TEAM HEALTH INC - 10-Q Quarterly Report

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

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FORM 10-Q EQUIVALENT(1)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 [ ] 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 November
1, 2002.

(1) This Form 10-Q Equivalent is only being filed solely pursuant to a
requirement contained in the indenture governing Team Health, Inc.'s 12% Senior
Subordinated Notes due 2009.

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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, professional liability
expense, 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 NINE MONTHS
ENDED SEPTEMBER 30, 2002

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEAM HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to financial statements.
3

TEAM HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to financial statements.
4

TEAM HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to financial statements.
5

TEAM HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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 the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to impairment tests on
an annual basis, or more frequently if certain indicators arise. Other
intangible assets continue to be amortized over their useful lives. The Company
completed its required initial 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 nine months ended September 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 $0.5 million and
$1.5 million, respectively.

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 significantly
changes the criteria that has to be met to classify an asset as held-for-sale,
and requires 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 qualify for discontinued operations treatment in the
statement of operations. The implementation of SFAS No. 144 did not have any
impact on the Company's results of operation or financial position.

During May 2002, the Financial Accounting Standards Board issued SFAS No.
145 "Rescission of Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections". SFAS No. 145 rescinds or changes several
previously issued accounting pronouncements. Included among such items is an
elimination of Statement No. 4 and specifically the requirement to classify all
gains and losses from the extinguishment of debt, if material, as extraordinary
items. Consequently, gains and losses from the

7

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

extinguishments of debt are subject to the criteria established in Accounting
Principles Board (APB) Opinion 30 "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with
a current view that such extinguishments generally do not meet the criteria of
APB Opinion 30 as being "unusual and infrequent". The provisions of SFAS No. 145
related to the classification of gains or losses attributable to debt
extinguishments are effective for fiscal years beginning after May 15, 2002. The
Company has elected to adopt the provisions of SFAS No. 145 during the three
months ended September 30, 2002. Accordingly, the Company's statement of
operations for the nine months ended September 30, 2002 includes a
reclassification of its previously recorded extraordinary loss due to a
refinancing charge to the presentation required under the SFAS.

During July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The scope of SFAS No. 146 also includes (1) costs related
to terminating a contract that is not a capital lease and (2) termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. The new standard is effective for
exit or restructuring activities initiated after December 31, 2002.

8

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 September 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):

During the three and nine months ended September 30, 2002, the Company
recorded an additional $2.9 million and $135.7 million of goodwill and $4.1
million and $21.5 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.

The carrying value of goodwill and other intangibles is routinely evaluated
by the Company to determine whether such assets may be impaired with respect to
their recorded values. If this evaluation indicates that certain intangibles may
not be recoverable, as determined based on the undiscounted cash flows derived
from the recorded assets over their remaining estimated useful lives, the
carrying value of the intangibles is reduced by the estimated shortfall of
discounted cash flows. During the three months ended September 30, 2002, the
Company concluded that one of its contract intangibles was impaired.
Accordingly, the contract intangible was reduced to its estimated fair value by
recording an impairment loss of approximately $1.0 million at September 30,
2002. The Company had previously recorded an impairment loss of $4.1 million in
the nine months ended September 30, 2001 relating to a portion of its radiology
operations.

NOTE 4. ACQUISITIONS

Effective September 1, 2002, the Company acquired all of the outstanding
stock of three corporations held by a single stockholder. The acquired
corporations provide hospital emergency department and hospital physician
staffing services under five contracts for locations in West Virginia and
Virginia. The purchase price

9

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for the acquired corporations was $8.6 million of which $5.2 million was paid in
cash at September 1, 2002 with the remainder of the purchase price due in four
annual installments of $0.9 million, $0.9 million, $1.1 million and $0.5 million
commencing on October 31, 2003. In addition, the Company may have to pay up to
$2.0 million in future contingent payments.

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, in addition to adjustment for transaction costs, was also
subject to adjustment during the 90-day period subsequent to April 30, 2002 for
actual net working capital at April 30, 2002. The total purchase price for SHR
after consideration of the aforementioned adjustments was approximately $145.5
million.

SHR is the leading provider of permanent healthcare staffing services to
military treatment 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.

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. 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

10

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 results of operations from the above acquisitions have been included
with those of the Company since their respective dates of acquisition. The
portion of the purchase prices allocated to intangibles and goodwill was
approximately $153.5 million including $142.7 million which is not deductible
for tax purposes. Amounts allocated to intangibles are being amortized over
their estimated lives which range from twenty months to seven years.

The following is a summary of the net assets acquired in 2002 (in
thousands):

Current assets.............................................. $ 31,038
Property and equipment...................................... 848
Intangibles................................................. 21,510
Goodwill.................................................... 132,036
Deferred income taxes....................................... 907
Other assets................................................ 1,101
--------
187,440
Less -- liabilities assumed................................. 20,944
--------
$166,496
========

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):

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.

11

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. LONG-TERM DEBT

Long-term debt as of September 30, 2002 consists of the following (in
thousands):

Term Loan Facility.......................................... $222,750
12% Senior Subordinated Notes............................... 100,000
322,750
Less current portion........................................ (12,250)
--------
$310,500
========

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
senior credit facilities were to refinance the Company's outstanding bank term
loans and to provide for a new revolving credit facility. The senior credit
facilities consisted of the following:

- $75 million Senior Secured Revolving Credit Facility

- $75 million Senior Secured Term Loan A

- $150 million Senior Secured Term Loan B

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 and to retire the Company's outstanding loan balances as of April 30, 2002,
under its previous senior credit facility.

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%.

The interest rates at September 30, 2002 were 4.88% and 5.44% 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 September 30, 2002.
No funds have been borrowed under the revolving credit facility as of September
30, 2002, but the Company had $1.6 million of standby letters of credit
outstanding against the revolving credit facility commitment. On July 3, 2002,
the Company entered into a forward interest rate swap agreement effective
November 7, 2002, to effectively convert $62,500,000 of floating-rate borrowings
to 3.86% fixed-rate borrowings through April 30, 2005.

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.

12

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate maturities of long-term debt due within one year of September 30,
2002 (in thousands) are as follows:

2003........................................................ $ 12,250
2004........................................................ 15,500
2005........................................................ 19,250
2006........................................................ 21,625
Thereafter.................................................. 254,125
--------
$322,750
========

In conjunction with entering into the new senior credit facilities, the
Company expensed deferred financing costs on its previously outstanding bank
debt of approximately $3.4 million during the three months ended June 30, 2002.

NOTE 6. NET REVENUE ADJUSTMENT

During the three months ended September 30, 2001, the Company recorded a
provision of $24.5 million to increase its contractual allowances for patient
accounts receivable. The charge resulted from a change in estimated collection
rates based on a detailed analysis of the Company's outstanding accounts
receivable using additional data developed during the period. The results of the
additional research indicated that the Company's estimated collection rates for
prior periods were lower than originally estimated.

NOTE 7. 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.

INDEMNITIES

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.

In connection with the acquisition of SHR on May 1, 2002, subject to
certain limitations, the previous shareholders of SHR and related entities have
indemnified us against certain potential losses attributable to events or
conditions that existed prior to May 1, 2002. The indemnity limit is $10.0
million, with certain potential losses, as defined, subject to a $.5 million
"basket" before such losses are recoverable from the previous shareholders. In
addition, a separate indemnification exists with a limit of $10.0 million
relating to

13

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

any claims asserted against SHR during the three years subsequent to the date of
SHR's acquisition related to tax matters whose origin was attributable to tax
periods prior to May 1, 2002.

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 September 30, 2002, the Company may have to pay up to $11.3 million
in future contingent payments as additional consideration for acquisitions made
prior to September 30, 2002. These payments will be made and recorded as
additional purchase price should the acquired operations achieve the financial
targets contracted in the respective agreements related to their acquisition.

NOTE 8. COMPREHENSIVE EARNINGS

The components of comprehensive earnings, net of related taxes, are as
follows (in thousands):

Accumulated other comprehensive loss, net of related taxes, was $1.2
million and $0.4 million at September 30, 2002 and 2001, respectively, relating
to the fair value of interest rate swaps.

14

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 treatment 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 health care
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 accounting principles generally accepted in the United States,
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 millions of 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 nine months ended September 30, 2002.

15

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 ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001

Net Revenue. Net revenue for the three months ended September 30, 2002
increased $102.1 million, or 43.7%, to $335.9 million from $233.8 million for
the three months ended September 30, 2001. During the three months ending
September 30, 2001, the Company recorded a charge of $24.5 million to increase
its contractual allowances for patient accounts receivable for periods prior to
2001. The impact of this charge was to reduce fee-for-service net revenue for
the three months ended September 30, 2001 by $24.5 million. See footnote 6 to
the unaudited consolidated financial statements for additional information. The
increase in net revenue of $102.1 million included an increase of $53.4 million
in fee-for-service revenue, $45.4 million in contract revenue and $3.3 million
in other revenue. For the three month periods ended September 30, 2002 and 2001,
fee-for-service revenue was 71.7% of net revenue in 2002 compared to 80.2% in
2001, contract revenue was 25.9% of net revenue in 2002 compared to 17.8% in
2001 and other revenue was 2.4% of net revenue in 2002 compared to 1.9% in 2001.
The change in the mix of revenues is principally due to the

16

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 $111.1
million for the three months ended September 30, 2002 compared to $93.0 million
for the three months ended September 30, 2001, an increase of $18.1 million or
19.5%. As a percentage of net revenue the provision for uncollectibles was 33.1%
for the three months ended September 30, 2002 compared to 39.8% for the three
months ended September 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 three
months ended September 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 September 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 September 30, 2002 increased $84.0
million, or 59.7% ($59.6 million, or 36.1%, after giving effect to the charge of
$24.5 million in 2001), to $224.8 million from $140.8 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 $9.1
million or 6.0%, to $161.3 million in 2002 from $152.2 million in 2001. The
increase in same contract revenue of 6.0% includes the effects of both increased
billing volume and higher estimated net revenue per billing unit between
periods. Overall, same contract revenue increased approximately 2.7% between
periods due to an increase in billing volume. 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 September 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
$49.1 million and new contracts obtained through internal sales contributed
$10.8 million of the remaining increase. The increases noted above were
partially offset by $9.4 million of revenue derived from contracts that
terminated during the periods.

Professional Expenses. Professional expenses for the three months ended
September 30, 2002 were $182.0 million compared to $133.4 million for the three
months ended September 30, 2001, an increase of $48.6 million or 36.4%. The
increase of $48.6 million included $38.0 million resulting from acquisitions
between periods. As a percentage of net revenue less provision for
uncollectibles, professional expenses were 80.9% for the three months ended
September 30, 2002 compared to 94.8% for the three months ended September 30,
2001 (68.2% after giving effect to the charge of $24.5 million in 2001).
Physician costs, billing and collection expenses and other professional
expenses, excluding professional liability expense and the effect of
acquisitions, increased $9.5 million, or 7.5% 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 mid-level practitioners and physician assistants in 2002 in an effort to
improve emergency department productivity and to meet increased emergency
department volumes. Professional liability expense was $9.6 million for the
three months ended September 30, 2002 compared with $8.0 million for the three
months ended September 30, 2001, resulting in an increase between periods of
$1.6 million or 19.7%. The increase in the Company's professional liability
expense, in addition to increases resulting from acquisitions ($0.6 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 $42.9 million for the three months
ended September 30, 2002 from $7.4 million for the corresponding period in 2001.
The increase in gross profit after giving effect to the
17

charge of $24.5 million in 2001 is attributable to the contribution of
acquisitions. Gross profit as a percentage of revenue less provision for
uncollectibles was 19.1% for the three months ended September 30, 2002 compared
to 5.2% for the three months ended September 30, 2001 due to the factors
described above.

General and Administrative Expenses. General and administrative expenses
for the three months ended September 30, 2002 increased to $21.7 million from
$15.8 million for the three months ended September 30, 2001, for an increase of
$5.9 million, or 37.5% between periods. General and administrative expenses as a
percentage of net revenue less provision for uncollectibles were 9.6% for the
three months ended September 30, 2002 compared to 11.2% for the three months
ended September 30, 2001. The increase in general and administrative expenses
between periods included expenses associated with acquired operations of $4.1
million accounting for 26.3% of the 37.5% increase between periods. The
remaining net increase of 11.2% 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 Expenses. Management fee and other expenses were
$0.1 and $0.3 million for the three months ended September 30, 2002 and 2001,
respectively.

Impairment of Intangibles. Impairment of intangibles for the three months
ended September 30, 2002 was $1.0 million and was related to one of the
Company's contract intangibles.

Depreciation and Amortization. Depreciation and amortization was $5.7
million for the three months ended September 30, 2002 compared to $3.8 million
for the three months ended September 30, 2001, an increase of $1.9 million or
51.8%. Depreciation increased by $0.3 million between periods while amortization
expense increased by $1.6 million between periods. The increase in depreciation
expense was due to capital expenditures made during 2001 and 2002. Amortization
expense increased $1.6 million between periods principally due to amortization
of identifiable intangibles resulting from acquisitions made during 2001 and
2002, partially offset by no longer amortizing goodwill subsequent to January 1,
2002 (amortization of goodwill was $0.5 million for the three months ended
September 30, 2001) as a result of implementing SFAS No. 142, Goodwill and Other
Intangible Assets.

Net Interest Expense. Net interest expense increased $0.8 million to $6.4
million for the three months ended September 30, 2002 compared to $5.6 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 (Loss) before Income Taxes. Earnings before income taxes for the
three months ended September 30, 2002 were $8.0 million compared to a loss of
$18.1 million for the three months ended September 30, 2001.

Income Tax Expense (Benefit). Income tax expense for the three months
ended September 30, 2002 was $4.1 million compared to a benefit of $6.2 million
for the three months ended September 30, 2001. The increase in income tax
expense for the three months ended September 30, 2002 over the same period in
2001 was primarily due to the increased level of earnings before income taxes in
2002.

Net Earnings (Loss). Net earnings for the three months ended September 30,
2002 were $3.9 million compared to a net loss of $11.9 million for the three
months ended September 30, 2001.

Dividends on Preferred Stock. The Company accrued $3.3 million and $3.0
million of dividends for the three months ended September 30, 2002 and 2001,
respectively, on its outstanding Class A mandatory redeemable preferred stock.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001

Net Revenue. Net revenue for the nine months ended September 30, 2002
increased $154.4 million, or 20.9%, to $894.9 million from $740.5 million for
the nine months ended September 30, 2001. During the three months ending
September 30, 2001, the Company recorded a charge of $24.5 million to increase
its contractual allowances for patient accounts receivable for periods prior to
2001. The impact of this charge was to reduce fee-for-service net revenue for
the nine months ended September 30, 2001 by $24.5 million. See
18

footnote 6 to the unaudited consolidated financial statements for additional
information. The increase in net revenue of $154.4 million included an increase
of $61.3 million in fee-for-service revenue, $81.1 million in contract revenue
and $12.1 million in other revenue. For the nine month periods ended September
30, 2002 and 2001, fee-for-service revenue was 75.2% of net revenue in 2002
compared to 82.6% in 2001, contract revenue was 22.3% of net revenue in 2002
compared to 16.0% in 2001 and other revenue was 2.5% of net revenue in 2002
compared to 1.4% 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 $293.1
million for the nine months ended September 30, 2002 compared to $277.0 million
for the nine months ended September 30, 2001, an increase of $16.1 million or
5.8%. As a percentage of net revenue the provision for uncollectibles was 32.8%
for the nine months ended September 30, 2002 compared to 37.4% for the nine
months ended September 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 nine
months ended September 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 revenue 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 nine months ended September 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 nine months ended September 30, 2002 increased $138.3
million, or 29.9% ($113.8 million, or 23.3%, after giving effect to the $24.5
million charge in 2001), to $601.8 million from $463.5 million for the
corresponding nine 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 $22.9
million or 5.3%, to $452.5 million during 2002 from $429.6 million during 2001.
The increase in same contract revenue of 5.3% includes the effects of both
increased billing volume and higher estimated net revenue per billing unit
between periods. Overall, same contract revenue increased approximately 3.0%
between periods due to an increase in billing volume. Beginning January 1, 2002,
the Company's reimbursement under the Medicare Program was reduced. The
estimated effect of such reduction in the nine months ended September 30, 2002
was $6.9 million. Acquisitions contributed $88.5 million and new contracts
obtained through internal sales contributed $33.4 million of the remaining
increase. The increases noted above were partially offset by $31.0 million of
revenue derived from contracts that terminated during the periods.

Professional Expenses. Professional expenses for the nine months ended
September 30, 2002 were $484.4 million compared to $389.7 million for the nine
months ended September 30, 2001, an increase of $94.7 million or 24.3%. The
increase of $94.7 million included $64.1 million resulting from acquisitions
between periods. As a percentage of net revenue less provision for
uncollectibles, professional expenses were 80.5% for the nine months ended
September 30, 2002 compared to 84.1% for the nine months ended September 30,
2001 (79.9% after giving effect to the charge of $24.5 million in 2001).
Physician costs, billing and collection expenses and other professional
expenses, excluding professional liability expense and the effect of
acquisitions, increased $25.8 million, or 7.1% 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 mid-level practitioners and physician assistants in 2002 in an effort to
improve emergency department productivity and to meet increased emergency
department volumes. Professional liability expense was $27.4 million for the
nine months ended September 30, 2002 compared with $21.8 million for the nine
months ended September 30, 2001, resulting in an increase between periods of
$5.6 million or 25.8%. The increase in the Company's professional liability
insurance cost in addition to increases resulting from acquisitions ($0.9
million), reflects

19

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 $117.4 million for the nine months
ended September 30, 2002 from $73.7 million for the corresponding period in
2001. The increase in gross profit after giving effect to the charge of $24.5
million in 2001 is attributable to the contribution of acquisitions. Gross
profit from other than acquired operations declined approximately $5.2 million
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
increased to 19.5% for the nine months ended September 30, 2002 compared to
15.9% for the nine months ended September 30, 2001 due to the factors described
above.

General and Administrative Expenses. General and administrative expenses
for the nine months ended September 30, 2002 increased to $58.6 million from
$46.4 million for the nine months ended September 30, 2001, for an increase of
$12.2 million, or 26.3% between periods. General and administrative expenses as
a percentage of net revenue less provision for uncollectibles were 9.7% for the
nine months ended September 30, 2002 compared to 10.0% for the nine months ended
September 30, 2001. The increase in general and administrative expenses between
periods included expenses associated with acquired operations of $9.6 million
accounting for 20.7% of the 26.3% increase between periods. The remaining net
increase of 5.6% 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 Expenses. Management fee and other expenses were
$0.4 million for the nine months ended September 30, 2002 and 2001.

Impairment of Intangibles. Impairment of intangibles was $1.0 million and
$4.1 million for the nine months ended September 30, 2002 and 2001,
respectively. Intangibles related to a contract in 2002 and in 2001 a portion of
the Company's intangibles relating to its radiology operations were reduced to
their estimated fair market value.

Depreciation and Amortization. Depreciation and amortization was $14.3
million for the nine months ended September 30, 2002 compared to $11.2 million
for the nine months ended September 30, 2001. Depreciation increased by $1.0
million between periods while amortization expense increased by $2.1 million
between periods. The increase in depreciation expense was due to capital
expenditures made during 2001 and 2002. Amortization expense increased $2.1
million between periods principally due to amortization of identifiable
intangibles resulting from acquisitions made during 2001 and 2002, partially
offset by no longer amortizing goodwill subsequent to January 1, 2002
(amortization of goodwill was $1.5 million for the nine months ended September
30, 2001) as a result of implementing SFAS No. 142, Goodwill and Other
Intangible Assets.

Net Interest Expense. Net interest expense increased $0.2 million to $17.5
million for the nine months ended September 30, 2002 compared to $17.3 million
for the corresponding period in 2001. The increase in net interest expense is
principally due to additional debt outstanding resulting from the acquisition of
SHR partially offset by lower interest rates between periods.

Refinancing Costs. In conjunction with implementing SFAS No. 145,
"Rescission of Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections", the Company reclassified its previously recorded
extraordinary loss of $3.4 million ($2.0 million net of income tax benefit of
$1.4 million) due to the write-off of its previously deferred financing cost to
the presentation required under the new SFAS.

Earnings (Loss) before Income Taxes and Cumulative Effect of Change in
Accounting Principle. Earnings before income taxes and cumulative effect of
change in accounting principle for the nine months ended September 30, 2002 was
$22.2 million compared to a loss of $5.7 million for the nine months ended
September 30, 2001.

Income Tax Expense (Benefit). Income tax expense for the nine months ended
September 30, 2002 was $10.6 million compared to a benefit of $1.2 million for
the nine months ended September 30, 2001. The

20

increase in income tax expense for the nine months ended September 30, 2002 over
the same period in 2001 was primarily due to the increased level of earnings
before income taxes in 2002.

Earnings (Loss) before Cumulative Effect of Change in Accounting Principle,
Net of Taxes. Earnings before cumulative effect of change in accounting
principle, net of taxes, for the nine months ended September 30, 2002, was $11.6
million compared to a loss of $4.5 million for the nine months ended September
30, 2001.

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.

Net Earnings (Loss). Net earnings for the nine months ended September 30,
2002 and 2001 were $11.3 million and a loss of $4.5 million, respectively.

Dividends on Preferred Stock. The Company accrued $9.8 million and $8.9
million of dividends for the nine months ended September 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 nine months ended September
30, of 2002 and 2001 was $25.5 million and $35.9 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 $7.2 million in the first nine months of 2002 and $3.7
million in the first nine 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 $167.0 million during the nine months ended September 30, 2002 and $15.2
million in the corresponding period in 2001. Future contingent payment
obligations are approximately $11.3 million as of September 30, 2002.

The Company made scheduled debt maturity payments of $8.6 million in the
first nine months of 2002 and $11.9 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
21

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.

Except for four days in 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.

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 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 $30.6 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 September 30, 2002, had cash and cash equivalents of
approximately $23.7 million and a revolving credit facility borrowing
availability of $73.4 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 not
formally announced its Physician Fee Schedule for 2003. However, CMS has
indicated based on preliminary estimates that certain of those physician
reimbursement rates will decrease from their corresponding levels in 2002. The
Company has estimated the impact of such estimated decreased rates on its
revenues in 2003 from Medicare and commercial insurance plans with fee schedules
based on Medicare rates at approximately $6.4 million based on its 2002
estimated patient volume.

TRICARE PROGRAM

Substantially all of the revenue derived by SHR is for services rendered to
military personnel and their dependents as a subcontractor under the Tricare
program administered by the Department of Defense. The Department of Defense has
a requirement for an integrated health care delivery system that includes a
contractor managed care support contract to provide health, medical and
administrative support services to its eligible beneficiaries. SHR currently
provides its services through subcontract arrangements with certain of the
managed care organizations that contract directly with the Tricare program. On
August 1, 2002, the Department of Defense issued a request for proposals ("RFP")
for the managed care support contracts, also

22

known as Tricare Next Generation ("T-Nex"). The intent of the RFP is to replace
the existing managed care support contracts on a phased-in basis between April
2004 and November 2004.

The responses to the RFP by interested managed care organizations are
currently scheduled to be submitted in December 2002. SHR is actively pursuing
contractual relationships with several of the managed care organizations
responding to the RFP's. The current T-Nex proposal provides for awarding prime
contracts to three managed care organizations to cover three distinct
geographical regions of the country. The award of such prime contracts is
currently expected to occur in mid-2003 with the start of the delivery of health
care services in 2004 as noted above.

The impact on the results of operations of SHR resulting from the changes
stemming from the T-Nex proposal are not known or able to be estimated at this
time. In the event that the managed care organizations that SHR has established
relationships with in response to the RFP process are not awarded prime
contracts, SHR expects that it will be able to pursue direct service contracts
with individual military treatment facilities. The potential success and impact
on the results of operations of SHR in obtaining direct service contracts is
similarly not known or able to be estimated at this time. If SHR is unable to
establish contracts with military treatment facilities either directly or
through managed care organizations, then it could have a material adverse effect
on our financial condition and results of operations.

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 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 September 30, 2002, the fair value of the Company's total debt, which
has a carrying value of $322.8 million, was approximately $330.8 million. The
Company had $225.8 million of variable debt outstanding at September 30, 2002.
If the market interest rates for the Company's variable rate borrowings averaged
1% more during the twelve months subsequent to September 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.

23

ITEM 4. CONTROLS AND PROCEDURES

(a) The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chairman
and Chief Executive Officer along with the Company's Executive Vice President of
Finance and Administration, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation the Company's Chief Executive Officer along
with the Company's Executive Vice President of Finance and Administration
concluded that as of November 4, 2002 the Company's disclosure controls and
procedures (1) are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings and (2) are adequate to ensure
that information required to be disclosed by the Company in the reports filed or
submitted by the Company under the Exchange Act is recorded, processed and
summarized and reported within the time periods specified in the SEC's rules and
forms.

(b) There have been no significant changes in the Company's internal
controls or in other factors which could significantly effect internal controls
subsequent to the date the Company carried out its evaluation.

24

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 7 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 REPORTS ON FORM 8-K

Exhibits

Exhibit 3.118 Certificate of Incorporation of Kelly Medical Corporation
dated August 13, 1985
Exhibit 3.119 Amended and restated bylaws of Kelly Medical Corporation
Exhibit 3.120 Certificate of Incorporation of Medical Services, Inc. dated
February 4, 1992
Exhibit 3.121 Amended and restated bylaws of Medical Services, Inc.
Exhibit 3.122 Certificate of Incorporation of Health Care Alliance, Inc.
dated January 4, 1995
Exhibit 3.123 Amended and restated bylaws of Health Care Alliance, Inc.
Exhibit 3.124 Certificate of Amendment to the Articles of Incorporation of
Kelly Medical Corporation dated September 16, 2002
Exhibit 4.2 Supplemental Indenture dated March 28, 2001
Exhibit 4.3 Supplemental Indenture dated September 3, 2001
Exhibit 4.4 Supplemental Indenture dated May 31, 2002

Reports on Form 8-K

During the nine months ended September 30, 2002 we filed the following
reports on form 8-K:

(1) Report dated April 2, 2002 announcing the signing of a definitive
agreement to acquire Spectrum Healthcare Resources.

(2) Report dated May 15, 2002 announcing the completion of the acquisition
of Spectrum Healthcare Resources.

(3) Report dated July 12, 2002, amending its Current Report on Form 8-K,
dated May 15, 2002 relating to the acquisition of Spectrum Healthcare
Resources (SHR) for the purpose of including the required financial
statements and pro forma financial information with respect to SHR in
accordance with the requirements of Form 8-K.

25

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
Equivalent to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Knoxville, Tennessee, on November 6, 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

26

SECTION 302 CERTIFICATE

I, H. Lynn Massingale, Chief Executive Officer of Team Health, Inc., certify
that:

1. I have reviewed this quarterly report on Form 10-Q of Team Health, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 6, 2002

By: /s/ H. LYNN MASSINGALE
----------------------------------
H. Lynn Massingale
Chief Executive Officer

27

SECTION 302 CERTIFICATE

I, Robert J. Abramowski, Executive Vice President of Finance and Administration
of Team Health, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Team Health, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 6, 2002

By: /s/ ROBERT J. ABRAMOWSKI
----------------------------------
Robert J. Abramowski
Executive Vice President of
Finance and Administration

28