UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

Commission File Number 001-31299

 

MEDICAL STAFFING NETWORK HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

901 Yamato Road

Suite 110

Boca Raton, Florida 33431

(Address of principal executive offices)

(Zip Code)

 

(561) 322-1300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes  ý No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý   No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  30,230,620 shares of common stock, par value $0.01 per share, were outstanding as of November 2, 2004.

 

 

MEDICAL STAFFING NETWORK HOLDINGS, INC.

 

INDEX

 

PART I.FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets as of September 26, 2004 (Unaudited) and December 28, 2003	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 26, 2004 and September 28, 2003	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 26, 2004 and September 28, 2003	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 6.	EXHIBITS	28
SIGNATURES		29
EXHIBIT INDEX		30

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.                                                     FINANCIAL STATEMENTS

 

MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share amounts)		September 26, 2004			December 28, 2003
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	397		$	825
Accounts receivable, net of allowance for doubtful accounts of $1,081 and $1,920 at September 26, 2004 and December 28, 2003, respectively		60,850			68,602
Prepaid expenses		8,001			9,140
Other current assets		3,606			4,645
Total current assets		72,854			83,212
Furniture and equipment, net of accumulated depreciation of $17,265 and $13,112 at September 26, 2004 and December 28, 2003, respectively		8,966			11,377
Goodwill, net of accumulated amortization of $8,545 at September 26, 2004  and December 28, 2003		125,052			125,028
Intangible assets, net of accumulated amortization of $1,664 and $1,174 at September 26, 2004 and December 28, 2003, respectively		2,697			3,187
Other assets		5,747			6,066
Total assets		$	215,316		$	228,870
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	13,005		$	7,048
Accrued payroll and related liabilities		9,356			6,616
Current portion of long-term debt		12,000			—
Current portion of capital lease obligations		580			1,090
Total current liabilities		34,941			14,754
Long-term debt, net of current portion		20,469			54,978
Deferred income taxes		9,492			7,115
Capital lease obligations, net of current portion		91			418
Other liabilities		219			318
Total liabilities		65,212			77,583
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 75,000 authorized: 30,231 and 30,209 issued and outstanding at September 26, 2004 and December 28, 2003, respectively		302			302
Additional paid-in capital		284,411			284,346
Accumulated deficit		(134,609		)	(133,361		)
Total stockholders’ equity		150,104			151,287
Total liabilities and stockholders’ equity		$	215,316		$	228,870

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended						Nine Months Ended
(in thousands, except per share amounts)		Sept. 26, 2004			Sept. 28, 2003			Sept. 26, 2004			Sept. 28, 2003
Service revenues		$	106,204		$	123,686		$	318,599		$	405,154
Cost of services rendered		83,167			97,147			250,715			314,552
Gross profit		23,037			26,539			67,884			90,602
Operating expenses:
Selling, general and administrative		16,115			18,733			50,409			61,604
Corporate and administrative		3,829			3,112			11,414			8,500
Depreciation and amortization		1,615			1,757			4,912			5,082
Income from operations		1,478			2,937			1,149			15,416
Interest expense, net		780			1,147			2,751			3,549
Income (loss) from continuing operations before provision for (benefit from) income taxes		698			1,790			(1,602		)	11,867
Provision for (benefit from) income taxes		410			693			(354		)	4,723
Income (loss) from continuing operations		288			1,097			(1,248		)	7,144
Loss from discontinued operations, net of taxes		—			—			—			(506		)
Net income (loss)		$	288		$	1,097		$	(1,248	)	$	6,638
Income (loss) per share – basic:
Income (loss) from continuing operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
Basic net income (loss) per share		$	0.01		$	0.04		$	(0.04	)	$	0.22
Income (loss) per share – diluted:
Income (loss) from continuing operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
Diluted net income (loss) per share		$	0.01		$	0.04		$	(0.04	)	$	0.22
Weighted average number of common shares outstanding:
Basic		30,231			30,199			30,227			30,184
Diluted		30,326			30,618			30,227			30,816

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended
(in thousands)		Sept. 26, 2004			Sept. 28, 2003
Operating activities
Net income (loss)		$	(1,248	)	$	6,638
Loss from discontinued operations, net of taxes		—			506
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		4,912			5,082
Amortization of debt issuance cost		507			811
Deferred income taxes		2,603			3,716
Provision for doubtful accounts		703			2,714
Other		55			77
Changes in operating assets and liabilities:
Accounts receivable		7,049			12,599
Prepaid expenses and other current assets		1,912			(2,396		)
Other assets		(185		)	(413		)
Accounts payable and accrued expenses		5,957			(2,054		)
Accrued payroll and related liabilities		2,740			(1,003		)
Other liabilities		(99		)	(29		)
Cash provided by continuing operations		24,906			26,248
Cash used in discontinued operations		—			(500		)
Cash provided by operating activities		24,906			25,748
Investing activities
Purchases of furniture and equipment		(1,082		)	(3,126		)
Capitalized internal software costs		(930		)	(895		)
Cash paid for acquisitions, net of cash acquired		(24		)	(10,803		)
Cash used in investing activities		(2,036		)	(14,824		)
Financing activities
Net repayments under revolving credit facility		(17,509		)	(13,000		)
Payments on term note		(5,000		)	(5,197		)
Proceeds from borrowings on term note		—			12,000
Principal payments under capital lease obligations		(837		)	(824		)
Proceeds from exercise of stock options		48			353
Cash used in financing activities		(23,298		)	(6,668		)
Net increase (decrease) in cash and cash equivalents		(428		)	4,256
Cash and cash equivalents at beginning of period		825			4,595
Cash and cash equivalents at end of period		$	397		$	8,851
Supplemental disclosure of noncash investing and financing activities
Purchase of equipment through capital leases		$	—		$	185
Supplemental disclosures of cash flow information
Interest paid		$	1,514		$	2,884
Income taxes paid (refunded), net		$	(4,444	)	$	3,244

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Medical Staffing Network Holdings, Inc. (the Company), a Delaware corporation, is a provider of temporary staffing services in the United States. The Company’s per diem healthcare staffing assignments place professionals, predominately nurses, at hospitals and other healthcare facilities to solve temporary staffing needs. The Company also provides staffing of allied health professionals such as specialized radiology and diagnostic imaging specialists and clinical laboratory technicians. During 2004, the Company expanded its services to provide temporary general staffing. The Company’s per diem general staffing assignments place individuals in a variety of areas including clerical, janitorial and food services. The Company’s temporary healthcare staffing client base includes profit and non-profit hospitals, teaching hospitals, and regional healthcare providers. The Company considers the different services described above to be one segment as each of these services relate solely to providing temporary staffing to customers 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 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 temporary staffing business in total. Temporary staffing services represent 100% of the Company’s consolidated revenue for the three and nine months ended September 26, 2004 and September 28, 2003.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the year ending December 26, 2004.

 

The condensed consolidated balance sheet as of December 28, 2003 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

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For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 28, 2003 (File No. 001-31299).

 

2. STOCK-BASED COMPENSATION PLANS

 

The Company grants stock options for a fixed number of common shares to employees and directors from time to time. The Company accounts for employee stock options using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock option grants when the exercise price of the options equals, or is greater than, the market value of the underlying stock on the date of grant. Accordingly, the Company did not recognize any compensation cost during the three and nine months ended September 26, 2004 and September 28, 2003 for stock-based employee compensation awards.

 

Application of the fair value method prescribed by Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to the Company’s options would require the Company to record the following pro forma net income (loss) and net income (loss) per share amounts (in thousands, except per share amounts):

 

		Three Months Ended						Nine Months Ended
		Sept. 26, 2004			Sept. 28, 2003			Sept. 26, 2004			Sept. 28, 2003
Net income (loss) as reported		$	288		$	1,097		$	(1,248	)	$	6,638
Fair value method of stock based compensation, net of taxes		(339		)	(335		)	(884		)	(897		)
Pro forma net income (loss)		$	(51	)	$	762		$	(2,132	)	$	5,741
Per share amounts:
As reported basic income (loss) from continuing operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
As reported basic income (loss)		$	0.01		$	0.04		$	(0.04	)	$	0.22
As reported diluted income (loss) from continuing operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
As reported diluted income (loss)		$	0.01		$	0.04		$	(0.04	)	$	0.22
Pro forma basic income (loss) from continuing operations		$	—		$	0.03		$	(0.07	)	$	0.21
Discontinued operations, net of taxes		—			—			—			(0.02		)
Pro forma basic income (loss)		$	—		$	0.03		$	(0.07	)	$	0.19
Pro forma diluted income (loss) from continuing operations		$	—		$	0.03		$	(0.07	)	$	0.21
Discontinued operations, net of taxes		—			—			—			(0.02		)
Pro forma diluted income (loss)		$	—		$	0.03		$	(0.07	)	$	0.19

 

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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:

 

		Three Months Ended				Nine Months Ended
		Sept. 26, 2004		Sept. 28, 2003		Sept. 26, 2004		Sept. 28, 2003
Expected life in years		3 – 8		3 – 8		3 – 8		3 – 8
Risk-free interest rate		3.25% – 4.40%		2.02% – 3.68%		3.25% – 4.40%		2.02% – 3.68%
Volatility		65%		77%		65%		77%
Dividend yield		0%		0%		0%		0%

 

3. DISCONTINUED OPERATIONS

 

The Company discontinued its physician staffing services in the second quarter of 2003. Pursuant to the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, loss from discontinued operations, net of taxes, in the Company’s condensed consolidated statement of operations for the nine months ended September 28, 2003. There were no revenues or cost of services rendered from physician staffing services during the three and nine months ended September 26, 2004 and for the three months ended September 28, 2003. There were no net assets of the discontinued operations at September 26, 2004. Net assets of the discontinued operations were less than $0.1 million at December 28, 2003, and consisted solely of current assets.

 

Service revenues, cost of services, gross loss and loss from discontinued operations, net of taxes, are as follows (in thousands):

 

		Three Months Ended Sept. 28, 2003			Nine Months Ended Sept. 28, 2003
Service revenues		$	—		$	495
Cost of service revenues		—			(1,095		)
Gross loss		$	—		$	(600	)
Loss before benefit from income taxes		$	—		$	(845	)
Benefit from income taxes		—			339
Loss from discontinued operations, net of taxes		$	—		$	(506	)

 

4. RESTRUCTURING CHARGE

 

As announced on June 16, 2003, the Company completed its plan to restructure its operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure the Company had put in place to support multiple growth initiatives and reflected the softening in demand for its services. Approximately 130 branch staff and corporate employees

 

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were terminated as part of the restructuring.  As a result, in the second quarter of 2003, the Company recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in the Company’s consolidated statements of operations for the nine months ended September 28, 2003. No amounts have been or are expected to be incurred or paid in subsequent quarters relating to this restructuring.  A breakdown of the restructuring charge is as follows (in thousands):

 

Lease termination costs		$	390
Office closing costs		164
Employee termination costs		158
Miscellaneous		51
Total		$	763

 

5. ACQUISITION

 

In March 2003, the Company acquired certain assets of Saber-Salisbury Group (SSG), a temporary healthcare staffing company, for approximately $10.8 million in cash, of which approximately $2.2 million was held in escrow, and the potential for additional consideration contingent upon SSG achieving certain financial results. Approximately $10.4 million of the purchase price was allocated to goodwill. The primary reason for the acquisition was to expand service offerings within the temporary healthcare industry. The acquisition was accounted for in accordance with SFAS No. 141, Business Combinations, and, accordingly, the results of operations have been included in the condensed consolidated statement of operations beginning from March 1, 2003, the date when the Company assumed substantial control over SSG.

 

6. LONG-TERM DEBT

 

On October 26, 2001, the Company entered into a $120.0 million senior credit facility.  The facility consisted of a $40.0 million term note due in October 2006, a $60.0 million term note due in October 2007 and a $20.0 million revolving credit facility due to expire in October 2006.  In connection with the Company’s initial public offering completed on April 23, 2002 the Company repaid $93.4 million of borrowings that were outstanding under the facility and repaid $62.9 million that was outstanding under its previously existing senior unsecured notes.

 

On July 3, 2002, the Company amended the facility by replacing the previous two term notes with a single $25.0 million term note.  All amounts outstanding under the previous term notes were repaid at that time.  On October 3, 2002, the Company amended the facility by replacing the $25.0 million term note with a $65.0 million term note and reducing the borrowing capacity of its revolving credit facility from $20.0 million to $15.0 million. On March 21, 2003, the Company amended the facility by replacing the $65.0 million term note with a $77.0 million term note and a new term note facility that allowed for borrowings of up to $13.0 million.

 

On December 22, 2003, the Company entered into a new senior credit facility (the Senior Credit Facility) which replaced the previous facility. The Senior Credit Facility provided a $65.0 million revolving credit facility (the Revolver) which expires in December 2006 and a $17.0 million term note (the Term Note) which is due in December 2005.

 

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On June 25, 2004, the Company amended the Senior Credit Facility to reduce the Revolver capacity from $65.0 million to $60.0 million. The amendment also favorably modified certain financial covenants while increasing the applicable margin on the Revolver by 0.5% and on the Term Note by 1.0%. In conjunction with the amendment, on July 1, 2004, the Company repaid $5.0 million of borrowings under the Term Note. The $5.0 million can not be re-borrowed under the terms of the Term Note. The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and a $7.0 million availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver.

 

The Revolver bears interest at either prime or LIBOR plus an applicable margin (4.4% at September 26, 2004) with interest payable monthly or as interest rate contracts expire. The Term Note bears interest at LIBOR plus an applicable margin (13.0% at September 26, 2004) with interest payable monthly. Unused capacity under the Revolver bears interest at 0.5% which is payable monthly. The Senior Credit Facility is secured by substantially all of the assets of the Company and contains certain covenants that, among other things, limit the payments of dividends, restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. As of September 26, 2004, the Company was in compliance with all covenants.

 

As of September 26, 2004, $12.0 million was outstanding on the Term Note and $20.5 million was outstanding under the Revolver. As of September 26, 2004, an additional $22.6 million was immediately available for borrowing under the Revolver.

 

Under the terms of the Senior Credit Facility, on a fiscal year basis, the Company is required to repay the Term Note based on a percentage of excess cash flow, as defined. Based on the results for the nine months ended September 26, 2004, the Company could be required to repay all or a substantial portion of the $12.0 million outstanding on the Term Note, as such, the Company has classified the $12.0 million as current in the condensed consolidated balance sheet. The Company expects to have adequate availability under the Revolver should repayment of all or a substantial portion of the Term Note be required.

 

7. COMPREHENSIVE INCOME (LOSS)

 

SFAS No. 130, Comprehensive Income, requires that an enterprise (a) classify items of other comprehensive income by their nature in the financial statements, and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities and the effective portion of certain derivative instruments. The Company’s results of operations were the sole component of comprehensive income (loss) for the three and nine months ended September 26, 2004. The Company’s results of operations and accumulated unrealized loss on the derivative instrument were the only components of comprehensive income for the three and nine months ended September 28, 2003.

 

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The following table sets forth the computation of comprehensive income (loss) for the periods indicated (in thousands):

 

		Three Months Ended						Nine Months Ended
		Sept. 26, 2004			Sept. 28, 2003			Sept. 26, 2004				Sept. 28, 2003
Net income (loss)		$	288		$	1,097		$		(1,248	)	$	6,638
Other comprehensive loss:
Unrealized loss on derivative, net of taxes		—			(13		)	—				(39		)
Total comprehensive income (loss)		$	288		$	1,084		$	(1,248		)	$	6,599

 

8. INCOME (LOSS) PER SHARE

 

		Three Months Ended						Nine Months Ended
		Sept. 26, 2004			Sept. 28, 2003			Sept. 26, 2004			Sept. 28, 2003
		(in thousands, except per share amounts)
Numerator:
Numerator for basic income (loss) per share		$	288		$	1,097		$	(1,248	)	$	6,638
Denominator:
Denominator for basic income (loss) per share-weighted average shares		30,231			30,199			30,227			30,184
Effect of dilutive shares:
Employee stock options		95			419			—			632
Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions		30,326			30,618			30,227			30,816
Income (loss) per share – basic:
Income (loss) before discontinued operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
Basic net income (loss) per share		$	0.01		$	0.04		$	(0.04	)	$	0.22
Income (loss) per share – diluted:
Income (loss) before discontinued operations		$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes		—			—			—			(0.02		)
Diluted net income (loss) per share		$	0.01		$	0.04		$	(0.04	)	$	0.22

 

For the three months ended September 26, 2004, 0.4 million incremental options were excluded from the denominator for diluted earnings per share as the impact of conversion was anti-dilutive. For the nine months ended September 26, 2004, 1.9 million options were excluded in the calculation of diluted shares as the impact of their conversion was anti-dilutive due to the net loss. For the three and nine months ended September 28, 2003, 0.3 million incremental options were excluded from the denominator for diluted earnings per share as the impact of conversion was anti-dilutive.

 

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9. RELATED PARTY TRANSACTIONS

 

The Company provides staffing services to a healthcare system of which one of the Company’s directors, Philip A. Incarnati, is the President and Chief Executive Officer. During each of the three months ended September 26, 2004 and September 28, 2003, the Company billed approximately $0.8 million, for its services to the healthcare system.  During the nine months ended September 26, 2004 and September 28, 2003, the Company billed approximately $2.5 million and $1.4 million, respectively, for its services to the healthcare system.  The Company had a receivable balance from the healthcare system of $0.2 million and $0.3 million at September 26, 2004 and December 28, 2003, respectively.

 

The Company paid less than $0.1 million during the nine months ended September 26, 2004 and September 28, 2003, in donations to a Florida Atlantic University (FAU) Foundation to support a center for nursing. One of the Company’s directors, Dr. Anne Boykin, is the Dean of the College of Nursing at FAU, a university located in Boca Raton, Florida.

 

10. CONTINGENCIES

 

On February 20, 2004, Joseph and Patricia Marrari, and on April 16, 2004, Tommie Williams, filed class action lawsuits against the Company in the United States District Court for the Southern District of Florida, on behalf of themselves and purchasers of the Company’s common stock pursuant to or traceable to the Company’s initial public offering in April 2002. These lawsuits also named as defendants certain of the Company’s directors and executive officers (collectively with the Company, the “Defendants”). The complaints allege that certain disclosures in the Registration Statement/Prospectus filed in connection with the Company’s initial public offering on April 17, 2002 were materially false and misleading in violation of the Securities Act of 1933 (the “Securities Act”). The complaints seek compensatory damages as well as costs and attorney fees.

 

On March 29, 2004, a third class action lawsuit brought on behalf of the same class of the Company’s stockholders, making claims under the Securities Act similar to those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants removed this case to the United States District Court for the Southern District of Florida and Plaintiff moved to remand the case back to the Florida Circuit Court of the Fifteenth Judicial Circuit, which motion Defendants opposed.  On September 16, 2004 the federal district court entered an order granting Plaintiff’s motion to remand. Defendants filed their Notice of Appeal to the Eleventh Circuit on October 13, 2004, by which they appealed the remand order. Also on October 13, 2004, Defendants moved to stay the state court proceedings. The Zia complaint seeks rescission or damages as well as certain equitable relief and costs and attorney fees.

 

On March 2, 2004, another class action complaint was filed against the Company and certain of its directors and executive officers in the United States District Court for the Southern District of Florida by Jerome Gould, individually and on behalf of a class of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003. The complaint alleges that certain of the Company’s public disclosures during the class period

 

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were materially false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder. The complaint seeks compensatory damages, costs and attorney fees.

 

On July 2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated, Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed Lead Counsel for Plaintiffs. On September 1, 2004, Lead Plaintiff filed his consolidated amended class action complaint (the “Complaint”). The Complaint makes allegations on behalf of a class consisting of purchasers of the Company’s common stock pursuant to or traceable to the Company’s initial public offering in April 2002, for purposes of the Securities Act claims, and on behalf of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003, for purposes of the Exchange Act claims. The Complaint alleges that certain of the Company’s public disclosures during the class period were materially false and misleading in violation of Section 11 of the Securities Act and Section 10(b) of the Exchange Act. The Complaint seeks compensatory damages as well as costs and attorney fees. On November 1, 2004, Defendants filed their motion to dismiss the Complaint.

 

The Company believes that these lawsuits are without merit and it intends to defend itself against them vigorously.  Due to their preliminary status, the Company is unable to predict the outcome of these lawsuits or reasonably estimate a range of possible loss.

 

From time to time, the Company is subject to lawsuits and claims that arise out of its operations in the normal course of business. The Company is a plaintiff or a defendant in various litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. The Company believes that the disposition of any claims that arise out of operations in the normal course of business will not have a material adverse effect on the Company’s financial position or results of operations.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to our condensed consolidated financial statements and accompanying notes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The discussion and analysis is organized as follows:

 

•                  Overview.  This section provides a general description of our business, trends in our industry, as well as significant transactions that have occurred that we believe are important in understanding our financial condition and results of operations.

 

•                  Results of operations.  This section provides an analysis of our results of operations for the three and nine months ended September 26, 2004 relative to the three and nine months ended September 28, 2003 presented in the accompanying condensed consolidated statements of operations.

 

•                  Liquidity and capital resources.  This section provides an analysis of our cash flows, capital resources, off-balance sheet arrangements and our outstanding debt and commitments as of September 26, 2004.

 

•                  Critical accounting policies.  This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application.

 

•                  Caution concerning forward-looking statements.  This section discusses how certain forward-looking statements made by us throughout this discussion and analysis are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstance.

 

Overview

 

Business Description

 

We are a leading temporary healthcare staffing company and the largest provider of per diem nurse staffing services in the United States as measured by revenues. More than two-thirds of our clients are acute care hospitals, clinics and surgical and ambulatory care centers. We serve both for-profit and not-for-profit organizations that range in scope from one facility to national chains with over 100 facilities. Our clients pay us directly. We do not receive a material portion of our revenues from Medicare or Medicaid reimbursements or similar state reimbursement programs.

 

Our per diem nurse staffing division currently operates in an integrated network of branches that are organized into several geographic regions. These branches serve as our direct contact with our healthcare professionals and clients. The cost structure of a typical branch is fixed, consisting of limited personnel, office space rent, information systems infrastructure and

 

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office supplies. We have been able to develop a highly efficient branch management model that is easily scalable. During 2004, we expanded our services to provide temporary general staffing. Our per diem general staffing assignments place individuals in a variety of areas including clerical, janitorial and food services. We believe that general staffing compliments our temporary healthcare staffing and makes us a full service provider to our existing clients.

 

Industry Trends

 

Service revenues and gross profit margins have been under pressure as demand for temporary nurses is currently going through a period of contraction. Due to the current difficult economic times, the unemployment rate, while slightly improved over the past year, remains near a nine-year high. We believe this has resulted in nurses in many households becoming a primary wage earner, which is causing such nurses to seek more traditional full-time employment. Additionally, hospitals are experiencing lower than projected admissions levels and are placing greater reliance on existing full-time staff, resulting in increased overtime and nurse-patient loads.

 

We cannot predict when conditions will reverse, but we are confident in the long-term growth of the industry. In a January 13, 2000 report, the U.S. Census Bureau, Population Projections Bureau, projected that the number of Americans over 65 years of age is expected to grow from 34.5 million in 2000 to 53.7 million in 2020. In a July 2002 report, the U.S. Department of Health and Human Services stated that the national supply of full-time equivalent registered nurses was approximately 1.9 million while demand was approximately 2.0 million. This gap between supply and demand for nurses is expected to grow from 0.1 million in 2000 to 0.8 million by 2020. Additionally, there is a growing trend to restrict mandatory healthcare worker overtime requirements by employers and to establish nurse-patient ratios. Several states have enacted legislation prohibiting mandatory overtime and other states have similar legislation pending. In conjunction with the aforementioned factors, as the economy rebounds, the prospects for the healthcare staffing industry should improve as hospitals experience higher census levels and increasing shortages of healthcare workers.

 

Acquisition

 

In the first nine months of 2004, we made no acquisitions. In March 2003, we purchased certain assets of one healthcare staffing company for an aggregate purchase price of $10.8 million. The acquisition was accounted for as a purchase and, accordingly, the results of the acquired business were included in our condensed consolidated financial statements from the date we assumed substantial control.

 

Service Revenues

 

Our temporary staffing services represent 100% of our consolidated revenue for the three and nine months ended September 26, 2004 and September 28, 2003. Approximately 75% of our revenues for the three and nine months ended September 26, 2004 were derived from per diem nurse staffing. Allied healthcare professional staffing, which includes various non-nursing specialties such as, radiology and diagnostic imaging specialists and clinical laboratory technicians, represented approximately 16% of our revenues for the three and nine months ended

 

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September 26, 2004. Travel nurse staffing (assignments lasting no more than thirteen weeks) represented approximately 9% of our revenues for the three months and nine months ended September 26, 2004. Per diem general staffing represented less than 1% of our revenues for both the three months and nine months ended September 26, 2004.

 

Discontinued Operations

 

We discontinued our physician staffing services in the second quarter of 2003. Pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, loss from discontinued operations, net of taxes, in our condensed consolidated statements of operations. For the three months ended September 28, 2003, we had no loss from discontinued operations. For the nine months ended September 28, 2003, we had a loss from discontinued operations, net of taxes, of approximately $0.5 million. There were no net assets of discontinued operations as of September 26, 2004. Net assets of discontinued operations were less than $0.1 million at December 28, 2003 and consisted solely of current assets. No reclassification of the prior year-end balance sheet presentation was made to reflect the net assets of the discontinued operations, due to immateriality.

 

Restructuring Charge

 

On June 16, 2003, we completed our plan to restructure our operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure we had put in place to support multiple growth initiatives and reflected the softening in demand for our services. As a result, in the second quarter of 2003, we recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in our consolidated statement of operations for the nine months ended September 28, 2003. No amounts have been or are expected to be incurred or paid in subsequent quarters relating to this restructuring.

 

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Results of Operations

 

The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of service revenues:

 

		Three Months Ended				Nine Months Ended
		Sept. 26, 2004		Sept. 28, 2003		Sept. 26, 2004		Sept. 28, 2003
Service revenues		100.0	%	100.0	%	100.0	%	100.0	%
Cost of services rendered		78.3		78.5		78.7		77.6
Gross profit		21.7		21.5		21.3		22.4
Selling, general and administrative		15.2		15.2		15.8		15.2
Corporate and administrative		3.6		2.5		3.6		2.1
Depreciation and amortization		1.5		1.4		1.5		1.3
Income from operations		1.4		2.4		0.4		3.8
Interest expense, net		0.7		1.0		0.9		0.9
Income (loss) from continuing operations before provision for (benefit from) income taxes		0.7		1.4		(0.5	)	2.9
Provision for (benefit from) income taxes		0.4		0.5		(0.1	)	1.1
Income (loss) from continuing operations		0.3		0.9		(0.4	)	1.8
Loss from discontinued operations, net of taxes		—		—		—		0.2
Net income (loss)		0.3		0.9		(0.4	)	1.6

 

Comparison of Three Months Ended September 26, 2004 to Three Months Ended September 28, 2003

 

Service Revenues.  Service revenues decreased $17.5 million, or 14.1%, to $106.2 million for the three months ended September 26, 2004, as compared to $123.7 million for the comparable prior year quarter.  The decrease was due to a lower number of hours worked by professionals due to the current weak demand for temporary healthcare staffing. Average hourly billing rates remained relatively consistent with those in the comparable prior year quarter.

 

Per diem nurse staffing revenues decreased $10.1 million, or 11.3%, to $79.2 million for the three months ended September 26, 2004, as compared to $89.3 million for the comparable prior year quarter. The decrease was the result of a lower number of hours worked by professionals.

 

Revenues from divisions other than per diem nurse staffing collectively decreased $7.4 million, or 21.4%, to $27.0 million for three months ended September 26, 2004, as compared to $34.4 million for the comparable prior year quarter. The decrease was the result of a lower number of hours worked by professionals.

 

Cost of Services Rendered.  Cost of services rendered decreased $14.0 million, or 14.4%, to $83.2 million for the three months ended September 26, 2004 as compared to $97.2 million for the comparable prior year quarter. The decrease was primarily attributable to the decrease in the number of hours worked by professionals.

 

Gross Profit.  Gross profit decreased $3.5 million, or 13.2%, to $23.0 million for the three months ended September 26, 2004, as compared to $26.5 million for the comparable prior

 

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