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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) - DECEMBER 20, 2002
MEDICAL STAFFING NETWORK HOLDINGS, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-31299 06-0865171
------------------ --------------- ------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
901 YAMATO ROAD, SUITE 110, BOCA RATON, FL 33431
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 561-322-1301
This amendment to the Current Report on 8-K originally dated December 20, 2002,
is being filed in order to provide the required financial information for the
Company.
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ITEM 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
(a) Financial Statements of Businesses Acquired
The following historical financial statements of Travel Nurse International are
filed herewith:
Report of Independent Certified Public Accountants
Balance Sheets, March 31, 2002 and September 30, 2002 (Unaudited)
Statements of Income
Statements of Changes in Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma consolidated financial statements of Medical
Staffing Network Holdings, Inc. are filed herewith:
Unaudited Pro Forma Condensed Consolidated Financial Information
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 30, 2001
Notes to the Unaudited Pro Forma Condensed Consolidated Statement of Operations
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
nine months ended September 29, 2002
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 29, 2002
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(c) Exhibits
23.1 Consent of Ernst & Young LLP
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Travel Nurse International
Financial Statements
For the year ended March 31, 2002
CONTENTS
<Table>
Report of Independent Certified Public Accountants............................1
Financial Statements
Balance Sheets................................................................2
Statements of Income..........................................................3
Statements of Changes in Stockholder's Equity (Deficit).......................4
Statements of Cash Flows......................................................5
Notes to Financial Statements.................................................6
</Table>
Report of Independent Certified Public Accountants
Stockholder
Travel Nurse International
We have audited the accompanying balance sheet of Travel Nurse International as
of March 31, 2002, and the related statements of income, changes in
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Travel Nurse International at
March 31, 2002, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Miami, Florida
October 14, 2002, except for Note 11, as to which the date is December 20, 2002
and the penultimate paragraph of Note 7, as to which the date is November 8,
2002
1
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Travel Nurse International
Balance Sheets
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2002 2002
---------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash......................................................................... $ 8,668 $ 41,800
Accounts receivable, net of allowance for doubtful accounts of $254,000
and $121,000 at March 31, 2002 and September 30, 2002,
respectively............................................................... 4,160,268 3,679,319
Unbilled receivables......................................................... 826,000 528,000
Prepaid expenses............................................................. 65,765 284,146
Other current assets......................................................... 40,524 157,637
------------- --------------
Total current assets............................................................ 5,101,225 4,690,902
Furniture and equipment, net.................................................... 97,343 121,617
Due from stockholder............................................................ 235,630 237,655
Due from affiliate.............................................................. 4,086,375 5,040,543
Other assets.................................................................... 45,192 56,203
------------- --------------
Total assets.................................................................... $ 9,565,765 $ 10,146,920
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................. $1,046,018 $ 478,781
Short term borrowing......................................................... 2,781,554 2,758,074
Accrued liabilities.......................................................... 1,737,630 1,849,901
Accrued payroll taxes........................................................ 3,479,084 5,013,973
Deferred income tax liability................................................ 446,000 182,300
Other........................................................................ 44,000 254,154
------------- --------------
Total current liabilities....................................................... 9,534,286 10,537,183
Commitments and contingencies (Note 7)
Stockholder's equity (deficit):
Common stock; no par value; 1,000,000 shares authorized; 800,000
and 700,000 shares issued and outstanding at March 31, 2002 and September
30, 2002, respectively..................................................... 82,000 81,000
Stock subscription receivable................................................ (1,000) -
Treasury stock, at cost...................................................... (75,000) (75,000)
Retained earnings (deficit).................................................. 25,479 (396,263)
------------- --------------
Total stockholder's equity (deficit)............................................ 31,479 (390,263)
------------- --------------
Total liabilities and stockholder's equity (deficit)............................ $ 9,565,765 $ 10,146,920
============= ==============
</Table>
SEE ACCOMPANYING NOTES.
2
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Travel Nurse International
Statements of Income
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
MARCH 31, -------------------------------
2002 2002 2001
------------ -------------- ------------
(UNAUDITED)
Revenues:
Service revenues........................................... $ 25,334,903 $ 17,331,840 $ 13,721,879
Management fee revenues.................................... 6,790,500 543,000 1,897,200
------------ -------------- ------------
32,125,403 17,874,840 15,619,079
Costs of services rendered.................................... 21,043,340 14,195,398 10,438,929
------------ ------------ ------------
Gross profit.................................................. 11,082,063 3,679,442 5,180,150
------------ ------------- ------------
Operating expenses:
General and administrative................................. 8,245,460 3,694,085 4,250,938
Provision for doubtful accounts............................ 200,000 40,000 100,000
Depreciation............................................... 39,943 24,000 19,000
------------ -------------- ------------
8,485,403 3,758,085 4,369,938
------------ -------------- ------------
Income (loss) from operations................................. 2,596,660 (78,643) 810,212
Other income (expense):
Interest income............................................ 8,118 - -
Interest expense........................................... (927,090) (606,799) (456,342)
------------ -------------- ------------
(918,972) (606,799) (456,342)
------------ -------------- ------------
Income (loss) before provision for (benefit from) income
taxes...................................................... 1,677,688 (685,442) 353,870
Provision for (benefit from) income taxes..................... 456,000 (263,700) -
------------ -------------- ------------
Net income (loss)............................................. $ 1,221,688 $ (421,742) $ 353,870
============ ============== ============
</Table>
SEE ACCOMPANYING NOTES.
3
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Travel Nurse International
Statements of Changes in Stockholder's Equity (Deficit)
For the year ended March 31, 2002 and
the six months ended September 30, 2002
<Table>
<Caption>
TOTAL
STOCK RETAINED STOCKHOLDER'S
COMMON COMMON SUBSCRIPTION TREASURY EARNINGS EQUITY
SHARES STOCK RECEIVABLE STOCK (DEFICIT) (DEFICIT)
-------- -------- ------------- --------- ------------ -------------
Balance, March 31, 2001 800,000 $ 81,000 $ (1,000) $ - $ (1,196,209) $ (1,116,209)
Net income............................ - - - - 1,221,688 1,221,688
Exercise of stock options............. 100,000 1,000 - - - 1,000
Purchase of treasury stock............(100,000) - - (75,000) - (75,000)
-------- --------- --------- --------- ------------ --------------
Balance, March 31, 2002 800,000 82,000 (1,000) (75,000) 25,479 31,479
Net loss (UNAUDITED).................. - - - - (421,742) (421,742)
Stock subscription cancellation
(UNAUDITED).........................(100,000) (1,000) 1,000 - - -
-------- --------- --------- --------- ------------ --------------
- - -
Balance, September 30, 2002
(UNAUDITED)........................... 700,000 $ 81,000 $ - $(75,000) $ (396,263) $ (390,263)
======== ======== ========= ======== ============ =============
</Table>
SEE ACCOMPANYING NOTES.
4
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Travel Nurse International
Statements of Cash Flows
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------------
2002 2002 2001
------------ ------------- -------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)............................................. $ 1,221,688 $ (421,742) $ 353,870
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts.......................... 200,000 40,000 100,000
Depreciation............................................. 39,943 24,000 19,000
Deferred income taxes.................................... 446,000 (263,700) -
Changes in operating assets and liabilities:
Accounts receivable.................................... 259,047 440,949 100,045
Unbilled receivables................................... (228,000) 298,000 -
Prepaid expenses....................................... (65,765) (218,381) (192,137)
Other current assets................................... 21,475 (117,113) (2,646)
Due from stockholder................................... (87,777) (2,025) (17,996)
Due from affiliate..................................... (4,184,908) (954,168) (489,759)
Other assets........................................... (36,472) (11,011) (43,445)
Accounts payable....................................... 836,726 (567,237) 429,688
Accrued liabilities.................................... 534,981 112,271 (678,199)
Accrued payroll taxes.................................. 1,787,383 1,534,889 836,073
Other liabilities...................................... - 210,154 199,292
------------ ------------- -------------
Net cash provided by operating activities..................... 744,321 104,886 613,786
INVESTING ACTIVITIES
Purchases of furniture and equipment.......................... (54,802) (48,274) (26,793)
Payment from related party.................................... 44,000 - -
------------ ------------- -------------
Net cash used in investing activities......................... (10,802) (48,274) (26,793)
FINANCING ACTIVITIES
Net proceeds from short term borrowing........................ 24,829,890 18,065,542 13,923,079
Repayments of short term borrowing............................ (25,480,741) (18,089,022) (14,416,833)
Proceeds from issuance of common stock........................ 1,000 - -
Purchase of treasury stock.................................... (75,000) - (75,000)
------------ ------------- -------------
Net cash used in financing activities......................... (724,851) (23,480) (568,754)
------------ ------------- -------------
Net increase in cash.......................................... 8,668 33,132 18,239
Cash at beginning of the period............................... - 8,668 -
------------ ------------- -------------
Cash at end of the period................................... $ 8,668 $ 41,800 $ 18,239
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest........................................ $ 913,964 $ 591,699 $ 456,342
============ ============= =============
</Table>
SEE ACCOMPANYING NOTES.
5
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Travel Nurse International
Notes to Financial Statements
March 31, 2002
1. ORGANIZATION
Travel Nurse International (the Company), formerly known as Travel Nurse Data
Bank, Inc., is a California corporation organized on April 28, 1999 for the
purpose of providing qualified temporary supplemental travel nurse staffing,
with contract assignments generally ranging from four to thirteen weeks, to
healthcare facilities, primarily located in the West and Northwestern United
States.
On July 11, 2002, the Company amended its Articles of Incorporation and changed
its name from Travel Nurse Data Bank, Inc. to Travel Nurse International.
The accompanying interim financial statements (including notes to the financial
statements) of the Company at September 30, 2002 and for the six months ended
September 30, 2002 and 2001, are unaudited. In the opinion of management, the
accompanying unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company at September 30, 2002, and the results of its
operations and its cash flows for the six months ended September 30, 2002 and
2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk as defined by Statement of Financial Accounting Standard
(SFAS) No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF
CREDIT RISK, consist principally of accounts receivable. The Company's
customers are healthcare providers and accounts receivable represent amounts
due from these providers. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, does not require
collateral. Two customers represent 21% and 16%, and 18% and 20% (unaudited)
of the Company's total gross receivable balance at March 31, 2002 and
September 30, 2002, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years.
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Travel Nurse International
Notes to Financial Statements - (continued)
REVENUE RECOGNITION
Revenue from services consists mainly of temporary staffing revenues. Revenues
are recognized when services are rendered. Accordingly, accounts receivable
includes an accrual for employees' time worked as of March 31, 2002 and
September 30, 2002, but not yet invoiced. At March 31, 2002 and September 30,
2002, the amount accrued is approximately $826,000 and $528,000 (unaudited),
respectively.
Approximately 33%, 15% (unaudited), and 42% (unaudited) of service revenues were
earned from one customer for the year ended March 31, 2002 and for the six
months ended September 30, 2002 and 2001, respectively. In addition, for the six
months ended September 30, 2002, approximately 22% (unaudited) of service
revenues were earned from another client (less than 10% for the year ended March
31, 2002 and the six months ended September 30, 2001).
The Company records reimbursements received for out-of-pocket expenses, such as
travel and housing for contract employees, as revenue in the statement of
income.
The Company earns management fee revenue by providing consulting services,
access to the Company's proprietary nurse database, assistance in recruiting
temporary supplemental personnel and assistance in locating travel and housing
for nurses, to Healthcare Consulting and Staffing Services, Inc., a nurse
staffing business solely owned by a relative of the Company's sole stockholder.
Pursuant to a management agreement between the Company and Healthcare Consulting
and Staffing Services, Inc., management fee revenue is recognized as services
are rendered. See Note 9.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expense was
approximately $51,000, $57,000 (unaudited) and $22,000 (unaudited) for the year
ended March 31, 2002 and for the six months ended September 30, 2002 and 2001,
respectively.
LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
long-lived assets will not be recoverable, as determined using the undiscounted
cash flows method, the Company's carrying value of the long-lived assets will be
reduced by the amount by which carrying value exceeds fair value.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Deferred 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
7
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Travel Nurse International
Notes to Financial Statements - (continued)
the differences are expected to reverse. A valuation allowance is established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
COMPREHENSIVE INCOME
SFAS No. 130, COMPREHENSIVE INCOME, requires that an enterprise (a) classify
items of other comprehensive income by their nature in the financial statements,
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. There are no components of comprehensive income other than
the Company's net income for the year ended March 31, 2002, and for the six
months ended September 30, 2002 and 2001.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS, requires
disclosure of the fair value of certain financial instruments. The carrying
amounts of cash, accounts receivable and accounts payable approximate fair value
due to the short maturity of the instruments and the provision for what
management believes to be adequate reserves for potential losses. Management
believes the fair value of its short term borrowing approximates its carrying
amount based on its rate of interest.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under the new rules, goodwill and
other intangibles determined to have an indefinite life are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. SFAS No. 142 eliminates the
current requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets. SFAS No. 142 will apply to goodwill and intangible assets arising from
transactions completed before and after the Statement's effective date. The
Company believes the adoption of these statements will not have a material
effect on its results of operations or financial position.
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Travel Nurse International
Notes to Financial Statements - (continued)
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, including legal obligations. The Company is required to
adopt SFAS No. 143 on April 1, 2002. The Company believes adoption of SFAS No.
143 will not have a material effect on its financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the criteria required for classifying an
asset as held-for-sale have been significantly changed. Assets held-for-sale are
stated at the lower of their fair values or carrying amounts, and depreciation
is no longer recognized. In addition, the expected future operating losses from
discontinued operations will be displayed in discontinued operations in the
period in which the losses are incurred rather than as of the measurement date.
More dispositions will qualify for discontinued operations treatment in the
statement of income under the new rules. The Company believes the adoption of
SFAS No. 144 will not have a material effect on its financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS No. 145). SFAS No. 145 will rescind SFAS No. 4 which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result of SFAS No. 145, the criteria in APB No. 30 will now be used to classify
those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer
necessary because SFAS No. 4 has been rescinded. The provisions of SFAS No. 145
shall be applied effective fiscal years beginning after May 15, 2002, with early
application encouraged. The adoption of this new accounting standard is not
expected to have a material impact on the Company's consolidated financial
position or results of operation.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than when a commitment to an exit plan is made. It is effective
for exit or disposal activities that are initiated after December 31, 2002. The
adoption of this new accounting standard is not expected to have a material
impact on the Company's consolidated financial position or results of operation.
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Travel Nurse International
Notes to Financial Statements - (continued)
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2002 2002
------------- --------------
(UNAUDITED)
Computer equipment and software............................... $ 62,942 $ 77,888
Furniture..................................................... 33,757 61,255
Office equipment.............................................. 27,927 33,757
Vehicle....................................................... 22,018 22,018
--------- ---------
146,644 194,918
Less accumulated depreciation................................. (49,301) (73,301)
--------- ---------
$ 97,343 $ 121,617
========= =========
</Table>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2002 2002
-------------- ----------------
(UNAUDITED)
Accrued salaries.............................................. $ 1,029,133 $ 965,538
Deferred compensation of stockholder.......................... 341,444 428,544
Reserve for healthcare benefit claims......................... 97,644 97,644
Accrued vacation.............................................. 79,000 79,000
Accrued professional fees..................................... 70,000 -
Other......................................................... 120,409 279,175
----------- -----------
$ 1,737,630 $ 1,849,901
=========== ===========
</Table>
5. SHORT TERM BORROWING
On October 11, 2000, the Company entered into the Accounts Receivable Financing
Agreement (the Agreement) with Flexible Funding, a third party lender, whereby
Flexible Funding agreed to (1) establish and maintain an open end credit
program, using as collateral the assignment by the Company to Flexible Funding
of all of the accounts receivable resulting from placement of any temporary
employees with a third-party business, and (2) administer the accounts created
thereby. All payments made by the Company's customers are remitted directly to
Flexible Funding's cash account and are applied against the
10
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Travel Nurse International
Notes to Financial Statements - (continued)
Company's outstanding loan balance. The Agreement has no maturity date; however,
it had provisions for rights of either party to terminate the Agreement.
The total amount of funds available to the Company under the Agreement is
equal to 80% of eligible accounts receivables, as defined, or $700,000,
unless prior written authorization is obtained from Flexible Funding. Funding
under the Agreement is based on rates charged by Flexible Funding on each new
accounts receivable invoice for which funds are loaned. The rates used to
calculate the funding fee withheld from the funds loaned are 1% for
borrowings up to 33% of the available loan amount, 2% for borrowings up to
66% of the available loan amount and 2.5% for borrowings over 66% of the
available loan amount. Fees charged by Flexible Funding are added to the
outstanding loan balance at that time. In addition to the funding fee,
Flexible Funding charges interest at the prime rate (4.75% at both March 31,
2002 and September 30, 2002) on the average daily balance. Outstanding
balances due Flexible Funding are all short tem in nature.
The Company's sole stockholder personally guarantees payment of borrowings under
the Agreement.
At both March 31, 2002 and September 30, 2002, the Company had outstanding
borrowings of approximately $2,800,000, which were in excess of the maximum
amount of funds available to the Company as of those dates, and, therefore, was
not in compliance with the maximum indebtedness covenant proscribed in the
Agreement.
On October 10, 2002, the Company entered into an addendum to the Agreement,
which increased the total amount of funds available to the Company at any one
time to a maximum of 90% of the eligible receivables, as defined, or $4,000,000.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a voluntary defined contribution 401(k) profit-sharing
plan covering all eligible employees as defined in the plan document. Plan
participants may elect to contribute up to a maximum of 15% of their
compensation, up to the maximum allowed by the Internal Revenue Service. The
plan provides for employer matching of 25% of the employee's before-tax
contributions that do not exceed 3% of eligible wages (i.e. the Company matches
a maximum of 0.75% of the employee's eligible wages). Employees vest immediately
in both employee and employer contributions to the plan. The Company's
contributions to the plan for the year ended March 31, 2002 were approximately
$4,700.
11
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Travel Nurse International
Notes to Financial Statements - (continued)
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company subleases office space under a non-cancelable operating lease that
expires November 29, 2004. Future minimum rental payments associated with this
agreement as of March 31, 2002 are as follows:
<Table>
<Caption>
Years ending March 31:
2003......................................................................... $ 282,157
2004......................................................................... 293,350
2005......................................................................... 201,474
-----------
$ 776,981
===========
</Table>
The Company incurred rent expense under its operating lease of approximately
$325,000 for the year ended March 31, 2002.
The Company has certain office equipment under a non-cancelable operating lease.
Future minimum payments under the non-cancelable operating lease as of March 31,
2002 are approximately $22,000 for each of the years ended March 31, 2003 and
2004. The Company incurred approximately $49,000 of equipment lease expense for
the year ended March 31, 2002.
On April 16, 2002, the Company amended its sublease for office space in San
Francisco, California, for additional space. Future minimum rental payments
associated with the additional space under the sublease are $58,177, $90,756 and
$74,467 for the years ended March 31, 2003, 2004 and 2005, respectively. The
lease expires November 29, 2004.
PAYROLL TAX LIABILITIES
As of January 1, 2000, in accordance with Circular E of the Employer's Tax
Guide, the Company was required to make semi-weekly deposits of its Federal
payroll taxes. The Company, however, continued to make payroll tax deposits on a
monthly basis during the ensuring quarter, resulting in the assessment of
penalties and interest by the Internal Revenue Service (the IRS). In addition,
the Company in several instances was deficient and delinquent in payment of its
Federal and applicable State payroll taxes. Notwithstanding notices from the IRS
regarding the Company's deficient and delinquent payroll tax payments, the IRS
and State taxing authorities have not assessed interest or penalties on the
Company's payroll tax liabilities to the extent accrued by the Company as of
March 31, 2002. At March 31, 2002, the Company accrued Federal and State payroll
tax liabilities totaling $3,479,084, of which approximately $255,000 and
$595,000 represent associated estimated assessments of interest and penalties to
the taxing authorities, respectively. It is the Company's position that the
amount accrued at March 31, 2002 represents the best estimate of interest and
penalties expected to be assessed by taxing authorities, based
12
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Travel Nurse International
Notes to Financial Statements - (continued)
on rates and amounts in effect for the applicable periods and promulgated by the
respective taxing authorities, by designating payroll tax deposit payments
against related tax liabilities in the most advantageous way permitted (e.g.,
permitted deposits apply to earliest tax liabilities). The Company expects to
settle the Federal and State payroll tax liabilities by March 31, 2003.
The IRS may reject the Company's method used to calculate its payroll tax
liability and the amount of assessed interest and penalty related to periods as
of March 31, 2002 could be greater.
As a result of ongoing discussions with the IRS, the Company has not filed its
June 30, 2002 quarterly payroll tax return.
LITIGATION
In 1999, the Company's sole stockholder became a competitor of his former
employer, U.S. Nursing Corporation (USN). USN alleges that its proprietary toll
free number had been misappropriated. In settlement discussions, as confirmed on
November 8, 2002 during a Mandatory Settlement Conference, USN demanded $2.5
million in damages including punitive damages of up to $1.5 million from the
Company. Management intends to vigorously defend this matter and it is the
Company's position that the outcome of this matter will not have a significant
effect on the Company's financial position or results of operations.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the outcome of
these matters will not have a significant effect on the Company's financial
position or results of operations.
8. EQUITY
Pursuant to a March 2000 employment agreement with the former President of
the Company, effective in March 2000, the Company granted an option to
purchase 10% of its common stock (100,000 shares) at an exercise price of
$.01 per share. The option was fully vested on the grant date. The Company
estimated a fair value of the stock option at the grant date of approximately
$73,000 by using a fair value option-pricing model with the following
assumptions used for the grant: no dividend yield, an expected life of 1
year, no expected volatility and a risk-free interest rate of 6.5% The fair
value of the stock option is reflected in common stock and accumulated
deficit as of March 31, 2001 in the accompanying statement of changes in
stockholder's equity. Upon employment termination, the former President of
the Company exercised the stock option to purchase 100,000 shares of the
Company's common stock for $1,000.
During the year ended March 31, 2002, the Company repurchased the 100,000
shares of its common stock issued to the former President for an aggregate
purchase price of $75,000. The shares are reflected as treasury stock.
13
<Page>
Travel Nurse International
Notes to Financial Statements - (continued)
In May 2002, the Company canceled 100,000 shares of its common stock that were
subscribed by a relative of the sole stockholder of the Company. These shares
were to be issued to the relative of the sole stockholder for services rendered;
however, no services were rendered and no other consideration was paid to the
Company and the parties agreed to cancel the subscription.
9. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH HEALTHCARE CONSULTING AND STAFFING SERVICES, INC.
In November 1999, the Company entered into a Management Fee and Supplemental
Staffing Agreement (Management Agreement) with Healthcare Consulting and
Staffing Services, Inc. (HCSS), a company solely owned by a relative of the
Company's sole stockholder. Pursuant to the Management Agreement, the Company
provides to HCSS consulting services, access to the Company's proprietary
nurse database, assistance in recruiting temporary supplemental personnel and
assistance in locating travel and housing for nurses in exchange for
management fees. The Company earned a monthly fixed fee of $130,000 and a
variable fee equal to 30% of HCSS' strike revenue for the year ended March
31, 2002. For the year ended March 31, 2002 and the six months ended
September 30, 2002 and 2001, the Company recognized $6,790,500, $543,000
(unaudited) and $1,897,200 (unaudited), respectively, of management fee
revenues. On June 30, 2002, the Management Agreement was terminated.
In addition, the Company provides financial and operational support to HCSS
including operational funding and payroll processing and payment. During the
year ended March 31, 2002 and the six months ended September 30, 2002 and 2001,
the Company paid approximately $1,995,000, $286,000 (unaudited) and $329,000
(unaudited), respectively, of expenses on behalf of HCSS and advanced cash of
approximately $2,848,000, $978,000 (unaudited) and $186,000 (unaudited),
respectively, to HCSS. At March 31, 2002 and September 30, 2002, the Company had
a net due from HCSS of $4,086,375 and $5,040,543 (unaudited), respectively. This
amount due to the Company was converted into a Promissory Note and Loan
Agreement. See Note 11.
OTHER RELATED PARTY TRANSACTIONS
At March 31, 2002 and September 30, 2002, the Company has $235,630 and $237,655
(unaudited), respectively, due from its sole stockholder. This amount represents
advances to the sole stockholder in lieu of compensation, which has been
deferred. The Company expects to be repaid in full.
14
<Page>
Travel Nurse International
Notes to Financial Statements - (continued)
The Company's sole stockholder is also its Chief Executive Officer. In 1999, the
sole stockholder and Chief Executive Officer agreed to defer compensation for
each fiscal year through March 31, 2003. Interest accrues on the unpaid earned
compensation at 8%, compounded annually. At March 31, 2002 and September 30,
2002, the Company had deferred compensation of $341,444 and $428,544
(unaudited), respectively, including accrued interest of $42,444 and $57,544
(unaudited), respectively, which is reflected in accrued liabilities in the
accompanying balance sheet.
The Company purchases certain computer equipment from a business owned by an
employee of the Company. During the year ended March 31, 2002 and the six months
ended September 30, 2002 and 2001, the Company purchased $21,847, $31,873
(unaudited) and $8,723 (unaudited), respectively, of computer equipment and
related supplies from this business.
10. INCOME TAXES
At March 31, 2002 and September 30, 2002 the Company had temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and such amounts measured by tax laws.
The provision for (benefit from) income taxes is as follows:
<Table>
<Caption>
YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
MARCH 31, 2002 2002 2001
-----------------------------------------------------------
(UNAUDITED)
Current
Federal................................ $ - $ - $ -
State.................................. 10,000 - -
Deferred
Federal................................ 395,000 (233,375) -
State.................................. 51,000 (30,325) -
-----------------------------------------------------------
$ 456,000 $ (263,700) $ -
===========================================================
</Table>
15
<Page>
Travel Nurse International
Notes to Financial Statements - (continued)
At March 31, 2002 and September 30, 2002, the significant components of the
Company's deferred tax assets and liabilities are as follows:
<Table>
<Caption>
MARCH 31, SEPTEMBER 30,
2002 2002
--------------------------------
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforward.............................. $ 160,000 $ 17,300
Account receivable........................................... 93,700 47,500
Deferred compensation........................................ 134,100 168,300
Other, net................................................... 43,500 36,000
--------------------------------
Total deferred tax assets...................................... 431,300 269,100
--------------------------------
Deferred tax liabilities:
Remaining cash to accrual conversion......................... (870,700) (435,400)
Other, net................................................... (6,600) (16,000)
--------------------------------
Net deferred tax liabilities................................... (877,300) (451,400)
--------------------------------
Net deferred tax liability..................................... $ (446,000) $ (182,300)
===============================
</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 March 31, 2002 and
September 30, 2002.
16
<Page>
The reconciliation of income tax computed at the U.S. Federal statutory rate to
income tax expense during the year ended March 31, 2002 and the six months ended
September 30, 2002 and 2001 is as follows:
<Table>
<Caption>
YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
MARCH 31, 2002 2002 2001
--------------------------------------------------------
(UNAUDITED)
Tax at U.S. statutory rate................ 34.00% 34.00% 34.00%
State taxes, net of Federal benefit....... 5.88 5.88 5.88
Nondeductible penalties................... 8.62 - 8.62
Meals and entertainment................... 0.23 (0.23) 0.23
Other..................................... - (1.65) -
Current year benefit of release in
valuation reserve....................... (21.55) - (48.73)
--------------------------------------------------------
Effective income tax rate................. 27.18% 38.00% -%
========================================================
</Table>
Through March 31, 2001 the Company reported income to Federal and state taxing
authorities utilizing the cash method of accounting. For the fiscal year ended
March 31, 2002, the Company was required to change its method of tax accounting
to the accrual basis, because it no longer met the requirements for cash basis
reporting. One-half of the cumulative effect of the change to the accrual basis
was recognized in the Company's tax reporting in the year ended March 31, 2002.
The remaining $2,100,000 impact of the change will be recognized in taxable
income in the year ended March 31, 2003.
At March 31, 2002 and September 30, 2002, the Company had Federal and state
net operating loss carryforwards of approximately $407,000 and $42,000
(unaudited), respectively, which expire 2019 through 2020.
11. SUBSEQUENT EVENTS
On October 23, 2002, the Company and HCSS executed a Promissory Note and Loan
Agreement (the Note) whereby HCSS promised to pay, over a period of twenty-six
months, $4,300,000 owed to the Company. The Note provides for HCSS to make a
balloon payment for the unpaid balance of the Note at maturity and the Company
at its option, upon making a written request in accordance with the terms of the
Note, to demand payment of any unpaid amounts prior to maturity. Beginning on
the date of the Note, interest at 8% per annum accrues on the unpaid principal
amount until it is paid in its entirety. The Note is collateralized by all
tangible assets of HCSS and real property in Hauula, Hawaii.
On December 20, 2002, the consummation of the sale of substantially all of the
assets and assumptions of certain liabilities of the Company occurred for
approximately $9,500,000 of consideration plus an incentive earnout amount based
on future earnings of the Company.
17
<Page>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On December 20, 2002, Medical Staffing Networks, Inc. (MSN), our
indirectly wholly-owned subsidiary, consummated the purchase of substantially
all of the assets, and the assumption of certain liabilities of Travel Nurse
International (TNI), which operates a healthcare staffing business. The
unaudited pro forma condensed consolidated statement of operations for the year
ended December 30, 2001 gives effect to each of the acquisition of TNI, the
acquisitions of Clinical Resource Services, Inc. (Clinical Resource) and Health
Search International, Inc. (HSI) which occurred on November 7, 2002, the
acquisition of Excel Staffing Services, Inc. which occurred on June 10, 2001 and
our initial public offering which was completed in April 2002. The unaudited pro
forma condensed consolidated statement of operations for the year ended December
30, 2001 also gives effect to our recapitalization on October 26, 2001 that was
accounted for as a leveraged recapitalization whereby the Company retained the
historical cost basis of accounting, as if these events had occurred on January
1, 2001. The unaudited pro forma condensed consolidated statement of operations
for the nine months ended September 29, 2002 gives effect to each of the
acquisition of TNI, the acquisitions of Clinical Resource and HSI and the
initial public offering, as if these events had occurred on December 31, 2001,
the beginning of our fiscal year. The unaudited pro forma condensed consolidated
balance sheet as of September 29, 2002 gives effect to each of the acquisition
of TNI and the acquisitions of Clinical Resource and HSI as if they had been
acquired on such date.
The purchase price allocation to the assets acquired and liabilities
assumed was based on a preliminary estimate in determining their respective fair
values. Our management believes that the preliminary allocations set forth
herein are reasonable and are subject to revisions upon completion of an
independent valuation study.
The pro forma financial information is not necessarily indicative of
the actual results of operations or financial position that would have occurred
had the acquisitions or the other transactions occurred on the assumed dates nor
do they represent any indication of future performance. The pro forma
adjustments give effect to available information and assumptions that we believe
are reasonable. The pro forma condensed consolidated financial information
should be read in conjunction with our consolidated financial statements and the
related notes, as well as "Selected Consolidated Financial Data and Other Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in our initial public offering on Form S-1 filed in April
2002 and our unaudited condensed consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2002.
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2001
(in thousands, except share and per share data)
<Table>
<Caption>
Medical
Staffing
Medical Network
Staffing Holdings, Inc. Historical (16) Pro Forma
Network Pro Forma Pro Forma --------------- Acquisition
Holdings, Inc. Adjustments As Adjusted TNI Adjustments Pro Forma
-------------- ------------ -------------- --------------- ----------- ------------
C>
Revenues:
Service revenues $ 342,958 (14) $ 6,458 (1)
11,037 (12)
3,724 (13) 364,177 25,335 $ 389,512
Management fees - 6,790 (6,790)(17) -
------------- -------- ----------- ------------- -------- ------------
342,958 21,219 364,177 32,125 (6,790) 389,512
Cost of services rendered 256,667 (14) 4,914 (1)
7,634 (12)
1,942 (13) 271,157 21,043 292,200
Selling, general and
administrative expenses (2) 47,415 375 (1)
(348)(7)
2,176 (12)
1,278 (13) 50,896 8,445 (5,640)(17) 53,701
Corporate general and
administrative expenses 6,428 25 (1) 6,453 - - 6,453
Depreciation and amortization
expenses 5,871 303 (1)
100 (8)
1 (12)
50 (13) 6,325 40 163 (18) 6,528
Loss on early extinguishment 4,380 (15) - 4,380 - - 4,380
of debt
Recapitalization expenses 7,160 - 7,160 - - 7,160
------------- -------- ----------- ------------- -------- ------------
Income from operations 15,037 2,769 17,806 2,597 (1,313) 19,090
Interest expense, net 14,312 352 (1)
6,225 (3)
(12,148)(4)
(1,243)(4)
683 (9)
71 (12)
24 (13) 8,276 919 (919)(19)
476 (20) 8,752
------------- ------------ ----------- ------------- -------- ------------
Income before provision for
income taxes 725 8,805 9,530 1,678 (870) 10,338
Income tax expense 2,031 (15) 196 (1)
(2,366)(5)
4,616 (5)
472 (5)
618 (10)
(170)(11) 5,397 456 232 (21)
(357)(22) 5,728
------------- -------- ----------- ------------- -------- ------------
Net income (loss) $ (1,306) $ 5,439 $ 4,133 $ 1,222 $ (745) $ 4,610
============= ======== =========== ============= ======== ============
Basic (loss) income per share $ (0.49)(6) $ 0.14 $ 0.15
Diluted (loss) income per share $ (0.49)(6) $ 0.13 $ 0.15
Weighted average common shares
outstanding:
Basic 6,338,000 29,916,875 29,916,875
Diluted 6,338,000 31,368,875 31,368,875
</Table>
<Page>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2001
(1) Represents the historical operating results of Excel Staffing Services,
Inc. for the period from January 1, 2001 through June 10, 2001, except for
depreciation and amortization expenses ($303,000) and interest expense
($352,000) from January 1, 2001 through the date of acquisition, which
represent pro forma adjustments to reflect amortization of goodwill and
intangibles and interest expense on the debt entered into to finance the
acquisition.
(2) Includes provision for doubtful accounts.
(3) Reflects the following related to the October 2001 recapitalization:
- 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 related to the use of proceeds from the initial
public offering of approximately $156.3 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.
- Reduction in interest expense by approximately $1.2 million related to
the assumed repayment of $20.3 million of the $120 million senior
credit facility entered into in the recapitalization, using proceeds
from the underwriters' exercise of the over-allotment option. The
over-allotment was exercised on April 17, 2002.
The interest rates in effect at December 30, 2001 were used to compute the
pro forma as adjusted interest expense.
(5) Reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the recapitalization of $2.4 million and initial
public offering of $5.1 million.
(6) Income from continuing operations was reduced by $1.8 million of dividends
accrued on the Series I Convertible Preferred Stock. As a result, all
potential common stock equivalents are antidilutive.
(7) In connection with the Clinical Resource and HSI acquisitions, a management
agreement that existed with the former stockholders was terminated and
replaced with an employment agreement that consists of the same services to
be provided. The management fee for the year ended December 31, 2001 was
approximately $500,000.
(8) In connection with the Clinical Resource and HSI acquisitions, this amount
reflects incremental amortization expense related to the non-compete
agreement of $600,000 being amortized over 72 months.
<Page>
(9) Reflects incremental interest expense associated with debt used to acquire
Clinical Resource and HSI of approximately $13.9 million at an effective
interest rate of 4.9%.
(10) Provision for income taxes for both Clinical Resource and HSI as if each
company were a C-Corporation.
(11) In connection with the Clinical Resource and HSI acquisitions, this amount
reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the pro forma adjustments.
(12) Represents the historical financial information for Clinical Resource for
the year ended December 31, 2001.
(13) Represents the historical financial information for HSI for the year ended
December 31, 2001.
(14) In accordance with the transition guidance included in EITF 01-14, the
Company's adoption in June 2002, required the reclassification of financial
statements for prior periods. The adoption of EITF 01-14 did not affect the
Company's net income (loss) as the reclassification resulted in an increase
in both revenues and cost of services rendered for the year ended December
30, 2001 of appoximately $4.6 million.
(15) Pursuant to the provisions of SFAS No. 145, which the Company elected to
early adopt as of December 29, 2002, the Company was required to reclassify
its extraordinary loss on early extinguishment of debt of approximately
$2.7 million, net of tax benefit of approximately $1.6 million related to
the October 2001 recapitalization transaction, into income from continuing
operations for the year ended December 30, 2001.
(16) Pursuant to the Securities Exchange Act of 1934 Regulation S-X Rule 11-02,
if the acquired entity's year end differs by less than 93 days from the
registrant's year end, the income statements should be combined using their
respective fiscal years. As such, the historical financial information for
TNI is for the year ended March 31, 2002.
(17) In connection with the TNI acquisition, a management agreement that existed
with a related party was terminated. The expense associated with the
management fee revenue of approximately $6.8 million for the year ended
March 31, 2002 was approximately $5.6 million.
(18) In connection with the TNI acquisition, this amount reflects incremental
amortization expense related to the non-compete agreement of approximately
$977,000 being amortized over 72 months.
(19) Reflects the elimination of interest expense recorded by TNI as no debt was
acquired in asset purchase.
(20) Reflects incremental interest expense associated with debt used to acquire
TNI of approximately $9.7 million at an effective interest rate of 4.9%.
(21) Incremental income tax provision for TNI as if it was a C-Corporation taxed
at 41%.
(22) In connection with the TNI acquisition, this amount reflects income tax
benefit utilizing combined federal and state statutory rates for the effect
of the pro forma adjustments.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(in thousands, except share and per share data)
Medical
Staffing
Medical Network
Staffing Holdings, Inc. Historical (12) Pro Forma
Network Pro Forma Pro Forma --------------- Acquisition
Holdings, Inc. Adjustments As Adjusted TNI Adjustments Pro Forma
--------------- --------------- --------------- --------------- --------------- -----------
Revenues:
Service revenues $ 346,261 $ 9,426 (10)
2,427 (11) $ 358,114 $ 24,069 $ 382,183
Management fees - 4,645 (4,645) (13) -
----------- ---------- ----------- ---------- ---------- -----------
346,261 11,853 358,114 28,714 (4,645) 382,183
Cost of services rendered 258,660 6,704 (10)
1,146 (11) 266,510 20,127 286,637
Selling, general and
administrative (8) 48,926 (326) (3)
1,961 (10)
830 (11) 51,391 5,970 (2,820) (13) 54,541
Corporate general
and administrative 5,420 - 5,420 - - 5,420
Depreciation and amortization 3,112 75 (4)
9 (10)
60 (11) 3,256 34 122 (14) 3,412
----------- ---------- ----------- ---------- ---------- -----------
Income from operations 30,143 1,394 31,537 2,583 (1,947) 32,173
Interest expense, net 6,467 (4,149) (1)
512 (5)
14 (10)
14 (11) 2,858 912 (912)(15)
357 (16) 3,215
----------- ---------- ----------- ---------- ---------- -----------
Income before provision
for income taxes 23,676 5,003 28,679 1,671 (1,392) 28,958
Income tax expense 9,709 1,701 (2)
435 (6)
(102) (7) 11,743 470 215 (17)
(571)(18) 11,857
----------- ---------- ----------- ---------- ---------- -----------
Net income $ 13,967 $ 2,969 $ 16,936 $ 1,201 $ (1,036) $ 17,101
=========== ========== =========== ========== ========== ===========
Basic income per share $ 0.60 (9) $ 0.56 $ 0.57
Diluted income per share $ 0.50 (9) $ 0.54 $ 0.55
Weighted average common
shares outstanding:
Basic 18,199,429 29,985,169 29,985,169
Diluted 27,766,225 31,323,676 31,323,676
<Page>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(1) Reflects the following related to the use of proceeds from the initial
public offering of approximately $156.3 million:
- Reduction in interest expense of approximately $2.2 million related to
the assumed repayment of $59.3 million of 12% senior unsecured notes
entered into in the recapitalization.
- Reduction in interest expense of approximately $1.9 million related to
the assumed repayment of $97.0 million of the $120 million senior
credit facility entered into in the recapitalization.
The interest rates in effect on April 17, 2002 were used to compute the pro
forma as adjusted interest expense.
(2) Reflects income tax expense of $1.7 million utilizing combined federal and
state statutory rates for the effect of the initial public offering.
(3) In connection with the Clinical Resource and HSI acquisitions, a management
agreement that existed with the former stockholders was terminated and
replaced with an employment agreement that consists of the same services to
be provided. The management fee for the nine months ended September 30,
2002 was approximately $400,000.
(4) In connection with the Clinical Resource and HSI acquisitions, this amount
reflects incremental amortization expense related to the non-compete
agreement of $600,000 being amortized over 72 months.
(5) Reflects incremental interest expense associated with debt used to acquire
Clinical Resource and HSI of approximately $13.9 million at an effective
interest rate of 4.9%.
(6) Provision for income taxes for both Clinical Resource and HSI as if each
company were a C-Corporation.
(7) In connection with the Clinical Resource and HSI acquisitions, this amount
reflects income tax expense utilizing combined federal and state statutory
rates for the effect of the pro forma adjustments.
(8) Includes provision for doubtful accounts.
(9) Net income was reduced by $3.1 million of dividends accrued on the Series I
Convertible Preferred Stock.
(10) Represents the historical financial information for Clinical Resource for
the nine months ended September 30, 2002.
(11) Represents the historical financial information for HSI is for the nine
months ended September 30, 2002.
(12) Represents the historical information for TNI is for the nine months ended
September 30, 2002.
(13) In connection with the TNI acquisition, a management agreement that existed
with a related party was terminated. The expense associated with the
management fee revenue of approximately $4.6 million for the nine months
ended September 30, 2002 was approximately $2.8 million.
(14) In connection with the TNI acquisition, this amount reflects incremental
amortization expense related to the non-compete agreement of approximately
$977,000 being amortized over 72 months.
<Page>
(15) Reflects the elimination of interest expense recorded by TNI as no debt was
acquired in asset purchase.
(16) Reflects incremental interest expense associated with debt used to acquire
TNI of approximately $9.7 million at an effective interest rate of 4.9%.
(17) Incremental income tax provision for TNI as if it was a C-Corporation taxed
at 41%.
(18) In connection with the TNI acquisition, this amount reflects income tax
benefit utilizing combined federal and state statutory rates for the effect
of the pro forma adjustments.
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 29, 2002
(in thousands)
<Table>
<Caption>
Medical
Staffing
Medical Network
Staffing Holdings, Inc. Historical(7)
Network Pro Forma Pro Forma ------------- Pro Forma
ASSETS Holdings, Inc. Adjustments As Adjusted TNI Adjustments Pro Forma
------------- ----------- -------------- ------------- ----------- ---------
Current assets:
Cash $ 2,339 $ - (1)
(912)(3)
708 (5)
204 (6) $ 2,339 $ 42 $ (42)(8)
- (9) $ 2,339
Accounts receivable, net 85,350 (1,027)(3)
2,254 (5)
448 (6) 87,025 3,679 (3,036)(8) 87,668
Unbilled receivables - - - 528 (528)(8) -
Due from Health Search - (693)(3)
693 (5) - - - -
Due from UltimIT Solutions Services,
Inc. - (626)(3)
626 (6) - - - -
Prepaid expenses 2,167 (140)(3)
97 (5)
43 (6) 2,167 284 (284)(8) 2,167
Other current assets 1,623 (41)(3)
26 (5)
15 (6) 1,623 158 (158)(8) 1,623
--------- -------- --------- -------- ------- ---------
Total current assets 91,479 1,675 93,154 4,691 (4,048) 93,797
Furniture and equipment, net 11,129 (127)(3)
20 (5)
128 (6) 11,150 122 - 11,272
Goodwill and other intangible assets,
net 93,568 11,937 (4)
600 (4) 106,105 - 977 (12)
4,028 (12) 111,110
Due from stockholder - - - 238 (238)(8) -
Due from affiliate - - - 5,040 (5,040)(8) -
Note receivable - - - - 4,000 (11) 4,000
Other assets 3,902 (9)(3)
4 (5)
5 (6) 3,902 56 (56)(8) 3,902
--------- -------- --------- -------- ------- ---------
Total assets $ 200,078 $ 14,233 $ 214,311 $ 10,147 $ (377) $ 224,081
========= ======== ========= ======== ======= =========
</Table>
<Page>
MEDICAL STAFFING NETWORK HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 29, 2002
(in thousands)
<Table>
<Caption>
Medical
Staffing
Medical Network
Staffing Holdings, Inc. Historical(7)
Network Pro Forma Pro Forma ------------- Pro Forma
ASSETS Holdings, Inc. Adjustments As Adjusted TNI Adjustments Pro Forma
------------- ----------- -------------- ------------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,060 $ (8)(3)
2 (5)
6 (6) $ 3,060 $ 479 $ (464)(8) $ 3,075
Accrued payroll and related liabilities 8,989 (637)(3)
589 (5)
344 (6) 9,285 1,850 (1,803)(8) 9,332
Accrued payroll taxes - - - 5,014 (5,014)(8) -
Other current liabilities 3,157 - 3,157 254 (254)(8) 3,157
Short term borrowings - - - 2,758 (2,758)(8) -
Line of credit - (626)(3)
330 (5)
296 (6) - - - -
Notes payable - stockholders - (436)(3)
436 (5) - - - -
Due to Clinical Resource - (693)(3)
693 (6) - - - -
Due to Health-Pharm Management
Corporation - (160)(3)
60 (5)
100 (6) - - - -
Due to UltimIT Solution Services, Inc. - (32)(3)
32 (5) - - - -
Deferred income tax liability - - - 182 (182)(8) -
Due to affiliate - - - - - -
Current portion of long-term debt 1,687 - 1,687 - - 1,687
Current portion of capital lease
obligations 981 - 981 - - 981
--------- -------- --------- -------- ------- ---------
Total current liabilities 17,874 296 18,170 10,537 (10,475) 18,232
Long-term debt, net of current portion 40,313 13,937(1)(2) 54,250 - 9,708(9)(10) 63,958
Capital lease obligations, net of
current portion 1,383 - 1,383 - - 1,383
Other long-term obligations 3,476 - 3,476 - - (8) 3,476
--------- -------- --------- -------- ------- ---------
Total liabilities 63,046 14,233 77,279 10,537 (767) 87,049
Stockholders' equity:
Common stock 301 (3)(3)
2 (5)
1 (6) 301 81 (81)(8) 301
Treasury stock, at cost - - - (75) 75(8) -
Promissory notes due for purchases
of common stock (4,551) - (4,551) - - (4,551)
Additional paid in capital 283,703 - 283,703 - - 283,703
Accumulated other comprehensive income (118) - (118) - - (118)
Retained (deficit) earnings (142,303) (2,380)(3)
2,351 (5)
29 (6) (142,303) (396) 396(8) (142,303)
--------- -------- --------- -------- ------- ---------
Total common stockholders' equity 137,032 - 137,032 (390) 390 137,032
--------- -------- --------- -------- ------- ---------
Total liabilities and common stockholders'
equity $ 200,078 $ 14,233 $ 214,311 $ 10,147 $ (377) $ 224,081
========= ======== ========= ======== ======= =========
</Table>
<Page>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF SEPTEMBER 29, 2002
(1) In connection with the Clinical Resource and HSI acquisitions, changes in
cash are due to (in thousands):
<Table>
Total estimated cash consideration to Clinical Resource and HSI stockholders..... $(13,756)
Estimated transaction costs...................................................... (181)
Proceeds from borrowing under revolving line of credit........................... 13,937
---------
Net change in cash .............................................................. $ -
=========
</Table>
Total transaction costs are estimated to be $181,000, which includes legal
fees, consulting fees and accounting fees.
(2) In connection with the Clinical Resource and HSI acquisitions, total cash
consideration and estimated transaction costs of $13.9 million were
financed by the revolving line of credit.
(3) Reflects the elimination of account balances of Clinical Resource and HSI
not acquired.
(4) Represents the allocation of the purchase price in excess of the fair value
of the net assets acquired from Clinical Resource and HSI to goodwill of
$11.9 million and the estimated fair value of covenant not to compete of
$600,000.
A summary of the allocation of purchase price is as follows (in thousands):
<Table>
Accounts receivable................................................................ $ 1,675
Furniture and equipment............................................................ 21
Covenant not to compete............................................................ 600
Goodwill........................................................................... 11,937
Current liabilities................................................................ (296)
-------
Net assets acquired................................................................ $ 13,937
=======
</Table>
The purchase price allocation to the assets acquired and liabilities
assumed was based on a preliminary estimate in determining their respective
fair values. Our management believes that the preliminary allocations set
forth herein are reasonable and are subject to revisions upon completion of
an independent valuation study.
(5) Represents the financial information for Clinical Resource as of September
30, 2002.
(6) Represents the financial information for HSI as of September 30, 2002.
(7) Represents the financial information for TNI as of September 30, 2002.
(8) Reflects the elimination of account balances of TNI not acquired.
(9) In connection with the TNI acquisition, changes in cash are due to (in
thousands):
<Table>
Total estimated cash consideration to TNI stockholders............................... $ (9,500)
Estimated transaction costs.......................................................... (208)
Proceeds from borrowing under revolving line of credit............................... 9,708
----------
Net change in cash................................................................... $ -
==========
</Table>
Total transaction costs are estimated to be $208,000, which includes legal
fees, consulting fees and accounting fees.
(10) Total cash consideration and estimated transaction costs of $9.7 million
were financed by the revolving line of credit.
<Page>
(11) In connection with the TNI acquisition, TNI received $4.0 million which has
been reflected as a note receivable to the Company. The note is payable
over 2 years and accrues interest at 6% per annum.
(12) Represents the allocation of the purchase price in excess of the fair value
of the net assets acquired from TNI to goodwill of $4.0 million and the
estimated fair value of the covenant not to compete of $1.0 million. A
summary of the allocation of purchase price is as follows (in thousands):
<Table>
Accounts receivable................................................................ $ 643
Furniture and equipment............................................................ 122
Note receivable.................................................................... 4,000
Covenant not to compete............................................................ 977
Goodwill........................................................................... 4,028
Current liabilities................................................................ (62)
----------
Net assets acquired................................................................ $ 9,708
==========
</Table>
The purchase price allocation to the assets acquired and liabilities
assumed was based on a preliminary estimate in determining their respective
fair values. Our management believes that the preliminary allocations set
forth herein are reasonable and are subject to revisions upon completion of
an independent valuation study.
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL STAFFING NETWORK HOLDINGS, INC.
Date: March 7, 2003 By: /s/ KEVIN S. LITTLE
---------------------------------------
Kevin S. Little
Chief Financial Officer
Signing on behalf of the registrant and as
principal financial and accounting officer