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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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 333-80337
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TEAM HEALTH, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1562558
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1900 WINSTON ROAD
SUITE 300
KNOXVILLE, TENNESSEE 37919
(865) 693-1000
(ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock par value $0.01 per share -- 10,067,513 shares as of August 8,
2002.
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FORWARD LOOKING STATEMENTS
Statements in this document that are not historical facts are hereby
identified as "forward looking statements" for the purposes of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act") and Section 27A of the Securities Act of 1933 (the "Securities Act"). Team
Health, Inc. (the "Company") cautions readers that such "forward looking
statements", including without limitation, those relating to the Company's
future business prospects, revenue, working capital, liquidity, capital needs,
interest costs and income, wherever they occur in this document or in other
statements attributable to the Company, are necessarily estimates reflecting the
judgment of the Company's senior management and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the "forward looking statements". Such "forward looking statements"
should, therefore, be considered in light of the factors set forth in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The "forward looking statements" contained in this report are made under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations". Moreover, the Company, through its senior management,
may from time to time make "forward looking statements" about matters described
herein or other matters concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements" to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
1
TEAM HEALTH, INC.
QUARTERLY REPORT FOR THE SIX MONTHS
ENDED JUNE 30, 2002
PAGE
----
Part 1. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- June 30, 2002 and December
31, 2001.................................................... 3
Consolidated Statements of Operations -- Three months ended
June 30, 2002 and 2001...................................... 4
Consolidated Statements of Operations -- Six months ended
June 30, 2002 and 2001...................................... 5
Consolidated Statements of Cash Flows -- Six months ended
June 30, 2002 and 2001...................................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures of Market Risk..... 21
Part 2. Other Information
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Other Reports.................................. 22
Signatures............................................................ 24
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,479 $ 70,183
Accounts receivable, net.................................. 153,129 119,776
Prepaid expenses and other current assets................. 11,890 7,732
Income tax receivable..................................... 5,871 8,721
-------- --------
Total current assets........................................ 193,369 206,412
Property and equipment, net................................. 19,808 18,806
Intangibles, net............................................ 33,010 19,490
Goodwill.................................................... 156,383 24,202
Deferred income taxes....................................... 73,142 76,374
Other....................................................... 18,618 16,159
-------- --------
$494,330 $361,443
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 14,438 $ 12,758
Accrued compensation and physician payable................ 58,548 49,521
Other accrued liabilities................................. 13,623 11,068
Current maturities of long-term debt...................... 8,250 24,211
Deferred income taxes..................................... 4,039 4,815
-------- --------
Total current liabilities................................... 98,898 102,373
Long-term debt, less current maturities..................... 316,750 193,089
Other non-current liabilities............................... 38,809 34,892
Mandatory redeemable preferred stock........................ 137,787 130,779
Commitments and Contingencies
Common stock, $0.01 par value 12,000 shares authorized,
10,068 and 10,000 shares issued and outstanding at June
30, 2002 and December 31, 2001, respectively.............. 101 100
Additional paid in capital.................................. 644 --
Retained earnings (deficit)................................. (98,659) (99,571)
Accumulated other comprehensive loss........................ -- (219)
-------- --------
$494,330 $361,443
======== ========
See accompanying notes to financial statements.
3
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
(UNAUDITED)
Fee for service revenue..................................... $217,571 $212,472
Contract revenue............................................ 70,341 40,334
Other revenue............................................... 7,399 3,345
-------- --------
Net revenue............................................... 295,311 256,151
Provision for uncollectibles................................ 91,256 91,592
-------- --------
Net revenue less provision for uncollectibles............. 204,055 164,559
Professional expenses....................................... 164,935 130,916
-------- --------
Gross profit.............................................. 39,120 33,643
General and administrative expenses......................... 19,787 15,398
Management fee and other expenses........................... 124 50
Impairment of intangibles................................... -- 4,137
Depreciation and amortization............................... 5,019 3,772
Interest expense, net....................................... 5,889 5,790
-------- --------
Earnings before income taxes and extraordinary loss....... 8,301 4,496
Income tax expense.......................................... 3,958 1,821
-------- --------
Earnings before extraordinary loss........................ 4,343 2,675
Extraordinary loss on refinancing, net of income tax benefit
of $1,373................................................. (2,016) --
-------- --------
Net earnings................................................ 2,327 2,675
Dividends on preferred stock................................ 3,286 2,964
-------- --------
Net loss attributable to common stockholders.............. $ (959) $ (289)
======== ========
See accompanying notes to financial statements.
4
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
(UNAUDITED)
Fee for service revenue..................................... $431,489 $423,584
Contract revenue............................................ 112,729 77,079
Other revenue............................................... 14,820 6,084
-------- --------
Net revenue............................................... 559,038 506,747
Provision for uncollectibles................................ 182,073 184,043
-------- --------
Net revenue less provision for uncollectibles............. 376,965 322,704
Professional expenses....................................... 302,462 256,329
-------- --------
Gross profit.............................................. 74,503 66,375
General and administrative expenses......................... 36,973 30,687
Management fee and other expenses........................... 262 177
Impairment of intangibles................................... -- 4,137
Depreciation and amortization............................... 8,587 7,405
Interest expense, net....................................... 11,165 11,608
-------- --------
Earnings before income taxes, extraordinary item and
cumulative effect of change in accounting principle.... 17,516 12,361
Income tax expense.......................................... 7,783 5,006
-------- --------
Earnings before extraordinary item and cumulative effect
of change in accounting principle...................... 9,733 7,355
Extraordinary loss on refinancing, net of income tax benefit
of $1,373................................................. (2,016) --
Cumulative effect of change in accounting principle, net of
income tax benefit of $209................................ (294) --
-------- --------
Net earnings................................................ 7,423 7,355
Dividends on preferred stock................................ 6,511 5,896
-------- --------
Net earnings available to common stockholders............. $ 912 $ 1,459
======== ========
See accompanying notes to financial statements.
5
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------
2002 2001
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
OPERATING ACTIVITIES
Net earnings................................................ $ 7,423 $ 7,355
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 8,587 7,405
Amortization of deferred financing cost................... 871 919
Provision for uncollectibles.............................. 182,073 184,043
Impairment of intangibles................................. -- 4,137
Deferred income taxes..................................... 6,626 (5,802)
Loss on sale of equipment................................. 44 15
Extraordinary loss........................................ 2,016 --
Cumulative effect of change in accounting principle....... 294 --
Equity in joint venture income............................ (232) (402)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (191,862) (181,090)
Prepaid expenses and other current assets................. (3,913) (1,734)
Income tax receivable..................................... 3,000 12,545
Accounts payable.......................................... (2,592) (4,195)
Accrued compensation and physician payable................ (2,940) 1,986
Other accrued liabilities................................. 1,767 (1,210)
Professional liability reserves........................... 2,895 2,682
--------- ---------
Net cash provided by operating activities................... 14,057 26,654
INVESTING ACTIVITIES
Purchases of property and equipment......................... (4,898) (2,658)
Cash paid for acquisitions, net............................. (161,630) (8,154)
Purchase of investments..................................... (1,046) (566)
Other investing activities.................................. 1,344 86
--------- ---------
Net cash used in investing activities....................... (166,230) (11,292)
FINANCING ACTIVITIES
Payments on notes payable................................... (117,300) (8,540)
Proceeds from notes payable................................. 225,000 --
Payment of deferred financing costs......................... (5,145) (20)
Proceeds from sales of common stock......................... 644 --
Proceeds from sales of preferred stock...................... 1,270 --
--------- ---------
Net cash used in financing activities....................... 104,469 (8,560)
--------- ---------
Net increase (decrease) in cash............................. (47,704) 6,802
Cash and cash equivalents, beginning of period.............. 70,183 55,404
--------- ---------
Cash and cash equivalents, end of period.................... $ 22,479 $ 62,206
========= =========
Interest paid............................................... $ 10,109 $ 12,567
========= =========
Taxes paid.................................................. $ 6,175 $ 4,155
========= =========
See accompanying notes to financial statements.
6
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Team Health, Inc. (the "Company") and its wholly owned subsidiaries
and have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial reporting and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
items) necessary for a fair presentation of results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. The consolidated balance sheet of the
Company at December 31, 2001 has been derived from the audited financial
statements at that date, but does not include all of the information and
disclosures required by accounting principles generally accepted in the United
States for complete financial statements. These financial statements and
footnote disclosures should be read in conjunction with the December 31, 2001
audited consolidated financial statements and the notes thereto included in the
Company's Form 10-K.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and notes. Actual results could differ from
those estimates.
NOTE 2. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to impairment tests on an annual basis, or more frequently if certain indicators
arise. Other intangible assets will continue to be amortized over their useful
lives. The Company completed its required impairment testing of goodwill during
the three months ended March 31, 2002. As a result of this review, the Company
concluded that a portion of its recorded goodwill was impaired. Accordingly, an
impairment loss of $0.5 million ($0.3 million net of taxes) was recorded at
March 31, 2002 as the cumulative effect of a change in accounting principle. The
impact on net earnings for the three months and six months ended June 30, 2001,
had the nonamortization of goodwill been in effect for such periods, would have
been an increase in previously reported net earnings of approximately $0.3
million and $0.6 million, respectively.
Effective January 1, 2002, the Company adopted SFAS No. 144, Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 significantly changes the criteria
that would have to be met to classify an asset as held-for-sale, and will
require expected future operating losses from discontinued operations to be
displayed in discontinued operations in the period(s) in which the losses are
incurred (rather than as of the measurement date as previously required). In
addition, more dispositions will qualify for discontinued operations treatment
in the income statement. The implementation of SFAS No. 144 did not have any
impact on the Company's results of operation or financial position.
7
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. INTANGIBLE ASSETS
The following is a summary of intangible assets and related amortization as
of June 30, 2002 and December 31, 2001 for intangibles that continue to be
amortized following the implementation of SFAS 142 on January 1, 2002 (in
thousands):
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
As of June 30, 2002:
Contracts................................................ $49,138 $16,511
Other.................................................... 685 302
------- -------
Total................................................. $49,823 $16,813
======= =======
As of December 31, 2001:
Contracts................................................ $32,035 $12,977
Other.................................................... 685 253
------- -------
Total................................................. $32,720 $13,230
======= =======
Aggregate amortization expense:
For the three months ended June 30, 2002................. $ 2,617
=======
For the six months ended June 30, 2002................... $ 3,961
=======
Estimated amortization expense
For the year ended December 31, 2002..................... $10,470
For the year ended December 31, 2003..................... 13,046
For the year ended December 31, 2004..................... 5,270
For the year ended December 31, 2005..................... 4,051
For the year ended December 31, 2006..................... 1,887
During the three and six months ended June 30, 2002, the Company recorded
an additional $123.0 million and $132.2 million of goodwill and $12.6 million
and $17.1 million, respectively, of contract intangibles as a result of its
acquisitions during the periods and contingent acquisition payments made for
previous acquisitions. Contract intangibles are being amortized over their
estimated lives which range from approximately twenty months to seven years.
NOTE 4. ACQUISITIONS
On May 1, 2002, the Company acquired all of the operations of Spectrum
Health Resources ("SHR"), a provider of physician and other professional medical
staffing to military treatment facilities. The agreement provided for the
Company to acquire the operations of SHR through the purchase of all of the
outstanding stock of the parent company of SHR and the refinancing of the parent
company's outstanding debt for cash of $147.0 million. The purchase price of SHR
of $147.0 million (before transaction costs) was also subject to
8
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment during the 90-day period subsequent to April 30, 2002 for actual net
working capital at April 30, 2002. The following is a summary of the transaction
as of June 30, 2002 (in thousands):
Acquisition Costs:
Stock purchase price........................................ $ 77,927
Repayment of assumed debt................................... 62,150
Purchase from a third party of a note receivable due from
the parent of SHR......................................... 6,951
Transaction costs........................................... 1,066
Estimated working capital adjustment........................ (1,321)
--------
$146,773
========
Allocation of Purchase Price:
Current assets.............................................. $ 28,583
Property and equipment...................................... 513
Intangibles................................................. 12,950
Goodwill.................................................... 122,956
Deferred income taxes....................................... 907
Other assets................................................ 1,101
--------
167,010
Less -- liabilities assumed................................. 20,237
--------
$146,773
========
The results of SHR's operations have been included with those of the
Company since May 1, 2002. The portion of the purchase price allocated to
intangibles and goodwill will not be deductible for tax purposes. The portion of
the purchase price allocated to intangibles will be amortized over their
estimated life of twenty months.
SHR is the leading provider of permanent healthcare staffing services to
military healthcare facilities. The acquisition of SHR, which provides services
similar to the existing staffing operations of the Company, significantly
expands the Company's base of business by providing an entry into a portion of
the healthcare staffing market not presently served by the Company.
The Company's three equity sponsors control a majority of the Company's
voting common stock. Those three equity sponsors were also controlling equity
investors in SHR prior to and at the time of entering into the definitive
purchase agreement. Prior to negotiating the final purchase price and entering
into the definitive purchase agreement to acquire SHR, the Board of Directors
took the following steps:
1. The Board of Directors appointed a Special Committee, consisting
of three Directors who are not affiliated with the equity sponsors. The
Special Committee was authorized to (i) consider, negotiate and approve the
acquisition of SHR, (ii) retain such legal counsel and advisers and
consultants as they deem appropriate, (iii) consider, negotiate and approve
the terms of any financing related to the transaction, and (iv) expend any
funds in furtherance of the duties granted to it. The final authority to
approve the acquisition and financing rested with the full Board of
Directors, but the Board of Directors could not approve any transaction not
recommended by the Special Committee.
2. Two of the three equity sponsors along with the Company's
management members assisted the Special Committee in the evaluations and
negotiations of the transaction on behalf of the Company. The largest
common equity sponsor in SHR and the Company represented SHR in its
evaluation and negotiation of the transaction.
9
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. The Special Committee obtained an opinion by the investment
banking firm of SunTrust Robinson Humphrey, a division of SunTrust Capital
Markets, Inc., that the purchase price paid for SHR was fair from a
financial point of view to the equity holders of the Company as well as its
bond holders.
Effective January 1, 2002, the Company completed the acquisition of certain
of the assets and related business operations of two businesses. The operations
acquired include those of L&S Medical Management, Inc. ("L&S") and a pediatric
services business. L&S provides billing and other management services on a
management fee basis to anesthesiologist practices, principally in the
Southeastern portion of the United States. As of January 1, 2002, L&S provided
services under 18 anesthesia related contracts. The pediatric services operation
provides evenings and weekend pediatric urgent care and non-trauma emergency
practice services at three locations in Florida. The pediatric services provided
are billed by the Company on a fee-for-service basis.
The assets and operations of L&S were acquired for $6.4 million in cash and
the Company may have to make up to $3.9 million in future contingent payments
for the existing L&S contracts as of December 31, 2001. In addition, the Company
has agreed to pay the owners of L&S, as additional purchase price consideration,
a multiple of earnings before interest, taxes and depreciation and amortization
for certain potential new contract locations identified at the date of closing.
The additional amount(s) of purchase price will only be paid if the owners of
L&S are successful in the completion of their marketing efforts as evidenced by
such locations having entered into contracts for services within specified time
frames following December 31, 2001. The additional purchase price, if any, for
such subsequent contracts is not able to be estimated at this time.
The assets and operations of the three pediatric services locations were
acquired for $4.7 million in cash. The Company may have to make up to $3.2
million in future contingent payments for the existing business operations if
targeted future earnings levels are achieved.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions noted above had taken place as
of January 1, 2002 and 2001, respectively (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues less provision................ $219,097 $204,246 $434,513 $401,172
Earnings before extraordinary item and
cumulative effect of accounting change... 4,647 1,831 10,447 5,862
Net earnings............................... 2,631 1,831 8,137 5,862
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred as
of January 1, 2002 and 2001, respectively.
NOTE 5. REFINANCING OF BANK DEBT
On May 1, 2002, in conjunction with the acquisition of SHR, the Company
entered into a new senior credit facility agreement with a group of banks. The
new senior credit facilities were to refinance the Company's outstanding bank
term loans and to provide for a new revolving credit facility. The new senior
credit facilities consist of the following:
- $75 million Senior Secured Revolving Credit Facility
- $75 million Senior Secured Term Loan A
- $150 million Senior Secured Term Loan B
10
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $225 million in proceeds from the new term loans, along with the use of
$39.9 million of existing cash balances, were used to fund the acquisition of
SHR (prior to transaction costs and adjustments for net working capital) and to
retire the Company's outstanding loan balances as of April 30, 2002 under its
previous senior credit facility. The Company's new $75 million revolving credit
facility was unused as of the acquisition closing date.
The interest rates for any senior revolving credit facility borrowings and
for the Term Loan A amounts outstanding for the first six months of the
agreement are equal to either the eurodollar rate plus 2.75% or the agent bank's
base rate plus .75%. Thereafter, the revolver and Term Loan A interest rates are
based on a grid which is based on the consolidated ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization (EBITDA), both as
defined in the credit agreement. The interest rate on the Term Loan B amount
outstanding is equal to the eurodollar rate plus 3.25% or the agent bank's base
rate plus 1.25%.
Any amounts outstanding under the revolver and the $75 million Term Loan A
are due five years from the date of the senior credit agreement and will be
payable in 19 quarterly installments. The $150 million Term Loan B is due six
and one-half years from the date of the senior credit agreement and is payable
in annual installments. The annual amounts of Term Loan A and B repayable from
the draw down date of the new senior credit agreement (May 1, 2002) are as
follows:
YEAR TERM LOAN A TERM LOAN B
- ---- ----------- ------------
1......................................................... $ 6,750,000 $ 1,500,000
2......................................................... 12,500,000 1,500,000
3......................................................... 15,500,000 1,500,000
4......................................................... 20,000,000 1,500,000
5......................................................... 20,250,000 1,500,000
6......................................................... -- 67,500,000
6.5....................................................... -- 75,000,000
----------- ------------
Total..................................................... $75,000,000 $150,000,000
=========== ============
The new senior credit facility agreement contains both affirmative and
negative covenants, including limitations on the Company's ability to incur
additional indebtedness, sell material assets, retire, redeem or otherwise
reacquire its capital stock, acquire the capital stock or assets of another
business, pay dividends, and requires the Company to meet or exceed certain
coverage, leverage and indebtedness ratios. In addition, the new senior credit
agreement includes a provision for the prepayment of a portion of the
outstanding term loan amounts at any year-end if the Company generates "excess
cash flow," as defined in the agreement.
Long-term debt as of June 30, 2002 consists of the following (in
thousands):
Term Loan Facility.......................................... $225,000
12% Senior Subordinated Notes............................... 100,000
--------
325,000
Less current portion........................................ 8,250
--------
$316,750
========
The interest rates at June 30, 2002 were 4.88% and 5.34% for term loans A
and B, respectively. The Company pays a commitment fee for the revolving credit
facility which was equal to 0.5% of the commitment at June 30, 2002. No funds
have been borrowed under the revolving credit facility as of June 30, 2002, but
the Company has $1.2 million of standby letters of credit outstanding against
the revolving credit facility commitment.
11
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was obligated under the terms of the new senior credit facility
agreement to obtain within 90 days of the date of entering into the agreement
interest rate hedge agreements covering at least 50% of all funded debt, as
defined, of the Company. Such hedge agreements are required to be maintained for
at least the first three years of the senior credit facility agreement. On July
3, 2002, the Company entered into forward swap agreement effective November 7,
2002 that effectively converts the interest rate on $62,500,000 of variable rate
bank debt to a fixed rate of 3.86% through April 30, 2005.
In conjunction with entering into the new senior credit facilities, the
Company recognized an extraordinary loss relating to the write-off of
capitalized financing costs on its previously outstanding bank debt of
approximately $2.0 million ($3.4 million net of related income tax benefit of
$1.4 million).
NOTE 6. CONTINGENCIES
LITIGATION
We are party to various pending legal actions arising in the ordinary
operation of our business such as contractual disputes, employment disputes and
general business actions as well as professional liability actions. We believe
that any payment of damages resulting from these types of lawsuits would be
covered by insurance, exclusive of deductibles, would not be in excess of
related reserves, and such liabilities, if incurred, should not have a
significant negative effect on the results of operations and financial condition
of our Company. Moreover, in connection with the recapitalization of the Company
in 1999, subject to certain limitations, the Company's previous owner,
MedPartners, and related entities, have jointly and severally agreed to
indemnify us against certain losses relating to litigation arising out of
incidents occurring prior to the recapitalization in 1999 to the extent those
losses are not covered by third party insurance. With respect to certain
litigation matters, we are only indemnified if our losses from all
indemnification claims exceed a total of $3.7 million and do not exceed a total
of $50 million. With respect to other litigation matters, we are indemnified for
all losses. Finally, also in connection with the recapitalization, MedPartners
agreed to purchase, at its sole cost and expense, for the benefit of Team Health
Holdings, insurance policies covering all liabilities and obligations for any
claim for medical malpractice arising at any time in connection with the
operations of the Company and its subsidiaries prior to the closing date of the
recapitalization transactions for which the Company or any of its subsidiaries
or physicians becomes liable.
HEALTHCARE REGULATORY MATTERS
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with such laws and regulations
can be subject to future governmental review and interpretation as well as
significant regulatory action. From time to time, governmental regulatory
agencies will conduct inquiries and audits of the Company's practices. It is the
Company's current practice and future intent to cooperate fully with such
inquiries.
In addition to laws and regulations governing the Medicare and Medicaid
programs, there are a number of federal and state laws and regulations governing
such matters as the corporate practice of medicine and fee splitting
arrangements, anti-kickback statutes, physician self-referral laws, false or
fraudulent claims filing and patient privacy requirements. The failure to comply
with any of such laws or regulations could have an adverse impact on our
operations and financial results. It is management's belief that the Company is
in substantial compliance in all material respects with such laws and
regulations.
CONTINGENT ACQUISITION PAYMENTS
As of June 30, 2002, the Company may have to pay up to $9.3 million in
future contingent payments as additional consideration for acquisitions made
prior to June 30, 2002. These payments will be made and
12
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded as additional purchase price should the acquired operations achieve the
financial targets contracted in the respective agreements related to their
acquisition.
NOTE 7. COMPREHENSIVE EARNINGS
The components of comprehensive earnings, net of related taxes, are as
follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
Net earnings available to common shareholders....... $(959) $(289) $ 912 $1,459
Cumulative effect of change in accounting
principle -- fair value of interest rate swaps.... -- -- -- 54
Net change in fair value of interest rate swaps..... -- (54) 219 (418)
----- ----- ------ ------
Other comprehensive income (loss)................... -- (54) 219 (364)
----- ----- ------ ------
Comprehensive earnings.............................. $(959) $(343) $1,131 $1,095
===== ===== ====== ======
Accumulated other comprehensive loss, net of related taxes, was $0 at June
30, 2002 and approximately $0.4 million at June 30, 2001 relating to the fair
value of interest rate swaps. The interest rate swaps expired on March 13, 2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We believe we are the largest national provider of outsourced physician
staffing and administrative services to hospitals and other healthcare providers
in the United States. Since our inception, we have focused primarily on
providing outsourced services to hospital emergency departments and urgent care
centers, which accounts for the majority of our net revenue. Spectrum Healthcare
Resources ("SHR"), which was acquired effective May 1, 2002, and also provides
outsourced physician staffing and administrative services, is the leading
provider of medical staffing to military healthcare facilities. SHR, in addition
to providing physician staffing in various specialties, also provides a broad
array of non physician health care services including specialty technical
staffing, para-professionals and nurse staffing on a permanent basis.
Our regional operating models include comprehensive programs for emergency
medicine, radiology, anesthesiology, inpatient care, pediatrics and other health
care services, principally within hospital departments and other healthcare
treatment facilities.
The following discussion provides an assessment of the Company's results of
operations, liquidity and capital resources and should be read in conjunction
with the consolidated financial statements of the Company and notes thereto
included elsewhere in this document.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Company are prepared in
accordance with United States generally accepted accounting principles, which
requires us to make estimates and assumptions. A significant portion of the
Company's revenue is derived from fee-for-service patient visits. The
recognition of net revenue (gross charges less contractual allowances) from such
visits is dependent on such factors as proper completion of medical charts
following a patient visit, the forwarding of such charts to one of the Company's
six billing centers for medical coding and entering into the Company's billing
systems, and the verification of each patient's submission or representation at
the time services are rendered as to the payor(s) responsible for payment of
such services. Net revenues are recorded based on the information known at the
time of entering of such information into our billing system as well as an
estimate of the net revenues associated with medical charts for a given service
period that have not been processed yet into the Company's billing systems. The
above factors and estimates are subject to change. For example, patient payor
information may change following an initial attempt to bill for services due to
a change in payor status. Such changes in payor status have an impact on
recorded net revenue due to differing payors being subject to different
contractual allowance amounts. Such changes in net revenue are recognized in the
period that such changes in payor become known. Similarly, the actual volume of
medical charts not processed into our billing systems may be different from the
amounts estimated. Such differences in net revenue are adjusted in the following
month based on actual chart volumes processed.
Net revenue less provision for uncollectibles reflects management's
estimate of billed amounts to ultimately be collected. Management, in estimating
the amounts to be collected resulting from its over six million annual patient
visits and procedures, considers such factors as prior contract collection
experience, current period changes in payor mix and patient acuity indicators,
reimbursement rate trends in governmental and private sector insurance programs
and trends in collections from self-pay patients. Such estimates are performed
at the individual contract level, reviewed periodically and adjusted, if
subsequent actual collection experience indicates a change in estimate is
necessary. Such provisions and any subsequent changes in estimates may result in
adjustments to our operating results with a corresponding adjustment to our
accounts receivable allowance for uncollectibles on our balance sheet.
The Company's revenue recognition accounting policy along with its other
critical accounting policies have been disclosed in its 2001 Annual Report on
Form 10K. There have been no changes to these critical accounting policies or
their application during the six months ended June 30, 2002.
14
RESULTS OF OPERATIONS
The following discussion provides an analysis of our results of operations
and should be read in conjunction with our unaudited consolidated financial
statements. The operating results of the periods presented were not
significantly affected by general inflation in the U.S. economy. Net revenue
less the provision for uncollectibles is an estimate of future cash collections
and as such it is a key measurement by which management evaluates performance of
individual contracts as well as the Company as a whole. The following table sets
forth the components of net earnings as a percentage of net revenue less
provision for uncollectibles for the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
Fee for service revenue................................ 106.6% 129.1% 114.5% 131.2%
Contract revenue....................................... 34.5 24.5 29.9 23.9
Other revenue.......................................... 3.6 2.1 3.9 1.9
Net revenue............................................ 144.7 155.7 148.3 157.0
Provision for uncollectibles........................... 44.7 55.7 48.3 57.0
Net revenue less provision for uncollectibles.......... 100.0 100.0 100.0 100.0
Professional expenses.................................. 80.8 79.6 80.2 79.4
Gross profit........................................... 19.2 20.4 19.8 20.6
General and administrative expenses.................... 9.7 9.4 9.8 9.5
Management fee and other expenses...................... 0.1 -- 0.1 0.1
Impairment of intangibles.............................. -- 2.5 -- 1.2
Depreciation and amortization.......................... 2.5 2.3 2.3 2.3
Interest expense, net.................................. 2.9 3.5 3.0 3.6
Income tax expense..................................... 1.9 1.1 2.0 1.6
Earnings before income tax expense, extraordinary item
and cumulative effect of change in accounting
principle............................................ 2.1 1.6 2.6 2.3
Extraordinary loss on refinancing, net of income tax
benefit.............................................. 1.0 -- 0.5 --
Cumulative effect of change in accounting principle,
net of income tax benefit............................ -- -- 0.1 --
Net earnings........................................... 1.1 1.6 2.0 2.3
Dividends on preferred stock........................... 1.6 1.8 1.8 1.8
Net earnings (loss) available to common stockholders... (0.5) (0.2) 0.2 0.5
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001
Net Revenues. Net revenues for the three months ended June 30, 2002
increased $39.2 million, or 15.3%, to $295.3 million from $256.2 million for the
three months ended June 30, 2001. The increase in net revenues of $39.2 million
included an increase of $5.1 million in fee-for-service revenue, $30.0 million
in contract revenue and $4.1 million in other revenue. For the three month
periods ended June 30, 2002 and 2001, fee-for-service revenue was 73.7% of net
revenue in 2002 compared to 82.9% in 2001, contract revenue was 23.8% of net
revenue in 2002 compared to 15.7% in 2001 and other revenue was 2.5% of net
revenue in 2002 compared to 1.3% in 2001. The change in the mix of revenues is
principally due to the acquisition of SHR in 2002. SHR derives a higher
percentage of its revenues from hourly contract billings than fee-for-service
contracts.
Provision for Uncollectibles. The provision for uncollectibles was $91.3
million for the three months ended June 30, 2002 compared to $91.6 million for
the three months ended June 30, 2001, a decrease of $0.3 million or 0.4%. As a
percentage of net revenue the provision for uncollectibles was 30.9% for the
three months ended June 30, 2002 compared to 35.8% for the three months ended
June 30, 2001. The provision for
15
uncollectibles is primarily related to revenue generated under fee-for-service
contracts which is not expected to be fully collected. The lower percentage of
net revenue in the three months ended June 30, 2002 is the result of the lower
mix of fee-for-service revenue within the total revenues of SHR which was
acquired on May 1, 2002. During the fourth quarter of 2001, the Company revised
its estimate of the allocation of deductions from net revenues for contractual
allowances and uncollectibles. The adjustment had the effect of reducing the
2001 full year provision for uncollectibles in the fourth quarter of 2001 from
the amounts provided in the first nine months of 2001, with an offsetting
adjustment to contractual allowances. The estimate of the Company's provision
for uncollectibles for the three months ended June 30, 2002 is consistent with
the calculation methodology used for the fourth quarter of 2001. The Company
believes that the revised estimating methodology results in a better allocation
of deductions between contractual allowances and provisions for uncollectibles.
Net Revenue Less Provision for Uncollectibles. Net revenue less provision
for uncollectibles for the three months ended June 30, 2002 increased $39.5
million, or 24.0%, to $204.1 million from $164.6 million for the corresponding
three months in 2001. Same contract revenue less provision for uncollectibles,
which consists of contracts under management from the beginning of the prior
period through the end of the subsequent period, increased $4.1 million or 2.7%,
to $154.5 million during 2002 from $150.4 million during 2001. The increase in
same contract revenue of 2.7% includes the effects of both increased billing
volume and lower estimated net revenue per billing unit between periods.
Overall, same contract revenue increased approximately 4.0% between periods due
to an increase in billing volume. The increase in same contract billing volume
resulting principally from increased patient visits was partially offset by a
decline in the average revenue per billing unit of approximately 1.5% between
periods. Beginning January 1, 2002, the Company's reimbursement under the
Medicare Program was reduced. The estimated effect of such reduction in the
three months ended June 30, 2002 was $2.3 million. In addition, net estimated
revenue per billing unit was adversely impacted between periods by a less
favorable payor mix. Acquisitions contributed $33.8 million and new contracts
obtained through internal sales contributed $10.2 million of the remaining
increase. The increases noted above were partially offset by $8.6 million of
revenue derived from contracts that terminated during the periods.
Professional Expenses. Professional expenses for the three months ended
June 30, 2002 were $164.9 million compared to $130.9 million for the three
months ended June 30, 2001, an increase of $34.0 million or 26.0%. The increase
of $34.0 million included $24.4 million resulting from acquisitions between
periods. As a percentage of net revenue less provision for uncollectibles,
professional expenses were 80.8% for the three months ended June 30, 2002
compared to 79.6% for the three months ended June 30, 2001. Physician costs,
billing and collection expenses and other professional expenses, excluding
professional liability expense and the effect of acquisitions, increased $8.0
million, or 6.5% between periods. The increase in these professional expenses
was principally due to increases in physician hours and rates and costs
associated with the addition of capacity in our billing operations between
periods. In addition, the Company experienced increased usage of medical
licensed practitioners in 2002 in an effort to improve emergency department
productivity and to meet increased emergency department volumes. Professional
liability expense was $9.8 million for the three months ended June 30, 2002
compared with $7.9 million for the three months ended June 30, 2001, resulting
in an increase between years of $1.9 million or 24.5%. The increase in the
Company's professional liability expense, in addition to increases resulting
from acquisitions ($.3 million), reflects higher premium costs between periods
due to a "hardening" of the insurance market for such coverage as well as a
provision for claim losses in excess of insurance limits.
Gross Profit. Gross profit increased to $39.1 million for the three months
ended June 30, 2002 from $33.6 million for the corresponding period in 2001. The
increase in gross profit is attributable to the effect of acquisitions. Gross
profit from steady state operations declined between periods, principally due to
the effect of lower net revenues per billing unit and increased professional
liability costs. Gross profit as a percentage of revenue less provision for
uncollectibles decreased to 19.2% for the three months ended June 30, 2002
compared to 20.4% for the three months ended June 30, 2001 due to the factors
described above.
General and Administrative Expenses. General and administrative expenses
for the three months ended June 30, 2002 increased to $19.8 million from $15.4
million for the three months ended June 30, 2001, for an
16
increase of $4.4 million, or 28.5% between periods. General and administrative
expenses as a percentage of net revenue less provision for uncollectibles were
9.7% for the three months ended June 30, 2002 compared to 9.4% for the three
months ended June 30, 2001. The increase in general and administrative expenses
between periods included expenses associated with acquired operations of $3.9
million resulting in an increase of 25.2% of the 28.5% increase between periods.
The remaining net increase of 3.3% was principally due to increases in salaries
and related benefit costs resulting from annual wage increases and the full year
effect of additional staff added in prior periods.
Management Fee and Other Operating Expenses. Management fee and other
operating expenses were $0.1 million for the three months ended June 30, 2002
and 2001, respectively.
Depreciation and Amortization. Depreciation and amortization was $5.0
million for the three months ended June 30, 2002 compared to $3.8 million for
the three months ended June 30, 2001, an increase of $1.2 million or 33.1%.
Depreciation increased by $0.4 million between periods while amortization
expense increased by $0.8 million between periods. The increase in depreciation
expense was due to capital expenditures made during 2001 and 2002. Amortization
expense increased $0.8 million between periods principally due to amortization
of intangibles resulting from the acquisition of SHR and contingent acquisition
payments made during 2001 and 2002, partially offset by no longer amortizing
goodwill subsequent to January 1, 2002 (amortization of goodwill was $0.6
million for the three months ended June 30, 2001) as a result of implementing
SFAS No. 142, Goodwill and Other Intangible Assets.
Net Interest Expense. Net interest expense increased $0.1 million to $5.9
million for the three months ended June 30, 2002 compared to $5.8 million for
the corresponding period in 2001. The increase in net interest expense is
principally due to an increase in outstanding debt due to the refinancing of
bank debt in conjunction with the acquisition of SHR partially offset by lower
interest rates between periods.
Earnings before Income Taxes and Extraordinary Item. Earnings before
income taxes and extraordinary item for the three months ended June 30, 2002
were $8.3 million compared to $4.5 million for the three months ended June 30,
2001.
Income Tax Expense. Income tax expense for the three months ended June 30,
2002 was $4.0 million compared to $1.8 million for the three months ended June
30, 2001. The increase in income tax expense for the three months ended June 30,
2002 over the same period in 2001 was primarily due to the increased level of
earnings before income taxes in 2002.
Earnings before Extraordinary Loss, Net of Taxes. Earnings before
extraordinary loss, net of taxes, for the three months ended June 30, 2002, was
$4.3 million compared to $2.7 million for the three months ended June 30, 2001.
Extraordinary Loss. In conjunction with the refinancing of bank debt, the
Company incurred a loss of $2.0 million ($3.4 million net of tax benefit of $1.4
million) relating to previously deferred financing costs related to bank debt
that was repaid as part of a new bank financing.
Net Earnings. Net earnings for the three months ended June 30, 2002 were
$2.3 million compared to net earnings of $2.7 million for the three months ended
June 30, 2001.
Dividends on Preferred Stock. The Company accrued $3.3 million and $3.0
million of dividends for the three months ended June 30, 2002 and 2001,
respectively, on its outstanding Class A mandatory redeemable preferred stock.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Net Revenues. Net revenues for the six months ended June 30, 2002
increased $52.3 million, or 10.3%, to $559.0 million from $506.7 million for the
six months ended June 30, 2001. The increase in net revenues of $52.3 million
included an increase of $7.9 million in fee-for-service revenue, $35.7 million
in contract revenue and $8.7 million in other revenue. For the six month periods
ended June 30, 2002 and 2001, fee-for-service revenue was 77.2% of net revenue
in 2002 compared to 83.6% in 2001, contract revenue was 20.2% of net revenue in
2002 compared to 15.2% in 2001 and other revenue was 2.6% of net revenue in 2002
compared to
17
1.2% in 2001. The change in the mix of revenues is principally due to the
acquisition of SHR in 2002. SHR derives a higher percentage of its revenues from
hourly contract billings than fee-for-service contracts.
Provision for Uncollectibles. The provision for uncollectibles was $182.1
million for the six months ended June 30, 2002 compared to $184.0 million for
the six months ended June 30, 2001, a decrease of $1.9 million or 1.1%. As a
percentage of net revenue the provision for uncollectibles was 32.6% for the six
months ended June 30, 2002 compared to 36.3% for the six months ended June 30,
2001. The provision for uncollectibles is primarily related to revenue generated
under fee-for-service contracts which is not expected to be fully collected. The
lower percentage of net revenue in the six months ended June 30, 2002 is
partially the result of the lower mix of fee-for-service revenue within the
total revenues of SHR which was acquired on May 1, 2002. During the fourth
quarter of 2001, the Company revised its estimate of the allocation of
deductions from net revenues for contractual allowances and uncollectibles. The
adjustment had the effect of reducing the 2001 full year provision for
uncollectibles in the fourth quarter of 2001 from the amounts provided in the
first nine months of 2001, with an offsetting adjustment to contractual
allowances. The estimate of the Company's provision for uncollectibles for the
six months ended June 30, 2002 is consistent with the calculation methodology
used for the fourth quarter of 2001. The Company believes that the revised
estimating methodology results in a better allocation of deductions between
contractual allowances and provisions for uncollectibles.
Net Revenue Less Provision for Uncollectibles. Net revenue less provision
for uncollectibles for the six months ended June 30, 2002 increased $54.3
million, or 16.8%, to $377.0 million from $322.7 million for the corresponding
six months in 2001. Same contract revenue less provision for uncollectibles,
which consists of contracts under management from the beginning of the prior
period through the end of the subsequent period, increased $14.0 million or
4.8%, to $304.0 million during 2002 from $290.0 million during 2001. The
increase in same contract revenue of 4.8% includes the effects of both increased
billing volume and higher estimated net revenue per billing unit between
periods. Overall, same contract revenue increased approximately 2.2% between
periods due to an increase in billing volume. In addition, the average revenue
per billing unit increased approximately 1.9% between periods. Beginning January
1, 2002, the Company's reimbursement under the Medicare Program was reduced. The
estimated effect of such reduction in the six months ended June 30, 2002 was
$4.6 million. Acquisitions contributed $38.9 million and new contracts obtained
through internal sales contributed $21.0 million of the remaining increase. The
increases noted above were partially offset by $19.6 million of revenue derived
from contracts that terminated during the periods.
Professional Expenses. Professional expenses for the six months ended June
30, 2002 were $302.5 million compared to $256.3 million for the six months ended
June 30, 2001, an increase of $46.2 million or 18.0%. The increase of $46.2
million included $26.2 million resulting from acquisitions between periods. As a
percentage of net revenue less provision for uncollectibles, professional
expenses were 80.2% for the six months ended June 30, 2002 compared to 79.4% for
the six months ended June 30, 2001. Physician costs, billing and collection
expenses and other professional expenses, excluding professional liability
expense and the effect of acquisitions, increased $16.3 million, or 6.8% between
periods. The increase in these professional expenses was principally due to
increases in physician hours and rates and costs associated with the addition of
capacity in our billing operations between periods. In addition, the Company
experienced increased usage of medical licensed practitioners in 2002 in an
effort to improve emergency department productivity and to meet increased
emergency department volumes. Professional liability expense was $17.8 million
for the six months ended June 30, 2002 compared with $13.8 million for the six
months ended June 30, 2001, resulting in an increase between years of $4.0
million or 29.2%. The increase in the Company's professional liability insurance
cost in addition to increases resulting from acquisitions ($.4 million) reflects
the cost of higher premiums between periods due to a "hardening" of the
insurance market for such coverage as well as a provision for claim losses in
excess of insurance limits.
Gross Profit. Gross profit increased to $74.5 million for the six months
ended June 30, 2002 from $66.4 million for the corresponding period in 2001. The
increase in gross profit is attributable to the effect of acquisitions. Gross
profit from steady state operations declined slightly between periods,
principally due to increases in professional expenses, including professional
liability costs, in excess of related revenue increases. Gross profit as a
percentage of revenue less provision for uncollectibles decreased to 19.8% for
the six months
18
ended June 30, 2002 compared to 20.6% for the six months ended June 30, 2001 due
to the factors described above.
General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 2002 increased to $37.0 million from $30.7
million for the six months ended June 30, 2001, for an increase of $6.3 million,
or 20.5% between periods. General and administrative expenses as a percentage of
net revenue less provision for uncollectibles were 9.8% for the six months ended
June 30, 2002 compared to 9.5% for the six months ended June 30, 2001. The
increase in general and administrative expenses between periods included
expenses associated with acquired operations of $5.5 million resulting in an
increase of 17.8% of the 20.5% increase between periods. The remaining net
increase of 2.7% was principally due to increases in salaries and related
benefit costs resulting from annual wage increases and the full year effect of
additional staff added in prior periods offset by lower external consulting
costs between periods.
Management Fee and Other Operating Expenses. Management fee and other
operating expenses were $0.3 million for the six months ended June 30, 2002 as
compared to $0.2 million for the six months ended June 30, 2001.
Depreciation and Amortization. Depreciation and amortization was $8.6
million for the six months ended June 30, 2002 compared to $7.4 million for the
six months ended June 30, 2001. Depreciation increased by $0.7 million between
periods while amortization expense increased by $0.5 million between periods.
The increase in depreciation expense was due to capital expenditures made during
2001 and 2002. Amortization expense increased $0.5 million between periods
principally due to amortization of intangibles resulting from the acquisition of
SHR and contingent acquisition payments made during 2001 and 2002, partially
offset by no longer amortizing goodwill subsequent to January 1, 2002
(amortization of goodwill was $1.0 million for the six months ended June 30,
2001) as a result of implementing SFAS No. 142, Goodwill and Other Intangible
Assets.
Net Interest Expense. Net interest expense decreased $0.4 million to $11.2
million for the six months ended June 30, 2002 compared to $11.6 million for the
corresponding period in 2001. The decrease in net interest expense is
principally due to lower interest rates between periods of approximately $2.0
million partially offset by an increase in net interest expense due to
additional debt outstanding resulting from the acquisition of SHR.
Earnings before Income Taxes, Extraordinary Item and Cumulative Effect of
Change in Accounting Principle. Earnings before income taxes, extraordinary
item and cumulative effect of change in accounting principle for the six months
ended June 30, 2002 was $17.5 million compared to $12.4 million for the six
months ended June 30, 2001.
Income Tax Expense. Income tax expense for the six months ended June 30,
2002 was $7.8 million compared to $5.0 million for the six months ended June 30,
2001. The increase in income tax expense for the six months ended June 30, 2002
over the same period in 2001 was primarily due to the increased level of
earnings before income taxes in 2002.
Earnings before Extraordinary Loss and Cumulative Effect of Change in
Accounting Principle, Net of Taxes. Earnings before extraordinary loss and
cumulative effect of change in accounting principle, net of taxes, for the six
months ended June 30, 2002, was $9.7 million compared to $7.4 million for the
six months ended June 30, 2001.
Extraordinary Loss. In conjunction with the refinancing of bank debt, the
Company incurred a loss of $2.0 million ($3.4 million net of tax benefit of $1.4
million) relating to deferred financing costs related to bank debt that was
repaid as part of a new bank financing.
Cumulative Effect of Change in Accounting Principle. In connection with
implementing SFAS No. 142, Goodwill and Other Intangible Assets, as of January
1, 2002, the Company completed a transitional impairment test of existing
goodwill and concluded that a portion of its goodwill was impaired. Accordingly,
an impairment loss of $0.5 million ($.3 million net of taxes) was recorded as
the cumulative effect of a change in accounting principle during the three
months ended March 31, 2002.
19
Net Earnings. Net earnings for the six months ended June 30, 2002 and 2001
were $7.4 million.
Dividends on Preferred Stock. The Company accrued $6.5 million and $5.9
million of dividends for the six months ended June 30, 2002 and 2001,
respectively, on its outstanding Class A mandatory redeemable preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are to meet working capital
requirements, fund debt obligations and to finance its capital expenditures and
acquisitions. Funds generated from operations during the past two years, with
the exception of the acquisition of SHR on May 1, 2002, have been sufficient to
meet the Company's cash requirements.
Cash provided by operating activities in the six months ended June 30, of
2002 and 2001 was $14.1 million and $26.7 million, respectively. The decrease in
cash provided by operating activities is principally due to requirements to fund
the Company's growth in its accounts receivable relating to both fee-
for-service and contract revenues, as well as to fund growth resulting from
acquisitions between periods.
The Company spent $4.9 million in the first six months of 2002 and $2.7
million in the first six months of 2001 for capital expenditures. These capital
expenditures are primarily for information technology related maintenance
capital and development projects.
The Company has historically been an acquirer of other physician staffing
businesses and interests. Such acquisitions in recent years have been completed
for cash. The acquisition of SHR on May 1, 2002, at a purchase price of $147.0
million (before transaction costs and adjustment for net working capital) was
financed through the use of available cash of approximately $39.9 million and
the use of new bank senior credit facilities. The acquisitions in many cases
(excluding the acquisition of SHR) include contingent purchase price payment
amounts that are payable in years subsequent to the years of acquisition. Cash
payments made in connection with acquisitions, including contingent payments,
were $161.6 million during the six months ended June 30, 2002 and $8.2 million
in the corresponding period in 2001. Future contingent payment obligations are
approximately $9.3 million as of June 30, 2002.
The Company made scheduled debt maturity payments of $6.4 million in the
first six months of 2002 and $8.5 million during the corresponding period in
2001 in accordance with its term loan facilities. In addition, in conjunction
with the acquisition of SHR, the Company on May 1, 2002, entered into a new
senior credit facility to finance the acquisition of SHR and to repay its
outstanding bank term facilities in the amount of $110.9 million on May 1, 2002.
The senior credit facility provides for up to $75 million of borrowings
under a senior revolving credit facility and provided $225 million of new term
loans. Borrowings outstanding under the senior credit facility mature in various
years with a final maturity date of October 31, 2008. The senior credit facility
agreement contains both affirmative and negative covenants, including
limitations on the Company's ability to incur additional indebtedness, sell
material assets, retire, redeem or otherwise reacquire its capital stock,
acquire the capital stock or assets of another business, pay dividends, and
requires the Company to meet or exceed certain coverage, leverage and
indebtedness ratios. In addition, the senior credit agreement includes a
provision for the prepayment of a portion of the outstanding term loan amounts
at any year-end if the Company generates "excess cash flow," as defined in the
agreement.
During the first four months of 2002 and in all of 2001, the Company's cash
needs were met from internally generated operating sources and there were no
borrowings by the Company under its revolving credit facility. Subsequent to the
acquisition of SHR on May 1, 2002 and through June 30, 2002, the Company
accessed its revolving credit facility for four days during this period
borrowing $2.5 million during the four days.
The Company in March 2001 renewed its professional liability insurance,
which provides coverage for potential liabilities on a "claims-made" basis. The
coverage is in effect for a two-year period through March 12, 2003. The
Company's options for continued coverage beyond March 12, 2003 for claims
incurred
20
but not reported before that date include the option of exercising a "tail"
policy, which would cover such potential claims. The cost of such tail policy is
approximately $30.0 million and, if exercised, would be payable in March 2003.
At this time, we have not yet determined if we will exercise our option to
purchase this "tail" policy.
The Company as of June 30, 2002, had cash and cash equivalents of
approximately $22.5 million and a revolving credit facility borrowing
availability of $73.8 million. The Company believes that its cash needs, other
than for significant acquisitions, will continue to be met through the use of
its remaining existing available cash, cash flows derived from future operating
results and cash generated from borrowings under its senior revolving credit
facility.
INFLATION
We do not believe that general inflation in the U.S. economy has had a
material impact on our financial position or results of operations.
The Company renewed an agreement on March 12, 2001, with an insurance
company to provide professional liability insurance for claims made during the
four-year period ending March 12, 2003. A number of other health care providers
attempting to renew or secure new professional liability insurance coverage have
experienced significant increases in the cost of such coverage in recent months.
The Company is not able to estimate at this time the effect on its professional
liability insurance costs for such coverage subsequent to the expiration of its
current policy coverage period.
MEDICARE PROGRAM PHYSICIAN REIMBURSEMENT RATES
A portion of the Company's revenues are derived from services provided to
patients covered under the Medicare Program and commercial insurance plans whose
reimbursement rates are tied to Medicare rates. Physician reimbursement rates
for services provided to such Medicare Program beneficiaries are established
annually by the Centers for Medicare and Medicaid Services ("CMS"). CMS has
announced portions of its proposed Physician Fee Schedule for 2003 and certain
of those physician reimbursement rates have decreased from their corresponding
levels in 2002. The Company has not estimated at this time what impact that such
decreased rates announced for 2003 would have on its revenues in 2003 from
Medicare and commercial insurance plans with fee schedules based on Medicare
rates. The CMS proposal is subject to further revision before its finalization.
SEASONALITY
Historically, the Company's revenues and operating results have reflected
minimal seasonal variations due to the geographic diversification of the
contract base.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
The Company does not use derivative financial instruments for speculative or
trading purposes.
The Company's earnings are affected by changes in short-term interest rates
as a result of its borrowings under its senior credit facilities. Interest rate
swap agreements are used to manage a portion of the Company's interest rate
exposure.
The Company was obligated under the terms of the new senior credit facility
agreement to obtain within 90 days of the date of entering into the agreement
interest rate hedge agreements covering at least 50% of all funded debt, as
defined, of the Company. Such hedge agreements are required to be maintained for
at least the first three years of the senior credit facility agreement. On July
3, 2002, the Company entered into a forward interest rate swap agreement
effective November 7, 2002, to effectively convert $62.5 million of
floating-rate borrowings to 3.86% fixed-rate borrowings. The agreement is a
contract to exchange, on a quarterly basis, floating interest rate payments
based on the eurodollar rate, for fixed interest rate payments over the life of
the agreement. The contract has a final expiration date of April 30, 2005. This
agreement
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exposes the Company to credit losses in the event of non-performance by the
counterparty to the financial instrument. The counterparty is a creditworthy
financial institution and the Company believes the counterparty will be able to
fully satisfy its obligations under the contract.
At June 30, 2002, the fair value of the Company's total debt, which has a
carrying value of $325.0 million, was approximately $337.0 million. The Company
had $225.0 million of variable debt outstanding at June 30, 2002. If the market
interest rates for the Company's variable rate borrowings averaged 1% more
during the twelve months subsequent to June 30, 2002, the Company's interest
expense would increase, and earnings before income taxes would decrease, by
approximately $2.2 million. This analysis does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment. Further, in the event of a change of such magnitude, management
could take actions to further mitigate its exposure to the change. However, due
to the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no changes in the Company's
financial structure.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Team Health is a party to various pending legal actions arising in the
ordinary operation of its business such as contractual disputes, employment
disputes and general business actions as well as malpractice actions. Team
Health does not believe that the results of such legal actions, individually or
in the aggregate, will have a material adverse effect on the Company's business
or its results of operations, cash flows or financial condition.
See note 6 to the financial statements for a description of legal actions
to which we are party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND OTHER REPORTS
Exhibit 3.100 Certificate of Incorporation of Spectrum Healthcare
Services, Inc. dated January 18, 1994
Exhibit 3.101 Certificate of Amendment of Restated Certificate of
Incorporation of Spectrum Healthcare Services, Inc. dated
July 21, 1997
Exhibit 3.102 Amended and Restated Bylaws of Spectrum Healthcare Services,
Inc.
Exhibit 3.103 Certificate of Incorporation of Spectrum Occupational Health
Services, Inc. dated August 30, 1994
Exhibit 3.104 Certificate of Amendment of Certificate of Incorporation of
Spectrum Primary Care, Inc. (f/k/a Spectrum Occupational
Health Services, Inc.) dated November 3, 1994
Exhibit 3.105 Bylaws of Spectrum Occupational Health Services, Inc.
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Exhibit 3.106 Certificate of Incorporation of Spectrum Healthcare
Resources, Inc. dated November 3, 1994
Exhibit 3.107 Bylaws of Spectrum Healthcare Resources, Inc.
Exhibit 3.108 Certificate of Incorporation of Spectrum Healthcare
Resources of Delaware, Inc. dated November 3, 1994
Exhibit 3.109 Bylaws of Spectrum Healthcare Resources of Delaware, Inc.
Exhibit 3.110 Certificate of Incorporation of Spectrum Primary Care of
Delaware, Inc. dated November 3, 1994
Exhibit 3.111 Bylaws of Spectrum Primary Care of Delaware, Inc.
Exhibit 3.112 Certificate of Incorporation of Spectrum Healthcare, Inc.
dated December 5, 1996
Exhibit 3.113 Bylaws of Spectrum Healthcare, Inc.
Exhibit 3.114 Certificate of Incorporation of Spectrum Cruise Care, Inc.
dated July 11, 1996
Exhibit 3.115 Bylaws of Spectrum Cruise Care, Inc.
Exhibit 3.116 Certificate of Incorporation of Spectrum Healthcare
Nationwide, Inc. dated May 10, 2001
Exhibit 3.117 Bylaws of Spectrum Healthcare Nationwide, Inc.
Exhibit 10.18 Credit Agreement dated May 1, 2002 among Team Health, Inc.,
The Banks, Financial Institutions and Other Institutional
Lenders Named Therein, Fleet National Bank, Bank of America,
N.A., and Banc of America Securities, LLC.
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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 on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Knoxville, Tennessee, on August 8, 2002.
TEAM HEALTH, INC.
/s/ H. LYNN MASSINGALE
--------------------------------------
H. Lynn Massingale,
Chief Executive Officer
/s/ ROBERT J. ABRAMOWSKI
--------------------------------------
Robert J. Abramowski
Executive Vice President Finance &
Administration
/s/ DAVID P. JONES
--------------------------------------
David P. Jones
Chief Financial Officer
24