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)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

[ ] 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)

Yes [ ] No [X]

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
4, 2003.

(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, 2003

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

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, 2002 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, 2002
audited consolidated financial statements and the notes thereto included in the
Company's Form 10-K Equivalent.

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.

During July 2002, the Financial Accounting Standards Board (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 were previously 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.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensa-

7

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tion, to provide alternative methods of transition to the fair value method of
accounting for stock-based employee compensation under SFAS No. 123. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported earnings in annual
and interim financial statements. While the Statement does not amend SFAS No.
123 to require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether the
accounting for that compensation is using the fair value method of SFAS No. 123
or the intrinsic value method of Opinion 25.

As more fully discussed in Note 7, the Company adopted the disclosure
requirements of SFAS No. 148 and the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, prospectively to all new
awards granted to employees after January 1, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity-type instruments, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. The Company's mandatory
redeemable preferred stock is subject to the provisions of this statement. In
addition, dividends on its redeemable preferred stock will be required to be
included in interest expense in the Company's statements of operations. The
provisions of SFAS No. 150 are applicable to the Company's financial statements
beginning in 2005. The Company does not expect the adoption of SFAS No. 150 to
have a material effect on the results of its operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 provides guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, non-controlling interests, and results of operations of a VIE are
to be included in an entity's consolidated financial statements. A VIE exists
when either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial interest.
Those characteristics include the direct or indirect ability to make decisions
about an entity's activities through voting rights or similar rights, the
obligation to absorb the expected losses of an entity if they occur, and the
right to receive the expected residual returns of the entity if they occur.

FIN 46 was effective immediately for new entities created or acquired after
February 1, 2003. The Company has no interest in any entities created nor did it
acquire any entities after February 1, 2003. FIN 46 will become effective on
December 15, 2003, for entities in which the Company held a variable interest
prior to February 1, 2003. Although management believes that FIN 46 will not
have a material impact, management continues to evaluate its interests acquired
prior to February 1, 2003 to assess whether consolidation or further disclosure
of a VIE is required under FIN 46.

8

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. NET REVENUE

Net revenue for the three and nine months ended September 30, 2003 and
2002, respectively, consisted of the following (in thousands):

NOTE 4. INTANGIBLE ASSETS

The following is a summary of intangible assets and related amortization as
of September 30, 2003 and December 31, 2002 (in thousands):

As of September 30, 2003, the Company may have to pay up to $8.3 million in
future contingent payments as additional consideration for acquisitions made
prior to September 30, 2003. These payments will be made and recorded as
additional goodwill should the acquired operations achieve the financial targets
agreed to in the respective acquisition agreements. During the nine months ended
September 30, 2003, the Company recorded an additional $0.7 million of goodwill
related to previous acquisitions.

During the three months ended September 30, 2002, the Company recorded an
impairment loss of approximately $1.0 million relating to one of its contract
intangibles.

9

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. LONG-TERM DEBT

Long-term debt as of September 30, 2003 consists of the following (in
thousands):

Term Loan Facilities........................................ $202,413
12% Senior Subordinated Notes............................... 100,000
--------
302,413
Less current portion........................................ 14,874
--------
$287,539
========

The Term Loan Facilities consisted of the following (in thousands):

Senior Secured Term Loan A.................................. $ 59,476
Senior Secured Term Loan B.................................. 142,937
--------
$202,413
========

In addition to the term loan facilities, the Company has a senior secured
revolving credit facility totaling $75.0 million.

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.

The interest rates for any senior revolving credit facility borrowings and
for the Term Loan A amounts are based on a grid which is based on the
consolidated ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization, all as defined in the credit agreement. The
interest rate on any Term Loan B amount outstanding is equal to the eurodollar
rate plus 3.25% or the agent bank's base rate plus 1.25%. In the event of a
default by the Company under its bank loan covenants, such interest rates would
increase by 2.0% over the current rates then in effect. Upon expiration of the
current interest rate period, the Company would pay the agent bank's base rates
plus 2.0% plus the maximum applicable margin. Under the bank's base rate
borrowing base, the maximum applicable margin for the senior revolving credit
facility borrowings and Term Loan A amounts is 1.0% and for the Term Loan B
amounts is 1.25%.

The interest rates at September 30, 2003 were 4.03% and 4.53% 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, 2003.
No funds have been borrowed under the revolving credit facility as of September
30, 2003, but the Company had $2.3 million of standby letters of credit
outstanding against the revolving credit facility commitment. The Company has a
forward interest rate swap agreement that became effective November 7, 2002, to
effectively convert $62.5 million of floating-rate borrowings to 3.86%
fixed-rate borrowings through April 30, 2005.

The senior credit agreement also 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.

10

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate maturities of long-term debt due within one year of September 30,
2003 are currently as follows (in thousands):

2004........................................................ $ 14,874
2005........................................................ 18,471
2006........................................................ 20,749
2007........................................................ 11,157
Thereafter.................................................. 237,162
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$302,413
========

NOTE 6. PROFESSIONAL LIABILITY INSURANCE

The Company provides for its estimated professional liability losses
through a combination of commercial insurance company coverage as well as
reserves established to provide for future payments under self-insured retention
components and to establish reserves for future claims incurred but not
reported. During the period March 12, 1999 through March 11, 2003, the primary
source of the Company's coverage for such risks was a professional liability
insurance policy provided through one insurance carrier. The policy with the
Company's primary insurance carrier for such coverage and period provided
coverage for potential liabilities on a "claims-made" basis. The policy included
the ability for the Company to be able to exercise a "tail" premium option. The
tail premium option included an aggregate limit of $130.0 million that included
claims reported during the two-year period ended March 12, 2003, as well as all
incurred but not reported claims during the period March 12, 1999 to March 11,
2003. As a result of conditions in the professional liability insurance market,
the Company decided that it would provide, beginning March 12, 2003, for such
risks previously covered by the Company's primary insurance carrier through a
captive insurance company. Since March 12, 2003, loss estimates on a
"claims-made" basis are being provided for and funded within the captive
insurance company. Additionally, the Company is providing for an actuarial
estimate of losses for professional liability claims incurred but not reported
since March 12, 2003.

The option for the tail premium was exercised by the Company effective
March 11, 2003, and its cost of approximately $30.6 million, was paid in April
2003. The Company had previously recorded the cost of such option over the
four-year period ended March 11, 2003.

The Company's decision to forego commercial professional liability
insurance in favor of a self-insured program was, in part, based on the results
of an actuarial study. The actuarial study was prepared to provide the Company
with an actuarial estimate of the current annual cost of its professional
liability claim losses and related expenses and also to estimate the Company's
potential exposure to prior period losses under the $130.0 million aggregate
policy limit. The foregoing actuarial study included numerous underlying
estimates and assumptions, including assumptions as to future claim losses, the
severity and frequency of such projected losses, loss development factors, and
others. The results of the actuarial study included a projection that the
Company would incur a loss resulting from claims for the covered periods
exceeding the $130.0 million aggregate insurance company loss limit under the
previous policy. Such loss estimate, discounted at 4% over the projected future
payment periods, totaled $50.8 million. The Company had previously recorded this
loss estimate in its statement of operations for the three months ended March
31, 2003.

The Company's provisions for losses subsequent to March 11, 2003, that are
not covered by commercial insurance company coverage are subject to subsequent
adjustment should future actuarial projected results for such periods indicate
projected losses are greater or less than previously projected. In addition, the
results of future actuarial studies may result in the loss estimate provision
under the aggregate policy limit to be further adjusted upward or downward as
actual results are realized over time.

11

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7. STOCK OPTIONS

Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
prospectively to all new awards granted to employees after January 1, 2003.
Prior to January 1, 2003 the Company applied the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for options awarded. No stock-based
employee compensation expense is reflected in net earnings for the nine months
ended September 30, 2002 as all options granted prior to January 1, 2003 had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Therefore, the expense related to stock-based employee
compensation included in the determination of net earnings (loss) for the three
and nine months ended September 30, 2003 and 2002 is less than that which would
have been recognized if the fair value method had been applied to all awards.
The following table illustrates the effect on net earnings (loss) if the fair
value method had been applied to all outstanding and unvested awards in each
period (in thousands):

NOTE 8. 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.

INDEMNITY

In connection with the acquisition of a company that specializes in
providing medical staff providers to military treatment facilities on May 1,
2002, subject to certain limitations, the previous shareholders of such company
and its 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 $0.5 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 any claims asserted against the acquired
company during the three years subsequent to the date of its acquisition related
to tax matters whose origin was attributable to tax periods prior to May 1,
2002.

12

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, the Company may have to pay up to $8.3 million in
future contingent payments as additional consideration for acquisitions made
prior to September 30, 2003. These payments will be made and recorded as
additional purchase price should the acquired operations achieve the financial
targets agreed to in the respective acquisition agreements.

POTENTIAL TAX ASSESSMENT

The Company had previously received a Notice of Proposed Adjustment (NOPA)
from the Internal Revenue Service (IRS) relating to audits of its federal
corporate income tax returns for 2000 and 2001. The IRS has asserted
deficiencies of taxable income in such tax returns in the total amount of $88.4
million plus interest on the resulting taxes due. In addition, the IRS is
asserting deficiencies of taxable income in tax returns for the years 2000 and
2001 for two affiliated professional corporations in the amount of $10.6
million.

A NOPA had previously been received for the Company's tax returns for the
two affiliated professional corporations referenced above for 1999. The issue
asserted by the IRS for such year is identical to the issue being asserted for
the 2000 and 2001 tax returns, as well as with the position being asserted by
the IRS with respect to the Company's federal corporate tax returns for 2000 and
2001. The Company had filed a protest with the Office of the Regional Director
of Appeals in connection with the 1999 tax returns of the affiliated
professional corporations and in September 2003 received a verbal indication
that a favorable "no change" ruling with respect to the 1999 tax returns has
been concluded to by the Office. Such conclusion is currently awaiting
concurrence by a healthcare industry expert within the IRS.

The Company believes that it has meritorious legal defenses to the
deficiencies asserted and believes that the ultimate outcome of the proposed
adjustments will not result in a material impact on the Company's consolidated
results of operations or financial position.

TRICARE PROGRAM

During the nine months ended September 30, 2003, the Company derived
approximately $170.7 million of revenue 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 healthcare delivery system that includes a
contractor managed care support contract to provide health, medical and
administrative support services to its eligible beneficiaries. The Company
currently provides its services through subcontract arrangements with managed
care organizations that contract directly with the TRICARE program.

13

TEAM HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On August 1, 2002, the Department of Defense issued a request for proposals
for the next generation of managed care support contracts, also known as the
"TRICARE Contracts". The intent of the TRICARE Contracts is to replace the
existing managed care support contracts on a phased-in basis between June and
November 2004. The TRICARE Contracts proposal provided for the awarding of prime
contracts to three managed care organizations to cover three distinct
geographical regions of the country. The award of the prime contracts was
announced in August 2003.

The Department of Defense is currently in the process of determining how it
will procure the civilian positions that it will require going forward. Options
currently being discussed include "rolling-over" existing staffed positions with
existing providers, such as the Company, through the recently selected managed
care organizations, to terminating all existing contracts for staffed positions
and putting ongoing staffing needs of military treatment facilities out for
competitive bidding.

The impact on the results of operations and financial condition of the
Company resulting from the changes in the TRICARE Contracts program are not
known or able to be estimated at this time. The Company has exclusive contracts
with two of the three future prime contractors for future resource sharing. In
the event the Department of Defense opts to allow for the rollover of existing
staffing, the Company expects to maintain and expand on the business that it
currently has in the West and North regions under the TRICARE Contracts. The
Company does not have a contract to provide staffing with the managed care
organization that has been awarded the South region under the TRICARE Contracts.
The Company expects that it will be able to pursue direct service contracts with
individual military treatment facilities in the South region, as it currently
provides staffing to numerous military treatment facilities in the South region.
The potential success and impact on the results of operations of the Company in
obtaining direct service contracts is not known or able to be estimated at this
time. Alternatively, if the Department of Defense opts to terminate its existing
staffing contracts and enter into a competitive bidding process for such
positions across all regions, the Company's existing revenues and margins and
financial condition may be materially adversely affected.

NOTE 9. 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 $1.5
million at September 30, 2003, 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 among the largest national providers 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, which
account for the majority of our net revenue. Effective May 1, 2002, we acquired
a provider of outsourced physician staffing and administrative services to
military treatment facilities. In addition to providing physician staffing, the
acquired provider also provides a broad array of non-physician health care
services including specialty technical staffing, para-professionals and nurse
staffing on a permanent basis to the military.

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 AND ESTIMATES

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. Management believes the
following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

Revenue Recognition

Net Revenue. A significant portion (69.8%) of the Company's revenue in the
nine months ended September 30, 2003, resulted 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 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 systems 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. 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 fee-for-service 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, resolution of
credit balances, the estimated impact of billing system effectiveness
improvement initiatives and trends in collections from self-pay patients. Such
estimates are substantially formulaic in nature and are calculated at the
individual contract level. The estimates are continuously updated and adjusted
if subsequent actual collection experience indicates a change in estimate is
necessary. Such provisions and any subsequent changes

15

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.

Insurance Reserves

The nature of the Company's business is such that it is subject to
professional liability lawsuits. Historically, to mitigate a portion of this
risk, the Company has maintained insurance for individual professional liability
claims with per incident and annual aggregate limits per physician for all
incidents. Prior to March 12, 2003, such insurance coverage has been provided by
a commercial insurance company provider. Professional liability lawsuits are
routinely reviewed by the Company's insurance carrier and management for
purposes of establishing ultimate loss estimates. Provisions for estimated
losses in excess of insurance limits have been provided at the time such
determinations are made. In addition, where as a condition of a professional
liability insurance policy the policy includes a self-insured risk retention
layer of coverage, the Company has recorded a provision for estimated losses
likely to be incurred during such periods and within such limits based on its
past loss experience following consultation with its outside insurance experts
and claims managers.

Subsequent to March 11, 2003, the Company has provided for a significant
portion of its professional liability loss exposures through the use of a
captive insurance company and through greater utilization of self-insurance
reserves. Accordingly, beginning on March 12, 2003, a substantial portion of the
Company's provision for professional liability losses is based on periodic
actuarially determined estimates of such losses for periods subsequent to March
11, 2003. An independent actuary firm is responsible for preparation of the
periodic actuarial studies. Management's estimate of the Company's professional
liability costs resulting from such actuarial studies is significantly
influenced by assumptions, which are limited by the uncertainty of predicting
future events, and assessments regarding expectations of several factors. These
factors include, but are not limited to: the frequency and severity of claims,
which can differ significantly by jurisdiction; coverage limits of third-party
insurance; the effectiveness of the Company's claims management process; and the
outcome of litigation.

If in the event that losses for the period March 12, 1999 through March 11,
2003, become known to likely be greater than the insured limits applicable to
such coverage in such periods, or in the event that subsequent to March 11,
2003, such actuarial determined estimates of losses are greater or less than
previous loss estimates, such change in estimates will require an adjustment to
the Company's loss provisions in the periods such change in loss estimates are
determined. The Company in March 2003 had an actuarial projection made of its
potential exposure for losses under the provisions of its commercial insurance
policy that ended March 11, 2003. The results of that actuarial study indicated
that the Company would incur a loss for claim losses and expenses in excess of
the $130.0 million aggregate limit. Accordingly, the Company recorded a loss
estimate, discounted at 4%, of $50.8 million in its statement of operations for
the three months ended March 31, 2003. The results of future actuarial studies
may result in such loss estimate provision under the aggregate policy limit to
be further adjusted upward or downward as actual results are realized over time.

The payment of any losses realized by the Company under the aggregate loss
provision discussed above will only be after the Company's previous commercial
insurance carrier has paid such losses and expenses up to $130.0 million for the
applicable prior periods. The pattern of payment for professional liability
losses for any incurrence year typically is as long as six years. Accordingly,
the Company's portion of its loss exposure under the aggregate policy feature,
if realized, is not expected to result in a cash outflow in 2003.

The actuarial study completed in March 2003 included projections of
professional liability loss estimates for purposes of providing for such losses
under the Company's captive and self-insurance programs in effect since March
12, 2003. The Company's professional liability costs consist of the annual
projected costs resulting from such actuarial study along with the cost of
certain professional liability commercial insurance premiums and programs
available to the Company that remain in effect. The provisions for professional
liability costs will fluctuate as a result of several factors, including hours
of exposure as measured by hours of physician and related professional staff
services as well as actual loss development trends. As noted above, due

16

to the long pattern of payout for such exposures, the Company anticipates that a
substantial portion of such latter amount will not be realized in the form of
actual cash outlays until periods beyond 2003.

Impairment of Intangible Assets

In assessing the recoverability of the Company's intangibles the Company
must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, the Company may be required to record
impairment charges for these assets. Effective January 1, 2002, the Company
adopted Statement of Financial Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, which required the Company to analyze its goodwill for
impairment issues during the first three months of 2002, and thereafter on an
annual basis. As a result of the initial impairment review, the Company recorded
as a cumulative change of accounting principle a loss of $0.3 million net of
related tax benefit in the three months ended March 31, 2002. During the three
months ended September 30, 2002, the Company recorded an impairment loss of
approximately $1.0 million relating to one of its contract intangibles.

The Company's critical accounting policies have been disclosed in its 2002
Annual Report on Form 10-K Equivalent. There have been no changes to these
critical accounting policies or their application during the nine months ended
September 30, 2003.

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:

17

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002

NET REVENUES. Net revenues for the three months ended September 30, 2003
increased $49.1 million, or 14.6%, to $385.0 million from $335.9 million for the
three months ended September 30, 2002. The increase in net revenues of $49.1
million included an increase of $31.0 million in fee-for-service revenue, $18.6
million in contract revenue and a decrease of $0.5 million in other revenue. For
the three month periods ended September 30, 2003 and 2002, fee-for-service
revenue was 70.6% of net revenue in 2003 compared to 71.7% in 2002, contract
revenue was 27.5% of net revenue in 2003 compared to 25.9% in 2002 and other
revenue was 1.9% of net revenue in 2003 compared to 2.4% in 2002.

PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $129.7
million for the three months ended September 30, 2003 compared to $111.1 million
for the three months ended September 30, 2002, an increase of $18.6 million or
16.7%. The provision for uncollectibles as a percentage of net revenue was 33.7%
for the three months ended September 30, 2003 compared to 33.1% for the three
months ended September 30, 2002. The provision for uncollectibles is primarily
related to revenue generated under fee-for-service contracts that is not
expected to be fully collected. The higher provision as a percentage of net
revenue in 2003 is principally due to the lower mix of fee-for-service revenue
in 2003.

NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision
for uncollectibles for the three months ended September 30, 2003 increased $30.5
million, or 13.6%, to $255.3 million from $224.8 million for the corresponding
three months in 2002. Acquisitions contributed $2.0 million and new contracts
obtained through internal sales contributed $26.7 million of the increase. The
aforementioned increases were partially offset by $20.1 million of revenue
derived from contracts that terminated during the periods. Same contract revenue
less provision for uncollectibles, which consists of contracts under management
in both periods, increased $22.0 million, or 11.0%, to $222.4 million in 2003
from $200.4 million in 2002. The increase in same contract revenue of 11.0%
includes the effect of an increase in same contract fee-for-service revenue of
approximately 8%, including approximately 1% from increased volume and 7% from
higher estimated average net patient charges between periods, principally as the
result of higher acuity factors and reimbursement rate increases. The remaining
increase in same contract revenue included an increase in net revenue less
provision for uncollectibles for locum tenens services and contract revenue of
approximately 3.0% between periods.

COST OF SERVICES RENDERED. Cost of services rendered includes professional
service expenses (including provider compensation as well as billing and
collection costs for services rendered) and professional liability costs which
represents the cost of professional liability losses and insurance. Professional
service expenses for the three months ended September 30, 2003 were $188.6
million compared to $172.4 million for the three months ended September 30,
2002, an increase of $16.2 million or 9.4%. The increase of $16.2 million
included $1.6 million resulting from acquisitions between periods. The remaining
increase in professional service expenses was principally due to increases in
provider hours as the result of net new contract sales, principally for staffing
within military treatment facilities, including increases resulting from troop
deployments in 2003, as well as additional costs to accommodate increased
emergency department ("ED") patient visits. As a percentage of net revenue less
provision for uncollectibles, professional service expenses were 73.8% for the
three months ended September 30, 2003 compared to 76.7% for the three months
ended September 30, 2002. Both the rate of provider compensation expense and
billing and collection costs increased less than the rate of increase in net
revenues between periods. Professional liability costs were $17.1 million in the
period compared with $9.6 million for the three months ended September 30, 2002,
resulting in an increase between years of $7.5 million or 78.5%. The increase in
professional liability costs is due to an increased level of cost resulting from
an estimate of the Company's losses on a self-insured basis beginning March 12,
2003, compared to its commercial insurance premium based cost in the prior
period.

GROSS PROFIT. Gross profit was $49.6 million for the three months ended
September 30, 2003, compared to $42.9 million for the corresponding period in
2002. The increase in gross profit is attributable to the effect of acquisitions
and net new contract growth between periods as well as increases in ED volumes
and estimated net revenue per ED patient visit. Gross profit as a percentage of
revenue less provision for uncollectibles for

18

the three months ended September 30, 2003 was 19.4% compared to 19.1% for the
three months ended September 30, 2002.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 2003 increased to $23.1 million from
$21.6 million for the three months ended September 30, 2002, for an increase of
$1.5 million, or 6.8% between periods. General and administrative expenses as a
percentage of net revenue less provision for uncollectibles were 9.0% for the
three months ended September 30, 2003, compared to 9.6% for the three months
ended September 30, 2002. The increase in general and administrative expenses
between periods included expenses associated with acquired operations of $0.1
million, which was 0.3% of the increase between periods. The remaining net
increase of 6.5%, or approximately $1.4 million, was principally due to
increases in salaries and related benefit costs of approximately $1.6 million
offset by a decrease in other general and administrative expenses of $0.2
million. Included in the increase in salaries and benefits between periods was
an increase of approximately $0.6 million related to the Company's management
incentive plan.

MANAGEMENT FEE AND OTHER OPERATING EXPENSES. Management fee and other
operating expenses were $0.1 million for the three months ended September 30,
2003 and 2002, 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 $5.5
million for the three months ended September 30, 2003 and $5.7 million for the
three months ended September 30, 2002. Depreciation expense decreased by $0.2
million between periods.

NET INTEREST EXPENSE. Net interest expense decreased $0.3 million to $6.1
million for the three months ended September 30, 2003 compared to $6.4 million
for the corresponding period in 2002. The decrease in net interest expense is
due to lower borrowing levels and net interest rates between periods.

EARNINGS BEFORE INCOME TAXES. Earnings before income taxes for the three
months ended September 30, 2003 were $14.8 million compared to $8.0 million for
the three months ended September 30, 2002.

PROVISION FOR INCOME TAXES. Income taxes for the three months ended
September 30, 2003 were $5.5 million compared to $4.1 million for the three
months ended September 30, 2002. The increase in income taxes for the three
months ended September 30, 2003 over the same period in 2002 was due to the
increased level of earnings before income taxes in 2003.

NET EARNINGS. Net earnings for the three months ended September 30, 2003
were $9.4 million compared to $3.9 million for the three months ended September
30, 2002.

DIVIDENDS ON PREFERRED STOCK. The Company accrued $3.6 million of
dividends for the three months ended September 30, 2003 and $3.3 million of
dividends for the three months ended September 30, 2002, on its outstanding
Class A mandatory redeemable preferred stock.

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002

NET REVENUES. Net revenues for the nine months ended September 30, 2003
increased $199.2 million, or 22.3%, to $1,094.1 million from $894.9 million for
the nine months ended September 30, 2002. The increase in net revenues of $199.2
million included an increase of $91.5 million in fee-for-service revenue, $107.3
million in contract revenue and $0.4 million in other revenue. For the nine
month periods ended September 30, 2003 and 2002, fee-for-service revenue was
69.8% of net revenue in 2003 compared to 75.2% in 2002, contract revenue was
28.1% of net revenue in 2003 compared to 22.3% in 2002 and other revenue was
2.1% of net revenue in 2003 compared to 2.5% in 2002. The change in the mix of
revenues is primarily due to the effect of an acquisition in 2002. The acquired
operation derives a higher percentage of its revenues from hourly contract
billing than fee-for-service contracts.

PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $350.2
million for the nine months ended September 30, 2003 compared to $293.1 million
for the nine months ended September 30, 2002, an

19

increase of $57.1 million or 19.4%. The provision for uncollectibles as a
percentage of net revenue was 32.0% for the nine months ended September 30, 2003
compared to 32.7% for the nine months ended September 30, 2002. The provision
for uncollectibles is primarily related to revenue generated under
fee-for-service contracts that is not expected to be fully collected. The lower
provision as a percentage of net revenue in 2003 is principally due to the lower
mix of fee-for-service revenue in 2003.

NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision
for uncollectibles for the nine months ended September 30, 2003 increased $142.1
million, or 23.6%, to $743.9 million from $601.8 million for the corresponding
nine months in 2002. Acquisitions contributed $58.4 million and new contracts
obtained through internal sales contributed $86.2 million of the increase. The
aforementioned increases were partially offset by $45.9 million of revenue
derived from contracts that terminated during the periods. Same contract revenue
less provision for uncollectibles, which consists of contracts under management
in both periods, increased $43.4 million, or 8.5%, to $553.7 million in 2003
from $510.3 million in 2002. The increase in same contract revenue of 8.5%
between periods includes the effects of both an increase in ED fee-for-service
billing volume of approximately 3.9% and increased estimated net revenue per ED
patient visit of approximately 7.9%, principally as the result of higher acuity
factors and reimbursement rate increases. Net revenue less provision for
uncollectibles for other physician specialties and ED non fee-for-service
revenue overall increased approximately 1.9% between periods.

COST OF SERVICES RENDERED. Cost of services rendered includes professional
service expenses (including provider compensation as well as billing and
collection costs for services rendered) and professional liability costs which
represents the cost of professional liability losses and insurance. Professional
service expenses for the nine months ended September 30, 2003 were $557.6
million compared to $457.0 million for the nine months ended September 30, 2002,
an increase of $100.6 million or 22.0%. The increase of $100.6 million included
$46.0 million resulting from acquisitions between periods. As a percentage of
net revenue less provision for uncollectibles, professional service expenses
were 74.9% in the nine months ended September 30, 2003 and 75.9% in the nine
months ended September 30, 2002. The remaining increase in professional service
expenses was principally due to increases in provider hours as the result of net
new contract sales, principally for staffing within military treatment
facilities, including increases resulting from troop deployments in 2003, as
well as additional costs to accommodate increased ED patient visits.
Professional liability costs were $93.2 million for the nine months ended
September 30, 2003, including a provision for losses in excess of an aggregate
insured limit for periods prior to March 12, 2003 of $50.8 million. The total
professional liability cost of $93.2 million in the period compared with $27.4
million for the nine months ended September 30, 2002, resulting in an increase
between years of $65.8 million (54.7% excluding the effect of the $50.8 million
provision for excess insurance losses). The increase in professional liability
costs, in addition to increases resulting from the provision for excess losses
($50.8 million) and from acquisitions ($1.5 million), is due to an increase
between periods in the Company's commercial insurance program premium through
its expiration date of March 11, 2003, plus an increased level of cost resulting
from an estimate of the Company's losses on a self-insured basis subsequent to
March 11, 2003.

GROSS PROFIT. Gross profit was $93.1 million for the nine months ended
September 30, 2003 compared to $117.4 million for the corresponding period in
2002. The decrease in gross profit is attributable to the effect of the
provision for excess losses of $50.8 million partially offset by the effect of
acquisitions, net new contract growth and increased profitability of steady
state operations between periods. Gross profit as a percentage of revenue less
provision for uncollectibles for the nine months ended September 30, 2003 was
19.3% before the provision for excess losses for prior periods compared to 19.5%
for the nine months ended September 30, 2002. The decrease was principally due
to increases in provider and professional liability costs increasing faster than
growth in revenues.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 2003 increased to $69.0 million from
$58.6 million for the nine months ended September 30, 2002, an increase of $10.4
million, or 17.8% between periods. General and administrative expenses as a
percentage of net revenue less provision for uncollectibles were 9.3% for the
nine months ended September 30, 2003, compared to 9.7% for the nine months ended
September 30, 2002. The increase in general and administrative expenses between
periods included expenses associated with acquired operations of $4.9 mil-
20

lion, which was 8.3% of the 17.8% increase between periods. The remaining net
increase of 9.5%, or approximately $5.5 million, was principally due to
increases in salaries and related benefit costs of approximately $4.9 million
and costs related to a disputed contract settlement of approximately $0.6
million. Included in the increase in salaries and benefits between periods was
an increase of approximately $1.8 million related to the Company's management
incentive plan.

MANAGEMENT FEE AND OTHER OPERATING EXPENSES. Management fee and other
operating expenses were $0.4 million for the nine months ended September 30,
2003 and 2002, respectively.

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

DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $16.6
million for the nine months ended September 30, 2003 and $14.3 million for the
nine months ended September 30, 2002. Depreciation decreased $0.2 million
between periods while amortization expense increased by $2.5 million between
periods. The increase in amortization expense is principally due to the
acquisition of contract intangibles in 2002.

NET INTEREST EXPENSE. Net interest expense increased $1.0 million to $18.5
million for the nine months ended September 30, 2003 compared to $17.5 million
for the corresponding period in 2002. The increase in net interest expense is
principally due to increases in outstanding debt resulting from acquisitions
between periods.

REFINANCING COSTS. The Company expensed in the nine months ended September
30, 2002 $3.4 million of deferred financing costs related to its previously
outstanding bank debt that was refinanced in 2002.

EARNINGS (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE. Earnings (loss) before income taxes for the nine months
ended September 30, 2003 was a loss of $11.4 million compared to earnings of
$22.2 million for the nine months ended September 30, 2002.

PROVISION (BENEFIT) FOR INCOME TAXES. Income taxes for the nine months
ended September 30, 2003 was a benefit of $3.6 million compared to a provision
of $10.6 million for the nine months ended September 30, 2002. The decrease in
income taxes for the nine months ended September 30, 2003 over the same period
in 2002 was due to the decreased level of earnings before income taxes in 2003.

EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF TAXES. Earnings (loss) before cumulative effect of change in accounting
principle, net of taxes, for the nine months ended September 30, 2003, was a
loss of $7.8 million compared to earnings of $11.6 million for the nine months
ended September 30, 2002.

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 ($0.3 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 (loss) for the nine months ended
September 30, 2003 was a net loss of $7.8 million compared to net earnings of
$11.3 million for the nine months ended September 30, 2002.

DIVIDENDS ON PREFERRED STOCK. The Company accrued $10.8 million of
dividends for the nine months ended September 30, 2003 and $9.8 million of
dividends for the nine months ended September 30, 2002, 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 a provider of medical staffing to military
treatment facilities on May 1, 2002, have been sufficient to meet the Company's
cash requirements.

21

Cash provided by operating activities in the nine months ended September
30, of 2003 and 2002 was $50.4 million and $25.5 million, respectively. The
$24.9 million increase in cash provided by operating activities is principally
due to an increase in net earnings after excluding in 2003 the effect of a
non-cash charge of $50.8 million for professional liability insurance costs
pertaining to prior periods.

The Company spent $7.1 million in the first nine months of 2003 and $7.2
million in the first nine months of 2002 for capital expenditures. These
expenditures were primarily for information technology investments and related
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 completed on May 1, 2002 of a provider of medical
staffing to military treatment facilities, 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 noted above) 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 $1.6
million during the nine months ended September 30, 2003 and $167.0 million in
the corresponding period in 2002. Future contingent payment obligations are
approximately $8.3 million as of September 30, 2003.

The Company made scheduled debt maturity payments of $9.7 million in the
first nine months of 2003 and $8.6 million during the corresponding period in
2002 in accordance with its applicable term loan facilities. In addition, the
Company in 2003 prepaid $8.3 million of its bank term debt under an "excess cash
flow" payment provision of its senior credit facility agreement.

The Company began providing effective March 12, 2003, for its professional
liability risks in part through a captive insurance company. The Company prior
to such date insured such risks principally through the commercial insurance
market. The change in the Company's professional liability insurance program is
expected to result in increased cash flow due to the retention of cash formerly
paid out in the form of insurance premiums to a commercial insurance company
coupled with a long period (typically 2-4 years or longer on average) before
cash payout of such losses occurs. A portion of such cash retained will be
retained within the Company's captive insurance company and therefore not
immediately available for general corporate purposes. As of September 30, 2003,
cash or cash equivalents and related investments held within the captive
insurance company totaled approximately $1.9 million.

The current senior credit facility at September 30, 2003 provides for up to
$75.0 million of borrowings under a senior revolving credit facility and $202.4
million of 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. The senior credit agreement also 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 2003, the Company made an $8.3 million excess cash flow
payment as required under the terms of the senior credit agreement as a result
of cash flow generated in 2002. The payment of $8.3 million had been recorded in
current maturity of long-term debt as of March 31, 2003 (previously estimated at
$7.0 million in the December 31, 2002 balance sheet of the Company).

The Company as of September 30, 2003, had total cash and cash equivalents
of approximately $68.9 million and a revolving credit facility borrowing
availability of $72.7 million. The Company's cash needs in the nine months ended
September 30, 2003 were met from internally generated operating sources and
there were no borrowings by the Company under its revolving credit facility.

22

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.

MEDICARE PROGRAM PHYSICIAN REIMBURSEMENT RATES

A portion of the Company's revenues is 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 2004. However, CMS has
indicated based on preliminary estimates that certain of those physician
reimbursement rates will decrease from their corresponding levels in 2003. The
Company has estimated the impact of such estimated decreased rates on its
revenues in 2004 from Medicare and commercial insurance plans with fee schedules
based on Medicare rates at approximately $5.8 million based on its 2003
estimated patient volume.

PROFESSIONAL LIABILITY INSURANCE

A significant operating cost of the Company is the cost of providing for
its professional liability losses. The Company's cost associated with
professional liability losses was $37.0 million in fiscal 2002 and $42.4 million
(prior to a provision for losses in excess of an aggregate loss limit of $50.8
million) for the nine months ended September 30, 2003. Such costs have
historically been determined by a combination of premiums for the purchase of
commercial insurance or through self-insurance reserve provisions. Due to
adverse conditions in the commercial insurance marketplace for such coverage,
there has been a significant increase in the cost of such insurance coverage in
2003. The Company's professional liability commercial insurance coverage in
effect for the four-year period ended March 11, 2003, ended on such date. The
Company implemented, effective March 12, 2003, a program of insurance that
includes both a captive insurance company arrangement and self-insurance reserve
provisions for potential losses beginning on such date. The Company's provisions
for its professional liability losses are now substantially determined through
actuarial studies of its projected losses. Such actuarial projected losses, in
addition to considering the Company's loss experience, also include assumptions
as to the frequency and severity of claims which in turn may be influenced by
market expectations and experience in general. Accordingly, the Company's cost
for professional liability risks has increased significantly between periods.

TRICARE PROGRAM

During the nine months ended September 30, 2003, the Company derived
approximately $170.1 million of revenue 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 healthcare delivery system that includes a
contractor managed care support contract to provide health, medical and
administrative support services to its eligible beneficiaries. The Company
currently provides its services through subcontract arrangements with managed
care organizations that contract directly with the TRICARE program.

On August 1, 2002, the Department of Defense issued a request for proposals
for the next generation of managed care support contracts, also known as the
"TRICARE Contracts". The intent of the TRICARE Contracts is to replace the
existing managed care support contracts on a phased-in basis between June and
November 2004. The TRICARE Contracts proposal provided for the awarding of prime
contracts to three managed care organizations to cover three distinct
geographical regions of the country. The award of the prime contracts was
announced in August 2003.

23

The Department of Defense is currently in the process of determining how it
will procure the civilian positions that it will require going forward. Options
currently being discussed include "rolling-over" existing staffed positions with
existing providers, such as the Company, through the recently selected managed
care organizations, to terminating all existing contracts for staffed positions
and putting ongoing staffing needs of military treatment facilities out for
competitive bidding.

The impact on the results of operations and financial condition of the
Company resulting from the changes in the TRICARE Contracts program are not
known or able to be estimated at this time. The Company has exclusive contracts
with two of the three future prime contractors for future resource sharing. In
the event the Department of Defense opts to allow for the rollover of existing
staffing, SHR expects to maintain and expand on the business that it currently
has in the West and North regions under the TRICARE Contracts. The Company does
not have a contract to provide staffing with the managed care organization that
has been awarded the South region under the TRICARE Contracts. The Company
expects that it will be able to pursue direct service contracts with individual
military treatment facilities in the South region, as it currently provides
staffing to numerous military treatment facilities in the South region. The
potential success and impact on the results of operations of the Company in
obtaining direct service contracts is not known or able to be estimated at this
time. Alternatively, if the Department of Defense opts to terminate its existing
staffing contracts and enter into a competitive bidding process for such
positions across all regions, the Company's existing revenues and margins and
financial condition may be materially adversely affected.

SEASONALITY

Historically, because of the significance of our revenues derived from
patient visits to emergency departments, which are generally open on a 365 day
basis, our revenues and operating results have reflected minimal seasonal
variation and also due to our geographic diversification. Revenue from our
non-emergency department staffing lines is dependent on a healthcare facility
being open during selected time periods. Revenue in such instances will
fluctuate depending upon such factors as the number of holidays in the period.

Accordingly, revenues derived from the hourly contract business of SHR is
generally lower in the fourth quarter of the year due to the number of holidays
therein.

RECENTLY ISSUED ACCOUNTING STANDARDS

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation under SFAS No. 123. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported earnings in annual and interim financial statements.
While the Statement does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether the accounting for that
compensation is using the fair value method of SFAS No. 123 or the intrinsic
value method of Opinion 25.

As more fully discussed in Note 7, the Company adopted the disclosure
requirements of SFAS No. 148 and the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, prospectively to all new
awards granted to employees after January 1, 2003.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity-type instruments, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. The Company's mandatory
redeemable preferred stock is subject to the provisions of this statement. In
addition, dividends on its redeemable preferred
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stock will be required to be included in interest expense in the Company's
statements of operations. The provisions of SFAS No. 150 are applicable to the
Company's financial statements beginning in 2005. The Company does not expect
the adoption of SFAS No. 150 to have a material effect on the results of its
operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 provides guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, non-controlling interests, and results of operations of a VIE are
to be included in an entity's consolidated financial statements. A VIE exists
when either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial interest.
Those characteristics include the direct or indirect ability to make decisions
about an entity's activities through voting rights or similar rights, the
obligation to absorb the expected losses of an entity if they occur, and the
right to receive the expected residual returns of the entity if they occur.

FIN 46 was effective immediately for new entities created or acquired after
February 1, 2003. The Company has no interest in any entities created nor did it
acquire any entities after February 1, 2003. FIN 46 will become effective on
December 15, 2003, for entities in which the Company held a variable interest
prior to February 1, 2003. Although management believes that FIN 46 will not
have a material impact, management continues to evaluate its interests acquired
prior to February 1, 2003 to assess whether consolidation or further disclosure
of a VIE is required under FIN 46.

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 its 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. 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, 2003, the fair value of the Company's total debt, which
has a carrying value of $302.4 million, was approximately $306.3 million. The
Company had $202.4 million of variable debt outstanding at September 30, 2003.
If the market interest rates for the Company's variable rate borrowings averaged
1% more during the twelve months subsequent to September 30, 2003, the Company's
interest expense would increase, and earnings before income taxes would
decrease, by approximately $2.0 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.

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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 as defined in Rule 13a-15(e)
and 15d-15(e) 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 the end of the period covered by this report
the Company's disclosure controls and procedures (1) were 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) were 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
control over financial reporting identified in connection with the evaluation
described in paragraph (a) above, that have materially affected or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.

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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 8 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

(a) Exhibits

3.134 Certificate and Articles of Organization of Team Health
Contracting Midwest, LLC dated July 1, 2003
4.6 Supplemental Indenture dated September 9, 2003
10.20 Amendment No 2 to Credit Agreement dated May 1, 2002
31.1 Certification by Lynn Massingale, M.D. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Robert J. Abramowski pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

(b) Reports of Form 8-K

During the quarter ended September 30, 2003, the Company filed a Report on
Form 8-K under item 12, dated August 11, 2003 relating to the announcement of
its earnings for the second quarter of 2003.

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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
Equivalent to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Knoxville, Tennessee, on November 4, 2003.

TEAM HEALTH, INC.

/s/ H. LYNN MASSINGALE, M.D.
--------------------------------------
H. Lynn Massingale
Chief Executive Officer

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

/s/ DAVID JONES
--------------------------------------
David Jones
Vice President and Treasurer

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