BP53755 -- Cross Country -- 10Q


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q


ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Quarterly Period Ended September 30, 2004


Or


¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Transition Period From ___________ to ___________


Commission file number 0-33169


[http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=3077217&doc=2]


CROSS COUNTRY HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)


Delaware

(State or other jurisdiction of

Incorporation or organization)

 

13-4066229

(I.R.S. Employer

Identification Number)

                                                                                                      

                       

                                                         

6551 Park of Commerce Blvd, N.W.

Boca Raton, Florida 33487

(Address of principal executive offices)(Zip Code)


(561) 998-2232

(Registrant’s telephone number, including area code)


Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


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


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


The registrant had outstanding 32,058,963 shares of Common Stock, par value $0.0001 per share, as of October 31, 2004.






CROSS COUNTRY HEALTHCARE, INC.


INDEX


FORM 10-Q


SEPTEMBER 30, 2004


PART I    FINANCIAL INFORMATION

 


Item 1.


 


Condensed Consolidated Financial Statements.

 


 


Condensed Consolidated Balance Sheets

 


 


Condensed Consolidated Statements of Income

 


 


Condensed Consolidated Statements of Cash Flows

 


 


Notes to Condensed Consolidated Financial Statements

 


Item 2.


 


Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 


Item 3.


 


Quantitative and Qualitative Disclosures About Market Risk.

 


Item 4.


 


Controls and Procedures.

 

PART II.    OTHER INFORMATION

 


Item 1.


 


Legal Proceedings.

 


Item 2.


 


Unregistered Sales of Equity Securities and Use of Proceeds.

 


Item 6.


 


Exhibits.

 

SIGNATURES




ii




PART I.    FINANCIAL INFORMATION


ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Cross Country Healthcare, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands)


  

September 30,

2004

 

December 31,

2003

 
  

(Unaudited)

    

                                                                                                                                         

   

  

     

   

Assets

       

Current assets:

       

   Cash and cash equivalents

 

$

 

$

 

   Accounts receivable, net

  

101,537

  

112,407

 

   Income taxes receivable

  

  

2,310

 

   Other current assets

  

11,832

  

12,572

 

Total current assets

  

113,369

  

127,289

 

Property and equipment, net

  

12,632

  

12,602

 

Goodwill, net

  

309,276

  

307,532

 

Trademarks, net

  

15,749

  

15,749

 

Other identifiable intangible assets, net

  

7,297

  

8,580

 

Other assets, net

  

2,603

  

2,972

 

Total assets

 

$

460,926

 

$

474,724

 
        

Liabilities and Stockholders’ Equity

       

Current liabilities:

       

   Accounts payable and accrued expenses

 

$

6,834

 

$

9,462

 

   Accrued employee compensation and benefits

  

32,634

  

29,994

 

   Short-term debt

  

6,208

  

4,944

 

   Income taxes payable

  

520

  

 

   Other current liabilities

  

4,391

  

3,358

 

Total current liabilities

  

50,587

  

47,758

 
        

Deferred income taxes

  

17,649

  

17,649

 

Long-term debt and notes payable

  

54,212

  

88,794

 

Total liabilities

  

122,448

  

154,201

 
        

Commitments and contingencies

       
        

Stockholders’ equity:

       

   Common stock

  

3

  

3

 

   Additional paid-in capital

  

254,854

  

251,988

 

   Other stockholders’ equity

  

83,621

  

68,532

 

Total stockholders’ equity

  

338,478

  

320,523

 

Total liabilities and stockholders’ equity

 

$

460,926

 

$

474,724

 




See accompanying notes to the condensed consolidated financial statements


1




Cross Country Healthcare, Inc.

Condensed Consolidated Statements of Income

(Unaudited, amounts in thousands, except per share data)


  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
  

2004

 

2003

 

2004

 

2003

 

                                                                                                    

   

  

     

  

     

      

Revenue from services

 

$

165,070

 

$

184,389

 

$

504,987

     

$

511,304

 

Operating expenses:

             

   Direct operating expenses

  

126,614

  

139,512

  

386,245

  

385,921

 

   Selling, general and administrative expenses

  

27,588

  

29,198

  

84,109

  

80,594

 

   Bad debt expense

  

  

787

  

1,156

  

787

 

   Depreciation

  

1,024

  

1,230

  

3,969

  

3,336

 

   Amortization

  

526

  

991

  

1,745

  

2,556

 

   Non-recurring secondary offering costs

  

  

  

  

16

 

Total operating expenses

  

155,752

  

171,718

  

477,224

  

473,210

 

Income from operations

  

9,318

  

12,671

  

27,763

  

38,094

 

Other expenses:

             

   Loss on early extinguishment of debt

  

  

  

  

960

 

   Interest expense, net

  

970

  

1,571

  

3,229

  

2,812

 

Income from continuing operations before income taxes

  

8,348

  

11,100

  

24,534

  

34,322

 

Income tax expense

  

3,214

  

4,296

  

9,446

  

13,283

 

Income from continuing operations

  

5,134

  

6,804

  

15,088

  

21,039

 

Discontinued operations, net of income taxes

  

  

(1

)

 

  

(355

)

Net income

 

$

5,134

 

$

6,803

 

$

15,088

 

$

20,684

 
              

Net income/(loss) per common share - basic:

             

   Income from continuing operations

 

$

0.16

 

$

0.21

 

$

0.47

 

$

0.65

 

   Discontinued operations, net of income taxes

  

  

(0.00

)

 

  

(0.01

)

Net income

 

$

0.16

 

$

0.21

 

$

0.47

 

$

0.64

 
              

Net income/(loss) per common share - diluted:

             

   Income from continuing operations

 

$

0.16

 

$

0.21

 

$

0.46

 

$

0.64

 

   Discontinued operations, net of income taxes

  

  

(0.00

)

 

  

(0.01

)

Net income

 

$

0.16

 

$

0.21

 

$

0.46

 

$

0.63

 
              

Weighted average common shares outstanding-basic

  

32,025

  

32,037

  

31,954

  

32,169

 

Weighted average common shares outstanding-diluted

  

32,504

  

32,581

  

32,554

  

32,588

 




See accompanying notes to the condensed consolidated financial statements


2




Cross Country Healthcare, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)


  

Nine Months Ended

September 30,

 
  

2004

 

2003

 

                                                                                                                                              

   

  

    

   

Operating activities

       

Net income

 

$

15,088

 

$

20,684

 

Adjustments to reconcile net income to net cash
  provided by operating activities:

       

   Depreciation

  

3,969

  

3,336

 

   Amortization

  

1,745

  

2,556

 

   Bad debt expense

  

1,156

  

787

 

   Amortization of deferred compensation

  

48

  

31

 

   Loss on early extinguishment of debt

  

  

960

 

   Loss from discontinued operations

  

  

355

 

   Changes in operating assets and liabilities:

       

       Accounts receivable

  

9,616

  

10,419

 

       Income tax receivable and other current assets

  

3,797

  

1,561

 

       Accounts payable and accrued expenses

  

12

  

(650

)

       Income tax payable and other current liabilities

  

1,553

  

3,405

 

   Net cash provided by continuing operations

  

36,984

  

43,444

 
        

       Loss from discontinued operations, net

  

  

(355

)

       Loss on impairment of discontinued operations

  

  

302

 

       Change in net assets from discontinued operations

  

  

(221

)

              Net cash used in discontinued operations

  

  

(274

)

Net cash provided by operating activities

  

36,984

  

43,170

 
        

Investing activities

       

Acquisitions and earnout payments

  

(1,646

)

 

(107,694

)

Purchases of property and equipment

  

(3,998

)

 

(2,329

)

Other investing activities

  

  

(5

)

Net cash used in investing activities

  

(5,644

)

 

(110,028

)

        

Financing activities

       

Repayment of debt

  

(127,243

)

 

(48,890

)

Proceeds from issuance of debt

  

93,925

  

125,000

 

Other financing activities

  

1,978

  

(8,323

)

Net cash (used in) provided by financing activities

  

(31,340

)

 

67,787

 
        

Change in cash and cash equivalents

  

  

929

 

Cash and cash equivalents at beginning of period

  

  

17,210

 

Cash and cash equivalents at end of period

 

$

 

$

18,139

 





See accompanying notes to the condensed consolidated financial statements


3




CROSS COUNTRY HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.     ORGANIZATION AND BASIS OF PRESENTATION


        On May 8, 2003, the name of the corporation was changed to Cross Country Healthcare, Inc. from Cross Country, Inc. The condensed consolidated financial statements include the accounts of Cross Country Healthcare, Inc. and its wholly-owned direct and indirect subsidiaries (collectively, the “Company”). All material intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U. S. generally accepted accounting principles 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. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.


2.     RECLASSIFICATIONS


        Certain prior period amounts have been reclassified to conform to the current period presentation.


3.     EARNINGS PER SHARE


        In accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 128, Earnings Per Share, basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding including the vested portion of restricted shares. The denominator used to calculate diluted earnings per share reflects the dilutive effects of stock options and nonvested restricted stock (as calculated utilizing the treasury stock method). Certain shares of common stock that are issuable upon the exercise of options have been excluded from per share calculations because their effect would have been anti-dilutive.


4.     STOCK-BASED COMPENSATION


        The Company, from time to time, grants stock options for a fixed number of common shares to employees, and annually to members of its Audit Committee. The Company accounts for these stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for stock option grants when the exercise price of the options equals, or is greater than, the average market value of the underlying stock on the date of grant.


        The Company issued a total of 16,216 shares of restricted stock to certain key employees in the first quarter of 2003. The restricted stock vests based on continued employment in three equal annual installments on the first, second and third anniversary of the grant date. Under APB Opinion No. 25, compensation expense related to grants of restricted stock is recognized over the period in which services are performed. The aggregate fair market value of the shares on the grant date approximated $0.2 million. On the date of grant, deferred compensation of $0.2 million was recorded as a contra-equity account in additional paid-in capital and is being amortized to operations over the related vesting period.




4




        The pro-forma disclosure of stock based compensation required by FASB Statement No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, is shown below.


      The Company’s consolidated net income during the three and nine month periods ended September  30, 2004 and 2003, would have changed to the pro forma amounts set forth below had the Company’s stock option grants been accounted for under the fair value based method prescribed by FASB Statement No. 123, Accounting for Stock-Based Compensation.


  

Three Months Ended 
September 30,

 

Nine Months Ended 
September 30,

 
  

2004

 

2003

 

2004

 

2003

 
              

(Unaudited, amounts in thousands, except per share data)

   

  

     

  

     

  

     

   

                                                                                                              

             

Net income as reported

 

$

5,134

 

$

6,803

 

$

15,088

 

$

20,684

 
              

Stock based employee compensation included 
   in reported net income

  


  


  


  


 

Stock based employee compensation, net of tax,
   applying FASB Statement No. 123

  


(224


)

 


(636


)

 


(677


)

 


(1,865


)

Pro forma net income applying FASB Statement
   No. 123

 


$


4,910

 


$


6,167

 


$


14,411

 


$


18,819

 
              

Basic and diluted earnings per share as reported:

             

Net income per common share-basic

 

$

0.16

 

$

0.21

 

$

0.47

 

$

0.64

 

Net income per common share-diluted

 

$

0.16

 

$

0.21

 

$

0.46

 

$

0.63

 
              

Pro forma basic and diluted earnings per share:

             

Pro forma net income per common share-basic

 

$

0.15

 

$

0.19

 

$

0.45

 

$

0.59

 

Pro forma net income per common share-diluted

 

$

0.15

 

$

0.19

 

$

0.44

 

$

0.58

 
              


5.     ACQUISITIONS


        On June 5, 2003, the Company acquired substantially all of the assets of Med-Staff, Inc. (Med-Staff) for $102.2 million in cash, net of a post-closing working capital adjustment. The Company made the strategic acquisition to broaden its travel nurse recruiting and placement efforts, to provide a sizable platform in per diem nurse staffing, and to gain a direct presence in nurse staffing at military hospitals and clinics. The consideration for this acquisition was $104.0 million in cash paid at closing, of which currently $7.5 million is being held in escrow to cover any post-closing liabilities that may occur before December 5, 2004. The purchase price was subject to a post-closing adjustment based on changes in the net working capital of the acquired company. In the fourth quarter of 2003, the post-closing net working capital adjustment of approximately $1.8 million was calculated and allocated to goodwill as a reduction to the purchase price.


        In addition, the related asset purchase agreement provided for potential earnout payments up to a maximum of $37.5 million based on adjusted earnings before interest, taxes, depreciation and amortization (as defined in the asset purchase agreement) of Med-Staff for the one year period ending December 31, 2003. Med-Staff did not qualify to receive any earnout payments.


        The acquisition has been included in the healthcare staffing segment and the results of Med-Staff’s operations have been included in the condensed consolidated statements of income since the date of acquisition, in accordance with FASB Statement No. 141, Business Combinations.




5




        The following unaudited pro forma summary presents the consolidated results of operations as if the Med-Staff acquisition had occurred on January 1, 2003. These pro forma amounts give effect to certain adjustments, including amortization of specifically identifiable intangibles, incremental ongoing expenses, incremental interest expense and related income tax effects. These pro forma results include a pre-tax reduction to net income for a loss on early extinguishment of debt of approximately $1.1 million. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transaction taken place on January 1, 2003 or of future results of operations.


   

Nine Months Ended

September 30, 2003

                                                                                                                                           

   

(Unaudited, amounts in thousands)

   
    

Revenue from services

 

$

582,274

    

Net income

 

$

22,597

    

Net income per share-basic

 

$

0.70

    

Net income per share-diluted

 

$

0.69


        The Company has been liable for certain contingent payments which are based on profitability measures as defined by the respective purchase agreements of prior acquisitions (earnout payments). Upon payment of these earnout payments, the amount paid is allocated to goodwill as additional purchase price. During the nine month period ended September 30, 2004, the Company paid approximately $0.8 million and $0.9 million in earnout payments for Gill/Balsano Consulting, LLC (Gill/Balsano) and Jennings Ryan & Kolb (JRK), respectively, in accordance with their purchase agreements. During the nine month period ended September 30, 2003, the Company paid approximately $2.0 million, $0.7 million and $0.5 million in earnout payments for Heritage Professional Education, LLC, Gill/Balsano, and JRK, respectively, in accordance with their respective purchase agreements.


        As of September 30, 2004, the Company was contingently liable for additional earnout payments of approximately $0.4 million relating to its acquisition of JRK. In October 2004, in connection with the sale of the assets of JRK, the Company paid the remaining $0.4 million in earnout payments (see Subsequent Events footnote).


6.     DISPOSAL OF BUSINESS


        The Company abandoned its efforts to sell the E-Staff business during the first quarter of 2003 and decided to dispose of this subsidiary by winding down its operations. E-Staff operations ceased as of March 31, 2003. The Company determined that approximately $0.3 million of the net carrying amount of the assets from discontinued operations was impaired. This impairment charge was taken during the first quarter of 2003 and is included in the accompanying condensed consolidated statements of income as loss from discontinued operations for the three and nine month periods ending September 30, 2003.


7.     COMPREHENSIVE INCOME


        The Company was party to an interest rate swap agreement which effectively fixed the interest rate paid on $45.0 million of borrowings under the Company’s prior amended credit facility at 6.71%, effective January 1, 2001, plus an applicable margin. The Company recorded the fair value of this instrument in accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. In February 2003, the Company paid the last payment on the interest rate swap agreement in accordance with the maturity date of the instrument. Upon maturity of the interest rate swap agreement, the Company reclassified the remaining accumulated derivative loss of $0.4 million to interest expense, net, on the accompanying condensed consolidated statements of income. There are no other components of comprehensive income other than the Company’s consolidated net income and the accumulated derivative change during the three and nine month periods ending September 30, 2004 and 2003.



6




8.     DEBT


        On June 5, 2003, the Company entered into a $200.0 million senior secured credit facility consisting of a $125.0 million term loan with staggered maturities through June 2009, and a five year $75.0 million revolving credit facility. The proceeds from the term loan, along with cash on hand of $9.6 million were used to finance the purchase of Med-Staff for $104.0 million, to repay the term loan balance on the prior amended credit facility, and to pay fees and expenses incurred in connection with the financing. 


        Debt issuance costs related to the new credit facility totaled $2.6 million, net, and $3.0 million, net, as of September 30, 2004, and December 31, 2003, respectively. Debt issuance costs are recorded in other assets on the condensed consolidated balance sheets.  These costs are being amortized over the life of the credit facility. Debt issuance costs of $1.0 million, net, relating to the prior amended credit facility, were written off during the nine months ended September 30, 2003 and are included in loss on early extinguishment of debt in the condensed consolidated statements of income.

 

        The senior credit facility allows for the issuance of letters of credit in an aggregate face amount at any time outstanding not in excess of $25.0 million as of September 30, 2004. Additionally, swingline loans, as defined in the senior credit facility, not to exceed an aggregate principal amount at any time outstanding of $10.0 million are available under the senior credit facility.  As of September 30, 2004, $3.0 million was outstanding under the revolving credit facility and $11.6 million was outstanding under the letter of credit facility leaving $60.4 million available under the revolving credit facility.


        During the nine month period ended September 30, 2004, the Company repaid $36.2 million on the term loan portion of its credit facility, of which $33.2 million were optional prepayments. The aggregate scheduled maturities of the term loan portion of the Company’s long-term debt, as of September 30, 2004, are as follows, including amounts due for the remainder of 2004:


Year Ending December 31: 

 

(Unaudited, amounts

in thousands)

 

 

 

 

 

                                      

2004

 

$

760

 

2005

 

 

3,040

 

2006

 

 

3,040

 

2007

 

 

3,040

 

2008                                                                       

 

 

24,321

Thereafter

 

 

22,800

                                                                                   

 

 

 

 

$

57,001


9.     STOCKHOLDERS’ EQUITY


        On November 4, 2002, the Company’s Board of Directors authorized a stock repurchase program whereby the Company may purchase up to 1.5 million of its common shares at an aggregate price not to exceed $25.0 million. During the nine month period ended September 30, 2004, the Company purchased 29,000 shares of common stock at an average cost of $15.37 per share pursuant to this program. The cost of such purchases was approximately $0.4 million. All of these shares were retired as of September 30, 2004.


        The Company can purchase up to an additional 469,600 shares at an aggregate price not to exceed approximately $10.8 million under the previously authorized stock repurchase program. This repurchase program is within the limits of the Company’s current senior secured credit facility covenants. Under this program, the shares may be purchased from time-to-time in the open market. The repurchase program may be discontinued at any time at the discretion of the Company. At September 30, 2004, the Company had approximately 32.0 million shares outstanding.



7




10.   SEGMENT DATA


        Information on operating segments and a reconciliation to income from continuing operations before income taxes for the periods indicated are as follows:

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  

2004

  

2003

 

2004

 

2003

  

(Unaudited, amounts in thousands)

  

(Unaudited, amounts in thousands)

Revenue from unaffiliated customers:

   

  

     

   

     

  

     

  

Healthcare staffing

 

$

151,492

  

$

172,357

 

$

463,467

 

$

474,083

Other human capital management services

  

13,578

   

12,032

  

41,520

  

37,221

  

$

165,070

  

$

184,389

 

$

504,987

 

$

511,304

                                                                                   

             

Contribution income (a):

             

Healthcare staffing

 

$

15,295

  

$

20,351

 

$

45,902

 

$

58,636

Other human capital management services

  

1,379

   

631

  

5,325

  

3,282

   

16,674

   

20,982

  

51,227

  

61,918

              

Unallocated corporate overhead

  

5,806

   

6,090

  

17,750

  

17,916

Depreciation

  

1,024

   

1,230

  

3,969

  

3,336

Amortization

  

526

   

991

  

1,745

  

2,556

Non-recurring secondary offering costs

  

   

  

  

16

Loss on early extinguishment of debt

  

   

  

  

960

Interest expense, net

  

970

   

1,571

  

3,229

  

2,812

Income from continuing operations before
income taxes

 


$


8,348

  


$


11,100

 


$


24,534

 


$


34,322

———————

(a)  The Company defines contribution income as income from continuing operations before interest, income taxes, depreciation, amortization and corporate expenses not specifically identified to a reporting segment. Contribution income is a financial measure used by management when assessing segment performance.


11.   CONTINGENCIES

        The Company’s Cross Country TravCorps, Inc. and Cross Country Nurses, Inc. subsidiaries are the subjects of a class action lawsuit filed in the Superior Court of California in Orange County alleging, among other things, violations of certain sections of the California Labor Code, unfair competition and breach of contract. This lawsuit has not been certified by the court as a class action, and no monetary damages have been specified. As a result, the Company is unable to determine its potential exposure, if any, and intends to vigorously defend this matter.

        The Company, Joseph Boshart (the Company’s President, Chief Executive Officer and a Director) and Emil Hensel (the Company’s Chief Financial Officer and a Director) are the subject of three class action lawsuits filed in August 2004 in the United States District Court, Southern District of Florida. The lawsuits allege, among other things, that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by, among other things, issuing public documents and statements that were materially false and misleading concerning the Company’s business, operations and prospects which artificially inflated the price of the Company’s common stock. This lawsuit is currently in the very early stages, it has not been certified by the court as a class action, and no monetary damages have been specified. As a result, the Company is unable to determine its potential exposure, and intends to vigorously defend this matter.

        On or about September 7, 2004, two individuals filed identical lawsuits derivatively on behalf of Cross Country Healthcare, Inc. naming Messrs. Boshart, Hensel, Cash, Cerullo, Dircks, Fagan, Husain, Swedish and Trunfio and Karen Bechtel as defendants. Both claims were filed in the United States District Court, Southern District of Florida.  The lawsuits allege, among other things, that the defendants violated state laws, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. These lawsuits are currently in the very early stages, have not been certified by the court as a class action, and no monetary damages have been specified. As a result, the Company is unable to determine its potential exposure, and intends to vigorously defend these matters.



8




        The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the outcome of these other matters will not have a significant effect on the Company’s consolidated financial position or results of operations.


12.   SUBSEQUENT EVENTS


        On October 4, 2004, the Company sold assets of its Jennings Ryan & Kolb and Gill/Balsano Consulting practices to Mitretek Systems, Inc. (Mitretek) for $12.3 million in cash plus a working capital adjustment. The net assets sold consisted primarily of goodwill and other intangibles with a carrying amount of $6.6 million. Net proceeds from this transaction were used to pay down $10.4 million of term loan debt. As of September 30, 2004, in accordance with FASB Statement No. 142, the Company performed an interim impairment test on the reporting unit that included the assets that were sold. The Company determined that no impairment existed for that reporting unit based on the results of the test.


        Separately, in October 2004, the Company’s Board of Directors approved a plan to pursue a sale with respect to its Cejka Consulting practice that was not acquired by Mitretek. Cejka Consulting was a part of TravCorps Corporation, which was acquired by Cross Country Healthcare in December 1999. Cejka Consulting, along with the aforementioned disposed practices comprised the Company’s Cross Country Consulting, Inc. subsidiary, which is a component of the Company’s other human capital management services business segment. Cross Country Consulting, Inc. will be accounted for as discontinued operations beginning in the fourth quarter of 2004.


        Subsequent to September 30, 2004, the Company made prepayments on its term loan debt totaling $14.4 million and including the amount discussed above.


        On November 3, 2004, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission for the registration of approximately 11.4 million shares of common stock by three of its existing shareholders. No members of management are registering shares pursuant to this registration statement. The Company will not receive any of the proceeds from the sale of these shares. All net proceeds from the sale will go to the selling stockholders. The Company will incur all fees and expenses relating to the registration statement.





9




ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


        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 Form 10-K, filed for the year ended December 31, 2003, and is intended to assist the reader in understanding the financial results and condition of the Company.


        Certain prior period information has been reclassified to conform to the current period presentation.


RESULTS OF OPERATIONS


        The following table summarizes, for the periods indicated, selected statements of income data expressed as a percentage of revenue:

   

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2004

  

2003

   

2004

  

2003

 
   

(Unaudited)

   

(Unaudited)

 

                                                                                                                

   

  

     

  

     

   

     

   

Revenue from services

  

100.0

%

 

100.0

%

  

100.0

%

 

100.0

%

Direct operating expenses

  

76.7

  

75.7

   

76.5

  

75.5

 

Selling, general and administrative expenses

  

16.7

  

15.8

   

16.7

  

15.8

 

Bad debt expense

  

  

0.4

   

0.2

  

0.1

 

Depreciation and amortization

  

0.9

  

1.2

   

1.1

  

1.1

 

Non—recurring secondary offering costs

  

  

   

  

0.0

 

Income from operations

  

5.7

  

6.9

   

5.5

  

7.5

 

Loss on early extinguishment of debt

  

  

   

  

0.2

 

Interest expense, net

  

0.6

  

0.9

   

0.6

  

0.6

 

Income from continuing operations before income taxes

  

5.1

  

6.0

   

4.9

  

6.7

 

Income tax expense

  

2.0

  

2.3

   

1.9

  

2.6

 

Income from continuing operations

  

3.1

  

3.7

   

3.0

  

4.1

 

Discontinued operations, net of income taxes

  

  

(0.0

)

  

  

(0.1

)

Net income

  

3.1

%

 

3.7

%

  

3.0

%

 

4.0

%


Three months ended September 30, 2004 compared to three months ended September 30, 2003


        REVENUE FROM SERVICES decreased $19.3 million, or 10.5%, to $165.1 million for the three months ended September 30, 2004 as compared to $184.4 million for the three months ended September 30, 2003. This decrease was primarily due to a decrease in revenue from our healthcare staffing businesses partially offset by an increase in our other human capital management services. The decrease in healthcare staffing was primarily from our travel staffing operations and was partially offset by an increase in our clinical trials staffing and international nurse recruitment businesses. The increase in other human capital management services was primarily due to an increase in our educational seminars business and our retained search business. See Segment Information below for further analysis.


        DIRECT OPERATING EXPENSES are comprised primarily of field employee compensation expenses, housing expenses, travel expenses and field insurance expenses. Direct operating expenses totaled $126.6 million for the three months ended September 30, 2004 as compared to $139.5 million for the three months ended September 30, 2003. As a percentage of revenue, direct operating expenses represented 76.7% of revenue for the three months ended September 30, 2004 and 75.7% for the three months ended September 30, 2003. This increase is primarily attributable to higher insurance and compensation costs.



10




        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES totaled $27.6 million for the three months ended September 30, 2004 as compared to $29.2 million for the three months ended September 30, 2003. This decrease is primarily due to lower selling expenses in our healthcare staffing segment as a result of lower volumes, a reduction in corporate general and administrative expenses, and lower selling expenses in our educational seminars business.  Partially offsetting these decreases were higher public company expenses related to our efforts toward complying with Section 404 of the Sarbanes-Oxley Act of 2002. As a percentage of revenue, selling, general and administrative expenses were 16.7% and 15.8% for the three months ended September 30, 2004 and 2003, respectively, reflecting negative operating leverage resulting from an organic decline in volume.


        BAD DEBT EXPENSE totaled $0.8 million for the three months ended September 30, 2003, which represented 0.4% of revenue. The amount represented an increase in the allowance for doubtful accounts to reflect slower collections and write-offs in the three months ended September 30, 2003. We did not accrue bad debt expense for the three months ended September 30, 2004, primarily due to improved collections.


        NET INTEREST EXPENSE totaled $1.0 million for the three months ended September 30, 2004 as compared to $1.6 million for the three months ended September 30, 2003. This decrease was primarily due to lower average borrowings outstanding during the three months ended September 30, 2004 compared to the three months ended September 30, 2003; partially offset by a higher effective interest rate in the three months ended September 30, 2004 compared to the three months ended September 30, 2003. Average borrowings outstanding were lower in the three months ending September 30, 2004 due to repayments of debt. The effective interest rate for the three months ended September 30, 2004 was 5.8% compared to a rate of 5.0% for the three months ended September 30, 2003.


        INCOME TAX EXPENSE totaled $3.2 million for the three months ended September 30, 2004 as compared to $4.3 million for the three months ended September 30, 2003. The effective tax rate was 38.5% for the three months ended September 30, 2004 compared to 38.7% in the three months ended September 30, 2003.  


Nine months ended September 30, 2004 compared to nine months ended September 30, 2003


        REVENUE FROM SERVICES decreased $6.3 million, or 1.2%, to $505.0 million for the nine months ended September 30, 2004 as compared to $511.3 million for the nine months ended September 30, 2003. Excluding the effect of the Med-Staff acquisition, revenue decreased $54.4 million, or 11.7%. This decrease was primarily due to a decrease in revenue from our organic healthcare staffing businesses partially offset by an increase in our other human capital management businesses. The organic decrease in other healthcare staffing was mostly from our travel staffing operations but was partially offset by an increase in our clinical trials staffing and international recruitment businesses. The increase in other human capital management was primarily due to an increase in our educational seminars business and our search business. See Segment Information below for further analysis.


        DIRECT OPERATING EXPENSES are comprised primarily of field employee compensation expenses, housing expenses, travel expenses and field insurance expenses. Direct operating expenses totaled $386.2 million for the nine months ended September 30, 2004 as compared to $385.9 million for the nine months ended September 30, 2003. As a percentage of revenue, direct operating expenses represented 76.5% of revenue for the nine months ended September 30, 2004 and 75.5% for the nine months ended September 30, 2003. This increase is primarily attributable to higher insurance and compensation costs.


        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES totaled $84.1 million for the nine months ended September 30, 2004 as compared to $80.6 million for the nine months ended September 30, 2003. This increase is primarily due to the added selling, general and administrative expenses of the Med-Staff organization, as well as higher legal fees and higher public company expenses related to our efforts toward complying with Section 404 of the Sarbanes-Oxley Act of 2002. Partially offsetting these increases were lower selling expenses in our healthcare staffing segment as a result of lower volumes. As a percentage of revenue, selling, general and administrative expenses were 16.7% and 15.8% for the nine months ended September 30, 2004 and 2003, respectively, reflecting negative operating leverage resulting from an organic decline in volume.


        BAD DEBT EXPENSE totaled $1.2 million for the nine months ended September 30, 2004 as compared to $0.8 million for the nine months ended September 30, 2003. Bad debt expense represented approximately 0.2% of revenue and 0.1% of revenue for the nine month periods ended September 30, 2004 and 2003, respectively.



11




        LOSS ON EARLY EXTINGUISHMENT OF DEBT totaled $1.0 million for the nine months ended September 30, 2003 and represented the write-off of loan fees associated with the early termination of our prior amended credit facility as a result of our refinancing in connection with the Med-Staff acquisition.

        NET INTEREST EXPENSE totaled $3.2 million for the nine months ended September 30, 2004 as compared to $2.8 million for the nine months ended September 30, 2003. This increase was primarily due to an increase in interest expense relating to higher average borrowings outstanding during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was partially offset by slightly lower average interest rate charges in the nine months ended September 30, 2004 due, in part, to the expiration in February 2003 of our interest rate swap agreement. Average borrowings outstanding were higher in the nine months ended September 30, 2004 due to the incremental financing for the acquisition of Med-Staff partially offset by repayments of debt. The effective interest rate for the nine months ended September 30, 2004 was 5.4% compared to a rate of 5.5% for the nine months ended September 30, 2003.

        INCOME TAX EXPENSE totaled $9.4 million for the nine months ended September 30, 2004 as compared to $13.3 million for the nine months ended September 30, 2003. The effective tax rate was 38.5% for the nine months ended September 30, 2004 compared to 38.7% in the nine months ended September 30, 2003.

SEGMENT INFORMATION

        The following table presents, for the periods indicated, selected statements of income data by segment in accordance with Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures about Segments of an Enterprise and Related Information:

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  

2004

  

2003

 

2004

 

2003

  

(Unaudited, amounts in thousands)

  

(Unaudited, amounts in thousands)

Revenue from unaffiliated customers:

   

  

     

   

     

  

     

  

Healthcare staffing

 

$

151,492

  

$

172,357

 

$

463,467

 

$

474,083

Other human capital management services

  

13,578

   

12,032

  

41,520

  

37,221

  

$

165,070

  

$

184,389

 

$

504,987

 

$

511,304

                                                                                  

             

Contribution income (a):

             

Healthcare staffing

 

$

15,295

  

$

20,351

 

$

45,902

 

$

58,636

Other human capital management services

  

1,379

   

631

  

5,325

  

3,282

   

16,674

   

20,982

  

51,227

  

61,918

              

Unallocated corporate overhead

  

5,806

   

6,090

  

17,750

  

17,916

Depreciation

  

1,024

   

1,230

  

3,969

  

3,336

Amortization

  

526

   

991

  

1,745

  

2,556

Non-recurring secondary offering costs

  

   

  

  

16

Loss on early extinguishment of debt

  

   

  

  

960

Interest expense, net

  

970

   

1,571

  

3,229

  

2,812

Income from continuing operations before
income taxes

 


$


8,348

  


$


11,100

 


$


24,534

 


$


34,322

———————

(a)  We define contribution income as income from continuing operations before interest, income taxes, depreciation, amortization and corporate expenses not specifically identified to a reporting segment. Contribution income is a financial measure used by management when assessing segment performance.

Three months ended September 30, 2004 compared to three months ended September 30, 2003

HEALTHCARE STAFFING

        Revenue from our healthcare staffing business segment decreased $20.9 million or 12.1% from $172.4 million in the three months ended September 30, 2003 to $151.5 million for the three months ended September 30, 2004. This decrease was due to a decrease in the average number of full time equivalents (FTEs), representing $18.9 million of the decrease while the remainder was due to price and mix.



12




        The average number of FTEs on contract decreased 11.8% from the prior year. This decrease in FTEs was due to a decrease in FTEs from our travel staffing operations and partially offset by higher FTEs in our clinical trials staffing and international recruitment businesses. Our travel nurse operations have weakened throughout 2003 and 2004 due to a more cautious buying process on the part of acute care hospital customers which reduced the level of demand for our nurse staffing services and resulted in a decline in the number of nurses applying with us for contract travel assignments. We believe the cautious buying process will continue in the short term and is primarily due to current economic conditions that enable hospitals to meet more of their nurse staffing needs internally at prevailing wages. Although our number of orders for contract nurses has improved from the low point in mid-2003, the level of our contract bookings for future assignments remain below the prior year. In the near term, we believe these dynamics would be favorably impacted by higher than expected in-patient hospital admission trends. Longer term, improvement in overall job creation in the economy would provide many staff nurses with increased household income and greater confidence in being able to reduce the amount of regular and overtime hours they provided directly to hospital employers during the last two years. We believe this would lead to an increase in the demand for our services and encourage more nurses to actively seek travel assignments and apply with us. In general, we believe nurses are more willing to seek travel assignments during relatively high levels of demand for contract employment, and conversely, are more reluctant to seek travel assignments during and immediately following periods of weak demand for contract employment. We also believe demand for travel nurse staffing services will be favorably impacted in the long term by an aging population and an increasing shortage of nurses, although we cannot predict when that will happen.  


        The average bill rates, excluding hospital sponsored pass-through bonuses and administrative and co-marketing expenses, in our staffing business during the three months ended September 30, 2004, were 0.6% lower than the three months ended September 30, 2003. Our pricing was negatively impacted by co-marketing and third party administrative fees as well as a reduction in hospital sponsored pass-through bonuses that are accounted for in revenue. Fees relating to the co-marketing arrangements we have with group purchasing organizations in which we have exclusive or preferred provider status, and third-party administrative fees relating to vendor managed programs, are included as an offset to revenue. We have experienced an increase in co-marketing expenses dispersed to secure more preferred provider relationships and an increase in vendor management services being utilized by our customers.


        Mobile contracts, where the nurse is on the hospital payroll, accounted for approximately 2% of our volume in our healthcare staffing business segment in the three months ended September 30, 2004 and 2003.


        For the three months ended September 30, 2004, nurse staffing operations generated 86.8% of healthcare staffing revenue and 13.2% was generated by other operations. For the three month period ended September 30, 2003, 89.8% of healthcare staffing revenue was generated from nursing operations and 10.2% was generated by other operations.


        Contribution income from our healthcare staffing segment for the quarter ended September 30, 2004 decreased 24.8% or $5.1 million from $20.4 million to $15.3 million. As a percentage of healthcare staffing revenue, contribution income was 10.1% for the three months ended September 30, 2004 compared to 11.8% for the three months ended September 30, 2003. Our profitability was negatively impacted by a decline in the bill-pay spread and higher insurance costs. The increase in direct costs in our travel staffing businesses was not offset by an increase in pricing to our customers. These factors, combined with less leverage on our overhead, contributed to this decrease in contribution income as a percentage of revenue.


OTHER HUMAN CAPITAL MANAGEMENT SERVICES


        Revenue from other human capital management services increased 12.8% or $1.5 million from $12.0 million in the three months ended September 30, 2003 to $13.6 million for the three months ended September 30, 2004. This increase was primarily due to higher revenue from our educational seminars and search businesses. Higher revenues from our educational seminars business resulted primarily from an increase in seminar attendance.


        Contribution income from other human capital management services for the quarter ended September 30, 2004 increased 118.5% to $1.4 million from $0.6 million for the three months ended September 30, 2003. This increase was primarily due to the increase in revenues from our educational seminars business as well as increases in all other businesses in this segment. Contribution income as a percentage of other human capital management services



13




revenue for the three months ended September 30, 2004 was 10.2% compared to 5.2% for the three months ended September 30, 2003 reflecting expense controls and improved operating leverage in our educational training business resulting from an increase in average attendees per seminar.


UNALLOCATED CORPORATE OVERHEAD


        Unallocated corporate overhead was $5.8 million in the three months ended September 30, 2004 compared to $6.1 million in the three months ended September 30, 2003. Corporate cost saving measures offset an increase in public company expenses related to our efforts toward complying with Section 404 of the Sarbanes-Oxley Act of 2002. As a percentage of consolidated revenue, unallocated corporate overhead was 3.5% during the three months ended September 30, 2004 compared to 3.3% during the three months ended September 30, 2003.


Nine months ended September 30, 2004 compared to nine months ended September 30, 2003


HEALTHCARE STAFFING


        Revenue from our healthcare staffing business segment decreased $10.6 million or 2.2% from $474.1 million in the nine months ended September 30, 2003 to $463.5 million for the nine months ended September 30, 2004. Revenue comparisons are impacted by the acquisition of Med-Staff on June 5, 2003. Excluding the effect of the Med-Staff acquisition, revenue decreased $58.7 million, or 13.8%. This decrease was due to a decrease in the FTEs, representing $51.1 million of the decrease while the remainder was due to price and mix. For comparison purposes only, on a stand alone basis, Med-Staff’s revenue for the nine months ended September 30, 2004 decreased by $22.9 million or 19.2% compared to the nine months ended September 30, 2003.

        

        On a combined basis, the number of full time equivalents (FTEs) decreased by 1.0% over the prior year. Excluding the FTEs from the Med-Staff acquisition, the average number of FTEs on contract decreased 13.2% from the prior year. This decrease in volume was due to a decrease in FTEs from our travel staffing operations and partially offset by higher FTEs in our clinical trials staffing and international recruitment businesses. Our travel nurse operations have weakened throughout 2003 and 2004 due to a more cautious buying process on the part of acute care hospital customers which reduced the level of demand for our nurse staffing services and resulted in a decline in the number of nurses applying with us for contract travel assignments. We believe the cautious buying process will continue in the short term and is primarily due to current economic conditions that enable hospitals to meet more of their nurse staffing needs internally at prevailing wages. Although our number of orders for contract nurses has improved from the low point in mid-2003, the level of our contract bookings for future assignments remain below the prior year. In the near term, we believe these dynamics would be favorably impacted by higher than expected in-patient hospital admission trends. Longer term, improvement in overall job creation in the economy would provide many staff nurses with increased household income and greater confidence in being able to reduce the amount of regular and overtime hours they provided directly to hospital employers during the last two years. We believe this would lead to an increase in the demand for our services and encourage more nurses to actively seek travel assignments and apply with us.  In general, we believe nurses are more willing to seek travel assignments during relatively high levels of demand for contract employment, and conversely, are more reluctant to seek travel assignments during and immediately following periods of weak demand for contract employment. We also believe demand for travel nurse staffing services will be favorably impacted in the long term by an aging population and an increasing shortage of nurses, although we cannot predict when that will happen.  

        

        The average bill rates, excluding hospital sponsored pass-through bonuses and administrative and co-marketing expenses, in our organic nurse staffing business during the nine months ended September 30, 2004, were 0.4% lower than the nine months ended September 30, 2003. In addition, our pricing was negatively impacted by co-marketing and third party administrative fees as well as a reduction in hospital sponsored pass-through bonuses that are accounted for in revenue. Fees relating to the co-marketing arrangements we have with group purchasing organizations in which we have exclusive or preferred provider status, and third-party administrative fees relating to vendor managed programs are included as an offset to revenue. We have experienced an increase in co-marketing expenses dispersed to secure more preferred provider relationships and an increase in vendor management services being utilized by our customers.


        Mobile contracts, where the nurse is on the hospital payroll, accounted for approximately 2% of our volume in our healthcare staffing business segment in both the nine months ended September 30, 2004 and 2003.



14




        For the nine months ended September 30, 2004, nurse staffing operations generated 87.4% of healthcare staffing revenue and 12.6% was generated by other operations. For the nine month period ended September 30, 2003, 88.8% of healthcare staffing revenue was generated from nursing operations and 11.2% was generated by other operations.


        Contribution income from our healthcare staffing segment for the nine months ended September 30, 2004 decreased 21.7% or $12.7 million from $58.6 million to $45.9 million. As a percentage of healthcare staffing revenue, contribution income was 9.9% for the nine months ended September 30, 2004 compared to 12.4% for the nine months ended September 30, 2003. Our profitability was negatively impacted by a decline in the bill-pay spread and higher insurance costs. The increase in direct costs in our travel staffing businesses was not offset by an increase in pricing to our customers. All of these factors, combined with less leverage on our overhead, contributed to this decrease in contribution income as a percentage of revenues.


OTHER HUMAN CAPITAL MANAGEMENT SERVICES


        Revenue from other human capital management services increased 11.6% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was primarily due to higher revenue from our educational training and search businesses. The increase in revenues from our educational training business primarily reflects higher seminar attendance in the nine month period ending September 30, 2004 compared to the nine month period ending September 30, 2003.


        Contribution income from other human capital management services for the nine months ended September 30, 2004 increased 62.2% to $5.3 million from $3.3 million in the nine months ended September 30, 2003. This increase was primarily due to the increase in revenues from our educational seminars business. Contribution income as a percentage of other human capital management services revenue for the nine months ended September 30, 2004 was 12.8% compared to 8.8% for the nine months ended September 30, 2003 reflecting expense controls and improved operating leverage on our educational training business resulting from an increase in average attendees per seminar.


UNALLOCATED CORPORATE OVERHEAD


        Unallocated corporate overhead was $17.8 million in the nine months ended September 30, 2004 compared to $17.9 million in the nine months ended September 30, 2003. Corporate cost saving measures offset increases in legal and public company expenses related to our efforts toward complying with Section 404 of the Sarbanes-Oxley Act of 2002. As a percentage of consolidated revenue, unallocated corporate overhead was 3.5% during both the nine months ended September 30, 2004 and 2003.


LIQUIDITY AND CAPITAL RESOURCES


        As of September 30, 2004, we had a current ratio, the amount of current assets divided by current liabilities, of 2.2 to 1.0 compared to 2.7 to 1.0 as of December 31, 2003. Working capital decreased by $16.7 million to $62.8 as of September 30, 2004, compared to $79.5 million as of December 31, 2003. This decrease in working capital was primarily due to a decrease in accounts receivable. During the nine months ended September 30, 2004, net cash provided by operating activities was used primarily to repay long-term debt as described below.


        Net cash provided by operating activities for the nine months ended September 30, 2004 was $37.0 million compared to $43.2 million for the nine months ended September 30, 2003. This decrease is primarily due to lower net income excluding non-cash items in the nine month period ending September 30, 2004 compared to the nine month period ending September 30, 2003. Days sales outstanding improved 2 days from 59 days for the three month period ended December 31, 2003 to 57 days for the three month period ended September 30, 2004.


        Investing activities used $5.6 million of cash in the nine months ended September 30, 2004 compared to $110.0 million during the nine months ended September 30, 2003. Investing activities in the nine months ended September 30, 2004 were primarily attributable to capital expenditures and earnout payments relating to previous acquisitions.  During the nine months ended September 30, 2003, investing activities included the purchase of Med-Staff.


        Net cash used in financing activities in the nine months ended September 30, 2004 was $31.3 million compared to a net source of funds of $67.8 million in the nine months ended September 30, 2003. During the nine months



15




ended September 30, 2004, we repaid $36.2 million of the term loan portion of debt, which included optional prepayments on our term loan of $33.2 million. This use of cash in the nine months ending September 30, 2004 was offset by net proceeds of $3.0 million provided by our revolving credit facility, and by other financing activities. Other financing activities included the proceeds from the exercise of stock options and the purchase of our common stock pursuant to our stock repurchase program.


        On November 5, 2002, our Board of Directors authorized a stock repurchase program, whereby we may purchase up to 1.5 million of our common shares at an aggregate price not to exceed $25.0 million. During the nine month period ended September 30, 2004, we purchased 29,000 shares of common stock at an average cost of $15.37 per share pursuant to the current authorization. The cost of such purchases was approximately $0.4 million. As of September 30, 2004, we had purchased 1,030,400 shares of our common stock at an average cost of $13.75 per share pursuant to the current authorization. All of the common stock was retired. The cost of such purchases was approximately $14.2 million. Under this program, the shares may be purchased from time to time on the open market. The repurchase program may be discontinued at any time at the discretion of the Company.


        Our operating cash flows constitute our primary source of liquidity and historically have been sufficient to fund our working capital, capital expenditures, and internal business expansion and debt service. We believe that our capital resources are sufficient to meet our working capital needs for the next twelve months. We expect to meet our future needs for working capital, capital expenditures, internal business expansion, debt service and any additional stock repurchases from a combination of operating cash flows and funds available under our credit facility. We also continue to evaluate acquisition opportunities that may require additional funding.


SUBSEQUENT EVENTS


        On October 4, 2004, we sold assets of our Jennings Ryan & Kolb and Gill/Balsano Consulting practices to Mitretek Systems, Inc. (Mitretek) for $12.3 million in cash plus a working capital adjustment. The net assets sold consisted primarily of goodwill and other intangibles with a carrying amount of $6.6 million. Net proceeds from this transaction were used to pay down $10.4 million of term loan debt. As of September 30, 2004, in accordance with FASB Statement No. 142, we performed an interim impairment test on the reporting unit that included the assets that were sold. We determined that no impairment existed for that reporting unit based on the results of the test.   


        Separately, in October 2004, the Board of Directors approved a plan to pursue a sale with respect to our Cejka Consulting practice that was not acquired by Mitretek. Cejka Consulting was a part of TravCorps Corporation, which was acquired by Cross Country Healthcare in December 1999. Cejka Consulting, along with the aforementioned disposed practices constituted the Company’s Cross Country Consulting, Inc. subsidiary, which is a component of our other human capital management services business segment. Cross Country Consulting, Inc. will be accounted for as discontinued operations beginning in the fourth quarter of 2004.


        On November 3, 2004, we filed a registration statement on Form S-3 with the Securities and Exchange Commission for the registration of approximately 11.4 million shares of common stock by three of our existing shareholders. No members of management are registering shares pursuant to this registration statement. The Company will not receive any of the proceeds from the sale of these shares. All net proceeds from the sale will go to the selling stockholders. We will incur all fees and expenses relating to the registration statement.




16




COMMITMENTS


        The following table and discussion reflects our remaining significant contractual obligations and other commitments as of September 30, 2004:


Contractual Obligations

 

Total

 

2004

 

2005

 

2006

 

2007

 

2008

 

Thereafter

  

(Unaudited, amounts in thousands)

                      

Term Loan (a)

 

$

57,001

 

$

760

 

$

3,040

 

$

3,040

 

$

3,040

 

$

24,321

 

$

22,800

                                                              

   

  

     

  

     

  

     

  

     

  

     

  

     

  

Operating Leases

  

22,827

  

1,286

  

5,060

  

4,307

  

3,164

  

2,432

  

6,578

                      
  

$

79,828

 

$

2,046

 

$

8,100

 

$

7,347

 

$

6,204

 

$

26,753

 

$

29,378

———————

(a)

Under the credit facility, we are required to comply with certain financial covenants. Our inability to comply with the required covenants or other provisions could result in default under our credit facility. In the event of any such default and our inability to obtain a waiver of the default, all amounts outstanding under the credit facility could be declared to be immediately due and payable.  

As of October 29, 2004, the Company made additional prepayments of $14.4 million which adjusted the remaining scheduled payments. The adjusted amounts for the term loan, in thousands, are: 2004 - $568; 2005- $2,273; 2006 - $2,273; 2007 - $2,273; 2008 - $18,185; and thereafter - $17,049.


CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES

        Our critical accounting policies remain consistent with those reported in our Annual Report on Form 10-K.

RECENTLY ISSUED ACCOUNTING STANDARDS

        No new standards have been issued that impact Cross Country Healthcare, Inc.

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

        This Form 10-Q includes forward-looking statements. 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, costs and availability of short-term leases for our travel nurses, demand for the healthcare services we provide, both nationally and in the regions in which we operate, 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, the outcome of any litigation, our clients’ ability to pay us for our services, our ability to successfully implement our acquisition and development strategies, the effect of liabilities and other claims asserted against us, the effect of competition in the markets we serve, and other factors set forth under the caption “Risk Factors” in the Company’s Registration Statement on Form S-3  filed on November 3, 2004.

        Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed in this Form 10-Q might not occur. The Company does not have a policy of updating or revising forward-looking statements, and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        There have been no material changes in the reported market risks since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.



17




ITEM 4.    CONTROLS AND PROCEDURES


        The Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports required under the Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding any required disclosure.


        There have been no changes in the Company’s internal controls or in other factors that occurred during the last fiscal quarter that have materially affected or that are reasonably likely to materially affect our internal controls over financial reporting.




18





PART II.    OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS

 

Theodora Cossack, et. al. v. Cross Country TravCorps, Inc. and Cross Country Nurses, Inc.

 

        On August 26, 2003, Theodora Cossack and Barry S. Phillips, C.P.A., filed suit in the Superior Court of the State of California, for the County of Orange, naming Cross Country TravCorps, Inc. and Cross Country Nurses, Inc. as defendants. Plaintiffs plead causes of action for (1) Violation of California Business and Professions Code §§ 17200, et. seq; (2) Violations of California Labor Code §§ 200, et. seq; (3) Recovery of Unpaid Wages and Penalties; (4) Conversion; (5) Breach of Contract; (6) Common Counts—Work, Labor, Services Provided; and (7) Common Counts—Money Had and Received.


        Plaintiffs, who purport to sue on behalf of themselves and all others similarly situated, allege that Defendants failed to pay plaintiffs, and the class they purport to represent, properly under California law. Plaintiffs claim that defendants failed to pay nurses hourly overtime as required by California law; failed to calculate correctly their employees’ regular rate of pay used to calculate the rate at which overtime hours are to be compensated; failed to calculate correctly and pay a double time premium for all hours worked in excess of 12 in a workday; scheduled some of its employees on an alternative workweek schedule, but failed to pay them additional compensation when those employees did not work such alternative workweek, as scheduled; failed to pay for missed meal and rest breaks; failed to pay wages due upon termination of employment within the time prescribed by California law; and failed to pay employees for the minimum hours defendants had promised them.


        Plaintiffs seek (among other things) an order enjoining defendants from engaging in the practices challenged in the complaint; for an order for full restitution of all monies Defendants allegedly failed to pay Plaintiffs (and their purported class); for pre-judgment interest; for certain penalties provided for by the California Labor Code; and for attorneys’ fees and costs.


        Cross Country demurred to all causes alleged by one of the plaintiffs, Barry Phillips, on the grounds that he lacks standing to sue. On December 12, 2003, the court sustained the demurrer as to all causes of action brought by that plaintiff, except his representative claim under §17200 of the California statutes. On or about December 15, 2003, plaintiffs filed an amended complaint. Cossack remains a plaintiff on all causes of action. On or about January 14, 2004, the Company filed its answer to the amended complaint.


        The lawsuit has not yet been certified by the court as a class action. At this time we are unable to determine our potential exposure. We intend to vigorously defend this matter.


City of Ann Arbor Employees Retirement System v. Cross Country Healthcare, Inc., Joseph A. Boshart and Emil Hensel; Peter A. Cohen, individually and on behalf of all other similarly situated v. Cross Country Healthcare, Inc., Joseph Boshart and Emil Hensel; and Robert Husted and Marcella Husted, individually and on behalf of all other similarly situated v. Cross Country Healthcare, Inc., Joseph Boshart and Emil Hensel


        On or about August 9, 2004, August 19, 2004 and August 24, 2004 individual lawsuits were filed by City of Ann Arbor Employees Retirement System, Peter Cohen, and Robert Husted and Marcella Husted, on behalf of themselves and all other persons who acquired the Company’s Common Stock during the period October 25, 2001 through August 6, 2002, respectively.  Each lawsuit was brought in the United States District Court Southern District of Florida. Each lawsuit alleges the Company, Joseph A. Boshart (President and CEO of Cross Country and a Director) and Emil Hensel (Chief Financial Officer of Cross Country and a Director) violated certain sections of 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, 15 U.S.C Sections 78j (b) and 78t (a) and Rule 10b-5 promulgated by the Securities and Exchange Commission, 17 C.F.R, Section 240.10b-5, by, among other things, issuing public documents and statements that were materially false and misleading concerning the Company’s business, operations and prospects which artificially inflated the price of the Company’s common stock.


        Plaintiffs seek, among other things, an order declaring the action to be a class action and declaring the plaintiffs to be a representative of the class as well as an award of damages in an amount to be determined.



19




        This lawsuit is in its very early stages and has not yet been certified by the court as a class action. The various complaints have not yet been consolidated, and the Company has not yet responded. We are unable at this time to determine our potential exposure. We intend to vigorously defend this matter.


William Marcus, Derivatively On Behalf of Cross Country Healthcare, Inc. v. Joseph A. Boshart, Emil Hensel, Karen H. Bechtel, W. Larry Cash, Bruce A. Cerullo, Thomas C. Dircks, A. Lawrence Fagan, M. Fazle Husain, Joseph Swedish and Joseph Trunfio; and David Steiner, Derivatively On Behalf of Cross Country Healthcare, Inc. v. Joseph A. Boshart, Emil Hensel, Karen H. Bechtel, W. Larry Cash, Bruce A. Cerullo, Thomas C. Dircks, A. Lawrence Fagan, M. Fazle Husain, Joseph Swedish and Joseph Trunfio


        On or about September 7, 2004, each of William Marcus and David Steiner filed identical lawsuits derivatively on behalf of Cross Country Healthcare, Inc. (the “Company”) naming Joseph A. Boshart, Emil Hensel, Karen H. Bechtel, W. Larry Cash, Bruce A. Cerullo, Thomas C. Dircks, A. Lawrence Fagan, M. Fazle Husain, Joseph Swedish and Joseph Trunfio (each a member of the Board of Directors of the Company from October 25, 2001 to August 6, 2002) as defendants. Both claims were filed in the United States District Court, Southern District of Florida.


        Plaintiffs allege, among other things, that the defendants violated state laws, including breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment from October 25, 2001 to August 6, 2002, which plaintiffs allege resulted in substantial losses to the Company and other damages, such as to its reputation and goodwill.


        Plaintiffs seek, among other things, a judgment against all of the defendants in favor of the Company for monetary damages, equitable and/or injunctive relief, restitution, and the costs and disbursements of the action (including reasonable attorneys fees, accountants’ and experts’ fees, costs and expenses).


        This lawsuit is in its very early stages. The two complaints have not been consolidated, and the Company has not yet responded. At this time we are unable to determine our potential exposure. We intend to vigorously defend this matter.



ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


        On November 4, 2002, we announced that our Board of Directors authorized a stock repurchase program, whereby we may purchase up to 1.5 million of our common shares at an aggregate price not to exceed $25.0 million. The Board of Directors did not specify an expiration date. During the three month period ended September 30, 2004, we purchased 12,600 shares of common stock at an average cost of $14.64 per share pursuant to its current authorization. A summary of the repurchase activity for the period covered by this report follows:


Period

 

(a) Total Number
of Shares (or Units)

Purchased

 

(b) Average

Price Paid per

Share (or 
Unit)

 

(c) Total Number
of Shares (or Units)

Purchased as Part
of Publicly
Announced

Plans or Programs

 

(d) Maximum Number (or

Approximate Dollar Value)
of Shares (or units) that 
May Yet 

Be Purchased Under the

Plans or Programs

July 1 – July 31, 2004

 

 

 

NA

 

NA

 

482,200

August 1 – August 31, 2004

 

12,100

 

$

14.63

 

12,100

 

470,100

September 1 – September 30, 2004

 

500

 

$

14.97

 

500

 

469,600

Total July 1 – September 30, 2004

 

12,600

 

$

14.64

 

12,600

 

469,600

                                                           

    

 

      

  

      

 

      

 


ITEM 6.    EXHIBITS.


        See Exhibit Index immediately following signature page.




20




SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


                                                                                                           

 

CROSS COUNTRY HEALTHCARE, INC.

 

Date: November 8, 2004


 


By:  


/s/ EMIL HENSEL

 

 

 

Emil Hensel

Chief Financial Officer and Director

(Principal Financial Officer)

 

Date: November 8, 2004


 


By:


/s/ DANIEL J. LEWIS

 

 

 

Daniel J. Lewis

Corporate Controller

(Principal Accounting Officer)

 


 

 





21




EXHIBIT INDEX


No.

    

Description

 

 

                                                                                                                                                                               

31.1

 

Certification Pursuant to pursuant to Rule 13a-14(a) and Rule 15d-14 (a) by Joseph A. Boshart, President

and Chief Executive Officer

31.2

 

Certification Pursuant to pursuant to Rule 13a-14(a) and Rule 15d-14 (a) by Emil Hensel, Chief Financial

Officer

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350 by Joseph A. Boshart, Chief Executive Officer

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350 by Emil Hensel, Chief Financial Officer






bp--x1-53755--Cross Country, Inc.--Certification




EXHIBIT 31.1


CERTIFICATION


I, Joseph A. Boshart, certify that:


1.

I have reviewed this quarterly report on Form 10-Q of Cross Country Healthcare, Inc.;


2.

Based on my knowledge, this 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 report;


3.

Based on my knowledge, the financial statements, and other financial information included in this 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 report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


a)

Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;


b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 8, 2004



/s/ JOSEPH A. BOSHART                               

Joseph A. Boshart

Chief Executive Officer





bp--x1-53755--Cross Country, Inc.--Certification

EXHIBIT 31.2


CERTIFICATION


I, Emil Hensel, certify that:


1.

I have reviewed this quarterly report on Form 10-Q of Cross Country Healthcare, Inc.;


2.

Based on my knowledge, this 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 report;


3.

Based on my knowledge, the financial statements, and other financial information included in this 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 report;


4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


a)

Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;


b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function):


a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 8, 2004



/s/ EMIL HENSEL                                                   

Emil Hensel

Chief Financial Officer




bp--x1-53755--Cross Country, Inc.--Certification





EXHIBIT 32.1


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350


     In connection with the accompanying Quarterly Report on Form 10-Q of Cross Country Healthcare, Inc. (the "Company") for the quarterly period ended September 30, 2004 (the "Periodic Report"), I, Joseph A. Boshart, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Date: November 8, 2004



/s/ JOSEPH A. BOSHART                                         

Joseph A. Boshart

Chief Executive Officer


     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Cross Country Healthcare and will be retained by Cross Country Healthcare and furnished to the Securities and Exchange Commission or its staff upon request.


     The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.






bp--x1-53755--Cross Country, Inc.--Certification




EXHIBIT 32.2



CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350


     In connection with the accompanying Quarterly Report on Form 10-Q of Cross Country Healthcare, Inc. (the "Company") for the quarterly period ended September 30, 2004 (the "Periodic Report"), I, Emil Hensel, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: November 8, 2004



/s/EMIL HENSEL                                                           

Emil Hensel

Chief Financial Officer



     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Cross Country Healthcare and will be retained by Cross Country Healthcare and furnished to the Securities and Exchange Commission or its staff upon request.


     The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.