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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004
Or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From ___________ to ___________
Commission file number 0-33169
CROSS COUNTRY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of Incorporation or organization) | 13-4066229 (I.R.S. Employer Identification Number) | |
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6551 Park of Commerce Blvd, N.W.
Boca Raton, Florida 33487
(Address of principal executive offices)(Zip Code)
(561) 998-2232
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No ¨
The registrant had outstanding 32,032,438 shares of Common Stock, par value $0.0001 per share, as of July 31, 2004.
CROSS COUNTRY HEALTHCARE, INC.
INDEX
FORM 10-Q
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| Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cross Country Healthcare, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
June 30, 2004 | December 31, 2003 | ||||||
(Unaudited) | |||||||
Current assets: |
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Cash and cash equivalents | $ | — | $ | — | |||
Accounts receivable, net | 102,846 | 112,407 | |||||
Income taxes receivable | 2,153 | 2,310 | |||||
Other current assets | 12,305 | 12,572 | |||||
Total current assets | 117,304 | 127,289 | |||||
Property and equipment, net | 12,582 | 12,602 | |||||
Goodwill, net | 309,110 | 307,532 | |||||
Trademarks, net | 15,749 | 15,749 | |||||
Other identifiable intangible assets, net | 7,673 | 8,580 | |||||
Other assets, net | 2,755 | 2,972 | |||||
Total assets | $ | 465,173 | $ | 474,724 | |||
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Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 6,466 | $ | 9,462 | |||
Accrued employee compensation and benefits | 33,788 | 29,994 | |||||
Current portion of long-term debt and notes payable | 3,671 | 4,944 | |||||
Other current liabilities | 4,450 | 3,358 | |||||
Total current liabilities | 48,375 | 47,758 | |||||
Deferred income taxes | 17,649 | 17,649 | |||||
Long-term debt and notes payable | 65,880 | 88,794 | |||||
Total liabilities | 131,904 | 154,201 | |||||
Commitments and contingencies | |||||||
Stockholders' equity: | |||||||
Common stock | 3 | 3 | |||||
Additional paid-in capital | 254,779 | 251,988 | |||||
Other stockholders' equity | 78,487 | 68,532 | |||||
Total stockholders' equity | 333,269 | 320,523 | |||||
Total liabilities and stockholders' equity | $ | 465,173 | $ | 474,724 | |||
See accompanying notes to the condensed consolidated financial statements
1
Cross Country Healthcare, Inc.
Condensed Consolidated Statements of Income
(Unaudited, amounts in thousands, except per share data)
Three Months Ended | Six Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
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Revenue from services | $ | 167,305 | $ | 165,912 | $ | 339,917 | $ | 326,915 | |||||
Operating expenses: | |||||||||||||
Direct operating expenses | 127,195 | 124,928 | 259,631 | 246,409 | |||||||||
Selling, general and administrative expenses | 28,426 | 26,383 | 56,521 | 51,396 | |||||||||
Bad debt expense | 530 | — | 1,156 | — | |||||||||
Depreciation | 1,352 | 1,038 | 2,945 | 2,106 | |||||||||
Amortization | 527 | 818 | 1,219 | 1,565 | |||||||||
Non-recurring secondary offering costs | — | 16 | — | 16 | |||||||||
Total operating expenses | 158,030 | 153,183 | 321,472 | 301,492 | |||||||||
Income from operations | 9,275 | 12,729 | 18,445 | 25,423 | |||||||||
Other expenses: | |||||||||||||
Loss on early extinguishment of debt | — | 960 | — | 960 | |||||||||
Interest expense, net | 1,012 | 655 | 2,259 | 1,241 | |||||||||
Income from continuing operations before income taxes | 8,263 | 11,114 | 16,186 | 23,222 | |||||||||
Income tax expense | 3,166 | 4,301 | 6,232 | 8,987 | |||||||||
Income from continuing operations | 5,097 | 6,813 | 9,954 | 14,235 | |||||||||
Discontinued operations, net of income taxes | — | 17 | — | (354 | ) | ||||||||
Net income | $ | 5,097 | $ | 6,830 | $ | 9,954 | $ | 13,881 | |||||
Net income/(loss) per common share - basic: | |||||||||||||
Income from continuing operations | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.44 | |||||
Discontinued operations, net of income taxes | — | 0.00 | — | (0.01 | ) | ||||||||
Net income | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.43 | |||||
Net income/(loss) per common share - diluted: | |||||||||||||
Income from continuing operations | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.44 | |||||
Discontinued operations, net of income taxes | — | 0.00 | — | (0.01 | ) | ||||||||
Net income | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.43 | |||||
Weighted average common shares outstanding-basic | 31,974 | 32,225 | 31,918 | 32,236 | |||||||||
Weighted average common shares outstanding-diluted | 32,584 | 32,581 | 32,578 | 32,593 | |||||||||
See accompanying notes to the condensed consolidated financial statements
2
Cross Country Healthcare, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
Six Months Ended June 30, | |||||||||||||
2004 | 2003 | ||||||||||||
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Operating activities | |||||||||||||
Net income | $ | 9,954 | $ | 13,881 | |||||||||
Adjustments to reconcile net income to net cash | |||||||||||||
Depreciation | 2,945 | 2,106 | |||||||||||
Amortization | 1,219 | 1,565 | |||||||||||
Bad debt expense | 1,156 | — | |||||||||||
Amortization of deferred compensation | 32 | 15 | |||||||||||
Loss on early extinguishment of debt | — | 960 | |||||||||||
Loss from discontinued operations | — | 354 | |||||||||||
Changes in operating assets and liabilities: | |||||||||||||
Accounts receivable | 8,405 | 7,822 | |||||||||||
Income taxes receivable and other current assets | 1,117 | (405 | ) | ||||||||||
Accounts payable and accrued expenses | 798 | (698 | ) | ||||||||||
Other current liabilities | 1,092 | 2,943 | |||||||||||
Net cash provided by continuing operations | 26,718 | 28,543 | |||||||||||
Loss from discontinued operations, net | — | (354 | ) | ||||||||||
Loss on impairment of discontinued operations | — | 302 | |||||||||||
Change in net assets from discontinued operations | — | (221 | ) | ||||||||||
Net cash used in discontinued operations | — | (273 | ) | ||||||||||
Net cash provided by operating activities | 26,718 | 28,270 | |||||||||||
Investing activities | |||||||||||||
Acquisitions and earnout payments | (1,578 | ) | (107,586 | ) | |||||||||
Purchases of property and equipment | (2,925 | ) | (1,496 | ) | |||||||||
Other investing activities | — | (7 | ) | ||||||||||
Net cash used in investing activities | (4,503 | ) | (109,089 | ) | |||||||||
Financing activities | |||||||||||||
Repayment of debt | (103,613 | ) | (42,623 | ) | |||||||||
Proceeds from issuance of debt | 79,425 | 125,000 | |||||||||||
Other financing activities | 1,973 | (4,485 | ) | ||||||||||
Net cash (used in) provided by financing activities | (22,215 | ) | 77,892 | ||||||||||
Change in cash and cash equivalents | — | (2,927 | ) | ||||||||||
Cash and cash equivalents at beginning of period | — | 17,210 | |||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 14,283 | |||||||||
Supplemental disclosures of noncash financing activities: | |||||||||||||
Tax benefit from stock option exercises | $ | 692 | $ | 45 | |||||||||
See accompanying notes to the condensed consolidated financial statements
3
CROSS COUNTRY HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
On May 8, 2003, the name of the corporation was changed to Cross Country Healthcare, Inc. from Cross Country, Inc. The condensed consolidated financial statements include the accounts of Cross Country Healthcare, Inc. and its subsidiaries, all of which are wholly-owned (collectively, the “Company”). All material intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated financial statements 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 notes required by generally accepted accounting principles for complete financial statements. In the op inion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.
2. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current period presentation.
3. EARNINGS PER SHARE
In accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 128, Earnings Per Share, basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding including the vested portion of restricted shares. The denominator used to calculate diluted earnings per share reflects the dilutive effects of stock options and nonvested restricted stock (as calculated utilizing the treasury stock method). Certain shares of common stock that are issuable upon the exercise of options have been excluded from the per share calculation because their effect would have been anti-dilutive. Incremental shares of common stock included in the diluted weighted average shares outstanding calculation for the three and six month periods ended June 30, 2004 were 610,018 and 660,694, resp ectively. Incremental shares of common stock included in the diluted weighted average shares outstanding calculation for the three and six month periods ended June 30, 2003 were 355,308 and 357,362, respectively.
4. STOCK-BASED COMPENSATION
The Company, from time to time, grants stock options for a fixed number of common shares to employees. The Company accounts for employee stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for stock option grants when the exercise price of the options equals, or is greater than, the average market value of the underlying stock on the date of grant.
The Company issued a total of 16,216 shares of restricted stock to certain key employees in the first quarter of 2003. The restricted stock vests based on continued employment in three equal annual installments on the first, second and third anniversary of the grant date. Under APB Opinion No. 25, compensation expense related to grants of restricted stock is recognized over the period in which services are performed. The fair market value of the shares on the grant date approximated $0.2 million. On the date of grant, deferred compensation of $0.2 million was recorded as a contra-equity account in additional paid-in capital and is being amortized to operations over the related vesting period.
The pro-forma disclosure of stock based compensation required by FASB Statement No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, is shown below.
4
The Company’s consolidated net income during the three and six month periods ended June 30, 2004 and 2003, would have changed to the pro forma amounts set forth below had the Company’s stock option grants been accounted for under the fair value based method prescribed by FASB Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Ended | Six Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
(Unaudited, amounts in thousands, except per share data) | |||||||||||||
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Net income as reported | $ | 5,097 | $ | 6,830 | $ | 9,954 | $ | 13,881 | |||||
Stock based employee compensation included in reported net income | — | — | — | — | |||||||||
Stock based employee compensation, net of tax, applying FASB Statement No. 123 | (236 | ) | (637 | ) | (453 | ) | (1,229 | ) | |||||
Pro forma net income applying FASB Statement No. 123 | $ | 4,861 | $ | 6,193 | $ | 9,501 | $ | 12,652 | |||||
Basic and diluted earnings per share as reported: | |||||||||||||
Net income per common share-basic | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.43 | |||||
Net income per common share-diluted | $ | 0.16 | $ | 0.21 | $ | 0.31 | $ | 0.43 | |||||
Pro forma basic and diluted earnings per share: | |||||||||||||
Pro forma net income per common share-basic | $ | 0.15 | $ | 0.19 | $ | 0.30 | $ | 0.39 | |||||
Pro forma net income per common share-diluted | $ | 0.15 | $ | 0.19 | $ | 0.29 | $ | 0.39 | |||||
5. ACQUISITIONS
On June 5, 2003, the Company acquired substantially all of the assets of Med-Staff, Inc. (Med-Staff) for $102.2 million in cash, net of a post-closing working capital adjustment. The Company made the strategic acquisition to broaden its travel nurse recruiting and placement efforts, to provide a sizable platform in per diem nurse staffing, and to gain a direct presence in nurse staffing at military hospitals and clinics. The consideration for this acquisition was $104.0 million in cash paid at closing, of which currently $7.5 million is being held in escrow to cover any post-closing liabilities that may occur before December 5, 2004. The purchase price was subject to a post-closing adjustment based on changes in the net working capital of the acquired company. In the fourth quarter of 2003, the post-closing net working capital adjustment of approximately $1.8 million was calculated and allocated to goodwill as a reduction to the purchase price.
In addition, the related asset purchase agreement provided for potential earnout payments up to a maximum of $37.5 million based on adjusted earnings before interest, taxes, depreciation and amortization (as defined in the asset purchase agreement) of Med-Staff for the one year period ending December 31, 2003. Med-Staff did not qualify to receive any earnout payments.
The acquisition has been included in the healthcare staffing segment and the results of Med-Staff’s operations have been included in the condensed consolidated statements of income since the date of acquisition, in accordance with FASB Statement No. 141, Business Combinations.
5
The following unaudited pro forma summary presents the consolidated results of operations as if the Med-Staff acquisition had occurred on January 1, 2003. These pro forma amounts give effect to certain adjustments, including amortization of specifically identifiable intangibles, incremental ongoing expenses, incremental interest expense and related income tax effects. These pro forma results include a pre-tax reduction to net income for a loss on early extinguishment of debt of approximately $1.1 million. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transaction taken place on January 1, 2003 or of future results of operations.
Three Months Ended June 30, 2003 | Six Months Ended June 30, 2003 | ||||||||