-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QW0HKRq7SsS4nX1p249EfnfLN2FqudGZKhn1gKsml6EELCX0+B8UHaKXbYFzMzYo BmLy8vt3K+ydE3+Bksh60w== 0000950123-00-004795.txt : 20000512 0000950123-00-004795.hdr.sgml : 20000512 ACCESSION NUMBER: 0000950123-00-004795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEAM HEALTH INC CENTRAL INDEX KEY: 0001086795 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621562558 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-80337 FILM NUMBER: 625381 BUSINESS ADDRESS: STREET 1: 1900 WINSTON RD CITY: KNOXVILLE STATE: TN ZIP: 37919 BUSINESS PHONE: 8003422898 MAIL ADDRESS: STREET 1: 1900 WINSTON RD CITY: KNOXVILLE STATE: TN ZIP: 37919 10-Q 1 TEAM HEALTH INC 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 MARCH 31, 2000 OR [ ] 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 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1900 WINSTON ROAD SUITE 300 KNOXVILLE, TENNESSEE 37919 (865) 693-1000 (ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS 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 May 11, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORWARD LOOKING STATEMENTS Statements in this document that are not historical facts are hereby identified as "forward looking statements" for 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. 3 TEAM HEALTH, INC. QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2000
Page Part 1. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets- 1 March 31, 2000 and December 31, 1999 Consolidated Statements of Operations - Three months ended March 31, 2000 and 1999 2 Consolidated Statements of Cash Flows- Three months 3 ended March 31, 2000 and 1999 Notes to Consolidated Financial Statements (Unaudited) 4 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures of Market Risk 13 Part 2. Other Information Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Other Reports 15 Signatures 15
i 4 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEAM HEALTH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
March 31, December 31, 2000 1999 --------- ----------- ASSETS Current assets: Cash and cash equivalents $ 30,521 $ 29,820 Accounts receivable, net 151,165 152,376 Prepaid expenses and other current assets 4,725 5,252 --------- --------- Total current assets 186,411 187,448 Property and equipment, net 19,898 19,570 Intangibles, net 36,282 36,574 Deferred income taxes 87,861 86,403 Other 21,341 20,455 --------- --------- $ 351,793 $ 350,450 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT) Current liabilities: Accounts payable $ 13,480 $ 14,185 Accrued compensation and physician payable 41,074 39,939 Other accrued liabilities 16,225 16,740 Current maturities of long-term debt 10,522 12,776 --------- --------- Total current liabilities 81,301 83,640 Long-term debt, less current maturities 226,494 228,900 Other non-current liabilities 20,577 18,423 Mandatory redeemable preferred stock 110,802 108,107 Common stock 100 100 Retained earnings (deficit) (87,481) (88,720) --------- --------- $ 351,793 $ 350,450 ========= =========
See accompanying notes. 1 5 TEAM HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ------------------------ 2000 1999 --------- --------- Fee for service revenue $ 188,704 $ 172,756 Contract revenue 34,617 36,255 Other revenue 2,699 2,577 --------- --------- Net revenue 226,020 211,588 Provision for uncollectibles 80,476 77,711 --------- --------- Net revenue less provision for uncollectibles 145,544 133,877 Professional expenses 112,534 108,388 --------- --------- Gross profit 33,010 25,489 General and administrative 16,876 15,744 Depreciation and amortization 2,830 2,180 Management fee 125 131 Interest expense, net 6,536 1,571 Recapitalization expense -- 16,013 --------- --------- Income (loss) before income taxes 6,643 (10,150) Income tax expense (benefit) 2,709 (4,097) --------- --------- Net income (loss) 3,934 (6,053) Dividends on preferred stock 2,695 521 --------- --------- Net income (loss) available to common stockholders $ 1,239 $ (6,574) ========= =========
See accompanying notes. 2 6 TEAM HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31, ------------------------- 2000 1999 --------- --------- OPERATING ACTIVITIES Net income (loss) $ 3,934 $ (6,053) Adjustments to reconcile net income (loss): Depreciation and amortization 2,830 2,180 Amortization of deferred financing costs 463 125 Provision for uncollectibles 80,476 77,711 Gain on sale of assets (21) (10) Recapitalization expense -- 16,013 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (79,000) (82,056) Income tax accounts 381 (4,061) Prepaids and other assets (53) (962) Accounts payable (705) 1,352 Accrued compensation and physician payable 939 348 Other accrued liabilities (2,613) 2,878 Professional liability insurance reserves 2,660 865 --------- --------- Net cash provided by operating activities 9,291 8,330 INVESTING ACTIVITIES Cash paid for merger costs -- (128) Purchases of property and equipment (2,062) (1,529) Sale of property and equipment 114 -- Cash paid for acquisitions, net (887) (18) Purchase of investments (161) -- Other investing activities (256) (124) --------- --------- Net cash used in investing activities (3,252) (1,799) FINANCING ACTIVITIES Payments on notes payable (4,660) (5,052) Proceeds from notes payable -- 250,000 Payments of deferred financing costs (662) (10,876) Redemption of common stock in connection with recapitalization -- (210,739) Payments of recapitalization expenses (16) (15,587) Net transfers from parents and parents' subsidiaries -- 2,578 --------- --------- Net cash (used in) provided by financing activities (5,338) 10,324 --------- --------- Net increase in cash 701 16,855 Cash and cash equivalents, beginning of period 29,820 3,472 --------- --------- Cash and cash equivalents, end of period $ 30,521 $ 20,327 ========= ========= Interest paid $ 7,596 $ 260 ========= ========= Taxes paid $ 2,257 $ -- ========= =========
See accompanying notes. 3 7 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (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 4 8 Effective March 12, 1999, the Company was recapitalized 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 approximately $49.3 million for all medical malpractice liabilities originating prior to the Recapitalization; 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. 5 9 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):
March 31, December 31, 2000 1999 --------- ----------- 12% Senior Subordinated Notes $ 100,000 $ 100,000 Term Loan Facility 136,900 139,300 Other debt 116 2,376 --------- --------- 237,016 241,676 Less current portion (10,522) (12,776) --------- --------- $ 226,494 $ 228,900 ========= =========
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 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 March 31, 2000 were 9.3% and 9.8% for the term loans A and B, respectively. The Company pays a commitment fee on the revolving credit facility, which was equal to 0.50% at March 31, 2000. No funds have been borrowed under the revolving credit facility as of March 31, 2000, but the 6 10 Company established a $0.1 million standby letter of credit against the revolving credit facility on May 5, 1999. 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 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 7 11 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 becomes liable. In July 1998, a lawsuit was filed against EmCare, Inc. and 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. EmCare, Inc. and InPhyNet Management, Inc. et al. 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; (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 case has been stayed until the earlier of June 30, 2000 or 21 days after the issuance of an opinion by the United States Supreme Court in United States ex rel. Stevens v. Vermont Agency of Natural Resources, which may address whether private persons have standing to bring qui tam actions alleging claims of fraud upon the government. 8 12 CONTINGENT ACQUISITION PAYMENTS As part of the Recapitalization, the Company assumed the potential liability for certain future earnout payments. As of March 31, 2000 and December 31, 1999, these potential liabilities are estimated to be approximately $17.7 million and $18.2 million, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 credentialling 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 payer 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 and combined financial statements of the Company and notes thereto included elsewhere in this document. RESULTS OF OPERATIONS The following discussion provides an analysis of our results of operations and should be read in conjunction with our consolidated and combined 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 indi- 9 13 vidual 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:
Three Months Ended March 31, ---------------------------- 2000 1999 ------ ------ Fee for service revenue 129.7% 129.0% Contract revenue 23.8 27.1 Other revenue 1.9 1.9 Net revenue 155.3 158.0 Provision for uncollectibles 55.3 58.0 Net revenue less provision for uncollectibles 100.0 100.0 Professional expenses 77.3 81.0 General and admin expenses 11.6 11.8 Depreciation and amortization 1.9 1.6 Recapitalization expense -- 12.0 Management fee 0.1 0.1 Interest expense, net 4.5 1.2 Income tax expense (benefit) 1.9 (3.1) Net income (loss) 2.7 (4.5) Dividends on preferred stock 1.9 0.4 Net income (loss) available to common stockholders 0.9 (4.9) OTHER FINANCIAL DATA EBITDA (1) 11.1 10.3 Net Cash provided by (used in): Operating activities 6.4 6.2 Investing activities (2.2) (1.3) Financing activities (3.7) 7.7
(1) See the following section for a discussion of how we calculated EBITDA and of the significance of EBITDA. THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 NET REVENUE. Net revenues for the three months ended March 31, 2000 increased $14.4 million, or 6.8%, to $226.0 million from $211.6 million during the three months ended March 31, 1999. During the three months ended March 31, 2000, fee-for-service revenue was 83.5% of net revenue as compared to 81.6% during the three months ended March 31, 1999. Contract revenue represented 15.3% of net revenue for the three months ended March 31, 2000, and 17.1% for the three months ended March 31, 1999. Other revenue represented 1.2% of net revenue for the three months ended March 31, 2000, and for the three months ended March 31, 1999, respectively. The increase in fee-for-service revenue as a percentage of total revenue was driven by the conversion of several contracts from flat rate contracts to fee-for-service contracts and rate increases on fee-for-service contracts. Net revenue as a percentage of net revenue less provision for uncollectibles was 155.3% for the three months ended March 31, 2000 as compared to 158.0% during the three months ended March 31, 1999. PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $80.5 million during the three 10 14 months ended March 31, 2000 as compared to $77.7 million during the three months ended March 31, 1999, an increase of $2.8 million or 3.6%. As a percentage of net revenue less provision for uncollectibles, the provision for uncollectibles was 55.3% for the three months ended March 31, 2000 as compared to 58.0% for the three months ended March 31, 1999, reflecting management's estimate of improvement in bad debt experience. The increase in the provision for uncollectibles is a result of increases in net revenue during the period. NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision for uncollectibles for the three months ended March 31, 2000 increased $11.6 million, or 8.7%, to $145.5 million from $133.9 million during 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 $10.0 million, or 8.0%, to $135.1 million during 2000 from $125.1 million during 1999. Acquisitions contributed $1.0 million and new contracts obtained through internal sales contributed $7.8 million of the increase. Offsetting the increases was $11.1 million associated with contract terminations during the periods. PROFESSIONAL EXPENSES. Professional expenses during the three months ended March 31, 2000 were $112.5 million compared to $108.4 million during the corresponding quarter in 1999. This increase was due primarily to expected cost increases in professional and medical support costs. As a percentage of net revenue less provision for uncollectibles, professional expenses decreased to 77.3% during the three months ended March 31, 2000 from 81.0% during the corresponding quarter in 1999. GROSS PROFIT. Gross profit increased to $33.0 million during the three months ended March 31, 2000 from $25.5 million during the same corresponding quarter in 1999. Gross profit as a percentage of revenue less provision for uncollectibles increased to 22.7% during the three months ended March 31, 2000 from 19.0% during the three months ended March 31, 1999. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses ("G&A") during the three months ended March 31, 2000 increased to $16.9 million from $15.7 million during the same corresponding quarter in 1999. This increase was due to normal operating cost increases and the addition of approximately $0.6 million of stand-alone costs incurred subsequent to the Recapitalization in order to replace certain services formerly provided by MedPartners. G&A as a percent of revenues less provision for uncollectibles decreased to 11.6% during the three months ended March 31, 2000 from 11.8% during the corresponding quarter in 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization during the three months ended March 31, 2000 increased to $2.8 million from $2.2 million during the same quarter in 1999. RECAPITALIZATION EXPENSE AND MANAGEMENT FEE. Recapitalization expense and management fee during the three months ended March 31, 2000 were $0.1 million compared to $16.1 million during the three months ended March 31, 1999. This decrease was primarily due to expenses of $16.0 million incurred during the three months ended March 31, 1999 related to the Recapitalization. 11 15 NET INTEREST EXPENSE. Net interest expense during the three months ended March 31, 2000 increased to $6.5 million from $1.6 million during the three months ended March 31, 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 during the three months ended March 31, 2000 was $2.7 million as compared to an income tax benefit during the three months ended March 31, 1999 of $4.1 million. The increase in income tax expense during the three months ended March 31, 2000 over the same period in 1999 was due primarily to the expenses incurred in the Recapitalization. NET INCOME. Net income during the three months ended March 31, 2000 was $3.9 million as compared to a net loss of $6.1 million during the three months ended March 31, 1999. This change was primarily due to the factors described above. DIVIDENDS ON PREFERRED STOCK. The Company accrued $2.7 million and $0.5 million of dividends on its outstanding mandatory redeemable preferred stock during the three months ended March 31, 2000 and 1999, respectively. EBITDA. EBITDA for the three months ended March 31, 2000 was $16.1 million as compared to $13.7 million during the three months ended March 31, 1999. EBITDA represents income (loss) before income taxes plus depreciation and amortization, net interest expense and what we consider non-operational and non-cash charges such as Management fees 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 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 analysis 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, together with funds available from MedPartners, 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 March 31, 2000, the Company had $105.1 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 $30.5 million as of March 31, 2000 and $29.8 million as of December 31, 1999; (ii) accounts receivable totaling $151.2 million as of March 31, 2000 and $152.4 million as of December 31, 1999; and (iii) $49.9 million of borrowing capacity under a revolving line of credit with a syndicate of lenders as of March 31, 2000 and December 31, 1999. For the three months ended March 31, 2000, $9.3 million in cash was provided by operations due to net income and non-cash charges offset by a negative change in operating assets and liabilities. The change in operating assets and liabilities consists primarily of increases in accounts receivable offset by increases in accrued compensation and accrued malpractice. Cash of $3.3 million was used in investing activities for the three months ended March 31, 2000 primarily 12 16 related to purchases of property and equipment and payments under earnout agreements. Cash of $5.3 million was used by financing activities for the three months ended March 31, 2000, primarily because the Company repaid $4.7 million of the Term loans and other debt during the period. For the three months ended March 31, 1999, $8.3 million in cash was provided by operations due to a net loss and a negative change in operating assets and liabilities, offset by non-cash charges such as depreciation and amortization, provision for uncollectibles, and recapitalization expenses. Cash of $1.8 million was used in investing activities for the three months ended March 31, 1999 primarily related to purchases of property and equipment. Cash of $10.3 million was provided by financing activities for the three months ended March 31, 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. IMPACT OF THE YEAR 2000 The Company was engaged in a major effort to minimize the impact of the Year 2000 date change on its financial systems. The Company did not experience any Year 2000 problems subsequent to December 31, 1999. 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 swap agreements are used to manage 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 three months ended March 31, 2000; the Company received a weighted average rate of 6.2% and paid a weighted average of 5.6% on the swaps. For the $50.0 million notional 13 17 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 5.6% and the weighted average receive rate is 6.2%, using the rate in effect at March 31, 2000. At March 31, 2000, the fair value of the Company's total debt, which has a carrying value of approximately $237.0 million, was approximately $227.8 million. The Company had $137.0 million of variable debt outstanding at March 31, 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% more during the fiscal year ended December 31, 2000 than they did during fiscal 1999, 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. 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. 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. 14 18 ITEM 6. EXHIBITS AND OTHER REPORTS None. 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 May 11, 2000. Team Health, Inc. /s/ H. LYNN MASSINGALE, M.D. - --------------------------------------- H. Lynn Massingale, Chief Executive Officer /s/ DAVID JONES - --------------------------------------- David Jones, Vice President and Treasurer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 30,521 0 151,165 0 0 186,411 53,265 33,367 351,793 81,301 226,494 110,802 0 100 (87,481) 351,793 0 226,020 0 112,534 16,876 80,476 6,536 6,643 2,709 3,934 0 0 0 3,934 0 0 NET
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