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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

or

o

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


GRAPHIC

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 No.)

6551 Park of Commerce Boulevard, N.W.
Boca Raton, Florida 33487
(Address of principal executive offices, zip code)

Registrant's telephone number, including area code: (561) 998-2232
Securities registered pursuant to Section 12(b) of the act:
None
Securities registered pursuant to Section 12(g) of the act:
Common Stock, $0.0001 Par Value Per Share

        Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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  o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

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

        The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of Common Stock on June 30, 2003 of $13.16 as reported on the Nasdaq National Market, was $268,196,312. This calculation does not reflect a determination that persons are affiliated for any other purpose.

        As of February 29, 2004, 31,903,379 shares of Common Stock, $0.0001 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement pursuant to Regulation 14A, which statement will be filed not later than 120 days after the end of the fiscal year covered by this Report, are incorporated by reference in Part III hereof.





TABLE OF CONTENTS

 
   
  Page
PART I        

ITEM 1.

 

BUSINESS

 

1
    RISK FACTORS   13
ITEM 2.   PROPERTIES   18
ITEM 3.   LEGAL PROCEEDINGS   19
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   19

PART II

 

 

 

 

ITEM 5.

 

MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

20
ITEM 6.   SELECTED FINANCIAL DATA   21
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   24
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   38
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   39
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   39
ITEM 9A.   CONTROLS AND PROCEDURES   39

PART III

 

 

 

 

ITEM 10.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

40
ITEM 11.   EXECUTIVE COMPENSATION   40
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   40
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   40
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES   40

PART IV

 

 

 

 

ITEM 15.

 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

41
    SIGNATURES   42

        All references to "we, "us," "our," or "Cross Country" in this Report on Form 10-K means Cross Country Healthcare, Inc. and its subsidiaries


Forward-Looking Statements

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to those discussed in the section entitled "Business-Risk Factors". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us in fiscal year 2004.


PART I

ITEM 1. BUSINESS

Overview of Our Company

        We are one of the largest providers of healthcare staffing services in the United States. As of the fourth quarter of 2003, our healthcare staffing business segment represented approximately 92% of our 2003 revenue and is comprised of travel and per diem nurse staffing, allied health staffing as well as clinical research trials staffing. Travel nurse staffing was approximately 77% of our total revenue. Our other human capital management services business segment represented approximately 8% of our revenue and consists of education and training, healthcare consulting, and physician and healthcare executive search services.

        We have a diverse client base that includes approximately 3,000 hospitals, pharmaceutical companies and other healthcare providers across all 50 states. Our fees are paid directly by our clients rather than by government or other third-party payors. As a result, we have no direct exposure to Medicare or Medicaid reimbursements. No single hospital accounts for more than 3% of our revenue. We believe we are well positioned in the current environment for healthcare staffing services to take advantage of longer-term industry and demographic dynamics that include a growing shortage and aging of registered nurses, an aging U.S. population expected to result in growth of hospital admissions, state and federal legislation regarding minimum nurse staffing levels and maximum allowable overtime, and the long-term secular trend among hospitals toward outsourcing to provide flexibility and variable costs in meeting their staffing requirements. For the year ended December 31, 2003, our revenue was $686.9 million and our net income was $25.8 million, or $0.79 per diluted share.

        In June 2003, we acquired the assets of Med-Staff, Inc., (Med-Staff) one of the largest privately held travel nurse and per diem nurse staffing companies in the U.S., for $102.2 million in cash, net of a post-closing working capital adjustment. We made the strategic Med-Staff acquisition to broaden our travel nurse recruiting and placement efforts, to provide us with a sizeable platform in per diem nurse staffing, and to give us a direct presence in nurse staffing at military hospitals and clinics.

Overview of Our Industry

Industry Dynamics

        Over the coming decades, demand for healthcare services is expected to increase due to an aging U.S. population, while the national supply of registered nurses is projected to decline. The expected result is a pronounced shortage of registered nurses. Contributing to this shortage is a rapidly aging population of working registered nurses, lower overall enrollment in nursing schools over the past decade, and a nurse education faculty even more advanced in age than working nurses with fewer doctoral candidates as potential replacement educators. Hospitals and other healthcare facilities utilize

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outsourced nurse staffing as a means of supplementing their own recruiting and retention programs, and benefit from the flexibility and variable cost that outsourcing provides in managing their changing nurse staffing requirements. Similarly, nurses have turned to outsourced nurse staffing for job flexibility and better working conditions.

Temporary Nurses

        The most common temporary nurse staffing alternatives available to hospital administrators are travel nurses and per diem nurses. Travel nurse staffing involves placement of registered nurses on a contracted, fixed-term basis. Assignments may range from several weeks to one year, but are typically 13 weeks long and usually involve temporary relocation to the geographic area of the assignment. Travel nurses provide hospitals and other healthcare facilities with the flexibility and variable cost to manage changes in their staffing needs due to shifts in demand, represent a pool of potential full-time job candidates, and enable healthcare facilities to provide their patients with continuity of care. The staffing company generally is responsible for providing travel nurses with customary employment benefits and for coordinating travel and housing arrangements. Per diem nurse staffing comprises the majority of temporary healthcare staffing and involves the placement of locally-based healthcare professionals on short-term assignments, often for daily shift work, with little advance notice of assignments by the client.

        Temporary Decrease in Demand.    Several factors have combined to temporarily reduce demand for outsourced nurse staffing services since mid-2002:

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        While we believe these dynamics to be temporary, the relative benefit of our outsourced nurse staffing services to hospital clients was impacted as there was a greater supply of nurses willing to work directly for hospital employers at the wages hospitals wanted to pay. The Staffing Industry Report, an independent staffing industry publication, estimated more than $10 billion in revenue was generated in the temporary medical staffing industry in 2002, and we estimate that nurse staffing represented approximately 70% of the total. We estimate that historically approximately 10% of hospital nurse staffing was outsourced (25% travel nurse staffing and 75% per diem nurse staffing). However, as a result of the decrease in demand due to the above factors, we estimate that approximately 7% to 8% of nurse staffing is currently outsourced.

        Shortage of Nurses.    There were approximately 2.7 million licensed registered nurses in the U.S. of which approximately 2.2 million are employed in nursing and approximately 1.7 million full-time and part-time registered nurses work in acute care hospital settings, according to the most recent data available from the U.S. Department of Health and Human Services (February 2001). Notwithstanding the recent re-entry of nurses into the workforce, the nurse shortage is expected to grow over the coming decades. A U.S. Bureau of Labor Statistics report (February 2004) stated that, for the first time, nurses represented the largest projected 10-year job growth occupation, putting the demand for registered nurses at 2.9 million in 2012, up from 2.3 million in 2002. A study by the American Hospital Association in 2001 identified 126,000 vacant nursing positions in hospitals nationwide. In addition, a study by the U.S. Department of Health and Human Services (July 2002) estimated a 20% shortage of nurses by 2015 and 29% by 2020. Similarly, a 2002 report to the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) titled "Health Care at the Crossroads—Strategies for Addressing the Evolving Nursing Shortage," quantified this shortage stating that by 2020 there will be at least 400,000 fewer nurses available to provide care than will be needed. Further, the national shortage of registered nurses is not evenly distributed across the country. The 2003 Nursing Shortage Update by Fitch, Inc. (Fitch) estimates that thirty states are currently experiencing a shortage, and by 2020, 44 states and the District of Columbia are projected to have shortages. Several factors have contributed to the decline in the supply of registered nurses:

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        Increasing Utilization of Healthcare Services.    There are a number of factors driving an increase in the utilization of healthcare services, including:

        Outsourcing of Staffing Services.    The use of temporary personnel enables healthcare providers to vary their staffing levels to match the changes in demand for their permanent staff caused by both

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planned and unplanned vacancies as well as variability in patient admissions. Healthcare providers also use temporary personnel to address budgeted shortfalls due to vacancy rates and use temporary staffing to manage seasonal fluctuations in demand for their services. The following factors have created seasonal fluctuations in demand for healthcare personnel:

        Legislative Changes Expected To Increase Demand.    In response to concerns by consumer groups over the quality of care provided in healthcare facilities and concerns by nursing organizations about the increased workloads and pressures on nurses, a number of states have either passed or introduced legislation addressing nurse-to-patient ratios and/or prohibiting mandatory nurse overtime. The passage of such legislation is expected to increase the demand for nurses. The California Safe Hospital Staffing law went into effect January 1, 2004. The new law requires all California hospitals to have enough nurses to provide each patient with safe and quality care. These ratios set a cap on the number of patients for which any one nurse can be responsible—and recognize that the standard for patient care remains staffing based on patient acuity. The new ratios have phased-in implementation dates of January 1, 2004, 2005, and 2008. An additional 17 states are considering legislation pertaining to nurse-to-patient ratios. Maine, New Jersey and Oregon have passed legislation limiting mandatory overtime for nurses. Several other states are considering or have already introduced similar legislation.

Competitive Strengths

        Our competitive strengths include:

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Our Business

Healthcare Staffing Services

Nurse Staffing

        We are a leading provider of travel nurse staffing services in the U.S. We also provide per diem nurse staffing and allied health professional staffing services. We market our healthcare staffing services to hospitals and healthcare facilities through our Cross Country Staffing organization and our Med-Staff, Inc. subsidiary to provide our clients with fixed-term and flexible-term staffing solutions. Cross Country Staffing provides clients with an integrated suite of managed services to optimize their workforce efficiencies while decreasing overall staffing costs. Cross Country Staffing's managed staffing services include technology, interview servicing, single source provider and vendor management capabilities. Med-Staff provides travel and per diem nurse staffing solutions to hospitals as well as to military hospitals and clinics.

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        The Cross Country Staffing sales and marketing organization is pursuing and implementing exclusive and preferred provider relationships with existing and new hospital clients and healthcare purchasing organizations. We also actively manage trade and association relationships through attendance at numerous national, regional and local conferences and meetings, including the Johnson & Johnson "Campaign for Nursing's Future," the National Association of Health Care Recruiters, Association of Critical Care Nurses, American Organization of Nurse Executives, American Society for Healthcare Human Resource Administration, American College of Healthcare Executives and Medical Group Management Association.

        We provide credentialed nurses for contracted fixed-term (travel) and flexible-term (per diem) staffing assignments at public and private healthcare facilities, and for-profit and not-for-profit facilities located predominantly throughout the U.S. The vast majority of our assignments are at acute care hospitals, including teaching institutions, trauma centers and community hospitals located in major metropolitan areas. We also provide other healthcare professionals, which include operating room technicians, therapists, advanced practice professionals and other allied health professionals, such as radiology technicians, rehabilitation therapists and respiratory therapists, in a wide range of specialties. We also fill a small number of staffing assignments in non-acute care settings, including nursing homes, skilled nursing facilities and sports medicine clinics, and, to a lesser degree, in non-clinical settings, such as schools.

        Our centralized travel nurse staffing services are provided to clients in all 50 states from our headquarters in Boca Raton, Florida as well as offices in Malden, Massachusetts, Tampa, Florida and Newtown Square, Pennsylvania. Our per diem staffing services are provided from 19 branch offices serving major metropolitan markets predominantly located along the East and West coasts of the U.S. We also operate a centralized flexible-term (per diem) staffing operation from our Boca Raton facilities.

Recruiting and Retention

        We operate differentiated nurse recruiting brands consisting of Cross Country TravCorps, Med-Staff, NovaPro, Cross Country Local and Assignment America, which allow us to recruit nurses and allied healthcare professionals on a domestic and international basis, and deliver an array of high quality staffing services. We believe that these professionals are attracted to us because we offer them high levels of customer service, competitive compensation and benefits packages, as well as a wide range of diverse assignments at attractive locations primarily throughout the U.S.

        In our travel staffing business, our nurse recruiters are a vital component of our business, responsible for establishing and maintaining key relationships with candidates for the duration of their employment with our Company. Our nurse recruiters work with the candidates throughout the placement process on their first assignment as well as subsequent assignments. We believe our strong retention rate is a direct result of these relationships. Nurse recruiters match the supply of qualified nurse candidates in our database with the demand of positions from our hospital clients. At year-end 2003, we had 145 travel nurse recruiters and believe we have an adequate number of nurse recruiters to support the present level of demand as well as a future upturn in demand.

        Our Cross Country TravCorps, Med-Staff and NovaPro travel staffing brands recruit credentialed nurses and other healthcare professionals, including operating room technicians, therapists and other allied health and advanced practice professionals such as radiology technicians, rehabilitation therapists and respiratory therapists, for placement on fixed-term travel assignments. The working nurses of Cross Country TravCorps, Med-Staff and NovaPro generally represent different demographic profiles and are typically attracted to a particular component of each brand's compensation package. Our Cross Country TravCorps brand offers nurses a more standardized benefits package focused more on the wage

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component while our Med-Staff brand offers nurses a benefits package focused more on the housing component. Our NovaPro brand targets nurses seeking more customized benefits packages.

        Our Med-Staff and Cross Country Local per diem brands recruit credentialed nurses and other healthcare professionals for flexible short-term local assignments at healthcare facilities made on short notice to fill day-to-day shift coverage and varying-length shift coverage.

        Our Assignment America international recruitment brand supplements the nurse recruiting activities in the U.S. and Canada by our Cross Country TravCorps, Med-Staff and NovaPro brands and attracts foreign-trained nurses. Assignment America currently recruits experienced acute-care nurses from English-speaking foreign countries (the United Kingdom, Ireland, New Zealand and Australia). We bear the upfront expense of each nurse's licensure and immigration requirements, preparing them personally and professionally for their transition into the U.S. prior to placing them on long-term domestic assignments in acute care facilities. As a result of the current demand environment for nurse staffing services, Assignment America has substantially narrowed its recruitment activities to focus on certain high demand specialties.

        In 2003, approximately 18,300 individuals that completed field staff applications were added to our database. More than half of our field employees have been referred by current or former employees, with the remainder attracted by advertisements in trade publications and our Internet website. Our Internet site allows potential applicants to review our business profile, apply on-line, view our company-provided housing and participate in on-line forums. We offer appealing assignments, attractive compensation packages, housing and other benefits, as well as substantial training opportunities through Cross Country University.

        Our recruiters are responsible for recruiting applicants, handling placements, maintaining a regular dialogue with nurses on assignment, making themselves available to address nurses' concerns regarding current assignments and future opportunities, and other significant job support and guidance. Recognizing that a nurse's relationship with the recruiter is the key to retaining qualified applicants, our recruiters establish lasting partnerships with the nurses. As part of the screening process, we conduct in-depth telephone interviews with our applicants and verify references to determine qualifications. Along with our hospital clients, we typically review the performance of our travel nurses after each assignment and use this information to maintain the high quality of our staffing. Our educational and training services give us a competitive advantage by enhancing both the quality of our nurses and the effectiveness of our recruitment efforts. Through Cross Country University, we can also further develop the capabilities of our recruiters and working nurses by:

        Our recruiters utilize our sophisticated databases of positions to match assignment opportunities with the experience, skills and geographic preferences of their candidates. Once an assignment is selected, our account manager reviews the candidate's resume package before submitting it to the client for review. Account managers are knowledgeable about the specific requirements and operating environment in the hospitals that they service. Our databases are kept up-to-date by our account managers as well as StaffingOffice.com, our new Internet-based application that provides hospitals with a centralized tool for managing their supplemental healthcare staffing needs. StaffingOffice.com is the technology component of Cross Country Staffing's suite of managed services. It utilizes the hospital's existing Internet connection and requires no infrastructure or software purchase on the part of the client.

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Contracts With Field Employees and Clients

        Each of our traveling field employees works for us under a contract. These contracts typically last 13 weeks. Our traveling field employees that are payroll contract employees are hourly employees whose contract specifies the hourly rate they will be paid, including applicable overtime, and any other benefits they are entitled to receive during the contract period. For payroll contract employees, we bill clients at an hourly rate and assume all employee costs, including payroll, withholding taxes, benefits and professional liability insurance and OSHA requirements, as well as any travel and housing costs and arrangements. Mobile contract employees are hourly employees of the hospital client and receive an agreement that specifies the hourly rates they will be paid by the hospital employer, as well as any benefits they are entitled to receive from us. For mobile contract employees, we provide recruitment, housing in apartments we lease and travel services. Our contract with the healthcare professional obligates us to provide these services to the healthcare professional. We are compensated for the services we provide at a predetermined rate negotiated with our hospital client, without regard to our cost of providing these services. Currently approximately 98% of our employees work for us under payroll contracts. Our fees are paid directly by our clients rather than by government or other third-party payors. In 2003, we completed approximately 19,200 individual travel assignments.

Operations

        We operate our travel nurse staffing business from a relatively centralized business model servicing all of the assignment needs of our field employees and client facilities through operations centers located in Boca Raton, Florida, Malden, Massachusetts, Tampa, Florida and Newtown Square, Pennsylvania. Our per diem staffing services are provided from 19 branch offices serving major metropolitan markets predominantly located along the East and West coasts of the U.S. We also operate a centralized per diem staffing operation from our Boca Raton facilities. These centers perform key support activities such as coordinating assignment accommodations, payroll processing, benefits administration, billing and collections, contract processing, client care and risk management.

        Hours worked by field employees are recorded by our operations system, which then transmits the data directly to Automated Data Processing (ADP) for payroll processing. As a result, biweekly client billings are generated automatically once the payroll information is complete. Our payroll department also provides customer support services for field employees who have questions.

        During 2003, we leased an average of approximately 3,170 apartments throughout the U.S. Our client housing department secures leases and arranges for furniture rental and utilities for field employees at their assignment locations. Typically, we provide for shared accommodations at no cost to the healthcare professional on assignment with us, with lease terms that generally correspond to the length of the assignment. We believe that our economies of scale help us secure preferred pricing and favorable lease terms.

Clinical Research and Trials Staffing

        Through our ClinForce brand, we provide clinical research professionals for in-sourced and out-sourced fixed-term contract assignments and permanent placement to many of the world's leading companies in the pharmaceutical, biotechnology, medical device, contract research organization and related clinical research organization clients in North America. Many of our research trials professionals are also registered nurses. We provide professionals in such areas as clinical research and clinical data sciences, medical review and writing, and pharmacoeconomics and regulatory affairs. Our understanding of the clinical research process enables us to provide responsive services to our clients and to offer greater opportunities to our research professionals.

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Other Human Capital Management Services

        We provide an array of healthcare-oriented human capital management services, which complement our core travel nurse staffing business. These services include:

        Search and Recruitment.    Cejka Search is a nationally recognized retained executive and physician search organization providing physician practice opportunities, executive opportunities, executive search and physician search services exclusively to the healthcare industry, including hospitals, pharmaceutical companies, insurance companies and physician groups. Cejka Search completes assignments throughout the U.S. for various segments of the healthcare industry.

        Healthcare Consulting Services.    Cross Country Consulting is a leading provider of healthcare management consulting services to hospitals, health systems, physician organizations and post-acute care facilities. Our consulting services include three leading nationwide healthcare consulting practices—Cejka Consulting, Gill/Balsano Consulting and Jennings Ryan & Kolb. Together they offer a broad array of nationally recognized consulting services in such areas as: strategy; financial and facilities planning; physician compensation and medical staff planning; post acute care planning and implementation; integrations, mergers and acquisitions; ambulatory planning and development; program planning and operational assessment; and regulatory assessments/certificates of need.

        Education and Training Services.    Cross Country University provides continuing education programs to the healthcare industry. CCU holds national conferences, as well as one-day seminars, on topics relevant to nurses and other healthcare professionals. In 2003, CCU held close to 5,200 seminars and conferences that were attended by approximately 158,000 registrants in more than 265 cities across the U.S. In addition, we extend these educational services to our field employees on favorable terms as a recruitment and retention tool.

Systems

        Our placement and support operations are enhanced by sophisticated information systems that facilitate smooth interaction between our recruitment and support activities. Our proprietary information systems enable us to manage virtually all aspects of our travel staffing operations. These systems are designed to accommodate significant future growth of our business. In addition, their parallel process design allows further capacity to be added to its existing hardware platform. We have proprietary software that handles most facets of our business, including contract pricing and profitability, contract processing, job posting, housing management, billing/payroll and insurance. Our systems provide reliable support to our facility clients and field employees and enable us to efficiently fulfill and renew job assignments. Our systems also provide detailed information on the status and skill set of each registered field employee.

        Our financial and management reporting is managed on the PeopleSoft Financial Suite. PeopleSoft is a leading enterprise resource planning software suite that provides modules used to manage our accounts receivable, accounts payable, general ledger and billing. This system is designed to accommodate significant future growth in our business.

Growth Strategy

        Despite the reduction in overall demand for outsourced healthcare staffing, there still remains unmet demand for our fixed- and flexible-term nurse staffing services. We are striving to meet a greater portion of this demand by pursuing and implementing exclusive and preferred provider relationships with new and existing hospital and health system clients that are large users of nurse staffing services. We also continue to recruit additional licensed nurses and other healthcare professionals, and manage

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our internal capacity to efficiently and effectively meet the changing supply and demand requirements of the healthcare staffing marketplace. We intend to continue to grow our businesses by:

Competitive Environment

        The fixed nurse staffing industry is highly competitive. While barriers to entry are relatively low, achieving substantial scale is more challenging. Of the market for outsourced nurse staffing services used by hospitals, we believe that approximately 25% is fixed-term travel nurse staffing and approximately 75% is flexible-term per diem nurse staffing. Our principal competitor in the fixed-term travel nurse staffing sector is AMN Healthcare Services, Inc. We also compete with a number of nationally and regionally focused temporary nurse staffing companies that have the capabilities to relocate nurses geographically. The per diem nurse staffing sector is highly fragmented and comprised of numerous local temporary nurse agencies across the nation, of which the two largest competitors are Medical Staffing Network Holdings, Inc. and InteliStaf Healthcare, Inc. In addition, the markets for our clinical trials and allied staffing services and for our healthcare-oriented human capital management services are highly competitive and highly fragmented, with limited barriers to entry.

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        The principal competitive factors in attracting qualified candidates for temporary employment are salaries and benefits, quality of accommodations, quality and breadth of assignments, speed of placements, quality of recruitment teams and reputation. We believe that persons seeking temporary employment through us are also pursuing employment through other means, including other temporary staffing firms, and that multiple staffing companies have the opportunity to place employees with many of our clients. Therefore, the ability to respond to candidate inquiries and submit candidates to clients more quickly than our competitors is an important factor in our ability to fill assignments. In addition, because of the large overlap of assignments, we focus on retaining field employees by providing long-term benefits, such as 401(k) plans and cash bonuses. Although we believe that the relative size of our database and economies of scale derived from the size of our operations make us an attractive employer for nurses seeking travel opportunities, we expect competition for candidates to continue.

        The principal competitive factors in attracting and retaining temporary healthcare staffing clients include the ability to fill client needs, price, quality assurance and screening capabilities, compliance with regulatory requirements, an understanding of the client's work environment, risk management policies and coverages, and general industry reputation. In addition, the level of demand for outsourced nurse staffing is influenced by in-patient admissions, national healthcare spending and spending on hospital care, general economic conditions and its impact on national, regional and local labor markets, and the corresponding supply of full- and part-time hospital-based nurses willing to work at prevailing hospital wages.

Regulatory Issues

        In order to service our client facilities and to comply with OSHA and JCAHO standards, we have a risk management program. The program is designed to protect against the risk of negligent hiring by requiring a detailed skills assessment from each healthcare professional. In addition, we have a claims-based professional liability insurance policy pursuant to which we provide primary coverage of $2 million for each occurrence through a self-insured retention program that is guaranteed by a $2 million irrevocable letter of credit held by our excess insurance provider. We also have up to $10 million in umbrella liability insurance coverage after the $2 million primary coverage has been exhausted.

        Professional Licensure.    Nurses and most other healthcare professionals employed by us are required to be individually licensed or certified under applicable state law. In addition, the healthcare professionals that we staff frequently are required to have been certified to provide certain medical care, such as CPR and ACLS, depending on the positions in which they are placed. Our comprehensive compliance program is designed to ensure that our employees possess all necessary licenses and certifications, and we believe that our employees, including nurses and therapists, comply with all applicable state laws.

        Business Licenses.    A number of states require state licensure for businesses that, for a fee, employ and assign personnel, including healthcare personnel, to provide services on-site at hospitals and other healthcare facilities to support or supplement the hospitals' or healthcare facilities' work force. A number of states also require state licensure for businesses that operate placement services for individuals attempting to secure employment. Failure to obtain the necessary licenses can result in injunctions against operating, cease and desist orders, and/or fines. We endeavor to maintain in effect all required state licenses.

        Regulations Affecting Our Clients.    Many of our clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced reimbursement rates. In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or

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preferred participation in their benefit plans. Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients' reimbursement. Such limitations on reimbursement could reduce our clients' cash flows, hampering their ability to pay us.

        Immigration.    Changes in immigration law and procedures following September 11, 2001 have slowed down our ability to recruit foreign nurses to meet demand, and changes to such procedures in the future could further hamper our overseas recruiting efforts. In addition, our use of foreign nurses may entail greater difficulty in ensuring that each professional has the proper credentials and licensure.

        Regulations Applicable to Our Business.    Our business is subject to extensive regulation by numerous governmental authorities in the United States. These complex federal and state laws and regulations govern, among other things, the validity of our foreign nurses working in the U.S., the licensure of professionals, the payment of our field employees (e.g. wage and hour laws, employment taxes and income tax withholdings, etc.) and the operations of our business generally. Because we conduct business in 50 states we are subject to the laws and regulations applicable to our business therein, which may be amended from time to time. Future federal and state legislation or interpretations thereof may require us to change our business practices. Compliance with all of these applicable rules and regulations require a significant amount of resources. We endeavor to be in compliance with all such rules and regulations.

Employees

        As of December 31, 2003, we had approximately 1,114 corporate employees and during 2003 had an average of approximately 5,917 full-time equivalent field employees. We are not subject to a collective bargaining agreement with any of our employees. We consider our relationship with employees to be good.

Available Information

        Financial reports and filings with the Securities and Exchange Commission (SEC) are available free of charge as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC, via the Internet at our website, www.crosscountry.com.

Risk Factors

        In addition to the other information included in this Report on Form 10-K, you should consider the following risk factors.

Although demand for outsourced nurse staffing has declined from higher than average levels during the past several years, industry dynamics are such that we are still unable to recruit enough nurses to meet our clients' demands for our nurse staffing services, limiting the potential growth of our staffing business.

        We rely significantly on our ability to attract, develop and retain nurses and other healthcare personnel who possess the skills, experience and, as required, licensure necessary to meet the specified requirements of our healthcare staffing clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. Although demand has slowed down, at this time we still do not have enough nurses to meet our clients' demands for our nurse staffing services. This shortage of nurses limits our ability to grow our staffing business. Furthermore, we believe that the aging of the existing nurse population and declining enrollments in nursing schools will further exacerbate the existing nurse shortage. In addition, in the aftermath of the

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terrorist attacks on New York and Washington, we experienced a temporary interruption of normal business activity. Similar events in the future could result in additional temporary or longer-term interruptions of our normal business activity.

The costs of attracting and retaining qualified nurses and other healthcare personnel may rise more than we anticipate.

        We compete with other healthcare staffing companies for qualified nurses and other healthcare personnel. Because there is currently a shortage of qualified healthcare personnel, competition for these employees is intense. To induce healthcare personnel to sign on with them, our competitors may increase hourly wages or other benefits. If we do not raise wages in response to such increases by our competitors, we could face difficulties attracting and retaining qualified healthcare personnel. In addition, if we raise wages in response to our competitors' wage increases and are unable to pass such cost increases on to our clients, our margins could decline.

Our costs of providing housing for nurses and other healthcare personnel may be higher than we anticipate and, as a result, our margins could decline.

        During December 2003, we had an average of 3,170 apartments on lease throughout the U.S. 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 housing lease exceeds the term of the nurse'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, typically 13 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.

Decreases in patient occupancy at our clients' facilities may adversely affect the profitability of our business.

        The general level of patient occupancy at our clients' facilities significantly affects demand for our temporary healthcare staffing services. When a hospital's occupancy increases, temporary employees are often added before full-time employees are hired. As occupancy decreases, clients may reduce their use of temporary employees before undertaking layoffs of their regular employees. We also may experience more competitive pricing pressure during periods of occupancy downturn. In addition, if a trend emerges toward providing healthcare in alternative settings, as opposed to acute care hospitals, occupancy at our clients' facilities could decline. This reduction in occupancy could adversely affect the demand for our services and our profitability.

We are dependent on the proper functioning of our information systems.

        Our company is 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 perform billing and accounts receivable functions. Our information systems are protected through physical and software safeguards and we have backup remote processing capabilities. However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. In the event that critical information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, to process payroll in a timely manner and to bill for services efficiently.

14



If regulations that apply to us change, we may face increased costs that reduce our revenue and profitability.

        The temporary healthcare staffing industry is regulated in many states. In some states, firms such as our company must be registered to establish and advertise as a nurse-staffing agency or must qualify for an exemption from registration in those states. If we were to lose any required state licenses, we could be required to cease operating in those states. The introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees. For example, some states could impose sales taxes or increase sales tax rates on temporary healthcare staffing services. These increased costs may not be able to be passed on to clients without a decrease in demand for temporary employees. In addition, if government regulations were implemented that limited the amounts we could charge for our services, our profitability could be adversely affected.

        We are also subject to federal and state laws, rules and regulations generally applicable to public corporations, including, but not limited to, those administered by the SEC. The federal government, certain states and other self-regulatory organizations have recently passed or proposed new laws, rules or regulations generally applicable to corporations, including the Sarbanes-Oxley Act of 2002, that affect or could affect us. These changes could increase our costs of doing business or could expose us to additional potential liability.

Future changes in reimbursement trends could hamper our clients' ability to pay us.

        Many of our clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced reimbursement rates. In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or preferred participation in their benefit plans. Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients' reimbursement. Limitations on reimbursement could reduce our clients' cash flows, hampering their ability to pay us.

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 our earnings. In addition, restrictive covenants in our credit facility, including a covenant that requires us to obtain lender's approval for any acquisition over $25.0 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 and other human capital management services companies that would complement or enhance our business and at times have preliminary acquisition discussions with some of these companies. These acquisitions involve numerous risks, including:

15


        These acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition.

We operate our business in a regulated industry and modifications, inaccurate interpretations or violations of any applicable statutory or regulatory requirements may result in material costs or penalties to our Company and could reduce our revenues and earnings per share.

        Our industry is subject to many complex federal and state laws and regulations related to, among other things, the validity of our foreign nurses working in the U.S., the licensure of professionals, the payment of our field employees (e.g., wage and hour laws, employment taxes and income tax withholdings, etc.) and the operations of our business generally. If we do not comply with the laws and regulations that are directly applicable to our business, we could incur civil and/or criminal penalties or be subject to equitable remedies.

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. Our Company may be subject to liability in such cases even if the contribution to the alleged injury was minimal. 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 staffing personnel. In some instances, we are required to indemnify clients against some or all of these risks. A failure of any of our employees or personnel 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.

        A key component of our business is the credentialing process. Ultimately, any hospital or other health care provider is responsible for its own internal credentialing process, and the provider makes the hiring decision. Nevertheless, in many situations, the provider will be relying upon the reputation and screening process of our Company. Errors in this process, or failure to detect a poor or incorrect history, could have a material effect on our reputation. In addition, we do not have access to all of the resources that are available to hospitals to check credentials, such as the National Practitioner Bank.

        To protect ourselves from the cost of these types of claims, we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. Our coverage is, in part, self-insured. However, our 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, we may be exposed to substantial liabilities.

If our insurance costs increase significantly, these incremental costs could negatively affect our financial results.

        The costs related to obtaining and maintaining professional and general liability insurance and health insurance for healthcare providers has been increasing. If the cost of carrying this insurance

16



continues to increase significantly, we will recognize an associated increase in costs, which may negatively affect our margins. This could have an adverse impact on our financial condition.

If we become subject to material liabilities under our self-insured programs, our financial results may be adversely affected.

        We provide workers compensation coverage through a program that is partially self-insured. 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 or medical coverage liabilities, our financial results may be adversely affected.

Our clients may terminate or not renew their staffing contracts with us.

        Our travel staffing arrangements with clients are generally terminable upon 30 or 90 days' notice. We may have fixed costs, including housing costs, associated with terminated arrangements that we will be obligated to pay post-termination.

        Our clinical trials staffing business is conducted under long-term contracts with individual clients that may conduct numerous clinical trials. Some of these long-term contracts are terminable by the clients without cause upon 30 to 60 days' notice.

        Health systems may develop their own in-house staffing capabilities that may replace their need to outsource staffing to us.

Our indemnity from W. R. Grace & Co., in connection with our acquisition of the assets of Cross Country Staffing, may be materially impaired by Grace's financial condition.

        In connection with our acquisition from W. R. Grace & Co. of the assets of Cross Country Staffing, our predecessor, Grace agreed to indemnify us against damages arising out of the breach of certain representations or warranties of Grace, as well as against any liabilities retained by Grace. In March 2001, Grace filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. This bankruptcy filing could materially impair Grace's obligations to indemnify us.

Our principal stockholders will be able to substantially influence the outcome of all matters submitted to our stockholders for approval, regardless of the preferences of other stockholders.

        Charterhouse Equity Partners III (CEP III) and investment funds managed by Morgan Stanley Private Equity together own approximately 35% of our outstanding common stock. Accordingly, acting together, they will be able to substantially influence:

        Currently, our Board of Directors is comprised of nine members, two of whom are designees of CEP III and two of whom are designees of investment funds managed by Morgan Stanley Private Equity. Under our stockholders' agreement, CEP III and the funds managed by Morgan Stanley Private Equity each have the right to designate two directors for nomination to our Board of Directors. This number decreases if either CEP III or the funds managed by Morgan Stanley Private Equity reduce their respective ownership by more than 50% of their holdings prior to our initial public offering. Their interests may conflict with the interests of the other holders of common stock.

17



CEP III and investment funds managed by Morgan Stanley Private Equity each have demand rights to cause us to file a registration statement under the Securities Act covering resales of their stock and sales of this stock could cause our stock price to decline.

        CEP III and investment funds managed by Morgan Stanley Private Equity each have demand rights to cause us to file, at our expense, a registration statement under the Securities Act covering resales of their shares. These shares represent approximately 35% of our outstanding common stock. These shares may also be sold under Rule 144 of the Securities Act, depending on their holding period and are subject to significant restrictions in the case of shares held by persons deemed to be our affiliates.

        In addition, we registered 4,398,001 shares of common stock for issuance under our stock option plans. Options to purchase 2,901,510 shares of common stock were issued and outstanding as of February 29, 2004, of which, options to purchase 2,417,432 shares were vested. Common stock issued upon exercise of stock options, under our benefit plans, is eligible for resale in the public market without restriction.

        We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of these shares for future sale will have on the market price of our common stock.

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.

        Our certificate of incorporation and by-laws 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 10,000,000 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. Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.


ITEM 2. PROPERTIES

        We do not own any real property. Our principal leases as of December 31, 2003 are listed below.

Location

  Function
  Square
Feet

  Lease Expiration
Boca Raton, Florida   Headquarters   70,406   April 30, 2013

Newtown Square, Pennsylvania

 

Staffing administration and general office use

 

35,000

 

July 31, 2006

Malden, Massachusetts

 

Staffing administration and general office use

 

30,462

 

June 30, 2005

Clayton, Missouri

 

Search and recruitment headquarters

 

20,539

 

November 30, 2008

Durham, North Carolina

 

Clinical research and trials staffing headquarters

 

16,273

*

September 30, 2013

Tampa, Florida

 

Staffing administration and general office use

 

15,698

 

December 31, 2007

Norcross, Georgia

 

Consulting headquarters

 

14,456

 

August 31, 2005

* 21,400 as of January 1, 2004

18



ITEM 3. LEGAL PROCEEDINGS

Theodora Cossack, et. al. v. Cross Country TravCorps 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; 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.

        The lawsuit is currently in its very early stages and has not yet been certified by the court as a class action. As a result, we are unable at this time to determine our potential exposure. We intend to vigorously defend this matter.

National League for Nursing, Inc. v. Cross Country Healthcare, Inc., et al. and National League for Nursing, Inc. v. Med-Staff, Inc. et al.

        Cross Country Healthcare, Inc. and its affiliates have reached an amicable resolution of two disputes with the National League for Nursing, Inc. (NLN) entitled National League for Nursing, Inc. v. Cross Country Healthcare,  Inc. et al., 03 Civ. 9948 (VM) (S.D.N.Y.) and National League for Nursing, Inc. v. Med-Staff, Inc., et al., Civil Action No. 03-2497 (JCL) (D. N.J.). Cross Country Healthcare, Inc. and its affiliates did not make any monetary payment to NLN and admitted no liability.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

19



PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

        Our common stock commenced trading on the Nasdaq National Market under the symbol "CCRN" on October 25, 2001. The following table sets forth, for the periods indicated, the high and low closing sale prices per share of common stock on the Nasdaq National Market. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 
  Closing
Sale Prices

Calendar Period

  High
  Low
2002            
Quarter Ended March 31, 2002   $ 30.97   $ 21.13
Quarter Ended June 30, 2002   $ 38.86   $ 27.50
Quarter Ended September 30, 2002   $ 36.51   $ 12.31
Quarter Ended December 31, 2002   $ 16.80   $ 10.40

2003

 

 

 

 

 

 
Quarter Ended March 31, 2003   $ 16.25   $ 9.75
Quarter Ended June 30, 2003   $ 13.91   $ 10.33
Quarter Ended September 30, 2003   $ 16.00   $ 13.00
Quarter Ended December 31, 2003   $ 15.47   $ 13.05

2004

 

 

 

 

 

 
Quarter Ended March 31, 2004 (through March 11, 2004)   $ 19.36   $ 15.72

        As of March 11, 2004, there were approximately 130 stockholders of record of our common stock. In addition, there are approximately 4,100 beneficial owners of our common stock held by brokers or other institutions on behalf of stockholders.

        We have never paid or declared cash dividends on our common stock. We currently intend to use available cash from operations for use in the operation and expansion of our business or to retire debt, to repurchase our common stock or to possibly pay cash dividends. Covenants in our credit facility limit our ability to repurchase our common stock and declare and pay cash dividends on our common stock.

        During 2003, we granted options to purchase a total of 187,747 shares of common stock to employees, including certain senior managers, at a weighted average exercise price of approximately $10.66 per share. Such grants were deemed exempt from registration under the Securities Act in reliance on either: (1) Rule 701 promulgated under the Securities Act as offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701; or (2) Section 4(2) of the Securities Act, including Regulation D there under, as transactions by an issuer not involving any public offering.

20



        With respect to equity compensation plans as of December 31, 2003, see table below:

Plan Category

  Number of securities
to be issued upon
exercise of outstanding options,
warrants and rights
(a)

  Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

  Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

Equity compensation plans approved by security holders   2,979,403   $ 13.53   821,202
Equity compensation plans not approved by security holders   None     N/A   N/A
   
 
 
  Total   2,979,403   $ 13.53   821,202
   
 
 


ITEM 6. SELECTED FINANCIAL DATA

        The selected consolidated financial data as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 are derived from the audited consolidated financial statements of Cross Country Healthcare, Inc. included elsewhere in this report. The selected consolidated financial data as of December 31, 2001 and 2000, and for the five-month period July 30, 1999 to December 31, 1999, are derived from the audited consolidated financial statements of Cross Country Healthcare, Inc. that have been audited but not included in this report. The selected consolidated financial data as of July 29, 1999 and for the seven-month period January 1, 1999 to July 29, 1999 have been derived from the audited financial statements of Cross Country Staffing, our predecessor, that have been audited but not included in this report.

        The following selected financial data should be read in conjunction with the consolidated financial statements and related notes of Cross Country Healthcare, Inc., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this report.

21



 
   
   
   
   
  Predecessor (a)
 
 
  Years Ended December 31,
   
   
  Period from
July 30
through
December 31,
1999(c)

  Period from
January 1
through
July 29,
1999

 
 
  2003 (b)
  2002
  2001
  2000
 
 
  (Dollars in thousands, except share and per share data)

   
   
 
Consolidated Statements of Operations Data                                      
Revenue from services   $ 686,930   $ 639,953   $ 504,364   $ 368,332   $ 87,727   $ 106,047  
Operating expenses:                                      
  Direct operating expenses     519,960     478,550     377,291     273,094     68,036     80,187  
  Selling, general and administrative expenses(d)     109,301     94,930     68,560     49,594     9,257     12,688  
  Bad debt expense     1,594     242     1,274     433     511     157  
  Depreciation     4,530     3,524     2,700     1,324     155     212  
  Amortization     3,548     3,148     14,851     13,624     4,422     496  
  Non-recurring secondary offering costs(e)     16     886                  
  Non-recurring indirect transaction costs(f)                 1,289          
   
 
 
 
 
 
 
  Total operating expenses     638,949     581,280     464,676     339,358     82,381     93,740  
   
 
 
 
 
 
 
Income from operations     47,981     58,673     39,688     28,974     5,346     12,307  
Other expense:                                      
  Interest expense, net     4,320     3,753     14,422     15,435     4,821     230  
  Loss on early extinguishment of debt(g)     960         8,000              
  Other expense                         190  
   
 
 
 
 
 
 
Income from continuing operations before income taxes     42,701     54,920     17,266     13,539     525     11,877  
Income tax expense(h)     (16,525 )   (21,254 )   (7,646 )   (6,807 )   (672 )    
   
 
 
 
 
 
 
Income (loss) from continuing operations     26,176     33,666     9,620     6,732     (147 )   11,877  
Discontinued operations, net of income tax benefit:                                      
  Loss from discontinued operations(i)     (355 )   (3,883 )   (741 )   (1,680 )   (195 )    
  Loss on disposal(i)             (207 )   (454 )        
   
 
 
 
 
 
 
Net income (loss)   $ 25,821   $ 29,783   $ 8,672   $ 4,598   $ (342 ) $ 11,877  
   
 
 
 
 
 
 
Net income (loss) per common share—basic(j):                                      
  Income (loss) from continuing operations   $ 0.81   $ 1.04   $ 0.39   $ 0.29   $ (0.01 )      
  Discontinued operations     (0.01 )   (0.12 )   (0.04 )   (0.09 )   (0.01 )      
   
 
 
 
 
       
Net income (loss)   $ 0.80   $ 0.92   $ 0.35   $ 0.20   $ (0.02 )      
   
 
 
 
 
       
Net income (loss) per common share—diluted(j):                                      
  Income (loss) from continuing operations   $ 0.80   $ 1.00   $ 0.38   $ 0.29   $ (0.01 )      
  Discontinued operations     (0.01 )   (0.12 )   (0.04 )   (0.09 )   (0.01 )      
   
 
 
 
 
       
Net income (loss)   $ 0.79   $ 0.88   $ 0.34   $ 0.20   $ (0.02 )      
   
 
 
 
 
       
Weighted-average common shares outstanding:                                      
  Basic     32,090,731     32,432,026     24,881,218     23,205,388     15,291,749        
  Diluted     32,530,563     33,653,433     25,222,936     23,205,388     15,291,749        

Other Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
FTE's(k)     5,917     5,535     4,816     4,167     2,789     2,466  
Weeks worked(l)     307,684     287,820     250,432     216,684     61,358     73,980  
Average healthcare staffing revenue per FTE per week(m)   $ 2,068   $ 2,046   $ 1,865   $ 1,619   $ 1,417   $ 1,429  
Net cash flow provided by operating activities   $ 51,798   $ 42,689   $ 19,795   $ 11,594   $ 6,301   $ 12,178  
Net cash flow (used in) provided by investing activities   $ (109,476 ) $ (19,834 ) $ (42,321 ) $ (10,781 ) $ 1,370   $ (202 )
Net cash flow provided by (used in) financing activities   $ 40,468   $ (8,381 ) $ 25,262   $ (5,641 ) $ (3,101 ) $ (11,977 )
 
  Years Ended December 31,
   
 
  As of July 29, 1999
 
  2003
  2002
  2001
  2000
  1999
 
  (Dollars in thousands)

Consolidated Balance Sheet Data                                    
Working capital   $ 79,532   $ 78,148   $ 72,732   $ 36,436   $ 33,998   $ 9,752
Cash and cash equivalents         17,210     2,736         4,828    
Total assets (n)     474,724     390,827     361,980     317,626     309,695     44,464
Total debt     93,738     42,815     48,865     157,272     159,074     7,874
Stockholders' equity (o)     320,523     300,832     269,927     123,340     118,742     19,466

22



(a)
On July 29, 1999, we acquired the assets of Cross Country Staffing, which, for accounting and reporting purposes, is our predecessor. Financial data for the period prior to July 30, 1999 is that of Cross Country Staffing.

(b)
Includes results of operations of Med-Staff, from June 5, 2003, the date of its acquisition.

(c)
Includes TravCorps results from December 16, 1999, the date of its acquisition, through December 31, 1999.

(d)
Includes expenses related to a discontinued management incentive compensation plan of $2.1 million for the seven-month period January 1–July 29, 1999. The management incentive compensation plan was discontinued on July 30, 1999.

(e)
Non-recurring secondary offering costs were $0.9 million, all relating to expenses incurred as a result of our secondary offering in March 2002. We did not receive any proceeds from this offering and, accordingly, did not capitalize any of the associated costs.

(f)
Non-recurring indirect transaction costs consist of non-capitalizable transition bonuses and integration costs related to the TravCorps acquisition and expenses related to this transaction.

(g)
Loss on early extinguishment of debt in the year ending December 31, 2003 relates to 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. Loss on early extinguishment of debt recorded in the period ending December 31, 2001 represents the write-off of loan fees relating to a repayment of $134.5 million of debt and a prepayment penalty relating to the early termination of $38.8 million of subordinated debt. The debt was repaid with proceeds from our initial public offering of common stock in October 2001.

(h)
Prior to July 30, 1999, our predecessor, Cross Country Staffing, operated as a partnership under the applicable provisions of the Internal Revenue Code, and, accordingly, income related to the operations of Cross Country Staffing was taxed directly to its partners.

(i)
Reflects the operating results of HospitalHub, Inc. and E-Staff.Inc. (E-Staff). HospitalHub began operations in 1999. We completed the divestiture of HospitalHub, Inc. during the second quarter of 2001. In March, 2002, we committed to a formal plan to dispose of E-Staff. E-Staff's operations ceased in the first quarter of 2003.

(j)
The financial data contained herein for periods prior to July 30, 1999, is that of our predecessor, Cross Country Staffing, a partnership, for which share and per share amounts were not applicable.

(k)
FTE's represent the average number of contract staffing personnel on a full-time equivalent basis.

(l)
Weeks worked is calculated by multiplying the FTE's by the number of weeks during the respective period.

(m)
Average healthcare staffing revenue per FTE per week is calculated by dividing the healthcare staffing revenue by the number of weeks worked in the respective periods. Healthcare staffing revenue includes revenue from permanent placement of nurses.

(n)
The Company has reclassified its consolidated balance sheet for the year ended December 31, 2002, in accordance with the provisions of EITF 03-08, Accounting for Claims-Made Insurance and Retroactive Insurance Contracts, as explained in the notes to the consolidated financial statements. This reclassification was not made for the other prior periods as the amount of reclassification would be immaterial to total assets.

(o)
Consists of partners' capital for periods prior to July 30, 1999, since our predecessor, Cross Country Staffing, was a partnership.

23



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Financial and Other Data and our consolidated financial statements and the accompanying notes that appear elsewhere in this annual report on Form 10-K.

        Certain prior year information has been reclassified to conform to the current year's presentation.

Overview

        We are one of the largest providers of healthcare staffing services in the United States. As of the fourth quarter of 2003, our healthcare staffing business segment represented approximately 92% of our current revenue and is comprised of travel nurse and allied health staffing, per diem nurse staffing and clinical research trials staffing. Approximately 77% of our revenue was derived from travel nurse staffing services. Our other staffing services include the placement of allied healthcare professionals, such as radiology technicians, rehabilitation therapists and respiratory therapists, and the placement of clinical research professionals. Our other human capital management services business segment, which represented approximately 8% of our revenues, consists of education and training, healthcare consulting and physician search services. For the year ended December 31, 2003, our revenue and net income as shown on the accompanying consolidated statement of operations were $686.9 million and $25.8 million, respectively.

History

        In July 1999, an affiliate of Charterhouse Group International, Inc. and certain members of management acquired the assets of Cross Country Staffing, our predecessor, from W. R. Grace & Co. Upon the closing of this transaction, we changed from a partnership to a C corporation form of ownership. In December 1999, we acquired TravCorps Corporation (TravCorps), which was owned by investment funds managed by Morgan Stanley Private Equity and certain members of TravCorps' management and subsequently changed our name to Cross Country TravCorps, Inc. Subsequent acquisitions and dispositions were made as discussed below. In May 2001, we changed our name to Cross Country, Inc. Subsequently, in May 2003, we changed our name to Cross Country Healthcare, Inc.

Revenue

        Our travel and per diem nurse staffing and allied healthcare staffing revenue is received primarily from acute care hospitals. Our clinical trials staffing revenue is received primarily from pharmaceutical and biotechnology companies, as well as medical device companies. Revenue from allied health staffing services is received from numerous sources, including providers of radiation, rehabilitation and respiratory services at hospitals, nursing homes, sports medicine clinics and schools. Revenue from our search and recruitment, consulting and education and training services is received from numerous sources, including hospitals, physician group practices, insurance companies and individual healthcare professionals. Our fees are paid directly by our clients rather than by government or other third-party payors.

        Revenue is recognized when services are rendered. Accordingly, accounts receivable includes an accrual for employees' time worked but not yet invoiced. Similarly, accrued compensation includes an accrual for employees' time worked but not yet paid. Each of our field employees on travel assignment works for us under a contract. These contracts typically last 13 weeks. Payroll contract employees are hourly employees whose contract specifies the hourly rate they will be paid, including applicable overtime, and any other benefits they are entitled to receive during the contract period. For payroll contract employees, we bill clients at an hourly rate and assume all employee costs, including payroll, withholding taxes, benefits and professional liability insurance and Occupational Safety and Health

24



Administration, or OSHA, requirements, as well as any travel and housing arrangements. Mobile contract employees are hourly employees of the hospital client and receive an agreement that specifies the hourly rates they will be paid by the hospital employer, as well as any benefits they are entitled to receive from us. For mobile contract employees, we provide recruitment, housing in apartments leased by us and travel reimbursement. Our contract with the healthcare professional obligates us to provide these services to the healthcare professional. We are compensated for the services we provide at a predetermined rate negotiated with our hospital client, without regard to our cost of providing these services. Currently, approximately 98% of our employees work under payroll contracts.

        Our healthcare staffing revenue and earnings are impacted by the relative supply of and demand for nurses at healthcare facilities. We rely significantly on our ability to recruit and retain nurses and other healthcare personnel who possess the skills, experience and, as required, licensure necessary to meet the specified requirements of our clients. Shortages of qualified nurses and other healthcare personnel could limit our ability to fill open assignments and grow our revenue and net income. Recently, as a result of decreased demand discussed below, we experienced a decrease in the rate at which our field staff renew their contracts with us. We believe this is partially due to a decline in the amount and diversity of opportunities we can present to them, along with a drop in facilities' willingness to continue to employ our nurses in consecutive contracts. Some travelers have decided to stop traveling to take full-time or part-time positions, even though it may not be their first choice. Although the number of open positions has recently increased, we believe it may take some time before nurses and other healthcare professionals get more comfortable in our ability to employ them consistently in a location that they desire.

        The relative demand for our services at clients' facilities may also affect the profitability of our business. Since the later part of 2002, many hospitals have taken nurse staffing actions that have decreased demand, which we believe has temporarily contracted our revenue. We believe these decisions have resulted in increased reliance on staff nurse overtime, increased patient-to-nurse ratios and high wage and compensation increases, including sign-on bonuses, by the hospitals. We also believe that, due to present economic conditions, where many nurse's spouses have been laid off and severance and unemployment benefits have ended, many part-time nurses employed directly by hospitals who would have typically worked two shifts or less per week have increased the number of shifts worked at their hospitals and are doing so at the prevailing hospital wage. Other factors that affect the demand for our services are patient occupancy rates. As occupancy increases, temporary employees are often added before full-time employees are hired. As occupancy decreases, clients tend to reduce their use of temporary employees before undertaking layoffs of their regular employees. Additionally, we may experience more competitive pricing pressure during these periods of decreased demand.

Acquisitions

        On June 5, 2003, we acquired the assets of Med-Staff, for $102.2 million in cash, net of a post closing working capital adjustment, plus an earnout provision up to a maximum of $37.5 million based on 2003 performance. Med-Staff did not qualify to receive any earn out payments. Med-Staff is headquartered in Newtown Square, Pennsylvania, and is a national provider of travel and per diem healthcare professionals that operates across a wide geographic and client base in all 50 states.

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

        The purchase price has been allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. Other identifiable intangible assets were valued at $4.5 million, of which $2.4 million was assigned to hospital relations and $2.1 million was assigned to non-compete agreements, based on a third-party appraisal. These identifiable intangible assets have been assigned useful lives with a weighted-average range of 6.6 years. Approximately $77.5 million has

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been recorded to goodwill as the excess of purchase price over the fair value of net tangible and intangible assets acquired. Additional direct acquisition costs of $0.5 million are included as goodwill as of December 31, 2003. Goodwill is expected to be deductible for tax purposes over a 15 year life. The initial purchase price allocation is based on preliminary information that could be changed based on the ultimate resolution of initial assessments.

        In connection with the acquisition, we 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, to repay the term loan balance on the prior credit facility, and to pay fees and expenses incurred in connection with the financing.

        The following table provides certain information relating to our acquisitions to date:

Acquired Business

  Acquisition Date
  Primary Services
  Purchase Price
  Potential
Earnout

  Earnout Earned
to date

Med-Staff   June 2003   Healthcare staffing—travel nurse, per diem nurse, military nurse staffing   $102.2 million   $37.5 million for
full year 2003 (a)
 

Jennings Ryan & Kolb, Inc.

 

March 2002

 

Healthcare management consulting services

 

$    2.1 million

 

$1.8 million
over 34 months

 

$1.4 million

NovaPro

 

January 2002

 

Nurse staffing

 

$    7.6 million

 


 


Gill/Balsano Consulting, LLC

 

May 2001

 

Healthcare management consulting services

 

$    1.8 million

 

$2.0 million
over 3 years

 

$1.8 million

ClinForce, Inc.

 

March 2001

 

Clinical trials staffing

 

$  32.8 million

 


 


Heritage Professional Education, LLC

 

December 2000

 

Continuing education for healthcare professionals

 

$    6.6 million

 

$6.5 million
over 3 years (b)

 

$3.5 million

E-Staff (Discontinued in 2002)

 

July 2000

 

Internet subscription based communication, scheduling, credentialing and training services

 

$    1.5 million

 

$3.8 million(c)
over 3 years

 

$0.5 million

TravCorps Corporation

 

December 1999

 

Healthcare staffing-nurse and allied professionals

 

$  77.1 million

(d)


 


(a)
Med-Staff did not qualify to receive any earnout payments

(b)
The earnout period relating to the Heritage Professional Education business ended December 31, 2003. Accordingly, we do not have any additional obligations.

(c)
Due to the discontinuance of the E-Staff business we do not expect additional earnout payments to be made.

(d)
Acquisition purchase price includes cash paid, the assumption of debt and post-closing adjustments. The TravCorps acquisition price represents the approximate value of our common stock that was exchanged for all the outstanding shares of TravCorps—$32.1 million, plus the assumption of $45.0 million of debt.

Discontinued Operations

        In March 2002, we committed to a formal plan to dispose of our subsidiary, E-Staff, through a sale of this business. E-Staff was previously included in our other human capital management services segment. E-Staff was an application service provider that had developed an Internet subscription-based communication, scheduling, credentialing and training service business for healthcare providers. As an application service provider, E-Staff maintained a database of the client's employees on E-Staff's servers. However, prospective E-Staff clients were concerned about placing their health care employees names and credentials on servers owned or controlled by one of the nation's largest healthcare staffing companies. Pursuant to FASB Statement No. 144, Accounting for the Impairment or Disposal of

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Long-Lived Assets, our consolidated financial statements have been reclassified to reflect the discontinuance of E-Staff. The costs and expenses, assets and liabilities of E-Staff have been segregated and reported as discontinued operations in the consolidated balance sheets and statements of operations.

        During the first quarter of 2003 we abandoned our efforts to sell the E-Staff business and decided to dispose of the subsidiary by winding down its operations. E-Staff operations ceased as of March 31, 2003. At that time, we determined that approximately $0.3 million of the net carrying amount of the assets from discontinued operations was impaired. This impairment charge was taken as a loss from discontinued operations during the year ended December 31, 2003.

        In December 2000, we committed to a formal plan to divest HospitalHub, Inc., or HospitalHub, our electronic job board business, which began operations in 1999. The operating results of HospitalHub have been accounted for as discontinued operations in our consolidated financial statements and notes thereto and in the other financial information included herein. We completed the divestiture of HospitalHub in the second quarter of 2001.

Goodwill and Other Identifiable Intangible Assets

        Goodwill and other identifiable intangible assets from the acquisition of the assets of our predecessor, Cross Country Staffing, a partnership, as well as from subsequent acquisitions were $307.5 million and $24.3 million, at December 31, 2003. We adopted the provisions of FASB No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Accordingly, goodwill and certain other identifiable intangible assets are no longer subject to amortization. Instead, we review impairment annually. Other identifiable intangible assets, which are subject to amortization, are being amortized using the straight-line method over their estimated useful lives ranging from 3 to 15 years. Goodwill and other intangible assets represented 103.5% of our stockholders' equity as of December 31, 2003.

Results of Operations

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

 
  Year Ended December 31,
 
 
  2003
  2002
  2001
 
Revenue from services   100.0 % 100.0 % 100.0 %
Direct operating expenses   75.7   74.8   74.8  
Selling, general and administrative expenses   15.9   14.8   13.6  
Bad debt expense   0.2   0.1   0.3  
Depreciation and amortization   1.2   1.0   3.4  
Non-recurring secondary offering   0.0   0.1    
   
 
 
 
Income from operations   7.0   9.2   7.9  
Interest expense, net   0.6   0.6   2.9  
Loss on early extinguishment of debt   0.1     1.6  
   
 
 
 
Income from continuing operations before income taxes   6.3   8.6   3.4  
Income tax expense   (2.4 ) (3.3 ) (1.5 )
   
 
 
 
Income from continuing operations   3.9   5.3   1.9  
Loss from discontinued operations, net of income taxes   (0.1 ) (0.6 ) (0.2 )
Loss on disposal of discontinued operations, net of income taxes       (0.0 )
   
 
 
 
Net income   3.8 % 4.7 % 1.7 %
   
 
 
 

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        Revenue for the year ended December 31, 2003 totaled $686.9 million as compared to $640.0 million for the year ended December 31, 2002. Revenue increased $46.9 million or 7.3% for the year ended December 31, 2003 from the prior year. The increase was primarily attributable to the acquisition of Med-Staff on June 5, 2003, partially offset by a decrease in revenue from other healthcare staffing businesses. Excluding the effects of this acquisition and the acquisition of JRK in March 2002, revenue for the year ended December 31, 2003 decreased 5.7% from the year ended December 31, 2002. (See—Segment Information).

        Direct operating expenses are comprised primarily of field employee compensation expenses, housing expenses, travel expenses and field insurance expenses. Direct operating expenses totaled $520.0 million for the year ended December 31, 2003 as compared to $478.6 million for the year ended December 31, 2002. As a percentage of revenue, direct operating expenses represented 75.7% of revenue for the year ended December 31, 2003 compared to 74.8% for the year ended December 31, 2002. This increase is primarily attributable to a higher mix of healthcare staffing businesses, which operate at higher direct cost structures than our other human capital management services as well as higher housing and insurance costs in our healthcare staffing segment.

        Selling, general and administrative expenses for the year ended December 31, 2003 totaled $109.3 million as compared to $94.9 million for the year ended December 31, 2002. As a percentage of revenue, selling, general and administrative expenses represented 15.9% of revenue for the year ended December 31, 2003 compared with 14.8% for the year ended December 31, 2002. This increase is primarily due to increased expenses in our healthcare staffing business related to the acquisition of Med-Staff, and to the expansion of our sales and marketing activities to support our strategy of pursuing and implementing exclusive and preferred provider relationships with hospital customers.

        Bad debt expense for the year ended December 31, 2003 totaled $1.6 million as compared to $0.2 million for the year ended December 31, 2002. As a percentage of revenue, bad debt expense represented 0.2% of revenue for the year ended December 31, 2003 compared with less than 0.1% for the year ended December 31, 2002. During the year ended December 31, 2003, we increased the allowance for doubtful accounts to cover the increased aging on certain accounts. We experienced a shift in relative mix of our business more towards the Northeast where we tend to have slower-paying customers.

        Depreciation and amortization expense for the year ended December 31, 2003 totaled $8.1 million as compared to $6.7 million for the year ended December 31, 2002. As a percentage of revenue, depreciation and amortization expense was 1.2% for the year ended December 31, 2003 compared to 1.0% for the year ended December 31, 2002. This was due to the implementation of system enhancements and the additional amortization from certain specifically identifiable intangible assets related to the acquisition of Med-Staff.

        Non-recurring secondary offering costs were $0.9 million, for the year ended December 31, 2002. These costs are all related to expenses incurred as a result of our secondary offering in March 2002. We did not receive any proceeds from this offering and, accordingly, did not capitalize any of the associated costs.

        Net interest expense for the year ended December 31, 2003 totaled $4.3 million as compared to $3.8 million for the year ended December 31, 2002. The increase was primarily related to higher average borrowings resulting from the financing for the acquisition of Med-Staff. This increase was partially offset by a reduction in the effective interest rate due mainly to the expiration of our interest rate swap agreement in February 2003. The effective interest rate for the year ended December 31, 2003 was 5.4% compared to 9.3% during the year ended December 31, 2002.

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        Income tax expense for the year ended December 31, 2003 was $16.5 million as compared to $21.3 million for the year ended December 31, 2002. Our effective tax rate was 38.7% for the years ended December 31, 2003 and 2002.

        Losses from discontinued operations, net of income tax benefits, for the years ended December 31, 2003 and December 31, 2002, were $0.4 million and $3.9 million, respectively. These losses from discontinued operations included E-Staff's results of operations and impairment charges of $0.3 million and $4.1 million pretax for the years ending December 31, 2003 and 2002, respectively. The impairment charges related to the development of our E-Staff technology, a web-based scheduling business. Effective March 31, 2002, we made a decision to pursue a sale of this business, and accordingly, E-Staff was reclassified to discontinued operations. During the year ended December 31, 2003, E-Staff operations ceased.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        Revenue for the year ended December 31, 2002 totaled $640.0 million as compared to $504.4 million for the year ended December 31, 2001. Comparisons include revenue from the acquisitions in 2002 and 2001. Excluding the effects of these acquisitions, revenue for 2002 increased 19.1% as compared with the year ended December 31, 2001. (See—Segment Information).

        Direct operating expenses totaled $478.6 million for the year ended December 31, 2002 as compared to $377.3 million for the year ended December 31, 2001. As a percentage of revenue, direct operating expenses represented 74.8% of revenue for both the years ended December 31, 2002 and 2001.

        Selling, general and administrative expenses for the year ended December 31, 2002 totaled $94.9 million as compared to $68.6 million for the year ended December 31, 2001. As a percentage of revenue, selling, general and administrative expenses represented 14.8% of revenue for the year ended December 31, 2002 compared with 13.6% for the year ended December 31, 2001. This increase is primarily due to increased expenses in our healthcare staffing business. In 2002, we invested in our developmental centralized per diem and international recruitment business, and hired additional recruiters for our travel nurse staffing business.

        Bad debt expense for the year ended December 31, 2002 totaled $0.2 million as compared to $1.3 million for the year ended December 31, 2001. As a percentage of revenue, bad debt expense represented less than 0.1% of revenue for 2002 compared with 0.3% for 2001. This decrease was due to improved collections coupled with a decrease in write-offs.

        Depreciation and amortization expense for the year ended December 31, 2002 totaled $6.7 million as compared to $17.6 million for the year ended December 31, 2001. As a percentage of revenue, depreciation and amortization expense declined to 1.0% for the year ended December 31, 2002 from 3.4% for the year ended December 31, 2001. This decrease was primarily due to a decrease in amortization of intangibles as a result of the adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, in January 2002 and the write-off of $6.4 million of debt issuance costs in October 2001 as a result of our initial public offering. FASB Statement No. 142 promulgates that goodwill and certain intangible assets that have indefinite lives should not be amortized. Instead, goodwill and certain intangible assets are reviewed annually for impairment. No impairment charges were necessary as of December 31, 2002.

        Non-recurring secondary offering costs for the year ended December 31, 2002 were $0.9 million, all relating to expenses incurred as a result of our secondary offering in March 2002. We did not receive any proceeds from this offering and, accordingly, did not capitalize any of the associated costs.

        Loss on early extinguishment of debt totaled $8.0 million for the year ended December 31, 2001. This amount represents the write off of $6.4 million in loan fees due to the repayment of $134.5 million of debt and a prepayment penalty of $1.6 million on the early termination of

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$38.8 million of subordinated debt, less applicable taxes. The debt was repaid with proceeds from our initial public offering of common stock in October 2001.

        Net interest expense for the year ended December 31, 2002 totaled $3.8 million as compared to $14.4 million for the year ended December 31, 2001. The decrease in 2002 was primarily due to the repayment of approximately $134.5 million of debt with the proceeds received from our initial public offering of common stock in October 2001.

        Income tax expense for the year ended December 31, 2002 was $21.3 million as compared to $7.6 million for the year ended December 31, 2001. Our effective tax rate was 38.7% for the year ended December 31, 2002 and 44.3% for the year ended December 31, 2001. The tax rate has been impacted by our adoption of FASB Statement No. 142. Certain non-tax deductible intangible assets, which were being amortized for financial reporting purposes during the year ended December 31, 2001, were not amortized during the year ended December 31, 2002. The tax treatment of these intangible assets remained the same. Accordingly, the effective tax rate was lower during the year ended December 31, 2002.

        Losses from discontinued operations, net of income tax benefits, for the years ended December 31, 2002 and December 31, 2001, were $3.9 million and $0.9 million, respectively. Losses from discontinued operations in the year ended December 31, 2002 include E-Staff's results of operations and a $2.5 million after-tax impairment charge relating to the development of our E-Staff technology, a web-based scheduling business. Losses in the year ended December 31, 2001 include the results of operations of E-Staff and adjustments to the estimated loss on disposal of the HospitalHub business, which was sold in June 2001.

Segment Information

        The following table presents, for the periods indicated, selected statement of operations data by segment:

 
  Year Ended December 31,
 
  2003
  2002
  2001
 
  (Dollars in thousands)

Revenue:                  
  Healthcare staffing   $ 636,394   $ 588,743   $ 466,986
  Other human capital management services     50,536     51,210     37,378
   
 
 
    $ 686,930   $ 639,953   $ 504,364
   
 
 
Contribution income(a):                  
  Healthcare staffing   $ 76,061   $ 81,160   $ 70,853
  Other human capital management services     4,660     6,521     4,701

Unallocated corporate overhead

 

 

24,646

 

 

21,450

 

 

18,315
Depreciation     4,530     3,524     2,700
Amortization     3,548     3,148     14,851
Non-recurring secondary offering costs     16     886    
Interest expense, net     4,320     3,753     14,422
Loss on early extinguishment of debt     960         8,000
   
 
 
Income from continuing operations before income taxes   $ 42,701   $ 54,920   $ 17,266
   
 
 

(a)
We define contribution income as earnings before interest, income taxes, depreciation, amortization and corporate expenses not specifically identified to a reporting segment. Contribution income is a measure used by management to access operations and is provided in accordance with FASB No. 131, Disclosure About Segments of an Enterprise and Related Information.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Healthcare Staffing

        Revenue from our healthcare staffing segment for the year ended December 31, 2003 totaled $636.4 million as compared to $588.7 million for the year ended December 31, 2002. This increase was primarily attributable to the acquisition of Med-Staff on June 5, 2003 along with increases in revenue from our developmental centralized per diem and international recruitment businesses. This increase was partially offset by a decrease in our other healthcare staffing businesses. Including Med-Staff, the number of FTEs increased 6.9% over the prior year. Excluding the effects of the Med-Staff acquisition, revenue decreased $34.5, million or 5.9%, from 2002 revenue. This decrease was due to a decrease in the average number of FTEs, representing $(45.9) million; an increase in the percentage of FTEs working under mobile contracts, representing $(4.9) million; partially offset by an increase in the average hourly bill rate, contributing $16.3 million. The average number of FTEs on contract, excluding the FTEs from the Med-Staff acquisition, decreased 7.6%. This decline in FTEs was due to a decrease in FTEs from our travel nurse staffing operations and clinical research trials business, partially offset by higher FTEs in our centralized per diem and international recruitment businesses. Demand for our travel nurse staffing operations continued to decrease during 2003 due to a more cautious buying process on the part of acute care hospital customers and full-time and part-time nurses offering more hours of service directly to hospital employers. We believe this trend may 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 we are encouraged there may be a change in direction in this dynamic based on the number of orders for contract nurses we have been receiving, we have not experienced sustained increases in contract booking activity. We believe it may take some time to change the behaviors of our hospital clients and nurses. We believe that demand for outsourced travel nursing services will increase in the long term, driven by an aging population and an increasing shortage of nurses. Mobile contracts, where the nurse is on the hospital payroll accounted for 2% of our volume in our core travel nursing operations in the year ended December 31, 2003 as compared to 1% in the year ended December 31, 2002.

        Although revenue from our developmental centralized per diem and international recruitment businesses increased in the year ended December 31, 2003 compared to the year ended December 31, 2002, the increase was partially offset by lower revenue in our clinical research trials staffing business for the same periods. While improving sequentially during the second half of 2003, FTEs from our clinical research trials business decreased on a year over year basis, due to a decrease in demand for clinical research professionals since the beginning of 2002.

        For the year ended December 31, 2003, 88.8% of our healthcare staffing revenue was generated by nurse staffing operations and 11.2% was generated by other operations. For the year ended December 31, 2002, 86.8% of our healthcare staffing revenue was generated by nurse staffing operations and 13.2% was generated by other operations.

        Contribution income from our healthcare staffing segment for the year ended December 31, 2003 was $76.1 million compared to $81.2 million for the year ended December 31, 2002. Contribution income was impacted by relatively higher housing and insurance costs and less leverage on overhead, partially offset by the contribution from the Med-Staff acquisition. As a percentage of revenue, contribution income was 12.0% for the year ended December 31, 2003 compared to 13.8% for the year ended December 31, 2002.

Other Human Capital Management Services

        Revenue from our other human capital management services segment for the year ended December 31, 2003 totaled $50.5 million as compared to $51.2 million for the year ended December 31, 2002. Revenue in 2002 included JRK from its March 1st acquisition. Excluding the

31



effects of this acquisition on both periods, revenue in the year ended December 31, 2003 decreased $2.1 million, or 4.0%, as compared with the year ended December 31, 2002. This decrease was primarily due to a decrease in revenues from our search and consulting businesses partially offset by an increase in revenues from our educational seminars business. During 2003, there was a reduction in demand for our physician search and consulting businesses. Revenue from the educational seminars business increased due to an increase in the number of seminars conducted partially offset by a lower number of attendees and average price per seminar.

        Contribution income from other human capital management services was $4.7 million for the year ended December 31, 2003 as compared to $6.5 million for the year ended December 31, 2002. This decrease in contribution income was primarily due to the same factors that impacted revenue coupled with higher operating expenses in our consulting and educational seminars businesses.

Unallocated Corporate Overhead

        Unallocated corporate overhead was $24.6 million in the year ended December 31, 2003 compared to $21.5 million in the year ended December 31, 2002. This increase was primarily due to an increase in the cost of employee benefits, higher legal fees, certain organizational costs related to the acquisition of Med-Staff and higher insurance costs. As a percentage of consolidated revenue, unallocated corporate overhead was 3.6% for the year ended December 31, 2003 compared to 3.4% in the prior year.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Healthcare Staffing

        Revenue from our healthcare staffing segment for the year ended December 31, 2002 totaled $588.7 million as compared to $467.0 million for the year ended December 31, 2001. Revenue from NovaPro, acquired in January 2002, and a full year's revenue, rather than 91/2 months of revenue from ClinForce in 2001 (acquired on March 16, 2001) was included in the results for the year ended December 31, 2002. Excluding the effects of these acquisitions, revenue increased $88.6, million or 19.0%, as compared with the revenue for the year ended December 31, 2001. The increase was mainly attributable to a higher average hourly bill rate in all businesses and an increase in the numbers of field employees in our nurse staffing and allied health staffing businesses, offset in part by a modest reduction in the hours billed per FTE per week. The average number of hours worked per week per FTE continued to decrease in 2002 primarily as a result of an increase in the number of nurses working three 12-hour shifts rather than five 8-hour shifts. For the year ended December 31, 2002, 86.8% of our healthcare staffing revenue was generated by nurse staffing operations and 13.2% was generated by other operations. For the year ended December 31, 2001, 86.5% of our healthcare staffing revenue was generated by nurse staffing operations and 13.5% was generated by other operations.

Other Human Capital Management Services

        Revenue from our other human capital management services segment for the year ended December 31, 2002 totaled $51.2 million as compared to $37.4 million for the year ended December 31, 2001. Revenue in 2002 included JRK, which was acquired on March 1, 2002, and three additional months of Gill/Balsano, which was acquired on April 1, 2001. Excluding the effects of these acquisitions, revenue for the year ended December 31, 2002 increased $7.8 million, or 20.8%, as compared with the year ended December 31, 2001. This increase is primarily due to an increase in revenues from our educational seminars business. Revenue from the educational seminars business increased due to an increase in number of seminars conducted and the number of attendees, partially offset by a lower average price per seminar.

32



Unallocated Corporate Overhead

        Unallocated corporate overhead for the year ended December 31, 2002 was $21.5 million compared to $18.3 million for the year ended December 31, 2001. As a percentage of consolidated revenue unallocated corporate overhead was 3.4% in the year ended December 31, 2002 compared to 3.6% in the year ended December 31, 2001.

Liquidity and Capital Resources

        As of December 31, 2003, we had a current ratio, defined as the amount of current assets divided by current liabilities, of 2.7 to 1.0. Working capital increased by $1.5 million to $79.5 million as of December 31, 2003, compared to $78.1 million as of December 31, 2002. The increase in working capital was primarily attributable to an increase in accounts receivable and a decrease in the short term portion of debt, partially offset by a decrease in cash and cash equivalents and an increase in accounts payable. Part of the increase in accounts receivable was related to acquisitions. Excluding acquisitions, accounts receivable, less allowance for doubtful accounts, decreased $6.7 million in the year ended December 31, 2003 as compared to the prior year due to lower revenue. Including acquisitions, days' sales outstanding increased 4 days to 60 days at December 31, 2003 compared to 56 days at December 31, 2002. This reflects, in part, a relative increase of business more toward the Northeast where we tend to have a greater concentration of slower-paying accounts.

        Our operating cash flows constitute our primary source of liquidity, and historically, have been sufficient to fund our working capital, capital expenditures, 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.

        On October 30, 2001, we completed our initial public offering of 7,812,500 shares of common stock at $17.00 per share. Additionally, the underwriters exercised the over-allotment option of 1,171,875 shares, bringing the total number of shares issued to 8,984,375. Total proceeds received by us, net of expenses related to the initial public offering were $138.8 million. The proceeds were used to repay $89.6 million of our outstanding balance under the term loan portion of our senior secured credit facility, $6.1 million of our outstanding balance under the revolver portion of our senior secured credit facility, and $40.3 million to redeem our outstanding senior subordinated pay-in-kind notes, including the associated redemption premium. The remainder of the proceeds was used for general corporate purposes.

        On March 20, 2002, an aggregate of 9,000,000 shares of our common stock were sold by existing shareholders pursuant to a registration statement filed by us with the Securities and Exchange Commission. The Company and no member of management sold any shares or received any of the proceeds from the sale of these shares, but the Company paid $0.9 million of expenses for such registration in 2002.

        On November 5, 2002, our Board of Directors authorized a stock repurchase program, whereby we may purchase up to 1,500,000 of our common shares at an aggregate cost not to exceed $25.0 million. In November 2002, we amended our credit facility to increase our limitation on repurchases of capital stock in order to allow us to proceed with this program. During the year ended December 31, 2003, we purchased and retired 566,400 shares of our common stock at an average cost of $13.61 per share bringing our total purchases under the current authorization to 1,001,400 at an average cost of $13.70 per share. Under the remainder of the current authorization we can purchase up to an additional 498,600 shares at an aggregate cost not to exceed $11.3 million. The shares may be purchased from

33



time to time on the open market. The repurchase program may be discontinued at any time at our discretion.

Credit Facility

        The current credit facility is provided by a lending syndicate comprised of Citicorp Global Markets, Inc., Wachovia Securities LLC, SunTrust Bank, Key Corporate Capital, LaSalle Bank, N.A., GE Capital Corp., and Merrill Lynch Capital Corp. We amended and restated our credit facility in June 2003 in conjunction with our acquisition of Med-Staff. As of December 31, 2003, the amended credit facility was comprised of (i) a revolving credit facility of up to $75.0 million, including a swing-line sub-facility of $10.0 million and a letter of credit sub-facility of $25.0 million, and (ii) a $93.2 million term loan facility. The revolving credit facility matures on June 5, 2008 and the term loan facility has staggered maturities through 2009.

        Borrowings under the amended credit facility bear interest at variable rates based, at our option, on LIBOR or the prime rate plus various applicable margins that are determined by the amended credit facility. At December 31, 2003, the weighted average effective interest rate under the amended credit facility was 6.3%. We are required to pay a quarterly commitment fee at a rate of 0.50% per annum on unused commitments under the revolving loan facility. As of December 31, 2003, we had no borrowings outstanding under our revolving credit facility and $11.6 million of outstanding letters of credit, leaving availability under our revolving credit facility of $63.4 million.

        The terms of the credit facility include customary covenants and events of default. Aside from customary mandatory prepayment covenants, beginning in 2004, we are required to make mandatory prepayments subsequent to the completion of a fiscal year ending using a portion of our excess cash flow, as defined in the agreement. We are required to obtain the consent of our lenders to complete any acquisition which exceeds $25.0 million. The Agreement also includes a provision that limits our ability to pay dividends and make stock repurchases. As of December 31, 2003, the remainder of our current stock repurchase authorization is within the covenant limit of $18.7 million for dividend and/or stock purchases. The covenant limitation can increase each year by 25% of net income, provided that our Debt/EBITDA Ratio (as defined in the Agreement) is 1.5 to 1.0 and, after the repayment, we have either $25.0 million of cash or $25.0 million of availability under the revolver. In the event of a default, our lenders may terminate their lending commitments to us and declare our outstanding indebtedness under the credit facility due and payable, together with accrued but unpaid interest and fees. Borrowings under the amended credit facility are collateralized by substantially all our assets and the assets of our subsidiaries.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

        Net cash provided by operating activities during 2003 was $51.8 compared to $42.7 million during 2002. The increase in operating cash flow is primarily due to higher collections of receivables in 2003 and a lower amount of cash flow used in discontinued operations in 2003. Investing activities used $109.5 million during 2003 compared to $19.8 million during 2002. In 2003 the primary use of cash in investing activities was for the acquisition of Med-Staff using $102.8 million, including professional fees. The remainder of cash used by investing activities in 2003 was for capital expenditures and earnout payments relating to previous acquisitions. Investing activities in 2002 were primarily attributable to the acquisitions of NovaPro, JRK and capital expenditures relating to upgrading our information systems. NovaPro and JRK were acquired in the first quarter of 2002 using cash of approximately $9.8 million during the year ended December 31, 2002. The remainder of cash used in 2002 was primarily for earnout payments relating to previous acquisitions. Net cash provided by financing activities in 2003 was primarily attributable to increased borrowings associated with the acquisition of Med-Staff. In connection with the acquisition, we borrowed $125.0 million under our new term loan facility, which we used to fund the purchase of Med-Staff and to prepay approximately $27.3 million of our term debt.

34



Subsequent to the acquisition of Med-Staff, we also repaid $31.8 million of the new term loan, of which $28.7 million was an optional prepayment. In addition, we continued to repurchase shares under our current authorization. In 2002, we used $6.4 million, net, to repay debt and $6.0 million to repurchase shares of our common stock in accordance with the approved program described above. These uses were offset by cash received from the exercise of stock options in 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        Net cash provided by operating activities during 2002 more than doubled to $42.7 million compared to $19.8 million during 2001. This increase was primarily due to increased business, improved operating margins and an improvement in days' sales outstanding from 63 days at December 31, 2001 to 56 days at December 31, 2002. Investing activities used $19.8 million during 2002 compared to $42.3 million during 2001. Investing activities in 2002 were primarily attributable to current year acquisitions and capital expenditures relating to upgrading our information systems. NovaPro and JRK were acquired in the first quarter of 2002 using cash of approximately $9.8 million during the year ended December 31, 2002. The remainder of cash used in 2002 was primarily for earnout payments relating to previous acquisitions. Investing activities in 2001 included approximately $32.8 million for the acquisition of ClinForce and $2.1 million for the acquisitions of Heritage and Gill/Balsano. Net cash used in financing activities during 2002 totaled $8.4 million compared to cash provided by financing activities of $25.3 million in 2001. In 2002, we used $6.4 million, net, to repay debt and $6.0 million to repurchase shares of our common stock in accordance with the approved program described above. These uses were offset by cash received from the exercise of stock options in 2002. In 2001, cash provided by financing activities came from our initial public offering and the proceeds from issuance of debt for acquisitions, offset by repayments of debt using the offering proceeds and funds generated by operations.

Commitments

        The following table reflects our significant contractual obligations and other commitments as of December 31, 2003:

Contractual Obligations

  Total
  2004
  2005
  2006
  2007
  2008
  Thereafter
 
  (Dollars in thousands)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Term Loan(a)   $ 93,196   $ 4,779   $ 4,779   $ 4,779   $ 4,779   $ 38,235   $ 35,845
Operating Leases     23,230     4,465     4,367     3,477     2,488     1,838     6,595
   
 
 
 
 
 
 
    $ 116,426   $ 9,244   $ 9,146   $ 8,256   $ 7,267   $ 40,073   $ 42,440
   
 
 
 
 
 
 

(a)
Under our 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 a 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.

Critical Accounting Principles and Estimates

        In response to the Securities and Exchange Commission's Release Number 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and Number 33-8056 "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported

35



amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to asset impairment, accruals for insurance, allowance for doubtful accounts, and contingencies and litigation. We state our accounting policies in the notes to the audited consolidated financial statements and related notes for the year ended December 31, 2003, contained herein. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

        We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

36


Recent Accounting Pronouncements

        In November 2003, the FASB issued EITF 03-8, Accounting for Claims-Made Insurance and Retroactive Insurance Contracts, which codified previously issued authoritative accounting guidance in the area of insurance contracts and related activity thereto. We had previously offset in our consolidated balance sheets our liability for known and incurred but not reported professional liability and workers' compensation losses with a corresponding receivable for such estimated losses from our commercial insurance companies under policies in effect for such periods. Such prior accounting treatment was pursuant to industry practice under the interpretative guidance under the American Institute of Certified Public Accountants Audit and Accounting Guide for Health Care Organizations. EITF No. 03-8 concluded that, under circumstances such as in our insured professional liability and workers' compensation policies, since a right of legal offset does not exist due to the fact that there are three parties to an incurred claim (the insured, the insurer and the claimant), the related liability should be classified separately on a gross basis with a separate related receivable recognized as being due from insurance carriers. Accordingly, our consolidated balance sheet as of December 31, 2003, reflects the provisions of EITF 03-8 for the receivable portion in other current assets and for the related liability in accrued employee compensation and benefits. The corresponding liability and receivable as of December 31, 2002 has also been reclassified in our consolidated balance sheet.

        In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the first fiscal year beginning after June 15, 2003. We do not have any interests qualifying as a variable interest entity as of December 31, 2003. As a result, FIN No. 46 will not have an impact on the consolidated financial statements.

        In April 2002, the FASB issued FASB Statement No. 145, Rescission of Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical

37



corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 are effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item should be reclassified. We adopted the provisions of this Statement as of January 1, 2003. Accordingly, the loss on early extinguishment of debt in 2003 was included in the other expenses section of the consolidated statement of operations and the loss on early extinguishment of debt in 2001 was reclassified from an extraordinary item to the other expenses section in the consolidated statements of operations.

        In July 2002, the FASB issued FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FASB Statement No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. Under FASB Statement No. 146, an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. FASB Statement No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted the provisions of FASB Statement No. 146 in the December 31, 2003 consolidated financial statements. The adoption of FASB No. 146 did not have an effect on our financial position, but may impact the timing of recognition of costs associated with future exit and disposal activities.

Inflation

        During the last several years, the rate of inflation in healthcare related services has exceeded that of the economy as a whole. This inflation has increased our direct operating costs. We are also impacted by fluctuations in housing costs and recently by increases in costs of professional, general and healthcare insurance. Historically, we have been able to recoup the negative impact of such fluctuations by increasing our billing rates. We may not be able to continue increasing our billing rates and increases in our direct operating costs may adversely affect us in the future. In addition, our clients are impacted by payments of healthcare reimbursements by federal and state governments as well as private insurers.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to interest rate changes, primarily as a result of our credit facility, which bears interest based on floating rates. We were party to an interest rate swap agreement, which fixed the interest rate paid on $45.0 million of borrowings under our credit facility at 6.705% plus the applicable margin. The last swap payment was made in February 2003. Prior to January 2001, we accounted for the swap agreement as a hedge, which means changes in the fair value of the swap were not required to be recognized in earnings. Effective January 1, 2001, we adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Upon adopting FASB Statement No. 133, we recorded a liability for the fair value of the swap, which reduced consolidated stockholders' equity by $0.9 million. We recognized changes in the fair value of the swap in earnings to the extent such changes were greater or less than the corresponding change in the fair value of the future variable interest payments on the portion of the debt underlying the swap. During the year ended December 31, 2002, other comprehensive income increased by $0.8 million as a result of this interest rate swap. The fair value of our interest rate swap at December 31, 2002 was $0.6 million and is separately stated in our consolidated balance sheets.

        A 1% change in interest rates on variable rate debt would have resulted in interest expense fluctuating approximately $0.8 million in 2003, $0.5 million for 2002 and $1.2 million for 2001.

38



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        See—Item 15 of Part IV of this Report.


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.


ITEM 9A.    CONTROLS AND PROCEDURES

        We carried out an evaluation, under the supervision and with the participation of the our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our "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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our 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.

        There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation.

39



PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information with respect to directors and executive officers is included in our Proxy Statement (the "Proxy Statement") to be filed pursuant to Regulation 14A with the SEC and such information is incorporated herein by reference.


ITEM 11.    EXECUTIVE COMPENSATION

        Information with respect to executive compensation is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Information with respect to our common stock is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information with respect to certain relationships and related transactions is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.


ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        Information with respect to principal accounting fees and services is included in our Proxy Statement to be filed with the SEC and such information is incorporated herein by reference.

40



PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)
See Index to Financial Statements immediately following Exhibit Index.

(b)
On October 10, 2003, the Company filed a Report on Form 8-K pursuant to Item 5. Other Events and Regulation F-D Disclosures and Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits.
(c)
Exhibits

41



Signatures

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    CROSS COUNTRY HEALTHCARE, INC.

 

 

By:

/s/  
JOSEPH A. BOSHART      
Name: Joseph A. Boshart
Title: Chief Executive Officer and President

Dated: March 12, 2004

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated and on the dates indicated:

Signature
  Title
  Date

 

 

 

 

 
/s/  JOSEPH A. BOSHART      
Joseph A. Boshart
  President, Chief Executive
Officer, Director (Principal
Executive Officer)
  March 12, 2004

/s/  
EMIL HENSEL      
Emil Hensel

 

Chief Financial Officer and
Director (Principal Financial
Officer)

 

March 12, 2004

/s/  
DANIEL J. LEWIS      
Daniel J. Lewis

 

Chief Accounting Officer


 

March 12, 2004

/s/  
KAREN H. BECHTEL      
Karen H. Bechtel

 

Director


 

March 12, 2004

/s/  
W. LARRY CASH      
W. Larry Cash

 

Director


 

March 12, 2004

/s/  
THOMAS C. DIRCKS      
Thomas C. Dircks

 

Director


 

March 12, 2004

/s/  
FAZLE HUSAIN      
Fazle Husain

 

Director


 

March 12, 2004

/s/  
JOSEPH SWEDISH      
Joseph Swedish

 

Director


 

March 12, 2004

/s/  
JOSEPH TRUNFIO      
Joseph Trunfio

 

Director


 

March 12, 2004

/s/  
C. TAYLOR COLE      
C. Taylor Cole

 

Director


 

March 12, 2004

42



Exhibit Index

No.
  Description

2.1+

 

Cross Country Staffing Asset Purchase Agreement, dated June 24, 1999, by and among W. R. Grace & Co.-Conn., a Connecticut corporation, Cross Country Staffing, a Delaware general partnership, and the Registrant, a Delaware corporation

2.2+

 

Agreement and Plan of Merger, dated as of October 29, 1999, by and among the Registrant, CCTC Acquisition, Inc. and Certain Stockholders of Cross Country Staffing, Inc and TravCorps Corporation and the Stockholders of TravCorps Corporation

2.3+

 

Stock Purchase Agreement, dated as of December 15, 2000, by and between Edgewater Technology, Inc. and the Registrant

2.4
p

 

Asset Purchase Agreement dated as of May 8, 2003, by and among Cross Country Nurses, Inc., the Registrant, Med-Staff, Inc., William G. Davis, Davis Family Electing Small Business Trust and Timothy Rodden

3.1+

 

Amended and Restated Certificate of Incorporation of the Registrant

3.2+

 

Amended and Restated By-laws of the Registrant

4.1+

 

Form of specimen common stock certificate

4.2+

 

Amended and Restated Stockholders Agreement, dated August 23, 2001, among the Registrant, a Delaware corporation, the CEP Investors and the Investors

4.3+

 

Registration Rights Agreement, dated as of October 29, 1999, among the Registrant, a Delaware corporation, and the CEP Investors and the MSDWCP Investors

4.4+

 

Amendment to the Registration Rights Agreement, dated as of August 23, 2001, among the Registrant, a Delaware corporation, and the CEP Investors and the MSDWCP Investors

4.5+

 

Stockholders Agreement, dated as of August 23, 2001, among the Registrant, Joseph Boshart and Emil Hensel and the Financial Investors

10.1+

 

Employment Agreement, dated as of June 24, 1999, between Joseph Boshart and the Registrant

10.2+

 

Employment Agreement, dated as of June 24, 1999, between Emil Hensel and the Registrant

10.4+

 

Lease Agreement, dated April 28, 1997, between Meridian Properties and the Registrant

10.5+

 

Lease Agreement, dated October 31, 2000, by and between Trustees of the Goldberg Brothers Trust, a Massachusetts Nominee Trust and TVCM, Inc.

10.6+

 

222 Building Standard Office Lease between Clayton Investors Associates, LLC and Cejka & Company

10.7*

 

Amended and Restated 1999 Stock Option Plan of the Registrant

10.8*

 

Amended and Restated Equity Participation Plan of the Registrant

10.9
p

 

Third Amended and Restated Credit Agreement dated as of June 5, 2003 among Cross Country Healthcare, Inc., The Lenders Party Hereto, Citigroup Global Markets Inc., as Sole Bookrunner and Joint Lead Arranger, Wachovia Securities LCC, as Joint Lead Arranger, Citigroup USA, Inc., as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, Wachovia Bank, National Association, as Syndication Agent, and General Electric Capital Corporation, Key Corporate Capital, Inc., LaSalle Bank N.A., and SunTrust Bank, as Documentation Agents

10.10+

 

Form of Subsidiary Guarantee Agreement, dated as of December 16, 1999, among the Registrant's subsidiary guarantors and Citicorp USA, Inc., as collateral agent for the Obligees

10.11+

 

Form of Security Agreement, dated as of July 29, 1999, as amended and restated as of December 16, 1999 among the Registrant and Citicorp USA, Inc. as collateral agent for the Obligees

10.12+

 

Form of Pledge Agreement, dated as of July 29, 1999, as amended and restated as of December 16, 1999, among the Registrant and Citicorp USA, Inc., as collateral agent for the Obligees
     

43



10.13+

 

Form of Indemnity, Subrogation and Contribution Agreement, dated as of December 16, 1999, among the Registrant, the subsidiaries of the Registrant and Citicorp USA, Inc., as collateral agent for the Obligees

10.14^

 

Amendment to Lease by and between Meridian Commercial Properties Limited Partnership and Cross Country, Inc. dated May 1, 2002

10.15#

 

Cross Country, Inc. Deferred compensation plan

10.16#

 

Restricted Stock Agreement between Company and Joseph A. Boshart

10.17#

 

Restricted Stock Agreement between Company and Emil Hensel

10.18#

 

Restricted Stock Agreement between Company and Vickie Anenberg

10.19#

 

Restricted Stock Agreement between Company and Jonathan Ward

10.20^

 

Amendment to Lease Agreement, as of May 1, 2002, by and between Meridian Commercial Properties Limited Partnership and Cross Country Healthcare, Inc.

10.21

 

Lease Agreement by and between Edgewood General Partnership and HR Logic, dated July 6, 2000

10.22

 

First Amendment to Lease Agreement by and between Edgewood General Partnership and HR Logic, dated December 7, 2000

10.23

 

Second Amendment to Lease Agreement by and between Edgewood General Partnership and Cross Country TravCorps, dated April 29, 2002

10.24

 

Lease Agreement between Corners Realty Corporation, Inc. and Cejka & Company dated May 11, 2001

10.25

 

Lease Agreement between Corners Realty Corporation, Inc and Cross Country Consulting, Inc., dated March 21, 2002

10.26

 

Lease Agreement by and between Petula Associates, Ltd. And Principal Life Insurance Company and Clinical Trials Support Services, Inc. dated November 3, 1999

10.27

 

First Amendment to Lease Agreement by and between Petula Associates, Ltd. And Principal Life Insurance Company and Clinical Trials Support Services, Inc., dated December 20, 1999.

10.28

 

Lease Agreement by and between Newtown Street Road Associates and Med-Staff, Inc, dated June 21, 2001.

10.29

 

Lease Agreement by and between Newtown Street Road Associates and Med-Staff, Inc., dated June 23, 1998

21.1

 

List of subsidiaries of the Registrant

23.1

 

Consent of Independent Certified Public Accountants

31.1

 

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

31.2

 

Certification Pursuant to Rule 13a-14(a)/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

+
Previously filed as an exhibit to the Company's Registration Statement on Form S-1, Commission File No. 333-74403, and incorporated by reference herein.

*
Previously filed as an exhibit to the Company's Registration Statement on Form S-1, Commission File No. 333-83450, and incorporated by reference herein.

^
Previously filed as exhibits in the Company's Quarterly Reports on Form 10Q filings during the year ended December 31, 2002, and incorporated by reference herein.

#
Previously filed as exhibits in the Company's Form 10-K for the year ending December 31, 2002, and incorporated by reference herein.

p
Previously filed as an exhibit in the Company's Form 8-K dated June 5, 2003, and incorporated by reference herein.

44



INDEX TO FINANCIAL STATEMENTS

 
  Page
Cross Country Healthcare, Inc.    
  Report of Independent Certified Public Accountants   F-2
  Consolidated Balance Sheets as of December 31, 2003 and 2002   F-3
  Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001
  F-4
  Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001
  F-5
  Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
  F-6
  Notes to the Consolidated Financial Statements   F-7

Financial Statements Schedule

 

 
  Schedule II—Valuation and Qualifying Accounts for the Years Ended December 31, 2003, 2002 and 2001   II-1

        Schedules not filed herewith are either not applicable, the information is not material or the information is set forth in the financial statements or notes thereto.

F-1



Report of Independent Certified Public Accountants

The Board of Directors and Stockholders
Cross Country Healthcare, Inc.

        We have audited the accompanying consolidated balance sheets of Cross Country Healthcare, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cross Country Healthcare, Inc. at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

West Palm Beach, Florida
February 13, 2004

F-2



Cross Country Healthcare, Inc.

Consolidated Balance Sheets

 
  December 31,
 
 
  2003
  2002
 
Assets              
Current assets:              
  Cash and cash equivalents   $   $ 17,209,946  
  Accounts receivable, less allowance for doubtful accounts of $3,613,834 in 2003 and $2,250,047 in 2002     112,406,934     97,641,426  
  Deferred income taxes     1,933,301     645,177  
  Income taxes receivable     2,310,236     1,815,458  
  Prepaid rent on employees' apartments     3,523,241     4,038,736  
  Deposits on employees' apartments, net of allowance of $411,160 in 2003 and $261,782 in 2002     886,679     1,051,191  
  Assets from discontinued operations, net         247,789  
  Other current assets     6,229,152     5,654,953  
   
 
 
Total current assets     127,289,543     128,304,676  
Property and equipment, net of accumulated depreciation and amortization of $17,248,084 in 2003 and $12,928,611 in 2002     12,602,570     12,394,162  
Trademark, net of accumulated amortization of $1,401,169 in 2003 and 2002     15,748,831     15,748,831  
Goodwill, net of accumulated amortization of $20,873,294 in 2003 and 2002     307,531,874     226,115,646  
Other identifiable intangible assets, net of accumulated amortization of $11,890,956 in 2003 and $8,824,087 in 2002     8,579,794     7,112,663  
Debt issuance costs, net of accumulated amortization of $335,991 in 2003 and $1,236,562 in 2002     2,971,070     1,105,470  
Other assets     528     45,180  
   
 
 
Total assets   $ 474,724,210   $ 390,826,628  
   
 
 

Liabilities and stockholders' equity

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable and accrued expenses   $ 9,461,986   $ 3,296,638  
  Accrued employee compensation and benefits     29,993,911     29,890,047  
  Current portion of long-term debt and notes payable     4,943,777     14,361,917  
  Liabilities from discontinued operations, net         185,889  
  Other current liabilities     3,357,950     2,422,642  
   
 
 
Total current liabilities     47,757,624     50,157,133  
Interest rate swap         606,356  
Deferred income taxes     17,649,548     10,778,749  
Long-term debt and notes payable     88,793,769     28,452,603  
   
 
 
Total liabilities     154,200,941     89,994,841  

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 
  Common stock—$0.0001 par value; 100,000,000 shares authorized; 31,801,885 and 32,229,666 shares issued and outstanding at December 31, 2003 and 2002, respectively     3,180     3,223  
  Additional paid-in capital     251,987,826     258,488,773  
  Accumulated other comprehensive loss         (371,687 )
  Retained earnings     68,532,263     42,711,478  
   
 
 
Total stockholders' equity     320,523,269     300,831,787  
   
 
 
Total liabilities and stockholders' equity   $ 474,724,210   $ 390,826,628  
   
 
 

See accompanying notes.

F-3



Cross Country Healthcare, Inc.

Consolidated Statements of Operations

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
Revenue from services   $ 686,929,644   $ 639,952,915   $ 504,363,637  
Operating expenses:                    
  Direct operating expenses     519,959,631     478,549,635     377,291,122  
  Selling, general and administrative expenses     109,301,085     94,930,045     68,559,671  
  Bad debt expense     1,594,020     242,230     1,273,656  
  Depreciation     4,529,591     3,524,004     2,699,916  
  Amortization     3,548,338     3,147,952     14,851,382  
  Non-recurring secondary offering costs     16,173     886,036      
   
 
 
 
    Total operating expenses     638,948,838     581,279,902     464,675,747  
   
 
 
 
Income from operations     47,980,806     58,673,013     39,687,890  
Other expenses:                    
  Interest expense, net     4,319,579     3,752,718     14,422,170  
  Loss on early extinguishment of debt     959,991         7,999,506  
   
 
 
 
Income from continuing operations before income taxes     42,701,236     54,920,295     17,266,214  
Income tax expense     (16,525,378 )   (21,254,154 )   (7,646,456 )
   
 
 
 
Income from continuing operations     26,175,858     33,666,141     9,619,758  
Discontinued operations, net of income tax benefit:                    
  Loss from discontinued operations     (355,073 )   (3,883,436 )   (741,006 )
  Loss on disposal of HospitalHub             (206,710 )
   
 
 
 
Net income   $ 25,820,785   $ 29,782,705   $ 8,672,042  
   
 
 
 
Net income (loss) per common share—basic:                    
  Income from continuing operations   $ 0.81   $ 1.04   $ 0.39  
  Discontinued operations     (0.01 )   (0.12 )   (0.04 )
   
 
 
 
Net income   $ 0.80   $ 0.92   $ 0.35  
   
 
 
 
Net income (loss) per common share—diluted:                    
  Income from continuing operations   $ 0.80   $ 1.00   $ 0.38  
  Discontinued operations     (0.01 )   (0.12 )   (0.04 )
   
 
 
 
Net income   $ 0.79   $ 0.88   $ 0.34  
   
 
 
 
Weighted average common shares outstanding—basic     32,090,731     32,432,026     24,881,218  
   
 
 
 
Weighted average common shares outstanding—diluted     32,530,563     33,653,433     25,222,936  
   
 
 
 

See accompanying notes.

F-4



Cross Country Healthcare, Inc.

Consolidated Statement of Stockholders' Equity

 
  Common Stock
   
  Accumulated
Other
Comprehensive
(Loss) Gain

   
   
 
 
  Additional
Paid-In
Capital

  Retained
Earnings

  Total
Stockholders'
Equity

 
 
  Shares
  Dollars
 
Balance at December 31, 2000   23,205,298   $ 2,321   $ 119,080,880   $   $ 4,256,731   $ 123,339,932  
  Initial public offering   8,984,375     898     138,765,700             138,766,598  
  Exercise of stock options   22,072     2     305,231             305,233  
  Net income                   8,672,042     8,672,042  
  Comprehensive loss:                                    
    FASB Statement No. 133 (derivative) transition adjustment               (910,009 )       (910,009 )
    Net change in hedging transaction               (246,727 )       (246,727 )
                   
       
 
  Total comprehensive loss               (1,156,736 )       (1,156,736 )
   
 
 
 
 
 
 
Balance at December 31, 2001   32,211,745     3,221     258,151,811     (1,156,736 )   12,928,773     269,927,069  
  Exercise of stock options   452,921     45     4,401,717             4,401,762  
  Tax benefit of stock option exercises           2,158,863             2,158,863  
  Stock repurchase and retirement   (435,000 )   (43 )   (6,014,790 )           (6,014,833 )
  Other           (208,828 )           (208,828 )
  Net income                   29,782,705     29,782,705  
  Comprehensive gain:                                    
    Net change in hedging transaction               785,049         785,049  
   
 
 
 
 
 
 
Balance at December 31, 2002   32,229,666     3,223     258,488,773     (371,687 )   42,711,478     300,831,787  
  Exercise of stock options   122,403     12     1,012,449             1,012,461  
  Tax benefit of stock option exercises           148,485             148,485  
  Stock repurchase and retirement   (566,400 )   (57 )   (7,708,905 )           (7,708,962 )
  Issuance of restricted shares to employees   16,216     2     188,104             188,106  
  Unearned compensation under restricted stock plan, net of amortization           (141,080 )           (141,080 )
  Net income                   25,820,785     25,820,785  
  Comprehensive gain:                                    
    Net change in hedging transaction               371,687         371,687  
   
 
 
 
 
 
 
Balance at December 31, 2003   31,801,885   $ 3,180   $ 251,987,826   $   $ 68,532,263   $ 320,523,269  
   
 
 
 
 
 
 

See accompanying notes.

F-5



Cross Country Healthcare, Inc.

Consolidated Statements of Cash Flows

 
  Year Ended December 31,
 
 
  2003
  2002
  2001
 
Operating activities                    
Net income   $ 25,820,785   $ 29,782,705   $ 8,672,042  
Adjustments to reconcile net income to net cash provided by operating activities:                    
 
Amortization

 

 

3,548,3 38

 

 

3,147,952

 

 

14,851,382

 
  Depreciation     4,529,591     3,524,004     2,699,916  
  Bad debt expense     1,594,020     242,230     1,273,656  
  Deferred income tax expense (benefit)     4,600,370     3,978,365     (169,137 )
  Amortization of unearned compensation     47,026          
  Loss from discontinued operations     355,073     3,883,436     741,006  
  Estimated loss on disposal of discontinued operations             206,710  
  Cumulative interest due at maturity             4,321,000  
  Loss on early extinguishment of debt     959,991         7,999,506  
  Changes in operating assets and liabilities:                    
    Accounts receivable     6,710,769     (6,870,488 )   (17,627,379 )
    Prepaid rent, deposits, and other current assets     1,173,174     4,332,784     (3,341,760 )
    Accounts payable and accrued expenses     1,921,691     2,510,414     1,242,312  
    Other current liabilities     830,911     359,968     832,835  
   
 
 
 
  Net cash provided by continuing operations     52,091,739     44,891,370     21,702,089  
    Loss from discontinued operations, net     (355,073 )   (3,883,436 )   (741,006 )
    Loss on impairment of discontinued operations     302,205     4,142,750      
    Change in net assets from discontinued operations     (240,305 )   (2,461,054 )   (1,166,224 )
   
 
 
 
      Net cash used in discontinued operations     (293,173 )   (2,201,740 )   (1,907,230 )
   
 
 
 
Net cash provided by operating activities     51,798,566     42,689,630     19,794,859  

Investing activities

 

 

 

 

 

 

 

 

 

 
Acquisition of assets of Med-Staff, Inc.     (102,757,172 )        
Acquisition of assets of Heritage Professional Education, LLC     (2,000,000 )   (1,500,000 )   (241,145 )
Acquisition of NovaPro assets         (7,906,527 )    
Acquisition of Jennings Ryan & Kolb, Inc.     (529,776 )   (1,876,008 )    
Acquisition of Clinforce, Inc.             (32,824,592 )
Acquisition of assets of Gill/Balsano Consulting, L.L.C.     (665,000 )   (498,750 )   (1,881,000 )
Purchases of property and equipment, net     (3,569,150 )   (7,240,897 )   (5,783,283 )
Other     44,651     72,266     99,949  
Investing activities of discontinued operations         (884,375 )   (1,691,093 )
   
 
 
 
Net cash used in investing activities     (109,476,447 )   (19,834,291 )   (42,321,164 )

Financing activities

 

 

 

 

 

 

 

 

 

 
Debt issuance costs     (3,307,061 )   (153,747 )   (981,833 )
Exercise of stock options     1,012,461     4,401,762     205,598  
Stock repurchase and retirement     (7,708,962 )   (6,014,833 )    
Initial public offering         (208,828 )   138,766,598  
Repayment of debt and note payable     (74,528,503 )   (30,155,707 )   (320,193,108 )
Proceeds from issuance of debt     125,000,000     23,750,000     207,465,010  
   
 
 
 
Net cash provided by (used in) financing activities     40,467,935     (8,381,353 )   25,262,265  
Change in cash and cash equivalents     (17,209,946 )   14,473,986     2,735,960  
Cash and cash equivalents at beginning of year     17,209,946     2,735,960      
   
 
 
 
Cash and cash equivalents at end of year   $   $ 17,209,946   $ 2,735,960  
   
 
 
 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

 

 

 
Issuance of common stock in exchange for employee services   $ 188,106   $   $ 99,635  
   
 
 
 
Tax benefit on stock option exercises   $ 148,485   $ 2,158,863   $  
   
 
 
 
Equipment purchased through capital lease obligations   $ 451,529   $   $  
   
 
 
 
Supplemental disclosure of cash flow information                    
Interest paid   $ 4,776,102   $ 3,785,670   $ 11,779,213  
   
 
 
 
Income taxes paid   $ 11,158,128   $ 11,683,839   $ 5,972,007  
   
 
 
 

See accompanying notes.

F-6



Cross Country Healthcare, Inc.

Notes to Consolidated Financial Statements

December 31, 2003

1.    Organization and Basis of Presentation

        On July 29, 1999, Cross Country Staffing, Inc. (CCS), a Delaware corporation, was established through an acquisition of certain assets and liabilities of Cross Country Staffing, a Delaware general partnership (the Partnership). The acquisition included certain identifiable intangible assets primarily related to proprietary databases and contracts. The Partnership was engaged in the business of providing nurses and other allied health personnel to health care providers primarily on a contract basis. CCS recorded the assets and certain assumed liabilities, as defined in the asset purchase agreement, at fair market value. The purchase price of approximately $189,000,000 exceeded the fair market value of the assets less the assumed liabilities by approximately $167,537,000, which, was recorded as goodwill and other identifiable intangible assets.

        On December 16, 1999, CCS entered into a Plan of Merger with TravCorps Corporation (TravCorps). TravCorps and its wholly-owned subsidiary, Cejka & Company (Cejka), provide flexible staffing, search, consulting and related outsourced services to health care providers throughout the United States. Pursuant to the Plan of Merger on December 16, 1999, all outstanding shares of TravCorps' common stock were exchanged for common stock in CCS and TravCorps became a wholly-owned subsidiary of CCS. The fair value of the shares of common stock issued to the stockholders of TravCorps, as determined by a valuation of the common stock as of December 16, 1999, was $32,102,000. The purchase price exceeded the fair value of the net tangible assets acquired by approximately $66,575,000, of which $10,243,000 was allocated to certain identifiable intangible assets ($5,800,000—trademark, $2,910,000—databases, $630,000—workforce, $900,000—hospital relations, and $3,000—covenant not to compete). The remaining $56,332,000 was allocated to goodwill. Subsequent to the adoption of Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets, the amount originally recorded as workforce was reclassified to goodwill.

        Effective October 1, 2000, TravCorps changed its name to TVCM, Inc. Effective October 10, 2000, CCS changed its name to Cross Country TravCorps, Inc. Subsequent to December 31, 2000, Cross Country TravCorps, Inc. changed its name to Cross Country, Inc. In May 2003, Cross Country, Inc. changed its name to Cross Country Healthcare, Inc. (the Company). The Company is primarily engaged in the business of providing temporary health care staffing services to acute and subacute care facilities nationwide.

        The consolidated financial statements include the accounts of the Company and its wholly-owned direct and indirect subsidiaries: CC Staffing, Inc., Cross Country TravCorps, Inc., Cross Country TravCorps, Inc. Ltd., TVCM, Inc. (f/k/a TravCorps), Cross Country Local, Inc. (f/k/a Flexstaff, Inc.), Med-Staff, Inc. (Med-Staff), Cejka Search, Inc. (f/k/a Cejka & Company), E-Staff, Inc. (E-Staff), CFRC, Inc., HospitalHub, Inc. (f/k/a Ashley One, Inc.)(HospitalHub), NovaPro, Inc., Cross Country Consulting, Inc., Cross Country Seminars, Inc. (f/k/a CCS/Heritage Acquisition Corp.) (Cross Country Seminars), Clinforce, Inc. (ClinForce), Cross Country Capital, Inc., and Assignment America, Inc. In December 2003, the legal entity E-Staff, Inc. was merged into Med-Staff, Inc. At December 31, 2002, CFRC, Inc. and HospitalHub were dissolved. All material intercompany transactions and balances have been eliminated in consolidation.

F-7



2.    Summary of Significant Accounting Policies

Use of Estimates

        The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Accounts Receivable and Concentration of Credit Risk

        Accounts receivable potentially subject the Company to concentrations of credit risk. The Company's customers are health care providers and accounts receivable represent amounts due from these providers. The Company performs ongoing credit evaluations of its customers' financial conditions and, generally, does not require collateral. The allowance for doubtful accounts represents the Company's estimate for uncollectible receivables based on a review of specific accounts and the Company's historical collection experience. The Company writes off specific accounts based on an ongoing review of collectibility as well as management's past experience with the customer. The Company's contract terms are typically between 30 to 60 days and will be considered past due based on the particular negotiated contract terms.

        Overall, based on the large number of customers in differing geographic areas throughout the United States and its territories, the Company believes the concentration of credit risk is limited. As of December 31, 2003, an aggregate of approximately 12% of the Company's outstanding accounts receivable were due from six customers. As of December 31, 2002, an aggregate of approximately 9% of the outstanding accounts receivable were due from five customers.

Cash and Cash Equivalents

        The Company considers all investments with original maturities of less than three months to be cash and cash equivalents.

Prepaid Rent and Deposits

        The Company leases a number of apartments for its field employees under short-term cancelable agreements (typically three to six months), which generally coincide with each employee's staffing contract. Expenses relating to these leases are included in direct operating expenses in the accompanying consolidated statements of operations. As a condition of these agreements, the Company places security deposits on the leased apartments. Prepaid rent and deposits relate to these short-term agreements.

Property and Equipment

        Property and equipment are stated at cost, less accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated useful lives of the assets, which generally range from three to seven years. Leasehold improvements are depreciated over the useful life of the individual lease.

F-8



        Certain software development costs are capitalized in accordance with the provisions of Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Such costs include charges for consulting services and costs for personnel associated with programming, coding, and testing such software. Amortization of capitalized software costs begins when the software is placed into service and is included in depreciation expense in the accompanying consolidated statements of operations. Software development costs are being amortized using the straight-line method over five years. Through December 31, 2002, certain software development costs related to the development of the E-Staff technology were capitalized in accordance with the provisions of FASB Statement No. 86, Accounting for Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Such costs included charges for consulting services and costs for personnel associated with programming, coding, and testing such software. These costs are included in assets from discontinued operations, net, at December 31, 2002. See Note 16 for a further discussion on discontinued operations. Through December 31, 2003, the Company has not recognized any revenue from the sale of software.

Reserves for Claims

        Workers' compensation, professional liability and health care benefits are provided under partially self-insured plans. The Company records its estimate of the ultimate cost of, and reserves for, workers' compensation and professional liability benefits based on actuarial computations reviewed by an independent actuary using the Company's loss history as well as industry statistics. Furthermore, in determining its reserves, the Company includes reserves for estimated claims incurred but not reported. The health care insurance accrual is for claims that have occurred but have not been reported and is based on the Company's historical claim submission patterns.

        The ultimate cost of workers' compensation and professional liability costs will depend on actual costs incurred to settle the claims and may differ from the amounts reserved by the Company for those claims.

        In August 2001, the Company changed its professional liability coverage from an occurrence to a claims made basis. The professional liability policy provided for coverage on a claims made basis in the amount of $1,000,000 per claim and $3,000,000 in the aggregate as well as excess coverage in the amount of $10,000,000 per claim and $10,000,000 in the aggregate. In addition, there was a $100,000 deductible per occurrence.

        In August 2002, the Company changed its professional and general liability policy to include a self-insured limit of $2,000,000 per claim through a self-insured retention, as well as excess coverage in the amount of $10,000,000 in the aggregate. There is no deductible per occurrence.

        In November 2003, the FASB issued Emerging Issues Task Force (EITF) No. 03-8, Accounting for Claims-Made Insurance and Retroactive Insurance Contracts by the Insured Entity. EITF No. 03-8 codified previously issued authoritative accounting guidance in the area of insurance contracts and related activity thereto. The Company had previously offset in its consolidated balance sheets its liability for known and incurred but not reported professional liability and workers' compensation losses with a corresponding receivable for such estimated losses from its commercial insurance companies under policies in effect for such periods. Such prior accounting treatment was pursuant to industry practice under the interpretative guidance under the American Institute of Certified Public Accountants Audit

F-9



and Accounting Guide for Health Care Organizations. EITF No. 03-8 concluded that, under circumstances such as in the Company's insured professional liability and workers' compensation policies, since a right of legal offset does not exist due to the fact that there are three parties to an incurred claim (the insured, the insurer and the claimant), the related liability should be classified separately on a gross basis with a separate related receivable recognized as being due from insurance carriers. Accordingly, the Company's consolidated balance sheets as of December 31, 2003, and 2002 reflect the provisions of EITF No. 03-8 for the receivable portion in other current assets and for the related liability in accrued employee compensation and benefits. Accruals for workers' compensation claims, health care benefits and professional liability insurance are included in accrued employee compensation and benefits in the consolidated balance sheets.

Goodwill and Other Identifiable Intangible Assets

        Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company adopted the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. FASB Statement No. 142 further clarifies the criteria to recognize intangible assets separately from goodwill and promulgates that goodwill and certain intangible assets with indefinite lives not be amortized. Instead, these assets are reviewed for impairment annually with any related losses recognized in earnings when incurred. Other identifiable intangible assets continue to be amortized, under the provisions of this Statement, using the straight-line method over their estimated useful lives ranging from 3 to 15 years.

        In accordance with FASB Statement No. 142, the Company completed the transitional impairment test of goodwill and indefinite-lived intangible assets during the first quarter of 2002. The transitional impairment test required the Company to determine the fair value of each reporting unit, as defined, and compare it to the reporting unit's carrying amount. The Company estimated the fair value of its reporting units using a discounted cash flow methodology. Based on the results of the initial test and subsequent annual impairment test during the fourth quarters of 2003 and 2002, the Company determined that there was no impairment of goodwill or indefinite-lived intangible assets as of January 1, 2002, December 31, 2002 or December 31, 2003.

        Long-lived assets and identifiable intangible assets with definite lives are evaluated for impairment in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, adopted as of January 1, 2002. In accordance with this Statement, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company periodically reviews long-lived assets, including identifiable intangible assets, to determine if any impairment exists based upon projected, undiscounted net cash flows of the Company. Recoverability of intangible assets is measured by comparison of the carrying amount of the asset to net future cash flows expected to be generated from the asset. At December 31, 2003 and 2002, the Company believes that no impairment of long-lived assets or identifiable intangible assets existed.

Debt Issuance Costs

        Deferred costs related to the issuance of debt have been capitalized and are being amortized on a straight-line basis, which approximates the effective interest method, over the six-year term of the debt.

F-10



In June 2003, in conjunction with the acquisition of Med-Staff, the Company amended its credit facility. Related debt issuances costs of approximately $960,000, net of amortization, relating to the prior amended credit facility were written off during the second quarter of 2003 and are included in loss on early extinguishment of debt in the other expenses section of the consolidated statements of operations. See Note 7 for a further discussion on long-term debt and notes payable.

        Subsequent to the Company's initial public offering in 2001, the Company repaid $89,580,000 of its outstanding balance under the term loan portion and $6,100,000 under the revolver portion of its senior secured credit facility, and paid $38,779,000 to redeem its outstanding senior subordinated pay-in-kind notes. Related debt issuance costs of $6,433,000, net of amortization, were written off and include a loss on early extinguishment of debt in the consolidated statement of operations for the period ending December 31, 2001, along with a redemption premium of $1,567,000 relating to the prepayment of the pay-in-kind notes. At December 31, 2003 and 2002, debt issuance costs of approximately $2,971,000 and $1,105,000, net of accumulated amortization of approximately $336,000 and $1,237,000, respectively, are included in the consolidated balance sheets.

Revenue Recognition

        Revenue from services consists primarily of temporary staffing revenues. Revenue is recognized when services are rendered. Accordingly, accounts receivable includes an accrual for employees' time worked but not yet invoiced. At December 31, 2003 and 2002, the amounts accrued are approximately $18,450,000 and $17,982,000, respectively.

        Revenues on permanent placements are recognized when services provided are substantially completed. The Company does not, in the ordinary course of business, give refunds. If a candidate leaves a permanent placement within a short period of time (i.e., one month), it is customary for the Company to seek a replacement at no additional cost. Allowances are established as considered necessary to estimate significant losses due to placed candidates not remaining employed for the Company's guarantee period. During 2003, 2002 and 2001, such losses were not material and, accordingly, related allowances were not recorded.

        Revenue from the Company's education and training services is recognized as the instructor-led seminars are performed and the related learning materials are delivered.

Stock-Based Compensation

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

        In addition, the Company issued 16,216 shares of restricted stock to certain key employees in the first quarter of 2003. The restricted stock will vest 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 is reflected over the period in which services are performed. The fair

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market value of the shares on the grant date approximated $188,000. Unearned deferred compensation of approximately $188,000 was recorded as a contra-equity account in additional paid-in capital and is being amortized to operations over the related vesting period.

        FASB Statement No. 148, Accounting for Stock Based Compensation—Transition and Disclosure requires disclosure of comparable information regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. The pro-forma disclosure of stock based compensation required by this Statement is shown below.

        The Company's consolidated net income would have changed to the pro forma amounts set forth below had compensation cost for stock options granted during 2003, 2002 and 2001 been measured under the fair value based method prescribed by FASB Statement No. 123, Accounting for Stock-Based Compensation.

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
Net income as reported   $ 25,820,785   $ 29,782,705   $ 8,672,042  
Stock based employee compensation included in as reported net income              
Stock based employee compensation, net of tax, applying FASB Statement No. 123     (2,432,669 )   (2,774,445 )   (1,934,711 )
   
 
 
 
Pro forma net income applying FAS Statement No. 123   $ 23,388,116   $ 27,008,260   $ 6,737,331  
   
 
 
 
Basic and diluted earnings per share as reported:                    
Net income per common share—basic   $ 0.80   $ 0.92   $ 0.35  
   
 
 
 
Net income per common share—diluted   $ 0.79   $ 0.88   $ 0.34  
   
 
 
 
Pro forma basic and diluted earnings per share:                    
Pro forma net income—basic   $ 0.73   $ 0.83   $ 0.27  
   
 
 
 
Pro forma net income—diluted   $ 0.72   $ 0.81   $ 0.27  
   
 
 
 

Advertising

        The Company's advertising expense consists primarily of print media, online advertising, direct mail marketing and promotional material. Advertising costs that are not considered direct response are expensed as incurred and were approximately $6,167,000, $5,918,000 and $3,735,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Direct response advertising costs associated with the Company's education and training services are capitalized and expensed when the related event takes place. At December 31, 2003 and 2002 approximately $976,000 and $1,264,000, respectively, of these costs are included in other current assets in the consolidated balance sheets.

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Derivative Financial Instruments

        The Company is exposed to market risks arising from changes in interest rates. To protect against such risks, the Company had one derivative financial instrument, an interest rate swap agreement, which matured in February 2003 and is more fully disclosed in Note 14, Interest Rate Swap.

Comprehensive Income

        FASB Statement No. 130, Comprehensive Income, requires that an enterprise: (a) classify items of other comprehensive income by their nature in the financial statements; and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. There are no other components of comprehensive income or loss other than the Company's consolidated net income and the accumulated derivative gain or loss for the years ended December 31, 2003, 2002 and 2001.

        During 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was effective beginning January 1, 2001. FASB Statement No. 133 requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. As the Company's derivative instrument was designated and qualified as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. Any ineffective portion of the derivative instrument's change in fair value was immediately recognized in earnings.

        The Company implemented the provisions of FASB Statement No. 133 on January 1, 2001. The implementation of FASB Statement No. 133 resulted in a reduction in consolidated stockholders' equity of approximately $910,000 as of January 1, 2001.

        During 2002 and 2001, the Company reclassified to interest expense, net, approximately $1,720,000 and $325,000, respectively, of the net amount recorded in other comprehensive loss. Upon maturity of the interest rate swap agreement in February 2003, the Company reclassified the remaining accumulated derivative loss of approximately $372,000 to interest expense, net, on the accompanying consolidated statements of operations.

Income Taxes

        The Company accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the

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financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Reclassifications

        Certain 2002 and 2001 amounts have been reclassified to conform to the 2003 presentation.

Recent Accounting Pronouncements

        In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the first fiscal year beginning after June 15, 2003. The Company does not have any interests qualifying as a variable interest entity as of December 31, 2003. As a result, FIN No. 46 will not have an impact on the consolidated financial statements.

        In April 2002, the FASB issued FASB Statement No. 145, Rescission of Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 were effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item should be reclassified. The Company adopted the provisions of this Statement as of January 1, 2003. Accordingly, the loss on early extinguishment of debt in 2003 was included in the other expenses section of the consolidated statement of operations and the loss on early extinguishment of debt in 2001 was reclassified from an extraordinary item to the other expenses section of the consolidated statements of operations.

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        In July 2002, the FASB issued FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FASB Statement No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. Under FASB Statement No. 146, an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. FASB Statement No. 146 was effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted the provisions of FASB Statement No. 146 in the December 31, 2003 consolidated financial statements. The adoption of FASB No. 146 did not have an effect on the Company's consolidated financial position, but may impact the timing of recognition of costs associated with future exit and disposal activities.

3.    Goodwill and Other Identifiable Intangible Assets

        As of December 31, 2003 and 2002, the Company had the following acquired intangible assets:

 
  December 31, 2003
  December 31, 2002
 
  Gross Carrying Amount
  Accumulated Amortization
  Net Carrying Amount
  Gross Carrying Amount
  Accumulated Amortization
  Net Carrying Amount
Intangible assets subject to amortization:                                    
Database   $ 11,445,000   $ 10,002,399   $ 1,442,601   $ 11,445,000   $ 7,692,129   $ 3,752,871
Hospital relations     6,422,750     1,253,417     5,169,333     3,988,750     813,402     3,175,348
Non-compete agreements     2,603,000     635,140     1,967,860     503,000     318,556     184,444
   
 
 
 
 
 
    $ 20,470,750   $ 11,890,956   $ 8,579,794   $ 15,936,750   $ 8,824,087   $ 7,112,663
   
 
 
 
 
 
Intangible assets not subject to amortization:                                    
Goodwill   $ 328,405,168   $ 20,873,294   $ 307,531,874   $ 246,988,940   $ 20,873,294   $ 226,115,646
Trademarks     17,150,000     1,401,169     15,748,831     17,150,000     1,401,169     15,748,831
   
 
 
 
 
 
    $ 345,555,168   $ 22,274,463   $ 323,280,705   $ 264,138,940   $ 22,274,463   $ 241,864,477
   
 
 
 
 
 

        Aggregate amortization expense for intangible assets subject to amortization was approximately $3,067,000, $2,709,000 and $2,626,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Estimated annual amortization expense is approximately as follows:

Year ending December 31:

   
2004   $ 1,658,000
2005     1,446,000
2006     1,416,000
2007     991,000
2008     750,000
Thereafter     2,319,000
   
    $ 8,580,000
   

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        The changes in the carrying amount of goodwill by segment are as follows:

 
  Healthcare Staffing Segment
  Other Human Capital Management Services
  Unamortized Goodwill
Balance as of December 31, 2002   $ 205,541,484   $ 20,574,162   $ 226,115,646
Goodwill acquired     77,974,571         77,974,571
Earnouts paid         3,194,776     3,194,776
Net working capital adjustment         246,881     246,881
   
 
 
Balance as of December 31, 2003   $ 283,516,055   $ 24,015,819   $ 307,531,874
   
 
 

        The following reconciliation adjusts net income to exclude amortization expense related to intangible assets that would not have been amortized, under the provisions of FASB Statement No. 142, if the Company adopted the standard as of January 1, 2001:

 
  Year Ended December 31, 2001
Net income, as reported   $ 8,672,042
Goodwill amortization, net of tax     6,763,799
Trademark amortization, net of tax     399,245
   
Adjusted net income   $ 15,835,086
   
Basic earnings per share:      
Net income, as reported   $ 0.35
Goodwill amortization, net of tax     0.27
Trademark amortization, net of tax     0.02
   
Adjusted net income   $ 0.64
   
Diluted earnings per share:      
Net income, as reported   $ 0.34
Goodwill amortization, net of tax     0.27
Trademark amortization, net of tax     0.02
   
Adjusted net income   $ 0.63
   
Basic weighted average shares outstanding     24,881,218
Diluted weighted average shares outstanding     25,222,936

4.    Acquisitions

        On June 5, 2003, the Company acquired substantially all of the assets of Med-Staff, Inc. for $104,000,000 in cash. The consideration for this acquisition was $104,000,000 in cash paid at closing, of which $8,000,000 was held in escrow to cover the post-closing net working capital adjustment and any post-closing liabilities that occurred before December 31, 2003. 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, a post-closing net working capital adjustment of approximately $1,762,000 was

F-16



calculated and allocated to goodwill as a reduction to the purchase price. The final purchase price of the transaction, as adjusted for the net working capital adjustment, was $102,238,250.

        In addition, the asset purchase agreement provided for potential earnout payments up to a maximum of $37,500,000 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.

        Med-Staff is headquartered in Newtown Square, Pennsylvania, and is a national provider of travel and per diem healthcare professionals operating across a wide geographic and client base in all 50 states. The Company believes that Med-Staff's differentiated compensation program will allow it to further segment the travel nurse population. Med-Staff also enables the Company to extend its nurse staffing services in the per diem and military staffing sectors.

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

        The purchase price, as adjusted for the net working capital adjustment, has been allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. These estimates were revised subsequent to the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed.

 
  June 5, 2003
Current assets:      
Accounts receivable, net   $ 23,070,298
Other current assets     1,139,718
   
Total current assets     24,210,016
Property and equipment     717,319
Other identifiable intangible assets     4,534,000
Goodwill     77,455,648
   
Total assets acquired     106,916,983

Current liabilities:

 

 

 
Accounts payable and accrued expenses     336,841
Accrued employee compensation and benefits     4,237,495
Other current liabilities     104,397
   
Total liabilities assumed     4,678,733
   
Net assets acquired   $ 102,238,250
   

        Of the total other identifiable intangible assets of $4,534,000, $2,434,000 was assigned to hospital relations and $2,100,000 was assigned to non-compete agreements, based on an independent third-party appraisal. These identifiable intangible assets have been assigned useful lives with a weighted-average range of 6.6 years. The excess of purchase price over the fair value of net tangible and intangible assets acquired has been recorded as goodwill, which is expected to be deductible for tax purposes. The

F-17



purchase price allocation is based on preliminary information that could be changed based on the ultimate resolution of initial assessments. Additional direct acquisition costs of approximately $519,000 were incurred during the year ended December 31, 2003 and are included as goodwill in the consolidated balance sheets.

        The following unaudited pro forma summary approximates the consolidated results of operations as if the Med-Staff acquisition had occurred as of the beginning of each period presented, after giving 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 pretax reduction to net income for a loss on early extinguishment of debt of approximately $1,105,000 and $1,390,000 for the years ended December 31, 2003 and 2002, respectively. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future results of operations.

 
  Year ended December 31,
 
  2003
  2002
Revenue from services   $ 757,900,000   $ 801,318,000
   
 
Net income   $ 27,735,000   $ 35,278,000
   
 
Net income per common share—basic   $ 0.86   $ 1.09
   
 
Net income per common share—diluted   $ 0.85   $ 1.05
   
 

        In March 2002, the Company acquired all of the outstanding stock of Jennings Ryan & Kolb, Inc. (JRK), a healthcare management consulting company, for approximately $1,800,000 in cash and the assumption of $300,000 in debt. Approximately $700,000 was allocated to goodwill, which is not subject to amortization under the provisions of FASB Statement No. 142. In addition, the agreement provides for potential earnout payments of approximately $1,800,000, of which approximately $530,000 was earned in 2002 and paid in 2003, and approximately $882,000 was earned in 2003 and paid in 2004. Subsequent to the acquisition, JRK was combined with the Company's other consulting operations to form Cross Country Consulting, Inc.

        In January 2002, the Company acquired substantially all of the assets of NovaPro, the healthcare staffing division of HR Logic Holdings, Inc., a professional employer organization, for approximately $7,100,000 in cash and a post-closing adjustment of approximately $544,000. Approximately $4,668,000 was allocated to goodwill, which is not subject to amortization under the provisions of FASB Statement No. 142. NovaPro targets nurses seeking more customized benefits package.

        Both acquisitions were accounted for as a purchase in accordance with FASB Statement No. 141 and, accordingly, their results of operations have been included in the consolidated statement of operations from their respective dates of acquisition.

        In May 2001, Cejka acquired substantially all of the assets of Gill/Balsano Consulting, L.L.C. (Gill/Balsano), a Delaware limited liability company. Gill/Balsano provides management consulting services to the healthcare industry. The acquisition met the accounting criteria of a purchase, and, accordingly,

F-18



the accompanying consolidated financial statements include the results of Gill/Balsano from the acquisition date. The consideration for this acquisition was $1,831,000 in cash. The excess of the aggregate purchase price over the fair market value of the assets acquired of approximately $1,674,000 was allocated to goodwill and, prior to the adoption of FASB Statement No. 142, in January 2002, was being amortized over 25 years. In addition, the asset purchase agreement provides for potential earnout payments of approximately $1,995,000 based on adjusted EBITDA (as defined in the asset purchase agreement) of Gill/Balsano over a three-year period ending March 31, 2004. This contingent consideration is not related to the seller's employment. Upon payment, the earnouts will be allocated to goodwill as additional purchase price. To date, earnout payments were $1,828,750, of which $498,750 was paid in 2002 and $665,000 was paid in both 2003 and 2004.

        On December 15, 2000, the Company entered into a stock purchase agreement to acquire substantially all of the outstanding stock of two subsidiaries that comprise ClinForce, Inc., a Delaware corporation that provides temporary staffing and permanent placement of clinical trials support services personnel. The acquisition was consummated on March 16, 2001 and met the accounting criteria of a purchase. Accordingly, the accompanying consolidated financial statements include the results of ClinForce from the acquisition date. The transaction was primarily funded through the issuance of additional debt. The purchase price of approximately $31,400,000 exceeded the fair value of assets acquired less liabilities assumed by approximately $28,000,000 of which $3,400,000 was allocated to certain identifiable intangible assets ($2,100,000—trademark, $890,000—workforce, and $410,000—hospital relations). The remaining $24,600,000 was allocated to goodwill and, prior to the adoption of FASB Statement No. 142, was being amortized over 25 years. Subsequent to the adoption of FASB Statement No. 142, workforce was reclassified to goodwill. The purchase price was subject to a post-closing adjustment based on changes in the net working capital of the acquired companies between October 31, 2000 and March 16, 2001. The post closing adjustment of approximately $1,415,000 was calculated and allocated to goodwill as additional purchase price.

        Earnout payments relating to the Company's acquisition of Heritage Professional Education, LLC (Heritage) on December 26, 2000 were $3,500,000, of which $1,500,000 was paid in 2002 and $2,000,000 was paid in 2003. These payments were allocated to goodwill as additional purchase price in their respective periods of payments. As of December 31, 2003, no further payments of earnouts are applicable relating to this purchase agreement.

5.    Property and Equipment

        At December 31, 2003 and 2002, property and equipment consist of the following:

 
  December 31,
 
 
  2003
  2002
 
Computer equipment   $ 9,854,173   $ 8,494,676  
Computer software     13,080,438     10,853,523  
Office equipment     1,871,170     1,462,272  
Furniture and fixtures     3,064,795     2,739,264  
Leasehold improvements     1,980,078     1,773,038  
   
 
 
      29,850,654     25,322,773  
Less accumulated depreciation and amortization     (17,248,084 )   (12,928,611 )
   
 
 
    $ 12,602,570   $ 12,394,162  
   
 
 

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6.    Accrued Employee Compensation and Benefits

        At December 31, 2003 and 2002, accrued employee compensation and benefits consist of the following:

 
  December 31,
 
  2003
  2002
Salaries   $ 10,102,869   $ 12,873,362
Bonuses     7,072,807     9,238,079
Accrual for workers' compensation claims     3,572,084     3,190,833
Accrual for health care benefits     2,082,581     1,822,202
Accrual for professional liability insurance     6,318,875     2,023,331
Accrual for vacation     844,695     742,240
   
 
    $ 29,993,911   $ 29,890,047
   
 

7.    Long-Term Debt and Notes Payable

        At December 31, 2003 and 2002, long-term debt consists of the following:

 
  December 31,
 
 
  2003
  2002
 
Term Loan, interest at 6.25% on principal of $93,196,202, at December 31, 2003 and 3.05% and 3.03% on principal of $33,266,444 and $9,308,962, respectively, at December 31, 2002   $ 93,196,202   $ 42,575,406  
Other     541,344     239,114  
   
 
 
      93,737,546     42,814,520  
Less current portion     (4,943,777 )   (14,361,917 )
   
 
 
    $ 88,793,769   $ 28,452,603  
   
 
 

        On July 29, 1999, the Company entered into a $105,000,000 senior secured credit facility consisting of a $75,000,000 term loan and a $30,000,000 revolving loan facility. This senior secured credit facility was amended and restated as of December 16, 1999 and March 16, 2001. In June 2003, the Company again amended and restated the agreement in conjunction with its acquisition of Med-Staff. The new senior secured credit facility consists of a $125,000,000 term loan and a $75,000,000 revolving credit facility. The Company repaid $31,803,798 of the principal on its term loan balance related to the new credit facility during 2003. The Company is required to pay a quarterly commitment fee at a rate of 0.50% per year on unused commitments under the revolving loan facility. The term loan balance under the new senior credit facility bears interest based on an alternative base rate plus a margin of 2.25% or LIBOR plus a margin of 3.25%. The revolving loan facility as of December 31, 2003 bears interest based on an alternate base rate plus a margin of 1.75% or LIBOR plus a margin of 2.75%. The term loan balance and the revolving loan facility at December 31, 2002 bear interest based on an alternate base rate plus a margin of 0.63% or LIBOR plus a margin of 1.63% (each as defined in the senior secured credit facility). The Company has pledged all of the assets of the Company as collateral for the senior credit facility.

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        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 $25,000,000 at December 31, 2003. Additionally, swingline loans, as defined in the senior credit facility, not to exceed an aggregate principal amount at any time outstanding of $10,000,000 are available under the senior credit facility. As of December 31, 2003, $11,639,004 was outstanding under the letter of credit facility leaving $63,360,996 available under the revolving credit facility.

        The senior credit facility requires that the Company meet certain covenants, including the maintenance of certain debt and interest expense ratios and capital expenditure limits. It also includes a mandatory prepayment provision, which, beginning in 2004, requires the Company to make mandatory prepayments subsequent to the completion of a fiscal year using a portion of its excess cash flow, as defined in the agreement. The dividends and distribution covenant limits the Company's ability to repurchase its common stock and declare and pay cash dividends on its common stock. As of December 31, 2003, the Company was limited to $18,700,000 to be used for either dividends and/or stock repurchases. This limitation increases each year, beginning January 1, 2004, by 25% of net income provided that the Company's Debt/EBITDA ratio (as defined in the Agreement) is less than 1.5 to 1.0 and the Company has $25,000,000 in cash or available cash under the revolving credit facility. The Company is also required to obtain consent of it's lenders to complete any acquisition which exceeds $25,000,000. At December 31, 2003, the Company was in compliance with all of its debt covenants.

        Other long-term debt includes capitalized lease obligations and notes payable.

        The aggregate scheduled maturities of long-term debt and notes payable as of December 31, 2003 are as follows:

Year ending December 31:      
  2004   $ 4,943,777
  2005     4,947,560
  2006     4,870,854
  2007     4,811,276
  2008     38,265,253
Thereafter     35,898,826
   
    $ 93,737,546
   

        On August 30, 2001, the Company issued notes payable to a third-party. The proceeds from the notes payable were used to pay the Company's insurance premiums. Principal and interest on these notes are payable over an 11-month period at an interest rate of 5.75%. At December 31, 2001, the outstanding balance on these notes was $1,247,000. The entire balance was repaid during 2002.

8.    Employee Benefit Plans

        The Company maintains a voluntary defined contribution 401(k) profit-sharing plan covering all eligible employees as defined in the plan documents. The plan provides for a discretionary matching contribution, which is equal to a percentage of each eligible contributing participant's elective deferral, which the Company, at its sole discretion, determines from year to year. Eligible employees who elect

F-21



to participate in the plan are generally vested in any matching contribution after three years of service with the Company. Contributions by the Company, net of forfeitures, under this plan amounted to approximately $2,826,000, $3,030,000 and $2,467,000, for the years ended December 31, 2003, 2002 and 2001, respectively.

        Med-Staff employees were covered under a separate benefit plan for 2003. The plan allows eligible employees to defer a portion of their annual compensation pursuant to Section 401(k) of the Internal Revenue Code. The plan is a voluntary defined contribution 401(k) profit-sharing plan covering substantially all eligible employees as defined in the plan documents. Eligible employees who elect to participate in the plan are generally fully vested in any matching contribution after six years of service with the Company. Contributions by the Company, net of forfeitures, under this plan amounted to approximately $66,000 from the date of acquisition through December 31, 2003.

9.    Commitments and Contingencies

        The Company has entered into non-cancelable operating lease agreements for the rental of office space and equipment. Certain of these leases include options to renew as well as rent escalation clauses. The rent escalations have been reflected in the table below. Future minimum lease payments associated with these agreements with terms of one year or more are approximately as follows:

Year ending December 31:      
  2004   $ 4,465,000
  2005     4,367,000
  2006     3,477,000
  2007     2,488,000
  2008     1,838,000
Thereafter     6,595,000
   
    $ 23,230,000
   

        Total operating lease expense included in selling, general, and administrative expenses was approximately $5,517,000, $3,833,000 and $2,758,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

        The Company's Cross Country TravCorps 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 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, if any, and intends to vigorously defend this matter.

        In a separate matter, Cross Country Healthcare, Inc. and its affiliates have reached an amicable resolution of two disputes with the National League for Nursing, Inc. (NLN) entitled National League for Nursing, Inc. v. Cross Country Healthcare, Inc. et al., 03 Civ. 9948 (VM) (S.D.N.Y.) and National League for Nursing, Inc. v. Med-Staff,  Inc., et al., Civil Action No. 03-2497 (JCL) (D. N.J.). Cross

F-22



Country Healthcare, Inc. and its affiliates did not make any monetary payment to NLN and admitted no liability.

        The Company is 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 matters will not have a significant effect on the Company's consolidated financial position or results of operations.

10.    Estimated Fair Value of Financial Instruments

        The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value because of their short maturity. The carrying amount of the revolving credit note and term loan approximates fair value because the interest rate is tied to a quoted variable index.

        The Company's interest rate swap agreement was carried at fair value in accordance with FASB Statement No. 133 as discussed in Note 14—Interest Rate Swap.

11.    Income Taxes

        The components of the Company's income tax expense (benefit) are as follows:

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
Continuing operations:                    
  Current                    
    Federal   $ 10,382,551   $ 15,061,237   $ 6,308,855  
    State     1,542,457     2,214,552     1,506,738  
   
 
 
 
      11,925,008     17,275,789     7,815,593  
  Deferred     4,600,370     3,978,365     (169,137 )
   
 
 
 
      16,525,378     21,254,154     7,646,456  
Discontinued operations—current                    
  Tax benefit on loss from discontinued operations     (224,165 )   (2,451,696 )   (498,134 )
  Tax benefit on loss on disposal               (330,961 )
   
 
 
 
      (224,165 )   (2,451,696 )   (829,095 )
   
 
 
 
    $ 16,301,213   $ 18,802,458   $ 6,817,361  
   
 
 
 

        Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

F-23



        Significant components of the Company's deferred tax assets and liabilities are as follows:

 
  December 31,
 
 
  2003
  2002
 
Current deferred tax assets and (liabilities):              
  Accrued and prepaid expenses   $ 2,201,012   $ 1,726,154  
  Allowance for doubtful accounts     1,387,460     980,562  
  Other     (1,655,171 )   (2,061,539 )
   
 
 
      1,933,301     645,177  
Non-current deferred tax assets and (liabilities):              
  Depreciation and amortization     (14,829,053 )   (7,911,383 )
  Identifiable intangibles     (2,917,336 )   (3,099,297 )
  Interest rate swap         231,931  
  Other     96,841      
   
 
 
      (17,649,548 )   (10,778,749 )
   
 
 
Net deferred taxes   $ (15,716,247 ) $ (10,133,572 )
   
 
 

        FASB Statement No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some of or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2003 and 2002 is not necessary.

        The reconciliation of income tax computed at the U. S. federal statutory rate to income tax expense is as follows:

 
  December 31,
 
 
  2003
  2002
 
Tax at U.S. statutory rate   $ 14,945,432   $ 19,222,103  
State taxes, net of federal benefit     1,387,790     1,784,910  
Non-deductible meals and entertainment     51,740     43,579  
Non-deductible other     6,625     39,415  
Other     133,791     164,147  
   
 
 
Income taxes on continuing operations     16,525,378     21,254,154  
Benefit from discontinued operations     (224,165 )   (2,451,696 )
   
 
 
Total income tax expense   $ 16,301,213   $ 18,802,458  
   
 
 

F-24


12.    Stockholders' Equity

        Effective April 27, 2001, 760,284 issued and outstanding shares of the Company's Class B common stock were converted to an equal number of shares of Class A common stock of the Company. All common stock data in these consolidated financial statements have been adjusted to give retroactive effect to the conversion.

        Effective August 23, 2001, the Company amended and restated its certificate of incorporation to provide for, among other things: 1) the reclassification of the common stock of the Company, whereby, each share of Class A common stock was converted into 5.80135 shares of common stock, par value $0.0001 per share; 2) authorization of 100,000,000 shares of common stock; and 3) authorization of 10,000,000 shares of preferred stock of the Company, par value $0.01 per share. All common stock data in these consolidated financial statements have been adjusted to give retroactive effect to the stock split.

        On October 30, 2001, the Company completed its initial public offering of 7,812,500 shares of common stock at $17.00 per share. Additionally, the underwriters exercised the over-allotment option of 1,171,875 shares, bringing the total number of shares issued to 8,984,375.

        In March 2002, the Company filed a registration statement with the Securities and Exchange Commission for the sale of 9,000,000 shares of common stock by existing shareholders. Additionally, the underwriters exercised the over-allotment option to purchase 700,000 shares from the selling stockholders. The Company did not receive any of the proceeds from the sale of these shares. Costs associated with this secondary offering of $902,209 are included in non-recurring secondary offering costs in the 2002 and 2003 consolidated statement of operations.

        On November 5, 2002, the Company's Board of Directors authorized a stock repurchase program whereby the Company may purchase up to 1,500,000 of its common shares at an aggregate price not to exceed $25,000,000. As of December 31, 2003, the Company purchased and retired 1,001,400 shares of its common stock at an average cost of $13.70 per share pursuant to the current authorization. The cost of such purchases was approximately $13,724,000. 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.

Stock Options

        On December 16, 1999, the Company's Board of Directors approved the 1999 Stock Option Plan and Equity Participation Plan (collectively, the Plans), which was amended and restated on October 25, 2001 and provides for the issuance of incentive stock options (ISOs) and non-qualified stock options to eligible employees and non-employee directors for the purchase of up to 4,398,001 shares of common stock. Non-qualified stock options may also be issued to consultants. The Plans were approved by the security holders at the Company's 2002 Annual Meeting of Stockholders. Under the Plans, the exercise price of options granted is determined by the compensation committee of the Company's Board of Directors. In the case of 10% or more stockholders, the exercise price of the ISOs granted may not be less than 110% of such fair market. Options granted during 2003, 2002 and 2001 under the Amended and Restated 1999 Stock Option Plan generally vest ratably over 4 years. Options granted during 2002 and 2001 under the Amended and Restated 1999 Equity Participation Plan vest 25% on the first

F-25



anniversary of the date of grant and then vest 12.5% every 6 months thereafter. All options expire on the tenth (or, in the case of a 10% shareholder, the fifth) anniversary of the date of grant.

        Changes under these stock option plans for 2003, 2002 and 2001 were as follows:

 
  December 31, 2003
  December 31, 2002
  December 31, 2001
 
  Shares
  Option Price
  Weighted Average Exercise Price
  Shares
  Option Price
  Weighted Average Exercise Price
  Shares
  Option Price
  Weighted
Average Exercise Price

Options outstanding at beginning of year   2,974,983   $  7.75-$37.13   $13.50   3,520,068   $  7.75-$37.13   $13.00   3,121,252   $  7.75-$32.35   $11.93
Granted   187,747   $10.38-$14.50   $10.66   53,279   $12.31-$26.15   $17.89   527,915   $10.13-$37.13   $18.19
Canceled   (60,924 ) $  7.75-$26.15   $13.67   (145,443 ) $  7.75-$26.15   $14.74   (107,027 ) $  7.75-$17.00   $  8.11
Exercised   (122,403 ) $  7.75-$15.50   $  8.27   (452,921 ) $  7.75-$23.25   $  9.72   (22,072   $  7.75-$10.13   $  9.31
   
 
 
 
 
 
 
 
 
Options outstanding at end of year   2,979,403   $  7.75-$37.13   $13.53   2,974,983   $  7.75-$37.13   $13.50   3,520,068   $  7.75-$37.13   $13.00
   
 
 
 
 
 
 
 
 
Options exercisable at end of year   2,515,785   $  7.75-$37.13   $13.24   1,856,412   $  7.75-$37.13   $12.97   1,535,826   $  7.75-$32.35   $12.02
   
 
 
 
 
 
 
 
 

        The following table represents information about stock options granted in each year:

 
  Year Ended December 31,
 
  2003
  2002
  2001
Weighted average exercise price of options granted during the year:                  
Issued at market price   $ 10.66   $ 17.89   $ 16.69
Issued above market price     N/A     N/A     21.95
Issued below market price     N/A     N/A     15.08

Weighted average fair value of options granted during the year:

 

 

 

 

 

 

 

 

 
Issued at market price   $ 6.21   $ 10.71   $ 10.12
Issued above market price     N/A     N/A     11.43
Issued below market price     N/A     N/A     6.03

F-26


        The following table describes outstanding options as of December 31, 2003:

Exercise Price
  Options
Outstanding

  Remaining Contractual Life
  Options Exercisable
$  7.75   767,351   5.96   767,351
10.13   31,540   6.50   22,588
10.38   166,784   9.28   0
10.78   25,386   6.77   18,532
11.62   561,144   5.96   561,144
12.05   9,000   9.41   0
12.31   29,700   8.61   7,425
12.38   37,358   7.27   26,068
14.50   7,400   9.58   0
15.19   11,724   6.50   8,793
15.50   563,425   5.96   563,425
16.17   25,404   6.75   19,053
17.00   286,579   7.55   143,890
19.37   123,250   5.96   123,250
18.57   56,670   7.27   35,419
20.26   11,724   6.50   8,793
21.56   25,404   6.75   19,053
23.25   123,250   5.96   123,250
24.76   56,670   7.27   35,419
25.32   2,565   6.50   1,924
26.15   18,600   8.23   4,650
26.96   5,557   6.75   4,168
30.39   2,567   6.50   1,926
30.95   12,397   7.27   7,748
32.35   5,557   6.75   4,168
37.13   12,397   7.27   7,748

 
 
 
$13.53   2,979,403   6.47   2,515,785

 
 
 

        The fair value of options granted used to compute pro forma net income disclosures here and within Note 2 were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions:

 
  Year ended December 31,
 
 
  2003
  2002
  2001
 
Expected dividend yield   0.00 % 0.00 % 0.00 %
Expected volatility   60.00   60.00   60.00  
Risk-free interest rate   3.22   4.29   5.19  
Expected life   6 years   6 years   6 years  

        The effect of applying FASB Statement No. 123 for providing pro forma disclosures is not likely to be representative of the effect on reported net income in future years.

F-27



13.    Earnings Per Share

        In accordance with the requirements of 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 (excluding nonvested restricted stock) and diluted earnings per share reflects the dilutive effects of stock options and restricted stock (as calculated utilizing the treasury stock method). Certain shares of common stock that are issuable upon the exercise of options have been excluded from the 2003, 2002 and 2001 per share calculations because their effect would have been anti-dilutive. Such shares amounted to 1,375,977, 429,912 and 1,839,798 during the years ending December 31, 2003, 2002 and 2001, respectively. For the years ended December 31, 2003, 2002, and 2001, respectively, 439,832, 1,221,407, and 341,718 incremental shares of common stock were included in diluted weighted average shares outstanding.

14.    Interest Rate Swap

        The Company's senior credit facility required that the Company maintain an interest rate protection agreement to manage the impact of interest rate changes on the Company's variable rate obligations. Effective February 7, 2000, the Company entered into an interest rate swap agreement (the Agreement) with a financial institution. Interest rate swap agreements involve the exchange of floating interest rate payments for fixed interest rate payments over the life of the agreement without an exchange of the underlying notional amount. The Company entered into the Agreement to reduce the exposure to adverse fluctuations in floating interest rates on the underlying debt obligation as required by the senior credit facility and not for trading purposes.

        The interest rate swap originally matured on February 7, 2003 and had an underlying notional amount of $45,000,000. The floating interest rate to be paid to the Company was based on the three-month U.S. dollar London Interbank Offered Rate (LIBOR), which was reset quarterly. Effective January 1, 2001, the Agreement was amended to change the fixed rate to be paid by the Company to 6.705%. In addition, the maturity date of the Agreement was extended to February 28, 2003. Any differences paid or received under the terms of the Agreement were recognized as adjustments to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying debt obligation.

        The fair value of the interest rate swap approximated a $606,000 net payable based on quoted market prices for similar instruments at December 31, 2002. The estimated fair value of the swap fluctuated over time based on changes in floating interest rates; however, these fair value amounts should not be viewed in isolation but rather in relation to the overall reduction in the Company's exposure to adverse fluctuations in floating interest rates. The Company recorded the fair value of the interest rate swap transaction at January 1, 2001, which resulted in a reduction in consolidated stockholders' equity of approximately $910,000. To test effectiveness of the interest rate swap, the Company compared the present value of the cumulative change in the fair value of the interest rate swap with the present value of the cumulative change in the expected variable interest payments.

        The Company was exposed to credit loss in the event of nonperformance by the counterparty to the Agreement. The amount of such exposure was limited to the unpaid portion of amounts due to the Company, if any, pursuant to the Agreement. However, management believed that this exposure was mitigated by provisions in the Agreement that allow for the legal right of offset of any amounts due to the Company from the counterparty with any amounts payable to the counterparty by the Company. As

F-28



a result, management considered the risk of counterparty default to be minimal. At December 31, 2002 and 2001, the Company expected to reclassify approximately $606,000 and $1,939,000, respectively, of net losses on the interest rate swap from accumulated other comprehensive income to earnings during the twelve months following December 31, 2002 and 2001, respectively. On February 28, 2003, the maturity date, the Company paid the last payment on the Agreement.

15.    Related Party Transactions

        The Company provides services to hospitals which are affiliated with certain Board of Director members. Revenue related to these transactions amounted to approximately $6,863,000, $6,186,000, and $8,671,000 in 2003, 2002 and 2001, respectively. Accounts receivable due from these hospitals at December 31, 2003 and 2002 were approximately $736,000 and $703,000, respectively.

16.    Discontinued Operations

        In August 2001, the FASB issued Statement No. 144 which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Company adopted the provisions of FASB Statement No. 144 as of January 1, 2002.

        In March 2002, the Company committed itself to a formal plan to dispose of its subsidiary, E-Staff, a Delaware corporation, through a sale of this business. E-Staff was previously included in the Company's other human capital management services segment. The Company had acquired substantially all of the assets of E-Staff, effective July 31, 2000, for $1,500,000. The asset purchase agreement provided for potential earnout payments of up to $3,750,000 based on achievement of a defined development milestone and the profits of E-Staff over a three-year period ending July 31, 2003. This contingent consideration was not related to the seller's employment. The Company paid $500,000 upon achievement of the developmental milestone in the first quarter of 2002. The amount was recorded to assets from discontinued operations, net. Due to the discontinuance of the E-Staff business, the Company made no additional earnout payments.

        E-Staff was an application service provider that had developed an Internet subscription based communication, scheduling, credentialing and training service business for healthcare providers. As an application service provider E-Staff was to maintain the database of the client's employees on E-Staff's servers. Prospective E-Staff clients were concerned about placing their healthcare employees' names and credentials on servers owned or controlled by one of the nation's largest healthcare staffing companies. Accordingly, the Company decided to sell this subsidiary. Pursuant to FASB Statement No. 144, the consolidated financial statements of the Company were reclassified to reflect the discontinuance of E-Staff. Accordingly certain costs and expenses, assets and liabilities of E-Staff have been segregated and reported as discontinued operations in the accompanying consolidated balance sheets and statements of operations.

F-29



        In September 2002, the Company decided to retain a portion of the E-Staff software and related equipment for internal use. As a result, in September 2002, approximately $436,000 of related software and equipment were reclassified from assets from discontinued operations, net, to property and equipment, net. These assets and the related depreciation expense have been reclassified to continuing operations for all periods presented in the accompanying consolidated balance sheets and statements of operations. These reclassifications did not have a material impact on the Company's consolidated financial position or results of operations. Based on discussions with potential buyers of the E-Staff technology during the third quarter of 2002, the Company evaluated the ongoing value of E-Staff and determined that approximately $4,143,000 of the carrying amount of the net assets from discontinued operations was impaired. The Company wrote down the assets from discontinued operations to $302,000, which, when combined with liabilities from discontinued operations of $168,000 approximated their estimated fair value of approximately $134,000. Fair value, at that time, was based on the latest offer received for the sale and included the estimated cash flows from the sale of E-Staff to a potential buyer, adjusted for the estimated probability of the sale. The impairment charge of $2,539,506, net of income tax benefit of $1,603,244, is included in the accompanying consolidated statement of operations as loss from discontinued operations for the year ended December 31, 2002.

        As a result of the difficulty encountered in selling the business, the Company abandoned its efforts to sell the E-staff business during the first quarter of 2003 and decided to dispose of the subsidiary by winding down its operations. E-staff operations ceased as of March 31, 2003. The Company determined that approximately $302,000 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 consolidated statements of operations as loss from discontinued operations for the year ended December 31, 2003. There are no remaining assets or liabilities at December 31, 2003.

        On December 20, 2000, the Company committed itself to a formal plan to dispose of its wholly-owned subsidiary, HospitalHub, through a sale or liquidation of this business segment. Under the provisions of FASB Statement No. 144, disposal activities that were initiated prior to the initial application of the Statement should continue to be accounted for in accordance with the prior pronouncement. Pursuant to APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the consolidated financial statements of the Company reflect the discontinuance of HospitalHub. Accordingly, the revenue and costs and expenses of HospitalHub have been segregated and reported as discontinued operations in the accompanying consolidated statements of operations. There were no assets or liabilities relating to HospitalHub at December 31, 2003 or 2002. The divestiture was completed in the second quarter of 2001.

17.    Segment Information

        The Company has two reportable operating segments: healthcare staffing and other human capital management services. The healthcare staffing operating segment includes travel staffing, clinical research and trials staffing and per diem staffing. This segment provides temporary staffing services of healthcare professionals primarily to hospitals, laboratories and pharmaceutical and biotechnology companies. The other human capital management services segment includes the combined results of

F-30



our education and training, healthcare consulting services, physician search and resource management services.

        The Company's management evaluates performance of each segment primarily based on revenues and contribution income (which is defined as earnings before interest, income taxes, depreciation, amortization and corporate expenses not specifically identified to a reported segment). The Company's management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed. (See Footnote 3—Goodwill and Other Identifiable Intangible Assets). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2—Summary of Significant Accounting Policies). The information in the following table is derived from the segments' internal financial information as used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments. Information on operating segments and a reconciliation of such information to income from continuing operations for the periods indicated are as follows:

 
  Year ended December 31,
 
  2003
  2002
  2001
Revenue from unaffiliated customers:                  
  Healthcare staffing   $ 636,393,844   $ 588,743,378   $ 466,985,416
  Other human capital management services     50,535,800     51,209,537     37,378,221
   
 
 
    $ 686,929,644   $ 639,952,915   $ 504,363,637
   
 
 
Contribution income(a):                  
  Healthcare staffing   $ 76,061,308   $ 81,159,968   $ 70,852,551
  Other human capital management services     4,659,354     6,520,861     4,701,442
Unallocated corporate overhead     24,645,754     21,449,824     18,314,805
Depreciation     4,529,591     3,524,004     2,699,916
Amortization     3,548,338     3,147,952     14,851,382
Non-recurring secondary offering costs     16,173     886,036    
Interest expense, net     4,319,579     3,752,718     14,422,170
Loss on early extinguishment of debt     959,991         7,999,506
   
 
 
Income from continuing operations before income taxes   $ 42,701,236   $ 54,920,295   $ 17,266,214
   
 
 

(a)
The Company defines contribution income as earnings before interest, income taxes, depreciation, amortization and corporate expenses not specifically identified to a reporting segment. Contribution income is not a measure of financial performance under generally accepted accounting principles and is only used by management when assessing segment performance. During the year ended December 31, 2002, the Company refined its methodology for identifying corporate overhead expenses to its segments to more accurately reflect the profitability of each segment. Upon review, certain individuals' salaries and related benefits were more specifically identified to the healthcare staffing segment. In addition, certain direct mail expenses were more specifically identified. Prior year segment data has been reclassified to reflect this improvement in its methodology.

F-31


18.   Quarterly Financial Data (Unaudited)

2003

  First Quarter
  Second Quarter
  Third Quarter
  Fourth Quarter
 
Revenue from services   $ 161,002,905   $ 165,911,567   $ 184,389,467   $ 175,625,705  
Gross profit     39,521,610     40,984,088     44,877,399     41,586,916  
Income from continuing operations(a)     7,422,081     6,813,437     6,803,877     5,136,463  
(Loss) income from discontinued operations(a)     (371,120 )   16,973     (944 )   18  
   
 
 
 
 
Net income   $ 7,050,961   $ 6,830,410   $ 6,802,933   $ 5,136,481  
   
 
 
 
 
Net income (loss) per common share-basic(a):                          
Income from continuing operations   $ 0.23   $ 0.21   $ 0.21   $ 0.16  
(Loss) income from discontinued operations     (0.01 )   0.00     (0.00 )   0.00  
   
 
 
 
 
Net income   $ 0.22   $ 0.21   $ 0.21   $ 0.16  
   
 
 
 
 
Net income (loss) per common share-diluted(a):                          
Income from continuing operations   $ 0.23   $ 0.21   $ 0.21   $ 0.16  
(Loss) income from discontinued operations     (0.01 )   0.00     (0.00 )   0.00  
   
 
 
 
 
Net income   $ 0.22   $ 0.21   $ 0.21   $ 0.16  
   
 
 
 
 

2002

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenue from services   $ 158,165,456   $ 158,738,288   $ 160,152,688   $ 162,896,483  
Gross profit     38,010,786     40,670,059     40,702,880     42,019,555  
Income from continuing operations(a)     7,213,226     8,452,414     8,753,302     9,247,199  
Loss from discontinued operations(a)     (216,404 )   (420,643 )   (2,881,396 )   (364,993 )
   
 
 
 
 
Net income   $ 6,996,822   $ 8,031,771   $ 5,871,906   $ 8,882,206  
   
 
 
 
 
Net income (loss) per common share-basic(a):                          
Income from continuing operations   $ 0.23   $ 0.26   $ 0.27   $ 0.28  
Loss from discontinued operations     (0.01 )   (0.01 )   (0.09 )   (0.01 )
   
 
 
 
 
Net income   $ 0.22   $ 0.25   $ 0.18   $ 0.27  
   
 
 
 
 
Net income (loss) per common share-diluted(a):                          
Income from continuing operations   $ 0.21   $ 0.25   $ 0.26   $ 0.28  
Loss from discontinued operations     (0.00 )   (0.01 )   (0.09 )   (0.01 )
   
 
 
 
 
Net income   $ 0.21   $ 0.24   $ 0.17   $ 0.27  
   
 
 
 
 

(a)
Pursuant to FASB Statement No. 144, the consolidated financial statements of the Company have been reclassified in all periods presented to reflect the discontinuance of E-Staff.

F-32



Schedule II

Description

  Balance at
Beginning
of Period

  Charged to
Costs and
Expenses

  Write-offs
  Recoveries
  Other
Changes

  Balance at
End
of Period

 
  Valuation and Qualifying Accounts (for continuing operations)

Allowance for Doubtful Accounts                                    
Year ended December 31, 2001   $ 2,087,747   $ 1,273,656   $ (989,037 ) $   $ 52,499 (a) $ 2,424,865
Year ended December 31, 2002     2,424,865     242,230     (599,332 )   105,743     76,541 (b)   2,250,047
Year ended December 31, 2003     2,250,047     1,594,020     (949,703 )   52,178     667,292 (c)   3,613,834

(a)
Allowance for doubtful accounts for receivables acquired in ClinForce acquisition.

(b)
Allowance for doubtful accounts for receivables acquired in NovaPro acquisition.

(c)
Allowance for doubtful accounts for receivables acquired in Med-Staff acquisition.

II-1




QuickLinks

TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
Signatures
Exhibit Index
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Cross Country Healthcare, Inc. Consolidated Balance Sheets
Cross Country Healthcare, Inc. Consolidated Statements of Operations
Cross Country Healthcare, Inc. Consolidated Statement of Stockholders' Equity
Cross Country Healthcare, Inc. Consolidated Statements of Cash Flows
Cross Country Healthcare, Inc. Notes to Consolidated Financial Statements December 31, 2003
Schedule II

Exhibit 10.21

 

 

LEASE AGREEMENT

 

THIS LEASE AGREEMENT (“Lease”) is made this 6th day of July, 2000, by and between the “Landlord” and the ‘Tenant” hereafter set forth.

 

WITNESSETH:

 

1.             DEFINITIONS.  In addition to the definitions contained elsewhere in this Lease, the following definitions shall apply:

 

(a)

 

Landlord:

 

Edgewood General Partnership

 

 

Address:

 

1408 North Westshore Boulevard, Suite 512

 

 

 

 

Tampa, Florida 33607

 

 

 

 

 

(b)

 

Tenant:

 

H.R. Logic, Inc.

 

 

Address:

 

1408 North Westshore Boulevard, Suite 604

 

 

 

 

Tampa, Florida 33607

 

(c)           Premises:  Suite No. 200 consisting of approximately 3,281 rentable square feet (which the parties expressly agree are contained in the Premises), on the attached Exhibit “A” expressly made a part hereof. The Premises are located on the second floor of the structure, hereinafter called the “Building”, located at N. Westshore Blvd., Tampa, FL 33607. The parties expressly agree that there are 3,281 rentable square feet within the Premises and 145,923 rentable square feet within the Building, despite the fact that such figures may not be precise. For the purposes of Items 1 (i), and 5, 11 and 15 of this Lease, the term “Building” includes its appurtenances, and its parking facilities.

 

(d)           “Use of Premises”: General and Administrative

 

(e)           “Commencement Date”: The later of December 1, 2000 (“the anticipated Commencement Date”), or the date Landlord delivers to Tenant possession of the Premises. If, however, Tenant takes possession of the Premises prior to the anticipated Commencement Date, then the date Tenant so takes possession shall be the Commencement Date.

 

(f)            “Term”: Not less than thirty six months commencing on the Commencement Date, this Lease to end on the last day of the 36th calendar month after the Commencement Date. The terms and conditions of this Lease are fully contingent upon the simultaneous execution of the First Amendment of Lease dated July 7, 2000.

 

(g)           “Rent”: (See also Item 3.) Rent and all other sums payable by Tenant to Landlord under this Lease, plus any applicable tax, shall be paid to Landlord, without demand, recoupment, abatement, deduction or offset, at its office presently located at P.O. Box 22197. Tampa. Florida 33622. or at such other place as Landlord may hereafter specify in writing.

 

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YEAR

 

DATES

 

*RATE PER
RSF

 

ANNUAL

 

MONTHLY

 

Year 1

 

12/1/00-
11/30/01

 

$

19.25

 

$

63,159.25

 

$

5,263.27

 

Year 2

 

10/01/01-
11/30/02

 

$

19.75

 

$

64,799.75

 

$

5,399.98

 

Year 3

 

12/01/02-
11/30/03

 

$

20.25

 

$

66,440.25

 

$

5,536.69

 

 


*Not inclusive of applicable sales tax

 

(h)           “Base Year means the calendar year in which the Lease commences.

 

(i)            “Operating Expense Base Amount” means the operating expenses of the Building, as defined at Item 4 hereof, in the Base Year of this Lease.

 

(j)            “Real Estate Tax Base Amount” means the total amount of real property taxes on the Land and Building, as defined at Item 4 hereof, in the Base Year of this Lease.

 

(k)           “Proportionate Share”: The net rentable area in the Premises (3,281 square feet) divided by the net rentable area in the Building (145,923 square feet), which equals 2.3 percent If Tenant leases from Landlord any additional space in the Building pursuant to the terms and provisions of this Lease, then Tenant’s Proportionate Share shall be increased accordingly.

 

(1)           “Additional Rent”: As described in Item 3 of this Lease.

 

(m)          “Land”: Land shall mean real property described in Exhibit D.

 

(n)           “Building”: Building shall mean the improvements presently or hereafter constructed on the Land.   I

 

2.             PREMISES AND TERM.  Landlord, in consideration of the Rent hereinafter reserved to be paid and of the covenants, conditions and agreements to be kept and performed by Tenant, hereby ‘leases, lets and demises to Tenant, and Tenant hereby leases and hires from Landlord, that certain space called the Premises as described above in Item 1, Section (c).

 

If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on or before the anticipated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any claim, loss or damage resulting therefrom, but, in that event, there shall be an abatement of Rent and Additional Rent covering the period between the anticipated Commencement Date and the time when Landlord can so deliver possession, the date when Landlord can so deliver possession being deemed to be the “Commencement Date” (Commencement Date). The ending date of this Lease shall be extended

 

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for not less than an identical period of time that transpired between the anticipated Commencement Date and the date thereafter Landlord so delivered possession (Commencement Date), it being the parties’ intent that this Lease have not less than a complete Term as described and contemplated in Item 1, Section (i) above. To this end, if the actual Commencement Date is a day other than the first day of a particular month, the Term of this Lease shall not expire until the last day of the last month of the proposed Term as described in Item 1, Section (g). If the Commencement Date is other than me anticipated Commencement Date, the parties representatives shall execute a letter amendment to this Lease (which they are hereby authorized to do) whereby the Commencement Date and expiration date of this Lease will be specified; however, their failure to do so shall have no effect on the other contents of this Lease, such contemplated execution to be merely for clarification purposes. By occupying the Premises, Tenant shall be conclusively deemed to have accepted the Premises as complying fully with each, every, any and all of Landlord’s covenants and obligations with respect to the delivery thereof. Tenant shall also have the nonexclusive right to use the parking facilities appurtenant to the Building.

 

3.             RENT. Tenant covenants and agrees to pay without demand, recoupment, abatement, deduction or offset, to Landlord Rent (and Additional Rent) for the Premises on or before the first (1st) day of the first (1st) full calendar month of the Term hereof and on or before the first (1st) day of each and every successive calendar month thereafter during the full Term of this Lease, subject to the adjustments as provided hereinafter, along with any applicable tax, at the current rate of six and three-quarters (6.75%) percent. In the event the Commencement Date occurs on a day other than the first (1st) day of a calendar month, the first Rent payment shall be in the amount of the Rent for one (1) full calendar month, plus the prorated Rent for the calendar month in which the Term of this Lease commences,’ such payment to be due on the Commencement Date.

 

Whenever under the terms of this Lease any sum of money is required to be paid by Tenant in addition to the Rent herein reserved, whether or not such sum is herein described as “Additional Rent”, or a provision is made for the collection of said sum as “Additional Rent” said sum shall nevertheless, at Landlord’s option, if not paid when due, be deemed Additional Rent, and shall be collectible as such with the first installment of Rent thereafter falling due hereunder.  In the event any installment or increment of Rent or Additional Rent payable under this Lease shall not be paid when due, a “late charge” of five percent (5%) of the amount overdue may be charged (as Additional Rent) by Landlord for the purpose of defraying the expense and inconvenience incident to handling such overdue payment and for the purpose of compensating Landlord for its attendant inconvenience and loss of cash flow.

 

4.             OPERATING EXPENSE ADJUSTMENTS.  The Landlord and Tenant each acknowledge that the Rent specified in Item 3 of this Lease does not provide for increases in operating expenses and real estate taxes in excess of the Base Year Amounts. Accordingly, during the term of this Lease, and any extension(s) thereto, beginning with the first calendar year subsequent to the Base Year, Tenant shall pay to Landlord, as additional rent, its proportionate share of estimated increases in operating expenses and real estate taxes over the Base Year amounts.

 

Commencing on January 1 of the calendar year following the Base Year and continuing on the first day of each calendar month thereafter until the expiration or other termination of this Lease, Tenant shall pay to Landlord, as additional monthly rental, an amount equal to one-twelfth of the Tenant’s Proportionate Share of the amount by which budgeted operating expenses and real estate taxes for the current calendar year exceeds the Base Year Amounts. In the event the amount of additional monthly rental collection hereunder for the preceding twelve month period is less than the actual excesses for such year, Tenant shall remit the balance thereof to the Landlord within five (5) days after the receipt of such notice. In the event the amount of additional monthly rental collection hereunder for the preceding twelve month period is greater

 

3



 

than the actual excesses for such period, Landlord shall remit the difference to the Tenant accompanied by said notice.

 

The term “operating expenses” includes all expenses incurred by Landlord with respect to the maintenance and operation of the Building of which the leased “Premises” are a part, including, but not limited to, the following: maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas and other utility charges; security, window washing and janitorial services; trash; landscaping and pest control; management fees, wages and benefits payable to employees of Landlord whose duties are directly connected with the operation and-maintenance of the Building; all services, supplies, repairs, replacements or other expenses for maintaining and operating the Building or project including parking and common areas; the cost, including interest, amortized over its useful life, of any capital improvements made to the Building by Landlord after the date of this lease which is required under any governmental law or regulation that was not applicable to the Building at the time it was constructed; the cost, including interest, amortized over its useful life, of installation of any device or other equipment for the purpose of improving operating efficiency; all other expenses which would generally be regarded as operating and maintenance expenses which would reasonably be amortized over a period not to exceed five years; all insurance premiums Landlord is required to pay or deems necessary to pay, including public liability insurance, with respect to the Building. The term operating expenses does not include the following: repairs, restoration or other work occasioned by fire, wind, the elements or other casualty; income and franchise taxes of Landlord; real estate broker’s commissions, attorney’s fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with Tenants, other occupants; advertising expenses and expenses for the renovating of space for new Tenants; interest or principal payments on any mortgage or other indebtedness of Landlord; any depreciation allowance or expense; or operating expenses which are the responsibility of Tenant.

 

The term “Taxes” means the aggregate amount of real property taxes and assessments taxes, assessed, imposed, or levied by any lawful authority upon the Land and the Building in any calendar year during the term of this Lease; and, shall also include administrative costs and contingency fees paid to independent consultants engaged to negotiate, on behalf of Landlord, assessments impaired by applicable taxing authorities.

 

If Landlord, in its sole discretion in operating the Building, chooses to install any energy or labor saving devices, equipment, fixtures or appliances to or in the Building that otherwise might be considered a capital expenditure, then Landlord may depreciate the cost of the equipment, device, appliance or fixture into the Operating Expenses of the Building, including interest at a reasonable rate, all according to generally accepted accounting principles applied on a consistent basis.

 

5.             USE OF PREMISES.  The Premises shall be used by Tenant as described above in Item 1, Section (d), and for no other business or purpose whatsoever without the prior written discretionary consent of Landlord. Tenant shall not do or permit to be done in or about the Premises or Building, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by, or will in any way conflict with, any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is presently or hereafter prohibited by any standard form of fire insurance policy or will presently or hereafter in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or presently or hereafter cause a cancellation of any insurance policy covering the Building or any of its contents, or presently or hereafter cause a cancellation of any insurance policy covering the Building or any part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises or Building, which will presently or hereafter in any way obstruct or interfere with the rights of other Tenants of the Building, or injure or annoy them or use or allow to be used the Premises or Building for any improper, immoral, unlawful or objectionable purpose (as determined by

 

4



 

Landlord); nor shall Tenant cause, maintain, or permit any nuisance (as determined by Landlord or by law) in or about the Premises or commit or suffer to be committed any waste in, on, or about the Premises or Building. Tenant shall be responsible for all losses and damages to Landlord as a result of Tenant’s failure to use, occupy and surrender the Premises or Building in strict accordance with the contents of this Lease, and such responsibility shall survive the expiration or earlier termination of this Lease. Tenant, at Tenant’s expense, shall comply with all laws, rules, orders, statutes, ordinances, directions, regulations and requirements of all federal, state, county and municipal authorities pertaining to Tenant’s use and occupancy of the Premises or Building and with the recorded covenants, conditions and restrictions pertaining thereto, regardless of when they become effective or applicable, including, without limitation, all applicable federal, state and local laws, regulations or ordinances pertaining to air and water quality, Hazardous Materials, waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and with any direction of any public officer or officials which shall impose any duty upon Landlord or Tenant with respect to the use or occupation of the Premises. For the purposes of this Item 5, the term “Tenant” includes Tenant’s agents, employees, principals, officers, successors, assigns, subtenants, invitees, contractors and consultants.

 

6.             ASSIGNMENT AND SUBLETTING. Tenant shall not assign the right of occupancy under this Lease, or any other interest therein, or sublet the Premises, or any portion thereof, without the prior written consent of Landlord, which the parties agree may be withheld at Landlord’s sole discretion. Tenant absolutely shall have no right of assignment or subletting if it is, or has ever been, in default of this Lease. If Landlord elects to grant its written consent to any proposed assignment or sublease (whether by Tenant or by others claiming by or through Tenant), Tenant or such others agree to pay Landlord an administrative fee in a reasonable amount (but not less than $150.00), plus attorney’s fees to process and approve such assignment or sublease, and Landlord may prescribe the substance and form of such assignment f r sublease.

 

Notwithstanding any assignment of this Lease, or the subletting of the Premises, or any portion thereof, Tenant shall continue to be fully liable for the performance of the terms, conditions and covenants of this Lease, including, but not limited to, the payment of Rent and Additional Rent This- continuing liability shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged, diminished, reduced or in any other way affected by; (a) any amendment or modification of, or supplement to, this Lease or any further assignment or transfer thereof or any further sublease pertaining thereto; or (b) any action taken or not taken by Landlord against any assignee or subtenants; or (c) any agreement which modifies any of the rights or obligations of the parties (or their respective successors) under this Lease; or (d) any agreement which extends the time within which an obligation under this Lease is to be performed; or (e) any waiver of the performance of an obligation required under this Lease; or (f) any failure to enforce any of the obligations set forth in this Lease. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord’s rights as to any subsequent assignments or sublettings. Landlord shall have the additional option, which shall be exercised by providing Tenant with written notice, of terminating Tenant’s rights and obligations under this Lease rather than permitting any assignment or subletting by Tenant, any statement or implication in this Lease or at law to the contrary notwithstanding.

 

If Landlord permits any assignment or subletting by Tenant and if the monies (no matter how characterized) received as a result of such assignment or subletting [when compared to the monies still payable by Tenant to Landlord] should be greater than would have been received hereunder had not Landlord permitted such assignment or subletting, then the excess shall be payable by Tenant to Landlord, it being the parties’ intention that Landlord, and not Tenant, in consideration for Landlord’s permitting such assignment or subletting, shall be the party to receive any profit from any such assignment or subletting. If there are one or more assignments

 

5



 

or sublettings by Tenant to which Landlord consents, then any and all extension options to be exercised subsequent to the date of such assignment or subletting and all options to lease additional space in the Building to be exercised subsequent to the date of such assignment or subletting are absolutely waived and terminated at Landlord’s sole discretion. In the event of the transfer and assignment by Landlord of its interest in this Lease and/or sale of the Building containing the Premises, either of which it may do at its sole option, Landlord shall thereby be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations. The provisions of Item 35 hereafter dealing with “Notices” shall be amended to provide the correct names and addresses of the assignee or subtenant. If Tenant is a partnership or corporation whose stock is not regularly traded on a bona fide public exchange, and if any transfer, sale, pledge or other disposition of a partnership interest or the common stock shall occur which changes the power to vote the majority of interest in the partnership or of the outstanding capital stock of the company, such action shall be considered an assignment under the terms of this Lease. Any breach of this Item 6 by Tenant will constitute an automatic default under the terms of this Lease, per Item 19 hereof.

 

7.             ACCESS TO THE PREMISES.  Landlord or its authorized agent or agents shall have the right to enter upon the Premises at all reasonable times for the purposes of inspecting the same, preventing waste, making such repairs as Landlord may consider necessary (but without any obligation to do so except as expressly provided for herein), and showing the Premises to prospective Tenants, mortgagees and/or purchasers. If during the last month of the Term, Tenant shall have removed all or substantially all of Tenant’s property therefrom, Landlord may immediately enter and alter, renovate and redecorate the Premises without elimination or abatement of Rent or Additional Rent or incurring liability to Tenant for any compensation or offsets in Rent or Additional Rent and charges owed and such acts shall have no effect upon this Lease.

 

8.             LANDLORD’S SERVICES.  Landlord shall, at its expense, furnish the Premises with (i) electricity subject to Item (ii) heat and air conditioning during reasonable and usual business hours (exclusive of Saturday afternoons, Sundays and nationally-recognized holidays) reasonably required for the occupation of the Premises, such heat and air-conditioning to be provided by utilizing the existing Building systems, it being expressly understood and agreed by the parties that Landlord specifically shall not be liable for any losses or damages of any nature whatsoever incurred by Tenant due to any failure of the equipment to function properly, or while it is being repaired, or due to any governmental laws, regulations or restrictions pertaining to the furnishing or use of such heat and air-conditioning; (iii) elevator service; (iv) lighting replacement for customary fluorescent lighting provided by-Landlord; (v) toilet room supplies; (vi) daily janitor service during the time and in the manner that such janitor service is customarily furnished in first class office Buildings in the metropolitan area where the Building is located; (vii) water; and (via) sewerage. The foregoing services are designated “Building Standard”.

 

Tenant will pay $35.00 per hour per floor (this price is subject to change) for HVAC after normal business hours which are:

Monday through Friday 8:00 a.m. - 6:00 p.m.

Saturday 8:00 a.m. - 12:00 noon.

 

Tenant agrees that Landlord is only responsible for Building Standard maintenance and Building Standard services. If other, more complete or specialty services and maintenance (over Building Standard) are required, then Tenant solely shall be and is responsible for same and for any and all expenses and costs of any nature whatsoever associated with same. To this end, Tenant is and shall be solely responsible for any expenses and costs of any nature whatsoever associated with, among other things, maintaining upgraded Tenant improvements in the Premises, replacing non-Building Standard lighting fixtures and bulbs in the Premises, servicing,

 

6



 

operating and maintaining any separate and non-Building Standard HVAC systems and faculties serving the Premises, etc.

 

Landlord shall not be liable for any damages directly or indirectly or consequentially resulting from, nor shall any Rent or Additional Rent herein set forth be reduced or abated by reason of, (1) installation, use, or interruption of use of any equipment in connection with the furnishing of any of me foregoing services, or (2) failure to furnish, or delay in furnishing, any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord or by the making of necessary repairs or improvements to the Premises or to the Building or because of any governmental laws, regulations or restrictions. The temporary failure to furnish any such services shall not be construed as an eviction of Tenant or relieve Tenant from the duty of observing and performing each, every, any and all of the provisions of this Lease.

 

9.             ELECTRICAL OVERLOAD; STRUCTURAL OVERLOAD.

 

(A)          Tenant’s use of electrical services furnished by Landlord shall be subject to the following:

 

(1)           Tenant’s electrical equipment shall be restricted to that equipment which individually does not have a rated capacity greater than .5 kilowatts per hour and/or require voltage other than 120/208 volts, single phase. Collectively, Tenant’s equipment shall not have an electrical design load greater than an average of five (5) watts per square foot (including overhead lighting).

 

(2)           Tenant’s overhead lighting shall not have a design load greater than an average of two (2) watts per square foot

 

(3)           If Tenant’s consumption of electrical services exceeds either the rated capacities and/or design loads as per subsections (1) and (2) above, then Tenant shall remove such equipment and/or lighting to achieve compliance within ten (10) days after receiving notice from Landlord. Or upon receiving Landlord’s prior written approval, such equipment and/or lighting may remain in the Premises, subject to the following:

 

(a)           Tenant shall pay for all costs of installations and maintenance of submeter, wiring, air-conditioning and other items required by Landlord, in Landlord’s discretion, to accommodate Tenant’s excess design loads and capacities;

(b)           Tenant shall pay to Landlord, upon demand, the cost of the excess demand and consumption of electrical service at rates determined by Landlord which shall be in accordance with any applicable laws; and

(c)           Landlord may, at its option, upon not less than thirty (30) days’ prior written notice to Tenant, discontinue the availability of such extraordinary utility service. If Landlord gives any such notice, Tenant will contract directly with the public utility for the supplying of such utility service to the Premises.

 

(B)           Tenant shall not place a load upon any floor of the Premises exceeding 50 pounds per square foot, which such floor was designed to carry and which may be allowed by law. Landlord reserves the right to prescribe the weight and position of all heavy equipment and similar items, and to prescribe the reinforcing necessary, if any, which in the opinion of Landlord may be required under the circumstances, such reinforcing to be at Tenant’s pre-paid expense.

 

10.           PARKING AREAS.  Landlord shall keep and maintain in good condition parking areas that may be provided. Landlord reserves the right to control the method, manner and time of parking in parking spaces. Landlord shall not be responsible at all, any statement or implication elsewhere in this Lease to the contrary notwithstanding, for the security of the parking areas provided pursuant to this Lease. Any and all parking charges payable by Tenant, whether to

 

7



 

Landlord or to Landlord’s designate(s), shall be Additional Rent; furthermore, if Tenant fails to pay duly, fully and timely such parking charges, Landlord [or its designate(s)] may discontinue, without notice to Tenant (or anyone else), the availability of ((he parking space(s) the subject of such parking charges, no matter by whom such parking spaces are or were. being utilized or are in the future to be utilized, anything to the contrary elsewhere in this Lease notwithstanding.

 

11.           LEASEHOLD IMPROVEMENTS.  The Premises are rented “as is”, without any additional services or improvements to be rendered by Landlord, other than those services described in Item 8 and such other services or improvements as may be described in Exhibit “B” attached hereto and expressly made a part hereof. If Landlord is to additionally alter, remodel, improve, or do any physical act or thing to the space as presently constituted or as described in Exhibit “B”, same shall be at the sole expense of Tenant and shall be affected only by a “Work Order” signed by the parties.  In the absence of a “Work Order” signed by the parties, Landlord is under no obligation to make any such alteration, remodeling or improvement or do any physical act or thing to the space.

 

Any and all extraordinary (as so determined by Landlord at its sole discretion) expenses and costs of any nature whatsoever attributable to the installation, maintenance and/or removal of telephone equipment, computer equipment and the like shall be borne solely by Tenant.

 

12.           REPAIRS AND MAINTENANCE .  Landlord will, at its own cost and expense, except as may be provided elsewhere herein, make necessary repairs of damage to the Building corridors, lobby, structural members of the Building, and equipment used to provide the Building Standard services referred to in Item 8, unless any such damage is caused by acts or omissions of Tenant, its agents customers, employees, principals, contractors, consultants, assigns, subtenants or invitees, in which event Tenant will bear the cost of such repairs. Tenant will allow no maintenance or repairs to be done in, on, to or about the Premises other than by a licensed contractor (such term to include all degrees and levels of subcontractors) approved by Landlord in writing prior to any such maintenance or repairs being undertaken.   Landlord shall be entitled to require such contractor to be bonded and insured in such amounts and with such companies as Landlord may in its discretion prescribe. Tenant will not injure the Premises or the Building but will maintain the Premises in a clean, attractive, condition and in good repair, except as to damage to be repaired by Landlord as provided above. Upon termination of this Lease, Tenant will surrender and deliver the Premises to Landlord in the same condition in which they existed at the commencement of this Lease, excepting only ordinary wear and tear and damage arising from any cause not required to be repaired by Tenant, or Landlord approved alterations and improvements. This Item 12 shall not apply in the case of damage or destruction by fire or other casualty which is covered by insurance maintained by Landlord on the Building (as to which Item 15 hereof shall apply) or damage resulting from an Eminent Domain taking (as to which Item 17 hereof shall apply).

 

13.           ALTERATIONS AND IMPROVEMENTS.  Tenant absolutely shall not make any alterations, additions or improvements to or in the Building outside the Premises. Furthermore, Tenant shall make no alterations or improvements (including additions) to or in the Premises without the prior written approval of Landlord, unless in each instance and for each such alteration or improvement, Landlord or a contractor approved by Landlord is hired to do such alterations or improvement. Such approval shall not be unreasonably withheld in the case of alterations or improvements to the interior of the Premises if such alterations or improvements are normal for the use described in Item 1(d) of this Lease, do not adversely affect utility of the Premises for future Tenants, do not alter the exterior of the Building, and are accompanied by insurance satisfactory to Landlord and by prepayment or bond provisions or waivers by the contractor in form satisfactory to Landlord sufficient to protect the Building from claims of lien of any sort; otherwise, such approval may be withheld for any reason whatsoever. Furthermore, such alterations or improvements absolutely shall not affect the mechanical, plumbing, electrical and HVAC systems in the Premises or the Building and shall not be of a structural nature.

 

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Tenant shall conduct its work in such a manner as to maintain harmonious labor relations and as not to interfere with the operation of the Building and shall, prior to the commencement of the work, submit to Landlord copies of all necessary permits. Landlord reserves the right to have final approval of the contractors hired by Tenant. All such contractors hired by Tenant shall be, at levels and coverage’s prescribed by Landlord, licenses, bonded and insured, and Landlord may require evidence of same, which Tenant agrees to secure and provide Landlord prior to the commencement of any work by such contractors. All alterations or improvements, whether temporary or permanent in character, made in or upon the Premises, either by Landlord or Tenant, shall be Landlord’s properly and at the end of the term hereof shall remain in or upon the Premises without compensation to Tenant. If, however, Landlord shall request in writing, Tenant will, prior to expiration or earlier termination of this Lease, remove any and all alterations, and improvements placed or installed by Tenant in the Premises, and will repair any damage caused by such removal. All of Tenant’s furniture, movable trade fixtures and equipment not attached to the Building may be removed by Tenant at the expiration of this Lease, if Tenant so elects, and shall be so removed, if required by Landlord, and, if not so removed, shall, at the option of Landlord, become the property of Landlord. To the extent Tenant makes any alterations or improvements and/or to the extent Landlord on behalf of Tenant under an “Extra Work Agreement” makes such alterations or improvements, and as a result thereof it can be determined that thereupon was caused an increase in real estate taxes or insurance premiums, then Tenant shall be responsible for reimbursing Landlord for such increases as Landlord may pay.

 

14.           INDEMNITY.  Landlord shall not be liable for, and Tenant will indemnify and save Landlord (and Landlord’s officers, principals, agents, employees and insurers) harmless of and from, each, every, and all fines, suits, damages, claims, demands, losses and actions (including attorney’s fees) for any injury to person or damage to or loss of property on or about the Premises and Building caused by the negligence or misconduct or breach of this Lease by Tenant, its employees, agents, principals, contractors, consultants, assigns, subtenants, invitees or by any other person entering the Premises or the Building under express or implied invitation of Tenant, or arising out of Tenant’s use of the Premises. Landlord absolutely shall not be liable or responsible for any loss or damage to any property or the death or injury to any person occasioned by theft, crime (of any nature whatsoever), fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition of governmental body or authority, by other Tenants of the Building or by any other matter beyond the absolute control of Landlord, or for any injury or damage or inconvenience which may arise through repair or alteration of any part of the Building, or failure to make repairs, or from any cause whatsoever except Landlord’s negligence or intentional act. It is specifically understood and agreed that there shall be no personal liability on Landlord (nor on Landlord’s officers, principals, agents and employees) with respect to any of the covenants, conditions or provisions of this Lease; in me event of a breach or default by Landlord of any of its obligations under this Lease, Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of any and all of Tenant’s right and remedies.

 

15.           DAMAGE BY FIRE OR THE ELEMENTS.  In the event that the Building is totally destroyed by fire, tornado or other casualty, or in the event the Premises or Building is so damaged that, within Landlord’s discretion, rebuilding or repairs cannot be completed within one hundred eighty (180) days after the date of such damage, Landlord, within sixty (60) days of the casualty, shall give Tenant written notice of the estimated time for completion or of Landlord’s intent not to repair. In such event, either Landlord or Tenant may, at its option, by written notice to the other given not more than thirty (30) days after the date of such fire or other casualty, terminate this Lease. In such event, the Rent and Additional Rent shall be abated during the unexpired portion of this Lease effective with the date of such fire or other casualty.

 

In the event the Building or the Premises are damaged by fire, tornado, or other casualty covered by Landlord’s insurance but only to such extent that rebuilding or repairs can be completed within one hundred eighty (180) days after the date of such damage, or if the damage should be more serious but neither Landlord nor Tenant elects to terminate this Lease, then

 

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Landlord shall, within thirty (30) days after the date of such damage or such election, commence to rebuild or repair the Building and/or the Premises and shall proceed with reasonable diligence to restore the Building and/or the Premises to substantially the same condition in which it/they was/were immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair or replace any part of the furniture, equipment, fixtures and other improvements which may have been placed by Tenant or other Tenants or occupants within the Building or Premises. Landlord shall, unless such damage is deemed by Landlord to be the result of the negligence or willful misconduct of Tenant or Tenant’s employees, agents, principals, contractors, consultants, assigns, subtenants or invitees, allow Tenant a fair diminution of Rent and Additional Rent during the time of such rebuilding or repairs. In the event any mortgagee, or the holder of any deed of trust, security agreement or mortgage on the Building, requires that the insurance proceeds be used to retire the mortgage debt, Landlord shall have no obligation to rebuild and this Lease shall terminate upon notice to Tenant. Any insurance which may be carried by Landlord or by Tenant against loss or damage to the Premises or its contents shall be for the sole benefit of the party carrying such insurance and under its sole control.

 

16.           BUILDINGS RULES AND REGULATIONS.  Tenant shall faithfully observe and comply with the Rules and Regulations printed on or annexed to (and expressly made a part of) this Lease and all reasonable modifications of and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by any other Tenant, occupant, invitee or visitor of the Building. Tenant shall and does hereby have an affirmative obligation (to include indemnification of Landlord, per Item 14 hereof) to notify its agents, employees, principals, assigns, subtenants and invitees of the contents of such Rules and Regulations and of this Lease and to assure their compliance therewith.

 

17.         EMINENT DOMAIN.  If the whole or a portion of the Building is taken for any public or quasi- public use under any statute or by right of Eminent Domain or private purchase in lieu thereof, then at Landlord’s option, but not otherwise, this Lease, the Term hereby demised and each, every, any and all rights of Tenant hereunder shall immediately cease and terminate and the Rent and Additional Rent shall be adjusted as of the date of such termination. Tenant shall be entitled to no part of the award made for such condemnation (or other taking) or the purchase price thereof. Nevertheless, anything to the contrary notwithstanding, likewise at Landlord’s option, but not otherwise, if the Premises are unaffected by such condemnation (or other taking), then this Lease and each and every one of its provisions shall continue in full force and effect Should by Eminent Domain the Tenants Premises be made unusable and or unable to be occupied then the Tenant shall have the right to terminate this Lease Agreement.

 

18.           SIGNS AND ADVERTISING.  Without the prior written approval of Landlord, which may be withheld at Landlord’s discretion, Tenant shall not permit the painting or display of any signs, placard, lettering, or advertising material of any kind on or near the exterior of the Premises or the Building. Notwithstanding the foregoing, Tenant may, with Landlord’s prior approval, display Tenant’s name on or near the entrance to the Premises, in a Building-standard manner prescribed by Landlord.

 

19.           TENANT’S DEFAULT.  The happening, of any one or more of the following events, shall constitute a default hereunder:

 

a)     Tenant’s failure to pay the Rent, Additional Rent, or any other sums (no matter how characterized) payable hereunder for a period of three (3) days after written notice by Landlord;

 

b)    Tenant’s failure to observe, keep or perform any of the other terms, covenants, agreements or conditions of this Lease or in the Building Rules and Regulations for a period of ten (10) days after written notice by Landlord;

 

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c)     The insolvency of Tenant;

 

d)     Tenant’s making an assignment for the benefit of creditors;

 

e)     A receiver or trustee being appointed for Tenant or a substantial portion of Tenant’s assets;

 

f)      Tenant’s voluntarily petitioning for relief under, or otherwise seeking the benefit of, any bankruptcy, reorganization, arrangement or insolvency law;

 

g)     Tenant’s deserting, vacating or abandoning any portion of the Premises or attempting to mortgage, pledge or otherwise encumber-in any way its interest hereunder;

 

h)     Tenant’s interest under this Lease being sold under execution or other legal process;

 

i)      Tenant’s interest under this Lease being affected, modified or altered by any unauthorized assignment or subletting or by operation of law;

 

j)      Any of the goods or chattels of Tenant used in, or incident to, the operation of Tenant’s business at, from or in the Premises being seized, sequestered, or impounded by virtue of, or under authority of, any legal proceeding;

 

k)     If Tenant shall be late in the payment of any sums due hereunder as rent or additional rent three (3) times in any twelve month period;

 

l)      Tenant’s failure to operate continuously during normal business hours from the Premises in a fully-staffed, fully-equipped manner and/or as contemplated by Item 1(d) of this Lease; or

 

m)    Tenant’s failure to take occupancy of the Premises when same is tendered by Landlord to Tenant; or

 

n)     Any attempted assignment or submitting of this Lease without Landlord’s written consent.

 

In the event of any of the foregoing happenings, Landlord, as its election, may exercise any one or more of the following options, the exercise of any of which shall not be deemed to preclude the exercise of any others herein listed or otherwise provided or permitted by statute or general law at the same time or in subsequent times or actions (all of which are cumulative):

 

1.     Terminate Tenant’s rights to possession under this Lease and re-enter and retake possession of the Premises and relet or attempt to relet the Premises on behalf of Tenant at such rent and under such terms and conditions as Landlord may deem best under the circumstances for the purpose of reducing Tenant’s liability. Landlord shall not be deemed to have thereby accepted a surrender of the Premises, and Tenant shall remain rally liable for any and all Rent, Additional Rent, or other sums (no matter how characterized) due under this Lease and for all damages suffered by Landlord because of Tenant’s breach of any of the covenants of this Lease.

 

2.     Declare this Lease to be terminated and ended, and re-enter upon and take possession of the Premises whereupon all right, title and interest of Tenant in the Premises shall end.

 

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3.     Accelerate and declare the entire remaining unpaid Rent and Additional Rent for the balance of this Lease to be immediately due and payable forthwith, and may at once, take legal action to recover and collect the same

 

No re-entry or retaking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease, unless a specific written notice of such intention is given to Tenant, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any Rent, Additional Rent or other monies due to Landlord hereunder or of any damages accruing to Landlord by reason of the violations of any of the terms, provisions and covenants herein contained. Landlord’s acceptance of Rent or Additional Rent or other monies following any event of default hereunder shall not be construed as Landlord’s waiver of such event of default. No forbearance by Landlord of action upon any violation or breach of any of the terms, provisions, and covenants herein contained shall be deemed or construed to constitute a waiver of the terms, provisions, and covenants herein contained, Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of any other violation or default. Legal actions to recover for loss or damage that Landlord may suffer by reason of termination of this Lease or the deficiency from any reletting as provided for above shall include the expense of repossession or reletting and any repairs or remodeling undertaken by Landlord following repossession.

 

THE PARTIES HERETO SHALL, AND THEY HEREBY DO, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ACCOUNT OF ANY MATTERS WHATSOEVER ARISING OUT OF, OR IN ANY WAY CONNECTED, WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES AND/OR BUILDING, AND/OR CLAM OF LOSS, INJURY OR DAMAGE. THE COVENANTS CONTAINED HEREIN ARE INDEPENDENT. In the event Landlord commences any proceeding to enforce this Lease or the Landlord/Tenant relationship between the parties or for nonpayment of Rent, Additional Rent or other monies due Landlord from Tenant under this Lease, Tenant will not interpose any counterclaim of whatever nature or description in any such proceedings. In the event Tenant must, because of applicable court rules, interpose any counterclaim or other claim against Landlord in such proceedings, Landlord and Tenant covenant and agree that, in addition to any other lawful remedy of Landlord, upon motion of Landlord, such counterclaim or other claim asserted by Tenant shall be severed out of the proceedings instituted by Landlord (and, if necessary, transferred to a court of different jurisdiction), and the proceedings instituted by Landlord may proceed to final judgment separately and apart from and without consolidation with or reference to the status of each counterclaim or any other claim asserted by Tenant.

 

The parties hereto agree that any and all suits for any and every breach of this Lease shall be instituted and maintained only in those courts of competent jurisdiction in the county or municipality in which the Building is located and Tenant, hereby submits to the jurisdiction of Florida courts. In the event of litigation by and between the parties [or their respective successor(s)] to enforce the terms and provisions of this Lease, the prevailing party shall be entitled to recover from the non-prevailing party the prevailing party’s reasonable attorney’s fees and court costs, all through final appeal.

 

Time is of the essence of this Lease; and in case Tenant shall fail to perform the covenants and obligations on its part to be performed at the time fixed for the performance of such respective covenants and obligations by the provisions of this Lease, Landlord may declare Tenant to be in default of such Lease.

 

20.           CONTRACTUAL LANDLORD’S LIEN.  Landlord shall have, at all times, a valid security interest to secure payment of all Rent, Additional Rent and other sums of money

 

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becoming due hereunder from Tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property or Tenant presently or which may hereinafter be situated in the Premises, and all proceeds therefrom, and such property shall not be removed therefrom without consent of Landlord until all arrearages in Rent and Additional Rent as well as any and all other sums of money then due to Landlord hereunder, shall first have been paid and discharged and all of he covenants, agreements, and conditions hereof have been fully complied with and performed by Tenant. In consideration of this Lease, upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements, and other personal property of Tenant situated on or in the Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sale Landlord or its assigns may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in Item 35 dealing with “Notices” in this Lease at least five (5) days before the time of sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorney’s fees and other expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this Item 20. Any surplus shall be paid to Tenant or as otherwise required by law, and Tenant shall pay any deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and deliver to Landlord a financing statement in form sufficient to perfect the security interest oaf Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code then in force in the State of Florida.

 

21.           SUBORDINATION.  In consideration of the execution of this Lease by Landlord, Tenant accepts this Lease subject to any deeds of conveyance and any deeds of trust, master leases, security interests or mortgages and all renewals, modifications, extensions, spreads, consolidations and replacements of the foregoing which might now or hereafter constitute a lien upon the Building (or the land upon which it is situated) or improvements therein or thereon or upon the Premises and to zoning ordinances and other Building and fire ordinances and governmental regulations relating to the use of the property (hereinafter collectively referred to as a “superior interest”. Although no instrument or act on the part of Tenant shall be necessary to effectuate such subordination, Tenant shall, nevertheless, for the purpose of confirmation, at any time hereafter, on demand in the form(s) prescribed by Landlord, execute any instruments, estoppel certificates, releases or other documents that may be requested or required by any purchaser or any holder of any superior interest for the purpose of subjecting and subordinating this Lease to such deed of conveyance or to the lien of any such deed of trust, master lease, security interest, mortgage, or superior interest. Tenant hereby appoints Landlord attorney-in-fact, irrevocably, to execute and deliver any such instrument or document for Tenant should Tenant fail or refuse to do so.

 

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22.           QUIET ENJOYMENT. Provided Tenant has fully, duly and timely performed all of the terms, covenants, agreements and conditions of this Lease on its part to be performed, including the payment of Rent, Additional Rent and all other sums due hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises, except as described in Item 21 above, against Landlord and all persons claiming by, through or under Landlord, for the Term (as may be extended) herein described, subject to me provisions and conditions of this Lease.

 

23.           SECURITY DEPOSIT.  Upon Tenant’s execution of this Lease, Tenant shall pay a security deposit of five thousand nine hundred ten dollars and forty-two cents ($5,910.42) (which equates to the amount of the last month’s rent) for the performance by Tenant of all the terms, covenants and conditions of this Lease upon Tenant’s part to be performed. Unless required to do so by law, Landlord shall have no obligation to segregate such security deposit from any other funds of Landlord, and interest earned on such security deposit, if any, shall belong to Landlord.   Security deposits shall not be considered advance payments of Rent or a measure of Landlord’s damages, in the case of a default by Tenant. The security deposit shall be returned to Tenant within thirty (30) days after the Expiration Date, provided Tenant has fully performed its obligations hereunder. Regardless of any permitted assignment of this Lease by Tenant, Landlord may return the security deposit to the original Tenant in the absence of evidence satisfactory to Landlord of an assignment of the right to receive the security deposit or the balance thereof, which shall satisfy in full Landlord’s obligation to return the security deposit. Landlord shall have the right to apply any part of said security deposit to cure any default of Tenant and if Landlord does so, Tenant shall upon demand deposit with the Landlord the amount so applied so that Landlord shall have the full security deposit on deposit at all times during the Term of this Lease. In the event of a sale or lease of the Building subject to this Lease, Landlord shall transfer the security deposit to the Purchaser or lessee, and Landlord shall thereupon be released from all liability for the return of such security deposit and Tenant shall look solely to the successor Landlord for the return of the security deposit. This provision shall apply to every transfer or assignment made of the security deposit to a successor Landlord. The security deposit shall not be assigned or encumbered by Tenant without the prior written consent of Landlord and any such unapproved assignment or encumbrance shall be void.

 

24.           MECHANIC’S LIENS.  Tenant is prohibited from making, and agrees not to make, alterations in the Premises, except as permitted by Item 13, and Tenant shall not permit any mechanic’s lien or liens to be placed upon the Premises or the Building or improvements thereon during the Term (as may be extended) hereof caused by or resulting from any work performed, materials furnished or obligation incurred by or at the request of Tenant, and in the case of the filing of any such lien, Tenant will promptly pay or statutorily bond same. If default in payment or statutory bonding thereof shall continue for ten (10) days after written notice thereof from Landlord to Tenant, Landlord shall have the right and privilege, at Landlord’s option, of paying the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses, interest, and attorney’s fees, shall be so much additional indebtedness hereunder due from Tenant to Landlord and shall be repaid to Landlord immediately on rendition of a bill therefor, together with interest per annum at the maximum rate permitted by law until repaid, and if not so paid within ten (10) days of the rendition of such bill, shall constitute default under Item 19 hereof.

 

The interest of Landlord shall not be subject to liens for improvements made by Tenant in or to the Premises or the Building. Tenant shall notify every contractor making such improvements of the provision set forth in the immediately preceding sentence of this paragraph. The parties agree, should Landlord so request, to execute, acknowledge and deliver without charge to the other a Memorandum of Lease in recordable form containing a confirmation that the interest of Landlord (as well as those parties holding interests superior to, or inferior to, Landlord) shall not be subject to liens for improvements made by Tenant to the Premises or the Building.

 

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25.           FORCE MAJEURE.  Whenever a period of time is herein prescribed for action to be taken by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or material, theft, crime, fire, public enemy, injunction, insurrection, court order, requisition of governmental body or authority, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the absolute control of Landlord.

 

26.           SEVERABILITY.  If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the Term (as may be extended) of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby.

 

27.           HOLDING OVER.  The failure of Tenant to surrender the Premises on the date provided herein for the expiration of the Term (as may have been theretofore extended) of this Lease (or at the time this Lease may be terminated otherwise by Landlord), and the subsequent holding over by Tenant, with or without the consent of Landlord, shall result in the creation of a tenancy at will at double the Rent payable at the time of the date provided herein for the expiration of this Lease or at the time this Lease may be terminated otherwise by Landlord. This provision does not give Tenant any right to hold over at the expiration of the Term (as may have been heretofore extended) of this Lease, and shall not be deemed, the parties agree, to be a renewal of the Lease Term (as may have been heretofore extended), either by operation of law or otherwise.

 

28.           RELOCATION.  If the premises consist of less than two thousand five hundred (2,500) square feet, Landlord may at any time during the Term (as may be extended) of this Lease relocate Tenant and substitute for the Premises other space (which would then become the “Premises” for the purpose of this Lease) in the Building. The parties expressly agree that Landlord shall pay the reasonable physical moving costs of such relocation, but shall not be responsible for any other losses, expenses, costs, damage or injuries of any nature whatsoever. Tenant’s new space shall be comparable to the Premises hereby leased. Tenant shall relocate within thirty (30) days (or such additional time as Landlord may direct) of Landlord’s written notice to Tenant that Tenant do so, Tenant’s failure to relocate timely shall be a Default (see Item 19 of this Lease), no curative notice of any nature (after the expiration of such 30 day or additional period) to be due Tenant from Landlord. Upon such a Default by Tenant, Landlord shall have all the rights and remedies described in said Item 19.

 

29.           RENT SEPARATE COVENANT.  Tenant shall not for any reason withhold or reduce Tenant’s required payments of Rent, Additional Rent and other charges provided in the Lease, it being expressly understood and agreed contractually by the parties that the payment of Rent and Additional Rent is a contractual covenant by Tenant that is independent of the other covenants of the parties under this Lease.

 

30.           JOINT AND SEVERAL LIABILITY; CHANGE IN BUSINESS FORM.  If two or more individuals, corporations, partnerships, or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other business association to pay Rent and Additional Rent and perform all other obligations hereunder shall be deemed to be joint and several. In like manner, if Tenant is a partnership or other business association, the members of which are, by virtue of statute or general law, subject to personal liability, the liability of each such member shall be joint and several. Tenant may not and shall not change or convert its business form and/or composition in any way whatsoever without Landlord’s prior, written and solely discretionary consent.

 

31.           ABSENCE OF OPTION.  The submission of this Lease for examination does not constitute a reservation of or option for the Premises, and this Lease becomes effective only upon execution and delivery thereof by Landlord.

 

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32.           CORPORATE TENANCY.  If Tenant is a corporation, the undersigned officer of Tenant hereby warrants and certifies to Landlord that Tenant is a corporation in good standing and is authorized to do business in the State of Florida. The undersigned officer of Tenant hereby further warrants and certifies to Landlord that he or she, as such officer, is authorized and empowered to bind the corporation to the terms of this Lease by his or her signature thereto. Landlord, before it accepts and delivers this Lease, may require Tenant to supply it with a certified copy of the corporate resolution authorizing the execution of this Lease by Tenant. If Tenant is a corporation (other than one whose shares are regularly and publicly traded on a recognized stock exchange), Tenant represents that the ownership and power to vote its entire outstanding capital stock belongs to and is vested in the officer or officers executing this Lease or members of his, her or their immediate family. If there shall occur any change in the ownership of and/or power to vote the majority of the outstanding capital stock of Tenant, whether such change of ownership by sale, assignment, bequest, inheritance, operation of law or otherwise, without the prior written discretionary consent of Landlord, then Landlord shall have the option to terminate this Lease upon thirty (30) days’ written notice to Tenant so stating, furthermore, Tenant shall have an affirmative obligation to notify immediately Landlord of any such change.

 

33.           BROKERAGE COMMISSION.  Carter & Associates, L.L.C. d/b/a Carter & Associates, L.L.C., L.C., a Georgia L.L.C., (“Carter”) has represented Landlord in connection with this Lease. Carter shall be paid a commission by Landlord pursuant to the terms of a separate agreement. Tenant warrants that there are no other claims aside from those stated above for broker’s commissions or finder’s fees in connection with its execution of this Lease and agrees to indemnify and save Landlord completely harmless from any liability that may arise from such claim, including reasonable attorney’s fees.

 

34.           LANDLORD’S DEFAULT.  Landlord shall in no event be charged with default in the performance of any of its obligations under this Lease unless and until Landlord shall have failed to perform such obligations within ten (10) days (or within such additional time as is reasonably required to remedy any such default) after written notice to Landlord by Tenant properly specifying and detailing the particulars of wherein and whereby Tenant claims Landlord has failed to perform any such obligations. If the holder of record of the first mortgage covering the Premises shall have given prior written notice to Tenant that it is the holder of such first mortgage and such notice includes the address at which notices to such mortgagee are to be sent, then Tenant shall give such mortgagees notice simultaneously with any notice given to Landlord to correct any default of Landlord as herein above provided. Such mortgagee shall have the right within thirty (30) days (or within such additional time as is reasonably required to correct any such default) after receipt of such notice to correct or remedy such default before Tenant may take any action under this Lease by reason of such default. Any notice of default given Landlord by Tenant shall be null and void unless simultaneous notice has been given by Tenant to said first mortgagee. It is specifically understood and agreed, anything in this Lease to the contrary notwithstanding, that there shall be no personal liability on Landlord (nor on Landlord’s officers, principals, agents and employees) with respect to any of the covenants, conditions or provisions of this Lease; in the event of a breach or default by Landlord of any of its obligations under this Lease; Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of Tenant’s remedies, and in absolutely no event shall Landlord be liable for prospective profits or special, indirect, or consequential damages. Likewise, anything in this Lease to the contrary notwithstanding, in no event shall Tenant have the right to terminate this Lease as a result of any default by Landlord, but rather, Tenant’s remedies against Landlord shall be solely limited to a claim for damages and/or a claim for injunction except for as provided for in Paragraphs 15 and 17.

 

35.           NOTICES.  Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered or given when (a) actually received or (b) signed for or “refused” as indicated on the postal service return receipt. Delivery shall and must be by personal delivery or

 

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by United States mail, postage prepaid, certified or registered mail, addressed to the parties hereto at the respective address set out opposite their names below, or at such other address as they may hereafter specif6y by written notice delivered in accordance herewith:

 

LANDLORD:

 

EDGEWORD GENERAL PARTNERSHIP

 

 

c/o Carter & Associates

 

 

1408 North Westshore Boulevard, Suite 512

 

 

Tampa, Florida 33607

 

 

 

TENANT:

 

HR Logic, Inc.

 

 

1408 North Westshore Boulevard, Suite 200

 

 

Tampa, Florida 33607

 

 

 

COPY TO:

 

HR Logic, Inc.

 

 

Attn: Christina Harris

 

 

402 43rd Street

 

 

West Bradenton, Florida 34209

 

36.           INSURANCE.  Tenant shall not conduct or permit to be conducted any activity, or place any equipment, materials or other items in, on or about the Premises or the Building, which will in any way increase the rate of fire or liability or casualty insurance on the Building. Should Tenant fail to comply with the foregoing covenant on its part to be performed, Tenant shall reimburse Landlord for such increased amount upon written demand therefor from Landlord, the same to be considered Additional Rent payable hereunder.

 

Tenant shall, at Tenant’s sole expense, obtain and keep in force at all times during the Term (as maybe extended) of this Lease comprehensive general liability insurance, including property damage, on an occurrence basis, with limits of not less than One Million Dollars ($1,000,000.00) combined Single limit, insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto, with Landlord named as an additional insured. The limit of said insurance shall not, however, limit the liability of Tenant hereunder. Tenant may carry said insurance under a blanket policy, provided an endorsement naming Landlord as an additional insured is attached thereto. Tenant shall furnish Landlord with a Certificate of Insurance, confirming that Landlord has been named as an additional insured and providing for written notice to Landlord in the event of any change or termination in the maintenance of such insurance.

 

Tenant shall maintain insurance upon all property in the Premises owned by Tenant or for which Tenant is legally liable. Tenant shall maintain insurance against such other perils and in such amounts as Landlord may in writing from time to time require. The insurance required to be obtained and maintained under this Lease shall be with a company or companies licensed to issue the relevant insurance and licensed to do business in the State of Florida. Such insurance company or companies shall each have a policyholder’s rating of no less that “A” in the most recent edition of Best’s Insurance Reports. No policy shall be cancelable or subject to reduction of coverage except after thirty (30) days’ prior written notice to Landlord. All policies of insurance maintained by Tenant shall be in a form, and shall have a substance, acceptable to Landlord with satisfactory evidence that all premiums have been paid. Tenant agrees not to

 

17



 

violate or permit to be violated any of the conditions of provisions of the insurance policies required to be furnished hereunder, and agrees to promptly notify Landlord of any fire, loss or other casualty. If Tenant fails to procure and maintain insurance as required hereunder, Landlord may do so, and Tenant shall, on written demand, as Additional Rent, reimburse Landlord for all monies expended by Landlord to procure and maintain such insurance within five (5) days of the receipt of such demand.

 

Tenant hereby waives and releases Landlord of and from any and all liabilities, claims and losses for which Landlord is or may be held liable to the extent Tenant receives or is entitled to receive insurance proceeds on account thereof. .

 

Upon Landlord’s written request for same, Tenant will provide Landlord with written evidence of Tenant’s compliance with its obligations under this Item 36.

 

37.           RECORDING.  This Lease shall not be recorded without Landlord’s prior written discretionary consent.

 

38.           STATUTORILY MANDATED NOTIFICATION. As required by F.S. 404.056(8), Landlord hereby notifies Tenant as follows: “RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a Building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in Buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit.”

 

39.           NON-DISCLOSURE.  Tenant agrees that it will not divulge or disclose to third parties the terms, provisions and conditions of this Lease with the sole exception being to Tenant’s accounting firm. Tenant’s breach of this Item 39 shall constitute a Default under Item 19 of this Lease, no curative notice to Tenant from Landlord being required.

 

40.           HAZARDOUS MATERIALS.  Tenant shall not cause or permit any Hazardous Materials (as hereinafter defined) to be brought upon, kept or used in or about the Premises or the Building by Tenant, its agents, principals, employees, assigns, subtenants, contractors, consultants or invitees without prior written consent of Landlord, which consent may be withheld for any reason whatsoever or for no reason at all. If Tenant breaches the obligations stated in the immediately preceding sentence, or if the presence of Hazardous Material on the Premises or around the Building caused or permitted by Tenant (or the aforesaid others) results in contamination of the Premises or the Building or the surrounding area(s), or if contamination of the Premises or the Building or the surrounding area(s) by Hazardous Material otherwise occurs for which Tenant is legally, actually or factually liable or responsible to Landlord (or any party claiming by, through or under Landlord) for damages, losses, costs or expenses resulting therefrom, then Tenant shall fully and completely indemnify, defend and hold harmless Landlord (or any party claiming by, through or under Landlord) from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses [including, without limitation: (i) diminution in the value of the Premises and/or the Building and/or the land on which title Building is located and/or any adjoining area(s) which Landlord owns or in which it holds a property interest; (ii) damages for the loss or restriction on use of rentable or usable space of any amenity of the Premises, the Building or the land on which the Building is located; (iii) damages arising from any adverse impact on marketing of space; and (iv) any sums paid in settlement of claims, attorney’s fees, consultants’ fees and expert fees] which arise during or after the Term of this Lease, as may be extended, as a consequence of such contamination. This indemnification of

 

18



 

Landlord by Tenant includes, without limitations, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on o£ under the Premises or the Building. Without limiting the foregoing, if the presence of any Hazardous Material on, under or about the Premises, the Building or the surrounding area(s) caused or permitted by Tenant (or the aforesaid others) results in any contamination of the Premises, the Building or the surrounding area(s), Tenant shall immediately take all actions at its sole expense as are necessary or appropriate to return the Premises, the Building and the surrounding area(s) to the condition existing prior to the introduction of any such Hazardous Material thereto; provided that Landlord’s prior written discretionary approval of such actions by Tenant shall be first obtained. The foregoing obligations and responsibilities of Tenant shall survive the expiration or earlier termination of this Lease.

 

As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material or waste, including, but not limited to, those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such substances, materials and wastes that are or become regulated under any applicable local, state or federal law. “Hazardous Material” includes any and all material or substances which are defined as “hazardous waste”, “extremely hazardous waste” or a “hazardous substance” pursuant to state, federal or local governmental law. “Hazardous Substance” includes, but is not restricted to asbestos, polychlorobiphenyls (“PCB’s”) and petroleum. Tenant shall be able to store and use normal office cleaning materials.

 

Landlord and its agents shall have the right, but not the duty, to inspect the Premises -at any time and from time to time to determine whether Tenant is complying with the terms of this Item 40. If Tenant is not in compliance with this Item 40, Landlord shall have the right to immediately enter upon the Premises to remedy any contamination caused by Tenant’s failure so to comply, notwithstanding any other provision of this Lease. Landlord shall use its best efforts to minimize interference with Tenant’s business, but shall not be liable for any interference caused thereby.

 

Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law of by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Project any such materials or substances except to use in the ordinary course of Tenant’s business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord’s request concerning Tenant’s best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this lease from any release of hazardous materials on the Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the lease term.

 

19



 

Any non-compliance by Tenant with its duties, responsibilities and obligations under this Item 40 shall be an “automatic” (no notice of any nature from Landlord to Tenant being required) default of this Lease (see Item 19).

 

41.           NOTICE TO OWNERS, PROSPECTIVE TENANTS AND BUYERS OF REAL PROPERTY REGARDING “THE AMERICANS WITH DISABILITIES ACT”.  Please be advised that a Tenant of real property may be subject to the Americans With Disabilities Act (the ADA), a Federal law codified at 42 USC Section 12101 et seq. Among other requirements of the ADA that could apply to your property, Title III of the ADA requires Tenants of “public accommodations” to remove barriers to allow access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons by January 26, 1992. The regulations under Title III of the ADA are codified at 28 CFR Part 36.

 

We recommend that you and your attorney review the ADA and the regulations, and, if appropriate, your lease, to determine if this law could apply to you, and the nature of the requirements. These are legal issues. You are responsible for conducting your own independent investigation of these issues. The Landlord cannot give you legal advice on these issues.

 

42.           AMENDMENTS.  This Lease contains the entire agreement between the parties hereto and may not be altered, changed or amended, except by written instrument signed by both parties hereto. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord and addressed to Tenant, nor shall any custom or practice which may grow up between the parties in the administration of the provisions hereof be construed to waive or lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms, provisions, covenants, and conditions contained in this Lease shall apply to, inure or the benefit of, and be binding upon the parties hereto, and upon their respective successors in interest and legal representative, except as otherwise herein expressly provided,

 

The parties each acknowledge that they have thoroughly read and understand this Lease (to include its Exhibits and attachments) in its entirety, that they are completely familiar with each, every, any and all of the terms, covenants, provisions and conditions set forth therein, and mat there are no other representations, promises, covenants, assurances, conditions, statements, understandings, warranties or agreements (collectively, “Representations”) concerning this Lease which do not appear in writing therein. This Lease supersedes and revokes all previous negotiations, arrangements, letters of intent, offers to lease, lease proposals, brochures, Representations, and information or data conveyed, whether oral or in writing, between the parties and/or their respective representatives or any other person(s) purporting to represent either Landlord or Tenant. Each party acknowledges that it has not been induced to enter into this Lease by any Representations not expressly set forth herein. The parties further acknowledge that the terms and provisions contained within this Lease have been fully, freely and fairly negotiated by and between them.

 

20



 

IN WITNESS WHEREOF, the parties, either for themselves or by and through their undersigned, duly authorized representatives, have executed this Lease for the purpose therein expressed.

 

Signed, sealed and delivered

in the presence of:

 

 

 

 

 

TENANT:

 

 

 

HR LOGIC, INC.

 

 

 

 

 

By:

 

 

By:

/s/ Joseph Bello

 

Witness 1 as to Lessor

 

Name:

Joseph Bello

 

 

Title:

Chief Operating Officer

By:

 

 

 

 

 

Witness 2 as to Lessor

 

 

 

 

 

LANDLORD

EDGEWOOD GENERAL PARTNERSHIP

 

 

 

 

By:

 

 

By:

/s/  David Henry Simon

 

Witness 1 as to Landlord

 

Name:

David Henry Simon

 

 

Title:

President, Daper Tampa, Inc., a General

By:

 

 

 

Partner of Edgewater General Partnership

 

Witness 2 as to Landlord

 

 

 

 

21



 

EXHIBIT A

PREMISES

 

EXHIBIT B

LANDLORD’S WORK

 

EXHIBIT C

BUILDING RULES AND REGULATIONS

 

EXHIBIT D

LEGAL DESCRIPTION

 

 

Exhibits are available upon request

 

22




Exhibit 10.22

 

FIRST AMENDMENT OF LEASE

 

THIS AGREEMENT made this 7th day of December, 2000 between The Edgewood General Partnership, 1408 North Westshore Boulevard, Suite 512, City of Tampa, County of Hillsborough, State of Florida, herein referred to as Landlord, and H R Logic, Inc. at 1408 North Westshore Boulevard, Suite 200, City of Tampa, County of Hillsborough, State of Florida, herein referred to as Tenant:

 

The parties hereto have entered into a Lease Agreement dated July 6,2000 by and between H.R. Logic, Inc. and Edgewood General Partnership, a copy of which is attached hereto as “Exhibit A” and referred to herein as the “Lease” affecting the property described as follows:

 

“Tower II, Suite 200 comprising of 3,281 rentable square feet (the “Existing Premises”), located in the Tower n, Building, 1408 North Westshore Boulevard, Tampa, Florida 33607”

 

The parties desire to enter into a new agreement modifying or supplementing the provisions of the Lease as follows:

 

1.             Tenant shall expand into Suite 206 comprising of 1,340 rentable square feet (the “Expansion Space”). Collectively and as depicted in the attached “Exhibit B”, the Existing Premises and the Expansion Space shall comprise of approximately 4,621 rentable square feet and be hereinafter referred to as the “Premises”.

 

2.             Landlord will build out the Expansion Space based on the Scope of Work here-in attached as Exhibit “C”. The Landlord’s total out of pocket cost for the Scope of Work in Exhibit “C” shall not exceed four thousand four hundred fourteen dollars and fifty-eight cents ($4,415.58). The Scope of Work described in Exhibit “B” of the Lease has been completed by the Landlord and therefore Exhibit “B” of the Lease shall be deleted. The Landlord is providing the Existing Premises in “As Is” condition.

 

3.             The term of the Expansion Space shall begin upon the laterr of December 1, 2000 or upon substantial completion of the Tenant Improvements as defined in Exhibit “C” and shall expire coterminously with the term of the Existing Premises on November 30, 2003.

 

4.             Section l(g) of the Lease “Rent” shall be modified to include the Expansion Space as defined below:

 



 

TERM

 

RATE PER RSF

 

MONTHLY RENTAL*

 

 

 

 

 

 

 

Existing Premises

 

 

 

 

 

 

 

 

 

 

 

12/1/00-11/30/01

 

$

19.25

 

$

5,263.27

 

 

 

 

 

 

 

Expansion Space

 

 

 

 

 

 

 

 

 

 

 

12/1/00-11/31/01**

 

$

19.25

 

$

2,149.58

 

 


** Rent to begin as described in Section 3 above.

 

Premises

(the following outlines the rent schedule for both the Existing Premises and the     Expansion Space beginning on December 1, 2001)

 

12/1/01 - 11/30/02

 

$

19.75

 

$

7,605.40

 

12/1/02 - 11/30/03

 

$

20.25

 

$

7,797.94

 

 


*Plus applicable sales tax and operating expense pass-thru’s.

 

5.             Proportionate Share. The definition of “Proportionate Share” as set forth in Section l(k) of the Lease is hereby deleted in its entirety and replaced with the following: “The net rentable area in the Premises (4,621 square feet) divided by the net rentable area in the Building (145,923 square feet), which equals 3.17 percent.”

 

6.             Section 23 of the Lease “Security Deposit”, shall be amended and the new Security Deposit amount shall be eight thousand three hundred twenty four dollars and thirty cents ($8,324.30). Upon Tenant’s execution of this First Amendment, Tenant shall pay to Landlord in addition to its current Security Deposit of five thousand nine hundred ten dollars and forty two cents ($5,910.42), an amount equal to two thousand four hundred thirteen dollars and eighty-eight cents ($2,413.88).

 

7.             Section 1 (g) “Rent” of the Lease shall be amended as follows: Rent and all other sums payable by Tenant to Landlord under this Lease, plus any applicable sales tax, shall be paid to Landlord, without demand, recoupment, abatement, deduction or offset, at its office presently located at 405 North Reo Street, Suite 160, Tampa, Florida 33609, or at any such other place as Landlord may hereafter specify in writing.

 

All provisions of the Lease Agreement are incorporated herein and are hereby modified or supplemented to conform herewith, but in all respects are to and shall continue in full force.

 

2



 

IN WITNESS WHEREOF, the parties have executed this Modification under seal the day and year first written above.

 

SIGNED AND SEALED AND DELIVERED

 

 

 

IN THE PRESENCE OF:

 

 

 

 

 

TENANT:

 

 

 

H R Logic, Inc.

 

 

 

 

 

 

 

 

 

 

/s/ illegible

 

By:

 

/s/

Joseph Bello

 

Witness 1 as to Tenant

 

 

 

 

 

 

 

 

 

/s/ illegible

 

Title:

 

Chief Operating Officer

 

Witness 2 as to Tenant

 

 

 

 

 

 

 

 

 

 

 

LANDLORD:

 

/s/ illegible

 

Edgewood General Partnership

 

Witness 1 as to Landlord

 

 

 

 

 

 

By:

 

/s/ David Henry Simon

 

/s/ illegible

 

 

 

 

Witness 2 as to Landlord

 

Title:

As President of Daper Tampa, Inc.

 

 

 

 

A General Partner of Edgewood
General Partnership

 

 

3



 

Exhibits are available upon request.

 

4




Exhibit 10.23

 

SECOND AMENDMENT OF LEASE

 

THIS AGREEMENT made this 29th day of April, 2002 between Edgewood General Partnership, 1408 North Westshore Boulevard, Suite 150, City of Tampa, County of Hillsborough, State of Florida, herein referred to as “Landlord”, and Cross Country TravCorps, a Florida Corporation, successor in interest to H R Logic, Inc. at 1408 North Westshore Boulevard, Suite 200, City of Tampa, County of Hillsborough, State of Florida, herein referred to as “Tenant”:

 

The parties hereto have entered into a Lease Agreement dated July 6,2000 (hereinafter referred to as the “Lease”) by and between H.R. Logic, Inc. and Edgewood General Partnership, and a First Amendment of Lease dated December 7,2000 (hereinafter the “First Amendment”), a copy of both which are attached hereto as Exhibit “A” affecting the property described as follows:

 

“Tower II, Suite 200 comprising of 4,621 rentable square feet (the “Existing Premises”), located in the Tower II, Building, 1408 North Westshore Boulevard, Tampa, Florida 33607;”

 

The parties desire to enter into a new agreement modifying or supplementing the provisions of the Lease as follows:

 

1.              Premises.  Tenant shall relocate and expand the entire Existing Premises to Suite 300 comprising of 15,698 rentable square feet (hereinafter the “New Premises”), collectively and as depicted in the attached Exhibit “B.” All references in the Lease (as amended) to the Premises shall mean the “New Premises.”

 

Upon relocation to the New Premises Tenant shall relinquish its Existing Premises to the Landlord and shall no longer be responsible for rental payments for the Existing Premises for the period thereafter.

 

2.              Tenant Improvements.  Landlord will build out the New Premises based on the Space Plan shown in the attached Exhibit “C” and the Scope of Work herein attached as Exhibit “D”. The Landlord’s total out of pocket cost for the Scope of Work in Exhibit “D” shall not exceed One Hundred Twenty Three Thousand Three Hundred and 76/100 Dollars ($123,300.76).

 

Any work or Tenant Improvements requested by the Tenant beyond the Scope of Work set forth in Exhibit “D” shall be a matter solely between Tenant and the contractor performing the improvements and all expenses and financial arrangements and payment relating to such additional work shall be a matter solely between Tenant and such contractor. Tenant is advised that such contractor may request such payment in advance for such work to be performed beyond that set forth in Exhibit “D” set forth.

 

3.              Term and Commencement.  The term of the New Premises shall be for not less than sixty-five (65) months to commence on July 1, 2002 (“the anticipated Commencement Date”) or upon the substantial completion of the Tenant Improvements, and the date the Landlord delivers to

 



 

Tenant possession of the Premises (the “Actual Commencement Date”); and to expire on the last day of the 65th calendar month after the Actual Commencement Date.

 

4.              Rent.  Section 4 of the First Amendment of Lease, “Rent” shall be nullified and the new Base Rent for the New Premises shall be as defined below:

 

TERM

 

BASE RENTAL RATE*

 

MONTHLY RATE

 

Months 1 - 12

 

$

20.00

 

$

26,163.33

 

Months 13 - 24

 

$

20.60

 

$

26,948.23

 

Months 25 - 36

 

$

21.65

 

$

28,321.81

 

Months 37 - 48

 

$

23.00

 

$

30,087.83

 

Months 49 - 60

 

$

24.38

 

$

31,893.10

 

 

All provisions of the Lease Agreement are incorporated herein and are hereby modified or supplemented to conform herewith, but in all respects are to and shall continue in full force.

 

IN WITNESS WHEREOF, the parties have executed this Modification under seal the day and year first written above.

 

SIGNED AND SEALED AND

DELIVERED

 

 

 

 

IN THE PRESENCE OF:

 

 

 

 

 

 

TENANT:

 

 

 

 

Cross Country Travcorps,

 

 

 

 

A Florida Corporation

 

 

 

 

 

 

/s/ illegible

 

By:

/s/ Vickie Anenberg

 

Witness 1 as to Tenant

 

 

 

 

 

 

 

 

 

/s/ illegible

 

Title:

President

 

Witness 2 as to Tenant

 

 

 

 

 

 

 

 

 

 

 

LANDLORD:

 

/s/ illegible

 

Edgewood General Partnership

 

Witness 1 as to Landlord

 

 

 

 

 

 

By:

/s/ David Henry Simon

 

/s/ illegible

 

 

 

 

Witness 2 as to Landlord

 

Title:

As President of Daper Tampa, Inc.

 

 

 

 

A General Partner of Edgewood

General Partnership

 

 

2



 

Exhibits are available upon request.

 

3




Exhibit 10.24

 

LEASE AGREEMENT

 

BETWEEN

 

CORNERS REALTY CORPORATION, INC.

 

(Landlord)

 

AND

 

CEJKA & COMPANY

 

(Tenant)

 

 

Dated: May 11, 2001

 



 

This Lease Agreement (“Lease”) is made this l/f day of May, 2001 by and between CORNERS REALTY CORPORATION, INC., a. Delaware corporation (“Landlord”), and CEJKA & COMPANY, a Delaware corporation having an address at                           (“Tenant”).

 

WITNESSETH :

 

The parties hereto, for themselves, their legal representatives, successors and assigns, agree as follows:

 

1.             BASIC LEASE INFORMATION.  The terms used in this Lease shall have the meanings set forth in this Paragraph 1.

(a)           Building.  The office building located at 6525 The Corners Parkway, Norcross, GA 30092 and commonly known as “The Corners Office Park.”

 

(b)           Land.  Those certain parcels of land more particularly described on Exhibit A attached hereto and made a part hereof.  The Land is part of the Park.

 

(c)           Park.  The Land and all improvements thereon, including, without limitation, the Building and the Common Areas.

 

(d)           Premises.  Suite Numbers 120 and 450 substantially as shown on Floor Plan(s) attached hereto as Exhibit B and made a part hereof, which the parties agree contain 296 rentable square feet and 8,845 rentable square feet, respectively, as of the date of this Lease, for a total of 9,141 rentable square feet.

 

(e)           Common Areas.  Those certain areas and facilities of the Building and the Park which are from time to time provided by Landlord, in its discretion, for the use of tenants and their employees, clients, customers, guests, licensees and invitees or for use by the public.

 

(f)            Permitted Uses.  Executive and administrative offices reasonable and customary for Tenant’s business as an employment agency and related uses thereto.

 

(g)           Commencement Date.  July 1, 2001.

 

(h)           Expiration Date.  December 31, 2006.

 

(i)            Term.  Approximately Five (5) Years and Six (6) Months (Total: 66 Months), beginning on the Commencement Date and ending at 11:59 p.m. on the Expiration Date, unless this Lease is sooner terminated as provided herein.

 

(j)            Security Deposit.  $3,818.00.

 

(k)           Rent.  The Base Rent, the Additional Rent, as defined in Paragraph 3, and all other sums due from Tenant to Landlord hereunder.

 

2



 

(l)            Base Rent:

 

Lease Period

 

Per Rentable Square
Foot

 

Annually

 

Monthly

 

7/1/01 – 6/30/02

 

$

19.00

 

$

173,679.00

 

$

14,473.25

 

7/1/02 – 6/30/03

 

$

19.95

 

$

182,362.92

 

$

15,196.91

 

7/1/03 – 6/30/04

 

$

20.95

 

$

191,503.92

 

$

15,958.66

 

7/1/04 – 6/30/05

 

$

21.99

 

$

201,010.56

 

$

16,750.88

 

7/1/05 – 6/30/06

 

$

23.09

 

$

211,065.72

 

$

17,588.81

 

7/1/06 – 12/31/06

 

$

24.24

 

$

110,788.92*

 

$

18,464.82

 

 


*for six (6) months

 

(m)          Base Rent Adjustment Amount. Five (5%) percent.  (Included in computation in Subparagraph 1(1)).

 

(n)           Tenant’s Broker(s).  Corporate Property Advisors,

 

(o)           Landlord’s Broker/Manager. Trammell Crow Company.

 

(p)           Tenant Improvement Allowance.  Up to $109,692.00 (or $12.00 per rentable square foot).

 

2.             TERM AND POSSESSION

 

(a)           Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term. During the Term, Tenant shall have the right to use the Common Areas in common with others and in accordance with the Lease and the Rules and Regulations.

 

(b)           Intentionally deleted.

 

(c)           In the event this Lease pertains to Premises in which building interior finish is to be constructed by Landlord (the “Leasehold Improvements”), the Commencement Date shall be the date set forth in Subparagraph 1 (g). If a Leasehold Improvement Allowance is set forth in Paragraph 1 above, then Tenant shall be responsible for all hard and soft costs incurred in connection with the design and construction of the Leasehold Improvements which are in excess of the Tenant Improvement Allowance. If Tenant is given a Tenant Improvement Allowance, it must be used by Tenant within the first six (6) months of the Term. The “Substantial Completion Date,” if relevant, shall be the date upon which the Leasehold Improvements have been substantially completed, except for punch list items, in accordance with the plans and specifications (“Plans and Specifications”) attached hereto as Exhibit C and made a part hereof and the Work Agreement (“Work Agreement”) attached hereto as Exhibit D and made a part hereof, provided however, that if Landlord shall be delayed in such substantial completion as a result of: (i) Tenant’s failure to agree to plans, specifications, and cost estimates within five (5) Business Days; (ii) Tenant’s request for materials, finishes or installations other

 

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than Landlord’s standard; (iii) Tenant’s changes in plans and specifications; (iv) the performance or completion by a party employed by Tenant; or (v) the failure by Tenant to make payment for the cost of the Leasehold Improvements in excess of the Tenant Improvement Allowance as set forth above, the Commencement Date and the payment of Rent hereunder shall be accelerated by the number of days of such delay, and provided further that if Landlord cannot substantially complete the Premises as a result of any of events (i) through (v) above, Landlord may at its election complete so much of the Leasehold Improvements as may be practical under the circumstances and, by written notice to Tenant, establish the Commencement Date as the date of such partial completion, subject to any applicable accelerations due to delays resulting from events (i) through (v) above. Tenant shall provide Landlord with a punch list within ten (10) days of the Substantial Completion Date, and Landlord shall proceed to complete these items promptly. The taking of possession by Tenant shall be deemed conclusively to establish that the Leasehold Improvements have been completed in accordance with the plans and specifications (except for punch list items) and that the Premises are in good and satisfactory condition.

 

(d)           If this Lease is executed before the Premises become vacant or otherwise available and ready for occupancy, and Landlord cannot acquire possession of the Premises prior to the Commencement Date, Landlord shall not be deemed to be in default hereunder, and Tenant agrees to accept possession of the Premises at such time as Landlord is able to tender the same, which date shall be deemed the Commencement Date; and Landlord hereby waives payment of Rent covering any period prior to the tendering of possession to Tenant hereunder.

 

(e)           Landlord may submit Tenant a written agreement, substantially in the form annexed as Exhibit E, confirming the date fixed by Landlord, in accordance with the provisions of this Lease, as the Commencement Date and the Expiration Date, and Tenant shall execute such agreement and return it to Landlord within fifteen (15) calendar days thereafter. Any failure of the parties to execute such written agreement shall not affect the validity of the Commencement Date or the Expiration Date as fixed and determined by Landlord. In the event of any dispute as to the substantial completion of work required to be performed by Landlord, the certificate of Landlord’s architect or general contractor shall be conclusive. Notwithstanding anything above to the contrary, Tenant shall have access to the Premises within ten (10) days of the Commencement Date for the purpose of installing fixtures and furniture but not for the purpose of conducting business without the payment of Rent.

 

3.             BASE RENT; ADDITIONAL RENT.

 

(a)           Tenant shall pay in advance to Corners Realty Corporation, Inc., P. O. Box 531258, Atlanta, Georgia 30353-1258, Accounts Receivable, or at such other place as Landlord shall designate in writing, promptly, without notice, demand, offset or deduction, in lawful money of the United States of America on the first day of each calendar month during the Term: (i) the Base Rent as set forth in Paragraph 1(1) in equal installments in advance of the first day of each calendar month of the Term; and (ii) the additional rent (“Additional Rent”) consisting of all other sums of money as shall become due from and be payable by Tenant under this Lease including, but not limited to, those described in Subparagraph 3 (b) below (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Base Rent) . If the Term commences on a day other than the first day of a month, or

 

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terminates on a day other than the last day of a month, the Base Rent for the first and last partial month shall be prorated based upon the actual number of days leased in such month.

 

(b)           “Lease Year,” as used herein, means a period of twelve (12) consecutive calendar months, or a portion thereof falling within the Term, with the first Lease Year commencing with the first day of the calendar month beginning on or after the Commencement Date of the Term and each subsequent Lease Year commencing on each anniversary during the Term of the Commencement Date of the first Lease Year. The period, if any, from the Commencement Date of the Term to the beginning of the first Lease Year shall be treated as if it were part of the first Lease Year under this Lease for all purposes.

 

(c)           Simultaneously with the execution of this Lease, Tenant has paid to Landlord, and Landlord hereby acknowledges the receipt of the first installment of the Base Rent (“Initial Installment”). Such sum shall be applied by Landlord to the first installment (s) of Base Rent as they become due hereunder. In the event Tenant fails to take possession of the Premises in accordance with all of the terms hereof, the Initial Installment shall be retained by Landlord for application in reduction, but not in satisfaction, of damages suffered by Landlord as a result of such breach by Tenant.

 

(d)           In the event Tenant shall fail to pay by the first day of the month when due any rent or any other charges, fees, costs or expenses which Tenant is obligated or liable to pay to, refund to or reimburse Landlord, Tenant shall be obligated to pay interest at the rate of one and one-half percent (1H%) per month (or any portion of a month) during which such Rent or other obligation remains outstanding together with a late charge, which shall constitute liquidated damages, equal to five (5%) percent of the then outstanding Rent or other obligation. Such interest and late charges shall be deemed Additional Rent and shall become immediately due and payable along with the Base Rent and Additional Rent.

 

(e)           The obligations contained in this Paragraph 3 shall survive the Expiration Date or earlier termination of this Lease.

 

4.             USE.

 

(a)           Tenant shall occupy, operate and use the Premises only for the Permitted Uses during Business Hours  (as hereinafter defined) of the Building. Tenant shall comply with all governmental laws, ordinances and regulations (including, but not limited to, the Americans with Disabilities Act of 1990), now or hereinafter enacted (“Laws”) applicable to the Premises, Tenant’s occupancy, use or manner of use of the Premises and shall promptly comply with all governmental orders and directives at Tenant’s sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Premises or take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the Building or unreasonably interfere with their use of their respective premises or the Common Areas. Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly flammable.

 

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