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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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 MARCH 31, 2004
[ ] 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
---------------------
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 -- 9,787,372 shares as of May 7,
2004.
(1) This Form 10-Q Equivalent is only being filed solely pursuant to a
requirement contained in the indenture governing Team Health, Inc.'s 9%
Senior Subordinated Notes due 2012.
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.
TEAM HEALTH, INC.
QUARTERLY REPORT FOR THE THREE MONTHS
ENDED MARCH 31, 2004
PAGE
----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................ 2
Consolidated Balance Sheets -- March 31, 2004 and December 2
31, 2003....................................................
Consolidated Statements of Operations -- Three months ended 3
March 31, 2004 and 2003.....................................
Consolidated Statements of Cash Flows -- Three months ended 4
March 31, 2004 and 2003.....................................
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market 20
Risk........................................................
Item 4. Controls and Procedures..................................... 20
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures........................................................... 23
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,624 $ 100,964
Accounts receivable, net.................................. 167,275 167,957
Prepaid expenses and other current assets................. 8,678 4,243
Receivables under insured programs........................ 50,252 62,527
--------- ---------
Total current assets........................................ 271,829 335,691
Property and equipment, net................................. 18,713 19,967
Other intangibles, net...................................... 15,648 16,990
Goodwill.................................................... 167,665 167,665
Deferred income taxes....................................... 99,878 96,881
Receivables under insured programs.......................... 58,869 60,697
Other....................................................... 26,183 33,158
--------- ---------
$ 658,785 $ 731,049
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 18,773 $ 15,169
Accrued compensation and physician payable................ 70,920 76,557
Other accrued liabilities................................. 68,146 82,876
Income taxes payable...................................... 3,888 9,948
Current maturities of long-term debt...................... 10,750 43,528
Deferred income taxes..................................... 21,061 20,884
--------- ---------
Total current liabilities................................... 193,538 248,962
Long-term debt, less current maturities..................... 427,500 255,887
Other non-current liabilities............................... 185,579 182,557
Mandatory redeemable preferred stock........................ -- 158,846
Commitments and Contingencies
Common stock, $0.01 par value 12,000 shares authorized,
10,077 shares issued at March 31, 2004 and 10,069 shares
issued at December 31, 2003............................... 101 101
Additional paid in capital.................................. 736 703
Retained earnings (deficit)................................. (145,037) (113,813)
Less -- treasury shares at cost............................. (3,632) (1,045)
Accumulated other comprehensive loss........................ -- (1,149)
--------- ---------
$ 658,785 $ 731,049
========= =========
See accompanying notes to financial statements
2
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
-------- --------
(UNAUDITED)
(IN THOUSANDS)
Net revenue................................................. $397,302 $350,139
Provision for uncollectibles................................ 135,892 111,725
-------- --------
Net revenue less provision for uncollectibles............. 261,410 238,414
Cost of services rendered
Professional service expenses............................. 194,711 181,996
Professional liability costs.............................. 16,274 61,542
-------- --------
Gross profit (loss).................................... 50,425 (5,124)
General and administrative expenses......................... 24,694 21,463
Management fee and other expenses........................... 157 125
Depreciation and amortization............................... 3,485 5,523
Interest expense, net....................................... 7,318 6,215
Refinancing costs........................................... 14,731 --
-------- --------
Earnings (loss) before income taxes....................... 40 (38,450)
Provision (benefit) for income taxes........................ 76 (13,641)
-------- --------
Net loss.................................................... (36) (24,809)
Dividends on preferred stock................................ 3,602 3,561
-------- --------
Net loss attributable to common stockholders.............. $ (3,638) $(28,370)
======== ========
See accompanying notes to financial statements.
3
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss.................................................... $ (36) $ (24,809)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 3,485 5,523
Amortization of deferred financing costs.................. 300 356
Refinancing costs......................................... 6,225 --
Provision for uncollectibles.............................. 135,892 111,725
Deferred income taxes..................................... (3,524) (22,534)
Loss on sale of equipment................................. 31 --
Equity in joint venture loss (income)..................... (218) 59
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (135,210) (114,681)
Prepaid expenses and other current assets................. (5,644) (3,754)
Income tax payable........................................ (6,060) 8,616
Receivables under insured programs........................ 14,103 2,745
Accounts payable.......................................... 3,604 33
Accrued compensation and physician payable................ (13,226) (3,835)
Other accrued liabilities................................. (2,446) (2,126)
Professional liability reserves........................... 1,543 52,307
--------- ---------
Net cash provided by (used in) operating activities......... (1,181) 9,625
INVESTING ACTIVITIES
Purchases of property and equipment......................... (925) (3,229)
Cash paid for acquisitions, net............................. (1,548) (1,571)
Purchase of investments..................................... (276) (1,694)
Other investing activities.................................. 9,517 (765)
--------- ---------
Net cash provided by (used in) investing activities......... 6,768 (7,259)
FINANCING ACTIVITIES
Payments on notes payable................................... (291,165) (2,250)
Proceeds from notes payable................................. 430,000 --
Payment of deferred financing costs......................... (7,161) --
Proceeds from sales of common stock......................... 41 --
Purchase of treasury stock.................................. (2,609) --
Dividends paid on common shares............................. (27,585) --
Redemption of preferred shares.............................. (162,448) --
--------- ---------
Net cash used in financing activities....................... (60,927) (2,250)
--------- ---------
Net increase (decrease) in cash............................. (55,340) 116
Cash and cash equivalents, beginning of period.............. 100,964 47,789
--------- ---------
Cash and cash equivalents, end of period.................... $ 45,624 $ 47,905
========= =========
Interest paid............................................... $ 10,263 $ 9,001
========= =========
Taxes paid.................................................. $ 9,975 $ 494
========= =========
See accompanying notes to financial statements
4
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, 2003 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, 2003
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
On December 31, 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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.
5
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. NET REVENUE
Net revenue for the three months ended March 31, 2004 and 2003,
respectively, consisted of the following (in thousands):
THREE MONTHS ENDED
MARCH 31
-------------------
2004 2003
-------- --------
Fee for service revenue..................................... $284,939 $246,420
Contract revenue............................................ 105,031 96,707
Other revenue............................................... 7,332 7,012
-------- --------
$397,302 $350,139
======== ========
NOTE 4. OTHER INTANGIBLE ASSETS
The following is a summary of intangible assets and related amortization as
of March 31, 2004 and December 31, 2003 (in thousands):
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
As of March 31, 2004:
Contracts................................................ $35,614 $20,228
Other.................................................... 448 186
------- -------
Total................................................. $36,062 $20,414
======= =======
As of December 31, 2003:
Contracts................................................ $35,614 $18,898
Other.................................................... 448 174
------- -------
Total................................................. $36,062 $19,072
======= =======
Aggregate amortization expense:
For the three months ended March 31, 2004................ $ 1,342
=======
Estimated amortization expense:
For the year ended December 31, 2004..................... $ 5,365
For the year ended December 31, 2005..................... 4,147
For the year ended December 31, 2006..................... 2,582
For the year ended December 31, 2007..................... 2,151
For the year ended December 31, 2008..................... 1,798
As of March 31, 2004, the Company may have to pay up to $9.2 million in
future contingent payments as additional consideration for acquisitions made
prior to March 31, 2004. 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 three months ended March
31, 2004, the Company made a $1.5 million deferred cash payment related to a
previous acquisition.
NOTE 5. LONG-TERM DEBT
Effective March 23, 2004, the Board of Directors of the Company authorized
the redemption of the Company's 10% Cumulative Preferred Stock in the amount of
approximately $162.4 million, including
6
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued dividends. The Company's Board of Directors also declared a cash
dividend to shareholders of record as of March 18, 2004, in the amount of
approximately $27.6 million which was paid on March 23, 2004. The Board of
Directors also authorized a compensatory payment to holders of stock options in
lieu of a cash dividend in the amount of approximately $2.4 million of which
$1.3 million was paid and expensed on March 23, 2004 with the balance of $1.1
million to be paid and expensed in future periods as such stock options vest.
The Company's long-term debt in existence prior to the aforementioned
transactions was refinanced in conjunction therewith.
Effective March 23, 2004, the Company completed a tender offer for its
outstanding 12% Senior Subordinated Notes in the amount of $100.0 million, plus
a call premium of $8.0 million. As a result of the tender offer, approximately
$91.8 million of the 12% Senior Subordinated Notes were repaid and in addition a
related call premium of approximately $7.5 million was paid on March 23, 2004.
The remainder of the approximately $8.2 million 12% Senior Subordinated Notes
outstanding were subsequently repaid on April 21, 2004 along with an estimated
call premium of approximately $0.7 million. The Company issued on March 23,
2004, 9% Senior Subordinated Notes in the amount of $180.0 million, due April 1,
2012. In addition, on March 23, 2004, the Company entered into a new senior
credit facility agreement with a group of banks. The new senior credit
facilities, along with existing cash totaling $65.1 million, were used to
finance a portion of the aforementioned transactions and to refinance the
Company's outstanding bank term loans as well as to provide for a new revolving
credit facility.
The new senior credit facilities consist of the following:
- $80.0 million Senior Secured Revolving Credit Facility
- $250.0 million Senior Secured Term Loan B
The initial interest rates for any senior revolving credit facility
borrowings are equal to either the eurodollar rate plus 2.75% or the agent
bank's base rate plus 1.75%. Thereafter, the revolver 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), 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 initially the agent
bank's base rate plus 1.75%.
Any amounts outstanding under the revolver are due six years from the date
of the senior credit agreement. The $250.0 million Term Loan B is due seven
years from the date of the senior credit agreement. The payments due under Term
Loan B are as follows (in thousands):
June 30, 2004 -- 2010....................................... $ 15,625
September 30, 2010.......................................... 58,750
December 31, 2010........................................... 58,750
March 23, 2011.............................................. 116,875
--------
$250,000
========
The new senior credit facility agreement and the 9% bond indenture contain
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 and leverage 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.
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 at amounts such that 50% of
7
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's funded debt, as defined, was at fixed rates of interest. Such
hedge agreements are required to be maintained for at least the first three
years of the senior credit facility agreement. Subsequent to March 31, 2004, the
Company entered into an interest rate swap agreement that effectively converted
$35.0 million of its variable rate Term B loan to a fixed rate of 3.2% through
March 31, 2007.
The Company also has in place an existing forward interest rate swap
agreement that effectively converted $62.5 million of the Company's prior
floating-rate borrowings to 3.86% fixed-rate borrowings through April 30, 2005.
As a result of repayment of the underlying borrowings during the three months
ended March 31, 2004, the Company recorded as additional interest expense of
approximately $1.7 million in the period related to the interest rate swap
agreement to reflect its value on a mark-to-market basis.
Long-term debt as of March 31, 2004 following the refinancing transactions
noted above consisted of the following (in thousands):
Term Loan B................................................. $250,000
9% Senior Subordinated Notes................................ 180,000
12% Senior Subordinated Notes............................... 8,250
--------
438,250
Less current portion........................................ 10,750
--------
$427,500
========
The interest rate at March 31, 2004 was 4.36% for the new Term Loan B. The
Company pays a commitment fee for the revolving credit facility which was equal
to 0.5% of the commitment at March 31, 2004. No funds have been borrowed under
the revolving credit facility as of March 31, 2004, but the Company had $3.1
million of standby letters of credit outstanding against the revolving credit
facility commitment.
In conjunction with entering into the new senior credit facilities and the
partial redemption of its 12% Subordinated Notes as of March 23, 2004, the
Company recognized refinancing costs of approximately $14.7 million ($9.0
million net of related income tax benefit of $5.7 million) principally relating
to the write-off of capitalized financing costs on its previously outstanding
long-term debt and the incurrence of a call premium to redeem its outstanding
subordinated notes.
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
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 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
8
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
providing for an actuarial estimate of losses for professional liability claims
incurred but not reported since March 12, 2003.
The Company's decision to forego commercial professional liability
insurance in favor of a captive insurance company and 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.
The Company's most recent actuarial study was completed in April 2004. The
results of such actuarial study are included in the Company's statement of
operations for the three months ended March 31, 2004. Such results validated the
Company's reserves for professional liability losses for prior periods.
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. Therefore, the
expense related to stock-based employee compensation included in the
determination of net earnings (loss) for the three months ended March 31, 2004
and 2003 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):
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------- --------
Net loss attributable to common stockholders, as reported... $(3,638) $(28,370)
Add: Stock-based employee compensation expense included in
reported net loss attributable to common stockholders, net
of related tax effects.................................... 8 3
Deduct: Total stock-based employee compensation expense
determined under the fair value method for all awards, net
of related tax effects.................................... (39) (25)
------- --------
Pro forma net loss attributable to common stockholders...... $(3,669) $(28,392)
======= ========
9
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
ACQUISITION PAYMENTS
As of March 31, 2004, the Company may have to pay up to $9.2 million in
future contingent payments as additional consideration for acquisitions made
prior to March 31, 2004. 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.
OFFICE OF INSPECTOR GENERAL INFORMATION REQUEST
On March 30, 2004, the Company received a subpoena from the Department of
Health and Human Services Office of Inspector General located in Concord,
California requesting certain information for the period 1999 to present
relating to its billing practices. It is the Company's policy to fully cooperate
with the requests of government agencies. Due to the lack of information
available to the Company at this time relating to the subpoena, we are unable to
ascertain the significance of the information request. Management believes that
its billing practices are in substantial compliance with all regulatory
requirements. Management at this
10
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time can not predict the outcome of the matter and whether it will have a
material adverse effect on the Company's business, financial condition or
results of operations.
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. As the result of receiving a
favorable ruling by the Office of the Regional Director of Appeals in connection
with the 1999 tax returns of two of its affiliated professional corporations,
the Company has subsequently been verbally advised by the local agent that the
proposed adjustments for the Company's 2000 and 2001 federal corporate income
tax returns have been rescinded. The Company is currently awaiting formal
confirmation of the agent's decision by the IRS.
TRICARE PROGRAM
During the three months ended March 31, 2004, the Company derived
approximately $61.8 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.
The Department of Defense is currently in the process of determining how it
will procure the civilian positions that it will require going forward. To date
only a small percentage of the existing staffed positions have been awarded. The
government is considering "rolling over" some of the positions into the new
managed care contracts in a similar arrangement to today's current resource
sharing program. Additionally, the government will utilize direct government
contracting vehicles to procure some of the existing as well as new staffing
arrangements. The Company expects to competitively bid for most of the existing
positions as well as new positions.
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. 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, margins and
financial condition may be materially adversely affected.
11
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. COMPREHENSIVE EARNINGS
The components of comprehensive earnings, net of related taxes, are as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------- --------
Net loss attributable to common shareholders................ $(3,638) $(28,370)
Net change in fair value of interest rate swaps............. 1,149 (54)
------- --------
Comprehensive loss.......................................... $(2,489) $(28,424)
======= ========
12
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 and the largest provider of outsourced physician
staffing and administrative services to military treatment facilities. In
addition to providing physician staffing, we also provide 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 (71.7%) of the Company's revenue in the
three months ended March 31, 2004, 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 payer(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 payer
information may change following an initial attempt to bill for services due to
a change in payer status. Such changes in payer status have an impact on
recorded net revenue due to differing payers being subject to different
contractual allowance amounts. Such changes in net revenue are recognized in the
period that such changes in payer 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 payer 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 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.
13
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.
The Company's commercial insurance policy for professional liability losses
for the period March 12, 1999 through March 11, 2003, included insured limits
applicable to such coverage in the period. 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 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 2004.
Since March 12, 2003, the Company's professional liability costs consist of
annual projected costs resulting from an 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 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 from the Company's captive insurance subsidiary until
periods beyond 2004.
The Company's provisions for losses under the aggregate loss limits of its
policy in effect prior to March 12, 2003, and under its captive insurance and
self-insurance programs since March 12, 2003, are subject to periodic actuarial
reevaluation. The results of such periodic actuarial studies may result in
either upward or downward adjustment to the Company's previous loss estimates.
14
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.
The Company's critical accounting policies have been disclosed in its 2003
Annual Report on Form 10-K Equivalent. There have been no changes to these
critical accounting policies or their application during the three months ended
March 31, 2004.
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 loss as a percentage of net revenue less provision
for uncollectibles for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
---------------
2004 2003
------ ------
Net revenue................................................. 152.0% 146.9%
Provision for uncollectibles................................ 52.0 46.9
Net revenue less provision for uncollectibles............... 100.0 100.0
Professional services expenses.............................. 74.5 76.3
Professional liability costs................................ 6.2 25.8
Gross profit................................................ 19.3 (2.1)
General and administrative expenses......................... 9.4 9.0
Management fee and other expenses........................... 0.1 0.1
Depreciation and amortization............................... 1.3 2.3
Interest expense, net....................................... 2.8 2.6
Refinancing costs........................................... 5.6 --
Earnings (loss) before income taxes......................... -- (16.1)
Provision (benefit) from income taxes....................... -- (5.7)
Net loss.................................................... -- (10.4)
Dividends on preferred stock................................ 1.4 1.5
Net loss attributable to common stockholders................ (1.4) (11.9)
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
Net Revenues. Net revenues for the three months ended March 31, 2004
increased $47.2 million, or 13.5%, to $397.3 million from $350.1 million for the
three months ended March 31, 2003. The increase in net revenues of $47.2 million
included an increase of $38.5 million in fee-for-service revenue, $8.3 million
in contract revenue and $0.3 million in other revenue. For the three month
periods ended March 31, 2004 and 2003, fee-for-service revenue was 71.7% of net
revenue in 2004 compared to 70.4% in 2003, contract revenue was 26.4% of net
revenue in 2004 compared to 27.6% in 2003 and other revenue was 1.9% of net
revenue in 2004 compared to 2.0% in 2003.
Provision for Uncollectibles. The provision for uncollectibles was $135.9
million for the three months ended March 31, 2004 compared to $111.7 million for
the three months ended March 31, 2003, an increase of
15
$24.2 million or 21.7%. The provision for uncollectibles as a percentage of net
revenue was 34.2% for the three months ended March 31, 2004 compared to 31.9%
for the three months ended March 31, 2003. The provision for uncollectibles is
primarily related to revenue generated under fee-for-service contracts that is
not expected to be fully collected. The increase in the provision for
uncollectibles percentage resulted from fee schedule and average acuity pricing
increases in excess of increased average collection rates principally as a
result of a payer mix shift toward more self-insured emergency department
patient visits.
Net Revenue Less Provision for Uncollectibles. Net revenue less provision
for uncollectibles for the three months ended March 31, 2004 increased $23.0
million, or 9.6%, to $261.4 million from $238.4 million for the corresponding
three months in 2003. Same contract revenue less provision for uncollectibles,
which consists of contracts under management in both periods, increased $17.1
million, or 8.0%, to $230.4 million in 2004 from $213.4 million in 2003. The
increase in same contract revenue of 8.0% includes the effects of both higher
estimated net revenue per billing unit and increased volume between periods.
Overall, same contract revenue increased approximately 7.0% between periods due
to higher estimated net revenue per billing unit. Acquisitions contributed $1.6
million and new contracts obtained through internal sales contributed $23.3
million of the increase. The aforementioned increases were partially offset by
$19.0 million of revenue derived from contracts that terminated during the
periods.
Professional Service Expenses. Professional service expenses, which
includes physician costs, billing and collection expenses and other professional
expenses, totaled $194.7 million for the three months ended March 31, 2004
compared to $182.0 million for the three months ended March 31, 2003, an
increase of $12.7 million or 7.0%. The increase of $12.7 million in professional
service expenses included approximately $4.4 million resulting from acquisitions
and net growth in new contract sales. The remaining increase of approximately
$8.3 million resulted from increases in average rates paid per hour of provider
service and increased staffing hours on a same contract basis.
Professional Liability Costs. Professional liability costs were $16.3
million in 2004 compared with $61.5 million in 2003 for a decrease of $45.3
million. The decrease in professional liability expenses is due primarily to a
provision for losses in excess of an aggregate insured limit for periods prior
to March 12, 2003 of $50.8 million in 2003. Excluding the $50.8 million
provision, professional liability expenses increased $5.5 million between
periods. The Company's cost of professional liability insurance in 2004 is based
on an actuarial estimate of losses under the Company's captive insurance
program. In 2003, such costs reflected premium costs under a premium based
commercial insurance program.
Gross Profit (Loss). Gross profit (loss) was a profit of $50.4 million for
the three months ended March 31, 2004, compared to a loss of $5.1 million in
2003. The increase in gross profit is attributable to the effect of the
aggregate provision for professional liability insurance losses of $50.8 million
in 2003, net new contract growth and increased contribution from steady state
operations. Gross profit as a percentage of revenue less provision for
uncollectibles for the three months ended March 31, 2004 was 19.3% compared to
19.2% before the provision for excess losses for the three months ended March
31, 2003.
General and Administrative Expenses. General and administrative expenses
for the three months ended March 31, 2004 increased to $24.7 million from $21.5
million for the three months ended March 31, 2003, for an increase of $3.2
million between periods. General and administrative expenses as a percentage of
net revenue less provision for uncollectibles were 9.4% for the three months
ended March 31, 2004, compared to 9.0% for the three months ended March 31,
2003. Included in general and administrative expenses in 2004 is approximately
$1.3 million related to a bonus paid to stock option holders in connection with
a refinancing of the Company's debt structure. Excluding the effect of the stock
option bonus expense, general and administrative expenses increased
approximately $1.9 million, or 8.8%. The remaining increase in general and
administrative expenses between years was principally due to increases in
salaries and benefits of approximately $1.1 million and $0.9 million for
professional consulting expenses related to improving its billing and collection
processes.
Management Fee and Other Operating Expenses. Management fee and other
operating expenses were $0.2 million for the three months ended March 31, 2004
and $0.1 million for the corresponding period in 2003.
16
Depreciation and Amortization. Depreciation and amortization was $3.5
million for the three months ended March 31, 2004 and $5.5 million for the three
months ended March 31, 2003. Amortization expense decreased by $1.9 million
between periods due to certain of the Company's intangibles becoming fully
amortized in 2003.
Net Interest Expense. Net interest expense increased $1.1 million to $7.3
million for the three months ended March 31, 2004 compared to $6.2 million for
the corresponding period in 2003. The increase in net interest expense is
primarily due to a loss realized on hedging instruments associated with debt
that was repaid on March 23, 2004.
Refinancing Costs. The Company expensed $14.7 million of deferred
financing costs and bond repayment premiums related to its previously
outstanding bank and bond borrowings that were refinanced in 2004.
Earnings (Loss) before Income Taxes. Earnings before income taxes for the
three months ended March 31, 2004 were $40,000 compared to a loss of $38.5
million for the three months ended March 31, 2003.
Provision (Benefit) for Income Taxes. Provision for income taxes for the
three months ended March 31, 2004 was $0.1 million compared to a benefit of
$13.6 million for the three months ended March 31, 2003.
Net Earnings (Loss). Net loss for the three months ended March 31, 2004
was $36,000 compared to a net loss of $24.8 million for the three months ended
March 31, 2003.
Dividends on Preferred Stock. The Company recognized $3.6 million of
dividends for the three months ended March 31, 2004 and 2003, respectively, on
its Class A mandatory redeemable preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal ongoing 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
aforementioned cash requirements.
In March 2004, the Company completed a restructuring of its capital
structure. The restructuring resulted in the following transactions occurring:
- The Board of Directors of the Company authorized the redemption of the
Company's 10% Cumulative Preferred Stock in the amount of approximately
$162.4 million, including accrued dividends.
- The Company completed a tender offer for its outstanding 12% Senior
Subordinated Notes resulting in $91.8 million of such bonds being repaid,
plus payment of a call premium of $7.5 million.
- The Company issued new 9% Senior Subordinated Notes in the amount of
$180.0 million.
- The Company retired its existing bank debt in the amount of $199.4
million and entered into a new senior bank credit facility, including a
$250.0 million senior secured term loan and an $80.0 million revolving
credit facility.
- The Company incurred and paid approximately $7.1 million in costs through
March 31, 2004 (in addition to a $7.5 million call premium on its
previously outstanding 12% Senior Subordinated Bonds) to complete the
above transactions.
In addition, the Board of Directors of the Company declared and paid to its
shareholders a cash dividend of approximately $27.6 million on March 23, 2004.
The Board of Directors also authorized a cash payment to holders of stock
options in the form of a compensatory bonus in the approximate amount of $1.3
million.
As a result of the above transactions, the Company has total debt
outstanding of $438.3 million as of March 31, 2004, compared to $299.4 million
as of December 31, 2003. Included in debt outstanding at March 31, 2004, is
approximately $8.2 million of 12% Senior Subordinated Notes that were
subsequently repaid on April 21, 2004, plus a call premium of approximately $0.7
million. The combination of additional
17
debt outstanding at interest rates equal to or less than interest rates on its
previous debt outstanding prior to the above transactions and lower balances on
invested cash, both on an after-tax basis, is expected to result in an increased
net of tax cash outflow for the remaining nine months of 2004 of approximately
$3.7 million. Total principal payments on outstanding debt in 2004, including
the elimination of an excess cash flow definition payment due under its previous
bank credit facility, will decline by approximately $41.7 million from required
payments prior to the refinancing.
Cash used in operating activities in the three months ended March 31, 2004
was $1.2 million compared to cash provided by operating activities in the
corresponding period in 2003 of $9.6 million. The $10.8 million decrease in cash
provided by operating activities was principally due to costs associated with
the refinancing as well as taxes paid during the period offset by net cash
retained under the Company's self-insured professional liability insurance
program. Cash provided from investing activities in the three months ended March
31, 2004 was $6.8 million compared to a use of cash in 2003 of $7.3 million. The
$14.1 million increase in cash provided by investing activities was principally
due to the redemption of assets held in a deferred compensation plan which were
liquidated as part of the refinancing, as well as reduced levels of capital
expenditures in 2004. Cash used in financing activities in the three months
ended March 31, 2004 and 2003 was $60.9 million and $2.3 million, respectively.
The $58.6 million decrease in cash resulting from financing activities was due
to the debt restructuring and dividend paid in 2004.
The Company spent $0.9 million in the first three months of 2004 and $3.2
million in the first three months of 2003 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. Cash payments made in connection with acquisitions, including
contingent payments, were $1.5 million during the three months ended March 31,
2004 and $1.6 million in the corresponding period in 2003. Future contingent
payment obligations are approximately $9.2 million as of March 31, 2004.
The Company made scheduled debt maturity payments of $2.3 million in the
first three months of 2003 in accordance with its applicable term loan
facilities in effect at the time.
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 has
resulted 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 March 31, 2004, cash or cash equivalents and
related investments held within the captive insurance company totaled
approximately $15.1 million.
The Company's new senior credit facility at March 31, 2004 provides for up
to $80.0 million of borrowings under a senior revolving credit facility and
$250.0 million of term loans. Borrowings outstanding under the senior credit
facility mature in various years with a final maturity date of March 31, 2011.
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.
The Company as of March 31, 2004, had total cash and cash equivalents of
approximately $45.6 million and a revolving credit facility borrowing
availability of $76.9 million. The Company's ongoing cash needs in the three
months ended March 31, 2004 were met from internally generated operating sources
and there were no borrowings by the Company under its revolving credit facility.
18
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.
PROFESSIONAL LIABILITY INSURANCE
A significant operating cost of the Company is the cost of providing for
its professional liability losses. The Company's costs associated with
professional liability losses were $16.3 million for the three months ended
March 31, 2004 and $10.7 million (prior to a provision for losses in excess of
an aggregate loss limit of $50.8 million) in fiscal 2003. Such costs represent a
combination of premiums for the purchase of commercial insurance or through
self-insurance reserve provisions. 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.
TRICARE PROGRAM
During the three months ended March 31, 2004, the Company derived
approximately $61.8 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.
The Department of Defense is currently in the process of determining how it
will procure the civilian positions that it will require going forward. To date
only a small percentage of the existing staffed positions have been awarded. The
government is considering "rolling over" some of the positions into the new
managed care contracts in a similar arrangement to today's current resource
sharing program. Additionally, the government will utilize direct government
contracting vehicles to procure some of the existing as well as new staffing
arrangements. The Company expects to competitively bid for most of the existing
positions as well as new positions.
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. 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, margins and
financial condition may be materially adversely affected.
19
SEASONALITY
Historically, our revenues and operating results have reflected minimal
seasonal variation due to the significance of revenues derived from patient
visits to emergency departments, which are generally open on a 365 day basis,
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 at amounts such that 50% of the Company's funded
debt, as defined, was at fixed rates of interest. Such hedge agreements are
required to be maintained for at least the first three years of the senior
credit facility agreement. Subsequent to March 31, 2004, the Company entered
into an interest rate swap agreement that effectively converted $35.0 million of
its variable rate Term Loan B to a fixed rate of 3.2% through March 31, 2007.
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. This agreement exposes the Company to credit
losses in the event of non-performance by the counterparty to the financial
instrument. The counterparty to the Company's interest rate swaps agreement is a
creditworthy financial institution and the Company believes the counterparty
will be able to fully satisfy its obligations under the contracts.
The Company had previously 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 contract had a
final expiration date of April 30, 2005. As a result of the payment of the
underlying borrowings in 2004, the Company realized a loss of approximately $1.7
million related to this interest rate hedge agreement to reflect its value on a
mark to market basis.
At March 31, 2004, the fair value of the Company's total debt, which has a
carrying value of $438.3 million, was approximately $433.3 million. The Company
had $250.0 million of variable debt outstanding at March 31, 2004. If the market
interest rates for the Company's variable rate borrowings averaged 1% more
during the twelve months subsequent to March 31, 2004, the Company's interest
expense would increase, and earnings before income taxes would decrease, by
approximately $2.5 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.
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
20
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.
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 consolidated 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.7 Sixth Supplemental Indenture dated as of March 12, 2004.
4.8 Indenture dated as of March 23, 2004 by and among Team
Health, Inc. the Guarantors listed on the signature pages
thereto, and the Bank of New York.
4.9 Form of Exchange Note (included in Exhibit 4.8).
4.10 Registration Rights Agreement dated as of March 12, 2004 by
and among Team Health, Inc., the guarantors listed on the
Schedule thereto, and J.P. Morgan Securities Inc., Banc of
America Securities LLC and Merrill Lynch Pierce Fenner &
Smith Incorporated.
10.21 Credit Agreement, dated as of March 23, 2004 by and among
Team Health, Inc., Team Health Holdings, L.L.C., the
Subsidiary Guarantors (as defined therein), the Lenders (as
defined therein), and Bank of America, N.A.
10.22 Security and Pledge Agreement, dated as of March 23, 2004,
by and among Team Health, Inc., the Subsidiary Guarantors
(as defined therein) and Bank of America, N.A.
10.23 Holdings Pledge Agreement, dated as of March 23, 2004, by
and among Team Health Holdings, L.L.C. and Bank of America,
N.A.
10.24 Borrower Pledge Agreement (Cayman Islands Subsidiary), dated
as of March 23, 2004, by and among Team Health, Inc. and
Bank of America, N.A.
10.25 Team Health, Inc. Non-Qualified Supplemental Executive
Retirement Plan dated as of January 1, 2004.
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
On February 11, 2004, the Company furnished a Report on Form 8-K announcing
its earnings for the year ended December 31, 2003.
On February 27, 2004, the Company furnished a Report on Form 8-K relating
to the announcement of its tender offer and consent solicitation for any and all
of its $100.0 million aggregate principal amount of 12% Senior Subordinated
Notes due 2009.
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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 May 10, 2004.
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
23