<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] 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)
<TABLE>
<S> <C>
TENNESSEE 62-1562558
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock par value $.01 per share -- 10,000,000 shares as of November
9, 2000.
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<PAGE> 2
FORWARD LOOKING STATEMENTS
Statements in this document that are not historical facts are hereby
identified as "forward looking statements" for the purposes of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act") and Section 27A of the Securities Act of 1933 (the "Securities Act"). Team
Health, Inc. (the "Company") cautions readers that such "forward looking
statements", including without limitation, those relating to the Company's
future business prospects, revenue, working capital, liquidity, capital needs,
interest costs and income, wherever they occur in this document or in other
statements attributable to the Company, are necessarily estimates reflecting the
judgment of the Company's senior management and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the "forward looking statements". Such "forward looking statements"
should, therefore, be considered in light of the factors set forth in "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The "forward looking statements" contained in this report are made under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations". Moreover, the Company, through its senior management,
may from time to time make "forward looking statements" about matters described
herein or other matters concerning the Company.
The Company disclaims any intent or obligation to update "forward looking
statements" to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
1
<PAGE> 3
TEAM HEALTH, INC.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part 1. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- September 30, 2000 and
December 31, 1999...................................... 3
Consolidated Statements of Operations -- Three months
ended September 30, 2000 and 1999...................... 4
Consolidated Statements of Operations -- Nine months ended
September 30, 2000 and 1999............................ 5
Consolidated Statements of Cash Flows -- Nine months ended
September 30, 2000 and 1999............................ 6
Notes to Consolidated Financial Statements (Unaudited).... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 3. Quantitative and Qualitative Disclosures of Market
Risk................................................... 16
Part 2. Other Information
Item 1. Legal Proceedings................................. 18
Item 2. Changes in Securities and Use of Proceeds......... 18
Item 3. Defaults upon Senior Securities................... 18
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 18
Item 5. Other Information................................. 18
Item 6. Exhibits and Other Reports........................ 18
Signatures................................................ 19
</TABLE>
2
<PAGE> 4
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalent.................................. $ 45,363 $ 29,820
Accounts receivable, net.................................. 151,835 152,376
Prepaid expenses and other current assets................. 5,429 5,252
-------- --------
Total current assets........................................ 202,627 187,448
Property and equipment, net................................. 19,622 19,570
Intangibles, net............................................ 39,045 36,574
Deferred income taxes....................................... 80,195 86,403
Other....................................................... 19,051 20,455
-------- --------
$360,540 $350,450
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 16,841 $ 14,185
Accrued compensation and physician payable................ 43,376 39,939
Other accrued liabilities................................. 12,596 16,740
Current maturities of long-term debt...................... 12,039 12,776
-------- --------
Total current liabilities................................... 84,852 83,640
Long-term debt, less current maturities..................... 220,480 228,900
Other non-current liabilities............................... 25,319 18,423
Mandatory redeemable preferred stock........................ 116,174 108,107
Common stock................................................ 100 100
Retained earnings (deficit)................................. (86,385) (88,720)
-------- --------
$360,540 $350,450
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 5
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Fee for service revenue..................................... $195,616 $173,120
Contract revenue............................................ 34,726 34,856
Other revenue............................................... 3,208 2,562
-------- --------
Net revenue............................................... 233,550 210,538
Provision for uncollectibles................................ 84,144 73,656
-------- --------
Net revenue less provision for uncollectibles............. 149,406 136,882
Professional expenses....................................... 115,313 107,663
-------- --------
Gross profit.............................................. 34,093 29,219
General and administrative.................................. 17,543 14,207
Terminated transaction expense.............................. 2,000 --
Management fee and other expenses........................... 216 125
Depreciation and amortization............................... 3,598 2,475
Interest expense, net....................................... 6,380 6,336
-------- --------
Income before income taxes................................ 4,356 6,076
Income tax expense.......................................... 1,857 2,843
-------- --------
Net income................................................ 2,499 3,233
Dividends on preferred stock................................ 2,717 2,466
-------- --------
Net income (loss) available to common stockholders........ $ (218) $ 767
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 6
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Fee for service revenue..................................... $572,157 $519,008
Contract revenue............................................ 105,686 106,606
Other revenue............................................... 9,037 7,378
-------- --------
Net revenue............................................... 686,880 632,992
Provision for uncollectibles................................ 246,084 231,331
-------- --------
Net revenue less provision for uncollectibles............. 440,796 401,661
Professional expenses....................................... 340,748 321,748
-------- --------
Gross profit.............................................. 100,048 79,913
General and administrative.................................. 51,154 45,261
Terminated transaction expense.............................. 2,000 --
Management fee and other expenses........................... 466 381
Depreciation and amortization............................... 9,481 6,883
Interest expense, net....................................... 19,310 14,271
Recapitalization expense.................................... -- 16,013
-------- --------
Income (loss) before income taxes......................... 17,637 (2,896)
Income tax expense (benefit)................................ 7,235 (642)
-------- --------
Net income (loss)......................................... 10,402 (2,254)
Dividends on preferred stock................................ 8,067 5,452
-------- --------
Net income (loss) available to common stockholders........ $ 2,335 $ (7,706)
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 7
TEAM HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 10,402 $ (2,254)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 9,481 6,883
Amortization of deferred financing cost................... 1,396 886
Provision for uncollectibles.............................. 246,084 231,331
Loss on sale of assets.................................... 46 31
Recapitalization expense.................................. -- 16,013
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable....................................... (245,074) (229,550)
Income tax accounts....................................... 3,740 (4,390)
Prepaids and other assets................................. (14) (1,308)
Accounts payable.......................................... 2,493 3,924
Accrued compensation and physician payable................ 2,959 1,773
Other accrued liabilities................................. (1,891) 1,417
Professional liability reserves........................... 7,320 6,269
--------- ---------
Net cash provided by operating activities................... 36,942 31,025
INVESTING ACTIVITIES
Cash paid for merger costs.................................. -- (283)
Purchases of property and equipment......................... (5,585) (8,024)
Sale of property and equipment.............................. 108 15
Cash paid for acquisitions, net............................. (5,107) (3,265)
Purchase of investments..................................... (161) --
Sale of investments......................................... 237 --
Other investing activities.................................. (567) 34
--------- ---------
Net cash used in investing activities....................... (11,075) (11,523)
FINANCING ACTIVITIES
Payments on notes payable................................... (9,493) (7,542)
Proceeds from notes payable................................. -- 250,000
Payments of deferred financing costs........................ (815) (11,106)
Redemption of common stock in connection with
recapitalization.......................................... -- (210,761)
Payments of recapitalization expenses....................... (16) (16,187)
Net transfers from parents and parents' subsidiaries........ -- 2,471
--------- ---------
Net cash (used in) provided by financing activities......... (10,324) 6,875
--------- ---------
Net increase in cash........................................ 15,543 26,377
Cash and cash equivalents, beginning of period.............. 29,820 3,472
--------- ---------
Cash and cash equivalents, end of period.................... $ 45,363 $ 29,849
========= =========
Interest paid............................................... $ 19,926 $ 12,937
========= =========
Taxes paid.................................................. $ 9,640 $ 3,673
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 8
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Team Health,
Inc. (the "Company") and its wholly owned subsidiaries and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
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, 1999 has been derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. These financial statements and footnote disclosures should be read
in conjunction with the December 31, 1999 audited consolidated financial
statements and the notes thereto.
The preparation of the financial statements in conformity with generally
accepted accounting principles 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. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, FASB deferred the implementation date of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities on the balance sheet. Changes in such fair value are
required to be recognized immediately in net income (loss) to the extent the
derivatives are not effective as hedges. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 and is effective for interim periods in the
initial year of adoption. At the present time, the Company does not believe the
adoption of SFAS No. 133 will have a material effect on the results of
operations, financial position, or cash flows of the Company.
NOTE 3. RECAPITALIZATION TRANSACTION
Effective March 12, 1999, the Company was recapitalized (the
"Recapitalization") in a transaction between the Company, MedPartners and Team
Health Holdings, LLC, which is owned by certain equity sponsors and certain
members of the Company's senior management. In the Recapitalization, the
following simultaneous transactions were effected:
1. The Company issued 150,492,443 shares of new $0.01 par value common
stock and 100,000 new shares of class A redeemable preferred stock, which
are subject to mandatory redemption on December 31, 2009 at $1,000 per
share;
2. Team Health Holdings, LLC purchased from MedPartners 9,267,273
shares of the Company's $0.01 par value common stock and 94,229.1 shares of
the Company's class A redeemable preferred stock for $108.2 million;
3. Using funds from the Company's Senior Subordinated Notes and Term
Loan Facility, the Company redeemed and retired 140,492,443 shares of the
Company's $0.01 par value common stock from MedPartners for $210.7 million;
4. MedPartners assumed all medical malpractice liabilities originating
prior to the Recapitalization (approximately $49.3 million);
7
<PAGE> 9
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. The Company made an election that caused the transaction to be
treated as a sale of assets for tax purposes, and recognized an increase in
its deferred tax assets of approximately $51.1 million; and
6. The Company paid $8.7 million to certain members of the Company's
management on behalf of MedPartners for accrued management bonuses owed by
MedPartners to those members of the Company's management.
As a result of the Recapitalization, Team Health Holdings, LLC owns 92.7%
of the Company's $0.01 par value common stock and 94.3% of the Company's class A
redeemable preferred stock with MedPartners owning the remaining outstanding
securities.
Total financial, legal, accounting and other costs of the Recapitalization
amounted to approximately $28.0 million. Of these costs, $16.0 million was
expensed at the date of the Recapitalization. Financing costs of $12.0 million
associated with the Senior Subordinated Notes and Term Loan Facility were
capitalized and will be amortized over the term of the debt.
Effective January 19, 2000, the Company offered to exchange its outstanding
12% Senior Subordinated Notes due 2009 for new publicly registered 12% Senior
Subordinated Notes due March 15, 2009 (the "New Notes"). Effective February 23,
2000, 100% of the outstanding Notes were exchanged for New Notes. The terms of
the New Notes are identical in all significant respects to the terms of the
Notes, except that the Notes differed with respect to restrictions on transfer
and registration rights.
Prior to the Recapitalization, all equity accounts of the Company were
combined and reported as Net Invested Capital on the consolidated financial
statements due to the Company's status as a subsidiary of MedPartners.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
12% Senior Subordinated Notes........................ $100,000 $100,000
Term Loan Facility................................... 132,100 139,300
Other debt........................................... 419 2,376
-------- --------
232,519 241,676
Less current portion................................. (12,039) (12,776)
-------- --------
$220,480 $228,900
======== ========
</TABLE>
In connection with the Recapitalization, the Company issued $100.0 million
of 12% Senior Subordinated Notes due March 15, 2009. The Notes are subordinated
in right of payment to all senior debt of the Company and are senior in right of
payment to all existing and future subordinated indebtedness of the Company.
Interest on the Notes accrues at the rate of 12% per annum, payable
semi-annually in arrears on March 15 and September 15 of each year.
Beginning March 15, 2004, the Company may redeem some or all of the Notes
at any time at various redemption prices. The Notes were issued under an
indenture with a Trustee that contains affirmative and negative covenants.
In connection with its Recapitalization, the Company entered into the Term
Loan Facility agreement with a syndicate of financial institutions. The Term
Loan Facility is comprised of (i) a five-year revolving credit facility of up to
$50.0 million, including a swing-line sub-facility of $5.0 million and a letter
of credit
8
<PAGE> 10
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
sub-facility of $5.0 million, and (ii) a term loan facility, consisting of a
$60.0 million five-year term loan A facility and a $90.0 million six-year term
loan B facility. The Term Loan Facility is guaranteed by Team Health Holdings,
LLC, and all subsidiaries of the Company.
The Term Loan Facility agreement contains 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.
Borrowings under the Term Loan Facility bear interest at variable rates
based, at the Company's option, on the prime or the eurodollar rate. The
interest rates at September 30, 2000 were 9.7% and 10.4% for the term loans A
and B, respectively. The Company pays a commitment fee in the revolving credit
facility, which was equal to 0.50% at September 30, 2000. No funds have been
borrowed under the revolving credit facility as of September 30, 2000, but the
Company has established a $0.2 million standby letter of credit against the
revolving credit facility.
NOTE 5. 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 medical malpractice 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 the reserves
and such liabilities, if incurred, should not have a significant negative effect
on the operating results and financial condition of our Company. Moreover, in
connection with the Recapitalization, subject to certain limitations,
MedPartners and Pacific Physician Services, Inc. have jointly and severally
agreed to indemnify us against some losses relating to litigation arising out of
incidents occurring prior to the Recapitalization to the extent those losses are
not covered by third party insurance. With respect to some litigation matters,
we are only indemnified if our losses from all indemnification claims exceed a
total of $3.7 million and do not exceed a total of $50.0 million. With respect
to other litigation matters, we are indemnified for all losses. Finally, also in
connection with the Recapitalization, MedPartners agreed to purchase, at its
sole cost and expense, for the benefit of Team Health Holdings LLC, insurance
policies covering all liabilities and obligations for any claim for medical
malpractice arising at any time in connection with the operation of Team Health
and its subsidiaries prior to the closing date of the Recapitalization
transactions for which Team Health or any of its subsidiaries or physicians
become liable.
In July 1998, a lawsuit was filed against InPhyNet Medical Management, Inc.
and several other unrelated defendants in the United States District Court for
the District of Kansas. The case is captioned United States ex rel. George R.
Schwartz v. InPhyNet Management, Inc. currently. The plaintiff in that case,
George R. Schwartz, alleges that, based on Management Services contracts,
InPhyNet and others had inappropriate financial relationships with hospital
emergency department and urgent care center physicians and engaged in
inappropriate billing practices in violation of the False Claims Act and the
Medicare Anti-kickback Law as well as various other statutes. In his Fourth
Amended Complaint, the plaintiff is seeking, among other relief,
(1) an order that InPhyNet cease and desist from violating civil and
criminal provisions of the federal False Claims Act, the assignment
provisions of the Social Security Act, the Medicare federal anti-kickback
statute, the mail fraud statute, and the Racketeer Influence and Corrupt
Organization Act;
(2) three times the amount of damages sustained by the United States
government, an amount which is indeterminable at this time;
9
<PAGE> 11
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(3) a civil penalty of $5,000 to $10,000 for each civil False Claims
Act violation, a number of violations which is indeterminable at this time;
and
(4) costs and attorneys' fees.
If the plaintiff's challenge to our contractual arrangements is successful,
we may be forced to modify the current structure of our relationships with
physicians and clients. This modification could have a significant negative
impact on our operations and financial condition. In connection with the
Recapitalization, subject to some limitations, MedPartners and Pacific Physician
Services, Inc. have jointly and severally agreed to indemnify us against any and
all losses relating to this lawsuit. However, if we were forced to restructure
our business as presently conducted as a result of the outcome of this
litigation, our operations would be substantially disrupted. The stay of
proceedings for this case has expired; however, no discovery has been taken nor
has a trial date been set.
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.
CONTINGENT ACQUISITION PAYMENTS
As part of the Recapitalization, the Company assumed the potential
liability for certain future earnout payments. As of September 30, 2000 and
December 31, 1999, these potential liabilities are estimated to be approximately
$14.0 million and $18.2 million, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Team Health is one of the nation's largest providers of outsourced medical
staffing and administrative services to hospitals and clinics in the United
States, with over 350 hospital and clinic contracts in 28 states. Our regional
operating model includes comprehensive programs for emergency medicine,
radiology, inpatient care, pediatrics, and other hospital departments. We
provide a full range of physician staffing and administrative services,
including the: (i) staffing, recruiting and credentialing of clinical and
non-clinical medical professionals; (ii) provision of administrative support
services, such as payroll, insurance coverage and continuing educational
services; and (iii) billing and collection of fees for services provided by the
medical professionals. Since the Company's inception in 1979, we have focused
primarily on providing outsourced services to emergency departments, which
account for the majority of our net revenue.
The Company generally targets larger hospitals with high volume emergency
departments (more than 15,000 patient visits per year), where we believe we can
generate attractive margins, establish stable long-term relationships, obtain
attractive payor mixes and recruit and retain high quality physicians.
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.
10
<PAGE> 12
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
RESULTS OF OPERATIONS
The following discussion provides an analysis of our results of operations
and should be read in conjunction with our consolidated financial statements.
The operating results of the periods presented were not significantly affected
by inflation. 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 income and
EBITDA as a percentage of net revenue less provision for uncollectibles for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fee for service revenue............................. 130.9% 126.5% 129.8% 129.2%
Contract revenue.................................... 23.2 25.5 24.0 26.5
Other revenue....................................... 2.1 1.9 2.1 1.8
Net revenue......................................... 156.3 153.8 155.8 157.6
Provision for uncollectibles........................ 56.3 53.8 55.8 57.6
Net revenue less provision for uncollectibles....... 100.0 100.0 100.0 100.0
Professional expenses............................... 77.2 78.7 77.3 80.1
Gross profit........................................ 22.8 21.3 22.7 19.9
General and administrative expenses................. 11.7 10.4 11.6 11.3
Terminated transaction expense...................... 1.3 -- 0.5 --
Management fee and other expenses................... 0.1 0.1 0.1 0.1
Depreciation and amortization....................... 2.4 1.8 2.2 1.7
Interest expense, net............................... 4.3 4.6 4.4 3.6
Recapitalization expense............................ -- -- -- 4.0
Income tax expense (benefit)........................ 1.2 2.1 1.6 (0.2)
Net income (loss)................................. 1.7 2.4 2.4 (0.6)
Dividends on preferred stock........................ 1.8 1.8 1.8 1.4
Net income (loss) available to common
stockholders...................................... (0.1) 0.6 0.5 (1.9)
OTHER FINANCIAL DATA
EBITDA(1)........................................... 9.7 11.0 10.6 10.9
Net Cash provided by (used in):
Operating activities.............................. -- -- 8.4 7.7
Investing activities.............................. -- -- (2.5) (2.9)
Financing activities.............................. -- -- (2.3) 1.7
</TABLE>
---------------
(1) See the following section for a discussion of how we calculated EBITDA and
of the significance of EBITDA.
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
NET REVENUE. Net revenue for the three months ended September 30, 2000
increased $23.0 million, or 10.9%, to $233.5 million from $210.5 million during
the three months ended September 30, 1999. During the three months ended
September 30, 2000, fee-for-service revenue was 83.8% of net revenue compared to
82.2% during the three months ended September 30, 1999. Contract revenue
represented 14.9% of net revenue for the three months ended September 30, 2000,
and 16.6% for the three months ended September 30, 1999.
11
<PAGE> 13
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Other revenue represented 1.4% of net revenue for the three months ended
September 30, 2000, and 1.2% for the three months ended September 30, 1999. The
increase in fee-for-service revenue as a percentage of total revenue was driven
by new fee-for-service contracts, the conversion of several contracts from flat
rate contracts to fee-for-service contracts and rate increases on existing
fee-for-service contracts. Net revenue as a percentage of net revenue less
provision for uncollectibles was 156.3% for the three months ended September 30,
2000 as compared to 153.8% during the three months ended September 30, 1999.
PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $84.1
million for the three months ended September 30, 2000 compared to $73.7 million
for the three months ended September 30, 1999, an increase of $10.5 million or
14.2%. As a percentage of net revenue less provision for uncollectibles, the
provision for uncollectibles was 56.3% for the three months ended September 30,
2000 compared to 53.8% for the three months ended September 30, 1999, reflecting
management's estimate of its bad debt experience. The increase in the provision
for uncollectibles is a result of increases in fee-for-service revenue and
increases in fee-for-service revenue as a percentage of net revenue.
NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision
for uncollectibles for the three months ended September 30, 2000 increased $12.5
million, or 9.2%, to $149.4 million from $136.9 million for the corresponding
quarter in 1999. Same contract revenue less provision for uncollectibles, which
consists of contracts under management from the beginning of the prior period
through the end of the subsequent period, increased $13.5 million, or 11.2%, to
$134.5 million during 2000 from $121.0 million during 1999, primarily due to
increases in patient volume. Acquisitions contributed $1.8 million and new
contracts obtained through internal sales contributed $9.7 million of the
increase. Offsetting the increase between periods was $12.5 million of net
revenue from contracts terminated.
PROFESSIONAL EXPENSES. Professional expenses for the three months ended
September 30, 2000 were $115.3 million compared to $107.7 million for the
corresponding quarter in 1999. This increase between periods in professional
expenses is due to cost increases in professional and medical support costs
resulting from increased patient volume. As a percentage of net revenue less
provision for uncollectibles, professional expenses decreased to 77.2% for the
three months ended September 30, 2000 from 78.7% for the corresponding quarter
in 1999.
GROSS PROFIT. Gross profit increased to $34.1 million for the three months
ended September 30, 2000 from $29.2 million for the corresponding quarter in
1999. Gross profit as a percentage of revenue less provision for uncollectibles
increased to 22.8% for the three months ended September 30, 2000 from 21.3% for
the three months ended September 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the three months ended September 30, 2000 increased to $17.5 million from
$14.2 million for the corresponding quarter in 1999. The increase between
periods was due to several factors in addition to the effects of inflationary
year over year cost increases. Commissions and sales incentives increased
approximately $.8 million between periods reflecting the variation in
compensation expense as measured under the Company's various incentive-based
performance plans. In addition, the Company incurred approximately $.7 million
of increased costs in 2000, principally consulting costs, associated with
various performance and growth initiatives. The remaining increase in costs
between periods is attributable to the continued development of the Company's
infrastructure following its recapitalization in 1999. General and
administrative expenses as a percentage of revenues less provision for
uncollectibles increased to 11.7% during the three months ended September 30,
2000 from 10.4% during the corresponding quarter in 1999.
12
<PAGE> 14
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
TERMINATED TRANSACTION EXPENSE. During the three months ended September
30, 2000, the Company terminated discussions with respect to a potential
acquisition target. Costs of $2.0 million previously incurred for work performed
in connection with the potential acquisition were expensed in the period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
months ended September 30, 2000 increased to $3.6 million from $2.5 million for
the same quarter in 1999, primarily due to the Company's investment in the
development of its infrastructure and other technology initiatives as well as
increased amortization expense associated with payments made under contingent
acquisition obligations since July 1, 1999.
NET INTEREST EXPENSE. Net interest expense increased $0.1 million to $6.4
million for the three months ended September 30, 2000 compared to $6.3 million
for the corresponding quarter in 1999.
INCOME TAX EXPENSE. Income tax expense for the three months ended
September 30, 2000 was $1.9 million compared to $2.8 million for the three
months ended September 30, 1999. The decrease in income tax expense for the
three months ended September 30, 2000 over the same period in 1999 was due to
the lower income before income taxes in 2000 resulting from the factors
described above.
NET INCOME. Net income for the three months ended September 30, 2000 was
$2.5 million compared to a net income of $3.2 million for the three months ended
September 30, 1999.
DIVIDENDS ON PREFERRED STOCK. The Company accrued $2.7 million and $2.5
million of dividends on its outstanding mandatory redeemable preferred stock for
the three months ended September 30, 2000 and 1999, respectively.
EBITDA. EBITDA for the three months ended September 30, 2000 was $14.6
million compared to $15.0 million for the three months ended September 30, 1999.
EBITDA represents income (loss) before income taxes plus depreciation and
amortization, net interest expense and what we consider non-operational or
non-cash charges such as Management fees and other expenses and recapitalization
expenses. This definition is consistent with that of our credit agreement. We
have included information concerning EBITDA because we believe that EBITDA is
generally accepted as providing useful information regarding a company's ability
to service and/or incur debt. EBITDA is not intended to represent cash flows for
the period, nor has it been presented as an alternative to operating income as
an indicator of operating performance and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles ("GAAP") in the United States and is
not indicative of operating income or cash flow from operations as determined
under GAAP. We understand that while EBITDA is frequently used by securities
analysts in the evaluation of companies, EBITDA, as used herein, is not
necessarily comparable to other similarly titled captions of other companies due
to potential inconsistencies in the method of calculation.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended
September 30, 1999
NET REVENUE. Net revenues for the nine months ended September 30, 2000
increased $53.9 million, or 8.5%, to $686.9 million from $633.0 million during
the nine months ended September 30, 1999. During the nine months ended September
30, 2000, fee-for-service revenue was 83.3% of net revenue as compared to 82.0%
during the nine months ended September 30, 1999. Contract revenue represented
15.4% of net revenue for the nine months ended September 30, 2000, and 16.8% for
the nine months ended September 30, 1999. Other revenue represented 1.3% of net
revenue for the nine months ended September 30, 2000, and 1.2% for the nine
months ended September 30, 1999. The increase in fee-for-service revenue as a
percentage of total revenue was driven by new fee-for-service contracts, the
conversion of several contracts from flat rate contracts to fee-for-service
contracts and rate increases on existing fee-for-service contracts. Net revenue
as a
13
<PAGE> 15
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
percentage of net revenue less provision for uncollectibles was 155.8% for the
nine months ended September 30, 2000 compared to 157.6% for the nine months
ended September 30, 1999.
PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $246.1
million for the nine months ended September 30, 2000 compared to $231.3 million
for the nine months ended September 30, 1999, an increase of $14.8 million or
6.4%. As a percentage of net revenue less provision for uncollectibles, the
provision for uncollectibles was 55.8% for the nine months ended September 30,
2000 compared to 57.6% for the nine months ended September 30, 1999, reflecting
management's estimate of improvement in bad debt experience. The increase in the
provision for uncollectibles is a result of increases in fee-for-service revenue
and increases in fee-for-service revenue as a percentage of net revenue.
NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision
for uncollectibles for the nine months ended September 30, 2000 increased $39.1
million, or 9.7%, to $440.8 million from $401.7 million for the corresponding
period in 1999. Same contract revenue less provision for uncollectibles, which
consists of contracts under management from the beginning of the prior period
through the end of the subsequent period, increased $28.2 million, or 7.9%, to
$383.8 million during 2000 from $355.6 million during 1999, primarily due to
increases in patient volume. Acquisitions contributed $3.8 million and new
contracts obtained through internal sales contributed $26.6 million of the
increase. Offsetting the increases between periods was $28.5 million of net
revenue from contracts terminated.
PROFESSIONAL EXPENSES. Professional expenses for the nine months ended
September 30, 2000 were $340.7 million compared to $321.7 million for the
corresponding period in 1999. This increase was due primarily to cost increases
in professional and medical support costs driven by increasing patient volume
period over period. As a percentage of net revenue less provision for
uncollectibles, professional expenses decreased to 77.3% for the nine months
ended September 30, 2000 from 80.1% for the corresponding period in 1999.
GROSS PROFIT. Gross profit increased to $100.0 million for the nine months
ended September 30, 2000 from $79.9 million for the corresponding period in
1999. Gross profit as a percentage of revenue less provision for uncollectibles
increased to 22.7% for the nine months ended September 30, 2000 from 19.9% for
the nine months ended September 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 2000 increased to $51.2 million from
$45.3 million for the corresponding period in 1999. The increase between periods
was due to several factors in addition to the effects of inflationary year over
year cost increases. Commissions and incentives increased approximately $1.5
million between periods reflecting compensation expense as measured under the
Company's various incentive-based performance plans. In addition, the Company
incurred approximately $0.9 million of increased costs in 2000 associated with
various performance and growth initiatives. The remaining increase in costs
between periods is attributable to the continued development of the Company's
infrastructure following its recapitalization in 1999. General and
administrative expenses as a percentage of revenues less provision for
uncollectibles increased to 11.6% for the nine months ended September 30, 2000
from 11.3% for the corresponding period in 1999.
TERMINATED TRANSACTION EXPENSE. During the nine months ended September 30,
2000, the Company terminated discussions with respect to a potential acquisition
target. Costs of $2.0 million previously incurred for work performed in
connection with the potential acquisition were expensed in the period.
RECAPITALIZATION EXPENSE AND MANAGEMENT FEE AND OTHER
EXPENSES. Recapitalization expense and management fee for the nine months ended
September 30, 2000 were $0.5 million compared to $16.4 million for the nine
months ended September 30, 1999. This decrease was primarily due to expenses of
$16.0 million incurred for the nine months ended September 30, 1999 related to
the recapitalization.
14
<PAGE> 16
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the nine
months ended September 30, 2000 increased to $9.5 million from $6.9 million for
the nine months ended September 30, 1999, due to continued investment in the
development of infrastructure and technology initiatives as well as increased
amortization expense associated with payments made under contingent acquisition
obligations since January 1, 1999.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 2000 increased to $19.3 million from $14.3 million for the nine
months ended September 30, 1999. The increase in net interest expense is due to
the Senior Credit Facility and Notes issued on March 12, 1999.
INCOME TAX EXPENSE. Income tax expense for the nine months ended September
30, 2000 was $7.2 million compared to an income tax benefit of $0.6 million for
the nine months ended September 30, 1999. The income tax expense for the nine
months ended September 30, 2000 compared to the income tax benefit over the same
period in 1999 reflects the Company's increase in income before income taxes
between periods resulting from the factors described above.
NET INCOME. Net income for the nine months ended September 30, 2000 was
$10.4 million compared to a net loss of $2.3 million for the nine months ended
September 30, 1999.
DIVIDENDS ON PREFERRED STOCK. The Company accrued $8.1 million and $5.5
million of dividends on its outstanding mandatory redeemable preferred stock for
the nine months ended September 30, 2000 and 1999, respectively.
EBITDA. EBITDA for the nine months ended September 30, 2000 was $46.9
million as compared to $43.7 million during the nine months ended September 30,
1999.
EBITDA represents income (loss) before income taxes plus depreciation and
amortization, net interest expense and what we consider non-operational or
non-cash charges such as Management fees and other expenses and recapitalization
expenses. This definition is consistent with that of our credit agreement. We
have included information concerning EBITDA because we believe that EBITDA is
generally accepted as providing useful information regarding a company's ability
to service and/or incur debt. EBITDA is not intended to represent cash flows for
the period, nor has it been presented as an alternative to operating income as
an indicator of operating performance and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles ("GAAP") in the United States and is
not indicative of operating income or cash flow from operations as determined
under GAAP. We understand that while EBITDA is frequently used by securities
analysts in the evaluation of companies, EBITDA, as used herein, is not
necessarily comparable to other similarly titled captions of other companies due
to potential inconsistencies in the method of calculation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, funds generated from operations have been sufficient to meet
the Company's working capital requirements and debt obligations and to finance
any necessary capital expenditures. Expansion of the Company's business through
acquisitions may require additional funds, which, to the extent not provided by
internally generated sources, cash, and the Senior Credit Facilities, will
require the Company to seek additional external financing.
As of September 30, 2000, the Company had $117.8 million in working
capital, as compared to $103.8 million as of December 31, 1999. The Company's
principal sources of liquidity consisted of: (i) cash and cash equivalents
aggregating $45.4 million as of September 30, 2000 and $29.8 million as of
December 31, 1999; (ii) accounts receivable totaling $151.8 million as of
September 30, 2000 and $152.4 million as of
15
<PAGE> 17
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
December 31, 1999; and (iii) $49.8 million and $49.9 million of borrowing
capacity under a revolving line of credit with a syndicate of lenders as of
September 30, 2000 and December 31, 1999, respectively.
For the nine months ended September 30, 2000, $36.9 million in cash was
provided by operations due to net income and non-cash charges such as
depreciation and amortization and provision for uncollectibles offset by a net
use of cash for changes in operating assets and liabilities. The primary changes
in operating assets and liabilities consist of increases in accounts receivable
offset by decreases in tax accounts and increases in accrued compensation and
accrued malpractice. Cash of $11.1 million was used in investing activities for
the nine months ended September 30, 2000 primarily related to purchases of
property and equipment and payments under earnout agreements. Cash of $10.3
million was used by financing activities for the nine months ended September 30,
2000, primarily because the Company repaid $9.5 million of the Term loans and
other debt during the period.
For the nine months ended September 30, 1999, $31.0 million in cash was
provided by operations due to non-cash charges such as depreciation and
amortization, provision for uncollectibles, and recapitalization expenses offset
by a net loss and a net use of cash for changes in operating assets and
liabilities. The primary changes in operating assets and liabilities consist of
increases in accounts receivable and income tax accounts offset by increases in
accounts payable, accrued compensation, other accrued liabilities and accrued
malpractice. Cash of $11.5 million was used in investing activities for the nine
months ended September 30, 1999 primarily related to purchases of property and
equipment and payments under earnout agreements. Cash of $6.9 million was
provided by financing activities for the nine months ended September 30, 1999 as
proceeds from borrowings under the Senior Credit Facilities and Notes exceeded
payments made to MedPartners under the Recapitalization and the transaction
costs of the Recapitalization.
SEASONALITY
Historically, the Company's revenues and operating results have reflected
minimal seasonal variations due to the geographic diversification of the
contract base.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The Company is exposed to market risk related to changes in interest rates.
The Company does not use derivative financial instruments for speculative or
trading purposes.
The Company's earnings are affected by changes in short-term interest rates
as a result of its borrowings under its Senior Credit Facilities. Interest rate
swap agreements are used to manage a portion of the Company's interest rate
exposure. On September 20, 1999, the Company entered into interest rate swap
agreements to effectively convert $50.0 million of floating-rate borrowings to
fixed-rate borrowings. The agreements are contracts 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 agreements. The contracts have a
final expiration of March 13, 2002. These agreements expose the Company to
credit losses in the event of non-performance by the counterparties to its
financial instruments. The counterparties are creditworthy financial
institutions and the Company believes the counterparties will be able to fully
satisfy their obligations under the contracts. For the nine months ended
September 30, 2000, the Company received a weighted average rate of 6.41% and
paid a weighted average of 5.63% on the swaps. For the $50.0 million notional
amount swaps at the expected maturity date of March 13, 2002 (assuming the
options to extend or cancel are not exercised), the weighted average pay rate is
5.63% and the weighted average receive rate is 6.66%, using the rate in effect
at September 30, 2000.
At September 30, 2000, the fair value of the Company's total debt, which
has a carrying value of approximately $232.5 million, was approximately $224.0
million. The Company had $132.5 million of variable
16
<PAGE> 18
TEAM HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
debt outstanding at September 30, 2000, with interest rate swaps in place to
offset the variability of $50.0 million of this balance. If the market interest
rates for such borrowings averaged 1.0% more during the twelve months ended
September 30, 2001, the Company's interest expense would increase, and income
before income taxes would decrease by approximately $0.8 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.
17
<PAGE> 19
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 5 to the financial statements for a description of certain legal
actions to which we are party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND OTHER REPORTS
None.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Knoxville, Tennessee, on November 9, 2000.
Team Health, Inc.
/s/ H. Lynn Massingale, M.D.
--------------------------------------
H. Lynn Massingale,
Chief Executive Officer
/s/ David P. Jones
--------------------------------------
David P. Jones
Chief Financial Officer
19
