| MEDICAL STAFFING NETWORK HOLDINGS INC Item 1A Risk Factors There are a number of factors, including those specified below, which may adversely affect our business, financial results or stock price |
| Additional risks that we do not know about or that we currently view as immaterial may also impair our business or adversely impact our financial results or stock price |
| Risks Related to Our Business and Industry If we are unable to attract qualified nurses and allied healthcare professionals for our healthcare staffing business, our business could be negatively impacted |
| We rely significantly on our ability to attract and retain nurses and allied healthcare professionals who possess the skills, experience and licenses necessary to meet the requirements of our hospital and healthcare facility clients |
| We compete for healthcare staffing personnel with other temporary healthcare staffing companies and with hospitals and healthcare facilities |
| We must continually evaluate and expand our temporary healthcare professional network to keep pace with our hospital and healthcare facility clients’ needs |
| Currently, there is a shortage of qualified nurses in most areas of the United States, competition for nursing personnel is increasing, and salaries and benefits have risen |
| We may be unable to continue to increase the number of temporary healthcare professionals that we recruit, thereby decreasing the potential for growing our business |
| Our ability to attract and retain temporary healthcare professionals depends on several factors, including our ability to provide temporary healthcare professionals with assignments that they view as attractive and to provide them with competitive benefits and wages |
| We cannot assure you that we will be successful in any of these areas |
| The cost of attracting temporary healthcare professionals and providing them with attractive benefits packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our hospital and healthcare facility clients, our profitability could decline |
| Moreover, if we are unable to attract and retain temporary healthcare professionals, the quality of our services to our hospital and healthcare facility clients may decline and, as a result, we could lose clients |
| Contraction of demand for our temporary nurses may continue if hospital admissions levels remain lower than expected |
| Demand for temporary nurses has been experiencing a period of contraction |
| However, the rate of contraction has slowed during the past year |
| 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 |
| Consequently, our service revenues and gross profit margins have been under pressure |
| If these industry trends continue, our revenues and gross profit margins may decline |
| In June 2003, we completed a plan to restructure our operations by closing 29 branches |
| The restructuring was in response to the current contraction in demand for our services and was necessary to adjust the infrastructure we had put in place to support multiple growth initiatives |
| Subsequent to fiscal year end, we initiated a plan to restructure our per diem nurse staffing division whereby certain per diem branches will be closed |
| Additionally, certain operations and corporate staff will be eliminated |
| The restructuring was in response to continued weak demand for our per diem nurse staffing services |
| 8 ______________________________________________________________________ Higher unemployment rates could have a negative impact on our ability to successfully recruit additional healthcare professionals |
| We believe that high unemployment rates cause nurses in many households to become primary wage earners, which in turn causes them to seek more traditional full-time employment |
| Should unemployment rates increase, it could be more difficult for us to recruit nurses to become our employees |
| We operate in a highly competitive market and our success depends on our ability to remain competitive in obtaining and retaining hospital and healthcare facility clients and temporary healthcare professionals |
| The temporary healthcare staffing business is highly competitive |
| We compete in national, regional and local markets with full-service staffing companies and with specialized temporary staffing agencies |
| Some of our competitors in the temporary nurse staffing sector are AMN Healthcare Services, Inc, Cross Country Healthcare, Inc |
| and InteliStaf Healthcare, Inc |
| Some of our competitors may have greater marketing and financial resources than we do |
| Competition for hospital and healthcare facility clients and temporary healthcare professionals may increase in the future and, as a result, we may not be able to remain competitive |
| To the extent competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenues or hospital and healthcare facility clients |
| Furthermore, our margins could decline, which could seriously harm our operating results and cause the price of our stock to decline |
| In addition, the development of alternative recruitment channels could lead our hospital and healthcare facility clients to bypass our services, which would also cause our revenues and margins to decline |
| Our business depends upon our continued ability to secure and fill new orders from our hospital and healthcare facility clients, because we do not have long-term agreements or exclusive contracts with them |
| We do not have long-term agreements or exclusive guaranteed order contracts with our hospital and healthcare facility clients |
| The success of our business depends upon our ability to continually secure new orders from hospitals and other healthcare facilities and to fill those orders with our temporary healthcare professionals |
| Our hospital and healthcare facility clients are free to place orders with our competitors and may choose to use temporary healthcare professionals that our competitors offer them |
| Therefore, we must maintain positive relationships with our hospital and healthcare facility clients |
| If we fail to maintain positive relationships with our hospital and healthcare facility clients, we may be unable to generate new temporary healthcare professional orders and our business may be adversely affected |
| Reacting to concerns over agency utilization in prior years, hospitals and other healthcare facilities have devised strategies to reduce agency expenditure and limit overall agency utilization |
| If current pressures to control agency usage continue and escalate, we will have fewer business opportunities, which could harm our business |
| Fluctuations in patient occupancy at our hospital and healthcare facility clients may adversely affect the demand for our services and therefore the profitability of our business |
| Demand for our temporary healthcare staffing services is significantly affected by the general level of patient occupancy at our hospital and healthcare facility clients |
| When occupancy increases, hospitals and other healthcare facilities often add temporary employees before full-time employees are hired |
| As occupancy decreases, hospitals and other healthcare facilities typically reduce their use of temporary employees before undertaking layoffs of their regular employees |
| In addition, we may experience more competitive pricing pressure during periods of occupancy downturn |
| Occupancy at our hospital and healthcare facility clients also fluctuates due to the seasonality of some elective procedures |
| We are unable to predict the level of patient occupancy at any particular time and its effect on our revenues and earnings |
| 9 ______________________________________________________________________ Healthcare reform could negatively impact our business opportunities, revenues and margins |
| The US government has undertaken efforts to control increasing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and drug companies |
| In the recent past, the US Congress has considered several comprehensive healthcare reform proposals |
| The proposals were generally intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures |
| While the US Congress did not adopt any comprehensive reform proposals, members of Congress may raise similar proposals in the future |
| If any of these proposals are approved, hospitals and other healthcare facilities may react by spending less on healthcare staffing, including nurses |
| If this were to occur, we would have fewer business opportunities, which could seriously harm our business |
| Several state governments have also attempted to control increasing healthcare costs |
| For example, the State of Massachusetts has implemented a regulation that limits the hourly rate billable by and payable to temporary nursing agencies for registered nurses, licensed practical nurses and certified nurses’ aides |
| The State of Minnesota has also implemented a statute that limits the amount that nursing agencies may charge nursing homes |
| Several states have also proposed legislation that would limit the amounts that temporary staffing companies may charge |
| Any such current or proposed laws could seriously harm our business, revenues and margins |
| Furthermore, third party payors, such as health maintenance organizations, increasingly challenge the prices charged for medical care |
| Failure by hospitals and other healthcare facilities to obtain full reimbursement from those third party payors could reduce the demand or the price paid for our staffing services |
| There is a growing trend to restrict mandatory healthcare worker overtime requirements by employers and to establish nurse-patient ratios |
| The State of California has already enacted such legislation and several other states have similar legislation pending |
| This legislation could ultimately have a potential positive or negative impact on our business |
| We operate in a regulated industry and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenues and profitability |
| The healthcare industry is subject to extensive and complex federal and state laws and regulations related to professional licensure, conduct of operations, payment for services and payment for referrals |
| If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties or be subject to injunctions or cease and desist orders |
| The extensive and complex laws that apply to our hospital and healthcare facility clients, including laws related to Medicare, Medicaid and other federal and state healthcare programs, could indirectly affect the demand or the prices paid for our services |
| For example, our hospital and healthcare facility clients could suffer civil and/or criminal penalties and/or be excluded from participating in Medicare, Medicaid and other healthcare programs if they fail to comply with the laws and regulations applicable to their businesses |
| In addition, our hospital and healthcare facility clients could receive reduced reimbursements, or be excluded from coverage, because of a change in the rates or conditions set by federal or state governments |
| In turn, violations of or changes to these laws and regulations that adversely affect our hospital and healthcare facility clients could also adversely affect the prices that these clients are willing or able to pay for our services |
| JCAHO has created a set of standards by which to certify healthcare staffing providers |
| Healthcare staffing companies can apply to be reviewed by JCAHO to ensure that they are compliant with the standards |
| Healthcare facilities could potentially use only those providers that obtain certification |
| We went through the voluntary certification process in 2005 and received JCAHO’s gold seal of approval |
| Upon subsequent review (which occurs biannually), should we not meet the standards created by JCAHO, it could potentially have a material effect on our business |
| 10 ______________________________________________________________________ We are dependent on the proper functioning of our information systems |
| We are dependent on the proper functioning of our information systems in operating our business |
| Critical information systems used in daily operations identify and match staffing resources and client assignments and regulatory credentialing scheduling |
| They also perform billing and accounts receivable functions |
| Our information systems are vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events |
| If our information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could impact our ability to identify business opportunities quickly, maintain billing and clinical records reliably, pay our staff in a timely fashion and bill for services efficiently |
| Competition for acquisition opportunities may restrict our future growth by limiting our ability to make acquisitions at reasonable valuations |
| Our business strategy includes increasing our market share and presence in the temporary healthcare staffing industry through strategic acquisitions of companies that complement or enhance our business |
| We have historically faced competition for acquisitions |
| In the future, this could limit our ability to grow by acquisitions or could raise the prices of acquisitions and make them less accretive to us |
| In addition, restrictive covenants in our credit facility, including a covenant that requires us to obtain the approval of our lenders for any acquisition with a purchase price over dlra3 million, may limit our ability to complete desirable acquisitions |
| If we are unable to secure necessary financing under our credit facility or otherwise, we may be unable to complete desirable acquisitions |
| We may face difficulties integrating our acquisitions into our operations and our acquisitions may be unsuccessful, involve significant cash expenditures or expose us to unforeseen liabilities |
| We continually evaluate opportunities to acquire healthcare staffing companies that complement or enhance our business and frequently have preliminary acquisition discussions with some of these companies |
| These acquisitions involve numerous risks, including: · potential loss of key employees or clients of acquired companies; · difficulties integrating acquired personnel and distinct cultures into our business; · difficulties integrating acquired companies into our operating, financial planning and financial reporting systems; · diversion of management attention from existing operations; and · assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare regulations |
| These acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could seriously harm our financial condition and results of operations |
| Any acquisition may ultimately have a negative impact on our business and financial condition |
| Our ability to borrow under our credit facility may be limited |
| On December 22, 2003, we entered into a new credit facility, consisting of a three-year, dlra65 million asset-based revolving credit facility and a two-year dlra17 million term loan |
| On June 25, 2004, we amended the credit facility to reduce the revolver capacity from dlra65dtta0 million to dlra60dtta0 million |
| In conjunction with the amendment, on July 1, 2004, we repaid dlra5dtta0 million of borrowings under the term loan |
| On February 24, 2005, we amended the terms of the credit facility whereby the term loan was reduced to dlra6dtta0 million, the applicable margin for the 11 ______________________________________________________________________ term loan was reduced to 4dtta5prca, the maturity of the term loan was extended to December 2006 and certain financial covenants were amended |
| On September 24, 2005 and December 25, 2005, we amended the terms of the credit facility whereby certain financial covenants were favorably amended and the expiration date was extended to January 2, 2007 |
| The dlra6dtta0 million term loan repayment was funded with borrowings under the revolver |
| Our ability to borrow under the credit facility is based upon, and thereby limited by, the amount of our accounts receivable |
| Any material deterioration in our service revenues could reduce our borrowing base, which could cause us to lose our ability to borrow additional amounts under the credit facility |
| In such a circumstance, the borrowing availability under the credit facility may not be sufficient for our capital needs |
| During the year, our lenders amended certain financial covenants present in the revolving credit facility |
| If future covenant violations occur and the lenders do not agree to modify the covenants or waive such violations, our ability to borrow under our credit facility could be severely limited or eliminated which would have a material negative impact on our ability to fund ongoing operations |
| Significant legal actions could subject us to substantial uninsured liabilities |
| In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories |
| Many of these actions involve large claims and significant defense costs |
| In addition, we may be subject to claims related to torts or crimes committed by our employees or temporary healthcare professionals |
| In some instances, we are required to indemnify our clients against some or all of these risks |
| A failure of any of our employees or healthcare professionals to observe our policies and guidelines intended to reduce these risks, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages |
| We retain the first dlra1dtta0 million, per occurrence, of risk associated with professional liability |
| We maintain a professional liability insurance policy for losses in excess of this per occurrence amount |
| Our professional malpractice liability insurance and general liability insurance coverage may not cover all claims against us or continue to be available to us at a reasonable cost |
| If we are unable to maintain adequate insurance coverage or if our insurers deny coverage we may be exposed to substantial liabilities |
| We may be legally liable for damages resulting from our hospital and healthcare facility clients’ mistreatment of our healthcare personnel |
| Because we are in the business of placing our temporary healthcare professionals in the workplaces of other companies, we are subject to possible claims by our temporary healthcare professionals alleging discrimination, sexual harassment, negligence and other similar activities by our hospital and healthcare facility clients |
| The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain qualified healthcare professionals in the future |
| If we become subject to material liabilities under our self-insured programs, our financial results may be adversely affected |
| We provide for certain types of risk management coverage through a program that is partially self-insured |
| We retain the first dlra1dtta0 million, per occurrence, of risk associated with professional liability claims |
| We retain the first dlra0dtta5 million, per occurrence, of risk associated with workers compensation claims |
| In addition, we provide medical coverage to our employees through a partially self-insured preferred provider organization |
| If we become subject to substantial uninsured workers compensation claims or medical coverage liabilities, our financial results may be adversely affected |
| Our operations may deteriorate if we are unable to continue to attract, develop and retain our sales personnel |
| Our success depends upon the performance of our sales personnel, especially regional directors, branch managers and staffing coordinators |
| The number of individuals who meet our qualifications for 12 ______________________________________________________________________ these positions is limited and we may experience difficulty in attracting qualified candidates |
| In addition, we commit substantial resources to the training, development and support of these individuals |
| Competition for qualified sales personnel in the line of business in which we operate is strong and there is a risk that we may not be able to retain our sales personnel after we have expended the time and expense to recruit and train them |
| The loss of key senior management personnel could adversely affect our ability to remain competitive |
| We believe that the success of our business strategy and our ability to operate profitably depends on the continued employment of our senior management team, consisting of Robert J Adamson, Kevin S Little, N Larry McPherson, Patricia G Donohoe, Lynne Stacy, Jan Casford and Pat Layton |
| If any members of our senior management team become unable or unwilling to continue in their present positions, our business and financial results could be materially adversely affected |
| We have a substantial amount of goodwill on our balance sheet |
| Our level of goodwill may have the effect of decreasing our earnings or increasing our losses |
| As of December 25, 2005, we had dlra130dtta6 million of goodwill, net on our balance sheet, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired |
| Historically, we amortized goodwill on a straight-line basis over the estimated period of future benefit of 20 years |
| In July 2001, the Financial Accounting Standards Board issued SFAS Nodtta 141, Business Combinations, and SFAS Nodtta 142, Goodwill and Other Intangible Assets |
| SFAS Nodtta 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001 |
| SFAS Nodtta 142 requires that, subsequent to January 1, 2002, goodwill not be amortized but rather that it be reviewed annually for impairment |
| During the year ended December 25, 2005, we reevaluated our reporting units and determined that each branch location represented a reporting unit, as opposed to viewing the entire company as one reporting unit previously |
| We performed an analysis whereby the historical goodwill was allocated or “pushed down” to each reporting unit |
| In accordance with SFAS Nodtta 142, we performed our annual review for impairment during the fourth quarter of fiscal 2005 by performing a fair value analysis of each reporting unit |
| The fair value analysis was completed with the assistance of outside valuation professionals |
| Based on that analysis, no impairment was noted at any individual reporting unit |
| Accordingly, there was no financial impact in 2005 relating to the change in reporting unit for goodwill impairment testing |
| We will continue to perform a reporting unit level fair value analysis impairment test during the fourth quarter of each year |
| Should impairment indicators be present, including branches not achieving their expected operating results, additional analysis will be performed to determine the extent of any impairment and the associated charge will be recorded to the statement of operations |
| Should we decide to exit a market and close one or more of our reporting units, the associated goodwill will be written off with a charge to the statement of operations |
| Although it does not affect our cash flow, an impairment charge to earnings has the effect of decreasing our earnings or increasing our losses, as the case may be |
| If we are required to take an impairment charge to earnings, our stock price could be adversely affected |
| Subsequent to year end, we decided to close certain per diem nurse branches |
| As a result, during the first quarter of 2006, we will take a charge of approximately dlra3dtta0 million to write down the associated impaired goodwill |
| 13 ______________________________________________________________________ Our costs of providing housing for nurses and other healthcare personnel in our travel business may be higher than we anticipate and, as a result, our margins could decline |
| If the costs of renting apartments and furniture for our nurses and other healthcare personnel increase more than we anticipate and we are unable to pass such increases on to our clients, our margins may decline |
| To the extent the length of a nurse’s or other professional’s housing lease exceeds the term of the nurse’s or other professional’s staffing contract, we bear the risk that we will be obligated to pay rent for housing we do not use |
| To limit the costs of unutilized housing, we try to secure leases with term lengths that match the term lengths of our staffing contracts, which typically last thirteen weeks |
| In some housing markets we have had, and believe we will continue to have, difficulty identifying short-term leases |
| If we cannot identify a sufficient number of appropriate short-term leases in regional markets, or if, for any reason, we are unable to efficiently utilize the apartments we do lease, we may be required to pay rent for unutilized housing or, to avoid such risk, we may forego otherwise profitable opportunities |
| Demand for healthcare staffing services is significantly affected by the general level of economic activity and unemployment in the United States |
| When economic activity increases, temporary employees are often added before full-time employees are hired |
| However, as economic activity slows, many companies, including our hospital and healthcare facility clients, reduce their use of temporary employees before laying off full-time employees |
| In addition, we may experience more competitive pricing pressure during periods of economic downturn |
| Therefore, any significant economic downturn could have a material adverse impact on our condition and results of operations |
| Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approval and could discourage the purchase of our outstanding shares at a premium |
| Our executive officers and directors (including their affiliates) control approximately 64prca of our outstanding common stock |
| Warburg Pincus Private Equity Fund VIII, LP, a Delaware limited partnership (Warburg Pincus), owns approximately 48prca of our common stock |
| This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our common stock |
| These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of our common stock |
| Warburg Pincus has the right under our stockholders agreement to designate two persons to our Board of Directors |
| As a result of this share ownership and minority representation on our Board of Directors, our current stockholders, in particular Warburg Pincus, will be able to influence all affairs and actions of our company, including matters requiring stockholder approval such as the election of directors and approval of significant corporate transactions |
| The interests of our executive officers, directors and principal stockholders may differ from the interests of the other stockholders |
| Warburg Pincus and certain significant stockholders have demand registration rights to cause us to file, at any time and at our expense, a registration statement under the Securities Act covering resales of their shares |
| These shares represent approximately 48prca of our outstanding common stock, or approximately 14dtta5 million shares |
| These shares may also be sold under Rule 144 of the Securities Act, depending on their holding period and subject to significant restrictions in the case of shares held by persons deemed to be our affiliates |
| 14 ______________________________________________________________________ If provisions in our corporate documents and Delaware law delay or prevent a change in control of our company, we may be unable to consummate a transaction that our stockholders consider favorable |
| Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable |
| For example, our certificate of incorporation authorizes our Board of Directors to issue up to 15 million shares of “blank check” preferred stock |
| Without stockholder approval, the Board of Directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock |
| With these rights, preferred stockholders could make it more difficult for a third party to acquire us |
| Applicable Delaware law may also discourage, delay or prevent someone from acquiring or merging with us |
| Our stock price may be volatile and your investment in our common stock could suffer a decline in value |
| With the current uncertainty about healthcare policy, reimbursement and coverage in the United States, there has been significant volatility in the market price and trading volume of securities of healthcare and other companies, which is unrelated to the financial performance of these companies |
| These broad market fluctuations may negatively affect the market price of our common stock |
| Some specific factors that may have a significant effect on our common stock market price include: · actual or anticipated fluctuations in our operating results; · actual or anticipated changes in our growth rates or our competitors’ growth rates; · actual or anticipated changes in healthcare policy in the United States and internationally; · conditions in the financial markets in general or changes in general economic conditions; · our inability to raise additional capital; · conditions of other healthcare staffing companies or the medical staffing industry generally; and · changes in stock market analyst recommendations regarding our common stock, other comparable companies or the healthcare staffing industry generally |