-----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, KdTpflHYPmyPjksSTSjS2dz5S7k89vnh2d/a+bGmkaNzci2Kwl6FkMcrQfZGnk+v HZllKhzoMAGFB1HElHtlnA== 0000950123-01-505180.txt : 20010810 0000950123-01-505180.hdr.sgml : 20010810 ACCESSION NUMBER: 0000950123-01-505180 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 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: 1934 Act SEC FILE NUMBER: 333-80337 FILM NUMBER: 1701457 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 y52131e10-q.txt 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 JUNE 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 333-80337 TEAM HEALTH, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TENNESSEE 62-1562558 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1900 WINSTON ROAD SUITE 300 KNOXVILLE, TENNESSEE 37919 (865) 693-1000 (ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [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 August 9, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. 2 3 TEAM HEALTH, INC. QUARTERLY REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2001
PAGE ---- Part 1. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- June 30, 2001 and December 31, 2000............................................... 4 Consolidated Statements of Operations -- Three months ended June 30, 2001 and 2000........................... 5 Consolidated Statements of Operations -- Six months ended June 30, 2001 and 2000................................. 6 Consolidated Statements of Cash Flows -- Six months ended June 30, 2001 and 2000................................. 7 Notes to Consolidated Financial Statements (Unaudited).... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 Item 3. Quantitative and Qualitative Disclosures of Market Risk................................................... 17 Part 2. Other Information Item 1. Legal Proceedings................................. 19 Item 2. Changes in Securities and Use of Proceeds......... 19 Item 3. Defaults upon Senior Securities................... 19 Item 4. Submission of Matters to a Vote of Security Holders................................................ 19 Item 5. Other Information................................. 19 Item 6. Exhibits and Other Reports........................ 19 Signatures................................................ 20
3 4 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEAM HEALTH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 62,206 $ 55,404 Accounts receivable, net.................................. 143,713 149,724 Prepaid expenses and other current assets................. 7,406 5,590 -------- -------- Total current assets........................................ 213,325 210,718 Property and equipment, net................................. 18,956 19,555 Intangibles, net............................................ 41,071 37,726 Deferred income taxes....................................... 79,410 78,578 Other....................................................... 17,604 17,531 -------- -------- $370,366 $364,108 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 10,366 $ 14,561 Accrued compensation and physician payable................ 46,603 44,849 Other accrued liabilities................................. 17,110 5,734 Current maturities of long-term debt...................... 14,095 12,623 Deferred income taxes..................................... 3,634 8,846 -------- -------- Total current liabilities................................... 91,808 86,613 Long-term debt, less current maturities..................... 206,566 216,578 Other non-current liabilities............................... 32,234 28,150 -------- -------- 330,608 331,341 Commitments and Contingencies Mandatory redeemable preferred stock........................ 124,786 118,890 Common stock, $0.01 par value 12,000 shares authorized, 10,000 shares issued and outstanding...................... 100 100 Retained earnings (deficit)................................. (85,128) (86,223) -------- -------- $370,366 $364,108 ======== ========
See accompanying notes to financial statements. 4 5 TEAM HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, -------------------- 2001 2000 -------- -------- Fee for service revenue..................................... $212,472 $187,837 Contract revenue............................................ 40,334 36,343 Other revenue............................................... 3,345 3,130 -------- -------- Net revenue............................................... 256,151 227,310 Provision for uncollectibles................................ 91,592 81,464 -------- -------- Net revenue less provision for uncollectibles............. 164,559 145,846 Professional expenses....................................... 130,916 115,710 -------- -------- Gross profit.............................................. 33,643 30,136 General and administrative expenses......................... 15,398 13,926 Management fee and other expenses........................... 50 125 Impairment of intangibles................................... 4,137 -- Depreciation and amortization............................... 3,772 3,053 Interest expense, net....................................... 5,790 6,394 -------- -------- Earnings before income taxes.............................. 4,496 6,638 Income tax expense.......................................... 1,821 2,669 -------- -------- Net earnings.............................................. 2,675 3,969 Dividends on preferred stock................................ 2,964 2,655 -------- -------- Net earnings (loss) available to common stockholders...... $ (289) $ 1,314 ======== ========
See accompanying notes to financial statements. 5 6 TEAM HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 -------- -------- Fee for service revenue..................................... $423,584 $376,541 Contract revenue............................................ 77,079 70,960 Other revenue............................................... 6,084 5,829 -------- -------- Net revenue............................................... 506,747 453,330 Provision for uncollectibles................................ 184,043 161,940 -------- -------- Net revenue less provision for uncollectibles............. 322,704 291,390 Professional expenses....................................... 256,329 230,828 -------- -------- Gross profit.............................................. 66,375 60,562 General and administrative expenses......................... 30,687 28,218 Management fee and other expenses........................... 177 250 Impairment of intangibles................................... 4,137 -- Depreciation and amortization............................... 7,405 5,883 Interest expense, net....................................... 11,608 12,930 -------- -------- Earnings before income taxes.............................. 12,361 13,281 Income tax expense.......................................... 5,006 5,378 -------- -------- Net earnings.............................................. 7,355 7,903 Dividends on preferred stock................................ 5,896 5,350 -------- -------- Net earnings available to common stockholders............. $ 1,459 $ 2,553 ======== ========
See accompanying notes to financial statements. 6 7 TEAM HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net earnings................................................ $ 7,355 $ 7,903 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................. 7,405 5,883 Amortization of deferred financing cost................... 919 934 Provision for uncollectibles.............................. 184,043 161,940 Impairment of intangibles................................. 4,137 -- Deferred income taxes..................................... (5,802) (108) Loss on sale of equipment................................. 15 38 Equity in joint venture income............................ (402) (567) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable....................................... (181,090) (160,008) Prepaids and other assets................................. (1,734) (563) Accounts payable.......................................... (4,195) (80) Accrued compensation and physician payable................ 1,986 3,007 Other accrued liabilities................................. 11,335 (3,060) Professional liability reserves........................... 2,682 4,990 --------- --------- Net cash provided by operating activities................... 26,654 20,309 INVESTING ACTIVITIES Purchases of property and equipment......................... (2,658) (4,154) Cash paid for acquisitions, net............................. (8,154) (3,172) Purchase of investments..................................... (566) (392) Other investing activities.................................. 86 168 --------- --------- Net cash used in investing activities....................... (11,292) (7,550) FINANCING ACTIVITIES Payments on long-term debt.................................. (8,540) (7,066) Payments of deferred financing costs........................ (20) (662) Payments of recapitalization expenses....................... -- (16) --------- --------- Net cash used in financing activities....................... (8,560) (7,744) --------- --------- Net increase in cash........................................ 6,802 5,015 Cash and cash equivalents, beginning of period.............. 55,404 29,820 --------- --------- Cash and cash equivalents, end of period.................... $ 62,206 $ 34,835 ========= ========= Interest paid............................................... $ 12,567 $ 10,662 ========= ========= Taxes paid.................................................. $ 4,155 $ 8,833 ========= =========
See accompanying notes to financial statements. 7 8 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Team Health, Inc. (the "Company") and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. Certain prior year amounts have been reclassified to conform to the current year presentation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet of the Company at December 31, 2000 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. These financial statements and footnote disclosures should be read in conjunction with the December 31, 2000 audited consolidated financial statements and the notes thereto included in the Company's Form 10-K. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. NOTE 2. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS Effective January 1, 2001, the Company implemented the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This standard requires the Company to recognize all derivatives on the balance sheet at fair value. The Company's interest rate swaps are cash flow hedges which hedge the variability in expected cash flows of a portion of its floating rate liabilities. The Company believes that its hedges are highly effective with changes in effectiveness expected to be reported in other comprehensive earnings. Changes in any ineffectiveness will be reported through earnings. The adoption of this new FASB standard resulted in a cumulative effect of an accounting change, net of tax, of approximately $0.1 million being recognized as other comprehensive earnings. During the three months ended June 30, 2001, the decrease in fair value of interest rate swaps, net of tax, of approximately $0.1 million was recognized through other comprehensive earnings (see Note 7). At June 30, 2001, the fair value of the interest rate swaps was a liability of $0.6 million. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company will, however, apply the nonamortization provisions of the Statement for acquisitions consummated after June 30, 2001. Application of the nonamortization provisions of the Statement is expected to result in an increase in net earnings of approximately $2.1 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 9 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 3. ACQUISITIONS Effective March 1, 2001, the Company acquired all of the outstanding stock of an emergency staffing company for $1.5 million and may have to pay up to $0.7 million in future contingent payments. The acquisition is being accounted for under the purchase method of accounting and its results of operations are included in the accompanying financial statements since its date of acquisition. The pro forma effect of the acquisition on the Company's results of operations for the periods prior to acquisition was not significant. Subsequent to June 30, 2001, the Company reached agreement with the shareholders of Integrated Specialists Management Services, Inc. ("ISMS") to acquire their shares in ISMS as of August 1, 2001. The Company under the terms of the stock purchase agreement acquired all of the outstanding shares of ISMS for cash at an amount equal to a minimum price plus additional consideration equal to ISMS's net working capital as of July 31, 2001. The purchase price is subject to adjustment for post-closing net working capital adjustments and other agreed to items through January 31, 2002. The Company on August 1, 2001 paid $7.4 million of an estimated total purchase price of $8.6 million to the selling shareholders of ISMS. The remaining estimated purchase price ($1.2 million), which is subject to adjustment based on such factors as collection of accounts receivables, adjustment of liabilities and other working capital components, is to be paid on or before February 1, 2002. The acquisition will be accounted for using the purchase method of accounting. ISMS provides a wide range of management services to anesthesiology practices on a fee basis. Services include strategic management, management information systems, third-party payor contracting, financial and accounting support, benefits administration and risk management, scheduling support, operations management and quality improvement services. ISMS currently provides such services to four integrated anesthesia practices with approximately 330 providers under management. NOTE 4. LOSS DUE TO ASSET IMPAIRMENT The carrying value of goodwill and other intangibles is routinely evaluated by the Company to determine whether such assets may be impaired with respect to their recorded values. If this evaluation indicates that certain intangibles may not be recoverable, as determined based on the undiscounted cash flows derived from the recorded assets over the remaining amortization period, the carrying value of the intangibles is reduced by the estimated shortfall of discounted cash flows. During the three months ended June 30, 2001, the Company concluded that certain of its intangibles relating to a portion of its radiology related operations were impaired. Accordingly, goodwill and contracts related to such radiology operations were reduced to estimated fair value by recording an impairment loss of $4.1 million at June 30, 2001. NOTE 5. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ 12% Senior Subordinated Notes........................ $100,000 $100,000 Term Loan Facility................................... 120,300 128,800 Other debt........................................... 361 401 -------- -------- 220,661 229,201 Less current portion................................. 14,095 12,623 -------- -------- $206,566 $216,578 ======== ========
9 10 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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. 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 June 30, 2001 were 7.3% and 9.2% for term loans A and B, respectively. The Company pays a commitment fee for the revolving credit facility which was equal to 0.5% of the commitment at June 30, 2001. No funds have been borrowed under the revolving credit facility as of June 30, 2001, but the Company has established a $0.3 million standby letter of credit against the revolving credit facility. The terms of the Company's Term Loan Facility provide for the prepayment of term loan amounts on an annual basis if, as defined under the Term Loan Facility agreement, "excess cash flow" results. During 2000, the Company's excess cash flow, as defined, was $3.1 million and was paid on April 30, 2001. NOTE 6. 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 for such liabilities, and if incurred, should not have a significant negative effect on the operating results and financial condition of our Company. Additionally, in connection with a recapitalization of the Company effective March 12, 1999, subject to certain limitations, Caremark, Rx, Inc., formerly known as MedPartners, Inc. ("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. 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 of June 30, 2001, the Company may have to pay up to $6.6 million in future contingent payments as additional consideration for acquisitions made prior to June 30, 2001. These payments will be made and recorded as additional purchase price should the acquired operations achieve the financial targets contracted in the respective agreements related to their acquisition. 10 11 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NOTE 7. COMPREHENSIVE EARNINGS The components of comprehensive earnings, net of related taxes, are as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2001 JUNE 30, 2001 ------------- ------------- Net earnings (loss) available to common shareholders.................................... $(289) $1,459 Cumulative effect of change in accounting principle -- fair value of interest rate swaps........................................... -- 54 Net change in fair value of interest rate swaps... (54) (418) ----- ------ Other comprehensive loss.......................... (54) (364) ----- ------ Comprehensive earnings (loss)..................... $(343) $1,095 ===== ======
Accumulated other comprehensive loss at June 30, 2001, net of related taxes, is comprised of approximately $0.4 million relating to the fair value of interest rate swaps. 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 other healthcare providers in the United States, with over 350 hospital contracts in 30 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 credentials coordination for 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. RESULTS OF OPERATIONS The following discussion provides an analysis of our results of operations and should be read in conjunction with our unaudited consolidated financial statements. The operating results of the periods presented were not significantly affected by 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 11 12 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) components of net income and EBITDA as a percentage of net revenue less provision for uncollectibles for the periods indicated:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, -------------- -------------- 2001 2000 2001 2000 ----- ----- ----- ----- Fee for service revenue............................. 129.1% 128.8% 131.2% 129.2% Contract revenue.................................... 24.5 24.9 23.9 24.4 Other revenue....................................... 2.1 2.2 1.9 2.0 Net revenue......................................... 155.7 155.9 157.0 155.6 Provision for uncollectibles........................ 55.7 55.9 57.0 55.6 Net revenue less provision for uncollectibles....... 100.0 100.0 100.0 100.0 Professional expenses............................... 79.6 79.3 79.4 79.2 Gross profit........................................ 20.4 20.7 20.6 20.8 General and administrative expenses................. 9.4 9.6 9.5 9.7 Management fee and other expenses................... -- 0.1 0.1 0.1 Impairment of intangibles........................... 2.5 -- 1.2 -- Depreciation and amortization....................... 2.3 2.1 2.3 2.0 Interest expense, net............................... 3.5 4.4 3.6 4.4 Income tax expense.................................. 1.1 1.8 1.6 1.9 Net earnings...................................... 1.6 2.7 2.3 2.7 Dividends on preferred stock........................ 1.8 1.8 1.8 1.8 Net earnings (loss) available to common stockholders...................................... (0.2) 0.9 0.5 0.9 OTHER FINANCIAL DATA EBITDA(1)........................................... 11.1 11.1 11.1 11.1 Net Cash provided by (used in): Operating activities.............................. -- -- 8.3 7.0 Investing activities.............................. -- -- (3.5) (2.6) Financing activities.............................. -- -- (2.7) (2.7)
- --------------- (1) See the following section for a discussion of how we calculated EBITDA and of the significance of EBITDA. Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30, 2000 NET REVENUE. Net revenue for the three months ended June 30, 2001 increased $28.8 million or 12.7%, to $256.1 million from $227.3 million during the three months ended June 30, 2000. During the three months ended June 30, 2001, fee-for-service revenue was 83.0% of net revenue compared to 82.6% during the three months ended June 30, 2000. Contract revenue represented 15.7% of net revenue for the three months ended June 30, 2001, and 16.0% for the three months ended June 30, 2000. Other revenue represented 1.3% of net revenue for the three months ended June 30, 2001, and 1.4% for the three months ended June 30, 2000. Net revenue as a percentage of net revenue less provision for uncollectibles was 155.7% for the three months ended June 30, 2001 compared to 155.9% during the three months ended June 30, 2000. PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $91.6 million for the three months ended June 30, 2001 compared to $81.5 million for the three months ended June 30, 2000, an increase of $10.1 million or 12.4%. As a percentage of net revenue less provision for uncollectibles, the provision for uncollectibles was 55.7% for the three months ended June 30, 2001 compared to 55.9% for the three months 12 13 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) ended June 30, 2000, 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. The provision for uncollectibles is primarily related to revenue generated under fee-for-service contracts which is not expected to be fully collected. NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision for uncollectibles for the three months ended June 30, 2001 increased $18.7 million, or 12.8%, to $164.6 million from $145.8 million for the corresponding quarter in 2000. 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 $15.2 million or 11.7%, to $144.6 million in 2001 from $129.4 million in 2000. The increase in same contract net revenue includes the effects of both volume and pricing increases. Acquisitions contributed $2.1 million and new contracts obtained through internal sales contributed $14.9 million of the overall increase in net revenue. Offsetting the increase between periods was $13.4 million of net revenue from terminated contracts. PROFESSIONAL EXPENSES. Professional expenses for the three months ended June 30, 2001 were $130.9 million compared to $115.7 million for the corresponding quarter in 2000. As a percentage of net revenue less provision for uncollectibles, professional expenses increased to 79.6% during the three months ended June 30, 2001 from 79.3% during the corresponding quarter in 2000. Physician costs, billing and collection expenses and other professional expenses, excluding medical malpractice expense, increased $13.5 million or 12.4%. This increase between periods in professional expenses is due to cost increases in professional and medical support costs principally resulting from increased patient volume. In 2001, medical malpractice expense was $7.9 million as compared to $6.2 million in 2000, an increase of 27.4%. This increase reflects a less favorable medical malpractice market at the time of the Company's March 2001 policy renewal. GROSS PROFIT. Gross profit increased to $33.6 million for the three months ended June 30, 2001 from $30.1 million for the corresponding quarter in 2000. Gross profit as a percentage of revenue less provision for uncollectibles decreased to 20.4% for the three months ended June 30, 2001 from 20.7% for the three months ended June 30, 2000 due to the factors described above. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the three months ended June 30, 2001 increased to $15.4 million from $13.9 million for the corresponding quarter in 2000. The increase between periods included an increase in salaries and benefits of approximately $1.1 million between periods principally due to annual wage rate adjustments and the full year effect of additional staff added during the course of fiscal 2000. The remainder of the increase in general and administrative expenses is principally associated with increased travel and legal costs in connection with the pursuit of potential business acquisition opportunities. General and administrative expenses as a percent of revenues less provision for uncollectibles decreased to 9.4% for the three months ended June 30, 2001 from 9.6% for the corresponding quarter in 2000. IMPAIRMENT OF INTANGIBLES. Impairment of intangibles for the three months ended June 30, 2001 was $4.1 million. During the quarter ended June 30, 2001, the Company concluded that certain of its intangibles relating to a portion of its radiology operations were impaired. The intangibles related to such operations were reduced to estimated fair value by recording an impairment charge of $4.1 million at June 30, 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three months ended June 30, 2001 increased to $3.8 million from $3.1 million for the same quarter in 2000. Depreciation increased by $0.2 million during the period while amortization expense increased by $0.5 million. The increase in depreciation expense was due to capital expenditures made for 2000 and 2001, while amortization expense increased principally due to contingent acquisition payments made during 2000 and 2001. NET INTEREST EXPENSE. Net interest expense decreased to $5.8 million for the three months ended June 30, 2001 from $6.4 million for the three months ended June 30, 2000. The decrease is due to the 13 14 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) combination between periods of more favorable interest rates, lower outstanding debt levels and increased levels of invested cash balances. INCOME TAX EXPENSE. Income tax expense for the three months ended June 30, 2001 was $1.8 million as compared to income tax expense for the three months ended June 30, 2000 of $2.7 million. The decrease in income tax expense for the three months ended June 30, 2001 over the same period in 2000 was due to the decreased level of earnings before income taxes in 2001 resulting from the factors described above. NET EARNINGS. Net earnings for the three months ended June 30, 2001 was $2.7 million as compared to a net earnings of $4.0 million for the three months ended June 30, 2000. DIVIDENDS ON PREFERRED STOCK. The Company accrued $3.0 million and $2.7 million of dividends on its outstanding mandatory redeemable preferred stock for the three months ended June 30, 2001 and 2000, respectively. EBITDA. EBITDA for the three months ended June 30, 2001 was $18.2 million as compared to $16.2 million for the three months ended June 30, 2000. EBITDA represents income (loss) before income taxes plus depreciation and amortization, net interest expense, impairment of intangibles, and what we consider non-operational or non-cash charges such as management fees and other 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 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. Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000 NET REVENUE. Net revenue for the six months ended June 30, 2001 increased $53.4 million or 11.8%, to $506.7 million from $453.3 million during the six months ended June 30, 2000. During the six months ended June 30, 2001, fee-for-service revenue was 83.6% of net revenue compared to 83.1% during the six months ended June 30, 2000. Contract revenue represented 15.2% of net revenue for the six months ended June 30, 2001 and 15.6% for the six months ended June 30, 2000. Other revenue represented 1.2% of net revenue for the six months ended June 30, 2001 and 1.3% for the six months ended June 30, 2000. Net revenue as a percentage of net revenue less provision for uncollectibles was 157.0% for the six months ended June 30, 2001 as compared to 155.6% during the six months ended June 30, 2000. PROVISION FOR UNCOLLECTIBLES. The provision for uncollectibles was $184.0 million for the six months ended June 30, 2001 compared to $161.9 million for the six months ended June 30, 2000, an increase of $22.1 million or 13.6%. As a percentage of net revenue less provision for uncollectibles, the provision for uncollectibles was 57.0% for the six months ended June 30, 2001 compared to 55.6% for the six months ended June 30, 2000, 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. The provision for uncollectibles is primarily related to revenue generated under fee-for-service contracts which is not expected to be fully collected. 14 15 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) NET REVENUE LESS PROVISION FOR UNCOLLECTIBLES. Net revenue less provision for uncollectibles for the six months ended June 30, 2001 increased $31.3 million or 10.7%, to $322.7 million from $291.4 million for the corresponding six months in 2000. 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 $26.0 million or 10.2%, to $281.8 million in 2001 from $255.8 million in 2000. The increase in same contract net revenue includes the effects of both volume and pricing increases. Acquisitions contributed $3.6 million and new contracts obtained through internal sales contributed $29.0 million of the increase. Offsetting the increase between periods was $27.3 million of net revenue from terminated contracts. PROFESSIONAL EXPENSES. Professional expenses for the six months ended June 30, 2001 were $256.3 million compared to $230.8 million for the corresponding six months in 2000. As a percentage of net revenue less provision for uncollectibles, professional expenses increased to 79.4% for the six months June 30, 2001 from 79.2% for the corresponding six months in 2000. Physician costs, billing and collection expenses and other professional expenses, excluding medical malpractice expense, increased $23.6 million or 10.8%. This increase between periods in professional expenses is due to cost increases in professional and medical support costs principally resulting from increased patient volume. Medical malpractice expense was $13.8 million in 2001 compared to $11.9 million in 2000, an increase of 16.0%. This increase reflects a less favorable medical malpractice market at the time of the Company's March 2001 policy renewal. GROSS PROFIT. Gross profit increased to $66.4 million for the six months ended June 30, 2001 from $60.6 million for the corresponding six months in 2000. Gross profit as a percentage of revenue less provision for uncollectibles decreased to 20.6% for the six months ended June 30, 2001 from 20.8% for the six months ended June 30, 2000 due to the factors described above. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the six months ended June 30, 2001 increased to $30.7 million from $28.2 million for the corresponding six months in 2000. The increase between periods included an increase in salaries and benefits of approximately $1.5 million between periods due to annual wage rate adjustments as well as the full year effect of additional staff added during the course of fiscal 2000. The remainder of the increase in general and administrative expenses is principally associated with evaluating alternatives related to the renewal of the Company's professional liability insurance program and other risk management coverages, as well as increased travel and legal costs in connection with the pursuit of potential business acquisition opportunities. Cost increases in other general and administrative cost components were substantially offset in other areas due to Company cost savings initiatives. General and administrative expenses as a percentage of revenues less provision for uncollectibles decreased to 9.5% during the six months ended June 30, 2001 from 9.7% during the corresponding period in 2000. IMPAIRMENT OF INTANGIBLES. Impairment of intangibles for the six months ended June 30, 2001 was $4.1 million. During the six months ended June 20, 2001, the Company concluded that certain of its intangibles relating to a portion of its radiology related operations were impaired. The intangibles related to such operations were reduced to estimated fair value by recording an impairment charge of $4.1 million at June 30, 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six months ended June 30, 2001 increased to $7.4 million from $5.9 million for the same period in 2000. Depreciation increased by $0.5 million during the period while amortization expense increased by $1.0 million. The increase in depreciation expense was due to capital expenditures made during 2000 and 2001. Amortization expense increased principally due to contingent acquisition payments made during 2000 and 2001. INTEREST EXPENSE, NET. Interest expense, net decreased $1.3 million to $11.6 million for the six months ended June 30, 2001 compared to $12.9 million for the corresponding period in 2000. This decrease is 15 16 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) attributable to the combination between periods of more favorable interest rates, lower outstanding debt levels, and increased levels of invested cash balances. INCOME TAX EXPENSE. Income tax expense for the six months ended June 30, 2001 was $5.0 million compared to $5.4 million for the six months ended June 30, 2000. The decrease in income tax expense for the six months ended June 30, 2001 over the same period in 2000 was due to the decreased level of earnings before income taxes in 2001 resulting from the factors described above. NET EARNINGS. Net earnings for the six months ended June 30, 2001 were $7.4 million compared to net earnings of $7.9 million for the six months ended June 30, 2000. DIVIDENDS ON PREFERRED STOCK. The Company accrued $5.9 million and $5.4 million of dividends on its outstanding mandatory redeemable preferred stock for the six months ended June 30, 2001 and 2000, respectively. EBITDA. EBITDA for the six months ended June 30, 2001 was $35.7 million compared to $32.3 million for the six months ended June 30, 2000. EBITDA represents earnings before income taxes plus depreciation and amortization, net interest expense, impairment of intangibles, and what we consider non-operational or non-cash charges such as management fees and other 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 earnings 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 earnings 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 The Company's principal uses of cash are to meet working capital requirements, debt obligations and to finance its capital expenditures and acquisitions. Historically, cash generated from operations has been sufficient to meet the funding needs of the Company. Expansion of the Company's business through acquisitions may require additional funds which, to the extent not provided by internally generated sources, available cash, and the existing credit facilities will require the Company to seek additional external financing. Cash provided by operating activities in the six months ended June 30, 2001 and 2000 was $26.7 million and $20.3 million, respectively. The Company has made scheduled principal repayments of $5.4 million in the six months ended June 30, 2001 and $4.8 million during the corresponding period in 2000 in accordance with the term loan facilities. In addition, the Company made a prepayment of term loan balances in the amount of $3.1 million on April 30, 2001. This annual payment is based on the Term Loan Facility agreement "excess cash flow" results, as defined. Also, during 2000, the Company amortized $2.3 million of other debt assumed as part of the recapitalization The Company spent $2.7 million in the six months ended June 30, 2001 and $4.2 million in the six months ended June 30, 2000 for capital expenditures. These capital expenditures are primarily for information technology related maintenance capital and development projects. 16 17 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) The Company has historically been an acquirer of other physician staffing businesses and interests. The acquisitions have been acquired either for stock or cash, or a combination thereof. The acquisitions in many cases include contingent purchase price payment amounts that are payable in years subsequent to the years of acquisition. Cash payments made in association with acquisitions, including contingent payments, were $8.2 million during the six months ended June 30, 2001 and $3.2 million in the corresponding period in 2000. The potential exists for future contingent payment obligations of approximately $6.6 million as of June 30, 2001. During the first six months of 2001 and 2000, the Company's cash needs were met from internally generated operating sources and there were no borrowings by the Company under its revolving credit facility. The Company as of June 30, 2001 had cash and cash equivalents available of approximately $62.2 million and a revolving credit facility borrowing availability of $49.7 million. The Company believes that its cash needs, other than for significant acquisitions, will be met through the use of its existing available cash and cash generated from operations of the Company or borrowings under its revolving credit facility. INFLATION We do not believe that inflation has had a material impact on our financial position or results of operations. SEASONALITY Historically, the Company's revenues and operating results have reflected minimal seasonal variations due to the geographic diversification of the contract base. IMPLEMENTATION OF NEW ACCOUNTING STANDARD In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company will, however, apply the nonamortization provisions of the Statement for acquisitions consummated after June 30, 2001. Application of the nonamortization provisions of the Statement is expected to result in an increase in net earnings of approximately $2.1 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 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 17 18 TEAM HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) 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 six months ended June 30, 2001, the Company received a weighted average rate of 5.67% and paid a weighted average of 5.63% on the swaps. The weighted average pay rate is 5.63% and the weighted average receive rate is 3.71%, using the rate in effect at June 30, 2001, for the $50.0 million notional amount swap agreements. At June 30, 2001, the fair value of the Company's total debt, which has a carrying value of approximately $220.7 million, was approximately $227.7 million. The Company had $120.7 million of variable debt outstanding at June 30, 2001, 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 June 30, 2002, the Company's interest expense would increase, and earnings before income taxes would decrease, by approximately $0.7 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. 18 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. 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 Exhibit 10.16 Amendment No. 1 to Security Agreement. 19 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 August 9, 2001. Team Health, Inc. /s/ H. Lynn Massingale -------------------------------------- H. Lynn Massingale, Chief Executive Officer /s/ David P. Jones -------------------------------------- David P. Jones Chief Financial Officer 20 EX-10.16 3 y52131ex10-16.txt AMENDMENT NO. 1 TO SECURITY AGREEMENT 1 Exhibit 10.16 AMENDMENT NO. 1 TO SECURITY AGREEMENT This AMENDMENT NO. 1 TO SECURITY AGREEMENT (this "Amendment"), dated as of June 30, 2001, is entered into by and among TEAM HEALTH, INC., a Tennessee corporation (the "Borrower"), the SUBSIDIARY GUARANTORS listed on the signature pages hereof (the "Subsidiary Guarantors", and together with the Borrower, the "Grantors") and FLEET NATIONAL BANK, as administrative agent (in such capacity, the "Administrative Agent") for the Secured Parties. R E C I T A L S: A. The Grantors and the Administrative Agent have entered into that certain Security Agreement, dated as of March 12, 1999 (the "Agreement"). Each capitalized term used but not otherwise defined herein shall have the meaning ascribed to such term by the Agreement. B. The Grantors and the Administrative Agent wish to amend the Agreement on the terms and conditions set forth below. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of the Agreement. Upon the Effective Date (as defined in Section 3 of this Amendment), the Agreement shall be amended as follows: 1.1 Sections 1(a), (b), (c) and (h) of the Agreement are hereby amended by deleting each such Sections and replacing each in its entirety to read as follows: "(a) all of such Grantor's "equipment," as such term is defined in the UCC, now owned or hereafter acquired, wherever located, and, in any event, shall include, without limitation, all machinery and equipment in all of its forms, whether now owned or hereafter acquired, wherever located, all fixtures and all parts thereof and all accessions thereto (collectively, the "Equipment");" "(b) all of such Grantor's "inventory," as such term is defined in the UCC, now owned or hereafter acquired, wherever located, and, in any event, shall include, without limitation, all inventory in all of its forms, whether now owned or hereafter acquired, wherever located, now or hereafter existing (including, without limitation, (i) raw materials and work in process, (ii) finished goods, (iii) materials used or consumed in the manufacture or production thereof, (iv) goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind (including, without limitation, goods in which such Grantor has an interest or right as consignee) and (v) goods that are returned to or repossessed by such Grantor), and all accessions thereto, products thereof and documents therefor (collectively, "Inventory");" 2 "(c) all of such Grantor's "accounts" (including, without limitation, health-care-insurance receivables), "contract rights", "chattel paper", "instruments", "deposit accounts" and "Letter-of-credit rights", as each such term is defined in the UCC, now owned or hereafter acquired, wherever located, and, in any event, shall include, without limitation, all accounts, contract rights, chattel paper, instruments, deposit accounts, letter-of-credit rights, lockbox accounts and other claims of any kind, whether now owned or hereafter acquired, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights now or hereafter existing in and to all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, deposit accounts, letter-of-credit rights, lockbox accounts or claims (any and all such accounts, contract rights, chattel paper, instruments, deposit accounts and claims, to the extent not referred to in clause (d), (e) or (f) below, being the "Receivables", and any and all such leases, security agreements and other contracts being the "Related Contracts"); provided, however, that the Collateral shall not include (i) those rights to payment under agreements with Medicare, Medicaid or CHAMPUS to the extent, if any, that (and only for so long as) the grant of a lien or security interest in, or an assignment thereof would cause an immediate, actual forfeiture of such Grantor's rights thereunder or is prohibited by law and (ii) contracts (but not excluding accounts receivable arising therefrom or related thereto, except to the extent expressly consented to in writing by the Administrative Agent) entered into by such Grantor to the extent, if any, that (and only for so long as) the grant of a lien or a security interest in, or assignment thereof would cause an immediate, actual forfeiture of any of such Grantor's rights thereunder or an immediate default thereunder or is prohibited by law;" "(h) without limitation of any of the foregoing, all of such Grantor's "general intangibles", as such term is defined in the UCC, now owned or hereafter acquired, wherever located, and, in any event, shall include, without limitation, general intangibles, including, without limitation, choses in action, claims and causes of action or rights of recovery or set-off of every kind and character, and the business of such Grantor as a going concern; 1.2 Section 1(i) of the Agreement is hereby amended by (i) deleting the reference therein to "clauses (a) - (h)" and replacing it with a reference to "clauses (a) - (j)" and (ii) renumbering Section1(i) to Section 1(k). 1.3 Section 1 of the Agreement is hereby amended by adding a new Section 1(i) to the Agreement reading as follows: "(i) all such Grantor's "commercial tort claims," as such term is defined in the UCC, as described on Schedule VI;" 1.4 Section 1 of the Agreement is hereby amended by adding a new Section 1(j) to the Agreement reading as follows: - 2 - 3 "(j) all of such Grantor's "documents," as such term is defined in the UCC, now owned or hereafter acquired, wherever located; and" 1.5 Section 1 of the Agreement is hereby amended by adding the definition of the term "UCC" to the end of Section 1 reading as follows: "As used in this Agreement, the term "UCC" shall mean the Uniform Commercial Code as now or hereafter in effect in the State of New York; provided, that, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the Administrative Agent's security interest in any Collateral is governed by the Uniform Commercial Code as enacted and if effect in a jurisdiction other than such state, the term "UCC" shall mean the Uniform Commercial Code as enacted and if effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions." 1.6 Section 12 of the Agreement is hereby amended by adding a new Section 12(c) to the Agreement reading as follows: "(c) Each Grantor hereby agrees that it will not (i) in one transaction or a series of related transaction, merge into or consolidate with any other entity, or sell all or substantially all of its assets, (ii) change the state of its incorporation or formation or (iii) change its corporate name or legal identity; in each case, without providing the Administrative Agent with thirty (30) days' prior written notice." 1.7 Section 14 of the Agreement is hereby amended in its entirety to read as follows: "Section 14. Revised Article 9. The parties to this Agreement acknowledge that revisions to Article 9 of the Uniform Commercial Code ("Revised Article 9") will become effective in various states on July 1, 2001 and that Revised Article 9 may be adopted and become effective in one or more other states at any time thereafter. In anticipation of the effectiveness of Revised Article 9 and its resulting application to the Loan Documents or any matters contemplated thereby, the Administrative Agent and each Grantor hereby agree as follows: (a) In applying the law of any state at any time on and after the date Revised Article 9 is enacted (A) the Collateral includes, without limitation, each of the following categories as defined by Revised Article 9, and all property of such Grantor included therein at any time owned or acquired: goods; inventory; equipment; documents; instruments; accounts; chattel paper; deposit accounts; letter-of-credit rights; commercial tort claims; investment property; general intangibles; supporting obligations; and all products and proceeds of the foregoing; in each case wherever located, and whenever owned or acquired, and (B) the Administrative Agent's Lien in all such property created under this - 3 - 4 Agreement, as amended, shall continue in full force and effect on and under and pursuant to Revised Article 9. (b) The Administrative Agent may, at any time and from time to time, file financing statements, continuation statements, and amendments thereto that describe the Collateral as "all assets" of such Grantor, or words of similar effect, and which contain any other information required pursuant to Revised Article 9 for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, and such Grantor agrees to furnish any such information to the Administrative Agent promptly upon request. Any such financing statement, continuation statement, or amendment may be signed by the Administrative Agent on behalf of such Grantor and may be filed at any time in any jurisdiction whether or not Revised Article 9 is then in effect in that jurisdiction. (c) Such Grantor shall, at any time and from time to time, whether or not Revised Article 9 is in effect in any particular jurisdiction, take such steps as the Administrative Agent may reasonably request (A) to obtain an acknowledgement, in form and substance reasonably satisfactory to the Administrative Agent, of any bailee having possession of any of the Collateral, stating that the bailee holds such Collateral for the Administrative Agent, (B) to obtain "control" of any letter-of-credit rights, or electronic chattel paper (as such terms are defined by Revised Article 9 with corresponding provisions thereof defining what constitutes "control" for such items of Collateral), with any agreements establishing control to be in form and substance reasonably satisfactory to the Administrative Agent, and (C) otherwise to insure the continued perfection and priority of the Administrative Agent's security interest in any of the Collateral and of the preservation of its rights therein, whether in anticipation of or following the effectiveness of Revised Article 9 in any jurisdiction. If such Grantor shall at any time, whether or not Revised Article 9 is in effect in any particular jurisdiction, acquire a "commercial tort claim" (as such term is defined in Revised Article 9) in excess of $100,000, such Grantor shall promptly notify the Administrative Agent thereof in writing, therein providing a reasonable description and summary thereof, and upon delivery thereof to the Administrative Agent, such Grantor shall be deemed to thereby grant to the Administrative Agent (and such Grantor hereby grants to the Administrative Agent) a security interest and Lien in and to such commercial tort claim and all proceeds thereof, all upon the terms of and governed by this Agreement. (d) Nothing contained in this Section 14 shall be construed to narrow the scope of the Administrative Agent's Liens or the perfection or priority thereof or to impair or otherwise limit any of the rights, powers, privileges, or remedies of the Administrative Agent or any Secured Party under the Loan Documents." - 4 - 5 1.8 The Agreement is hereby amended by adding a new Schedule VI, entitled "Commercial Tort Claims", attached hereto. 2. Reaffirmation and Grant of Security Interests. 2.1 Reaffirmation. Each Grantor hereby reaffirms all of its obligations under the Agreement, as amended hereby, to the Administrative Agent and the other Secured Parties. 2.2 Grant of Security Interests. Each of the Grantors hereby assigns and pledges to the Administrative Agent, for the benefit of the Administrative Agent and the ratable benefit of the Secured Parties, and hereby grants to the Administrative Agent, for the benefit of the Administrative Agent and the ratable benefit of the Secured Parties, a security interest in the Collateral (as defined in the Agreement, as amended hereby) to secure the payment of all the Secured Obligations. 3. Conditions Precedent to Amendments. This Amendment shall be effective on the date (the "Effective Date") the Grantors and the Administrative Agent shall have duly executed and delivered this Amendment to the Administrative Agent. 4. Representations and Warranties. Each Grantor represents and warrants to the Administrative Agent: (a) The execution and delivery by such Grantor of this Amendment and the performance by such Grantor of its obligations under this Amendment are within the corporate powers of such Grantor, have been duly authorized by all necessary corporate action on the part of such Grantor, have received all necessary governmental approval (if any shall be required), and do not and will not (i) violate any provision of law or any order, decree or judgment of any court or other government agency which is binding on such Grantor, (ii) contravene or conflict with, or result in a breach of, any provision of any organizational documents of such Grantor or of any agreement, indenture, instrument or other document which is binding on such Grantor or (iii) result in or require the creation or imposition of any Lien on any property of such Grantor (other than Liens in favor of the Administrative Agent). (b) Each of the representations and warranties of such Grantor contained in the Loan Documents, as amended hereby, is true and correct in all material respects on and as of the date hereof as if made on the date hereof, other than any such representations or warranties that, by their terms, refer to a specific date other than the date hereof, in which case, as of such specific date. (c) As of the date hereof, after giving effect to this Amendment, no Default under the Agreement or any other Loan Document has occurred and is continuing. 5. Miscellaneous. 5.1 From and after the date hereof, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, and each reference - 5 - 6 to the Agreement in any of the other Loan Documents shall mean and be a reference to the Agreement as amended hereby. 5.2 Except as specifically set forth above, the Agreement and the Exhibits thereto shall remain unaltered and in full force and effect and the respective terms, conditions or covenants thereof are hereby in all respects ratified and confirmed. This Amendment shall constitute a Collateral Document and a Loan Document for all purposes under the Credit Agreement and the other Loan Documents. 5.3 This Amendment may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 5.4 THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. [signature pages follow] - 6 - 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. TEAM HEALTH, INC. By:_______________________________________________ Name: H. Lynn Massingale Title: President Address: 1900 Winston Road Knoxville, TN 37919 TEAM HEALTH HOLDINGS, L.L.C. By:_______________________________________________ Name: H. Lynn Massingale Title: President and Chief Executive Officer Address: c/o Madison Dearborn Partners Three First National Plaza Suite 3800 Chicago, Illinois 60602 CLINIC MANAGEMENT SERVICES, INC. EMERGICARE MANAGEMENT, INCORPORATED HOSPITAL BASED PHYSICIAN SERVICES, INC. TEAM RADIOLOGY, INC. By:_______________________________________________ Name: H. Lynn Massingale Title: President Address: 1900 Winston Road Knoxville, TN 37919 - 7 - 8 ALLIANCE CORPORATION CHARLES L. SPRINGFIELD, INC. CLINIC MANAGEMENT SERVICES, INC. DANIEL & YEAGER, INC. DRS. SHEER, AHEARN AND ASSOCIATES, INC. EMERGENCY COVERAGE CORPORATION EMERGENCY MANAGEMENT SPECIALISTS, INC. EMERGENCY PHYSICIAN ASSOCIATES, INC. EMERGENCY PHYSICIANS OF MANATEE, INC. EMERGENCY PROFESSIONAL SERVICES, INC. INPHYNET CONTRACTING SERVICES, INC. INPHYNET JOLIET, INC. INPHYNET LOUISIANA, INC. INPHYNET SOUTH BROWARD, INC. HERSCHEL FISCHER, INC. IMBS, INC. INPHYNET ANESTHESIA OF WEST VIRGINIA, INC. INPHYNET HOSPITAL SERVICES, INC. INPHYNET MEDICAL MANAGEMENT INSTITUTE, INC. KARL G. MANGOLD, INC. MED: ASSURE SYSTEMS, INC. METROAMERICAN RADIOLOGY, INC. NEO-MED, INC. NORTHWEST EMERGENCY PHYSICIANS INCORPORATED PARAGON ANESTHESIA, INC. PARAGON CONTRACTING SERVICES, INC. PARAGON IMAGING CONSULTANTS, INC. QUANTUM PLUS, INC. REICH, SEIDELMANN & JANICKI CO. ROSENDORF MARGULIES BORUSHOK SCHOENBAUM RADIOLOGY ASSOCIATES OF HOLLYWOOD, INC. SARASOTA EMERGENCY MEDICAL CONSULTANTS, INC. SOUTHEASTERN EMERGENCY PHYSICIANS OF MEMPHIS, INC. SOUTHEASTERN EMERGENCY PHYSICIANS, INC. TEAM HEALTH FINANCIAL SERVICES, INC. THBS, INC. THE EMERGENCY ASSOCIATES FOR MEDICINE, INC. VIRGINIA EMERGENCY PHYSICIANS, INC. By:_______________________________________________ Name: H. Lynn Massingale Title: Vice President Address: 1900 Winston Road Knoxville, TN 37919 - 8 - 9 FISCHER MANGOLD PARTNERSHIP By: Herschel Fischer, Inc., its general partner Karl G. Mangold, Inc., its general partner By:_______________________________________________ Name: H. Lynn Massingale Title: Vice President Address: 1900 Winston Road Knoxville, TN 37919 MT. DIABLO EMERGENCY PHYSICIANS, a California General Partnership By: Herschel Fischer, Inc., its general partner Karl G. Mangold, Inc., its general partner By:_______________________________________________ Name: H. Lynn Massingale Title: Vice President Address: 1900 Winston Road Knoxville, TN 37919 PARAGON HEALTHCARE LIMITED PARTNERSHIP By: InPhyNet Hospital Services, Inc., its sole general partner By:_______________________________________________ Name: H. Lynn Massingale Title: Vice President Address: 1900 Winston Road Knoxville, TN 37919 TEAM HEALTH BILLING SERVICES, L.P. By: Team Health, Inc., its sole general partner By:_______________________________________________ Name: H. Lynn Massingale Title: President Address: 1900 Winston Road Knoxville, TN 37919 - 9 - 10 TEAM HEALTH SOUTHWEST L.P. By: Team Radiology, Inc., its sole general partner By:_______________________________________________ Name: H. Lynn Massingale Title: President Address: 1900 Winston Road Knoxville, TN 37919 FLEET NATIONAL BANK, as Administrative Agent, By:_______________________________________________ Title: Director - 10 - 11 SCHEDULE VI COMMERCIAL TORT CLAIMS ---------------------- PARTIES CASE NO./COURT DESCRIPTION OF DISPUTE - ------- -------------- ---------------------- 1. [to be provided by Grantors] - 11 - -----END PRIVACY-ENHANCED MESSAGE-----