Because we are in the business of placing our temporary healthcare
professionals in the workplaces of other companies, we are subject to possible
claims by our temporary healthcare professionals alleging discrimination, sexual
harassment, negligence and other similar activities by our hospital and
healthcare facility clients. The cost of defending such claims, even if
groundless, could be substantial and the associated negative publicity could
adversely affect our ability to attract and retain qualified healthcare
professionals in the future.
IF WE BECOME SUBJECT TO MATERIAL LIABILITIES UNDER OUR SELF-INSURED PROGRAMS,
OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
We provide workers compensation coverage through a program that is partially
self-insured. In addition, we provide medical coverage to our employees through
a partially self-insured preferred provider organization. If we become subject
to substantial uninsured workers compensation or medical coverage liabilities,
our financial results may be adversely affected.
OUR OPERATIONS MAY DETERIORATE IF WE ARE UNABLE TO CONTINUE TO ATTRACT, DEVELOP
AND RETAIN OUR SALES PERSONNEL.
Our success depends upon the performance of our sales personnel, especially
regional directors, branch managers and staffing coordinators. The number of
individuals who meet our qualifications for these positions is limited and we
may experience difficulty in attracting qualified candidates. In addition, we
commit substantial resources to the training, development and support of these
individuals. Competition for qualified sales personnel in the line of business
in which we operate is strong and
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there is a risk that we may not be able to retain our sales personnel after we
have expended the time and expense to recruit and train them.
THE LOSS OF KEY SENIOR MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR ABILITY
TO REMAIN COMPETITIVE.
We believe that the success of our business strategy and our ability to
operate profitably depends on the continued employment of our senior management
team, consisting of Robert J. Adamson, Kevin S. Little, Patricia G. Donohoe,
Linda Duval and Jeffrey P. Jacobsen. If any members of our senior management
team become unable or unwilling to continue in their present positions, our
business and financial results could be materially adversely affected.
WE HAVE A SUBSTANTIAL AMOUNT OF GOODWILL ON OUR BALANCE SHEET. OUR LEVEL OF
GOODWILL MAY HAVE THE EFFECT OF DECREASING OUR EARNINGS OR INCREASING OUR
LOSSES.
As of December 30, 2001, we had $67 million of unamortized goodwill on our
balance sheet, which represents the excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. At December 30,
2001, goodwill represented 41% of our total assets.
Currently, we amortize goodwill on a straight-line basis over the estimated
period of future benefit of 20 years. In July 2001, the Financial Accounting
Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001, as well as all purchase method business combinations completed
after June 30, 2001. SFAS No. 142 requires that, subsequent to January 1, 2002,
goodwill not be amortized but rather that it be reviewed annually for
impairment. In the event impairment is identified, a charge to earnings would be
recorded. We have adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
December 31, 2001. Although it does not affect our cash flow, amortization of
goodwill or an impairment charge to earnings has the effect of decreasing our
earnings or increasing our losses, as the case may be. If we are required to
amortize a substantial amount of goodwill or take a charge to earnings, our
stock price could be adversely affected.
OUR COSTS OF PROVIDING HOUSING FOR NURSES AND OTHER HEALTHCARE PERSONNEL IN OUR
TRAVEL BUSINESS MAY BE HIGHER THAN WE ANTICIPATE AND, AS A RESULT, OUR MARGINS
COULD DECLINE.
We currently have approximately 150 apartments on lease throughout the
United States. If the costs of renting apartments and furniture for our nurses
and other healthcare personnel increase more than we anticipate and we are
unable to pass such increases on to our clients, our margins may decline. To the
extent the length of a nurse's or other professional's housing lease exceeds the
term of the nurse's or other professional's staffing contract, we bear the risk
that we will be obligated to pay rent for housing we do not use. To limit the
costs of unutilized housing, we try to secure leases with term lengths that
match the term lengths of our staffing contracts, which typically last 13 weeks.
In some housing markets we have had, and believe we will continue to have,
difficulty identifying short-term leases. If we cannot identify a sufficient
number of appropriate short-term leases in regional markets, or, if for any
reason, we are unable to efficiently utilize the apartments we do lease, we may
be required to pay rent for unutilized housing or, to avoid such risk, we may
forego otherwise profitable opportunities.
DEMAND FOR MEDICAL STAFFING SERVICES IS SIGNIFICANTLY AFFECTED BY THE GENERAL
LEVEL OF ECONOMIC ACTIVITY AND UNEMPLOYMENT IN THE UNITED STATES.
When economic activity increases, temporary employees are often added before
full-time employees are hired. However, as economic activity slows, many
companies, including our hospital and healthcare facility clients, reduce their
use of temporary employees before laying off full-time employees. In addition,
we may experience more competitive pricing pressure during periods of
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economic downturn. Therefore, any significant economic downturn could have a
material adverse impact on our condition and results of operations.
RISKS RELATED TO THIS OFFERING
OUR EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS WILL BE ABLE TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE THE
PURCHASE OF OUR OUTSTANDING SHARES AT A PREMIUM.
After the offering, our executive officers and directors (including
stockholders with which directors are affiliated) will control approximately
64.4% of our outstanding common stock. Warburg Pincus will own approximately
48.3% of our common stock. See "Principal Stockholders." This concentration of
ownership may have the effect of delaying, preventing or deterring a change in
control of our company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale or merger of our
company and may negatively affect the market price of our common stock. These
transactions might include proxy contests, tender offers, mergers or other
purchases of common stock that could give you the opportunity to realize a
premium over the then-prevailing market price for shares of our common stock.
Upon the completion of the offering, Warburg Pincus will continue to have
the right under our stockholders agreement to designate two persons to our board
of directors. As a result of this share ownership and minority representation on
our board of directors, our current stockholders, in particular Warburg Pincus,
will be able to influence all affairs and actions of our company, including
matters requiring stockholder approval such as the election of directors and
approval of significant corporate transactions. The interests of our executive
officers, directors and principal stockholders may differ from the interests of
the other stockholders.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION IN BOOK VALUE PER SHARE.
The initial public offering price of our common stock is substantially
higher than what the net tangible book value per share of our outstanding common
stock will be immediately after this offering. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares outstanding. If you purchase our common stock in this
offering, you will incur an immediate dilution of approximately $17.78 in the
net tangible book value per share of common stock.
We also have a significant number of outstanding options to purchase our
common stock with exercise prices significantly below the initial public
offering price of the common stock. To the extent these options are exercised,
you will experience further dilution. There are currently options to purchase
2,033,080 shares of our common stock outstanding, of which options to purchase
62,450 shares of our common stock are currently exercisable.
IF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK IS SOLD INTO THE MARKET
FOLLOWING THE OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD SIGNIFICANTLY
DECLINE, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that these sales could occur,
could adversely affect the market price of our common stock and could materially
impair our future ability to raise capital through offerings of our common
stock. An aggregate of 28,914,692 shares of common stock will be outstanding
after this offering. Of these, the 7,812,500 shares offered by this prospectus
will be freely tradable without restriction or further registration.
On the day that is 181 days after completion of this offering, lockup
agreements entered into by our directors, officers and certain existing
stockholders will expire and such directors, officers and stockholders will be
able to sell an aggregate total of 2,969,445 shares under Rule 144 of the
Securities Act. The underwriters may also consent to release some or all of
these shares for sale prior to that time.
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Warburg Pincus and certain significant stockholders have demand registration
rights to cause us to file, at our expense, a registration statement under the
Securities Act covering resales of their shares any time after the earlier of
October 26, 2004 and the date that is 181 days after the date on which our
initial public offering closes. These shares will represent approximately 73.0%
of our outstanding common stock, or 21,102,192 shares, upon completion of this
offering. These shares may also be sold under Rule 144 of the Securities Act,
depending on their holding period and subject to significant restrictions in the
case of shares held by persons deemed to be our affiliates.
In addition, after this offering, we also intend to register 3,259,384
shares of common stock for issuance under our stock option plans. Options to
purchase 2,033,080 shares of common stock are currently issued and outstanding,
of which, as of December 30, 2001, 9,355 options to purchase shares were vested.
IF PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, WE MAY BE UNABLE TO CONSUMMATE A TRANSACTION
THAT OUR STOCKHOLDERS CONSIDER FAVORABLE.
Provisions in our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition involving us that our stockholders may
consider favorable. For example, our certificate of incorporation authorizes our
board of directors to issue up to 15 million shares of "blank check" preferred
stock. Without stockholder approval, the board of directors has the authority to
attach special rights, including voting and dividend rights, to this preferred
stock. With these rights, preferred stockholders could make it more difficult
for a third party to acquire us. Applicable Delaware law may also discourage,
delay or prevent someone from acquiring or merging with us.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
There is currently no public market for our common stock. An active trading
market for our common stock may not develop. You may be unable to resell the
common stock you buy at or above the initial public offering price. We will
establish the initial public offering price through negotiations with the
representatives of the underwriters. You should not view the price they and we
establish as any indication of prices that will prevail in the trading market.
You may not be able to resell your shares at or above the initial public
offering price due to fluctuations in the market price of our common stock
caused by changes in our operating performance or prospects and other factors.
With the current uncertainty about healthcare policy, reimbursement and
coverage in the United States, there has been significant volatility in the
market price and trading volume of securities of healthcare and other companies,
which is unrelated to the financial performance of these companies. These broad
market fluctuations may negatively affect the market price of our common stock.
Some specific factors that may have a significant effect on our common stock
market price include:
- actual or anticipated fluctuations in our operating results;
- actual or anticipated changes in our growth rates or our competitors'
growth rates;
- actual or anticipated changes in healthcare policy in the United States
and internationally;
- conditions in the financial markets in general or changes in general
economic conditions;
- our inability to raise additional capital;
- conditions of other medical staffing companies or the medical staffing
industry generally; and
- changes in stock market analyst recommendations regarding our common
stock, other comparable companies or the medical staffing industry
generally.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, principally in the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Generally, you can identify these
statements because they use words such as "anticipates," "believes," "expects,"
"future," "intends," "plans," and similar terms. These statements are only our
current expectations. Although we do not make forward-looking statements unless
we believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy, and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which are unforeseen, including, among
others, the risks we face as described on the previous pages and elsewhere in
this prospectus. Given these uncertainties, the forward-looking statements
discussed in this prospectus might not occur. These forward-looking statements
are made as of the date of this prospectus. Except as may be required under
applicable statutes, regulations or court decisions, we undertake no obligation
to update or revise them.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 7,812,500 shares of
common stock that we are offering will be approximately $136.0 million after
deducting the underwriting discount and estimated offering expenses of
approximately $12.4 million. If the underwriters exercise their over-allotment
option in full, we estimate that our net proceeds will be approximately
$156.8 million.
We anticipate using the net proceeds of the offering to:
Repay all of the principal and accrued interest under our outstanding senior
unsecured notes, which we estimate will be approximately $62.4 million. As of
December 30, 2001, $59.3 million aggregate principal amount of our senior
unsecured notes was outstanding, plus accrued interest of approximately
$1.3 million, all of which was issued in connection with our recapitalization.
The senior unsecured notes bear interest at a rate of 12% per annum compounding
quarterly. Amounts outstanding under our senior unsecured notes, including
accrued interest, are due in October 2009. See "Certain Transactions" for more
information on our senior unsecured notes. All of our outstanding senior
unsecured notes are held by our stockholders and several of our employees,
including our executive officers.
Repay an aggregate of approximately $73.6 million of outstanding term loans
under our senior credit facility. We entered into our senior credit facility in
connection with our recapitalization and borrowed an aggregate of approximately
$105 million in connection with the recapitalization. See "Certain
Transactions," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" for more information
on our senior credit facility. Upon making these debt payments, we will have
approximately $37.6 million of outstanding indebtedness remaining under our
senior credit facility. Borrowings under our senior credit facility bear
interest at either a prime rate-based rate or Eurodollar-based rate plus the
applicable percentage, as defined. As of December 30, 2001, Tranche A term loans
and revolving loans under our senior credit facility in the aggregate principal
amount of $55 million mature in 2006 and Tranche B term loans in the aggregate
principal amount of $60 million mature in 2007. Proceeds from our senior
facility were used to prepay approximately $83 million on our existing credit
facility, representing all of the outstanding principal and accrued interest in
respect of that facility, and to fund the payment of merger consideration in
connection with the recapitalization. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for additional information regarding our sources and uses of capital.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all future earnings for the operation and expansion
of our business and, therefore, do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future. Any payment of cash
dividends on our common stock will be at the discretion of our board of
directors and will depend upon our results of operations, earnings, capital
requirements, contractual restrictions and other factors deemed relevant by our
board. In addition, our current senior credit facility prohibits us from
declaring or paying any cash dividends without the consent of our lenders
holding more than 50% of the outstanding loans under the facility.
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CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of December 30, 2001.
In the pro forma column, we have made adjustments to give effect to the
conversion of all of our outstanding preferred stock, plus accrued dividends,
into our common stock upon the closing of the offering, as if the conversion
occurred on December 30, 2001.
In the pro forma as adjusted column, we have made adjustments to give effect
to the adjustments set forth above, and to give effect to the sale of 7,812,500
shares of our common stock at the initial public offering price of $19.00 per
share, and the application of the net proceeds of the offering to repay a
portion of our outstanding debt. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Description of
Capital Stock" and the notes to our consolidated financial statements included
elsewhere in this prospectus for additional information.
<Table>
<Caption>
DECEMBER 30, 2001
-----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash..................................................... $ 11,253 $ 11,253 $ 11,253
Long-term debt:
Term loans (1)......................................... 100,630 100,630 25,207
Revolving loans (2).................................... 15,047 15,047 15,047
12% senior unsecured notes (3)......................... 60,624 60,624 --
Capitalized lease obligations.......................... 991 991 991
Other.................................................. 35 35 35
--------- --------- ---------
Total debt............................................... 177,327 177,327 41,280
Less current maturities................................ 10,365 10,365 10,365
Total long-term debt................................. 166,962 166,962 30,915
Preferred stock:
Series I Convertible Preferred Stock, 7,000,000 shares
authorized, 6,602,865 shares issued and outstanding;
no shares issued and outstanding pro forma or pro
forma, as adjusted................................... 124,617 -- --
Stockholders' equity:
Common stock, $0.01 par value, 75,000,000 shares
authorized--actual, pro forma and pro forma as
adjusted, 26,547 issued and outstanding--actual,
20,590,832 issued and outstanding--pro forma and
28,403,332 issued and outstanding--pro forma as
adjusted............................................. -- 206 284
Additional paid-in capital............................. -- 124,411 260,380
Promissory notes for purchase of common stock.......... (4,551) (4,551) (4,551)
Accumulated deficit.................................... (153,171) (153,171) (153,171)
--------- --------- ---------
Total stockholders' (deficit) equity................. $(157,722) $ (33,105) $ 102,942
--------- --------- ---------
Total capitalization................................. $ 133,857 $ 133,857 $ 133,857
========= ========= =========
</Table>
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The outstanding share information in the table above is based on the number
of shares outstanding as of December 30, 2001. The table above excludes:
- 2,033,080 shares of our common stock that we may issue upon the exercise
of outstanding options at a weighted average exercise price of $5.55 per
share;
- 813,833 shares of our common stock available for future issuance under our
option plans; and
- 1,171,875 shares of our common stock that may be purchased by the
underwriters to cover over-allotments.
- ------------------------
(1) Actual amount includes approximately $630,000 of accrued interest at
December 30, 2001.
(2) Actual amount includes approximately $47,000 of accrued interest at
December 30, 2001.
(3) Actual amount includes approximately $1,305,000 of accrued interest at
December 30, 2001.
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DILUTION
Our historical net tangible book deficiency as of December 30, 2001 was
$101.4 million. Our pro forma net tangible book deficiency as of December 30,
2001 was $101.4 million, or $4.92 per share. Pro forma net tangible book value
per share represents our total tangible assets less our total liabilities,
divided by the number of shares of our common stock outstanding, giving effect
to the conversion of all of our outstanding shares of preferred stock, including
accrued dividends on these shares, into 20,564,285 shares of our common stock,
as if the conversion occurred on December 30, 2001. After giving effect to this
conversion, the sale of the 7,812,500 shares of common stock we propose to offer
pursuant to this prospectus and the application of the net proceeds therefrom,
and after deducting the underwriting discount and estimated offering expenses,
our net tangible book value as of December 30, 2001 would have been
$34.7 million, or $1.22 per share. This represents an immediate increase in net
tangible book value of $3,820.64 per share to our existing stockholders and an
immediate dilution of $17.78 per share to new investors. Whenever the book value
is less than the investor paid, the investor suffers dilution. The dilution to
investors in the offering is illustrated in the following table:
<Table>
Initial public offering price per share..................... $19.00
------
Net tangible book value (deficiency) per share at December
30, 2001................................................ $(3,819.42)
----------
Increase per share attributable to cash payments made by
new
investors............................................. $ 3,820.64
----------
Net tangible book value per share after this offering....... $ 1.22
------
Dilution in net tangible book value per share to new
investors................................................. $17.78
======
</Table>
The following table enumerates the number of shares of common stock issued,
the total consideration paid and the average price per share paid by our
existing stockholders. The following table also enumerates, as of December 30,
2001, the number of shares of common stock purchased and the total consideration
paid, calculated before deduction of the underwriting discount and estimated
offering expenses, and the average price per share paid by the new investors in
this offering assuming the sale by us of 7,812,500 shares of our common stock at
the initial offering price of $19.00 per share.
<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- --------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- -------------- ---------- ---------
(IN THOUSANDS)
Existing stockholders............... 20,590,832 72% $124,780 46% $ 6.06
New investors....................... 7,812,500 28 148,438 54 $ 19.00
---------- ----- -------- -----
Total............................. 28,403,332 100% $273,218 100%
========== ===== ======== =====
</Table>
The information presented in the previous table with respect to existing
stockholders assumes the conversion of all of our outstanding preferred stock,
plus accrued dividends on these shares, into 20,564,285 shares of our common
stock as if such conversion occurred on December 30, 2001. The table assumes no
exercise of stock options.
As of December 30, 2001, there were options outstanding to purchase
2,033,080 shares of our common stock at a weighted average exercise price of
$5.55 per share. If all outstanding options were exercised, the total number of
shares outstanding would be 30,436,412, the percent of shares purchased by new
investors would be 26%; the total amount of consideration paid by all
stockholders would be $284.5 million; the percent of consideration paid by new
investors would be 52%; the average price per share paid by option holders would
be $5.55; and the average price per share paid by all stockholders would be
$9.35. See "Management" and "Description of Capital Stock" for information
regarding outstanding options and preferred stock.
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SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER DATA
The summary consolidated financial data of Medical Staffing Network
Holdings, Inc., formerly known as MSN Holdings, Inc., is provided below. The
income statement data for the period from June 5, 1997 through December 31, 1997
are derived from the audited financial statements of Southeast Staffing
Partners, Inc., our predecessor, that are not included in this prospectus. The
1998 income statement data are derived from the audited consolidated financial
statements of Medical Staffing Network Holdings, Inc. that are not included in
this prospectus. The 1998 income statement data includes the operating results
of our predecessor for the period from January 1, 1998 through February 28,
1998, which results were not material. The income statement data for 1999, 2000
and 2001 are derived from our audited consolidated financial statements of
Medical Staffing Network Holdings, Inc. that are included elsewhere in this
prospectus.
The summary consolidated financial data below should be read in conjunction
with the consolidated historical financial statements and related notes as well
as the sections titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Use of Proceeds" appearing elsewhere
in this prospectus.
<Table>
<Caption>
PREDECESSOR
JUNE 5, 1997
(INCEPTION)
THROUGH FISCAL YEAR ENDED
DECEMBER 31, ---------------------------------------------------
1997 (1) 1998 (1) 1999 2000 2001
------------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Service revenues...................................... $ 2,744 $ 33,097 $ 96,456 $ 182,045 $ 338,380
Cost of services rendered............................. 2,020 25,066 72,922 135,971 252,089
---------- ---------- ---------- ---------- ----------
Gross profit.......................................... 724 8,031 23,534 46,074 86,291
Selling, general and administrative expenses (2)...... 1,058 6,548 13,810 26,997 47,415
Corporate and administrative expenses................. -- 1,324 2,578 4,711 6,428
Depreciation and amortization expenses................ 78 757 2,114 3,797 5,871
Recapitalization expenses (3)......................... -- -- -- -- 7,160
---------- ---------- ---------- ---------- ----------
(Loss) income from operations......................... (412) (598) 5,032 10,569 19,417
Interest expense, net................................. 11 518 1,867 5,007 14,312
---------- ---------- ---------- ---------- ----------
(Loss) income before provision for income taxes and
extraordinary items................................. (423) (1,116) 3,165 5,562 5,105
Extraordinary loss, net (4)........................... -- -- -- -- (2,732)
Net (loss) income..................................... (423) (1,116) 2,375 3,520 (1,306)
Deduct required dividends on convertible preferred
stock (5)........................................... -- -- -- -- 1,804
---------- ---------- ---------- ---------- ----------
(Loss) income available to common stockholders........ $ (423) $ (1,116) $ 2,375 $ 3,520 $ (3,110)
Net (loss) income per share:
Basic............................................... $ (0.09) $ (0.15) $ 0.32 $ 0.46 $ (0.49)
Diluted............................................. $ (0.09) $ (0.15) $ 0.09 $ 0.13 $ (0.49)
Weighted average common shares outstanding:
Basic............................................... 4,822,000 7,247,000 7,498,000 7,581,000 6,338,000
Diluted............................................. 4,822,000 7,247,000 25,586,000 26,817,000 6,338,000
OTHER OPERATING DATA:
EBITDA (6)............................................ (334) 159 7,147 14,366 32,448
EBITDA % of revenue................................... NM 0.5% 7.4% 7.9% 9.6%
Number of per diem branches........................... 1 26 34 74 136
Net cash flow used in operating activities............ $ (19) $ (2,925) $ (2,219) $ (9,009) $ (1,654)
Net cash flow used in investing activities............ $ (4,293) $ (28,908) $ (20,939) $ (23,738) $ (14,611)
Net cash flow provided by financing activities........ $ 4,590 $ 31,927 $ 23,101 $ 32,638 $ 27,313
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------------------------- AS OF
PREDECESSOR DECEMBER 30,
1997 (1) 1998 (1) 1999 2000 2001
----------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash.................................................... $ 279 $ 372 $ 314 $ 205 $ 11,253
Total assets............................................ 5,035 44,574 70,695 111,836 162,019
Total liabilities and redeemable preferred stock........ 1,358 41,047 64,792 101,929 319,741
</Table>
20
<Page>
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------------------------- AS OF
PREDECESSOR DECEMBER 30,
1997 (1) 1998 (1) 1999 2000 2001
----------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
Total stockholders' equity (deficit).................... 3,677 3,528 5,903 9,907 (157,722)
</Table>
- ------------------------------
(1) On March 1, 1998, we entered into a merger agreement with Southeast Staffing
Partners, Inc., which for accounting and reporting purposes, is our
predecessor. Financial data prior to March 1, 1998 are that of our
predecessor. The 1998 financial data include the January and February 1998
results of our predecessor, which results were not material.
(2) Includes provision for doubtful accounts.
(3) Reflects non-recurring costs incurred in connection with the
recapitalization in October 2001.
(4) Reflects the charges related to the early extinguishment of debt in
connection with the recapitalization.
(5) Reflects 8% dividends accrued on the Series I Convertible Preferred Stock
issued in connection with the recapitalization. This preferred stock will be
converted into common stock upon completion of the offering.
(6) EBITDA consists of net (loss) income excluding net interest, taxes,
depreciation, amortization, and non-recurring recapitalization expenses.
EBITDA is provided as a measure of financial performance commonly used as an
indicator of a company's historical ability to service debt. EBITDA is
presented because we believe it is a widely accepted financial indicator
used by certain investors and securities analysts to analyze and compare
companies on the basis of operating performance. EBITDA is not intended as
an alternative to operating income as an indicator of operating performance
or cash flows from operating activities as a measure of liquidity determined
in accordance with GAAP. EBITDA, as we define it, is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation. For further
information, see our consolidated financial statements and related notes
elsewhere in this prospectus.
21
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
We acquired Excel Staffing Services, Inc. on June 10, 2001 and entered into
a recapitalization on October 26, 2001. In October 2001, an investment group led
by Warburg Pincus acquired a majority ownership of our company in a transaction
that resulted in a recapitalization. The recapitalization was accounted for as a
leveraged recapitalization of the company and, accordingly, the company retained
the historical cost basis of accounting.
The pro forma condensed consolidated statements of operations for the year
ended December 30, 2001 gives effect to the acquisition of Excel Staffing
Services, Inc. and the recapitalization as if the transactions had occurred on
January 1, 2001.
The pro forma information for the year ended December 30, 2001, as adjusted
for this offering, reflects the repayment of certain of our indebtedness using a
portion of the net proceeds received from this offering as if this offering and
the repayment had occurred on January 1, 2001.
The pro forma information is not necessarily indicative of the actual
results of operations that would have occurred had the acquisition of Excel
Staffing Services, Inc., the recapitalization in October 2001, and this offering
occurred on the assumed dates nor do they represent any indication of future
performance. The pro forma condensed consolidated statement of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto included elsewhere in this prospectus.
<Table>
<Caption>
FISCAL YEAR ENDED 2001
-------------------------------------------------------------------------------------
MEDICAL EXCEL
STAFFING STAFFING
NETWORK SERVICES, PRO FORMA ADJUSTMENTS PRO FORMA
HOLDINGS, INC. INC. (1) RECAPITALIZATION COMBINED FOR OFFERING AS ADJUSTED
--------------- ---------- ---------------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Service revenues...................... $338,380 $6,458 $ -- $ 344,838 $ -- $ 344,838
Cost of services rendered............. 252,089 4,914 257,003 257,003
Selling, general and administrative
expenses (2)........................ 47,415 375 47,790 47,790
Corporate and administrative
expenses............................ 6,428 25 6,453 6,453
Depreciation and amortization
expenses............................ 5,871 303 6,174 6,174
Recapitalization expenses............. 7,160 -- 7,160 7,160
---------- ------ ----------- -----------
Income from operations................ 19,417 841 20,258 20,258
Interest expense, net................. 14,312 352 6,225 (3) 20,889 (12,148) (4) 8,741
---------- ------ ----------- -----------
Income before provision for income
taxes............................... 5,105 489 (631) 11,517
Income tax expense.................... 3,679 196 (2,366) (5) 1,509 4,616 (5) 6,125
---------- ------ ----------- -----------
Income (loss) from continuing
operations.......................... 1,426 293 (2,140) 5,392
Basic (loss) income per share before
extraordinary loss.................. $ (0.06 ) (6) $(461.97 ) (7) $ 0.19
Diluted (loss) income per share before
extraordinary loss.................. $ (0.06 ) (6) $(461.97 ) (7) $ 0.18
Weighted average common shares
outstanding:
Basic............................... 6,338,000 27,000 28,745,000
Diluted............................. 6,338,000 27,000 30,197,000
</Table>
- ------------------------------
(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.
22
<Page>
(3) Reflects the following adjustments related to the October 2001
recapitalization:
- 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.
- 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.
- 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 adjustments related to the use of proceeds of
approximately $136.0 million:
- 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.
- 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.
The interest rates in effect at December 30, 2001 were used to compute the
pro forma as adjusted interest expense.
(5) Adjustments to reflect income tax expense utilizing combined federal and
state statutory rates for the effect of the pro forma adjustments.
(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) Pro Forma Combined income from continuing operations was reduced by
$10.1 million of dividends accrued on the Series I Convertible Preferred
Stock. As a result, all potential common stock equivalents are antidilutive.
23
<Page>
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 THE "SELECTED FINANCIAL DATA"
AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING
STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND
PROJECTIONS.
OVERVIEW OF OUR COMPANY
We are a leading medical staffing company and the largest provider of per
diem nurse staffing services in the United States as measured by revenues. More
than two-thirds of our clients are acute care hospitals, clinics and surgical
and ambulatory care centers. We serve both for-profit and not-for-profit
organizations that range in scope from one facility to national chains with over
100 facilities. Our clients pay us directly. We do not receive a material
portion of our revenues from Medicare or Medicaid reimbursements or similar
state reimbursement programs. All of our revenues are derived from providing
healthcare staffing services. Approximately 75% of our 2001 revenues were
derived from per diem nurse staffing, while allied healthcare professional
staffing represented 16% of our 2001 revenues, travel nurse staffing
(assignments lasting more than thirteen weeks) represented 8% of our 2001
revenues and physician staffing represented 1% of our 2001 revenues.
Approximately 90% of our organic revenue growth in 2001 was the result of
increased volume with the balance the result of increased pricing.
Since 1998, we have opened 100 new de novo branches (branches opened
internally since our inception as opposed to branches acquired from third
parties), including 30 in 2000 and 64 in 2001. We closed one de novo branch in
2000 and five de novo branches in 2001. The de novo branches opened in 2000
generated $48.9 million in revenues in 2001. We intend to continue to identify
and develop opportunities to open de novo branches as they arise. However, our
ability to continue to open de novo branches depends on a number of factors,
including identifying, attracting and retaining local management and securing
good locations on acceptable terms. If our ability to continue to open de novo
branches is impaired, our revenue growth could be affected.
In 2001, we purchased substantially all of the assets of one medical
staffing company for an aggregate purchase price of $9.8 million. In 2000, we
purchased substantially all of the assets of five medical staffing companies for
an aggregate purchase price of $22.0 million. In 1999, we purchased
substantially all of the assets of three medical staffing companies, and all of
the outstanding capital stock of one medical staffing company, for an aggregate
purchase price of $19.7 million. All such acquisitions were accounted for as
purchases and, accordingly, the results of these acquired businesses are
included in our consolidated financial statements from the acquisition dates.
In October 2001, an investment group led by Warburg Pincus acquired majority
ownership of us in a transaction that recapitalized our business. Our
recapitalization was accounted for as a leveraged recapitalization of our
company and, accordingly, we have retained the historical cost basis of
accounting. In connection with the recapitalization, we incurred approximately
$165 million of indebtedness, approximately $83 million of which was used to
repay existing indebtedness.
24
<Page>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of total revenues:
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------
1999 2000 2001
-------- -------- --------
Service revenues............................................ 100% 100% 100%
Cost of services rendered................................... 75.6 74.7 74.5
Gross profit................................................ 24.4 25.3 25.5
Selling, general and administrative expenses(1)............. 14.3 14.8 14.0
Corporate and administrative expenses....................... 2.7 2.6 1.9
EBITDA (2).................................................. 7.4 7.9 9.6
Depreciation and amortization expenses...................... 2.2 2.1 1.8
Recapitalization expenses................................... -- -- 2.1
Income from operations...................................... 5.2 5.8 5.7
Interest expense, net....................................... 1.9 2.8 4.2
Income before income taxes and extraordinary loss........... 3.3 3.0 1.5
Provision for income taxes.................................. 0.8 1.1 1.1
Income before extraordinary loss............................ -- -- 0.4
Extraordinary loss on early extinguishment of debt, net of
income tax benefit........................................ -- -- 0.8
Net income (loss)........................................... 2.5% 1.9% NM
</Table>
- ------------------------
(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.
COMPARISON OF YEAR ENDED DECEMBER 30, 2001 TO YEAR ENDED DECEMBER 31, 2000
SERVICE REVENUES. Our service revenues for 2001 increased $156.3 million,
or 85.9%, from $182.1 million in 2000 to $338.4 million in 2001. The majority of
the increase in revenues in 2001 was attributable to a $123.2 million increase
in our per diem nurse staffing revenues from $129.8 million in 2000 to
$253.0 million in 2001. A majority of the increase in sales revenues in 2001 was
the result of volume increases from same-store growth and de novo branch
openings. The balance of the increase in sales revenues was the result of price
increases.
De novo branches opened in 2000 contributed $38.9 million of the increase in
revenues and de novo branches opened in 2001 contributed $24.9 million of the
increase. Acquisitions completed in 2000 contributed $20.4 million of the
increase in revenues and acquisitions in 2001 contributed $9.1 million of the
increase. The balance of the 2001 per diem nurse staffing revenue growth came
from a $29.9 million increase in the revenue of branches opened prior to 2000.
Service revenues from our staffing divisions other than the per diem nurse
staffing division collectively increased $33.1 million, or 63.4%, from
$52.2 million in 2000 to $85.3 million in 2001. Acquisitions completed in 2000
contributed $12.6 million to the increase. The balance of the growth in 2001 of
$20.5 million came from organic growth.
25
<Page>
COST OF SERVICES RENDERED. Cost of services rendered increased
$116.1 million, or 85.4%, from $136.0 million in 2000 to $252.1 million in 2001.
The increase was attributable to the 85.9% increase in service revenues.
GROSS PROFIT. Gross profit increased $40.2 million, or 87.2%, from
$46.1 million in 2000 to $86.3 million in 2001, representing gross margin
percentages of 25.3% in 2000 and 25.5% in 2001. The increase in gross margin
percentage in 2001 is the result of improved gross profit margins in our per
diem nurse and allied staffing divisions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $20.4 million, or 75.6%, from $27.0 million in
2000 to $47.4 million in 2001. As a percentage of revenue, selling, general and
administrative expenses decreased from 14.8% in 2000 to 14.0% in 2001.
CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative
expenses increased $1.7 million, or 36.5%, from $4.7 million in 2000 to
$6.4 million in 2001. As a percentage of revenue, corporate and administrative
expenses decreased from 2.6% in 2000 to 1.9% in 2001. The decrease as a
percentage of revenue was a result of increased operating leverage. The decrease
occurred despite significant expansion of the corporate infrastructure required
to sustain the rapid growth of the business.
EBITDA. As a result of the above, EBITDA increased $18.0 million, or 125.9%
from $14.4 million in 2000 to $32.4 million in 2001. As a percentage of revenue,
EBITDA increased from 7.9% in 2000 to 9.6% in 2001.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expense increased $2.1 million, or 54.6%, from $3.8 million in 2000 to
$5.9 million in 2001. The increase was due in part to a full year of goodwill
amortization on our 2000 acquisitions and the goodwill amortization on our 2001
acquisitions. The balance of the increase was the result of depreciation on
fixed asset additions. In July 2001, the Financial Accounting Standards Board
issued FAS No. 141, BUSINESS COMBINATIONS and FAS No. 142, INTANGIBLE ASSETS.
FAS 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
before July 1, 2001. FAS 142 further clarifies the criteria to recognize
intangible assets separately from goodwill and promulgates that goodwill and
certain intangible assets not be amortized. Instead, these assets will be
reviewed for impairment annually with any related losses recognized in earnings
when incurred. These standards apply to us beginning December 31, 2001 for
existing intangible assets and July 1, 2001 for business combinations completed
after June 30, 2001. As a result of the adoption of FAS 142, goodwill will not
be amortized in 2002.
RECAPITALIZATION EXPENSES. Recapitalization expenses for 2001 were
$7.2 million, comprised of non-capitalizable costs incurred in conjunction with
our recapitalization in October 2001. The recapitalization was accounted for as
a leveraged recapitalization and, accordingly, we retained the historical cost
basis of accounting.
INCOME FROM OPERATIONS. As a result of the above, income from operations
increased $8.8 million, or 83.7%, from $10.6 million in 2000 to $19.4 million in
2001. As a percentage of revenue, income from operations decreased from 5.8% in
2000 to 5.7% in 2001.
INTEREST EXPENSE, NET. Net interest expense increased $9.3 million, or
185.9% from $5.0 million in 2000 to $14.3 million in 2001. Of the $9.3 million
increase, $5.0 million of net interest expense was due to the appreciation of
the value of outstanding put warrants, as a result of the increase in the fair
value of our common stock. These put warrants were issued in connection with a
$20 million subordinated promissory note issued by us on September 29, 2000. The
balance of the increase was primarily the result of a higher average outstanding
debt balance in 2001, which was primarily the result of
26
<Page>
borrowings made for acquisitions in 2000, the 2001 acquisition and the debt
incurred in conjunction with our recapitalization, offset in part by lower
average interest rates.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS. Income before income
taxes and extraordinary loss decreased $0.5 million, or 8.2%, from $5.6 million
to $5.1 million in 2001.
PROVISION FOR INCOME TAXES. Our provision for income taxes was
$2.0 million in 2000 and $3.7 million in 2001 representing effective tax rates
of 36.7% in 2000 and 72.1% in 2001. The difference in the effective rate in 2001
and our expected effective rate of 41.0% is attributable to non-deductible costs
incurred in conjunction with our recapitalization.
INCOME BEFORE EXTRAORDINARY LOSS. Income before extraordinary loss
decreased $2.1 million, or 59.5%, from $3.5 million in 2000 to $1.4 million in
2001.
EXTRAORDINARY LOSS, ON EARLY EXTINGUISHMENT OF DEBT, NET OF INCOME TAX
BENEFIT. The extraordinary loss on early extinguishment of debt in 2001 of
$2.7 million, net of an income tax benefit of $1.7 million was attributable to
the write off of deferred financing costs and note discounts associated with the
debt that was repaid in conjunction with our October 2001 recapitalization.
NET INCOME (LOSS). Net income decreased $4.8 million from net income of
$3.5 million to a net loss of $1.3 million in 2001.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
SERVICE REVENUES. Our service revenues for 2000 increased $85.6 million, or
88.7%, from $96.5 million in 1999 to $182.0 million in 2000. The majority of the
increase in revenues in 2000 was attributable to a $56.2 million increase in our
per diem nurse staffing revenues from $73.6 million in 1999 to $129.8 million in
2000.
Acquisitions completed in 1999 contributed $10.9 million of the increase in
revenues and acquisitions completed in 2000 contributed $8.5 million of the
increase. De novo branches opened in 1999 contributed $6.5 million of the
increase in revenues and de novo branches opened in 2000 contributed
$10.0 million of the increase. The balance of the 2000 per diem revenue growth
of $20.3 million resulted from an increase in the revenues of branches opened
prior to 1999.
Service revenues from our staffing divisions other than the per diem nurse
staffing division collectively increased $29.3 million, or 128.1%, from
$22.9 million in 1999 to $52.2 million in 2000. Acquisitions completed in 1999
contributed $24.2 million to the increase and acquisitions completed in 2000
contributed $3.1 million. The balance of the growth in 2000 of $2.0 million came
from organic growth.
COST OF SERVICES RENDERED. Cost of services rendered increased
$63.1 million, or 86.6%, from $72.9 million in 1999 to $136.0 million in 2000.
The increase was attributable to the 88.7% increase in service revenues.
GROSS PROFIT. Gross profit increased $22.6 million, or 95.8%, from
$23.5 million in 1999 to $46.1 million in 2000, representing gross margin
percentages of 24.4% in 1999 and 25.3% in 2000. The increase was attributable to
a disproportionate increase in our non per diem nurse staffing revenues, which
have a higher relative gross margin than the per diem nurse gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.2 million, or 95.3%, from $13.8 million in
1999 to $27.0 million in 2000. As a percentage of revenue, selling, general and
administrative expenses increased from 14.3% in 1999 to 14.8% in 2000. This
increase was due to the expenses required to establish the infrastructure for
our de novo branches opened in 2000.
27
<Page>
CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative
expenses increased $2.1 million, or 82.7%, from $2.6 million in 1999 to
$4.7 million in 2000. As a percentage of revenue, corporate and administrative
expenses decreased from 2.7% in 1999 to 2.6% in 2000. The decrease as a
percentage of revenue was a result of increased operating leverage. The decrease
occurred despite significant expansion of the corporate infrastructure required
to sustain the rapid growth of the business.
EBITDA. As a result of the above, EBITDA increased $7.3 million, or 101.4%
from $7.1 million in 1999 to $14.4 million in 2000. As a percentage of revenue,
EBITDA increased from 7.4% in 1999 to 7.9% in 2000.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expense increased $1.7 million, or 79.6%, from $2.1 million in 1999 to
$3.8 million in 2000. The increase was due in part to a full year of goodwill
amortization on our 1999 acquisitions and the goodwill amortization on our 2000
acquisitions. The balance of the increase was the result of depreciation on
fixed asset additions.
INCOME FROM OPERATIONS. Income from operations increased $5.6 million, or
110.6%, from $5.0 million in 1999 to $10.6 million in 2000. As a percentage of
revenue, income from operations increased from 5.2% in 1999 to 5.8% in 2000.
INTEREST EXPENSE, NET. Net interest expense increased $3.1 million, or
168.1% from $1.9 million in 1999 to $5.0 million in 2000. The increase of net
interest expense was due to the higher average outstanding debt balance in 2000
which was primarily the result of the borrowings made for acquisitions in 1999
and 2000 and a higher weighted average borrowing rate.
PROVISION FOR INCOME TAXES. Our provision for income taxes was
$0.8 million in 1999 and $2.0 million in 2000 representing an effective tax rate
of 25.0% in 1999 and 36.7% in 2000. The difference in the effective rate in 1999
and our expected effective rate of 37.0% is attributable to the release of a
valuation allowance of approximately $0.8 million on our deferred tax asset upon
determination that the benefit of the deferred tax asset will be realized
coupled with the utilization of a net operating loss carryforward to offset 1999
taxable income. In accordance with FAS 109, we evaluate evidence, both positive
and negative, to determine if a valuation allowance is required.
NET INCOME. Net income increased by $1.1 million, or 48.2%, from
$2.4 million in 1999 to $3.5 million in 2000.
QUARTERLY RESULTS OF OPERATIONS
The following table presents a summary of our unaudited quarterly operating
results for each of the four quarters in 2000 and 2001. We derived this
information from unaudited interim financial statements that have been prepared
on a basis consistent with the financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information when read in
conjunction with our audited financial statements and related notes. The
operating results for any quarter are not necessarily indicative of results for
any future period.
28
<Page>
<Table>
<Caption>
2000 2001
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Service revenues................. $35,389 $40,179 $47,948 $58,529 $70,479 $81,166 $93,005 $93,731
Cost of services rendered........ 26,206 29,971 35,819 43,975 52,510 60,363 69,322 69,894
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 9,183 10,208 12,129 14,554 17,969 20,803 23,683 23,837
Operating Expenses:
Selling, general and
administrative
expenses (1)................. 5,295 6,279 6,953 8,469 9,304 11,125 13,383 13,603
Corporate and administrative
expenses..................... 954 1,296 1,172 1,290 1,392 1,707 1,744 1,584
Depreciation and amortization
expenses....................... 857 940 962 1,037 1,268 1,370 1,508 1,726
Operating income................. 2,076 1,693 3,042 3,758 6,005 6,601 6,728 84
Pre-tax income................... 1,167 631 1,889 1,875 3,095 3,126 3,207 (4,323)
Net income....................... 699 378 1,133 1,309 1,857 1,876 1,924 (6,963)
EBITDA (2)....................... 2,934 2,633 4,004 4,795 7,272 7,971 8,556 8,650
</Table>
- ------------------------
(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.
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.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our cash needs since 1999 through various equity and debt
issuances and through cash flow from operations. Currently, we have no
commitments to make any material capital expenditures.
In October 2001, an investment group led by Warburg Pincus acquired a
majority interest in our company in a recapitalization that provided us with
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.
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As of December 30, 2001, we had cash totaling $11.2 million, working capital
totaling $54.7 million and unused availability under our committed credit
facility totaling $5.0 million. We used $1.7 million of cash from operating
activities during 2001 compared to $9.0 million of cash from operating
activities during 2000.
Cash flows from operating activities was positively impacted in 2001 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 6.2% as of December 30,
2001, 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. At December 30, 2001, we were in
compliance with all covenants under our senior credit facility.
As the borrower under our senior credit facility, our subsidiary, Medical
Staffing Network, Inc., may only pay dividends or make other distributions to us
in the amount of $250,000 in any fiscal year to pay our operating expenses. This
limitation on our subsidiary's ability to distribute cash to us will limit our
ability to obtain and service any additional debt at the holding company level.
In addition, our subsidiary is subject to restrictions under the senior credit
facility against incurring additional indebtedness.
Our senior unsecured notes bear interest compounding quarterly at a rate of
12% per annum and are due in October 2009. Interest is payable in full on the
maturity date. The notes, which are unsecured obligations, are structurally
subordinated to amounts due under our senior credit facility.
As of December 30, 2001, there was $115.0 million outstanding under our
senior credit facility, and $60.6 million of principal and accrued interest
outstanding under our senior unsecured notes. As of December 30, 2001, the
weighted average interest rate for the loans under our senior credit facility
was 6.2%.
We intend to use a portion of the proceeds of this offering to repay
approximately $62.4 million of our senior notes including accrued interest, and
to pay $73.6 million of our term loans under our senior credit facility, leaving
an outstanding balance of approximately $37.6 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 us 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 our acquisition activities, if any. There can
be no assurance that additional financing will be available when required or, if
available, will be available on satisfactory terms.
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 December 30, 2001, we had
borrowings of $115.0 million under our senior credit facility that were subject
to variable rates, with a blended rate of 6.2%. As of December 30, 2001, an
adverse change of 1.0% in the interest rate of all such borrowings outstanding
would have
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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. We are party to an interest rate swap agreement with
a notional amount of $50 million. Under the swap agreement, the net settlement
is computed on a quarterly basis as the difference between the 90 day LIBOR and
the fixed rate of 4.34%. This results 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 swap at December 30, 2001 was
approximately $40,000. LIBOR at December 30, 2001 was 1.983%. The swap matures
December 24, 2004. In addition, there is exposure to market risk associated with
the senior subordinated notes which bear interest at a fixed rate. The carrying
amount of the senior subordinated notes which bear interest at a fixed rate
approximates 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. Effective January 1, 2001, we
adopted Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities." We will recognize changes in the
fair value of the swap in earnings to the extent such changes are greater or
less than the corresponding change in the fair value of the future variable
interest payments on the portion of the debt underlying the swap.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS and
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under the new rules, goodwill and
indefinite lived intangible assets 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. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we will apply the new accounting rules beginning
December 31, 2001.
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." SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. We do not expect that the adoption of the
Statement will have a significant impact on our financial position and results
of operations.
In November 2001, Topic D-103, INCOME STATEMENT CHARACTERIZATION OF
REIMBURSEMENT RECEIVED FOR "OUT-OF-POCKET" EXPENSES INCURRED (EITF D-103) to the
EITF Abstracts was issued. Under this guidance, reimbursement received for
"out-of-pocket" expenses incurred should be characterized as revenue in the
income statement. Currently, we classify reimbursable out-of-pocket expenses as
service revenues, net of the reimbursements paid by us to employees for
out-of-pocket expenses. This guidance should be applied in financial reporting
periods beginning after December 15, 2001 and comparative financial statements
for prior periods should be reclassified.
We will adopt this consensus in the first quarter of 2002 and expect that
this adoption will have no impact on our financial position or results of
operations, other than the reclassification of such costs from a reduction of
revenues to cost of services rendered in the statement of operations.
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BUSINESS
OVERVIEW OF OUR COMPANY
We are a leading medical staffing company and the largest provider of per
diem nurse staffing services (staffing assignments of less than 13 weeks in
duration) in the United States as measured by revenues. Our per diem staffing
assignments place our professionals, predominately nurses, at hospitals and
other healthcare facilities to solve our clients' temporary staffing needs. In
2000, the medical staffing industry generated $7.2 billion in revenues, 57% (or
approximately $4.1 billion) of which was generated by the per diem nurse
staffing industry. We believe we are also a leading provider of specialized
radiology and diagnostic imaging specialists and clinical laboratory
technicians, or "allied health" professionals, as measured by revenues. We serve
our clients through what we believe to be the largest temporary medical staffing
network in the United States, which was comprised as of December 30, 2001 of 136
per diem branches that provide nurse staffing on a per diem basis in 43 states.
Our extensive client base includes over 7,000 healthcare facilities including
leading for-profit and not-for-profit hospitals, leading teaching hospitals and
regional healthcare providers. As of December 30, 2001, our database contained
profiles of over 25,000 active professionals who we place on temporary
assignment in healthcare facilities, up 89% compounded annually from 7,000 on
December 31, 1999.
Our business has grown significantly since our founding in 1998. Our
revenues have increased from $96.5 million in 1999 to $338.4 million in 2001,
representing a compound annual growth rate of 87.3%. From 2000 to 2001 our
revenue growth was $156.3 million, of which $114.2 million was from organic
sources and $42.1 million was from acquisitions. The organic growth was
comprised of same-store revenue growth (defined as revenue growth from our
branches that have been open more than two years) of $50.4 million and growth
from branches opened in 2000 and 2001 of $63.8 million. Our same-store revenue
growth has been the result of our ability to leverage our national network and
leading brand name, successfully recruit nurses and cross-sell our services.
Branches that we have opened, which we call our "de novo" branches, generated
rapid revenue growth and typically achieved positive EBITDA within six months of
operation. We opened 30 de novo branches in 2000 and 64 de novo branches in
2001. Our de novo branches generated average revenues of $1.1 million in the
first year of operation, while our branches open prior to 2000 generated average
revenues of over $4 million. Due to our ability to leverage the fixed costs
within our branches and our corporate overhead, our EBITDA has increased
substantially from $7.1 million in 1999 to $32.4 million in 2001, and our EBITDA
margin increased from 7.4% to 9.6% during the same period.
We believe the flexibility of our service offerings provides substantial
value to our clients and professionals. We provide our clients with significant
assistance in managing their profitability by giving them the highest degree of
control in managing their labor costs without sacrificing clinical expertise. In
addition, working on a per diem basis allows our healthcare professionals
substantial flexibility in balancing their careers with their lifestyle
objectives.
We were formed as a Delaware corporation in 1998. Our predecessor
corporation, Southeast Staffing Partners, Inc., a Florida corporation, was
founded in June 1997. In October 2001, we consummated a recapitalization. See
"Certain Transactions--Recapitalization."
INDUSTRY OVERVIEW
Since the mid 1990s, changes in the healthcare industry have prompted a
shift in staffing models that has led to an increased usage of temporary
staffing at hospitals and other healthcare facilities. The number of
professionals choosing temporary healthcare as a short-term or long-term career
option has also grown alongside increased demand for temporary healthcare
professionals.
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According to THE STAFFING INDUSTRY REPORT, the temporary medical staffing
industry generated $7.2 billion in revenues in 2000 and was expected to grow to
an $8.7 billion industry in 2001, representing a growth rate of 21%. Nurse
staffing represented over 70%, or $5.3 billion, of 2000 revenues in the
temporary medical staffing industry and the balance was generated by the
staffing of allied professionals (radiology and diagnostic imaging specialists,
clinical laboratory technicians and pharmacists), physicians and med-financial
professionals (finance, accounting and administrative personnel for medical back
offices). The temporary nurse staffing market has two major components: per diem
nursing and travel nursing.
In 2000, per diem nurse staffing was the largest sector of the temporary
medical staffing industry, representing $4.1 billion in revenues, or 57% of the
temporary medical staffing industry. The per diem industry provides healthcare
professionals for assignments of a single shift to 13 weeks, and is used to meet
local labor shortages and openings due to holidays, vacations, illness and staff
turnover, as well as daily and seasonal fluctuations in hospital volume. The per
diem market operates with many local operators and is highly fragmented. In
2000, the top nine per diem staffing companies generated 26% of the market's
revenues. The per diem staffing model requires a local presence in every market
served because these short-term staffing needs are typically filled on a local
basis, and are dependant on the relationship that exists between branch offices,
professionals and the healthcare facility. In 2001, approximately 75% of our
revenues were derived from per diem nurse staffing.
The travel nurse market represented approximately 17%, or $1.2 billion, of
the total industry revenues in 2000. Healthcare facilities hire travel nurses on
a contract, fixed-term basis to meet seasonal fluctuations in hospital census
levels for time periods ranging from several weeks to one year, but are
typically 13 weeks long. Travel nurse companies coordinate travel and housing
arrangements for their professionals who typically relocate to the area in which
they are placed. The travel staffing model utilizes a centralized approach to
serving its clients. Staffing for allied, med-financial professionals and
physicians accounted for 26% of the temporary medical staffing industry, or
$1.9 billion in 2000 revenues. Allied staffing consists of highly specialized
radiology and diagnostic imaging specialties, clinical laboratory specialties
and pharmacists. These professionals are staffed on both a per diem and travel
basis.
TEMPORARY HEALTHCARE STAFFING INDUSTRY GROWTH DRIVERS
Significant changes in the healthcare industry in recent years have led
healthcare professionals and healthcare facilities alike to subscribe to the
temporary staffing model. Hospitals and other healthcare facilities face a
variety of challenges in maintaining appropriate staffing to provide quality
patient care while controlling costs. We believe that the following factors will
continue to drive the growth of the temporary healthcare staffing industry:
- INCREASED UTILIZATION OF HEALTHCARE SERVICES. The Centers for Medicare and
Medicaid Services project healthcare expenditures will approximately
double over the next decade, rising from $1.3 trillion to $2.6 trillion.
This rapid, projected increase in healthcare expenditures is primarily due
to higher patient census levels resulting from aging of baby boomers and a
projected increase in the utilization of higher acuity treatments. This
increase in patient census levels as well as the advent of new
technologies have increased staffing requirements for nurses and allied
professionals.
- INTENSIFYING SHORTAGE OF NURSES INCREASES NEED FOR MEDICAL STAFFING
SERVICES. The nursing population has contracted significantly due to a
number of factors. Fewer individuals have chosen to become nurses, as
reflected in the decline in enrollment in baccalaureate nursing programs,
which is down 24% from 1996 through 1999. The average age of those nurses
who remain in the current nursing population has increased from
40.3 years in 1980 to 45.2 in 2000. A report by the General Accounting
Office for the Ways and Means Committee projects that by 2010,
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approximately 40% of the nurse workforce will likely be older than
50 years of age. To compound the shortage, many registered nurses have
chosen less demanding positions in other industries or have decided to
care for lower acuity patients. The 2001 American Health Care Association
Vacancy and Turnover Survey found national vacancy rates in nursing
facilities for registered nurses to average 18.4%. According to a study
published in The Journal of the American Medical Association, the size of
the nurse workforce is expected to fall nearly 20% below requirements by
2020. This contraction has contributed to the shortage of nurses, which
has required providers to increase their utilization of temporary medical
services to meet their needs.
- WORKING ON A PER DIEM BASIS APPEALS TO NURSES. We believe the primary
reasons qualified nurses choose to work in settings outside of the acute
care area are that they are dissatisfied with their compensation levels
and working conditions. Working on a per diem basis provides a nurse with
improved compensation levels and alternatives regarding work schedules and
working conditions. This flexibility to accommodate various lifestyle
choices and financial incentive increases the appeal of per diem positions
to nurses. By offering non-practicing nurses an alternative to a full-time
position, per diem staffing companies draw nurses back into the workforce
who are either not practicing in high-acuity settings or who have left the
workforce.
- COST CONTAINMENT PRESSURES DRIVE PROVIDERS TO VARIABLE STAFFING MODELS. As
healthcare providers have faced reductions in reimbursement rates and
other cost containment pressures from payors, they have increasingly
relied on temporary medical staffing as a means to improve their
profitability. Temporary medical staffing allows healthcare facilities to
match staffing levels with fluctuating patient census levels. Using
temporary medical staffing to contain costs is particularly important for
healthcare facilities, as labor accounts for the largest portion of their
cost structure.
- INCREASED STAFFING REQUIRED DUE TO NEW LEGISLATION. As of June 2001,
legislation was introduced in fifteen states to address nursing shortage
issues, such as mandating minimum nurse to patient ratios, and legislation
limiting the amount of mandatory overtime a nurse may be required to work
was introduced in ten states. In addition, the Family and Medical Leave
Act grants nurses and other employees twelve weeks of leave to care for a
new child or sick parent, which reduces the number of available nurses.
Healthcare facilities are increasingly turning to temporary medical
staffing in order to meet the staffing requirements created by these
mandates.
OUR GROWTH STRATEGY
We seek to continue our rapid growth by pursuing the following strategies:
FURTHER EXPAND OUR LEADERSHIP POSITION IN THE PER DIEM MEDICAL STAFFING
INDUSTRY. We intend to maintain and grow our leadership position in the per
diem medical staffing industry. This sector represents the largest part of the
temporary medical staffing industry. We believe the per diem model will continue
to grow rapidly as medical professionals seek desirable assignments, attractive
compensation and lifestyle advantages associated with the per diem model. We
constantly seek ways to improve upon the manner in which we meet the needs of
our clients and professionals. By continuing to offer our clients and
professionals highly attractive solutions and alternatives, we believe we can
maintain and expand our leadership position. Moreover, we believe we are a
leader in implementing clinical standards through our efforts in establishing a
standards board for the temporary staffing industry and are a known advocate of
healthcare professionals.
DRIVE SAME-STORE REVENUE GROWTH. Our revenue growth from 2000 to 2001 for
branches that have been opened for more than two years was 26.9%. We intend to
foster continued same-store revenue growth by using our nationally recognized
brand name, competitive benefits package and leadership in providing temporary
medical staffing to increase the number of professionals we recruit and staff. A
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substantial number of our recruits are referred to us by our current
professionals, which is a practice we also intend to encourage. We also intend
to increase the number of healthcare facilities with which we work and improve
our staffing penetration at those facilities by actively marketing our services
and cross-selling our product offerings.
CONTINUE OUR DE NOVO DEVELOPMENT PROGRAM. A key element of our growth
strategy involves the implementation of our de novo branch development program.
We have refined this program by opening 100 new locations since our inception,
including 64 new branches opened in 2001. Our de novo development program is
implemented by our dedicated de novo team which uses a specialized set of
criteria to identify attractive potential markets, focusing initially on
identifying management for the branch. Following the pre-opening procedures, the
de novo team establishes a physical presence and capitalizes on the Medical
Staffing Network brand name by launching marketing and recruiting campaigns. The
team continues to oversee the branch until it has stabilized. Due to the
expertise of our de novo management team, our de novo branches typically
achieved positive EBITDA within six months of operation. We expect a significant
portion of our growth to be driven by the maturation of the 64 de novo branches
opened in 2001, which averaged sales of $390,000, compared to our branches open
prior to 2000, which averaged sales of over $4 million. Decisions regarding the
implementation of our de novo program are made by our management team based on
our business plan, which is approved annually by our board of directors.
EXPAND OUR SERVICE OFFERINGS TO OUR HEALTHCARE CLIENTS. We will actively
continue to increase our service offerings to our clients. We will continue to
leverage our local infrastructure and relationships with healthcare facilities
to promote cross-selling opportunities. We believe we have become a leading
provider of allied health staffing since entering this market in 1998, as
measured by revenues. A major means of expanding our offerings involves our
internally developed "Branch-in-Branch" program which places sales and
recruiting personnel dedicated to staffing allied and other non-nurse
professionals within our established per diem branches. This program improves
the utilization of our installed infrastructure and enables us to be responsive
to more of our clients' staffing needs by expanding into new product lines.
PURSUE SELECTIVE ACQUISITIONS. Since our inception, we have completed 18
acquisitions. We have significant experience in evaluating acquisition
candidates and adhere to highly selective criteria. We have been highly
successful at integrating our acquisitions on to our standard operating platform
in a short period of time after closing. We intend to continue to use
acquisitions to expand our U.S. presence and to add complementary service
offerings. We are often able to generate significant improvement in branch
profitability and revenue growth after an acquisition due to operating
efficiencies, the ability to cross-sell services and enhancements related to our
brand-name and relationships. We have historically required sellers to enter
into non-compete agreements for a period of five years, with a geographic scope
ranging from the jurisdiction in which the former business was conducted to
every location in which we operate. However, we do not have any commitments or
agreements for any material acquisitions. Decisions regarding whether to pursue
specific acquisitions are made by our board of directors in consultation with
our management team. In addition, acquisitions by any of our subsidiaries for
which the aggregate consideration exceeds $10 million, or the pro forma effect
of which would constitute a default or event of default under our senior credit
facility, require the consent of our lenders in accordance with the credit
agreement relating to our senior credit facility.
BUSINESS OVERVIEW
We provide hospitals and other healthcare facilities with a wide range of
staffing services including per diem nurses, allied professionals, travel
nurses, and physicians. While we have a national presence, we operate on a local
basis through an integrated network, which consisted of 136 per diem branches
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in 43 states as of December 30, 2001, so that we may develop significant
relationships with our clients and healthcare professionals and provide the
highest level of service. We currently provide services to over 7,000 healthcare
facilities that pay us directly for the services we provide.
SERVICES PROVIDED
PER DIEM NURSING. The per diem nurse staffing portion of our business
provides nurses for assignments with durations ranging from a single shift to a
13-week assignment and represented approximately 75% of our fiscal year 2001
revenues. We offer our clients all major classifications of nurses, including
Registered Nurses and Licensed Practical Nurses, across all specialties such as
pediatric, geriatric, intensive care unit and cardiovascular. We provide per
diem personnel to a variety of healthcare facilities including acute care
hospitals, nursing homes, clinics and surgical and ambulatory care centers. We
serve both for-profit and not-for-profit organizations that range in scope from
one facility to national chains with over 100 facilities. We currently provide
per diem nurse staffing to over 7,000 healthcare facilities.
ALLIED STAFFING. Our allied staffing division, which represented
approximately 16% of our 2001 revenues, specializes in providing allied
professionals to hospitals, nursing homes, clinics and surgical and ambulatory
care centers, both on a per diem and a travel basis. We believe our allied
healthcare business to be among the largest in the country as measured by
revenues. Allied specialties that we staff include diagnostic imaging and
radiology technicians, clinical laboratory technicians and pharmacists. We
currently provide allied staffing to over 400 healthcare facilities.
TRAVEL NURSING. Comprising approximately 8% of our 2001 revenues, our
travel nursing operations provide nurses and surgical technicians to hospitals
across the country for assignments lasting over thirteen weeks. We have provided
travel nursing services to over 1,000 healthcare facilities.
PHYSICIANS. Accounting for approximately 1% of our 2001 revenues, our
physician staffing business specializes in placing board certified radiologists,
anesthesiologists and psychiatrists on temporary to permanent assignments.
NATIONAL BRANCH NETWORK
We currently operate an integrated network, which consisted of 136 per diem
branches located in 43 states as of December 30, 2001. Our branches are
organized into several geographic regions, each of which is coordinated by a
regional director. These branches serve as our direct contact with our
healthcare professionals and clients and are active in recruiting, scheduling
and sales and marketing. Each branch is responsible for covering a specific
local geographic region. Our typical branch is staffed with four or five
professionals who are responsible for the day-to-day operations of the business.
These professionals include a branch manager, two to three staffing
coordinators, and a payroll administrator.
- BRANCH MANAGER. The branch manager is responsible for developing local
client relations, negotiating contracts with healthcare facilities and
setting prices. Our branch managers typically have significant industry
experience.
- STAFFING COORDINATORS. Each staffing coordinator is responsible for
managing a portfolio of temporary personnel. The primary responsibility of
staffing coordinators is to interface with our client facilities and our
pool of available per diem personnel. To provide support to our clients
24 hours a day, 365 days per year, each per diem branch has an
on-call/after-hours coordinator who handles all after hours business.
- PAYROLL ADMINISTRATOR. Each office has a payroll administrator responsible
for maintaining the billing and payment records. The payroll administrator
processes time sheets collected from temporary personnel into MSN
HealthWorks, our software. Using these inputs, MSN HealthWorks generates
the payroll and creates client invoices.
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The cost structure of our typical branch is primarily fixed, consisting of
limited personnel, office space rent, information systems infrastructure and
supplies. We have been able to develop a highly efficient branch management
model that is easily scaleable to meet increasing demand.
RECRUITMENT AND RETENTION
Our ability to recruit and retain a pool of talented, motivated and highly
credentialed healthcare professionals is critical to our success. Our active
pool of professionals has grown 89% compounded annually from 7,000 in 1999 to
25,000 in 2001, with a significant number of new recruits generated via
word-of-mouth. Over 80% of our senior management have nursing or other clinical
backgrounds. We believe this depth of clinical experience helps us understand
the needs of clinical personnel and has enhanced our reputation in the industry
as an advocate for nurses and other healthcare professionals, improving our
ability to recruit such personnel. In addition, we offer competitive benefits
packages that differentiate us from the smaller, local per diem staffing
companies with which we compete, and which are typically unable to offer the
package of services and benefits that we offer. We believe our competitive
advantages in recruiting skilled personnel include the ability to offer the
following opportunities to our personnel:
- FLEXIBLE STAFFING ASSIGNMENTS. We provide our professionals with the
flexibility to tailor their staffing schedules to accommodate lifestyle
choices. There are many reasons why qualified nurses choose to work on a
per diem basis, but most are motivated by the ability to balance their
profession with their other responsibilities and interests. Our
professionals are able to choose not only when they work but also where
they work. Our scheduling systems are designed to place our professionals
in facilities and shifts where they have had a productive and positive
experience with our clients.
- COMPETITIVE BENEFITS PACKAGE. We believe that we were the first per diem
healthcare staffing company to offer a comprehensive benefit program for
qualified per diem staff. Our program includes a matching 401(k) plan,
paid vacation time and access to group discounted benefits such as major
health, dental, life, disability, and general liability insurances for
professionals who work for us for a certain number of hours a month for
more than six months.
- CHOICE OF PAY FREQUENCY--INCLUDING DAILY. Our ability to offer pay as
frequently as daily provides our professionals with another key element of
flexibility. Rather than waiting for the end of a traditional weekly or
biweekly pay period, our professionals can be paid immediately after
completing their shifts. This allows our branch staff to maintain an
active dialogue with our professionals regarding future assignments. This
consistent interaction fosters unique relationships that distinguish us
from our competition.
- LEADING CONTINUING EDUCATIONAL PROGRAMS. We also offer continuing
education courses as a means to improve our pool of nurses as well as to
maintain proper compliance. We have a unique relationship with Florida
Atlantic University's College of Nursing. The College of Nursing faculty
develop continuing education courses that we offer online through our
website. Our nurses can obtain continuing education units (CEUs) that many
states require to demonstrate updates on changing technology and clinical
practices. Our courses are fully accredited by the American Nurses
Credentialing Center of Excellence and the Florida Board of Nursing.
We have several proven channels of recruiting healthcare professionals that
consistently augment our pool of healthcare professionals at low marginal cost.
In 2001, we spent approximately 1.5% of our revenues on recruitment activities.
Our recruiting activities include print advertisements in local newspapers and
in trade journals, mailings, internet listings and solicitations at trade
conventions.
QUALITY MANAGEMENT
We have developed a substantial clinical quality improvement program to
uphold our high standards in recruiting healthcare professionals. Our two-step
internal process ensures that all of our
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temporary professionals have the proper credentials, skills and experience for
their assignments. We have found that our adherence to our high quality
management standards is an integral component of satisfying both our clients and
our professionals with our placements. Our two-step process for quality
management includes the following:
PRE-EMPLOYMENT QUALIFICATIONS. All of our per diem healthcare professionals
undergo a rigorous screening process which includes requirements such as a
minimum of one year of related work experience and the successful completion of
written tests specific to the area of specialty. Each applicant is then
interviewed in person by a local branch manager. This sets us apart from our
competitors who often do not conduct face-to-face interviews. We also check
prior work references, confirm the validity of the applicants' professional
license(s) and screen the applicant for any criminal activity and drug abuse.
All of these standards comply with or exceed those required by OSHA
(Occupational Safety & Health Administration) and JCAHO (Joint Commission on
Accreditation of Healthcare Organizations).
PLACEMENT AND ONGOING MONITORING. Once we have hired a healthcare
professional, we enter all of the professional's data into our database, which
tracks any "renewal dates" with respect to licenses and continuing education
requirements. Our database also matches our clients' needs with our available
pool of professionals. We strive to place our professionals in facilities where
they have previously worked in order to enhance the continuity of our services
to our clients. If this is not possible, we provide our professionals with
pre-staffing orientation to the facility. By taking these steps, we ensure that
the healthcare professional is comfortable with the facility's physical layout,
permanent staff and clinical protocols. We also continually monitor the
performance of our professionals through evaluations and client feedback, among
other things. In addition, our database allows remote access (via the Internet)
by our clients, providing them the ability to view the credentials of the
professionals being staffed at their facilities.
SALES AND MARKETING
We have developed a three-pronged approach to our sales and marketing
activities in order to address the different levels of decision makers at our
client's facilities:
Our first level of business development and relationship management is with
the purchasing manager, administrator(s) or chief nursing officer at a group of
facilities we service. Commonly-owned hospitals, nursing home chains and
healthcare group alliances often purchase temporary staffing services for
multiple facilities under a single contract and a single person typically
manages the selection process. A senior member of our staff, the regional
director and, in certain circumstances, the Executive Vice President of Nurse
Per Diem Operations, handles the negotiation of contractual terms and pricing
with such groups of facilities.
Our second level of business development and relationship management is with
the director of nursing or a nurse/allied department manager who reviews our
services from a clinical competency and quality hiring standards perspective.
Our regional director and local branch manager establish, build and maintain
relationships at this level.
Our third level of relationship management is with the facility staffing
coordinators and the after-hours and weekend supervisors who are the actual
users of the services. Our branch manager, and local staffing coordinators
regularly contact these buyers to coordinate the daily staffing and scheduling
of personnel.
INFORMATION SYSTEMS
Our information system for our per diem staffing operation, for which we
hold an exclusive twenty-five year license and which we refer to as MSN
HealthWorks, is customized to our recruiting, regulatory credentialing,
scheduling and billing needs. Not only is the database used as a management
tool, but it is also used by our staffing coordinators in each branch to quickly
respond to client
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questions and requests. MSN HealthWorks' applications and its supporting
infrastructure house and organize all of our client and employee information.
Electronic files are maintained on our client facilities, detailing historical
and prospective requests for staffing. These files also contain facility-
specific procedures and protocols so that we can ensure our healthcare
professionals integrate quickly. Each employee's electronic file contains the
employee's credentials, test scores, employment record and availability. This
data enables our branch-office staff to automatically match open requests with
qualified candidates.
MSN HealthWorks also monitors billing records using timecards to generate
invoices for our clients and paycheck information for our employees. MSN
HealthWorks operates as a single entry system, meaning that the initial shift
confirmation entry enables our payroll to be generated at the branch level on a
daily basis and the invoicing to be generated at our corporate office. This
system enables us not only to monitor costs and compliance, but also to ensure
that we respond to client requests as quickly as possible. We typically fill a
client staffing request in less than 15 minutes.
We have adapted our MSN HealthWorks platform to provide our clients with
functionality for budgeting and access to nurse and employee credentials via an
internet connection.
COMPETITION
The temporary medical staffing industry is highly competitive. We compete
with both national firms and local and regional firms. We compete with these
firms to attract nurses and other healthcare professionals as temporary
healthcare professionals and to attract hospital and healthcare facility
clients. We compete for temporary healthcare professionals on the basis of the
quantity, diversity and quality of assignments available, compensation packages,
and the benefits that we provide to temporary healthcare professionals while
they are on an assignment. We compete for hospital and healthcare facility
clients on the basis of the quality of our temporary healthcare professionals,
the timely availability of our professionals with the requisite skills, quality
and scope, price and geographic reach of our services.
The per diem market functions with many local operators and is highly
fragmented. The per diem staffing model requires a local presence in every
market served since an important relationship exists between the local branch
and the healthcare facility. We believe, however, that larger, nationally
established firms enjoy distinct competitive advantages over smaller, local and
regional competitors in the healthcare staffing industry. Continuing nursing
shortages and factors driving the demand for nurses over the past several years
have made it increasingly difficult for hospitals to meet their staffing needs.
More established firms have a critical mass of available nursing candidates,
substantial word-of-mouth referral networks and established brand names,
enabling them to attract a consistent flow of new applicants. Larger firms can
also more easily provide payroll services billing, which is cash flow intensive,
to healthcare providers. As a result, sizable and established firms such as ours
have had a significant advantage over small participants.
Some of our large competitors in the temporary medical staffing industry
include AMN Healthcare Services, Inc., Cross Country, Inc. and RehabCare
Group, Inc.
An application to register our service mark is currently pending with the
Patent and Trademark Office. The application was approved and published for
opposition in February 2002.
LIABILITY INSURANCE
We currently maintain a professional liability insurance policy, which we
believe is sufficient for the risks associated with our business. Medical
malpractice claims against us relating to our healthcare professionals are
defended by our insurance carrier. We have indemnity agreements with
approximately 20% of our clients which state that we will defend, indemnify and
hold harmless those clients against any act of omission or willful or reckless
acts, including negligence and misconduct. A majority of such agreements are
reciprocal.
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GOVERNMENT REGULATION
The healthcare industry is subject to extensive and complex federal and
state laws and regulations relating to professional licensure, conduct of
operations, payment for services and payment for referrals. The extensive and
complex laws that apply to our hospital and healthcare facility clients,
including laws related to Medicare, Medicaid and other federal and state
healthcare programs, could indirectly affect the demand or the prices paid for
our services. For example, our hospital and healthcare facility clients could
suffer civil and/or criminal penalties and/or be excluded from participating in
Medicare, Medicaid and other healthcare programs if they fail to comply with the
laws and regulations applicable to their businesses.
Our business, however, is not directly impacted by or subject to the laws
and regulations that generally govern the healthcare industry because we provide
services on a contract basis and are paid directly by our hospital and other
healthcare facility clients.
Some states require state licensure for businesses that employ and/or assign
healthcare personnel to provide healthcare services on-site at hospitals and
other healthcare facilities. We hold a Nursing Pool License in those states in
which we do business that require such licenses, including Florida, Illinois,
Kentucky, Maine, Maryland, Massachusetts, Minnesota, North Carolina, Rhode
Island and Washington.
Most of our temporary healthcare professionals are required to be
individually licensed or certified under applicable state laws. We take
reasonable steps to ensure that our professionals possess all necessary licenses
and certifications in all material respects.
EMPLOYEES
As of December 30, 2001, we employed 876 people in the following areas: 788
in branch staff, 67 in corporate office staff and 21 in regional and de novo
operations staff. In addition, during 2001 we employed over 25,000 temporary
healthcare professionals. We do not have any organized labor unions. We believe
we have excellent relationships with our employees.
Generally, our allied health professionals, per diem nurses and travel
nurses are our employees. Our physicians, certified registered nurse
anesthetists and anesthesiologists, however, are independent contractors. We
have not entered into any employment agreements with any of our healthcare
professionals.
FACILITIES
Our U.S. corporate headquarters is located in Boca Raton, Florida with an
aggregate of 20,000 square feet. We operate on a national basis with a presence
in 43 states and 141 locations as of December 30, 2001, including 136 branches
dedicated primarily to providing per diem nurse staffing. The facilities at our
headquarters and at each of our locations are leased. The lease to our
headquarters expires in 2007. We believe that our properties are adequate for
our current needs. In addition, we believe that adequate space can be obtained
to meet our foreseeable business needs. With the exception of our corporate
headquarters, we have no material operating leases.
LEGAL PROCEEDINGS
From time to time, we are subject to lawsuits and claims which arise out of
our operations in the normal course of business. We are plaintiffs or defendants
in various litigation matters in the ordinary course of business, some of which
involve claims for damages that are substantial in amount. We believe that the
disposition of claims currently pending will not have a material adverse effect
on our financial position or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning our executive officers and
directors, including their age, as of December 30, 2001.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ------------------------------------------------
Robert J. Adamson.................... 43 President, Chief Executive Officer and Director
Kevin S. Little...................... 31 Chief Financial Officer, Secretary and Treasurer
Patricia G. Donohoe, RN.............. 49 Executive Vice President of Business Development
Linda Duval, RN...................... 59 Executive Vice President of Nurse Per Diem
Operations
Jeffrey P. Jacobsen, NMT............. 47 Executive Vice President of Allied Staffing
Operations
Scott F. Hilinski.................... 33 Director
Joel Ackerman........................ 36 Director
David J. Wenstrup.................... 37 Director
</Table>
ROBERT J. ADAMSON has served as our President, CEO and a director since our
inception in March 1998. Prior to co-founding our company, he served for
15 months as Chief Operating Officer and Chief Financial Officer of TravelPro
USA, a privately held consumer products company. Prior to joining TravelPro,
Mr. Adamson was the President of StarMed Staffing, L.P., then a wholly owned
subsidiary of Medical Resources, Inc. Mr. Adamson also served as the
Co-President and Chief Financial Officer of Medical Resources. Prior to his work
at StarMed, Mr. Adamson was employed in various financial executive positions
for eight years in the computer industry.
KEVIN S. LITTLE has served as our Chief Financial Officer, Secretary and
Treasurer since our inception in March of 1998. Prior to co-founding our
company, Mr. Little was a founder, Co-President and Chief Financial Officer of
TBM Staffing, Inc. and President of the company's predecessor, Southeast
Staffing Partners, Inc., healthcare staffing services companies established in
1997. Prior to TBM Staffing and Southeast Staffing Partners, Inc., he was
Corporate Controller for Medical Resources, Inc. Before his work at Medical
Resources, Inc., Mr. Little was employed at Ernst & Young, LLP.
PATRICIA G. DONOHOE, RN, has served as our Executive Vice President of
Business Development since December 2001, and as Chief Operations Officer from
March 1998 to December 2001. Prior to co-founding our company, she was a founder
and Co-President of TBM Staffing, Inc. Prior to co-founding TBM, she was
Regional Director of StarMed Staffing, L.P.
LINDA DUVAL, RN, joined us in August 1999 as Executive Vice President of
Nurse Per Diem Operations. Formerly, Ms. Duval managed Pediatric Services of
America's operations and acquisition departments. Ms. Duval was a co-founder of
Premier Staffing which was acquired by Pediatric Services of America. Prior to
co-founding Premier, Ms. Duval was employed for nineteen years in senior
management positions with Olsten Corporation, a staffing company.
JEFFREY P. JACOBSEN, NMT, joined us in November 1999 through the acquisition
of MTS Staffing Resource, Inc. Mr. Jacobsen has been Executive Vice President of
Allied Staffing Operations since November 2001. Prior to November 2001,
Mr. Jacobsen was Vice President of Allied Staffing Operations. Mr. Jacobsen
managed the operations and sales team of MTS Staffing Resource, Inc. since
May 1989. Prior to joining MTS Staffing Resource, Inc., Mr. Jacobsen served as
the Manager of the Nuclear Medicine and Radiology Department at West Suburban
Hospital Medical Center.
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SCOTT HILINSKI became a director in June 1998. He has been a Managing
Director of Nautic Partners, LLC, formerly known as Navis Partners, LLC, since
June 2000. Prior to Nautic Partners, Mr. Hilinski was a Vice President for Fleet
Equity Partners, a private equity firm. Mr. Hilinski is also a director of
CompBenefits Corp., a dental and vision plan administrator, Great Smokies
Diagnostic Laboratory, Inc., a specialized diagnostic laboratory, and Provider
HealthNet Services, Inc., specializing in information technology outsourcing.
JOEL ACKERMAN became a director in October 2001 in connection with the
closing of our recapitalization. Mr. Ackerman is a general partner of Warburg
Pincus & Co. and a managing director of Warburg Pincus LLC where he has been
employed since 1993. He is also a director of Coventry Health Care Inc., a
managed healthcare company, Sonus Corp., which owns and operates hearing care
centers, ChartOne, Inc., an outsource provider of document and information
services to medical records departments of hospitals and physician facilities,
and Centennial HealthCare Corporation, an operator of skilled nursing
facilities.
DAVID J. WENSTRUP became a director in October 2001 in connection with the
closing of our recapitalization. Mr. Wenstrup is a general partner of Warburg
Pincus & Co. and a managing director of Warburg Pincus LLC, where he has been
employed since 1997. Prior to 1997, Mr. Wenstrup was with the Boston Consulting
Group. Mr. Wenstrup is also a director of Sonus Corp., Workscape Inc., a
web-based human resources company, and Centennial HealthCare Corporation.
TERM OF EXECUTIVE OFFICERS AND DIRECTORS
Upon the closing of this offering, the Board of Directors will be divided
into three classes to be designated as Class I, Class II and Class III, each
class consisting, as nearly as possible, of one-third of the total number of
directors constituting the Board of Directors. The sole Class I director is Joel
Ackerman, the sole Class II director is Scott Hilinski and the Class III
directors are Robert J. Adamson and David J. Wenstrup. The term of the Class I
director will terminate on the date of the 2002 annual meeting of our
stockholders; the term of the Class II director will terminate on the date of
the 2003 annual meeting of our stockholders; and the term of the Class III
directors will terminate on the date of the 2004 annual meeting of our
stockholders. At each annual meeting of our stockholders, successors to the
class of directors whose term expires at that meeting will be elected for three
year terms. Executive officers are appointed by the Board of Directors and serve
at the discretion of the Board of Directors.
BOARD COMPOSITION
According to our stockholders agreement, Warburg Pincus has the right to
designate two persons to our board of directors upon the completion of the
offering. Currently, Warburg Pincus has designated David J. Wenstrup and Joel
Ackerman as its representatives under this agreement. See "Certain Transactions"
for more information about our stockholders agreement, in particular what rights
certain of our current stockholders will have under this agreement once the
offering is completed. Mr. Wenstrup and Mr. Ackerman are currently managing
directors of Warburg Pincus LLC and are partners of Warburg Pincus & Co., which
are affiliates of Warburg Pincus Private Equity VIII, L.P., our principal
stockholder.
DIRECTOR COMPENSATION
We do not compensate our directors for serving on the board. We do reimburse
each member of our board of directors for out-of-pocket expenses incurred in
connection with attending our board meetings.
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BOARD COMMITTEES
The board of directors plans to establish an audit committee and a
compensation committee. In connection with the listing of our common stock on
the New York Stock Exchange, we intend to appoint one director within 90 days
and an additional director within one year who will not be our employees or
affiliated with management.
The audit committee will provide assistance to the board in satisfying its
fiduciary responsibilities relating to accounting, auditing, operating and
reporting practices, and will review the annual financial statements, the
selection and work of our independent auditors, the scope of the annual audits,
the fees to be paid to the auditors and the adequacy of internal controls for
compliance with corporate policies and directives.
The compensation committee will review general programs of compensation and
benefits for all employees and makes recommendations to our board of directors
concerning executive officer and director compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serve as members of the board of directors or
compensation committee of any entity that has an executive officer serving as a
member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation awarded to or earned by our Chief Executive Officer and by each of
our four other most highly compensated executive officers (the "named executive
officers") who earned in excess of $100,000 in cash compensation during the year
ended December 30, 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------
--------------------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (3) AWARD(S) (4) OPTIONS
- --------------------------- -------- -------- ---------- ---------------- ------------ ----------
Robert J. Adamson ...................... 2001 $400,000 $1,567,081 $859,021 -- 796,076
PRESIDENT AND CHIEF EXECUTIVE OFFICER 2000 325,000 265,993 $ 1,419 2,240,644 --
1999 250,000 109,800 -- 751,997 --
Kevin S. Little ........................ 2001 $175,000 $ 802,930 $330,827 -- 227,450
CHIEF FINANCIAL OFFICER 2000 165,000 132,967 $ 1,419 836,405 --
1999 150,000 54,900 -- 306,937 --
Patricia G. Donohoe, RN ................ 2001 $175,000 $ 609,041 $330,827 -- --
EXECUTIVE VICE PRESIDENT OF BUSINESS 2000 165,000 132,967 $ 1,419 836,405 --
DEVELOPMENT 1999 150,000 54,900 -- 306,937 --
Linda Duval, RN ........................ 2001 $155,000 $ 264,979 $ 5,250 -- 125,648
EXECUTIVE VICE PRESIDENT OF NURSE PER 2000 145,000 129,084 $ 1,419 -- 25,706
DIEM OPERATIONS 1999 53,900(1) 20,000 -- -- --
Jeffrey P. Jacobsen, NMT ............... 2001 $140,000 $ 175,000 $ 9,450 -- 79,607
EXECUTIVE VICE PRESIDENT OF ALLIED 2000 125,000 90,000 $ 9,450 -- --
STAFFING OPERATIONS 1999 95,000(2) 275,000 -- -- --
</Table>
- ------------------------------
(1) Ms. Duval was hired by the company in August 1999. The salary disclosed
represents the amount paid to Ms. Duval by the company in 1999.
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(2) Mr. Jacobsen was hired by the company in November 1999 in connection with
the acquisition of MTS Staffing Resource, Inc. The salary disclosed
represents the amount paid to Mr. Jacobsen by both MTS Staffing
Resource, Inc. and the company for 1999.
(3) Represents bonuses paid to Messrs. Adamson, Little and Albert, and Ms.
Donohoe in the amount of the interest accrued on loans made by us to such
persons relating to their purchase of restricted stock from us, plus an
amount necessary for such persons to pay taxes due with respect to such
bonuses.
(4) Restricted stock awards were purchased by the named executive officers in
consideration for a note secured by the underlying shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted during fiscal year 2001 to each of our named executive officers who
received grants in 2001.
<Table>
<Caption>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS/SARS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM (1)
OPTIONS/SARS FISCAL YEAR PRICE PER EXPIRATION -----------------------
GRANTED 2001 SHARE DATE 5% 10%
------------- ---------------- --------- ---------- ---------- ----------
Robert J. Adamson.................. 796,076 37.8% $ 6.06 11/2011 $3,033,860 $7,688,396
Kevin S. Little.................... 227,450 10.8% $ 6.06 11/2011 $ 866,815 $2,196,680
Linda Duval, RN.................... 46,041 2.2% $ 2.20 1/2011 $ 63,676 $ 161,366
79,607 3.8% $ 6.06 11/2011 $ 303,385 $ 768,837
Jeffrey P. Jacobsen, NMT........... 79,607 3.8% $ 6.06 11/2011 $ 303,385 $ 768,837
</Table>
- ------------------------------
(1) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts representing hypothetical gains are those
that could be achieved if options are exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the Securities and Exchange Commission, and do
not represent our estimate or projection of the future stock price.
FISCAL YEAR-END OPTION VALUES
None of our named executive officers exercised any stock options in fiscal
year 2001. The following table sets forth information concerning stock options
held by our named executive officers as of December 30, 2001.
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS (1) OPTIONS/SARS (1)
--------------------------- -------------------- --------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- -------------------- --------------------
Robert J. Adamson............................ 0 796,076 0 10,301,333
Kevin S. Little.............................. 0 227,450 0 2,943,232
Patricia G. Donohoe, RN...................... 0 0 0 0
Linda Duval, RN.............................. 10,282 141,072 172,753 1,630,898
Jeffrey P. Jacobsen, NMT..................... 0 79,607 0 1,030,129
</Table>
- ------------------------------
(1) There was no public trading market for our common stock on December 30,
2001. Accordingly, these values have been calculated in accordance with the
rules of the Securities and Exchange Commission, on the basis of the initial
public offering price per share of $19.00 minus the relevant exercise price.
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<Page>
EMPLOYMENT AGREEMENTS
On August 20, 2001, we entered into amended and restated employment
agreements with Robert J. Adamson, Kevin S. Little, Patricia G. Donohoe, and
Linda Duval, amending and restating their original employment agreements, dated
June 1, 1998, in the case of Mr. Adamson, Mr. Little and Ms. Donohoe, and dated
January 15, 2001, in the case of Ms. Duval. Mr. Adamson serves as our Chief
Executive Officer, Mr. Little serves as our Chief Financial Officer,
Ms. Donohoe serves as our Executive Vice President of Business Development, and
Ms. Duval serves as our Executive Vice President of Per Diem Nurse Operations.
Subject to earlier termination as described below, the employment terms for each
of Mr. Adamson and Mr. Little expire on December 26, 2004, while the terms for
Ms. Donohoe and Ms. Duval expire on October 26, 2004; provided that, unless we
or Mr. Adamson, Mr. Little, Ms. Donohoe or Ms. Duval, as the case may be, gives
written notice of non-renewal not later than ninety days prior to the end of the
term (or any extension of the term), the term will be automatically extended by
one additional year.
The employment agreements provide annual base salaries as follows:
<Table>
<Caption>
NAME OF EXECUTIVE ANNUAL BASE SALARY
- ----------------- ------------------
Robert J. Adamson.......................................... $400,000
Kevin S. Little............................................ $175,000
Patricia G. Donohoe........................................ $175,000
Linda Duval................................................ $155,000
</Table>
In addition, the employment agreements provide for participation in our
bonus incentive pool on terms determined by our board of directors.
Each of the above agreements contains the following additional provisions:
Notwithstanding the employment term described above, the employee's
employment will end on the earlier to occur of:
- a termination of employee's employment due to the employee's death or
disability, a termination by us with or without "cause," as defined below,
and
- a termination by the employee with or without "good reason," as defined
below.
For purposes of these employment agreements, "cause" means:
- the employee's failure, neglect or refusal to perform his or her duties,
which is not corrected by the employee within 10 business days of his or
her receipt of written notice from us of such failure, neglect or refusal;
- any willful or intentional act of the employee that has the effect of
injuring our reputation or business in any material respect;
- the employee's use of illegal drugs or repeated drunkenness on our
property;
- conviction of, or plea of guilty or no contest to, the commission of a
felony by the employee;
- the commission by the employee of an act of fraud or embezzlement against
us; or
- the employee's breach of any of the covenants provided in the applicable
employment agreement restricting the release of confidential information,
competition against us, solicitation of our employees, disparagement of us
and ownership of proprietary information.
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For purposes of these employment agreements, "good reason" means any of the
following, unless corrected by us within 30 days:
- the substantial and material diminution in the employee's status, duties,
or responsibilities then in effect;
- without the employee's consent, the relocation of the employee's principal
office location more than fifty (50) miles from its current location in
Boca Raton, Florida;
- any material breach by us of the applicable employment agreement; or
- the failure of any of our successors to assume our obligations under the
applicable employment agreement.
In the event that the employee's employment terminates for any reason, the
employee will receive all accrued but unpaid compensation through the date of
such termination.
In the event that the employee's employment is terminated by us without
cause (other than by reason of death or disability), or the employee voluntarily
resigns with good reason, in addition to the amounts described in the preceding
paragraph, the employee will continue to receive his or her base salary for a
period of twelve months following the date of such termination, and to the
extent permissible under our health plans, continuation of health benefits
during such period.
If the employee's employment is terminated within twelve months following a
"change in control," as defined below, in addition to the payments described in
the preceding paragraph, the employee will receive a lump-sum payment equal to
two times the sum of the employee's base salary and other compensation provided
under the employment agreement. In addition, if at the time of such termination
the employee holds any stock options or warrants, we will cash out those options
or warrants based upon the spread between the fair market value of the
underlying shares and the applicable exercise price, if any. With respect to
restricted stock held by the employee, all forfeiture provisions shall be deemed
fully met, the shares of restricted stock will be surrendered to us and the
employee will receive in return the difference between (x) the fair market value
of the shares of restricted stock and (y) the sum of the principal amount and
accrued interest on the promissory note payable by the employee in respect of
the restricted stock, if any.
For purposes of these employment agreements, the term "change in control"
means:
- the acquisition by any third party of beneficial ownership of securities
representing more than 50% of our voting securities entitled to vote
generally in the election of directors, determined on a fully-diluted
basis;
- incumbent directors constituting a majority of our Board of Directors
ceasing to constitute at least a majority of the Board of Directors,
except that anyone becoming a director with the approval of at least a
majority of the incumbent directors shall be considered to be an incumbent
director; or
- consummation of a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of our assets, in each case,
unless, following any such transaction, all or substantially all of the
individuals or entities who were the beneficial owners of our voting
securities immediately prior to such transaction beneficially own more
than 50% of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation resulting from
such transaction.
The term "change in control" does not include the merger of the subsidiary
of Warburg Pincus with and into us in connection with our recapitalization in
October 2001.
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In the event that
- any amount or benefit paid or distributed to the employee pursuant to the
employee's employment agreement, taken together with any amounts or
benefits otherwise paid or distributed to the employee, are or become
subject to the excise tax imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended, or any similar tax that may hereafter be
imposed, and
- it would be economically advantageous to the employee to reduce such
payments to avoid imposition of an excise tax,
the payments shall be reduced to an amount which maximizes the aggregate present
value of such payments without causing such payments to be subject to any excise
tax. This reduction will only be made if the net after-tax amount to be received
by the employee after giving effect to the reduction will be greater than the
net after-tax amount that would be received by the employee without the
reduction.
Following any termination of the employee's employment, the employee will
remain subject to certain restrictive covenants, including noncompetition,
nonsolicitation and noninterference restrictions for a period of up to three
years.
On November 1, 1999, we entered into an employment agreement with
Mr. Jacobsen, who serves as our Executive Vice President of Allied Staffing
Operations. Subject to earlier termination as described below, the employment
term expires on October 31, 2002. Mr. Jacobsen receives an annual base salary of
$155,000, and is eligible for participation in our incentive bonus pool provided
certain performance targets are achieved.
Notwithstanding the employment term described above, Mr. Jacobsen's
employment will end on the earlier to occur of: (i) his death, (ii) upon his
disability which results in non-performance of duties for more than thirty (30)
days, (iii) upon thirty (30) days written notice by either party, or
(iv) immediately for "cause," as defined below.
For purposes of Mr. Jacobsen's employment agreement, "cause," in the case of
a Company-initiated termination is limited to the following events:
- a breach of his confidential information and noncompete agreement;
- violation of any of our written policies or our personnel manual, provided
that he has ten (10) days to cure such violation, if curable;
- his willful failure to comply with the laws of the United States, the
State of Illinois, and all other governmental bodies having jurisdiction
over him (other than his failure to observe traffic laws which do not
involve the possible imposition of jail sentences);
- acts of moral turpitude which may damage our reputation;
- his failure, refusal or inability to perform his duties, provided that he
has 10 days to cure such failure, refusal or inability to perform; or
- an act of fraud, misappropriation or embezzlement.
For purposes of Mr. Jacobsen's employment agreement, "cause," in the case of
an employee-initiated termination, is limited to the following events:
- our material breach of the employment agreement; or
- our willful failure to comply with the laws of the United States, the
State of Illinois, and all other governmental bodies having jurisdiction
over us.
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EMPLOYEE BENEFIT PLANS
2001 STOCK INCENTIVE PLAN
Our 2001 Stock Incentive Plan reserves 2,274,499 shares of our common stock
for grant of incentive (tax-qualified under Section 422 of the Internal Revenue
Code) and nonqualified stock options, and shares of restricted stock (stock
which is subject to certain transferability restrictions) to our employees,
directors and consultants. As of December 30, 2001, we have granted options
covering 1,767,604 shares at weighted exercise price equal to $6.06 per share.
The plan is administrated by our board of directors, or a committee
designated by our board of directors; provided, that upon and after the time
that we first become subject to Section 16(b) of the Exchange Act, each member
of the administrative committee will, if practicable, be a "nonemployee
director" within the meaning of the rules promulgated under Section 16(b) and an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code. The administrative committee has the authority to:
- select plan participants;
- determine the nature and extent of the awards made to each plan
participant;
- determine whether awards will be paid in shares, options or cash,
representing the fair market value of the shares granted;
- determine when awards will be made to plan participants;
- determine the duration of the period and vesting schedule for each award;
- determine any payment conditions of the awards;
- prescribe the form of agreements evidencing awards made under the plan;
and
- make all other decisions relating to the administration of the plan.
Under the plan, the administrative committee also determines the exercise
price at the time of grant; provided, that the exercise price for incentive
stock options will not be less than 100% of the fair market value of a share on
the date of grant. In addition, following the date that the exemption from the
application of Section 162(m) of the Internal Revenue Code (or any other
exemption having similar effect) ceases to apply to options, all options
intended to qualify as "performance-based compensation" under Section 162(m) of
the Internal Revenue Code will have an exercise price per share of no less than
the fair market value of a share on the date of grant. If a plan participant who
holds an incentive stock option also owns, or is deemed to own, more than 10% of
the combined voting power of all of our classes of stock, the option period may
not exceed five years and the exercise price of the option may not be less than
110% of the fair market value on the grant date. Except as described above,
options under the plan are generally granted for a ten-year term, but may
terminate earlier if the employment with us terminates before the end of the
ten-year period.
AMENDED AND RESTATED STOCK OPTION PLAN
Our Amended and Restated Stock Option Plan reserves 1,151,016 shares of our
common stock for issuance of incentive (tax-qualified under Section 422 of the
Internal Revenue Code) and nonqualified stock options to our employees and
consultants. As of December 30, 2001, we have granted and outstanding options
covering 265,476 shares at a weighted exercise price equal to $2.16 per share.
Notwithstanding the number of shares reserved under the Amended and Restated
Stock Option Plan, our Board of Directors, in its capacity as plan
administrator, has frozen the plan such that no further options will be granted
under this plan.
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The plan is administered by our board of directors, or a committee
designated by our board of directors comprised of at least two members of our
board of directors. The board of directors has the authority to:
- select plan participants;
- determine when awards will be made to plan participants;
- determine the form and amounts of awards;
- determine any limitations, restrictions and conditions applicable to each
award;
- prescribe, amend and rescind rules and regulations relating to the plan;
and
- make all other decisions relating to the administration of the plan.
Under the plan, the board of directors also determines the exercise price at
the time of the grant; provided, that the exercise price for incentive stock
options will not be less than 100% of the fair market value of a share on the
date of grant. If a plan participant who holds an incentive stock option also
owns, or is deemed to own, more than 10% of the combined voting power of all of
our classes of stock, the option period shall not exceed five years and the
exercise price of the option may not be less than 110% of the fair market value
on the grant date. Except as described above, options under the plan are
generally granted for a ten-year term, but may terminate earlier if the
employment with us terminates before the end of the ten-year period.
In the event of a "change in control event," all unexercised options granted
under the plan immediately vest. For purposes of the plan, a "change in control
event" means the replacement of 50% or more of the directors of our operating
subsidiary, Medical Staffing Network, Inc., as a direct or indirect result of:
- a cash tender offer for our operating subsidiary's common stock;
- a solicitation of proxies other than by our operating subsidiary's
management or board of directors;
- acquisition of beneficial ownership of shares having 25% or more of the
total number of votes that may be cast for the election of directors of
our operating subsidiary by a third party or a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, for the purpose
of changing control of our operating subsidiary; or
- any merger, business combination, sale of assets, or other extraordinary
corporate transaction undertaken for the purpose of changing control of
our operating subsidiary.
AMENDED AND RESTATED EXECUTIVE INCENTIVE STOCK OWNERSHIP PLAN
Our Amended and Restated Executive Incentive Stock Ownership Plan reserves
6,138,750 shares of our common stock for grant of restricted stock awards to our
employees and directors. As of the date of this prospectus, we have granted
2,739,417 shares of restricted stock under this plan. Notwithstanding the number
of shares reserved under the Amended and Restated Executive Incentive Stock
Ownership Plan, our Board of Directors, in its capacity as plan administrator,
has frozen the plan such that no further shares of restricted stock will be
granted under this plan.
The plan is administrated by a committee of our board of directors which has
the authority to:
- select plan participants;
- determine the nature and extent of the awards made to each plan
participant; and
- make all other decisions relating to the administration of the plan.
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Participants have the right to surrender the restricted stock to us at any
time. Upon such surrender, the participant will pay us any unpaid portion of the
full recourse portion of any promissory notes (if any promissory notes were
delivered as payment for the restricted stock) for all restricted shares which
are non-forfeitable as of the date of such surrender.
In general, any termination of a participant's employment with us during the
period the restricted shares remain subject to restriction will result in
forfeiture of the restricted shares. However, upon a termination of a
participant's employment following a "change in control," as defined in the
participant's employment agreement, all restrictions applicable to restricted
stock awards lapse, such that no forfeiture will occur.
401(K) PLAN
We maintain a 401(k) Plan for the benefit of our employees, which we adopted
effective August 1, 1999. Under the plan, eligible employees may elect to make
salary deferral contributions ($10,500 in 2001) of their annual compensation,
subject to certain statutory limitations, and will receive a matching
contribution of 50% of the first 7% contributed.
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CERTAIN TRANSACTIONS
RECAPITALIZATION
On August 20, 2001, Warburg Pincus, MSN Acquisition Corp., a wholly owned
subsidiary of Warburg Pincus, and our company entered into an Agreement and Plan
of Merger, setting forth the terms and conditions upon which our company would
be recapitalized through a merger of MSN Acquisition Corp. with and into us. The
merger agreement was negotiated on an arm's-length basis by our management and
former stockholders and Warburg Pincus. The merger agreement was approved by our
board of directors and our stockholders. On October 26, 2001, the
recapitalization was completed.
Pursuant to the terms of the merger agreement, holders of our common stock
became entitled to receive $6.06 per share and holders of all of our shares of
convertible preferred stock became entitled to receive $6.06 times the number of
shares of common stock into which the preferred stock was then convertible.
Certain of our stockholders, including our 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 of our company that Warburg Pincus and certain
other investors received.
Upon completion of the recapitalization, the investment group led by Warburg
Pincus was issued preferred stock, common stock and the senior unsecured notes,
together representing approximately 85% of our equity ownership (66.1% of our
equity ownership was issued to Warburg Pincus) in exchange for cash totaling
approximately $156 million. In addition, a banking syndicate extended a senior
credit facility that provided us with advances totaling $105 million. Together,
these funds were used to pay the merger consideration to our former
stockholders, to retire approximately $82 million of then-outstanding debt
obligations, to pay transaction fees and expenses and to provide us with working
capital for operations.
Upon completion of the offering, all of our outstanding shares of our
preferred stock will convert into 20,266,669 shares of our common stock. In
addition, accrued dividends on the outstanding shares of our preferred stock
will convert into 808,976 shares of our common stock at a rate of one share of
our common stock for every $6.06 of accrued dividends.
A portion of the proceeds of this offering will be used to repay the
outstanding principal and accrued interest on our senior unsecured notes, which
were issued in connection with our recapitalization. Warburg Pincus was issued
an aggregate principal amount of approximately $39.2 million in senior unsecured
notes in connection with the recapitalization. As of December 30, 2001,
approximately $1.3 million of interest had accrued on the senior unsecured
notes.
We have granted certain holders of our preferred stock registration rights
with respect to all shares of common stock, including shares issuable upon
conversion of our preferred stock, owned by those stockholders. See "Description
of Capital Stock--Registration Rights."
During 2000, we paid $75,000 and during 2001 we paid $212,000 to Edward Y.
Albert, a stockholder and former director of ours, and a current director of our
subsidiary, in consulting fees for services rendered. In addition, we rented
office space from Patrick Barber, a former director of our company and our
subsidiary, during 2000 and 2001, in connection with which we paid rent of
$89,300 in 2000 and $47,000 in 2001.
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STOCKHOLDERS AGREEMENT
On October 26, 2001, we entered into a stockholders agreement with Warburg
Pincus and certain of our stockholders. The provisions of the stockholders
agreement will terminate upon consummation of the offering pursuant to this
prospectus, except that
- for as long as any investor that is a party to the stockholders agreement
beneficially owns at least 20% of our outstanding shares, we are obligated
to nominate and use our best efforts to have two individuals designated by
that investor elected to our board of directors; and
- for as long as any investor that is a party to the stockholders agreement
beneficially owns at least 10% of our outstanding shares, we are obligated
to nominate and use our best efforts to have one individual designated by
any investor that is a party to the stockholders agreement.
Accordingly, upon the completion of the offering, Warburg Pincus will have the
right under this stockholders agreement to designate two persons to our board of
directors. Currently, the directors designated by Warburg Pincus are Joel
Ackerman and David J. Wenstrup.
SENIOR UNSECURED NOTES
As of December 30, 2001, there was approximately $59.3 million in aggregate
principal amount of our senior unsecured notes outstanding and approximately
$1.3 million in accrued interest. Accrued interest on the senior unsecured notes
for the three months ended March 31, 2002 was an additional $1.8 million. Our
officers, directors and stockholders hold all of our outstanding senior
unsecured notes. The notes, which are unsecured obligations, are payable on
October 26, 2009. The notes bear interest compounding quarterly at a rate of 12%
per annum, and all interest is payable at maturity. We intend to use a portion
of the proceeds of this offering to repay the principal and accrued interest on
our outstanding senior unsecured notes.
MANAGEMENT LOANS
In connection with the purchase of restricted stock prior to the
recapitalization by Robert J. Adamson, Kevin S. Little and Patricia G. Donohoe,
our executive officers, and Edward Y. Albert, Jr., a former director, we loaned
the following:
<Table>
<Caption>
LARGEST AGGREGATE
AMOUNTS AMOUNTS AMOUNT OF AMOUNT
LOANED IN LOANED IN INDEBTEDNESS OUTSTANDING ON
EXECUTIVE/DIRECTOR 1998 2000 OUTSTANDING IN 2001 DECEMBER 30, 2001
- ------------------ --------- ---------- ------------------- -------------------
Robert J. Adamson..................... $826,875 $2,880,000 $3,706,875 $2,627,815
Kevin S. Little....................... $337,500 $1,007,500 $1,345,000 $ 970,562
Patricia G. Donohoe................... $337,500 $1,007,700 $1,345,000 $ 952,700
Edward Y. Albert, Jr.................. $168,750 $ 366,875 $ 535,625 --
</Table>
All of the loans are evidenced by promissory notes, bearing interest at the
prime rate announced from time to time by THE WALL STREET JOURNAL. From
January 1, 1998 through December 30, 2001, interest rates reflected by the prime
rate ranged from 4.75% to 9.5%. The amounts borrowed in 1998 are due in 2008 and
the amounts borrowed in 2000 are due in 2010. In connection with the
recapitalization, Mr. Adamson repaid $1,079,060 of his loan, Mr. Little repaid
$374,438 of his loan and Ms. Donohoe repaid $392,500 of her loan. The
outstanding balances of the loans of Messrs. Adamson and Little and Ms. Donohoe
mature in 2010. Mr. Albert has repaid his loan in full.
We expect that all future transactions between us and our officers,
directors or principal stockholders will be on terms no less favorable to us
than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding beneficial ownership of our
common stock as of December 30, 2001, and as adjusted to reflect the sale of
shares of common stock in the offering, for:
- each stockholder who we know beneficially owns more than 5% of our
outstanding shares of common stock;
- each of our directors;
- each of our named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the SEC. For the purpose of calculating the percentage
beneficially owned, the number of shares of common stock deemed outstanding
"Before Offering" includes:
- 21,102,192 shares of common stock outstanding, assuming the conversion of
all of our outstanding preferred stock into common stock, plus accrued
dividends on these shares through April 23, 2002; and
- 62,450 shares of common stock subject to options held by the person or
group that are currently exercisable or exercisable within 60 days from
December 30, 2001.
The number of shares of common stock outstanding "After Offering" includes
an additional 7,812,500 shares offered by us hereby. Except as indicated in the
footnotes to this table and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock listed as beneficially owned by them. Unless
otherwise indicated, the principal address for each of the stockholders below is
c/o Medical Staffing Network Holdings, Inc., 901 Yamato Road, Suite 110, Boca
Raton, FL 33431.
<Table>
<Caption>
PERCENTAGE OF
COMMON STOCK
TOTAL BENEFICIALLY OWNED
SHARES SHARES -------------------
SUBJECT BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER TO OPTIONS OWNED(1) OFFERING OFFERING
- ------------------------ ---------- ------------ -------- --------
Warburg Pincus Private Equity VIII, L.P. (2)(3)............. -- 13,953,136 66.1% 48.3%
Nautic Partners V, LP (4)................................... -- 3,022,016 14.3% 10.5%
General Electric Pension Trust (5).......................... -- 1,157,594 5.5% 4.0%
Robert J. Adamson (6)....................................... -- 935,669 4.4% 3.2%
Kevin S. Little (7)......................................... -- 355,508 1.7% 1.2%
Patricia G. Donohoe, RN..................................... -- 347,730 1.6% 1.2%
Linda Duval, RN............................................. 10,282 -- * *
Jeffrey P. Jacobsen, NMT.................................... -- -- -- --
Joel Ackerman (2)........................................... -- 13,953,136 66.1% 48.3%
David J. Wenstrup (2)....................................... -- 13,953,136 66.1% 48.3%
Scott F. Hilinski (4)....................................... -- 3,022,016 14.3% 10.5%
All directors and executive officers as a group
(eight) persons........................................... -- 18,624,341 88.2% 64.4%
</Table>
- --------------------------
* Less than one percent of the outstanding shares of common stock
(1) The number of shares beneficially owned includes shares of preferred stock,
plus accrued dividends on these shares as of April 23, 2002, that will
convert into shares of common stock on the closing of the offering.
(2) The stockholder is Warburg Pincus Private Equity VIII, L.P., including two
related limited partnerships ("WP VIII"). Warburg, Pincus & Co. ("WP") is
the sole general partner of each of these entities. WP VIII is managed by
Warburg Pincus LLC ("WP LLC"). Lionel I. Pincus is the managing partner of
WP and the managing member
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of WP LLC, and may be deemed to control both entities. The address of the
Warburg Pincus entities is 466 Lexington Avenue, New York, New York 10017.
(3) Messrs. Ackerman and Wenstrup, directors of the Company, are general
partners of WP and managing directors and members of WP LLC. All shares
indicated as owned by Messrs. Ackerman and Wenstrup are included because of
their affiliation with the Warburg Pincus entities. Neither Mr. Ackerman nor
Mr. Wenstrup owns any shares individually and each disclaims beneficial
ownership of all shares owned by the Warburg Pincus entities. Their address
is c/o Warburg Pincus LLC, 466 Lexington Avenue, New York, NY 10017. See
Note 2 above.
(4) The total shares listed under Nautic Partners V, LP ("NP5"), formerly known
as Navis Partners V, LP, consist of shares held by NP5 and the following
entities: Fleet Equity Partners VI, LP ("FEP6"), Fleet Venture Resources,
Inc. ("FVR"), Kennedy Plaza Partners III, LP ("KPP3"), Chisholm Partners IV,
LP ("CP4"), and Kennedy Plaza Partners II, LLC ("KPP2"). These entities and
certain persons affiliated with them may be deemed to be a group within the
meaning of Section 13(d)(3). Mr. Scott Hilinski, who may be deemed to share
beneficial ownership of some of these shares, is a director of the Company.
The address of NP5 is 50 Kennedy Plaza, Providence, RI 02903. By virtue of
an agreement dated June 30, 2000, among FleetBoston Financial Corporation
("FBF") and certain other parties thereto (the "Management Agreement") FBF
delegated voting and investment power over certain of the shares to certain
persons and entities named therein who are affiliated with the shareholder
entities named above. Certain of such persons and entities granted
Mr. Hilinksi a power of attorney to execute such voting and investment power
on their behalf. Pursuant to the Management Agreement, Silverado IV Corp.
("S4C") was given sole voting and investment power over the 135,989 shares
owned by FEP6. Mr. Hilinski, SC4, and the persons who control SC4,
Robert M. Van Degna and Habib Y. Gorgi, may be deemed to share beneficial
ownership of the shares held by FEP6. Mr. Hilinski is a Vice President of
S4C. Mr. Hilinski is a Managing Director of Nautic Management V, LP ("NM5"),
formerly known as Navis Management V, LP, the General Partner of NP5 and
Manager of KPP3. NP5 owns 2,012,663 shares. Mr. Hilinski, NM5 and the
persons who control NM5, Mr. Van Degna, Mr. Gorgi, Riordon B. Smith, Bernard
V. Buonanno, III, Gregory M. Barr, and Michael W. Joe., may be deemed to
share beneficial ownership of the shares held by NP5. KPP3 owns 2,014
shares. Mr. Hilinski, NM5 and the persons who control NM5, Mr. Van Degna,
Mr. Gorgi, Mr. Smith, Mr. Buonanno, III, Mr. Barr, and Mr. Joe, may be
deemed to share beneficial ownership of the shares held by KPP3.
Mr. Hilinski is also a Managing Director of Chisholm Management IV, LP, the
General Partner of CP4 and Manager of KPP2. CP4 owns 537,414 shares.
Mr. Hilinski, Chisholm Management IV, LP and the persons who control
Chisholm Management IV, LP, Mr. Van Degna, Mr. Gorgi, Mr. Smith,
Mr. Buonanno, III, Mr. Barr, and Mr. Joe, may be deemed to share beneficial
ownership of the shares held by CP4. KPP2 owns 16,624 shares. Mr. Hilinski,
Chisholm Management IV, LP and the persons who control Chisholm Management
IV, LP, Mr. Van Degna, Mr. Gorgi, Mr. Smith Mr. Buonanno, III, Mr. Barr, and
Mr. Joe, may be deemed to share beneficial ownership of the shares held by
KPP2. FVR holds 317,312 shares that were obtained as part of a co-investment
arrangement with CP4 under the Management Agreement. Mr. Hilinksi together
with certain persons named in the Management Agreement may be deemed to
share beneficial ownership of the shares held by FVR by virtue of the
Management Agreement and the power of attorney described above. All shares
indicated as owned by the aforementioned entities are included due to the
Management Agreement, Mr. Hilinski's affiliation with each such entity or
each such entity's affiliation with one or more other named shareholder
entities or persons who exercise control over such entities. Each of
Mr. Hilinski, Mr. Van Degna, Mr. Gorgi, Mr. Smith, Mr. Buonanno, III,
Mr. Barr, and Mr. Joe disclaim beneficial ownership of all shares held by
FEP6, FVR, CP4, KPP2, NP5 and KPP3, except for their pecuniary interest
therein. Each aforementioned entity disclaims beneficial ownership of all
shares not owned by it other than its pecuniary interests therein.
(5) GE Asset Management serves as the investment manager for General Electric
Pension Trust, and thus may be deemed to beneficially own all shares owned
by General Electric Pension Trust. The address for both entities is 3003
Summer Street, Stamford, CT 06904.
(6) The total shares listed for Robert J. Adamson include shares held by
Mr. Adamson and the following entities: RJA Holdings Limited Partnership
("RJA Holdings") and RJA Capital Limited Partnership ("RJA Capital"). As
President of the General Partner of RJA Holdings and RJA Capital,
Mr. Adamson is deemed to beneficially own the 31,295 shares held by RJA
Holdings and the 903,194 shares held by RJA Capital.
(7) The total shares listed for Kevin S. Little include shares held by
Mr. Little and KSL Capital Limited Partnership ("KSL Capital"). As President
of the General Partner of KSL Capital, Mr. Little is deemed to beneficially
own the 355,059 shares held by KSL Capital.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our amended and restated certificate of incorporation referenced below and
applicable law. A copy of our amended and restated certificate of incorporation
which will be restated in connection with the offering is filed as an exhibit to
the registration statement of which this prospectus is a part. The following
description refers to the terms of our amended and restated certificate of
incorporation and gives effect to the conversion of all of our outstanding
shares of preferred stock into common stock upon the completion of the offering.
Our amended and restated certificate of incorporation provides that our
authorized capital stock will consist of 75,000,000 shares of common stock, $.01
par value, and 15,000,000 shares of preferred stock, $.01 par value, that are
undesignated as to series. As of April 15, 2002, there were 14 record holders of
our common stock and 17 record holders of our Series I preferred stock, which
will automatically convert into common stock upon consummation of this offering.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and are not entitled
to cumulate votes. The holders of common stock are entitled to receive ratably
dividends as may be declared by our board of directors out of legally available
funds. Upon our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets that are legally available for
distribution after payment of all debts and other liabilities, subject to the
prior rights of any holders of preferred stock then outstanding. The holders of
common stock have no other preemptive, subscription, redemption, sinking fund or
conversion rights. All outstanding shares of common stock are fully paid and
nonassessable. The shares of common stock to be issued upon completion of the
offering will also be fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be negatively
impacted by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
UNDESIGNATED PREFERRED STOCK
There will not be any shares of preferred stock outstanding upon the closing
of the offering. Under our amended and restated certificate of incorporation,
which will become effective simultaneously with the offering, our board of
directors has the authority, without action by our stockholders, to designate
and issue any authorized but unissued shares of preferred stock in one or more
series and to designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of our common stock. It is
not possible to state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of our common stock until our board
determines the specific rights of the holders of preferred stock. However, the
effects might include, among other things, restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock and delaying or preventing a change in control of our
common stock without further action by our stockholders. We have no present
plans to issue any shares of preferred stock.
OPTIONS
As of December 30, 2001, we had outstanding options to purchase an aggregate
of 2,033,080 shares of common stock at a weighted average exercise price of
$5.55 per share under our option plans. All outstanding options provide for
anti-dilution adjustments in the event of certain mergers, consolidations,
reorganizations, recapitalizations, stock dividends, stock splits or other
changes in our corporate structure.
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<Page>
REGISTRATION RIGHTS
Under a registration rights agreement we entered into on October 26, 2001,
we granted registration rights to the investors that participated in the
recapitalization with respect to 21,102,192 shares of common stock as of
October 26, 2001. These registration rights also extend to any shares of our
capital stock thereafter acquired by these investors.
Under the registration rights agreement, investors holding outstanding
registrable securities may demand that we file a registration statement under
the Securities Act covering some or all of the investors' registrable securities
at any time after the earlier of October 26, 2004 and the date that is 181 days
after the date on which our initial public offering closes. We are not required
to effect more than three demand registrations nor are we required to effect a
registration if the requested registration would have an aggregate offering
price to the public of less than $15 million. In an underwritten offering, the
managing underwriter of any such offering has the right, subject to certain
conditions, to limit the number of registrable securities.
In addition, after our initial public offering, the investors party to the
registration rights agreement have "piggyback" registration rights. If we
propose to register any of our equity securities under the Securities Act other
than pursuant to the investors' demand registration right noted above or certain
excluded registrations, the investors may require us to include all or a portion
of their registrable securities in the registration and in any related
underwriting. In an underwritten offering, the managing underwriter, if any, of
any such offering has the right, subject to certain conditions, to limit the
number of registrable securities. These rights are being waived in connection
with this offering for a period of 180 days after the date of the final
prospectus relating to this offering.
Further, if we are eligible to effect a registration on Form S-3, the
investors may demand that we file a registration statement on Form S-3 covering
all or a portion of the investors' registrable securities, provided that the
registration has an aggregate offering price of $5 million and that we are not
required to effect more than three such registrations at the investors' request.
In general, we will bear all fees, costs and expenses of such registrations,
other than underwriting discounts and commissions.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years following the date the person became an interested stockholder,
unless the business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together with affiliates and associates,
owns or, in the case of affiliates or associates of the corporation, within
three years prior to the determination of interested stockholder status, owned
15% or more of a corporation's voting stock. The existence of this provision
could have anti-takeover effects with respect to transactions not approved in
advance by the board of directors, such as discouraging takeover attempts that
might result in a premium over the market price of the common stock.
Stockholders will not be entitled to cumulative voting in the election of
directors. The authorization of undesignated preferred stock will make it
possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
effect a change of control of the Company.
56
<Page>
The foregoing provisions of our amended and restated certificate of
incorporation and the Delaware General Corporation Law may have the effect of
deterring or discouraging hostile takeovers or delaying changes in control of
the Company.
CHARTER AND BYLAWS ANTI-TAKEOVER PROVISIONS
Our bylaws establish an advance notice procedure for stockholders to bring
matters before special stockholder meetings, including proposed nominations of
persons for election to the board of directors and bringing business matters or
stockholder proposals before a special meeting. These procedures specify the
information stockholders must include in their notice and the timeframe in which
they must give us notice. At a special stockholder meeting, stockholders may
only consider nominations or proposals specified in the notice of meeting. A
special stockholder meeting for any purpose may only be called by our board of
directors, our Chairman or our Chief Executive Officer and President, and will
be called by our Chief Executive Officer and President at the request of the
holders of a majority of our outstanding shares of capital stock.
The bylaws do not give the board of directors the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a meeting. However, our bylaws may have the effect
of precluding the conduct of that item of business at a meeting if the proper
procedures are not followed. These provisions may discourage or deter a
potential third party from conducting a solicitation of proxies to elect their
own slate of directors or otherwise attempting to obtain control of our company.
Our restated certificate of incorporation provides for the issuance by the
board of directors of up to 15,000,000 shares of preferred stock, with voting
power, designations, preferences and other special rights. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the rights
and powers, including voting rights, of holders of common stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the common stock. Preferred stockholders could also make it more
difficult for a third party to acquire our company. At the closing of this
offering, no share of preferred stock will be outstanding and we currently have
no plans to issue any shares of preferred stock.
Our restated certificate of incorporation provides that our board of
directors will be divided into three classes of directors, with the number of
directors in each class to be as nearly equal as possible. Our classified board
staggers terms of the three classes and will be implemented through one, two and
three-year terms for the initial three classes, followed in each case by full
three-year terms. With a classified board, only one-third of the members of our
board of directors will be elected each year. This classification of directors
will have the effect of making it more difficult for stockholders to change the
composition of our board of directors. The restated certificate of incorporation
and bylaws provide that the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by our board of directors, but must
consist of not less than three directors. This provision will prevent
stockholders from circumventing the provisions of our classified board.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
Our amended and restated certificate of incorporation will limit our
directors' liability to the fullest extent permitted under Delaware corporate
law. Specifically, our directors are not liable to us or our stockholders for
monetary damages for any breach of fiduciary duty by a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which a director derives an improper personal
benefit.
57
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If the Delaware General Corporation Law is amended to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
This provision will generally not limit liability under state or federal
securities laws.
Delaware law, and our amended and restated certificate of incorporation,
provide that we will, in certain situations, indemnify any person made or
threatened to be made a party to a proceeding by reason of that person's former
or present official capacity with our company against judgments, penalties,
fines, settlements and reasonable expenses including reasonable attorney's fees.
Any person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is our transfer agent and registrar.
NEW YORK STOCK EXCHANGE LISTING
The shares of common stock of Medical Staffing Network Holdings, Inc. have
been approved for listing on the New York Stock Exchange under the symbol "MRN."
58
<Page>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering there has not been a public market for our common
stock. Sales of substantial amounts of our common stock in the public market
after the offering could adversely affect the market price of our common stock
and our ability to raise equity capital in the future on terms favorable to us.
When the offering is completed, we will have a total of 28,914,692 shares of
common stock outstanding, assuming the conversion as of April 23, 2002 (the
anticipated closing date of the offering) of all of our outstanding preferred
stock into common stock, plus accrued dividends on these shares, and also
assuming that the underwriters do not exercise the overallotment option. The
7,812,500 shares offered by us pursuant to this prospectus will be freely
tradeable unless our affiliates, as defined in Rule 144 under the Securities Act
of 1933, as amended, purchase them. The remaining 21,102,192 shares are
"restricted," which means they were originally sold in offerings that were not
subject to a registration statement filed with the SEC. These restricted shares
may be resold only through registration under the Securities Act or under an
available exemption from registration, such as Rule 144 or Rule 701.
LOCK-UP AGREEMENTS
Our officers, directors, and certain of our stockholders have agreed to a
180-day lock-up with respect to 21,102,192 shares of our outstanding common
stock. In addition, the lock-up will apply with respect to all shares of our
common stock acquired by such persons during this 180-day period upon exercise
of presently outstanding options and warrants to acquire our capital stock. This
generally means that they cannot sell these shares during the 180 days following
the date of this prospectus. After the 180-day lock-up period, these shares may
only be sold in accordance with an available exemption from registration, such
as Rule 144.
RULE 144
In general, under Rule 144, a person or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any holder who is not an affiliate, is entitled
to sell within any three-month period a number of our shares of common stock
that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock, which will equal
approximately 289,147 shares upon completion of the offering; or
- the average weekly trading volume of our common stock as reported on all
national securities exchanges during the four calendar weeks preceding the
date on which notice of sale is filed with the SEC.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. Under
Rule 144 and subject to volume limitations, many of the restricted shares will
be eligible for sale beginning 180 days after the date of the final prospectus,
and the remaining restricted shares will become salable at various times
thereafter.
RULE 144(k)
A person who is not deemed an affiliate of ours at the time of the sale and
during the three months preceding a sale and who has beneficially owned shares
for at least two years, including the holding period of any prior owner who is
not an affiliate, would be entitled to sell shares following the offering under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
public information or notice requirements of Rule 144.
59
<Page>
REGISTRATION
Following the offering, we intend to file a registration statement under the
Securities Act covering shares of common stock subject to outstanding options or
issued or issuable under our option plans. This registration statement will
automatically become effective upon filing. Accordingly, shares registered under
this registration statement will, subject to Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the expiration of the 180-day lock-up agreements.
60
<Page>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Deutsche Bank Securities Inc. (as
joint bookrunners), and Credit Suisse First Boston Corporation and J.P. Morgan
Securities Inc. are acting as representatives, has agreed to purchase from us,
on a firm commitment basis, subject only to the conditions contained in the
underwriting agreement, the respective number of shares of common stock shown
opposite its name below.
<Table>
<Caption>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
Lehman Brothers Inc......................................... 2,734,375
Deutsche Bank Securities Inc................................ 2,734,375
Credit Suisse First Boston Corporation...................... 1,562,500
J.P. Morgan Securities Inc.................................. 781,250
---------
Total..................................................... 7,812,500
=========
</Table>
The underwriting agreement provides that the underwriters' obligations to
purchase our common stock depend on the satisfaction of the conditions contained
in the underwriting agreement, which includes:
- if any shares of common stock are purchased by the underwriters, then all
of the shares of common stock the underwriters agreed to purchase must be
purchased;
- if an underwriter defaults, purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be
terminated;
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
COMMISSIONS AND EXPENSES
The representatives have advised us that the underwriters propose to offer
the common stock directly to the public at the public offering price presented
on the cover page of this prospectus, and to selected dealers, that may include
the underwriters, at the public offering prices less a selling concession not in
excess of $0.79 per share. The underwriters may allow, and the selected dealers
may reallow, a concession not in excess of $0.10 per share to brokers and
dealers. After the offering, the underwriters may change the offering price and
other selling terms.
The following table summarizes the underwriting discounts and commissions we
will pay. The underwriting discounts and commissions are equal to the public
offering price per share, less the amount paid to us per share. The underwriting
discounts and commissions equal 7.0% of the initial public offering price.
<Table>
<Caption>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
Underwriting discounts and
commissions to be paid to the
underwriters by us................. $1.33 $ 10,390,625 $ 11,949,219
</Table>
61
<Page>
We estimate that the total expenses of the offering, including approximately
$190,000 in filing fees, $1,150,000 in professional fees and expenses and
$660,000 for other fees and expenses, excluding underwriting discounts and
commissions, will be approximately $2.0 million.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an aggregate
of 1,171,875 shares of common stock, exercisable to cover over-allotments, if
any, at the public offering price less the underwriting discounts and
commissions shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. To the extent the underwriters exercise this option,
each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
proportionate to that underwriter's initial commitment as indicated in the
preceding table.
LOCK-UP AGREEMENTS
We have agreed that, without the prior written consent of Lehman
Brothers Inc. and Deutsche Bank Securities Inc., we will not, directly or
indirectly, offer, sell or dispose of any common stock or any securities which
may be converted into or exchanged for any common stock for a period of
180 days from the date of this prospectus. All of our executive officers and
directors and stockholders, holding in the aggregate 21,102,192 shares of our
common stock, have agreed under lock-up agreements not to, without the prior
written consent of Lehman Brothers Inc. and Deutsche Bank Securities Inc.,
directly or indirectly, offer, sell or otherwise dispose of any common stock or
any securities which may be converted into or exchanged or exercised for any
common stock for a period of 180 days from the date of this prospectus.
OFFERING PRICE DETERMINATION
Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of our
common stock, the representatives considered:
- prevailing market conditions;
- our historical performance and capital structure;
- estimates of our business potential and earnings prospects;
- an overall assessment of our management; and
- the consideration of these factors in relation to market valuation of
companies in related businesses.
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities relating to
the offering, including liabilities under the Securities Act and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities. We have further agreed to indemnify
Deutsche Bank Securities Inc. against liabilities related to the directed share
program referred to below, including liabilities under the Securities Act.
62
<Page>
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
The representatives may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions, and penalty bids or purchases for the
purpose of pegging, fixing or maintaining the price of the common stock, in
accordance with Regulation M under the Securities Exchange Act of 1934:
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option, in whole or in part, or purchasing
shares in the open market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specific maximum.
- Syndicate short covering transactions involve purchases of the common
stock in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the source of
shares to close out the short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares than could
be covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors who
purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on the New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of our common stock. In addition, neither we nor any
of the underwriters make any representation that the underwriters will engage in
these stabilizing transactions or that any transaction, once commenced, will not
be discontinued without notice.
LISTING
We have been approved to list our common shares on the New York Stock
Exchange under the symbol "MRN." In connection with that listing, the
underwriters have undertaken to sell the minimum number of shares to the minimum
number of beneficial owners necessary to meet the New York Stock Exchange
listing requirements.
63
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STAMP TAXES
Purchasers of the shares of our common stock offered by this prospectus may
be required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
OFFERS AND SALES IN CANADA
This prospectus is not, and under no circumstances is it to be construed as,
an advertisement or a public offering of shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only under
an exemption from the requirements to file a prospectus or prospectus supplement
and an exemption from the dealer registration requirement in the relevant
province or territory of Canada in which such offer or sale is made.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to 390,625 shares, or 5%
of our common stock offered by this prospectus, for sale under a directed share
program to specified business associates. All of the persons purchasing the
reserved shares must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares. Shares committed to be purchased by directed share
participants which are not so purchased will be reallocated for sale to the
general public in the offering. All sales of shares pursuant to the directed
share program will be made at the initial public offering price set forth on the
cover page of this prospectus.
DISCRETIONARY SALES
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of our
common stock offered by them.
ELECTRONIC DISTRIBUTION
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group member's website and any information contained in
any other website maintained by an underwriter or selling group member is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any underwriter or
selling group member in its capacity as underwriter or selling group member and
should not be relied upon by investors.
OTHER
JPMorgan Chase Bank, an affiliate of J.P. Morgan Securities Inc., is a
lender under our existing senior credit facility. A portion of the net proceeds
from this offering will be used to repay our exisiting senior credit facility.
64
<Page>
LEGAL MATTERS
Willkie Farr & Gallagher, New York, New York, will pass on the validity of
the common stock offered by this prospectus for us. Clifford Chance Rogers &
Wells LLP, New York, New York, will pass on legal matters relating to the
offering for the underwriters.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements and schedule at December 30, 2001 and
December 31, 2000, and for each of the three years in the period ended
December 30, 2001, as set forth in their report. We've included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
stock we are offering by this prospectus. You should refer to the registration
statement and its exhibits for additional information that is not contained in
this prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete the offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC.
You can read our SEC filings, including this registration statement, over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any documents we file with the SEC at its public reference facilities at
450 Fifth Street, N.W., Room 1024, Washington, D.C. Copies may be obtained by
mail, upon payment of the Commission's customary charges, by writing to its
principal office at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Further information on the operation of the Commission's Public Reference Room
in Washington, D.C. can be obtained by calling the Commission at 1-800-SEC-0330.
The Commission also maintains an Internet worldwide web site that contains
reports, proxy statements and other information about issuers, such as our
company, who file electronically with the Commission. The address of that site
is http://www.sec.gov.
65
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 2000,
AND DECEMBER 30, 2001
CONTENTS
<Table>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 2000 and
December 30, 2001......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 2000 and the year ended
December 30, 2001......................................... F-4
Consolidated Statements of Changes in Redeemable Preferred
Stock and Common Stockholders' Equity (Deficit) for the
years ended December 31, 1999 and 2000 and for the year
ended December 30, 2001................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 2000 and for the year ended
December 30, 2001......................................... F-8
Notes to Consolidated Financial Statements.................. F-10
</Table>
F-1
<Page>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Staffing Network Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Medical
Staffing Network Holdings, Inc. and Subsidiary (the Company) as of December 31,
2000 and December 30, 2001, and the related consolidated statements of
operations, changes in redeemable preferred stock and common stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 30, 2001. 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 audits.
We conducted our audits 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 audits provide 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 Medical
Staffing Network Holdings, Inc. and Subsidiary at December 31, 2000 and
December 30, 2001, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 30, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Miami, Florida
January 25, 2002, except for Note 17,
as to which the date is
April 12, 2002
F-2
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, DECEMBER 30,
2000 2001
------------- -------------
ASSETS
Current assets:
Cash...................................................... $ 204,915 $ 11,253,199
Accounts receivable, net of allowance for doubtful
accounts of $1,435,453 and $2,181,767 at December 31,
2000 and December 30, 2001, respectively................ 41,045,412 65,190,898
Prepaid expenses.......................................... 983,462 5,032,378
Other current assets...................................... 654,934 1,014,641
------------ -------------
Total current assets........................................ 42,888,723 82,491,116
Furniture and equipment, net................................ 4,458,293 7,315,574
Goodwill and other intangible assets, net of accumulated
amortization of $4,991,433 and $8,723,481 at December 31,
2000 and December 30, 2001, respectively.................. 62,477,339 68,289,316
Other assets................................................ 2,011,733 3,923,288
------------ -------------
Total assets................................................ $111,836,088 $ 162,019,294
============ =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,410,700 $ 5,271,571
Accrued payroll and related liabilities................... 4,793,598 8,948,662
Other current liabilities................................. 1,592,185 3,186,974
Current portion of long-term debt......................... 7,441,755 10,034,721
Current portion of capital lease obligations.............. 137,824 329,922
------------ -------------
Total current liabilities................................... 15,376,062 27,771,850
Long-term debt, net of current portion and net of discount
of $2,633,303, at December 31, 2000..................... 61,108,508 105,000,000
Senior subordinated debt to related parties............... -- 59,319,327
Capital lease obligations, net of current portion......... 449,738 661,096
Other liabilities......................................... 403,657 2,371,960
Put warrants, 418,198 common shares exercisable at $.01 at
December 31, 2000......................................... 2,730,833 --
------------ -------------
Total liabilities........................................... 80,068,798 195,124,233
Commitments and contingencies:
Redeemable preferred stock.................................. 21,859,834 124,616,794
Common stockholders' equity:
Common stock, $0.01 par value:
Authorized shares--15,500,000 and 75,000,000 at
December 31, 2000 and December 30, 2001,
respectively..........................................
Issued and outstanding shares--11,990,372 and 26,547 at
December 31, 2000 and December 30, 2001,
respectively.......................................... 39,065 265
Additional paid-in-capital.............................. 12,445,256 --
Promissory notes due for purchases of common stock...... (6,932,500) (4,550,877)
Retained earnings (accumulated deficit)................. 4,355,635 (153,171,121)
------------ -------------
Total common stockholders' equity (deficit)................. 9,907,456 (157,721,733)
------------ -------------
Total liabilities, redeemable preferred stock, and common
stockholders' equity (deficit)............................ $111,836,088 $ 162,019,294
============ =============
</Table>
See accompanying notes.
F-3
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 30,
1999 2000 2001
----------- ------------ -------------
Service revenues.................................... $96,455,756 $182,044,952 $338,380,384
Cost of services rendered........................... 72,921,559 135,971,176 252,089,011
----------- ------------ ------------
Gross profit........................................ 23,534,197 46,073,776 86,291,373
Operating expenses:
Selling, general and administrative............... 13,645,153 26,062,511 45,632,978
Provision for doubtful accounts................... 164,133 934,308 1,781,682
Corporate and administrative...................... 2,578,340 4,710,908 6,428,208
Recapitalization transaction fees................. -- -- 7,159,809
Depreciation...................................... 331,918 1,151,593 2,139,116
Amortization...................................... 1,782,361 2,645,583 3,732,048
----------- ------------ ------------
Income from operations............................ 5,032,292 10,568,873 19,417,532
Interest expense, net............................... 1,867,421 5,006,637 14,312,598
----------- ------------ ------------
Income before provision for income taxes and
extraordinary items............................. 3,164,871 5,562,236 5,104,934
Provision for income taxes.......................... 790,314 2,042,063 3,679,555
----------- ------------ ------------
Income before extraordinary items................. 2,374,557 3,520,173 1,425,379
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $1,648,184........... -- -- (2,731,790)
----------- ------------ ------------
Net income (loss)................................... 2,374,557 3,520,173 (1,306,411)
----------- ------------ ------------
Deduct required dividends on convertible preferred
stock............................................. -- -- 1,803,505
----------- ------------ ------------
Income (loss) available to common stockholders...... $ 2,374,557 $ 3,520,173 $ (3,109,916)
=========== ============ ============
Basic earnings (loss) per share:
Income (loss) per share before extraordinary
loss............................................ $ 0.32 $ 0.46 $ (0.06)
Extraordinary loss per share...................... -- -- (0.43)
----------- ------------ ------------
Basic net income (loss) per share................. $ 0.32 $ 0.46 $ (0.49)
=========== ============ ============
Diluted earnings (loss) per share:
Income (loss) per share before extraordinary
loss............................................ $ 0.09 $ 0.13 $ (0.06)
Extraordinary loss per share...................... -- -- (0.43)
----------- ------------ ------------
Diluted net income (loss) per share............... $ 0.09 $ 0.13 $ (0.49)
=========== ============ ============
</Table>
See accompanying notes.
F-4
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
----------------------- ----------------------- --------------------- -----------------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
---------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Balance at December 31,
1998...................... 1,510,824 $5,009,613 1,896,581 $6,182,040 662,779 $3,313,897 -- $ --
Return of escrowed shares
issued in connection
with the SRI
acquisition............. -- -- -- -- (38,366) -- -- --
Sale of preferred stock
for $5.00 per share for
cash.................... -- -- -- -- -- -- 1,178,000 5,890,000
Conversion of preferred
stock................... -- -- -- -- -- -- 292,000 1,460,000
Stock issuance costs...... -- -- -- -- -- -- -- (142,802)
Net income................ -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Balance at December 31,
1999...................... 1,510,824 5,009,613 1,896,581 6,182,040 624,413 3,313,897 1,470,000 7,207,198
Issuance of common stock
for promissory notes.... -- -- -- -- -- -- -- --
Issuance of nonvoting
common stock for $2.13
per share............... -- -- -- -- -- -- -- --
Stock issuance costs...... -- -- -- -- -- -- -- --
Net income................ -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Balance at December 31,
2000...................... 1,510,824 5,009,613 1,896,581 6,182,040 624,413 3,313,897 1,470,000 7,207,198
Repurchased and converted
common and preferred
stock and warrants in
recapitalization........ (1,510,824) (5,009,613) (1,896,581) (6,182,040) (624,413) (3,313,897) (1,470,000) (7,207,198)
New equity issued in
recapitalization........ -- -- -- -- -- -- -- --
Payment of stock
subscription............ -- -- -- -- -- -- -- --
Dividends on Series I
Convertible Preferred
Stock................... -- -- -- -- -- -- -- --
Net loss.................. -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Balance at December 30,
2001...................... -- $ -- -- $ -- -- $ -- -- $ --
========== ========== ========== ========== ======== ========== ========== ==========
</Table>
CONTINUED ON NEXT PAGE.
F-5
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<Table>
<Caption>
COMMON STOCKHOLDERS'
REDEEMABLE PREFERRED STOCK EQUITY (DEFICIT)
------------------------------------------------ -----------------------
COMMON
SERIES E SERIES I STOCK
--------------------- ------------------------ ---------
SHARES DOLLARS SHARES DOLLARS SHARES PAR
-------- ---------- --------- ------------ ----------- ---------
Balance at December 31, 1998................... -- $ -- -- $ -- 9,016,292 $ 90,163
Return of escrowed shares issued in
connection with the SRI acquisition........ -- -- -- -- -- --
Sale of preferred stock for $5.00 per share
for cash................................... 322,000 1,610,000 -- -- -- --
Conversion of preferred stock................ (292,000) (1,460,000) -- -- -- --
Stock issuance costs......................... -- (2,914) -- -- -- --
Net income................................... -- -- -- -- -- --
-------- ---------- --------- ------------ ----------- ---------
Balance at December 31, 1999................... 30,000 147,086 -- -- 9,016,292 90,163
Issuance of common stock for promissory
notes...................................... -- -- -- -- 2,739,417 27,394
Issuance of nonvoting common stock for
$2.13...................................... -- -- -- -- 234,663 2,347
Stock issuance costs......................... -- -- -- -- -- --
Net income................................... -- -- -- -- -- --
-------- ---------- --------- ------------ ----------- ---------
Balance at December 31, 2000................... 30,000 147,086 -- -- 11,990,372 119,904
Repurchased and converted common and
preferred stock and warrants in
recapitalization........................... (30,000) (147,086) -- -- (11,990,372) (119,904)
New equity issued in recapitalization........ -- -- 6,602,865 122,813,289 26,547 265
Payment of stock subscription................ -- -- -- -- -- --
Dividends on Series I Convertible Preferred
Stock...................................... -- -- -- 1,803,505 -- --
Net loss..................................... -- -- -- -- -- --
-------- ---------- --------- ------------ ----------- ---------
Balance at December 30, 2001................... -- $ -- 6,602,865 $124,616,794 26,547 $ 265
======== ========== ========= ============ =========== =========
</Table>
CONTINUED ON NEXT PAGE.
F-6
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<Table>
<Caption>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------
RETAINED
ADDITIONAL EARNINGS TOTAL COMMON
PAID-IN PROMISSORY (ACCUMULATED STOCKHOLDERS'
CAPITAL NOTES DEFICIT) EQUITY (DEFICIT)
------------ ----------- ------------- ----------------
Balance at December 31, 1998................... $ 6,647,753 $(1,670,625) $ (1,539,095) $ 3,528,196
Return of escrowed shares issued in
connection with the SRI acquisition........ -- -- -- --
Sale of preferred stock for $5.00 per share
for cash................................... -- -- -- --
Conversion of preferred stock................ -- -- -- --
Stock issuance costs......................... -- -- -- --
Net income................................... -- -- 2,374,557 2,374,557
------------ ----------- ------------- -------------
Balance at December 31, 1999................... 6,647,753 (1,670,625) 835,462 5,902,753
Issuance of common stock for promissory
notes...................................... 5,234,481 (5,261,875) -- --
Issuance of nonvoting common stock for
$2.13...................................... 497,653 -- -- 500,000
Stock issuance costs......................... (15,470) -- -- (15,470)
Net income................................... -- -- 3,520,173 3,520,173
------------ ----------- ------------- -------------
Balance at December 31, 2000................... 12,364,417 (6,932,500) 4,355,635 9,907,456
Repurchased and converted common and
preferred stock and warrants in
recapitalization........................... (12,364,417) -- (154,577,446) (167,061,767)
New equity issued in recapitalization........ 160,606 -- -- 160,871
Payment of stock subscription................ -- 2,381,623 -- 2,381,623
Dividends on Series I Convertible Preferred
Stock...................................... (160,606) -- (1,642,899) (1,803,505)
Net loss..................................... -- -- (1,306,411) (1,306,411)
------------ ----------- ------------- -------------
Balance at December 30, 2001................... $ -- $(4,550,877) $(153,171,121) $(157,721,733)
============ =========== ============= =============
</Table>
See accompanying notes.
F-7
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 30,
1999 2000 2001
------------ ------------ -------------
Operating activities
Net income (loss).................................. $ 2,374,557 $ 3,520,173 $ (1,306,411)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Debt extinguishment costs, before income tax
benefit........................................ -- -- 4,379,973
Accretion of put warrants........................ -- -- 5,043,468
Depreciation and amortization.................... 2,114,279 3,797,176 5,871,164
Amortization of debt issuance cost............... -- 170,671 840,089
Deferred income taxes............................ (495,428) 171,694 405,260
Provision for doubtful accounts.................. 164,133 934,308 1,781,682
Changes in operating assets and liabilities:
Accounts receivable............................ (4,180,701) (17,937,907) (25,127,168)
Prepaid expenses and other current assets...... (44,626) (595,470) (4,067,147)
Other assets................................... (306,481) (1,589,689) (191,169)
Accounts payable............................... (625,946) 555,809 3,745,102
Accrued payroll and related liabilities........ (465,292) 1,778,741 4,155,064
Other current liabilities...................... (625,976) 264,127 1,594,789
Other liabilities.............................. (127,886) (78,898) 1,221,567
------------ ------------ -------------
Net cash used in operating activities.............. (2,219,367) (9,009,265) (1,653,737)
Investing activities
Cash paid for acquisitions, net of cash acquired... (20,006,733) (21,021,140) (10,243,257)
Purchases of furniture and equipment, net.......... (501,489) (1,855,547) (2,966,551)
Purchases of leasehold improvements................ -- (136,546) --
Capitalized internal software costs................ (431,240) (724,878) (1,401,380)
------------ ------------ -------------
Net cash used in investing activities.............. (20,939,462) (23,738,111) (14,611,188)
Financing activities
Proceeds from issuance of common stock............. -- -- 138,236
Proceeds from issuance of redeemable preferred
stock............................................ -- -- 105,531,322
Proceeds from issuance of senior subordinated
debt............................................. -- -- 50,972,067
Repurchase of common stock in recapitalization..... -- -- (149,900,005)
Exercise and (repurchase) net, of warrants in
recapitalization................................. -- -- (13,369,734)
Repurchase of put warrants in recapitalization..... -- -- (7,774,301)
Proceeds from promissory notes..................... -- -- 2,381,623
Proceeds from borrowings on credit facility, net of
financing costs.................................. 22,943,529 29,832,808 98,205,856
Proceeds from sale of preferred stock, net of
issuance costs................................... 7,354,284 -- --
Proceeds from borrowings on subordinated debt
facility, net of discount........................ -- 17,269,167 --
Proceeds from sale of put warrants................. -- 2,730,833 --
</Table>
CONTINUED ON NEXT PAGE.
F-8
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<Table>
<Caption>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 30,
1999 2000 2001
----------- ------------ -------------
Proceeds from sale of common stock, net of issuance
costs.............................................. $ -- $ 484,530 $ --
Principal payments under capital lease obligations... (126,690) (118,768) (210,010)
Net (payments) proceeds on revolving credit
agreements......................................... (7,070,378) -- 6,550,000
Principal payments on outstanding debt............... -- (17,560,658) (65,211,845)
----------- ------------ ------------
Net cash provided by financing activities............ 23,100,745 32,637,912 27,313,209
----------- ------------ ------------
Net (decrease) increase in cash...................... (58,084) (109,464) 11,048,284
Cash at beginning of year............................ 372,463 314,379 204,915
----------- ------------ ------------
Cash at end of year.................................. $ 314,379 $ 204,915 $ 11,253,199
=========== ============ ============
Supplemental disclosure of noncash investing and
financing activities
Common stock issued in exchange for retained
shares............................................. $ -- $ -- $ 22,635
=========== ============ ============
Redeemable preferred stock in exchange for retained
shares............................................. $ -- $ -- $ 17,281,967
=========== ============ ============
Senior subordinated debt issued in exchange for
retained shares.................................... $ -- $ -- $ 8,347,260
=========== ============ ============
Purchases of equipment through capital leases........ $ 309,832 $ 320,910 $ 613,466
=========== ============ ============
Capital leases assumed in connection with
acquisitions....................................... $ 14,096 $ 3,585 $ --
=========== ============ ============
Supplemental disclosures of cash flow information
Interest paid........................................ $ 1,769,759 $ 4,686,555 $ 13,416,151
=========== ============ ============
Income taxes paid.................................... $ 1,139,537 $ 2,055,000 $ 4,851,670
=========== ============ ============
</Table>
See accompanying notes.
F-9
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Medical Staffing Network Holdings, Inc., formerly known as MSN
Holdings, Inc. (the Company), a Delaware corporation, is a provider of
healthcare staffing services in the United States. The Company's per diem
staffing assignments place professionals, predominately nurses, at hospitals and
other healthcare facilities to solve temporary staffing needs. The Company also
provides staffing of allied health professionals such as specialized radiology
and diagnostic imaging specialists and clinical laboratory technicians. The
Company's client base includes profit and non-profit hospitals, teaching
hospitals, and regional healthcare providers. The Company considers the
different services described above to be one segment as each of these services
relate solely to providing healthcare staffing to customers that are healthcare
providers and the Company utilizes similar distribution methods, common systems,
databases, procedures, processes and similar methods of identifying and serving
these customers. The operating results of the services provided within this
segment are reviewed in the aggregate by the Company's chief operating decision
maker when making resource allocation decisions and for assessing performance of
the individual components. The Company does not prepare financial information
other than limited information on a branch by branch basis, and as such the
chief operating decision maker generally does not review information at any
level other than the healthcare staffing business in total. These
healthcare-staffing services represent 100% of the Company's consolidated
revenue as of December 30, 2001 and December 31, 2000, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, Medical Staffing Holdings, LLC (MSN LLC) and
Medical Staffing Network, Inc., a wholly-owned subsidiary of MSN LLC. All
material intercompany transactions and balances have been eliminated in
consolidation.
The Company's fiscal year consists of 52 weeks ending on the Sunday nearest
the last day of December in each year.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, ranging
generally from three to seven years. Leasehold improvements are depreciated over
the lives of the related leases or their estimated useful lives, whichever is
shorter.
Certain software development costs for internally developed software have
been capitalized in accordance with the provisions of Statement of Position
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE. These capitalized costs include purchased software for internal
use, consulting services and costs for personnel associated with programming,
coding and testing such software during the application development stage.
Amortization of capitalized software costs begins when the software is placed
into service and is included in depreciation expense in the accompanying
consolidated statements of income. Software development costs are being
amortized using the straight-line method over three years.
F-10
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Goodwill is amortized using the straight-line method over its
estimated useful life, which is estimated by management to be 20 years. Other
identifiable intangible assets consist of non-compete agreements of
approximately $71,250 and $1,331,000 at December 31, 2000 and December 30, 2001,
respectively. Identifiable intangible assets are being amortized using the
straight-line method over their estimated useful lives ranging from 6 to
7.5 years. The Company accounts for long-lived assets pursuant to Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121),
which requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Management reviews long-lived assets
and the related goodwill for impairment whenever events or changes in
circumstances indicate the assets may be impaired. An impairment loss is
recorded when the net book value of the assets exceeds the fair value, as
measured by projected undiscounted future cash flows. Recoverability of
intangible assets is measured by comparison of the carrying amount of the asset
to net future cash flows expected to be generated from the asset. Identifiable
intangible assets not covered by SFAS No. 121 and goodwill not identified with
assets that are subject to an impairment loss are evaluated in accordance with
Accounting Principles Board (APB) Opinion No. 17, INTANGIBLE ASSETS. At
December 31, 1999, December 31, 2000 and December 30, 2001, the Company believes
that no impairment of goodwill or identifiable intangible assets exists. The
carrying value of these assets is reviewed by the Company's management if the
facts and circumstances suggest that it may be impaired. If this review
indicates that these costs will not be recoverable, as determined based on the
expected undiscounted cash flows of the entity over the remaining amortization
period, the carrying value of these costs is reduced by the estimated shortfall
of cash flows.
RESERVES FOR CLAIMS
Workers' compensation and health care benefits are provided under
self-insured plans for certain employees. The Company records its estimate of
the ultimate cost of, and reserves for, workers' compensation and health care
benefits based on actuarial computations using the Company's loss history as
well as industry statistics. Furthermore, in determining its reserves, the
Company includes reserves for estimated claims incurred but not reported.
The ultimate cost of workers' compensation and health care benefits will
depend on actual costs incurred to settle the claims and may differ from the
amounts reserved by the Company for those claims. Accruals for workers'
compensation claims and health care benefits are included in accounts payable
and other current liabilities in the consolidated balance sheets.
DEBT ISSUANCE COSTS
Deferred costs related to the issuance of debt are being amortized using the
effective interest method, over the terms of the respective debt. Debt issuance
costs of approximately $2,204,000, less accumulated amortization of
approximately $329,000 and $3,707,000, less accumulated amortization of
approximately $112,000 at December 31, 2000 and December 30, 2001, respectively,
are recorded in the consolidated balance sheets.
F-11
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from services consists of temporary staffing revenues. Revenues are
recognized when services are rendered.
Reimbursements received for out-of-pocket expenses incurred are included as
service revenues, net of reimbursement paid by the Company to employees for
out-of-pocket expenses. Reimbursable out-of-pocket expenses include travel, per
diem allowances and housing for certain long-term contract employees.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 101, REVENUE ReCOGNITION. SAB No. 101
provides interpretive guidance on the recognition, presentation, and disclosure
of revenue in financial statements. The Company believes that its current
revenue recognition policies comply with SAB No. 101.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of common shares to
employees from time to time. The Company accounts for employee stock options
using the intrinsic value method as prescribed by APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and accordingly, recognizes no compensation
expense for stock option grants when the exercise price of the options equals,
or is greater than, the market value of the underlying stock on the date of
grant. Accordingly, the Company did not recognize any compensation cost during
each of the years ended December 31, 1999, December 31, 2000 and December 30,
2001 for stock-based employee compensation awards. The Company follows the
disclosure provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and for valuing common stock equivalents issued to nonemployees.
EARNINGS PER SHARE
In accordance with the requirements of SFAS No. 128, EARNINGS PER SHARE,
basic earnings per share is computed by dividing net income or loss by the
weighted average number of shares outstanding and diluted earnings per share
reflects the dilutive effects of stock options and other common stock
equivalents (as calculated utilizing the treasury stock method). Shares of
common stock that are issuable upon the exercise of options have been excluded
from the 2001 per share calculation because their effect would have been
anti-dilutive. See Note 13 for the calculation of earnings (loss) per share.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks arising from changes in interest
rates. To protect against such risks, the Company has one derivative financial
instrument, an interest rate swap agreement, which is more fully disclosed in
Note 15, INTEREST RATE SWAP.
During 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, effective
as of January 1, 2001. SFAS No. 133 requires companies to recognize all of its
derivative instruments as either assets or liabilities in the statement of
financial position at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a
F-12
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and on the type of hedging relationship. For
those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge
of a net investment in a foreign operation. As the Company's derivative
instrument is designated and qualifies as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized in current earnings during
the period of change.
The Company implemented the provisions of SFAS No. 133 on January 1, 2001.
As of December 30, 2001, the Company did not record the fair value of the
interest rate swap, because the amount is considered nominal.
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. The items of other
comprehensive income that are typically required to be displayed are foreign
currency items, minimum pension liability adjustments, unrealized gains and
losses on certain investments in debt and equity securities and the effective
portion of certain derivative instruments. There are no other components of
comprehensive income other than the Company's net income (loss) for the years
ended December 31, 1999 and 2000 and for the year ended December 30, 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS (SFAS
No. 141) and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). Under
the new rules, goodwill and other certain identified intangibles determined to
have an infinite life are no longer amortized. However, under the terms of SFAS
No. 142, identifiable intangibles with identifiable lives will continue to be
amortized. SFAS No. 142 requires that goodwill be separately disclosed from
other intangible assets in the statement of financial position and tested for
impairment on a periodic basis, or more frequently if certain indicators arise.
All goodwill recognized in an entity's statement of financial position at the
date SFAS No. 142 is initially applied shall be assigned to one or more
reporting units. The provisions of SFAS No. 142 also require the completion of a
transitional impairment test within six months of adoption and to complete the
final step of the transitional impairment test by the end of the fiscal year.
Any impairment loss resulting from the transitional impairment test will be
recorded as a cumulative effect of a change in accounting principle. In
addition, SFAS No. 142 requires reassessment of the useful lives of previously
recognized intangible assets, which shall be completed prior to the end of the
F-13
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
first interim period of the fiscal year in which SFAS No. 142 is initially
applied. Intangible assets that do meet the criteria for recognition apart from
goodwill must be reclassified and accounted for as an asset apart from goodwill
as of the date SFAS No. 142 is initially applied. Intangible assets that do not
meet the criteria for recognition apart from goodwill must be reclassified to
goodwill.
The amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company will apply the new accounting
rules beginning December 31, 2001. 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. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning December 31, 2001.
Upon adoption, the Company will no longer amortize goodwill. Based on the
current levels of goodwill, this would reduce annual amortization expense by
approximately $3,778,000.
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. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, with earlier application
encouraged. The Company does not expect that the adoption of the Statement will
have a significant impact on the Company's financial position and results of
operations.
In November 2001, Topic D-103, INCOME STATEMENT CHARACTERIZATION OF
REIMBURSEMENT RECEIVED FOR "OUT-OF-POCKET" EXPENSES INCURRED (EITF D-103). Under
this guidance, reimbursement received for "out-of-pocket" expenses incurred
should be characterized as revenue in the income statement. Currently, we
classify reimbursable out-of-pocket expenses as service revenues, net of the
reimbursements paid by us to employees for out-of-pocket expenses. This guidance
should be applied in financial reporting periods beginning after December 15,
2001 and comparative financial statements for prior periods should be
reclassified.
The Company will adopt this consensus in the first quarter of 2002 and
expects that this adoption will have no impact on our financial position or
results of operations, other than the reclassification of such costs from a
reduction of service revenues to cost of services rendered in the statement of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform with the 2001 presentation.
2. RECAPITALIZATION OF THE COMPANY AND NONRECURRING CHARGES
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 Amended Voting, Sale and
F-14
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECAPITALIZATION OF THE COMPANY AND NONRECURRING CHARGES (CONTINUED)
Retention Agreement, dated as of October 26, 2001 (the Stockholders Agreement),
by 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 stock became entitled to receive $6.06 per share of common
stock and holders of the Company's convertible preferred stock became entitled
to receive $18.60 times the number of shares of common stock into which the
preferred stock was then convertible. 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.
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 million. In addition, and as
further discussed in Note 6, a banking syndicate extended a senior credit
facility to the Company in the amount of $120 million, of which $105 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 million of the then outstanding debt obligations, to pay transaction fees
and expenses of approximately $7 million and to provide the Company with working
capital for operations.
Due to the significant minority stockholders which remained, the
transactions described above have been accounted for as a leveraged
recapitalization. Accordingly, the Company has retained its historical cost
basis of accounting. The shares repurchased by the Company have been canceled.
The Company incurred approximately $3,707,000 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. In addition, the Company
also incurred the following charges, which are included in the 2001 results of
operations: (i) an extraordinary loss of approximately $2,732,000 (net of tax
benefit of approximately $1,648,000) from the retirement of debt outstanding
prior to the recapitalization; and (ii) transaction costs of approximately
$7,160,000 comprised of bonus payments and stock option buyouts of approximately
$3,047,000, and professional service fees of approximately $4,113,000.
3. ACQUISITIONS
On June 10, 2001, the Company entered into an asset purchase agreement to
acquire substantially all of the assets of Excel Staffing Services, Inc.
(Excel), a temporary health care staffing company, in exchange for approximately
$7,800,000 in cash and $2,000,000 held in escrow and the potential for
additional consideration contingent upon Excel achieving certain financial
results. The purchase price exceeded the fair value of the assets acquired by
approximately $9,100,000, of which $1,395,000 was allocated to the fair value of
noncompete agreements entered into with the former owners.
The allocation of purchase price related to the acquisition completed during
the year ended December 30, 2001 is based on preliminary assessments of the
assets acquired and liabilities assumed and could be subject to adjustment based
on the ultimate resolution of such assessments.
On February 19, 2000, the Company entered into an asset purchase agreement
to acquire certain of the assets of Medix Resources, Inc., a temporary health
care staffing and computer services company, in exchange for approximately
$500,000 in cash and a note payable at the prime rate plus 1% in the amount of
$500,000 due on February 19, 2001. The purchase price exceeded the fair value of
the assets acquired by approximately $1 million.
F-15
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
On March 12, 2000, the Company entered into an asset purchase agreement to
acquire substantially all of the assets of Best Nursing, a temporary health care
staffing company, in exchange for approximately $1 million in cash and a 7% note
payable in the amount of $495,000 due on March 12, 2001. The purchase price
exceeded the fair value of the assets acquired by approximately $1.5 million.
On October 9, 2000, the Company entered into an asset purchase agreement to
acquire substantially all of the assets of American Anesthesia Services, Inc.
(AASI), a temporary health care staffing company, in exchange for approximately
$5.6 million in cash and the potential for nominal additional consideration
contingent upon AASI achieving certain financial results. The purchase price
exceeded the fair value of the assets acquired by approximately $5.6 million.
On October 11, 2000, the Company entered into an asset purchase agreement to
acquire substantially all of the assets of NursingCare USA (NC USA), a temporary
health care staffing company, in exchange for approximately $1 million cash and
the potential for nominal additional consideration contingent upon NC USA
achieving certain financial results. The purchase price exceeded the fair value
of the assets acquired by approximately $1 million.
On November 17, 2000, the Company entered into an asset purchase agreement
to acquire certain assets of Health Med, Inc. (Health Med), a temporary health
care staffing company, in exchange for approximately $12.9 million in cash and
the potential for nominal additional consideration contingent upon Health Med
achieving certain financial results. The purchase price exceeded the fair value
of the assets acquired by approximately $11.5 million.
On June 30, 1999, the Company entered into an asset purchase agreement to
acquire certain of the assets of Pediatric Services of America, Inc., a health
care services company, in exchange for approximately $1.8 million in cash. The
purchase price exceeded the fair value of the net assets acquired by
approximately $1.1 million.
On July 9, 1999, the Company entered into an asset purchase agreement to
acquire substantially all the assets of "Z" Healthcare Enterprises, Inc. (Z
Healthcare), a temporary health care staffing company, in exchange for
approximately $400,000 in cash and the potential for nominal additional
consideration contingent upon Z Healthcare achieving certain financial results.
The purchase price exceeded the fair value of the net assets acquired by
approximately $385,000.
On November 1, 1999, the Company entered into an asset purchase agreement to
acquire substantially all the assets of MTS Staffing Resource, Inc., a temporary
health care staffing company, in exchange for approximately $16.2 million in
cash, net of cash acquired. The purchase price exceeded the fair value of the
net assets acquired by approximately $12.7 million.
On November 1, 1999, the Company purchased all the outstanding shares of
common stock of Medical Office Services, Inc. (MOSI), a temporary health care
staffing company, in exchange for approximately $1.3 million in cash, net of
cash acquired, and the potential for nominal additional consideration contingent
upon MOSI achieving certain financial results. MOSI was subsequently dissolved
into the Company. The purchase price exceeded the fair value of the stock
acquired by approximately $1.1 million.
In addition, during 2001, the Company paid approximately $474,000 of
additional consideration related to the Health Med and AASI acquisitions. In
2000, the Company paid approximately $275,000 of additional consideration
related to the Z Healthcare acquisition. In 1999, the Company paid approximately
$316,000 of additional fees and other costs related to the 1998 acquisition of
MPS Healthcare, Inc. and Staff Relief Inc.
F-16
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
All acquisitions were accounted for as purchases and accordingly, the
accompanying consolidated financial statements include the results of the
acquired operations from the acquisition dates.
The following unaudited pro forma financial information reflects the results
of operations for the years ended December 31, 1999, December 31, 2000 and
December 30, 2001, as if the acquisitions had occurred at the beginning of the
respective periods presented. The pro forma financial information does not
purport to be indicative of the results of operations that would have occurred
had the transactions taken place at the beginning of the periods presented or of
future results of operations.
<Table>
<Caption>
DECEMBER 31, DECEMBER 30,
1999 2000 2001
------------ ------------ ------------
Net revenues....................... $119,255,756 $199,659,952 $344,838,384
Income from operations............. 7,918,542 13,407,673 20,418,332
Net income (loss).................. 3,068,607 4,096,173 (917,011)
Earnings per share:
Basic............................ 0.41 0.54 (0.14)
Diluted.......................... 0.12 0.16 (0.14)
</Table>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<Table>
<Caption>
DECEMBER 31, DECEMBER 30,
2000 2001
------------- -------------
Leasehold improvements............................. $ 143,082 $ 236,657
Furniture and equipment............................ 3,277,363 6,141,801
Internally developed software...................... 1,746,345 3,147,725
Equipment held under capital leases................ 749,254 1,362,720
----------- -----------
Total.............................................. 5,916,044 10,888,903
Less accumulated depreciation and amortization..... (1,457,751) (3,573,329)
----------- -----------
Furniture and equipment, net....................... $ 4,458,293 $ 7,315,574
=========== ===========
</Table>
Accumulated amortization on assets held under capital leases was $196,213
and $404,964 at December 31, 2000 and December 30, 2001, respectively.
5. INCOME TAXES
At December 31, 2000 and December 30, 2001, the Company had temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and such amounts measured by the tax laws.
The provision for income taxes is as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------- DECEMBER 30,
1999 2000 2001
---------- ---------- -------------
Total current provision for income
taxes.................................. $1,285,742 $1,870,369 $3,274,295
Deferred income taxes.................... (495,428) 171,694 405,260
---------- ---------- ----------
Provision for income taxes............... $ 790,314 $2,042,063 $3,679,555
========== ========== ==========
</Table>
F-17
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<Table>
<Caption>
DECEMBER 31,
------------------- DECEMBER 30,
1999 2000 2001
-------- -------- -------------
Deferred tax assets:
Provision for doubtful accounts........... $295,883 $510,057 $ 820,999
Intangibles............................... 119,452 -- --
Accrued expenses and reserves............. 70,087 87,043 122,646
Net operating loss carryforward........... 19,487 8,814 1,873
Other..................................... 14,201 14,201 --
-------- -------- ----------
Total deferred tax assets................... 519,110 620,115 945,518
Deferred tax liabilities:
Intangibles............................... -- 228,785 665,455
Fixed assets and software amortization.... 23,682 67,597 361,590
-------- -------- ----------
Total deferred tax liabilities.............. 23,682 296,382 1,027,045
-------- -------- ----------
Net deferred tax asset (liability).......... $495,428 $323,733 $ (81,527)
======== ======== ==========
</Table>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that no valuation allowance is required at December 31, 2000 and
December 30, 2001.
At December 30, 2001, the Company's net operating loss carryforward for
federal income tax purposes is approximately $5,000, with expiration periods
beginning in 2011. Internal Revenue Code (IRC) Section 382 limitations apply to
the use of the net operating loss carryforwards.
The reconciliation of income tax computed at the U.S. federal statutory rate
to income tax expense during the year ended December 30, 2001 is as follows:
<Table>
<Caption>
DECEMBER 31, DECEMBER 30,
1999 2000 2001
-------- -------- -------------
Tax at U.S. statutory rate....................... 34.00% 34.00% 34.00%
State taxes net of federal benefit............... 3.63 3.63 3.63
Nondeductible items.............................. 5.52 2.24 29.80
Change in valuation allowance.................... (15.65) -- --
Other............................................ (2.53) (3.16) 4.65
------ ----- -----
Effective income tax rate...................... 24.97% 36.71% 72.08%
====== ===== =====
</Table>
6. LONG-TERM DEBT
On October 26, 2001, in connection with the recapitalization discussed in
Note 2, the Company entered into a $120 million senior credit facility. The
senior credit facility consists of (i) senior credit notes (Term A) in the
amount of $40 million due in October 2006 bearing interest at a variable rate
based on the Company's leverage ratio (as defined) (5.83% at December 30, 2001)
interest is payable
F-18
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
at least quarterly and principal payments are payable quarterly commencing on
March 31, 2003; (ii) senior credit notes (Term B) in the amount of $60 million
due in October 2007 bearing interest at a variable rate based on the Company's
leverage ratio (as defined) (6.33% at December 30, 2001) interest is payable at
least quarterly and principal payments are payable quarterly commencing on
March 31, 2003; and (iii) provides for up to $20 million of revolving loans
expiring on October 2006, bearing interest at a variable rate (ranging from
5.83% to 7.5% at December 30, 2001) payable at least quarterly. The proceeds of
the above senior credit facility were used to extinguish the outstanding balance
of the $75 million revolving credit note ($62 million) and the $20 million
subordinated promissory note described below. In connection with the early
pay-off of these notes, debt issuance costs of $1,497,999 and a discount on
notes of $2,281,974 were written off. These amounts as well a prepayment penalty
of $600,000, are reflected net of a tax benefit in the accompanying consolidated
statements of operations as an extraordinary loss on early extinguishment of
debt.
The senior credit facility is secured by substantially all of the assets of
the Company and contains certain covenants that, among other things, limits the
payments of dividends and restricts additional indebtedness and obligations, and
requires maintenance of certain financial ratios. Approximately $5 million was
available under the revolving loans at December 30, 2001.
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) approximating $59.3 million. The
Senior Unsecured Notes bear interest at 12% per annum compounding quarterly,
with principal and interest due on October 2009. The holders of the Senior Notes
are required to redeem the notes upon the consummation of (i) an underwritten
public offering or (ii) a Change of Control (as defined).
On September 29, 1998, the Company entered into a $25 million revolving
credit note with a bank. In November 1999, the note was increased to
$40 million and ultimately to $75 million in September 2000 with the addition of
debt syndication partners. The revolving credit note bore interest at a variable
rate based on the Company's leverage ratio (as defined) (10.2% at December 31,
2000) payable monthly. The revolving credit note had an expiration date of
December 31, 2003, with quarterly principal payments in an amount equal to a
certain percentage of the outstanding principal amount (as defined). All amounts
outstanding under the revolving credit note were repaid on October 26, 2001 in
connection with the recapitalization.
In connection with the revolving credit note, the Company issued stock
purchase warrants, expiring on September 29, 2008, to the bank to purchase a
total of 454,050 shares of the Company's common stock at an exercise price of
$1.10 per share. Deferred interest expense of approximately $76,900 representing
the estimated value of the warrants was recorded. These warrants were exercised
in connection with the recapitalization.
On September 29, 2000, the Company entered into a $20 million subordinated
promissory note with an investment banking firm. The subordinated promissory
note bore an interest rate of 12% payable quarterly and matured on
September 29, 2007. In connection with the subordinated promissory note, the
Company issued put warrants, expiring on September 29, 2010, to the investment
banking firm to purchase a total of 1,283,606 shares of the Company's common
stock at an exercise price of $.003 per share. The put warrants were valued at
$2,731,000, representing their estimated fair value using a Black-Scholes
valuation model. The Company used a volatility factor of 60%, risk free interest
rate of 6.7% and an expected life of 10 years. In connection with the
recapitalization, the put warrants
F-19
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
were put back to the Company. The difference between the fair value of the put
warrants at the time of the recapitalization and the recorded amount
approximated $5,043,000 and is included as a component of interest expense for
the year ended December 30, 2001.
A summary of long-term debt at December 31, 2000 and December 30, 2001 is as
follows:
<Table>
<Caption>
2000 2001
----------- ------------
Senior credit notes, Term A due October 2006...... $ -- $ 40,000,000
Senior credit notes, Term B due October 2007...... -- 60,000,000
Revolving loan, due October 2006.................. -- 15,000,000
12% Senior Unsecured Promissory Notes due October
2009............................................ -- 59,319,327
Revolving credit notes due December 2003.......... 50,087,000 --
12% subordinated promissory note.................. 20,000,000 --
Prime plus 1% note payable, due February 2001..... 500,000 --
7% note payable, due March 2001................... 495,000 --
Other long-term debt.............................. 101,566 34,721
----------- ------------
71,183,566 174,354,048
Less current portion.............................. (7,441,755) (10,034,721)
----------- ------------
63,741,811 164,319,327
Less discount..................................... (2,633,303) --
----------- ------------
$61,108,508 $164,319,327
=========== ============
</Table>
Scheduled maturities of long-term debt during the next five years and
thereafter are as follows:
<Table>
2002........................................................ $ 10,034,721
2003........................................................ 6,000,000
2004........................................................ 12,000,000
2005........................................................ 15,500,000
2006........................................................ 23,100,000
Thereafter.................................................. 107,719,327
------------
$174,354,048
============
</Table>
7. EMPLOYEE BENEFIT PLAN
On August 1, 1999, the Company adopted a voluntary defined contribution
401(k) profit-sharing plan covering all eligible employees as defined in the
plan documents. The plan provides for matching up to 50% of the participant's
contributions up to a maximum of 7% of the participant's compensation and
provides for a discretionary matching contribution, which would be allocated to
each employee based on their annual pay divided by the total annual pay of all
participants eligible to receive such contribution. There was no voluntary
contribution during 1999, 2000 and 2001. The Company's matching contribution was
approximately $23,000, $99,000 and $175,000 for the year ended December 31,
1999, December 31, 2000 and December 30, 2001, respectively.
F-20
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PRIVATE PLACEMENT
On August 21, 2000, the Company completed a private placement of 234,663
shares of the Company's nonvoting common stock at a price of $2.13 per share,
less issuance costs of $15,470 to a member of its revolving credit syndication.
On February 26, 1999, the Company completed a private placement of 1,178,000
shares of the Company's Series D redeemable preferred stock and 322,000 shares
of the Company's Series E redeemable preferred stock at a price of $5.00 per
share, less issuance costs of $145,716.
9. REDEEMABLE PREFERRED STOCK
The Company has authorized 15,000,000 shares of preferred stock, par value
$.01, of which 7,000,000 shares have been designated as Series I Convertible
Preferred Stock. The Series I Convertible Preferred Stock has 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 are entitled to receive
dividends at a rate of 8% per annum of the stated value compounded quarterly,
are cumulative and accrue whether or not declared by the Board of Directors and
are 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 may 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 shall 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 may require the Company to
redeem any or all of the outstanding shares of the Series I Convertible
Preferred Stock at price in cash equal to the stated value per share plus any
accrued but unpaid dividends.
The Company had 20,266,669 shares of common stock reserved for issuance upon
conversion of the Series I Convertible Preferred Stock. Cumulative unpaid
dividends were approximately $1,804,000 at December 30, 2001. The aggregate
liquidation value of the Series I Convertible Preferred Stock at December 30,
2001 is $124,616,794.
Pursuant to the recapitalization, the Company converted the previously
authorized 4,000,000, 4,000,000, 750,000, 2,000,000 and 2,000,000 shares of
Series A, Series B, Series C, Series D and Series E redeemable preferred stock,
respectively into common shares. As of December 31, 2000, 1,510,824, 1,896,581,
624,413, 1,470,000 and 30,000 shares of Series A, Series B, Series C, Series D
and Series E redeemable preferred stock, respectively, were issued and
outstanding. The Series A and Series B redeemable preferred stock had identical
rights with the exception that Series A redeemable preferred stock holders as a
group may elect two members of the Board of Directors and Series B redeemable
preferred stock is nonvoting. Series A and Series B redeemable preferred stock
were convertible on a one-for-one basis by the holders upon written notice into
fully paid and nonassessable shares of the Company's common stock. The Series B
redeemable preferred stock was convertible by the holder upon written notice
into fully paid and nonassessable shares of the Series A redeemable preferred
stock. The liquidation value of both Series A and Series B redeemable preferred
stock was $3.375 per share.
Each share of Series A and Series B redeemable preferred stock was
automatically convertible into common stock upon the closing of a Qualified
Public Offering (as defined). If a Qualified Public
F-21
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE PREFERRED STOCK (CONTINUED)
Offering was not completed by June 1, 2004, the holders were entitled to redeem
the outstanding shares of either Series A or Series B redeemable preferred stock
at a price that is the greater of the liquidation value or the fair market value
of each share. At December 31, 2000, the Company had issued and outstanding
1,510,824 shares of Series A redeemable preferred stock and 1,896,581 of
Series B redeemable preferred stock.
The Company issued 624,413 shares of Series C redeemable preferred stock in
conjunction with the acquisition of Staff Relief, Inc. Series C redeemable
preferred stock shares were convertible on a one-for-one basis by the holder
upon written notice into fully paid and nonassessable shares of the Company's
common stock. Series C redeemable preferred stockholders as a group had the
ability to elect one member to the Board of Directors. The liquidation value of
the Series C redeemable preferred stock was $5.00 per share. Each share of
Series C redeemable preferred stock was automatically convertible into common
stock upon the closing of a Qualified Public Offering (as defined). If a
Qualified Public Offering was not completed by September 30, 2004, the holders
had the ability to redeem the outstanding shares of Series C redeemable
preferred stock at a price of $5.00 per share.
The rights and preferences of the Series D and Series E redeemable preferred
stock were similar to those of the Company's Series A and Series B redeemable
preferred stock, respectively, described herein, except that the liquidation
value of the Series D and Series E redeemable preferred stock was $5.00 per
share and the Series D redeemable preferred stock shareholders could only elect
one Director to the Board. After issuance on February 26, 1999, 292,000 shares
of Series E redeemable preferred stock were converted into 292,000 shares of
Series D redeemable preferred stock. At December 31, 2000, the Company had
issued and outstanding 1,470,000 shares of Series D redeemable preferred stock
and 30,000 of Series E redeemable preferred stock.
10. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company leases equipment under several lease agreements, which are
accounted for as capital leases. The assets and liabilities under capital leases
are recorded at the lower of the net present value of the minimum lease payments
or the fair value of the asset. The assets are amortized over the related lease
term. Future minimum lease payments under capital leases are as follows:
<Table>
Fiscal year:
2002........................................................ $ 402,797
2003........................................................ 389,986
2004........................................................ 265,124
2005........................................................ 60,797
2006 and thereafter......................................... 387
----------
1,119,091
Less amount representing interest........................... (128,073)
Less amount classified as current........................... (329,922)
----------
$ 661,096
==========
</Table>
F-22
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company has entered into noncancelable operating lease agreements for
the rental of space and equipment. Future minimum lease payments at
December 30, 2001 associated with these agreements are as follows:
<Table>
2002........................................................ $2,696,216
2003........................................................ 1,654,100
2004........................................................ 827,386
2005........................................................ 429,669
2006........................................................ 374,232
Thereafter.................................................. 633,366
----------
$6,614,969
==========
</Table>
Total operating lease expense was approximately $1,027,000, $1,980,000 and
$3,003,000 for the years ended December 31, 1999 and 2000, and December 30,
2001, respectively.
LITIGATION
The Company is involved in litigation arising in the ordinary course of
business. After consultation with legal counsel, management estimates that these
matters will be resolved without material adverse effect on the Company's future
financial position or results of operations.
11. RELATED PARTY TRANSACTIONS
The Company paid $75,000 and $212,000 during the years ended December 31,
2000 and December 30, 2001, respectively, in consulting fees to a stockholder
for services rendered. During the years ended December 31, 2000 and
December 30, 2001, the Company paid rent of approximately $89,300 and $47,000,
respectively, to a related party.
The Company entered into senior unsecured promissory notes of approximately
$59.3 million with certain related parties (see Note 6). At December 30, 2001,
accrued interest on these notes amounted to approximately $1.3 million and is
included in other liabilities in the consolidated balance sheet.
12. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In January 1999, the Company adopted a stock option plan (the Plan), under
which 1,151,016 shares of common stock are available for grant. At December 30,
2001, 306,938 shares were reserved for future issuances under the Plan. The Plan
is designed to serve as an incentive for retaining qualified and competent
employees. The Compensation Committee of the Board of Directors administers the
Plan and is authorized to grant options there under to all eligible employees of
the Company, including officers and directors of the Company and consultants.
The Plan provides for the granting of both "incentive stock options" (as defined
in Section 422A of the IRC) and nonqualified stock options. Options are granted
under the Plan on such terms and at such prices as determined by the
Compensation Committee, except that the per share exercise price of incentive
stock options
F-23
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
cannot be less than the fair market value of the common stock on the date of
grant, unless the optionee owns more than 10% of the total combined voting power
of the Company, in which case options cannot be granted at a price less than
110% of the fair market value of the Company's common stock on the date of
grant. Each option is exercisable after the period or periods specified in the
option agreement, but no option can be exercised after the expiration of ten
years and one day from the date of grant. Options granted under the Plan are not
transferable other than by will or by the laws of descent and distribution.
The Company's 2001 Stock Incentive Plan (the 2001 Plan) was adopted by the
Board on November 14, 2001. Under the terms of the 2001 Plan, the Company is
authorized to grant incentive stock options and nonqualified stock options, make
stock awards and provide the opportunity to purchase stock to employees,
directors and officers and consultants of the Company. The 2001 Plan provides
for the issuance of a maximum of 2,274,499 shares of Common Stock. The
Compensation Committee of the Board of Directors administers the Plan and is
authorized to grant options there under to all eligible employees of the
Company, including officers and directors of the Company and consultants. The
Plan provides for the granting of both "incentive stock options" (as defined in
Section 422A of the IRC) and nonqualified stock options. Options are granted
under the Plan on such terms and at such prices as determined by the
Compensation Committee, except that the per share exercise price of incentive
stock options cannot be less than the fair market value of the common stock on
the date of grant, unless the optionee owns more than 10% of the total combined
voting power of the Company, in which case options cannot be granted at a price
less than 110% of the fair market value of the Company's common stock on the
date of grant. Of the 1,767,604 options granted under the 2001 Plan during 2001,
1,051,724 of the options are exercisable upon vesting ratably over time ranging
from three to five years, and 715,880 will vest ratably over four years if
certain of the performance milestones as determined by the Compensation
Committee are attained or in eight years, but no option can be exercised after
the expiration of ten years and one day from the date of grant. Options granted
under the Plan are not transferable other than by will or by the laws of descent
and distribution.
A summary of the Company's stock option activity and related information for
the year ended December 30, 2001 is as follows:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1998............................ -- $ --
Granted................................................... 193,371 $1.87
Forfeited................................................. (90,547) $1.87
---------
Outstanding at December 31, 1999............................ 102,824 $1.87
Granted................................................... 311,542 $1.95
Forfeited................................................. (59,853) $1.94
---------
Outstanding at December 31, 2000............................ 354,513 $1.94
Granted................................................... 2,106,769 $5.44
Forfeited................................................. (428,202) $2.01
---------
Outstanding at December 30, 2001............................ 2,033,080 $5.55
=========
Exercisable at end of year.................................. 9,355 $1.95
=========
</Table>
F-24
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
<Table>
<Caption>
WEIGHTED AVERAGE
EXERCISE PRICE
----------------
Weighted average exercise price of options granted during
the year:
Issued at market price.................................... $ 5.44
Weighted average fair value of options granted during the
year:
Issued at market price.................................... $ 2.96
</Table>
Information about options outstanding at December 30, 2001 is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------
WEIGHTED AVERAGE
RANGE REMAINING
OF EXERCISE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- --------- ---------------- ---------------- -------- ----------------
$1.87 to $2.20 265,476 8.8 $ 2.16 9,355 $1.95
$6.06 1,767,604 9.8 $ 6.06 $ --
--------- -----
2,033,080 9,355
========= =====
</Table>
Pro forma information regarding net income or loss is required by SFAS
No. 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. The fair value of
options granted was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
<Table>
<Caption>
1999 2000 2001
-------- -------- -------------
Expected life............................................... 5 5 5 - 8
Risk-free interest rate..................................... 6.00% 6.72% 3.76% - 4.91%
Volatility.................................................. 60% 60% 60%
Dividend yield.............................................. 0% 0% 0%
</Table>
The effect of applying the fair value method proscribed by SFAS No. 123 to
the Company's options would have the Company recording the following pro forma
net income (loss) and net income (loss) per share amounts:
<Table>
<Caption>
1999 2000 2001
------------- ------------- -----------
Pro forma net income (loss)......................... $ 2,360,061 $ 3,470,145 $(1,407,091)
Pro forma income (loss) per common share:
Basic............................................... $ 0.32 $ 0.46 $ (0.22)
Diluted............................................. $ 0.09 $ 0.13 $ (0.22)
</Table>
Because the determination of the fair value of all options is based on the
assumptions described above, and because additional option grants are expected
to be made in future periods, this pro forma information is not likely to be
representative of the pro forma effects on reported net income or loss for
future years.
F-25
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK AND PUT WARRANTS
During 2000, the Company issued to an investment banking firm put warrants
to purchase 1,283,606 common shares at an exercise price of $.003 in conjunction
with the issuance of the Company's subordinated promissory note. The investment
banking firm had the ability to put the underlying shares to the Company, upon
exercise of the warrants. The warrants were exercisable upon (i) an IPO or other
liquidating event, (ii) a change in ownership as defined by the Internal Revenue
Service or (iii) upon seven years of the date of issuance. During 2001, in
connection with the recapitalization, the underlying shares related to the put
warrants were put back to the Company at a put price of $6.057 per warrant, or
$7,774,301.
During 1999, the Company issued 76,734 warrants to a former board member
exercisable at $1.87 per share. Prior to fiscal 1999, 1,853,135 warrants were
issued in connection with an acquisition, 454,050 warrants were issued in
conjunction with the Company's Revolving Credit Note and 137,533 warrants were
issued for services rendered to the Company. All warrants outstanding at
October 26, 2001 were repurchased or converted into the Company's common stock
in connection with the recapitalization in the amount of $13,369,734.
All warrants, with the exception of the aforementioned put warrants, were
exercisable over a ten-year period from the date of grant. The Company accounted
for the issuance of the warrants to the former board member under SFAS No. 123.
PROMISSORY NOTES DUE FOR PURCHASES OF COMMON STOCK
During fiscal 2000, certain executives of the Company, pursuant to the
Executive Incentive Stock Ownership Plan, executed promissory notes in exchange
for the purchase of 2,739,417 restricted common shares ranging in price from
$1.63 to $2.20. These restricted common shares have been included in diluted
earnings per share using the treasury stock method. The promissory notes are
secured by the common shares and are full recourse as to 30% of the face amount
of the note plus accrued interest. The notes are due ten years from date of
issuance and bear interest at the published prime rate. In connection with the
recapitalization, approximately $2,400,000 of the promissory notes were repaid.
STOCKHOLDERS' AGREEMENT
Certain of the stockholders of the Company have entered into a stockholders
agreement conferring certain rights and restrictions, including among others,
restrictions on transfers of shares, rights to acquire shares, and designation
of Board of Director seats. This agreement terminates upon an initial public
offering by the Company.
F-26
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
<Table>
<Caption>
YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 30,
1999 2000 2001
----------- ----------- ------------
Numerator:
Income before extraordinary items.................... $ 2,374,557 $ 3,520,173 $ 1,425,379
Extraordinary loss................................... -- -- 2,731,790
----------- ----------- -----------
Net income before preferred stock dividend........... 2,374,557 3,520,173 (1,306,411)
Less preferred stock dividends....................... -- -- 1,803,505
----------- ----------- -----------
Numerator for basic earnings per share--available to
common stockholders................................ $ 2,374,557 $ 3,520,173 $(3,109,916)
=========== =========== ===========
Effect of dilutive securities:
Add back preferred stock dividends................... -- -- 1,803,505
----------- ----------- -----------
Numerator for diluted earnings per share available to
common stockholders................................ $ 2,374,557 $ 3,520,173 $(1,306,411)
=========== =========== ===========
Denominator:
Denominator for basic earnings per share--weighted-
average shares..................................... 7,496,952 7,581,172 6,338,370
Effect of dilutive shares:
Restricted common shares............................. 364,476 589,851 --
Employee stock options............................... -- 29,414 --
Warrants............................................. 1,487,840 1,637,337 --
Convertible preferred stock.......................... 16,237,187 16,979,224 --
----------- ----------- -----------
Dilutive potential common shares..................... 18,089,503 19,235,826 --
----------- ----------- -----------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions.... 25,586,455 26,816,998 6,338,370
=========== =========== ===========
Basic earnings per share:
Income per share before extraordinary loss........... $ 0.32 $ 0.46 $ (0.06)
Extraordinary loss per share......................... -- -- (0.43)
----------- ----------- -----------
Basic net income (loss) per share.................... $ 0.32 $ 0.46 $ (0.49)
Diluted earnings per share:
Income per share before extraordinary loss........... $ 0.09 $ 0.13 $ (0.06)
Extraordinary loss per share......................... -- -- (0.43)
----------- ----------- -----------
Diluted net income (loss) per share.................. $ 0.09 $ 0.13 $ (0.49)
=========== =========== ===========
</Table>
F-27
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of their short duration of maturity. The carrying amount of the
revolving credit note approximates fair value because the interest rate is tied
to a quoted variable index. The carrying amount of the senior subordinated debt
approximates fair value as the terms of the debt was based on similar terms,
maturities, and interest rates as other debt issues with similar risk factors
that are not traded on quoted market prices. The fair value of the put warrants
was based on valuation models using current market rates.
15. 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
4.34% over the life of the Swap Agreement without an exchange of the underlying
notional amount, which is set at $50,000,000. The interest rate swap matures on
December 24, 2004.
The Company entered into the Swap Agreement to reduce the exposure to
adverse fluctuations in floating interest rates on the underlying debt
obligation and not for trading purposes. Any differences paid or received under
the terms of the Swap Agreement shall be recognized as adjustments to interest
expense over the life of the interest rate swap, thereby adjusting the effective
interest rate on the underlying debt obligation.
The fair value of the interest rate swap approximated $40,000 based on
quoted market prices for similar instruments at December 30, 2001. The estimated
fair value of the swap will fluctuate over time based on changes in floating
interest rates; however, these fair value amounts should not be viewed in
isolation but rather in relation to the overall reduction in the Company's
exposure to adverse fluctuations in floating interest rates.
The Company has no plans to terminate the Swap Agreement earlier than the
maturity date. The Company is exposed to credit loss in the event of
nonperformance by the counterparty to the Swap Agreement. The amount of such
exposure is limited to the unpaid portion of amounts due to the Company, if any,
pursuant to the Swap Agreement. However, management believes that this exposure
is mitigated by provisions in the Swap Agreement that allow for the legal right
of offset of any amounts due to the Company from the counter party with any
amounts payable to the counterparty by the Company. As a result, management
considers the risk of counter party default to be minimal.
F-28
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk as defined by 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, as well
as the Company's history of minimal bad debts. The Company does not generally
require collateral.
17. 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 will take 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.
F-29
<Page>
7,812,500 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
APRIL 17, 2002
---------------
LEHMAN BROTHERS
DEUTSCHE BANK SECURITIES
CREDIT SUISSE FIRST BOSTON
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