UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

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1 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA JEROME GOULD, Individually and On Behalf of All Others Similarly Situated, vs. Plaintiff, MEDICAL STAFFING NETWORK HOLDINGS, INC., ROBERT J. ADAMSON, KEVIN S. LITTLE, JOEL ACKERMAN, DAVID J. WENSTRUP, and SCOTT F. HILINSKI, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CIVIL ACTION NO. CLASS ACTION COMPLAINT JURY TRIAL DEMANDED Plaintiff, Jerome Gould ( Plaintiff ), individually and on behalf of all other persons similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the following based upon personal knowledge as to himself and his own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through his attorneys, which included, among other things, a review of the defendants public documents, conference calls and announcements made by defendants, United States Securities and Exchange Commission ( SEC ) filings, wire and press releases published by and regarding Medical Staffing Network Holdings, Inc. ( Medical Staffing or the Company ) securities analysts reports and advisories about the Company, and information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

2 NATURE OF THE ACTION 1. This is a federal class action on behalf of purchasers of the common stock of Medical Networks between April 18, 2002 and June 16, 2003, inclusive (the Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act ). JURISDICTION AND VENUE 2. The claims asserted herein arise under and pursuant to Sections 10(b), and 20(a) of the Exchange Act, (15 U.S.C. 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17 C.F.R b-5). 3. This Court has jurisdiction over the subject matter of this action pursuant to 27 of the Exchange Act (15 U.S.C. 78aa), and 28 U.S.C Venue is proper in this Judicial District pursuant to 27 of the Exchange Act, 15 U.S.C. 78aa and 28 U.S.C. 1391(b). Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this Judicial District. Additionally, the Company maintains a principal executive office in this Judicial District. 5. In connection with the acts, conduct and other wrongs alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including but not limited to, the United States mails, interstate telephone communications and the facilities of the national securities exchange. PARTIES 6. Plaintiff Jerome Gould bought shares of Medical Staffing and has suffered damages as a result of the wrongful acts of defendants as alleged herein. -2-

3 7. Defendant Medical Staffing is a Delaware corporation that maintains its principal place of business within this judicial district at 901 Yamato Road, Suite 110, Boca Raton, FL. 8. Defendant Robert J. Adamson ( Adamson ) was, at all relevant times, the Company s Chairman and Chief Executive Officer. 9. Defendant Kevin S. Little ( Little ) was, at all relevant times, the Company s Chief Financial Officer. 10. Defendant Joel Ackerman ( Ackerman ) was, at all relevant times, a Director of the Company. 11. Defendant David J. Wenstrup ( Wenstrup ) was, at all relevant times, a Director of the Company. 12. Defendant Scott F. Hilinski ( Hilinski ) was, at all relevant times, a Director of the Company. 13. Defendants Adamson, Little, Ackerman, Wenstrup, and Hilinski are collectively referred to hereinafter as the Individual Defendants. During the Class Period, each of the Individual Defendants, as senior executive officers and/or directors of Medical Staffing were privy to non-public information concerning its business, finances, products, markets and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Because of their possession of such information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. -3-

4 14. Because of the Individual Defendants positions within the Company, they had access to the adverse undisclosed information about the Company s business, operations, operational trends, financial statements, markets and present and future business prospects via access to internal corporate documents (including the Company s operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. 15. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the Company s public filings, press releases and other publications as alleged herein are the collective actions of the narrowly defined group of defendants identified above. Each of the above officers of Medical Staffing, by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, growth, financial statements, and financial condition, as alleged herein. Said defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws. 16. As officers and controlling persons of a publicly-held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the New York Stock Exchange ( NYSE ), and governed by the provisions of the federal securities laws, the -4-

5 Individual Defendants each had a duty to disseminate prompt, accurate and truthful information with respect to the Company s financial condition and performance, growth, operations, financial statements, business, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company s publicly-traded common stock would be based upon truthful and accurate information. The Individual Defendants misrepresentations and omissions during the Class Period violated these specific requirements and obligations. 17. The Individual Defendants participated in the drafting, preparation, and/or approval of the various public, shareholder, and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Medical Staffing, each of the Individual Defendants had access to the adverse undisclosed information about Medical Staffing s financial condition and performance as particularized herein and knew or recklessly disregarded that these adverse facts rendered the positive representations made by or about Medical Staffing and its business issued or adopted by the Company materially false and misleading. 18. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each Individual Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is -5-

6 responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein. 19. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Medical Staffing securities by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (1) deceived the investing public regarding Medical Staffing s business, operations, management and the intrinsic value of Medical Staffing s publicly traded securities; and (2) caused Plaintiff and other members of the Class to purchase Medical Staffing s publicly traded securities at artificially inflated prices. CLASS ACTION ALLEGATIONS 20. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all purchasers of the common stock of Medical Networks between April 18, 2002 and June 16, 2003, inclusive, (the Class Period ), and who were damaged thereby. Excluded from the Class are defendants, the officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 21. The members of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed Class. -6-

7 22. Plaintiff s claims are typical of the claims of the members of the Class, because Plaintiffs and all of the Class members sustained damages arising out of defendants wrongful conduct complained of herein. 23. Plaintiff will fairly and adequately protect the interests of the Class members and has retained counsel who are experienced and competent in class actions and securities litigation. 24. A Class Action is superior to all other available methods for the fair and efficient adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the damages suffered by individual members of the Class may be relatively small, the expense and burden of individual litigation make it impossible for the members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. 25. Questions of law and fact common to the members of the Class predominate over any questions that may affect only individual members, in that defendants have acted on grounds generally applicable to the entire Class. Among the questions of law and fact common to the Class are: (a) Whether the federal securities laws were violated by Defendants acts as alleged herein; (b) Whether Defendants breached their fiduciary duties by engaging in fraudulent activity; and (c) Whether the members of the Class have sustained damages and, if so, what is the appropriate measure of damages. -7-

8 SUBSTANTIVE ALLEGATIONS A. Background 26. Medical Staffing is a medical staffing company and provides per-diem nurse staffing services (staffing assignments of less than 13 weeks in duration). The Company's per-diem staffing assignments place its professionals, predominantly nurses, at hospitals and other healthcare facilities to solve its clients' temporary staffing needs. Medical Staffing also provides staffing of specialized radiology and diagnostic imaging specialists and clinical laboratory technicians, or allied health professionals. 27. According to the Company s most recent annual report, the per diem nurse staffing portion of its business provides nurses for assignments with durations ranging from a single shift to a 13-week assignment and represented approximately 76% of our fiscal year 2002 revenues. The Company offers its clients all major classifications of nurses, including registered nurses and licensed practical nurses, across all specialties such as pediatric, geriatric, intensive care unit and cardiovascular. Medical Staffing provides per diem personnel to a variety of healthcare facilities including acute care hospitals, nursing homes, clinics and surgical and ambulatory care centers. Medical Staffing serves both for-profit and not-for-profit organizations that range in scope from one facility to national chains with over 100 facilities and currently provides per diem nurse staffing to over 3,500 healthcare facilities. 28. On or about April 15, 2002, Medical Staffing filed with the SEC a Form S-1/A Registration Statement ( Registration Statement ) for its Initial Public Offering ( IPO ). -8-

9 29. On or about April 18, 2002, the prospectus (the Prospectus ) filed in connection with the IPO, which forms part of the Registration Statement, became effective and 7,812,500 of Medical Staffing shares were sold to the public, thereby raising approximately $136 million. 30. On April 22, 2002, the Company announced that it had made a public offering of 7,812,500 shares of its common stock. All of the shares were being sold by the company. The IPO offering price was $19.00 per share. Lehman Brothers and Deutsche Bank Securities were joint book runners for the offering. Credit Suisse First Boston and JPMorgan were serving as co-managers. The net proceeds to the company would be approximately $136 million. The company had granted the underwriters an over-allotment option on 1,171,875 shares. 31. In connection with the Company s IPO, the Company failed to disclose or recklessly disregarded the following: (1) that the Company s strategy of expansion through the opening and development of de novo branches was not successful and was thus adversely affecting the Company s revenue growth; (2) that the Company s de novo program was near termination; (3) that due to the regional and seasonal fluctuations in hospital patient censuses, particularly in Florida, more of the Company s hospital and healthcare facility clients adjusted staffing levels, which adversely affected the Company s business; and (4) that the Company s was in process of consolidation due to the adverse growth prospects. B. Materially False And Misleading False Statements Contained in the Company s Registration Statement for its IPO 32. The Company s IPO was accomplished through a Registration Statement and a Prospectus that were filed with the SEC on April 15, 2002 and April 18, The Company s Registration Statement submitted on Form S-3 was signed by the Individual Defendants. -9-

10 33. In the Company s Prospectus filed with the SEC on Form 424B1, the Company stated: Our business has grown significantly since our founding in Over 70% of our revenue growth in 2001 was derived from organic sources with the remainder coming from acquisitions. The organic growth was comprised of same-store revenue growth (defined as revenue growth from our branches that have been open more than two years) and growth from branches opened in 2000 and Our same-store revenue growth has been the result of our ability to leverage our national network and leading brand name, successfully recruit nurses and cross-sell our services. Branches that we have opened, which we call our "de novo" branches, generated rapid revenue growth and typically achieved positive EBITDA within six months of operation. We opened 30 de novo branches in 2000 and 64 de novo branches in Due to our ability to leverage the fixed costs within our branches and our corporate overhead, our EBITDA has increased substantially from $7.1 million in 1999 to $32.4 million in 2001, and our EBITDA margin increased from 7.4% to 9.6% during the same period. In 2001, we experienced a net loss available to common stockholders of approximately $3.1 million and used approximately $1.7 million of net cash flow in operating activities. 34. Additionally, the Company stated: SUCCESSFUL DE NOVO PROGRAM. We make extensive use of our carefully developed program for opening new branches, which we call our de novo program. Since 1998, we have opened 100 new branches using this program, including 64 in This strategy has enabled us to expand our U.S. presence and quickly and efficiently enter new markets. These branches have generated attractive financial results, including high growth, rapid EBITDA profitability and significant return on investment. We opened 30 de novo branches in 2000, which generated $48.9 million in revenues in With respect to the Company s growth strategy, the Company s Registration Statement and Prospectus stated: GROWTH STRATEGY -10-

11 We seek to continue our rapid growth by pursuing the following strategies: - FURTHER EXPAND OUR LEADERSHIP POSITION IN THE PER DIEM MEDICAL STAFFING INDUSTRY. We intend to maintain and grow our leadership position in the per diem medical staffing industry. By continuing to offer our clients and professionals highly attractive solutions and alternatives, we believe we can maintain and expand our leadership position. - DRIVE SAME-STORE REVENUE GROWTH. We intend to foster continued same-store revenue growth by increasing the number of professionals we recruit and staff, by increasing the number of facilities with which we work and by improving our staffing penetration at those facilities. - CONTINUE OUR DE NOVO DEVELOPMENT PROGRAM. We will continue to foster growth through new and existing de novo branches and to enter attractive new markets that demonstrate high demand for temporary medical staffing and complement our existing infrastructure. - EXPAND OUR SERVICE OFFERINGS TO OUR HEALTHCARE CLIENTS. We intend to leverage our local infrastructure and relationships with healthcare facilities to promote cross-selling opportunities. - PURSUE SELECTIVE ACQUISITIONS. We intend to continue to use acquisitions to expand our U.S. presence and to add complementary service offerings. However, we do not have any commitments or agreements for any material acquisitions. 36. With respect to per diem staffing, the Company stated: In 2000, per diem nurse staffing was the largest sector of the temporary medical staffing industry, representing $4.1 billion in revenues, or 57% of the temporary medical staffing industry. The per diem industry provides healthcare professionals for assignments of a single shift to 13 weeks, and is used to meet local labor shortages and openings due to holidays, vacations, illness and staff turnover, as well as daily and seasonal fluctuations in hospital volume. The per diem market operates with many local operators and is highly fragmented. -11-

12 In 2000, the top nine per diem staffing companies generated 26% of the market's revenues. The per diem staffing model requires a local presence in every market served because these short-term staffing needs are typically filled on a local basis, and are dependant on the relationship that exists between branch offices, professionals and the healthcare facility. In 2001, approximately 75% of our revenues were derived from per diem nurse staffing. 37. With the respect to the de novo programs of Medical Staffing, the Company stated: CONTINUE OUR DE NOVO DEVELOPMENT PROGRAM. A key element of our growth strategy involves the implementation of our de novo branch development program. We have refined this program by opening 100 new locations since our inception, including 64 new branches opened in Our de novo development program is implemented by our dedicated de novo team which uses a specialized set of criteria to identify attractive potential markets, focusing initially on identifying management for the branch. Following the pre-opening procedures, the de novo team establishes a physical presence and capitalizes on the Medical Staffing Network brand name by launching marketing and recruiting campaigns. The team continues to oversee the branch until it has stabilized. Due to the expertise of our de novo management team, our de novo branches typically achieved positive EBITDA within six months of operation. We expect a significant portion of our growth to be driven by the maturation of the 64 de novo branches opened in 2001, which averaged sales of $390,000, compared to our branches open prior to 2000, which averaged sales of over $4 million. Decisions regarding the implementation of our de novo program are made by our management team based on our business plan, which is approved annually by our board of directors. 38. The statements contained in were materially false and misleading when made because the Company failed to disclose: (1) that the Company s strategy of expansion through the opening and development of de novo branches was not successful and was thus adversely affecting the Company s revenue growth; (2) that the Company s de novo program was near termination; (3) that due to the regional and seasonal fluctuations in hospital patient censuses, particularly in Florida, more of the Company s hospital and healthcare facility clients adjusted -12-

13 staffing levels, which adversely affected the Company s business; and (4) that the Company s was in process of consolidation due to the adverse growth prospects. C. Materially False and Misleading Statements Issued by the Company after the completion of its IPO 39. Following the completion of the Company s IPO, the Company announced on May 13, 2002, record results. For the period ended March 31, 2002, the Company reported record revenues of $103.2 million for the first quarter of 2002, an increase of 46% over revenue for the same period in the prior year of $70.5 million. The company reported record net income of $2.8 million, or $0.13 per diluted share, for the first quarter of 2002 compared to net income of $1.9 million, or $0.07 per diluted share for the prior year first quarter, an increase of 47%. Earnings before interest, taxes, depreciation and amortization ( EBITDA ), a key measure used by management to evaluate the company's operations, increased to $9.6 million for the first quarter of 2002 from $7.3 million for the first quarter of Income available to common stockholders for the first quarter of 2002, which reflected accrued dividends on the company's previously outstanding convertible preferred stock, which were converted into shares of common stock in connection with the Company's IPO, was $0.3 million, or $.02 per diluted share. 40. Commenting on these results, defendant Adamson stated: "We are very pleased with the strength of our first quarter 2002 results which reflect our significant organic growth[.]"... "The success of our de novo program and same store growth resulted in organic revenue growth of 41% during the first quarter of 2002 over the same period in the prior year. Over 90% of our organic revenue growth was the result of an increase in volume, with the balance coming from price increases and a shift in mix towards higher billing staffing specialties." -13-

14 41. On May 30, 2002, the Company filed its quarterly report with the SEC on Form 10-Q. The Company s Form 10-Q was signed by defendants Adamson and Little and reaffirmed the Company s previously announced financial results. 42. On July 30, 2002, the Company announced its financial results for the period ended June 30, Medical Staffing reported record revenues of $115.5 million for the second quarter of 2002, an increase of 39% over revenues of $83.2 million for the second quarter of Net income was $5.1 million, or $0.17 per diluted share, for the second quarter of 2002, an increase of 173% compared with net income of $1.9 million, or $0.07 per diluted share, for the prior year second quarter. The $0.17 income per diluted share exceeded the consensus analysts' estimate of $0.16 per diluted share. EBITDA increased to $11.3 million for the second quarter of 2002 from $8.0 million for the second quarter of 2001, an increase of 41%. 43. The Company also issued the following guidance: 2002 and 2003 Revenue and Earnings Guidance The Company expects full-year 2002 revenue to grow to $480 million, or approximately 42% over 2001, and expects to generate net income of $20 million, or $0.68 to $0.70 per diluted share. EBITDA for 2002 is expected to reach $45 to $46 million. In addition, the Company is on track to open the targeted 40 de novo branches for the year. For the third quarter of 2002, the Company expects earnings to be $0.18 to $0.19 per diluted share on revenue ranging from $125 to $130 million. EBITDA for the third quarter of 2002 is expected to reach $12 million. For 2003, the Company expects full-year revenue to increase to $590 to $600 million, and expects to generate net income of $30 to $31 million, or $0.90 to $0.92 per diluted share. EBITDA for 2003 is expected to grow to $59 to $60 million. 44. Commenting on these results, defendant Adamson stated: -14-

15 "We continue to experience strong demand for our staffing services[.]"... "As our strong results suggest, demand for temporary healthcare staff is very robust and there continues to be a significant imbalance between supply and demand." Adamson added, "Despite the efforts noted by certain of our hospital customers to tightly manage temporary staffing, these hospital companies have reported that temporary staffing expenditures have continued to increase, albeit with one company noting a slower rate of growth. Many of our other customers have embraced temporary staffing as a way to control overall labor costs. We believe this is reflected in the overall healthcare staffing market growth substantially exceeding that quoted by these hospital companies and, of course, in our own growth, which substantially exceeds even the market growth rate." 45. On August 14, 2002, the Company filed its quarterly report with the SEC on Form 10-Q. The Company s Form 10-Q was signed by defendants Adamson and Little and reaffirmed the Company s previously announced financial results. 46. On August 7, 2002, Medical Staffing issued a press release wherein it announced that it was very comfortable with the earnings guidance it had reported in its second quarter earnings release issued on July 30, Commenting on the Company s guidance, defendant Adamson stated: "We remain very comfortable with the guidance we gave the investment community on July 30th. At that time, we projected that full-year 2002 revenue would grow to $480 million, or approximately 42% over 2001, and that net income would increase to $20 million, or $0.68 to $0.70 per diluted share. EBITDA for 2002 is expected to reach $45 to $46 million. In addition, the Company is on track to open the targeted 40 de novo branches for the year. For the third quarter of 2002, the Company expects earnings to be $0.18 to $0.19 per diluted share on revenue ranging from $125 to $130 million. EBITDA for the third quarter of 2002 is expected to reach $12 million. For 2003, the Company expects full-year revenue to increase to $590 to $600 million, and expects to generate net income of $30 to $31 million, or $0.90 to $0.92 per diluted share. EBITDA for 2003 is expected to grow to $59 to $60 million." -15-

16 ... "We note that one of the leading providers of travel nurse services commented today that demand for travel nurses was less than expected in certain markets during the second quarter. They went on to say that hospital clients who were experiencing lower patient census were transitioning their needs for temporary nurses to per diem providers. Our company did in fact see an increase in demand for per diem nurses in those marketplaces during the second quarter and demand has continued to be strong going into the third quarter. We expect that the value we add to the healthcare delivery system will directly translate into increased value for our shareholders." 47. On October 29, 2002, Medical Staffing announced its financial results for the third quarter of The Company reported record revenues of $127.5 million for the third quarter of 2002, which is an increase of 35% over revenue of $94.3 million for the third quarter of Net income increased 215% to $6.1 million, or $0.19 per diluted share, for the third quarter of 2002 compared with net income of $1.9 million, or $0.07 per diluted share, for the prior year third quarter. EBITDA increased 44% to $12.3 million for the third quarter of 2002 from $8.6 million for the third quarter of Over 82% of quarter-over-quarter revenue growth was attributable to organic sources. stated: 48. Commenting on the Company s purported record results, defendant Adamson "Demand for temporary nurse staffing services, and per diem nurses in particular, remains very strong. I am especially pleased to note that our earnings continue to grow at a higher rate than our top line, which demonstrates the scalability and operating leverage of our business model. Our growth rate continues to exceed the growth rate of the overall market as well as that of our publicly traded competitors in the per diem nurse staffing industry. Hours worked by our licensed nursing professionals in the third quarter of 2002 increased over 30% over the prior year quarter with nearly 75% of the growth being organic." *** -16-

17 Medical Staffing Network also continued to open new locations at a brisk pace, adding ten de novo offices during the third quarter. The new office additions bring the total new office openings to 31 for the year. "We continue to drive the unparalleled success of our de novo program in an efficient and disciplined manner, which solidifies our position as the fastest growing company in the per diem nurse staffing industry[.]" 49. Additionally, the Company also increased its 2003 guidance, as follows: Increased Earnings Guidance for 2003 For the fourth quarter of 2002, the company expects net income per diluted share to be $0.20 per diluted share, on revenue growth ranging from 41% to 44% over the prior year. Adjusted EBITDA is expected to increase 45% to 50% over the same period in Combined with quarterly results previously reported, the company expects full year 2002 net income per diluted share to increase to $0.70. Total year 2002 revenue is expected to range from $480 to $483 million, an increase of 40% to 41% over The Company is increasing its guidance for 2003 and now expects net income per diluted share to range between $0.91 and $0.93 on revenue growth ranging from 23% to 26% as compared to Adjusted EBITDA for 2003 is expected to increase 30% to 32% over On November 11, 2003, the Company filed its quarterly report with the SEC on Form 10-Q. The Company s Form 10-Q was signed by defendants Adamson and Little and reaffirmed the Company s previously announced financial results. 51. On February 18, 2003, Medical Staffing announced its fourth quarter and year-end financial results for the period ended, December 29, The Company reported record revenues of $137.2 million for the fourth quarter of 2002, which was an increase of 44.6% over revenues of $94.9 million for the fourth quarter of Net income increased to $3.9 million, or $0.13 per -17-

18 diluted share, for the fourth quarter of 2002 compared with a net loss attributable to common stockholders of $8.8 million, or $4.09 per diluted share, for the prior year fourth quarter. Net income for the fourth quarter of 2002 increased to $6.2 million, or $0.20 per diluted share. EBITDA, a non-gaap measure, increased to $9.2 million for the fourth quarter of 2002 from $8.6 million for the fourth quarter of Excluding the $3.8 million charge, fourth quarter 2002 EBITDA was $12.9 million. 52. Commenting on these results, defendant Adamson stated: "We are pleased to report record revenues for the fourth quarter of 2002 and a 41% increase in full year 2002 revenues over Of particular note is the fact that over 80% of our year-over-year revenue growth came from organic sources. Our growth has been driven by our continued consolidation of market share in the highly fragmented $5 billion nurse per diem industry together with our successful diversification into allied healthcare staffing specialties. Medical Staffing Network Holdings is the largest provider in the nurse per diem industry and has significant long-term growth opportunities as it continues to aggregate market share. Based on our success to date with our de novo and product line diversification programs, the Company further expanded its organic growth initiatives in the second half of We made significant investments in our travel nurse division, allied branch-in-branch program as well as rolling out new product specialties within our core allied healthcare staffing division. As a result of this investment, revenue from our branch-in-branch operations almost tripled in the fourth quarter of 2002 as compared with the fourth quarter of 2001, and fourth quarter 2002 revenue for our travel nursing division is up over 50% over last year's fourth quarter. "Consistent with our previous organic growth initiatives, particularly our highly successful de novo program, these programs result in near-term dilution of earnings but provide the Company with the capacity to sustain an above market growth rate. The outcome of our successes in consolidating per diem market share and diversifying our product lines short term is reflected in our guidance for revenues for the first quarter of 2003, representing a year-over-year increase of 38% to 42%. We believe this growth rate is the strongest in our -18-

19 industry. We continue to believe that the $5 billion per diem nurse market provides the best long-term growth opportunity within the overall healthcare staffing industry. "While reviewing the various growth opportunities available to the Company, we have recently made the decision to discontinue our physician staffing operation, which contributed less than 1% of our company-wide revenues and did not offer us a meaningful organic growth opportunity. The costs associated with the closure of this service line have been reflected in our first quarters' earnings guidance." 53. For the year ended December 29, 2002, revenues increased 41.0% to $483.5 million from $343.0 million for the year ended December 30, Net income increased in 2002 to $17.9 million, or $0.62 per diluted share, from a net loss attributable to common stockholders of $3.1 million, or $0.49 per diluted share, in Excluding the $3.8 million pretax charge, net income for 2002 increased to $20.1 million, or $0.70 per diluted share. In 2001, excluding the aforementioned special charges, the Company would have had net income of $9.4 million, or $0.34 per diluted share. EBITDA increased 30.7% to $42.4 million in 2002 from $32.4 million in the prior year. Excluding the $3.8 million charge, full year 2002 EBITDA was $46.2 million. 54. Additionally, the Company stated: 2003 Earnings Guidance For 2003, the Company expects full year net income per diluted share to be $0.91 to $0.93 on an increase in revenues of 28% to 30% to $620 to $630 million. The Company current plans to open 20 new de novo branches and add 40 to 45 allied branch-in-branch operations during For the first quarter of 2003, the Company expects revenues to increase 38% to 42% to $142 to $147 million and expects to generate $0.17 to $0.18 per diluted share, an increase of 30% to 38% over the same period in

20 Commented Adamson, "The growth outlined in our 2003 earnings guidance is the result of our continued commitment to investment in multiple growth initiatives. Our guidance for revenues for the first quarter of 2003 represents a year-over-year increase of 38% to 42%, or 4% to 7% sequentially. Our first quarter guidance of $0.17 to $0.18 per diluted share, while a 30% to 38% increase over the same period in the prior year, is a sequential quarter decline from earnings per share of $0.20 (before the charge, as the Company believes this is a more useful measure of quarter-over-quarter performance) in the fourth quarter of 2002 and is reflective of the near-term dilution from our new growth initiatives discussed above and the costs associated with the closure of our physician staffing business unit. Medical Staffing Network Holdings has had favorable experience from investing in growth opportunities, and, while we regret the near-term dilutive impact on earnings from these initiatives, our experience suggests that the return, in the form of higher than market growth rates, is an excellent outcome." 55. According to the Company s February 18, 2003, announcement, Medical Staffing Network opened 10 de novo offices during the fourth quarter of The new office additions bring the total new office openings to 40 for the year. Commenting on this, defendant Adamson stated: "We successfully achieved our target of opening 40 new per diem locations during These offices are projected to contribute significantly to our 2003 organic growth. In addition, the Company successfully opened 19 allied branch-in-branch operations and further expanded the range of services offered by its allied staffing group[.]" 56. On March 28, 2003, the Company filed its annual report with SEC on Form 10-K. The Company s Form 10-K was signed by the Individual Defendants and reaffirmed its previously announced financial results. 57. The statements contained in were materially false and misleading when made because the Company failed to disclose: (1) that the Company s strategy of expansion through the opening and development of de novo branches was not successful and was thus adversely -20-

21 affecting the Company s revenue growth; (2) that the Company s de novo program was near termination; (3) that due to the regional and seasonal fluctuations in hospital patient censuses, particularly in Florida, more of the Company s hospital and healthcare facility clients adjusted staffing levels, which adversely affected the Company s business; and (4) that the Company s was in process of consolidation due to the adverse growth prospects. THE TRUTH BEGINS TO EMERGE 58. On May 12, 2003, Medical Staffing announced record revenues for the first quarter of The Company reported record revenues of $144.4 million for the first quarter of 2003, which is an increase of 39.9% over revenues of $103.2 million for the first quarter of Net income increased to $5.2 million, or $0.17 per diluted share, for the first quarter of 2003 compared with $2.8 million, or $0.13 per diluted share, for the prior year first quarter. Commenting on these results, defendant Adamson stated: "Our record revenue for the quarter is reflective of the strength of the MSN brand, the quality of the services we provide to our clients, the superior employment opportunities and benefit programs offered to our healthcare staff and, of course, our diversified growth initiatives. Our ability to post materially higher revenue growth rates than our competitors is partially a function of the better operating dynamics of the per diem staffing sector and the fact that we are also benefiting from the continued maturation of our de novo and branch-in-branch (BiB) programs. We remain confident that, over time, our significant investment in and the near-term dilutive effect of our growth initiatives will be offset by our ability to grow our market share even during difficult market conditions. "Demand for temporary nurses is currently going through a period of contraction as hospitals are experiencing flat to declining admission rates and are placing greater reliance on full-time staff overtime and increased nurse patient loads. We believe that the underlying factors that contribute to the growing national shortage of qualified healthcare professionals, particularly registered nurses, will result in -21-

22 sustainable long-term growth for our industry. However, as we work through this softer market, we do have the benefit of being a well diversified healthcare staffing company and, perhaps most importantly, MSN continues to gain market share in its core business, the estimated $7 billion per diem nurse staffing segment. "I am pleased to announce that we have completed our full target of BiB sites for 2003 during the first four months of the year. We achieved the opening of 44 BiB sites by redirecting resources from our nurse de novo management team. There is a great deal of upside potential in further expansion of our de novo activity, but we have decided to put new office openings on hold until we see market conditions strengthen. In an effort to provide our services more cost effectively, the Company has enhanced its IT platform to network together client and employee databases in contiguous markets. Additionally, we recently launched our MSN/Visa Direct Pay Debit Card that enables our per diem healthcare professionals to have their earnings electronically transferred on to a Visa label debit card on a daily basis, eliminating the requirement of visiting the local office to collect a paycheck. These enhancements enable us to expand the geographical coverage areas of our per diem offices. As a result, we will be able to service current markets with fewer brick and mortar sites. The Company will take a charge in the second quarter for this restructuring. We have not yet finalized our restructuring plan, so the exact amount of the charge is uncertain. We expect that it will be material to net income for the second quarter, but we do not expect it to result in a loss for the quarter or to adversely impact the operating results of any subsequent quarter. We further expect this restructuring to improve the operating results that would otherwise have been generated in the second half of 2003 and beyond. "While we are confident that the long-term fundamentals for the healthcare staffing industry remain intact, market factors have reduced visibility for future earnings. Due to this reduced visibility, we are withdrawing our prior annual guidance for the year ending December 28, We plan to have our restructuring plan finalized by the end of May and will provide further information as to the charges related to the plan and our earnings guidance for the second quarter and full year 2003 at that time." 59. Following this announcement, shares of Medical Staffing common stock fell 11.73%, or $1.01 per share, to close at $7.60 per share. -22-

23 60. On June 16, 2003, the Company announced the Completion of Restructuring Plan, Issue[d] New Guidance, and Name[d] New President and Chief Operating Officer. More specifically, the Company stated: As a result, the Company expects to report second quarter 2003 income from continuing operations per diluted share of $0.02 (inclusive of the restructuring charges but exclusive of the loss from the discontinued physicians staffing) on revenues of $136 to $137 million. For full year 2003, the Company expects to report income from continuing operations of $0.43 to $0.46 (inclusive of the restructuring charges but exclusive of the loss from the discontinued physicians staffing) on revenues of $555 to $570 million. The Company also announced the appointment of Greg Guckes as President and Chief Operating Officer. Restructuring Plan Under the restructuring plan, the Company closed 13 satellite per diem recruitment locations and 16 per diem branches on May 21, Market-specific plans have been implemented to transfer the business from closed branches to other Medical Staffing Network locations. As a result of an intensive effort to demonstrate continued commitment to clients and nursing staff, to date the Company has exceeded its original expectation of retaining 50% of the revenues generated from the closed branches. In commenting on the restructuring, Robert J. Adamson, Chairman and Chief Executive Officer of Medical Staffing Network Holdings, Inc., stated, "The decision to close certain branches was driven by weaker demand and pricing pressure. We may increase our presence in certain of these markets when demand rebounds. Our client base is currently focused on alternative sources for nurse staffing capacity, such as increased overtime from their full-time staff, higher patient loads, an increased focus on recruitment and retention of full-time, facility-based employees. "In addition to closing certain locations, we reduced the number of full- time staff in our branch locations and corporate office by approximately 5%. This adjustment in our infrastructure is also in response to a contraction in demand for temporary healthcare professionals and continued pressure on gross margins. -23-

24 "Despite the overall contraction in the healthcare staffing industry, Medical Staffing Network has continued to show volume growth through the first half of We continue to gain market share. The principal challenge facing the Company today is pricing pressure, driven by weakened demand, resulting in gross margin erosion. The Company believes that the 300 basis point margin erosion that it has experienced in the past six months will be only partially recovered until the overall industry environment improves. The Company can not accurately predict when market conditions will change and gross margins will improve." Mr. Adamson continued, "At this time, the only region in which our second quarter revenues are materially declining from first quarter levels is the South Florida market. The South Florida marketplace is subject to significant seasonality fluctuations. However, the seasonal nature of this market has been masked in the last few years by the significant growth in demand. MSN continues to be the dominant provider of per diem nurse staffing services in this market." As previously announced, the Company has made a decision to suspend further de novo or allied branch-in-branch development for the current year. This decision will reduce the Company's previous revenue projections for the balance of The Company will evaluate reactivating its growth initiatives when management is comfortable that demand and price pressure issues have sufficiently recovered from present levels. Second Quarter Results The Company's second quarter results will be impacted by a restructuring cost of approximately $800,000 and a loss from discontinued operations, net of taxes, of approximately $400,000 relating to the cessation of physicians staffing. The restructuring will yield improved operating income in subsequent quarters, as it is expected to decrease quarterly selling, general and administrative expenses by approximately $1 million. Further, second quarter results will reflect reduced gross margins as the Company absorbed the impact of increased compensation and benefit costs of its healthcare employees in an environment where bill rate increases were minimal. New President and Chief Operating Officer -24-

25 The Company also announced that Greg Guckes has joined the executive management team as President and Chief Operating Officer and will be reporting to Mr. Adamson. Commenting on the appointment, Mr. Adamson said, "I am pleased to announce that, after an extensive six-month search, we have been successful in identifying an extremely qualified, talented and charismatic individual to serve as President and Chief Operating Officer. Greg has spent his entire 25-year career in the healthcare sector, with executive management responsibilities in sales, marketing and operations. Most recently, he was Executive Vice President and Chief Operating Officer for American Medical Response, a leading provider of emergency and non-emergency ambulance services with over 200 locations across the country. "Greg has extensive experience in successfully managing multi-site healthcare operations and dealing with the challenges of growing a business towards the billion dollar revenue mark. I look forward to working with Greg in continuing to build Medical Staffing Network into one of the leading healthcare staffing companies in the country." 61. News of this shocked the market resulting in shares of Medical Staffing falling 16.27%, or $1.44 per share, to close at $7.41 per share on June 17, UNDISCLOSED ADVERSE FACTS 62. The market for Medical Staffing s common stock was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Medical Staffing s common stock traded at artificially inflated prices during the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired Medical Staffing common stock relying upon the integrity of the market price of Medical Staffing s common stock and market information relating to Medical Staffing, and have been damaged thereby. 63. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Medical Staffing s common stock, by publicly issuing false and misleading -25-

26 statements and omitting to disclose material facts necessary to make defendants statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein. 64. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about Medical Staffing s business, prospects and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of Medical Staffing and its business, prospects and operations, thus causing the Company s common stock to be overvalued and artificially inflated at all relevant times. Defendants materially false and misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company s common stock at artificially inflated prices, thus causing the damages complained of herein. ADDITIONAL SCIENTER ALLEGATIONS 65. As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of -26-