10-Q 1 msn1125901.txt QUARTERLY REPORT ON FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-31299 MEDICAL STAFFING NETWORK HOLDINGS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 65-0865171 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 901 Yamato Road Suite 110 Boca Raton, Florida 33431 (Address of principal executive offices) (Zip Code) (561) 226-9000 (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 [ X ] No [ ] The number of shares outstanding of each class of the issuer's common stock, as of November 11, 2002: 30,091,045 shares Common Stock, par value $0.01 par value MEDICAL STAFFING NETWORK HOLDINGS, INC. INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - December 30, 2001 and September 29, 2002 (Unaudited)............... 3 Condensed Consolidated Statements of Income - for the Three Months and Nine Months Ended September 30, 2001 (Unaudited) and September 29, 2002 (Unaudited)............................................... 4 Condensed Consolidated Statements of Cash Flows - for the Nine Months Ended September 30, 2001 (Unaudited) and September 29, 2002 (Unaudited)............ 5 Notes to Condensed Consolidated Financial Statements - September 29, 2002 (Unaudited)............... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.. 26 ITEM 4. CONTROLS AND PROCEDURES.................................... 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 27 SIGNATURES.......................................................... 28 CERTIFICATIONS...................................................... 29 2 PART I - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS MEDICAL STAFFING NETWORK HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, September 29, 2001 2002 --------------------------- (Unaudited) Assets Current assets: Cash $11,253,199 $ 2,338,982 Accounts receivable, net of allowance for doubtful accounts of $2,181,767 and $2,756,897 at December 30, 2001 and September 29, 2002, respectively 65,190,898 85,350,246 Prepaid expenses 5,032,378 2,167,220 Other current assets 1,014,641 1,622,444 ---------------------------- Total current assets 82,491,116 91,478,892 Furniture and equipment, net 7,315,574 11,129,007 Goodwill and other intangible assets, net of accumulated amortization of $8,723,481 and $8,935,776 at December 30, 2001 and September 29, 2002, respectively 68,289,316 93,568,021 Other assets 3,923,288 3,902,378 ---------------------------- Total assets $162,019,294 $200,078,298 ============================ Liabilities, redeemable preferred stock and stockholders' (deficit) equity Current liabilities: Accounts payable $ 5,271,571 $3,059,889 Accrued payroll and related liabilities 8,948,662 8,989,286 Other current liabilities 3,186,974 3,156,667 Current portion of long-term debt 10,034,721 1,687,500 Current portion of capital lease obligations 329,922 980,870 ---------------------------- Total current liabilities 27,771,850 17,874,212 Long-term debt, net of current portion 105,000,000 40,312,500 Senior subordinated debt to related parties 59,319,327 - Capital lease obligations, net of current portion 661,096 1,383,251 Other liabilities 2,371,960 3,475,846 ---------------------------- Total liabilities 195,124,233 63,045,809 Commitments and contingencies Redeemable preferred stock 124,616,794 - Common stockholders' (deficit) equity: Common stock, $.01 par value, 75,000,000 authorized: 26,547 and 30,091,045 issued and outstanding at December 30, 2001 and September 29, 2002, respectively 265 300,910 Additional paid-in-capital - 283,703,397 Promissory notes due for purchases of common stock (4,550,877) (4,550,877) Accumulated other comprehensive loss, net of tax - (118,246) Accumulated deficit (153,171,121) (142,302,695) ---------------------------- Total common stockholders' (deficit) equity (157,721,733) 137,032,489 ---------------------------- Total liabilities, redeemable preferred stock, and common stockholders' (deficit) equity $162,019,294 $200,078,298 ============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 MEDICAL STAFFING NETWORK HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended September 30, September 29, September 30, September 29, 2001 2002 2001 2002 Service revenues $94,344,433 $127,520,926 $248,032,727 $346,261,249 Cost of services rendered 70,661,655 95,550,157 185,577,866 258,659,868 ------------------------- ---------------------------- Gross profit 23,682,778 31,970,769 62,454,861 87,601,381 Operating expenses: Selling, general and administrative 12,796,931 16,539,706 32,576,959 46,420,180 Provision for doubtful accounts 586,101 1,115,422 1,235,063 2,506,013 Corporate general and administrative 1,744,079 1,972,771 4,844,160 5,420,019 Recapitalization transaction fee 319,652 - 319,652 - Depreciation 563,511 1,172,718 1,494,612 2,899,945 Amortization 944,282 95,488 2,650,771 212,296 ------------------------- ---------------------------- Income from operations 6,728,222 11,074,664 19,333,644 30,142,928 Interest expense, net 3,521,017 808,389 9,905,210 6,467,210 ------------------------- ---------------------------- Income before provision for income taxes 3,207,205 10,266,275 9,428,434 23,675,718 Provision for income taxes 1,282,882 4,209,000 3,771,374 9,708,500 ------------------------- ---------------------------- Net income 1,924,323 6,057,275 5,657,060 13,967,218 Deduct required dividends on convertible preferred stock - - - 3,098,792 Income available to common stockholders $1,924,323 $6,057,275 $5,657,060 $10,868,426 ======================================================= Earnings per share: Basic earnings per share $ 0.25 $ 0.20 $ 0.73 $ 0.60 ======================================================= Diluted earnings per share $ 0.07 $ 0.19 $ 0.20 $ 0.50 ======================================================= Weighted average number of common shares outstanding: Basic 7,731,614 30,090,343 7,731,614 18,199,429 Diluted 29,215,916 31,402,107 28,720,704 27,766,225
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 MEDICAL STAFFING NETWORK HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, September 29, 2001 2002 ------------------------------ Operating activities Net income $ 5,657,060 $ 13,967,218 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 4,145,383 3,112,241 Accretion of put warrants 3,800,000 - Amortization of debt issuance costs 683,805 601,668 Deferred income taxes 120,864 1,518,797 Provision for doubtful accounts 1,235,063 2,506,013 Loss on derivative instrument - 350,876 Changes in operating assets and liabilities: Accounts receivable (21,591,927) (20,845,938) Prepaid expenses and other current assets (1,515,883) 671,894 Other assets (167,185) (514,180) Accounts payable 631,778 (2,817,827) Accrued payroll and related liabilities 5,900,093 40,624 Other current liabilities 370,212 (1,262,400) Other liabilities 192,617 995,300 ----------------------------- Net cash used in operating activities (538,120) (1,675,714) Investing activities Cash paid for acquisitions, net of cash acquired (9,769,750) (26,278,012) Purchases of furniture and equipment, net (1,981,681) (2,747,281) Capitalized internal software costs (877,832) (1,506,685) ----------------------------- Net cash used in investing activities (12,629,263) (30,531,978) Financing activities Net proceeds from issuance of common stock - 156,279,090 Exercise of stock options - 9,366 Principal payments under capital lease obligations (130,520) (640,933) Payment of debt issuance costs - (356,801) Net borrowings (payments) on outstanding debt 13,459,732 (131,997,247) ----------------------------- Net cash provided by financing activities 13,329,212 23,293,475 Net increase (decrease) in cash 161,829 (8,914,217) ----------------------------- Cash at beginning of period 204,915 11,253,199 ============================= Cash at end of period $ 366,744 $ 2,338,982 Supplemental disclosure of noncash investing and financing activities ============================= Purchases of equipment through capital leases $ 323,004 $ 1,976,422 Supplemental disclosures of cash flow information ============================= Interest paid $ 5,246,377 $ 4,070,933 =============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Medical Staffing Network Holdings, Inc. (or 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 29, 2002 are not necessarily indicative of the results that may be expected for the year ended December 29, 2002. The balance sheet at December 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Registration Statement on Form S-1 (File No. 333-82438). Certain reclassifications have been made to the prior period amounts to conform to the current period's presentation. 2 - STOCKHOLDERS EQUITY On April 12, 2002, the Company approved an amendment to its Certificate of Incorporation increasing the Company's authorized shares of common stock to 75,000,000 shares and a stock split in the form of a stock dividend of 3.069375 for 1, each of which took effect immediately prior to the closing of the Company's initial public offering. The financial statements have been restated to give retroactive recognition to the stock split in the prior periods, including all references in the condensed consolidated financial statements to number of shares and per share amounts. On April 23, 2002, the Company completed its initial public offering of 7,812,500 shares of common stock at $19.00 per share. Additionally, the underwriters exercised the over-allotment option of 1,171,875 shares, bringing the total number of shares issued to 8,984,375. Total proceeds received by the Company, net of estimated expenses related to the initial public offering were $156.3 million. The proceeds were used to repay $62.9 million of its outstanding balance under the senior unsecured notes, and approximately $93.4 million of the Company's outstanding loans under the senior credit facility. Immediately prior to the completion of the initial public offering, the outstanding shares of Series I Preferred Stock were converted into 21,075,645 shares of common stock. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 3 - RECAPITALIZATION OF THE COMPANY On October 26, 2001, as contemplated by (i) an Agreement dated as of August 20, 2001, as amended on October 26, 2001 (the "Recapitalization Agreement"), by and among Warburg Pincus Private Equity Fund VIII, L.P., a Delaware limited partnership ("Warburg Pincus"), MSN Acquisition Corp., a wholly owned subsidiary of Warburg Pincus, and the Company, and (ii) a Voting, Sale and Retention Agreement, dated as of August 20, 2001, as amended October 26, 2001 (the "Stockholders Agreement"), by and among Warburg Pincus, the Company and MSN Acquisition Corp., a recapitalization of the Company was completed. Pursuant to the terms of the Recapitalization Agreement, holders of the Company's common and convertible preferred stock became entitled to receive $6.06 per share. Certain of the stockholders, including executive officers, elected to retain certain of their shares of common stock rather than to receive the cash consideration for a portion of their shares. These retained shares were then exchanged for the same securities that the Warburg Pincus-led investment group (the "Investor Group") received. Upon completion of the recapitalization, the Investor Group was issued redeemable preferred stock, common stock and senior unsecured promissory notes, together representing approximately 85% of the equity ownership in exchange for cash consideration totaling approximately $156.6 million. In addition, a banking syndicate extended a senior credit facility to the Company in the amount of $120.0 million, of which $105.0 million was advanced to the Company at closing. Together, these funds were used to pay the merger consideration to the former stockholders, to retire approximately $82.0 million of the then outstanding debt obligations, to pay transaction fees and expenses of approximately $7.2 million and to provide the Company with working capital for operations. The transactions described above have been accounted for as a leveraged recapitalization of the Company and, accordingly, the Company has retained its historical cost basis of accounting. The shares repurchased by the Company have been canceled. The Company incurred approximately $3.7 million in debt issuance costs related to these transactions. These costs have been capitalized as long-term assets and are being amortized over the terms of the indebtedness. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 4 - REDEEMABLE PREFERRED STOCK During the first quarter of 2002, the Company had authorized 15,000,000 shares of preferred stock, par value $.01, of which 7,000,000 shares had been designated as Series I Convertible Preferred Stock. The Series I Convertible Preferred Stock had a stated value of $18.60 and 6,602,865 shares were issued in connection with the recapitalization. The holders of the Series I Convertible Preferred Stock were entitled to receive dividends at a rate of 8% per annum of the stated value compounded quarterly, which were cumulative and accrued whether or not declared by the Board of Directors and were payable when and as declared by the Board of Directors pursuant to certain restrictions as defined by the Company's credit agreement. The Series I Convertible Preferred Stock could be converted at any time, at the option of the holder on a one-for-one basis by the holder upon written notice into fully paid and nonassessable shares of the Company's common stock at an initial conversion price of $6.06, which is subject to adjustment pursuant to anti-dilution provisions. Upon completion of a Qualified Public Offering (as defined), each share of Series I Convertible Preferred Stock was to be automatically converted into common stock at its then effective conversion price. At any time after October 26, 2009, or upon consummation of a Change in Control (as defined), the holders of the Series I Convertible Preferred Stock could require the Company to redeem any or all of the outstanding shares of the Series I Convertible Preferred Stock at price in cash equal to the stated value per share plus any accrued but unpaid dividends. As discussed in Note 2, the outstanding shares of Series I Convertible Preferred Stock were converted into 21,075,645 shares of common stock in connection with the completion of the Company's initial public offering on April 23, 2002. 5 - EARNINGS PER SHARE Basic earnings per share (EPS) excludes dilution and is computed by dividing net income or loss attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, warrants to purchase stock, restricted common stock and common stock options using the treasury stock method) were exercised or converted into common stock. Certain shares of common stock that are issuable upon the exercise of options have been excluded from the EPS calculation because their effect would have been anti-dilutive. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) The table sets forth, for the period indicated, the computation of basic and diluted EPS:
Three months ended Nine months ended September 30, September 29, September 30, September 29, 2001 2002 2001 2002 ---------------------------- ---------------------------- Numerator: Net income before preferred stock dividends $ 1,924,323 $ 6,057,275 $ 5,657,060 $13,967,218 Less preferred stock dividends - - - 3,098,792 ---------------------------- ---------------------------- Numerator for basic earnings per share available to common stockholders $ 1,924,323 $ 6,057,275 $ 5,657,060 $10,868,426 ============================ ============================ Effect of dilutive securities: Add back preferred stock dividends - - - 3,098,792 ---------------------------- ---------------------------- Numerator for dilutive earnings per share available to common stockholders $ 1,924,323 $ 6,057,275 $ 5,657,060 $13,967,218 ============================ ============================ Three months ended Nine months ended September 30, September 29, September 30, September 29, 2001 2002 2001 2002 ---------------------------- ---------------------------- Denominator: Denominator for basic earnings per share- weighted-average shares 7,731,614 30,090,343 7,731,614 18,199,429 Effect of dilutive shares: Restricted common shares 1,803,804 - 1,484,876 - Employee stock options 393,658 1,311,764 299,894 1,338,606 Warrants 2,307,616 - 2,225,096 - Convertible preferred stock 16,979,224 - 16,979,224 8,228,190 --------------------------- ---------------------------- Dilutive potential common shares 21,484,302 1,311,764 20,989,090 9,566,796 --------------------------- ---------------------------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 29,215,916 31,402,107 28,720,704 27,766,225 =========================== =========================== Basic earnings per share $ 0.25 $ 0.20 $ 0.73 $ 0.60 =========================== =========================== Diluted earnings per share $ 0.07 $ 0.19 $ 0.20 $ 0.50 =========================== ===========================
9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 6 - COMPREHENSIVE INCOME Statement of Financial Accounting Standards (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 other components of comprehensive income other than the Company's consolidated net income and accumulated unrealized gain (loss) on the derivative instrument during the three and nine month periods ended September 29, 2002. The following table sets forth the computation of comprehensive income for the periods indicated: Three months ended Nine months ended ------------------------------------------ September September September September 30, 2001 29, 2002 30, 2001 29, 2002 ------------------------------------------------ Net income $1,924,323 $6,057,275 $5,657,060 $13,967,218 Other comprehensive income: Unrealized gain/(loss) on derivative, net of tax - 13,138 - (118,246) ------------------------------------------------- Total comprehensive income $1,924,323 $6,070,413 $5,657,060 $13,848,972 ================================================= 7 - LONG TERM DEBT On October 26, 2001, in connection with the recapitalization discussed in Note 3, the Company entered into a $120.0 million senior credit facility. The senior credit facility consisted of (i) senior credit notes (Term A) in the amount of $40.0 million due in October 2006 bearing interest at a variable rate based on the Company's leverage ratio (as defined), with interest payable at least quarterly and principal payable quarterly commencing on March 31, 2003; (ii) senior credit notes (Term B) in the amount of $60.0 million due in October 2007 bearing interest at a variable rate based on the Company's leverage ratio (as defined), with interest payable at least quarterly and principal payable quarterly commencing on March 31, 2003; and (iii) up to $20.0 million of revolving loans expiring on October 2006, bearing interest at a variable rate payable at least quarterly. 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 payment of dividends and restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. Also, in connection with the recapitalization, the Company issued Senior Unsecured Promissory Notes ("Senior Unsecured Notes") to the Investor Group and the previous stockholders (including officers) in the amount of approximating $59.3 million. The Senior Unsecured Notes bore interest at 12% per annum compounding quarterly, with principal and interest due in October 2009. The holders of the Senior Unsecured Notes had the right to require the Company 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) to redeem the Senior Unsecured Notes upon the consummation of (i) an underwritten public offering or (ii) a Change of Control (as defined). In connection with the Company's initial public offering completed April 23, 2002 as more fully described in Note 2, the Senior Unsecured Notes were redeemed in full in the amount of $62.9 million and the senior credit facility was repaid in the amount of approximately $93.4 million. On July 3, 2002, the Company amended the terms of its senior credit facility and entered into a $25 million note with terms and rights identical to its previous Term A note. In accordance with the amendment, the remaining balance on the existing Term A and Term B notes were paid off. As of September 29, 2002, the Company has $3 million available under the revolving credit facility. 8 - AQUISITIONS In July 2002, the Company acquired certain assets of three per diem nursing companies, STAT Medical Services, Inc., Medical Staffing Services, Inc. and Pro Med, Inc. for an aggregate cash purchase consideration of approximately $16 million. Approximately $14 million was allocated to goodwill, which is not subject to amortization under the provisions of Financial Accounting Standards Board (FASB) Statement No. 142, as more fully described in Note 9. All three acquisitions were accounted for in accordance with FASB Statement No. 141 and, accordingly, their results of operations have been included in the condensed consolidated statement of income beginning from their respective dates of acquisition. In August 2002, the Company acquired certain assets of Pharmstaff, Ltd., a provider of temporary pharmacists and pharmacy technicians to hospitals and other facilities, for an aggregate cash purchase consideration of approximately $9 million. Approximately $8.5 million was allocated to goodwill, which is not subject to amortization under the provisions of FASB Statement No. 142. The acquisition was accounted for in accordance with FASB Statement No. 141 and, accordingly, the results of operations have been included in the condensed consolidated statement of income from its date of acquisition. 9 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under the new rules, goodwill and other intangibles determined to have an infinite life are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an infinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued) The Company adopted SFAS No. 142 as of December 31, 2001 and, accordingly, no longer amortizes goodwill. The Company completed the transitional impairment test of goodwill and intangible assets with an indefinite life during the first quarter of 2002. Based on the results of this test, the Company determined that there was no impairment of goodwill or intangible assets with an indefinite life as of the transition date, December 31, 2001. The adoption of SFAS No. 142 reduced amortization expense by approximately $850,000 and $2,440,000 for the three and nine months ended September 29, 2002, respectively. The following pro forma information presents net income and basic and diluted earnings per share, adjusted to exclude amounts no longer being amortized, as if the adoption of SFAS No. 142 had occurred on January 1, 2001: Three months Nine months ended ended September September 30, 2001 30, 2001 ------------ ------------- Net income $ 2,434,323 $7,121,060 Basic net income per share $ 0.31 $ 0.92 Diluted net income per share $ 0.08 $ 0.25 Acquired intangible assets subject to amortization all relate to non-compete agreements with a gross carrying value of $2,399,000 and related accumulated amortization of $390,295 as of September 29, 2002. For the three and nine months ended September 29, 2002, amortization expense for intangible assets was $95,488 and $212,296, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows: 2002................................................... $ 307,782 2003................................................... 381,949 2004................................................... 377,199 2005................................................... 362,949 2006................................................... 362,949 2007................................................... 354,006 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued) In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30 (APB No. 30), Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Company adopted SFAS No. 144 on December 31, 2001. The adoption did not affect the Company's financial position or results of operations for the periods presented. 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 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. Upon adoption of SFAS No. 145 on December 30, 2002 the Company will be required to reclassify its extraordinary loss on early extinguishment of debt of $2,731,790 net of tax benefit of $1,648,184 related to the October 2001 recapitalization transaction into income from continuing operations. SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, 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 Company believes the adoption of SFAS 146 will not affect the Company's financial position or results of operations. In February 2002, the EITF issued Topic Number D-103 "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred," which is effective for financial statements beginning after December 31, 2001. Topic Number D-103 requires that reimbursements received for out-of-pocket expenses incurred, generally, be characterized as revenue in the statement of operations. The Company has adopted Topic Number D-103 in its 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 9 - RECENT ACCOUNTING PRONOUNCEMENTS (continued) quarter ended June 30, 2002. The Company has historically recorded reimbursements for out-of-pocket expenses as net amounts in cost of services rendered in the statement of income. In accordance with the transition guidance included in Topic Number D-103, the Company's adoption required the reclassification of financial statements for prior periods presented for comparative purposes. The adoption of Topic Number D-103 did not affect the Company's net income, financial position or cash flows. The reclassification did affect the presentation of certain revenue and cost of services rendered items contained within the Company's financial statements. Service revenues for the three and nine month period ended September 30, 2001 are presented as follows along with reimbursable expenses that have been reclassified from cost of services rendered to service revenues in accordance with Topic Number D-103: Three months Nine months ended ended September 30, September 30, 2001 2001 ----------------------------- Service revenues (as historically presented) $93,005,062 $244,649,745 Impact of Topic Number D-103 1,339,371 3,382,982 ----------------------------- Service revenues (as currently presented) $94,344,433 $248,032,727 ============================= Cost of service revenues are presented as follows: Three months Nine months ended ended September 30, September 30, 2001 2001 ----------------------------- Cost of services rendered (as historically presented) $69,322,284 $182,194,884 Impact of Topic Number D-103 1,339,371 3,382,982 ----------------------------- Cost of services rendered (as currently presented $70,661,655 $185,577,866 ============================ 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 29, 2002 (UNAUDITED) 10 - SUBSEQUENT EVENTS On October 3, 2002, the Company amended the terms of its senior credit facility (see Note 7) and entered into a $65 million note with terms and rights identical to its previous Term A notes and reduced the borrowing capacity of its revolving loan from $20 million to $15 million. Upon execution of the amendment, the Company had fully drawn the new $65 million Term A note and had no outstanding balance on the $15 million revolving loan. In October 2002, the Company acquired certain assets of three healthcare staffing companies, B&G Registry, Inc., Health Search International, Inc. and Clinical Resource Services, Inc., for an aggregate cash purchase consideration of approximately $22 million. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere herein. This discussion and analysis contains statements that are forward-looking in nature. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include the following: our ability to attract and retain qualified nurses and other healthcare personnel, the company's ability to enter into contracts with healthcare facility clients on terms attractive to the company, the functioning of our information systems, the effect of existing or future government regulation and federal and state legislative and enforcement initiatives on our business, our clients' ability to pay us for our services, the effect of liabilities and other claims asserted against us, the effect of competition in the markets we serve, the company's ability to carry out its business strategy. Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed herein might not occur. The Company's condensed consolidated financial statements present a consolidation of all its operations. This discussion supplements the detailed information presented in the condensed consolidated financial statements and notes thereto (which should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Registration Statement on Form S-1, File No. 333-82438), and is intended to assist the reader in understanding the financial results and condition of the Company. The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of total revenues: Three months ended Nine months ended ------------------------------------------- Sept. 30, Sept.29, Sept. 30, Sept.29, 2001 2002 2001 2002 ------------------------------------------- Service revenues 100.0% 100.0% 100.0% 100.0% Cost of services rendered 74.9 74.9 74.8 74.7 Gross profit 25.1 25.1 25.2 25.3 Selling, general and administrative expenses (1) 14.2 13.8 13.6 14.1 Corporate and administrative expenses 1.8 1.5 2.0 1.6 EBITDA (2) 9.1 9.7 9.6 9.6 Depreciation and amortization expenses 1.6 1.0 1.7 0.9 Recapitalization transaction fees 0.4 0.0 0.1 0.0 Income from operations 7.1 8.7 7.8 8.7 Interest expense, net 3.7 0.6 4.0 1.9 16 Pre-tax income 3.4 8.1 3.8 6.8 Net income 2.0 4.8 2.3 4.0 (1) Includes provision for doubtful accounts. (2) We define EBITDA as income before interest, income taxes, depreciation, amortization and non-recurring recapitalization costs. EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operations, investing or financing activities or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. EBITDA, as we define it, is not necessarily comparable to other similarly titled captions of other companies. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 SERVICE REVENUES. Our service revenues for the three months ended September 29, 2002 increased $33.2 million, or 35%, from $94.3 million for the three months ended September 30, 2001 to $127.5 million for the three months ended September 29, 2002. The majority of the increase in revenues for the three months ended September 29, 2002 was attributable to a $28.6 million, or 41%, increase in our per diem nurse staffing revenues from $70.3 million for the three months ended September 30, 2001 to $98.9 million for the three months ended September 29, 2002. Of this increase, $22.9 million, or 80%, was the result of year over year organic growth. The remaining increase of our per diem nurse staffing revenues of $5.7 million, or 20%, came from our 2002 per diem nursing acquisitions. Service revenues from our staffing divisions other than the per diem nurse staffing division collectively increased $4.6 million, or 19%, from $24.0 million for the three months ended September 30, 2001 to $28.6 million for the three months ended September 29, 2002. Of this increase, $4.3 million, or 93%, was the result of year over year organic growth. The remaining increase in revenues from our staffing divisions other than the per diem nurse staffing division came from our 2002 acquisition of Pharmstaff, Ltd. An increase in volume and a shift in mix towards higher billing specialties accounted for approximately 95% of our overall revenue growth for the three months ended September 29, 2002 as compared to revenue for the three months ended September 30, 2001, with the balance of the increase a result of price increases. COST OF SERVICES RENDERED. Cost of services rendered increased $24.9 million, or 35%, from $70.6 million for the three months ended September 30, 2001 to $95.5 million for the three months ended September 29, 2002. The increase was attributable to the 35% increase in service revenues. GROSS PROFIT. Gross profit increased $8.3 million, or 35%, from $23.7 million for the three months ended September 30, 2001 to $32.0 million for the three months ended September 29, 2002, representing gross margin percentages of 25.1% for both periods. 17 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $4.3 million, or 32%, from $13.4 million for the three months ended September 30, 2001 to $17.7 million for the three months ended September 29, 2002. As a percentage of revenue, selling, general and administrative expenses decreased from 14.2% for the three months ended September 30, 2001 to 13.8% for the three months ended September 29, 2002. The decrease is primarily the result of the continued growth and maturation of our de novo offices opened in the past two years which allows for increased leverage of overhead costs. CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative expenses increased $0.3 million, or 13%, from $1.7 million for the three months ended September 30, 2001 to $2.0 million for the three months ended September 29, 2002. As a percentage of revenue, corporate and administrative expenses decreased from 1.8% for the three months ended September 30, 2001 to 1.5% for the three months ended September 29, 2002. The decrease as a percentage of revenue was a result of increased operating leverage. RECAPITALIZATION TRANSACTION FEES. The Company incurred $0.3 million of non-recurring fees in the three months ended September 30, 2001 related to the recapitalization of the Company in 2001. EBITDA. As a result of the above, EBITDA increased $3.8 million, or 44% from $8.5 million for the three months ended September 30, 2001 to $12.3 million for the three months ended September 29, 2002. As a percentage of revenue, EBITDA increased from 9.1% for the three months ended September 30, 2001 to 9.7% for the three months ended September 29, 2002. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense decreased $0.2 million, or 16%, from $1.5 million for the three months ended September 30, 2001 to $1.3 million for the three months ended September 29, 2002. The decrease was due to the adoption of FAS No. 142, Goodwill and Other Intangible Assets. Included in the $1.5 million for the three months ended September 30, 2001 was approximately $0.8 million of amortization not recorded in the current period as a result of the adoption of FAS No. 142. This decrease was offset by an increase in depreciation expense of approximately $0.6 million related to an increase in fixed assets. INCOME FROM OPERATIONS. As a result of the above, income from operations increased $4.4 million, or 65%, from $6.7 million for the three months ended September 30, 2001 to $11.1 million for the three months ended September 29, 2002. As a percentage of revenue, income from operations was 7.1% for the three months ended September 30, 2001 and 8.7% for the three months ended September 29, 2002. INTEREST EXPENSE, NET. Net interest expense decreased $2.7 million, or 77% from $3.5 million for the three months ended September 30, 2001 to $0.8 million for the 18 three months ended September 29, 2002. The decrease is primarily the result of a lower average outstanding debt balance due to the use of the proceeds from our initial public offering to pay down outstanding debt. INCOME BEFORE INCOME TAXES. Income before income taxes increased $7.1 million, or 220%, from $3.2 million for the three months ended September 30, 2001 to $10.3 million for the three months ended September 29, 2002. PROVISION FOR INCOME TAXES. Our provision for income taxes was $1.3 million for the three months ended September 30, 2001 and $4.2 million for the three months ended September 29, 2002 representing effective tax rates of 40% for the three months ended September 30, 2001 and 41% for the three months ended September 29, 2002. NET INCOME. Net income increased $4.2 million, or 215%, from net income of $1.9 million for the three months ended September 30, 2001 to $6.1 million for the three months ended September 30, 2002. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 SERVICE REVENUES. Our service revenues for the nine months ended September 29, 2002 increased $98.3 million, or 40%, from $248.0 million for the nine months ended September 30, 2001 to $346.3 million for the nine months ended September 29, 2002. The majority of the increase in revenues for the nine months ended September 29, 2002 was attributable to a $81.8 million, or 45%, increase in our per diem nurse staffing revenues from $182.6 million for the nine months ended September 30, 2001 to $264.4 million for the nine months ended September 29, 2002. Of this increase, $67.9 million, or 83%, was the result of year over year organic growth. The remaining increase of our per diem nurse staffing revenues of $13.9 million, or 17%, came from our 2001 and 2002 per diem nursing acquisitions. Service revenues from our staffing divisions other than the per diem nurse staffing division collectively increased $16.4 million, or 20%, from $65.4 million for the nine months ended September 30, 2001 to $81.8 million for the nine months ended September 29, 2002. Of this increase, $16.1 million, or 98%, was the result of year over year organic growth. The remaining increase in revenues from our staffing divisions other than the per diem nurse staffing division came from our 2002 acquisition of Pharmstaff, Ltd. An increase in volume and a shift in mix towards higher billing specialties accounted for approximately 94% of our overall revenue growth for the nine months ended September 29, 2002 as compared to revenue for the nine months ended September 30, 2001, with the balance of the increase a result of price increases. 19 COST OF SERVICES RENDERED. Cost of services rendered increased $73.1 million, or 39%, from $185.6 million for the nine months ended September 30, 2001 to $258.7 million for the nine months ended September 29, 2002. The increase was attributable to the 40% increase in service revenues. GROSS PROFIT. Gross profit increased $25.1 million, or 40%, from $62.5 million for the nine months ended September 30, 2001 to $87.6 million for the nine months ended September 29, 2002, representing gross margin percentages of 25.2% for the nine months ended September 30, 2001 and 25.3% for the nine months ended September 29, 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $15.1 million, or 45%, from $33.8 million for the nine months ended September 30, 2001 to $48.9 million for the nine months ended September 29, 2002. As a percentage of revenue, selling, general and administrative expenses increased from 13.6% for the nine months ended September 30, 2001 to 14.1% for the nine months ended September 29, 2002. This increase was due to the expenses required to establish the infrastructure for our de novo branches opened in 2001 and 2002. CORPORATE AND ADMINISTRATIVE EXPENSES. Corporate and administrative expenses increased $0.5 million, or 12%, from $4.9 million for the nine months ended September 30, 2001 to $5.4 million for the nine months ended September 29, 2002. As a percentage of revenue, corporate and administrative expenses decreased from 2.0% for the nine months ended September 30, 2001 to 1.6% for the nine months ended September 29, 2002. The decrease as a percentage of revenue was a result of increased operating leverage. RECAPITALIZATION TRANSACTION FEES. The Company incurred $0.3 million of non-recurring fees in the nine months ended September 30, 2001 related to the recapitalization of the Company in 2001. EBITDA. As a result of the above, EBITDA increased $9.5 million, or 40% from $23.8 million for the nine months ended September 30, 2001 to $33.3 million for the nine months ended September 29, 2002. As a percentage of revenue, EBITDA was 9.6% for both periods. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expense decreased $1.0 million, or 25%, from $4.1 million for the nine months ended September 30, 2001 to $3.1 million for the nine months ended September 29, 2002. The decrease was due primarily to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. Included in the $4.1 million for the nine months ended September 30, 2001 was approximately $2.4 million of amortization not recorded in the current period as a result of the adoption of FAS No. 142. This decrease was offset by an increase in depreciation expense of approximately $1.4 million related to an increase in fixed assets. 20 INCOME FROM OPERATIONS. As a result of the above, income from operations increased $10.8 million, or 56%, from $19.3 million for the nine months ended September 30, 2001 to $30.1 million for the nine months ended September 29, 2002. As a percentage of revenue, income from operations was 7.8% for the nine months ended September 30, 2001 and 8.7% for the nine months ended September 29, 2002. INTEREST EXPENSE, NET. Net interest expense decreased $3.4 million, or 35% from $9.9 million for the nine months ended September 30, 2001 to $6.5 million for the nine months ended September 29, 2002. The decrease is primarily the result of a lower average outstanding debt balance due to the use of the proceeds from our initial public offering to pay down outstanding debt. INCOME BEFORE INCOME TAXES. Income before income taxes increased $14.3 million, or 151%, from $9.4 million for the nine months ended September 30, 2001 to $23.7 million for the nine months ended September 29, 2002. PROVISION FOR INCOME TAXES. Our provision for income taxes was $3.8 million for the nine months ended September 30, 2001 and $9.7 million for the nine months ended September 29, 2002 representing effective tax rates of 40% for the nine months ended September 30, 2001 and 41% for the nine months ended September 29, 2002. NET INCOME. Net income increased $8.3 million, or 147%, from net income of $5.7 million for the nine months ended September 30, 2001 to $14.0 million for the nine months ended September 29, 2002. 21 CRITICAL ACCOUNTING POLICIES AND ESTIMATES In response to the SEC Release Number 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and SEC Release Number 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, revenue recognition, allowance for doubtful accounts, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's unaudited condensed consolidated financial statements: o Revenue from services consists of temporary staffing revenues. Revenues are recognized when services are rendered. Reimbursements for out-of-pocket expenses incurred are characterized as revenue in the statement of operations. o We have recorded goodwill and other intangibles resulting from our acquisitions through September 29, 2002. Through December 30, 2001, goodwill and other intangibles were amortized on a straight-line basis over their lives of 6 to 20 years. We evaluate the recovery of the carrying amount of costs in excess of net tangible assets acquired by determining if a permanent impairment has occurred. This evaluation is done annually or more frequently if indicators of permanent impairment arise. Indicators of a permanent impairment include duplication of resources resulting from acquisitions, instances in which the estimated undiscounted cash flows of the entity are less than the remaining unamortized balance of the underlying intangible assets and other factors. At such time as an impairment is determined, the intangible assets are written off during that period. If we are required to record an impairment charge in the future, it would have an adverse impact on our results of operations. o We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. We determine the adequacy of this allowance by continually evaluating individual customer receivables, considering the 22 customer's financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. o We maintain an accrual for our health, workers compensation and professional liability that are partially self-insured and are classified in other current liabilities in our condensed consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating our historical experience and trends related to health, workers compensation, and professional liability claims and payments, based on Company specific actuarial computations and industry experience and trends. If such information indicates that our accruals are overstated or understated, we will adjust the assumptions utilized in our methodologies and reduce or provide for additional accruals as appropriate. o We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include professional liability and employee-related matters. Our hospital and healthcare facility clients may also become subject to claims, governmental inquiries and investigations and legal actions to which we may become a party relating to services provided by our professionals. From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with our hospital and healthcare facility clients relating to these matters. Although we are currently not aware of any such pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on us, if we become aware of such claims against us, we will evaluate the probability of an adverse outcome and provide accruals for such contingencies as necessary. SEASONALITY Due to the regional and seasonal fluctuations in the hospital patient census of our hospital and healthcare facility clients and due to the seasonal preferences for destinations by our temporary healthcare professionals, the number of healthcare professionals on assignment, revenue and earnings are subject to moderate seasonal fluctuations. Many of our hospital and healthcare facility clients are located in areas that experience seasonal fluctuations in population, particularly Florida, during the winter and summer months. These facilities adjust their staffing levels to accommodate the change in this seasonal demand and many of these facilities utilize temporary healthcare professionals to satisfy these seasonal staffing needs. Historically, the number of temporary healthcare professionals on assignment has increased from December through March followed by declines or minimal growth from April through November. As a result of all of these factors, results of any one quarter are not necessarily indicative of the results to be expected for any other quarter or for any year. 23 LIQUIDITY AND CAPITAL RESOURCES In October 2001, an investment group led by Warburg Pincus acquired a majority interest in our company in a recapitalization that provided us with the proceeds from new equity and senior debt issuances totaling approximately $156.6 million and advances from a new senior credit facility totaling $105.0 million. Together, these funds were used to provide us with working capital for operations, to retire then-outstanding debt obligations and accrued interest totaling approximately $82.0 million, as consideration for the acquisition of the former stockholders' equity interests for approximately $173.0 million, and to pay recapitalization costs of approximately $7.2 million. As of September 29, 2002, we had cash totaling approximately $2.3 million, working capital totaling $73.6 million and unused availability under our revolving credit facility totaling $3.0 million. We used $1.7 million of cash from operating activities during the nine months ended September 29, 2002 compared to cash use of $0.5 million from operating activities during the nine months ended September 30, 2001. Cash flows from operating activities was positively impacted during the nine months ended September 29, 2002 due to improvements in earnings before non-cash expenses and was negatively impacted due to cash required to fund our de novo program and working capital requirements of our recently completed acquisitions. Because we rely on cash flow from operations as a source of liquidity, we are subject to the risk that a decrease in the demand for our staffing services could have an adverse impact on our liquidity. Decreased demand for our staffing services could result from an inability to attract qualified healthcare professionals, fluctuations in patient occupancy at our hospital and healthcare facility clients and changes in state and federal regulations relating to our business. As of September 29, 2002 our senior credit facility consists of a $25.0 million term loan arrangement and allows us to borrow up to an additional $20.0 million under a revolving line of credit. The term loan bears interest at variable effective interest rates with a weighted average interest rate of 5.7% as of September 29, 2002, and is due in quarterly installments beginning March 31, 2003 through its maturity in October 2006 in the amount of $25.0 million. Our senior credit facility is collateralized by substantially all of our assets and requires us to comply with various quarterly financial covenants, including covenants for ratios of leverage and fixed charges to EBITDA. As of September 29, 2002, there was $42.0 million outstanding under our senior credit facility. As of September 29, 2002, the weighted average interest rate for the loans under our senior credit facility was approximately 5.7 %. As the borrower under the senior credit facility, our subsidiary, Medical Staffing Network, Inc., may only pay dividends or make other distributions to us in the amount of $250,000 in any fiscal year to pay our operating expenses. This limitation on our subsidiary's ability to distribute cash to us will limit our ability to obtain and service any 24 additional debt at the holding company level. In addition, our subsidiary is subject to restrictions under the senior credit facility against incurring additional indebtedness. Our senior unsecured notes bore interest compounding quarterly at a rate of 12% per annum and were due in October 2009. Interest was payable in full on the maturity date. The senior unsecured notes were subordinated to amounts due under the senior credit facility. We used a portion of the proceeds of our initial public offering to redeem the senior unsecured notes in full in the amount of approximately $62.9 million and to repay approximately $93.4 million of our loans under the senior credit facility, leaving an outstanding balance on our senior credit facility of $11.0 million. We believe that our current cash balances, together with our existing credit lines and other available sources of liquidity and expected cash flows from our operating activities, will be sufficient for us to meet our current and future financial obligations, as well as to provide us with funds for working capital, anticipated capital expenditures and other needs for at least the next 12 months. No assurance can be given, however, that this will be the case. In the longer term, we may require additional equity and debt financing to meet our working capital needs, or to fund acquisition activities, if any. There can be no assurance that additional financing will be available when required or, if available, will be available on satisfactory terms. INFLATION We do not believe that inflation has had a material effect on our results of operations in recent years and periods. There can be no assurance, however, that our business will not be adversely affected by inflation in the future. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to interest rate risk arises principally from the variable rates associated with our senior credit facility. On September 29, 2002, we had borrowings of $25.0 million under our senior credit facility that were subject its variable rates, with a blended rate of 5.7%. As of September 29, 2002, an adverse change of 1.0% in the interest rate of all such borrowings outstanding would have caused us to incur an increase in interest expense of approximately $0.3 million on an annual basis after considering the effect of the interest rate swap described below. During the nine months ended September 29,2002, we were party to an interest rate swap agreement with a notional amount of $50 million. Under the swap agreement, the net settlement was computed on a quarterly basis as the difference between the 90-day LIBOR and the fixed rate of 4.34%. This resulted in a fixed interest rate on $50 million of borrowings under our credit facility at 4.34% effective December 24, 2001, plus the applicable margin. The swap agreement was terminated on May 9, 2002 for approximately $460,000. In addition, during the nine months ended September 29, 2002, there was exposure to market risk associated with our senior unsecured notes which bore interest at a fixed rate. The carrying amount of the senior unsecured notes approximated fair value as the terms of the debt were based on similar terms, maturities, and interest rates as other debt issues with similar risk factors that are not traded on quoted market prices. Our senior unsecured notes were redeemed in full with proceeds from our initial public offering. ITEM 4. CONTROLS AND PROCEDURES Based on an evaluation of the disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, the Chief Executive Officer and President, Robert J. Adamson, and the Chief Financial Officer, Kevin S. Little, have concluded that the disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of the Company's most recent evaluation thereof. 26 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Kevin S. Little, Chief Financial Officer of Medical Staffing Network, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDICAL STAFFING NETWORK HOLDINGS, INC. Dated: November 13, 2002 By:/s/ Robert J. Adamson -------------------------------------- Chief Executive Officer and President By:/s/ Kevin S. Little -------------------------------------- Chief Financial Officer 28 CERTIFICATIONS I, Robert J. Adamson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Medical Staffing Network Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 29 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Robert J. Adamson ------------------------------------------- Robert J. Adamson Chief Executive Officer and President 30 I, Kevin S. Little, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Medical Staffing Network Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in 31 other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Kevin S. Little ------------------------------------------ Kevin S. Little Chief Financial Officer 32 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Medical Staffing Network Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert J. Adamson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Adamson ----------------------------------- Robert J. Adamson Chief Executive Officer and President November 13, 2002 33 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Medical Staffing Network Holdings, Inc. (the "Company") on Form 10-Q for the period ending September 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin S. Little, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kevin S. Little ----------------------------------- Kevin S. Little Chief Financial Officer November 13, 2002 34