<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996
REGISTRATION NO. 333-1926
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DOCTORS HEALTH SYSTEM, INC.
(Exact name of Registrant as specified in its Charter)
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<TABLE>
<S> <C> <C>
MARYLAND 8099 52-1907421
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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10451 MILL RUN CIRCLE
OWINGS MILLS, MARYLAND 21117
(410) 654-5800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
PAUL A. SERINI, ESQ.
EXECUTIVE VICE PRESIDENT
AND DIRECTOR OF LEGAL AFFAIRS
10451 MILL RUN CIRCLE
OWINGS MILLS, MARYLAND 21117
(410) 654-5800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPY TO:
ELIZABETH R. HUGHES, ESQ.
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK & TRUST BUILDING
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
(410) 244-7608
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
<S> <C> <C> <C>
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE PRICE AGGREGATE OFFERING
REGISTERED REGISTERED PER UNIT PRICE
<S> <C> <C> <C>
Class B Common Stock,
$0.01 par value........... 4,100,000 $ 20.00 $82,000,000.00
Options to purchase
Class B Common Stock...... 1,000,000 (2) (2)
<CAPTION>
TITLE OF EACH CLASS
OF SECURITIES TO BE AMOUNT OF
REGISTERED REGISTRATION FEE
<S> <C>
Class B Common Stock,
$0.01 par value........... $24,848.48(1)
Options to purchase
Class B Common Stock...... (2)
</TABLE>
(1) Fees totaling $21,379.31 were previously paid by the Registrant in
connection with the filing of the Registration Statement on March 4, 1996
and Amendment No. 1 thereto on June 4, 1996.
(2) Shares of Class B Common Stock to be issued upon conversion of these Options
are included in the shares of Class B Common Stock registered above.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CROSS-REFERENCE SHEET TO PROSPECTUS ON FORM S-1
FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM FORM S-1 CAPTION LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and Outside Front Front Outside Front Cover Page.
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page; Outside Front Cover Page; Table of
Contents.
3. Summary Information, Risk Factors and Ratio of Earnings to Prospectus Summary; Risk Factors.
Fixed Charges
4. Use of Proceeds Use of Proceeds.
5. Determination of Offering Price Cover Page; Plan of Distribution.
6. Dilution Risk Factors--Dilution.
7. Selling Security Holders Not Applicable.
8. Plan of Distribution Cover Page; Plan of Distribution.
9. Description of Securities to be Registered Outside Front Cover Page; Description of Capital Stock.
10. Interest of Named Experts and Counsel Not Applicable.
11. Information with Respect to the Registrant Outside Front Cover Page of Prospectus; Prospectus
Summary--The Company; Risk Factors; Selected Consolidated
Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business;
Management; Certain Transactions; Principal Stockholders;
Description of Capital Stock; Index to Financial Statements
and Referenced Financial Statements.
12. Disclosure of Commission Position on Indemnification for Not Applicable.
Securities Act Liabilities
</TABLE>
<PAGE>
(A redherring appears on the left-hand side of this page, rotated 90
degrees. Text is as follows:)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1996
(Doctors Health System, Inc. logo appears here)
4,100,000 SHARES OF CLASS B COMMON STOCK
1,000,000 OPTIONS TO PURCHASE CLASS B COMMON STOCK
------------------------
Doctors Health System, Inc., a Maryland corporation (the "Company"),
directly or through agents designated from time to time, may offer and issue
from time to time in connection with the acquisition of medical practices or
other transactions with physicians one or more of the following types of its
securities: (i) shares of its Class B common stock, par value $0.01 per share
("Class B Common Stock"); or (ii) Options to purchase Class B Common Stock
("Options," and collectively with the Class B Common Stock, the "Securities").
The Company will not receive cash proceeds in connection with the issuance of
the Securities.
The Securities offered pursuant to this Prospectus may be issued in one or
more series, in amounts, at prices and on terms to be determined at the time of
the offering of each such series.
It is anticipated that the acquisition of the medical practices will
involve the receipt by the Company primarily of enumerated tangible assets of
such practices and/or contractual rights. The consideration for acquisitions and
contractual rights will consist of shares of Class B Common Stock, cash,
Options, assumption of liabilities or a combination of some or all of them, as
determined from time to time by negotiations between the Company and the
physicians or physician groups operating such practices. In addition, such
physicians may enter into employment agreements and IPA participation
agreements, pursuant to which the Company may also issue Securities.
The terms of a transaction are determined by negotiations between the
Company's representatives and physicians. Factors taken into account in such
transactions include the established size, quality and reputation of the
practice and the Company's estimate of the market value of the Class B Common
Stock. It is anticipated that shares of Class B Common Stock issued will, in
most cases, be valued at a price reasonably related to the current market value
of the Class B Common Stock, either at the time the terms of a transaction are
tentatively agreed upon, or at or about the time of closing, or during the
period or periods prior to delivery of the shares.
The specific terms of each offering of Securities in respect of which this
Prospectus is being delivered are set forth in an accompanying Prospectus
Supplement (each, a "Prospectus Supplement") relating to such offering of
Securities. Such specific terms include, without limitation, to the extent
applicable (1) in the case of the Options, the Class B Common Stock for which
each such Option is exercisable, and the exercise price, duration,
detachability, restrictions, and call provisions of each such Option; and (2) in
the case of any offering of Securities, to the extent applicable, the offering
price or prices, and certain Federal income tax consequences. The resale or
transfer of the Securities will be subject to certain restrictions. See
"Description of Capital Stock."
It is not expected that underwriting discounts or commissions will be paid
by the Company except that finders fees may be paid to persons from time to time
in connection with specific acquisitions. The Company may issue all or a portion
of any offering of its Securities through agents or directly to other
purchasers. The related Prospectus Supplement for each offering of Securities
sets forth the name of any agents involved in the issuance of such Securities
and any applicable fee, commission or indemnification arrangement with any such
party. See "Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of this
Prospectus together with a Prospectus Supplement relating to specific Securities
shall not constitute an offer in such jurisdiction of any other Securities
covered by this Prospectus but not described in such Prospectus Supplement.
The Securities offered pursuant to this Prospectus will be subject to
significant contractual restrictions or transfer. Further, it is not currently
anticipated that any of the Securities will be listed on an exchange or other
public market. Accordingly, trades in the Securities may be subject to various
regulatory structures which could severely limit the liquidity of the
Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER , 1996
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1
(herein, together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to herein are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
To the extent applicable, the Company will comply with the informational
requirements of the Securities Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith, will file reports, proxy and information statements,
and other information with the Commission. Such reports, proxy and information
statements, and other information and the Registration Statement and the
exhibits and schedules thereto filed by the Company with the Commission can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates.
"Doctors Health System--It's the Sure Sign of Caring" is a service mark of
Doctors Health System, Inc. This Prospectus also includes other service marks of
Doctors Health System, Inc.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of the Company. The
words "estimate", "project", "intend", "expect" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward
looking-statements. For a discussion of certain of such risks and uncertainties,
see "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SUBJECT TO, THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
CONTAINED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE DEFINED HEREIN,
CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE MEANINGS ASSIGNED TO
THEM ELSEWHERE IN THIS PROSPECTUS. POTENTIAL INVESTORS SHOULD READ THIS
PROSPECTUS CAREFULLY IN ITS ENTIRETY.
THE COMPANY
Doctors Health System, Inc., a Maryland corporation ("DHS" or the
"Company") was incorporated in June of 1994 and commenced operations in February
of 1995. The Company is the substitute corporate entity formed to reorganize the
business of Baltimore Medical Group, P.A. ("BMGPA"). BMGPA was incorporated in
January of 1993. The Company's executive offices are located at 10451 Mill Run
Circle, Owings Mills, Maryland 21117, telephone (410) 654-5800.
The Company develops and consolidates individual and groups of internists,
pediatricians and family practitioners ("primary care physicians" or "PCPs"),
specialist physicians, hospitals and other health care providers into primary
care-driven, comprehensive managed care health delivery networks. Through
contracts with PCPs, specialists, hospitals and other health care providers, the
Company designs its networks: (i) to manage the provision of quality medical
services to patients; (ii) to furnish Network Physicians with access to managed
care contracts and related services; (iii) to establish a single source of
access for health maintenance organizations ("HMOs") and other Payors to a
comprehensive range of health care providers; and (iv) to offer patients a
comprehensive range of health care services. Currently, the Company is focusing
on the development and establishment of its networks in the Baltimore and
Washington metropolitan area and surrounding regions.
As of October 4, 1996, the Company had approximately 694 Network Physicians
in six regional networks throughout the state of Maryland, including
approximately 176 PCPs, 95 obstetrician/gynecologists, and 423 specialist
physicians. Of these, 90 were Equity Physicians, of which 57 had transferred
their practice assets to the Company or one of its subsidiaries, 17 had entered
into binding agreements to complete such transactions, and 16 were subject to a
letter of intent with respect to an acquisition which the Company believes will
be completed by December 31, 1996. While primary care-based, the Company
encourages its Core Medical Groups to develop into multi-specialty group
practices and provides or arranges financing and other resources to enable such
Core Medical Groups to develop into diversified multi-specialty practices. The
Company also provides to Network Physicians certain patient care management,
administrative and financial services, including information systems,
contracting for and providing facilities, equipment and other goods. See
"Business--Development of Integrated Health Care Delivery System."
The Company offers medical groups and independent physicians a variety of
methods of participating in the Company's Integrated Health Care Delivery
System. The Company may acquire certain medical practice assets or certain
contracting rights, either for cash or for Securities, or by execution of a
variety of Independent Physician Association ("IPA") participation agreements.
The Company typically enters into Physician Services Organization Agreements
("PSO Agreements") with the Core Medical Groups, pursuant to which the Company
provides care management, managed care contracting and related business
management services.
The Company's strategy is to capitalize upon changes in the health care
industry by: (i) establishing networks of primary care physicians and specialist
physicians to integrate a full spectrum of health care providers into one or
more high quality, cost-effective health care delivery networks; (ii)
transitioning the patients of Network Physicians to the Company's Global
Capitated Contracts; (iii) providing HMOs and other Payors with a single source
of access to geographically proximate networks of physicians and other
providers; (iv) focusing on obtaining Global Capitated Contracts and operating
profitably under a capitated reimbursement system; (v) allowing physicians
greater access to managed care, while relieving physicians of some of the
administrative responsibilities and economic risks of providing managed care
services; (vi) effectively managing the cost and quality of providing care
through the use of sophisticated information systems and a broad range of
practice management and administrative services; and (vii) expanding
aggressively by recruiting additional physicians to networks that have already
been established and by establishing additional networks. See
"Business--Strategy".
3
<PAGE>
GLOSSARY
Capitated Contract Carve-Outs--Medical services that are not included in a
capitated arrangement. Examples of typical carve-outs from global capitated
contracts include pharmacy, dental care, eye care, organ transplants, home
health, mental health, infusion care, durable medical equipment, marketing and
administration.
Capitated Gatekeeper--A PCP who is compensated pursuant to a Gatekeeper
Capitated Contract.
Capitated Gatekeeper Income--Income received by PCPs pursuant to a Gatekeeper
Capitated Contract.
Capitated Life--An Enrollee who is a member in a Managed Care Plan that pays a
fixed amount to a provider pursuant to a capitation arrangement.
Capitation--A method of paying health care providers in which a fixed amount is
paid per Enrollee to cover a defined set of services over a specified period,
regardless of the cost of the actual services provided.
Core Medical Group--An entity formed by Equity PCPs to conduct a medical group
practice that enters into a PSO Agreement or similar long-term management
agreement with the Company.
Enrollee--A patient who is covered for health benefits under an HMO contract or
other insurance.
Equity PCP--A Network PCP who transfers substantially all of his medical
practice assets to the Company and who receives an equity interest in the
Company.
Equity Physician--A Network Physician, including an Equity PCP, who transfers
substantially all of his medical practice assets to the Company and who
receives an equity interest in the Company.
Exclusive IPA--An IPA that enters into an exclusive contractual arrangement,
pursuant to which the IPA and each of its participating physicians agrees to
conduct all managed care contracting activity exclusively through the Company
and to take as patients any capitated patients referred by the Company to the
Company pursuant to the Company's Global Capitated Contracts.
Fee-for-service--A method of reimbursing health care providers in which payment
is made for each unit of service rendered.
Full Risk Contract--A contract, usually a Global Capitated Contract, pursuant to
which a health care provider and/or management company (such as the Company)
assumes all financial risks for medical services related to patient care (with
or without Capitated Contract Carve-Outs).
Gatekeeper Capitated Contract--A contract pursuant to which a Primary Care
Physician receives a fixed, prepaid monthly fee for each Enrollee in exchange
for providing primary care medical services, regardless of the costs of the
actual services provided.
Global Capitated Contract--A contract pursuant to which a health care provider
and/or a management company (such as the Company) is paid a fixed amount per
Enrollee to cover medical services and assume all or part of the financial
risk associated with such services with or without Capitated Contract
Carve-Outs over a specified period, regardless of the cost of the services
provided.
HCFA--The U.S. Health Care Financing Administration which administers the
Medicare program.
Health Maintenance Organization (HMO)--A managed care plan that integrates
financing and delivery of a comprehensive set of health care services to an
enrolled population.
Independent Physician Association (IPA)--An organization of independently
practicing physicians which contracts with the Company, managed care plans or
others for the provision of professional medical services to Enrollees of the
Managed Care Plan.
Integrated Health Care Delivery System--An organization in which physicians,
hospitals and other providers combine their efforts to deliver comprehensive
health care services to the community. The single entity (or group of
entities) manages and coordinates the system, including Payor contracting for
the providers, and allocation of compensation and capital among the various
interests. The system generally includes a single legal entity or related
entities, unified governance and management mechanisms, use of consolidated
management and information systems, and use of consolidated budgets for the
entire system.
IPA--Independent Physician Association.
4
<PAGE>
IPA Participant Physicians--Primary Care Physicians who enter into Exclusive or
Non-Exclusive IPA agreements with the Company.
Managed Care--A payment or delivery arrangement used by a Payor to control or
coordinate use of health services with the goal of providing quality care at a
lower cost, including Capitation arrangements.
Managed Care Plan--A health plan that uses managed care arrangements and has a
defined system of selected providers that contract with the plan. Under
Managed Care Plans, Enrollees have a financial incentive to use participating
providers that agree to furnish a broad range of services, and providers may
be paid on a prenegotiated fee-for-service, capitated, per diem or salaried
basis.
Medicaid--A program of Federal matching grants to the states to provide health
insurance for categories of the poor and medically indigent. States determine
eligibility, payments and benefits consistent with Federal standards.
Medicare--A federal act (Health Insurance for the Aged Act) to provide hospital
and medical insurance for persons eligible for social security or railroad
retirement benefits under the Social Security Act and who are over the age of
65 or disabled or other eligible individuals over the age of 65.
Network PCP or Network Physician--A PCP or other physician, including an Equity
Physician, who participates in the Company's Integrated Health Care Delivery
System through employment in a Core Medical Group, through an Exclusive or
Non-Exclusive IPA or through a joint contracting venture, or other
arrangement.
Non-Exclusive IPA--An IPA that has a non-exclusive contractual arrangement with
the Company, pursuant to which the IPA and some or all of its participant
physicians may contract with or through other IPAs and entities but agree to
take all managed care patients referred by the Company.
Operating Agreement--An agreement providing for the operation of a Core Medical
Group.
Payor--An organization, such as an insurance company, employer, HMO, or HCFA,
that pays or reimburses a health care provider or other entity for health care
services to be provided to a patient or health plan.
PCP--A Primary Care Physician.
Physician Hospital Organization (PHO)--Generally, an organization jointly owned
and governed by hospitals and physicians formed and controlled for the purpose
of procuring and administering Payor contracts.
Physician Services Organization Agreement (PSO Agreement)--An agreement entered
into between the Company and each Core Medical Group, pursuant to which the
Core Medical Group appoints the Company to act as its exclusive agent to
provide all assets, facilities and non-medical services necessary for the Core
Medical Group's medical practice and to obtain Managed Care contracts with
Payors on behalf of the Network Physicians who are members of the Core Medical
Group.
Practice Participation Agreement--An agreement entered into among the Company, a
Core Medical Group and each of the physicians who is a member of such Core
Medical Group, pursuant to which (1) each such physician sells to the Company
certain assets of his medical practice, (2) each physician enters into an
exclusive Employment Agreement with the Core Medical Group, (3) the Core
Medical Group and the Company enter into a PSO Agreement, and (4) each
physician enters into an Operating Agreement with each of the other member
physicians of the Core Medical Group which governs the operation of the Core
Medical Group.
Primary Care Physician (PCP)--A physician practicing as a general practitioner
or in the specialties of family practice, general internal medicine, or
general pediatrics. PCPs are sometimes referred to as "gatekeepers" because
they enjoy patient loyalty and continuity and are the initial providers when
patients seek medical services and control, through referrals, patients'
access to other providers such as specialists.
PSO Agreement--A Physician Services Organization Agreement.
Risk Sharing Arrangement--An arrangement or contract pursuant to which the
parties receive a fixed amount to provide or pay for defined services (usually
including, but not limited to, hospital and other institutional services)
regardless of the actual costs and share the benefits or risks under the
arrangement in the event that the costs of such services are less than or
exceed such fixed amount.
Specialty Care Core Medical Group--an entity formed by specialist physicians to
conduct a medical group practice to provide specialty services and that enters
into a PSO Agreement or similar long-term management agreement with the
Company.
Subcapitation--An arrangement in which a health care provider receiving
capitated income pays subcontracting providers (for example, for specialty
services) on a capitated basis with the subcontracting providers assuming the
financial risk of providing all of the subcapitated medical services, the
payment representing subcapitation.
Utilization--The frequency with which a medical benefit is used, a service is
performed, or a referral is made.
Utilization Review--The review of services delivered by a health care provider
to evaluate the appropriateness, necessity, and quality of the prescribed
services.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FACTORS LISTED BELOW IN EVALUATING AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY.
LIMITED OPERATING HISTORY; LOSSES
The Company was incorporated in June of 1994 and commenced operations as
DHS in February of 1995. The Company is the substitute corporate entity formed
to reorganize the business of Baltimore Medical Group, P.A. ("BMGPA"). BMGPA was
incorporated in January of 1993. Accordingly, the Company has a limited
operating history. For the year ended June 30, 1996, the Company recorded a net
loss of approximately $6.6 million. The Company is likely to record a net loss
for the year ending June 30, 1997, and at June 30, 1996 had an accumulated
deficit of approximately $9.1 million. There can be no assurance that future
operating losses would not have a material adverse effect on the operating
results and financial condition of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
LIQUIDITY; RESTRICTIONS ON FINANCING
Until the Company and its Payors attract an adequate number of Capitated
Lives in the Company's Global Capitated Contracts, the Company expects to incur
operating losses and experience negative operating cash flows. The Company
believes that its cash on hand and the balance remaining available under the
NationsBank Credit Facility will be sufficient to meet the Company's immediate
working capital needs. However, in the event that the Company and its Payors
either have not attracted an adequate number of Capitated Lives in Global
Capitated Contracts sufficient to offset the Company's operating expenses, or
the Company has not secured a substantial amount of additional capital, the
Company's operating results and financial condition would be materially and
adversely affected. There can be no assurance that the Company will be able to
secure such additional capital, or that such capital, if available, will be on
terms favorable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity, Cash Flow and Capital
Resources--Subsequent Events."
The Company's Series A, Series B and Series C Preferred Stock Directors
have the right under the Company's constituent documents to approve the
incurrence by the Company of indebtedness (including both borrowed money and
capitalized leases) in excess of $1 million beyond the amount budgeted by the
Company from time to time. In addition, the Company's ability to conduct equity
financings may be affected by certain rights of consent of the holders of the
Company's Series A, Series B and Series C Preferred Stock. See "Description of
Capital Stock." There can be no assurance that such holders of Preferred Stock
will grant their consent to the terms of any such financings.
UNCERTAINTY OF STRATEGY; ACQUISITION RISKS
The Company's strategy is based upon assumptions relating to the Company's
likely rate of growth of acquisitions of medical practices, the rate at which
capitated lives can be added to the Company's networks, the likely referral and
other business practices of physicians and health care institutions in the
Baltimore and Washington metropolitan area and surrounding regions, and
assumptions relating to the rate and character of reimbursement for services
provided through the various arrangements negotiated by the Company, including
the continued willingness of Payors to enter into risk sharing arrangements.
Certain of the Company's assumptions may prove to be incorrect, which could have
a material adverse effect on the operating results and financial condition of
the Company. Thus, no assurance can be given that the Company's strategy will be
successfully and profitably implemented.
Further, the Company's strategy depends upon the successful recruitment of
physicians to join Core Medical Groups and Exclusive IPAs. There can be no
assurance that the Company will be able to grow in existing or new markets or
successfully identify, complete or integrate any acquisitions or IPA contracts.
The process of identifying suitable candidates, and proposing, negotiating and
implementing an economically feasible transaction with a physician group or
forming or managing a physician network, is lengthy and complex. The Company's
strategy involves focusing the development of its Integrated Health Care
Delivery System in the Baltimore and Washington metropolitan area and
surrounding regions. Accordingly, the Company is subject to and may be adversely
affected by any changes in laws and regulations in these areas pertaining to its
business. See "Business--Regulation." Further, currently substantially all of
the Company's net revenues are used to pay for costs of and in support of the
Core Medical Groups and Network Physicians. Thus, the Company's ability to
generate any profit is dependent upon its ability to transition its Network
Physicians and other providers in the Company's provider networks away from
unmanaged fee-for-service compensation arrangements and into a profitable
Managed Care
6
<PAGE>
environment. The failure of the Company to execute its strategy effectively
could have a material adverse effect on the operating results and financial
condition of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON MANAGED CARE CONTRACTS
The profitability of the Company depends on securing and maintaining
contractual relationships with Managed Care plans and other Payors and
successfully managing the expenses involved in the provision of services under
those contracts without sacrificing the quality of medical care. Such medical
expenses are subject to adverse selection and other utilization risks and are
not otherwise within the Company's or the Core Medical Groups' control. The
inability of the Company and its Network Physicians to obtain such contracts or
successfully manage such expenses could have a material adverse effect on the
operating results and financial condition of the Company. In addition, the
success of Payors depends substantially on their ability to reduce, or
significantly restrain the growth of, spending for health care services.
Accordingly, there is a risk that the Company will not be able to obtain or
maintain the numbers of Managed Care contracts presently contemplated or that,
if such contracts are obtained, payments from such Payors will decrease over
time, either of which could have a material adverse effect on the operating
results and financial condition of the Company. Further, the coverage of the
Managed Care plans with which the Company contracts may be limited to the State
of Maryland, the District of Columbia, Virginia or other limited geographic
regions. There can be no assurance that the coverage of such Managed Care plans
will extend beyond such areas. Finally, the Company's contracts with Payors are
generally for one year and may be terminated earlier upon notice. There can be
no assurance that Managed Care contracts will not be terminated. The loss of any
Payors or the failure to retain such Payors' Enrollees could have a material
adverse effect on the operating results and financial condition of the Company.
ENROLLMENT IN MEDICARE MANAGED CARE PLANS
The Company has entered and will enter into Full Risk Contracts and Global
Capitated Contracts with HMOs and other Managed Care Plans covering Medicare
patients. The Company's profitability is highly dependent on the Company's
ability to attract existing patients and new Medicare patients who enroll in the
Medicare Managed Care contracts with licensed HMOs pursuant to Global Capitated
Contracts with the Company. See "Business--Strategy--Medicare Managed Care." The
Company's strategy depends on successful joint marketing efforts by HMOs and the
Company and the willingness of Medicare patients to enroll in Managed Care
plans. There can be no assurance that the Company will be able to successfully
attract a sufficient number of Medicare patients into Medicare Managed Care
plans under contract with the Company or that such patients can be converted in
accordance with the Company's strategy. The failure of the Company to attract a
sufficient number of Medicare patients to Medicare Managed Care plans could have
a material adverse effect on the operating results and financial condition of
the Company.
RISKS OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The profitability of the Company may be adversely affected by Medicare and
Medicaid regulations, cost containment decisions of Payors and other payment
factors over which the Company has no control. The Federal Medicare program has
undergone significant legislative and regulatory changes in the reimbursement
and fraud and abuse areas, including the adoption of the resource-based relative
value scale ("RBRVS") schedule for physician compensation under Medicare, which
may have a negative impact on the Company's revenue. Efforts to control the cost
of health care services are increasing. Future profitability in the changing
health care environment, with differing methods of payment for medical services,
is likely to be affected significantly by management of health care costs,
pricing of services and agreements with Payors. Because the Company derives its
revenues from the revenues generated by Network Physicians, further reductions
in payments to physicians generally or other changes in payment for health care
services could have a material adverse effect on the operating results and
financial condition of the Company.
HCFA recently announced its intention to conduct an experimental pilot
program designed to reduce expenditures under Medicare Managed Care plans in
selected areas, including the Baltimore metropolitan area. The effect of any
such experimental program, if implemented, cannot be predicted, but could have a
material adverse effect on the operating results and financial condition of the
Company. See "Business--Regulation."
DEPENDENCE OF THE COMPANY ON CORE MEDICAL GROUPS AND IPAS
The Company enters into Managed Care contracts with Payors pursuant to
which the Company agrees to arrange for the delivery of medical services to
Enrollees in exchange for Managed Care compensation. The Company does not engage
in the
7
<PAGE>
practice of medicine and will be largely dependent upon medical services
provided by Network Physicians for its revenues. The success of the Company
initially will be dependent in large part upon its ability to attract Network
Physicians to join Core Medical Groups or to participate in IPA arrangements
with the Company, and upon the Core Medical Groups' and the Network Physicians'
ability to deliver high quality patient care in a cost-efficient manner. There
can be no assurance that the Company will be able to attract and retain the
requisite number of PCPs and specialist physicians, or that such physicians will
deliver high quality medical services profitably, either of which could have a
material adverse effect on the operating results and financial condition of the
Company.
With respect to Core Medical Groups, the Company enters into a PSO
Agreement which obligates the Core Medical Group to contract solely and
exclusively with the Company for 30 years (with automatic ten-year renewals) for
all managed care contracts, and for the provision of all of the non-medical
services, including provision of facilities, equipment, supplies and other goods
and assets, used by the Core Medical Groups and their employee physicians to
engage in the practice of medicine. See "Business--Development of Integrated
Health Care Delivery System--Focus on Primary Care Physicians." There can be no
assurance that the Company will be able to meet its contractual obligations to
the Core Medical Groups in a manner that is reasonably acceptable to the Core
Medical Groups. A failure of the Company to meet its contractual obligations
could result in the termination of such arrangements, which could have a
material adverse effect on the operating results and financial condition of the
Company.
COMPETITION
The health care industry is highly competitive and is subject to continuing
changes in how services are provided and how health care providers are selected
and paid. Generally, the Company competes with any entity that contracts with
Payors for the provision of prepaid health services (including but not limited
to PHOs, IPAs and independent private practice physicians) and with hospitals
and Payors which own or operate health care delivery systems. The Company also
competes with other companies, including entities such as managed care
organizations which provide managed care and other services to health care
providers. Such competitors may include local, regional and national entities.
Some of these companies provide traditional management services to primary
care, multi-specialty and specialty physician groups, while other companies
provide claims processing, utilization review and other more focused management
services. Some competitors are significantly larger and better capitalized than
the Company and have access to greater resources, provide a wider variety of
services, have greater experience in providing health care management services
and have longer established relationships with buyers of such services than does
the Company. To the extent that health care reform measures or any other factors
make the provision of prepaid managed medical care an attractive market to other
potential participants, the Company may encounter increased competition.
Additionally, there is increased competition among a wide range of entities to
acquire or contract with physician practices. Such competition could increase
the cost of making such acquisitions and contracts and could endanger the
success of the Company's strategy of acquiring or contracting with PCPs in
selected markets. There can be no assurance that the Company will be able to
acquire or contract with a sufficient number of physician practices and thereby
compete favorably in contracting with Payors or to expand or maintain its
physician networks in existing or new markets. Any of the foregoing could have a
material adverse effect on the operating results and financial condition of the
Company.
DILUTION
The Company contemplates that it will acquire additional medical practices
for existing Core Medical Groups and will organize additional Core Medical
Groups. The Company also contemplates contracting with additional physicians
through IPAs and other arrangements and compensating IPAs for recruiting their
IPA Participant Physicians to contract with the Company. The Company may issue
Securities in connection with any of such transactions. The Company may make
such acquisitions and contracts if it believes, in the exercise of its
discretion, that such acquisitions are beneficial, and without any requirement
that the Company's stockholders approve such transactions, all on terms as may
be negotiated by the Company. In addition, the Company intends to obtain
additional financing, some of which could result in dilution to the then
existing Stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity, Cash Flow and Capital
Resources--Subsequent Events."
Accordingly, the percentage ownership interest of each then existing
stockholder in the Company will be reduced proportionately and, depending upon
the valuation at which such securities are issued, such issuances may be
dilutive to the then existing stockholders. Although the Company contemplates
that additional securities will be issued in the future, there can be no
assurance as to the number, if any, of new physicians, IPAs or investors who
will become stockholders of the Company.
8
<PAGE>
INTANGIBLES
As a result of the Company's acquisitions during 1995 and 1996, intangibles
increased from $1,287 as of June 30, 1995 to $2,387,150 as of June 30, 1996. The
Company's policy is to amortize intangibles over a 10 to 40 year period. The
intangibles acquired during fiscal 1995 and fiscal 1996 are being amortized over
20 years using the straight-line method in the Company's consolidated financial
statements. Such amortization is expected to significantly affect the Company's
profitability in the near term. In addition, the Company's future acquisitions
may generate additional intangibles. As required under generally accepted
accounting principles, the Company reviews the carrying value of intangibles at
each reporting period to determine if facts or circumstances exist which suggest
that intangibles may be impaired. If impairment is determined to have occurred,
intangibles will be adjusted downward. There can be no assurance that impairment
of intangibles with respect to the Company's acquisitions will not occur. Such
adjustment, if required, could have a material adverse effect on the operating
results and financial condition of the Company. See Note 3 to Notes to
Consolidated Financial Statements.
VOTING LIMITATIONS; RESTRICTIONS ON RESALE OF SECURITIES
Each of the classes of Common Stock is entitled to elect a certain number
of the Company's directors and has its own particular voting requirements. The
holders of the Class A Common Stock are entitled to elect five of the Company's
18 directors (each a "Class A Director") by an affirmative vote of a plurality
of all votes cast at a meeting at which a quorum of Class A Common Stock is
present. The holders of the Class B Common Stock are entitled to elect eight of
the Company's 18 directors (each a "Class B Director") by an affirmative vote of
a plurality of all votes cast at a meeting at which a quorum of Class B Common
Stock is present. The holders of the Series A Preferred Stock are entitled to
elect two of the Company's 18 directors (each a "Series A Preferred Director")
by an affirmative vote of a plurality of all votes cast at a meeting at which a
quorum of Series A Preferred Stock is present. The holders of the Series B
Preferred Stock are entitled to elect two of the Company's 18 directors (each a
"Series B Preferred Director") by an affirmative vote of a plurality of all
votes cast at a meeting at which a quorum of Series B Preferred Stock is
present. Prior to the Company's 1998 annual meeting, the holders of the Series C
Preferred Stock are entitled to elect one of the Company's 18 directors (each a
"Series C Preferred Director") by an affirmative vote of a plurality of all
votes cast at a meeting at which a quorum of Series C Preferred Stock is
present. At the Company's 1998 annual meeting of stockholders, the number of
directors of the Company shall be increased to 19, and thereafter, the holders
of the Series C Preferred Stock will be entitled to elect two of the Company's
directors. Upon conversion of all of the Series A, Series B and Series C
Preferred Stock to Class C Common Stock, the holders of shares of Class C Common
Stock shall be entitled to elect five directors of the Company prior to the
Company's 1998 annual meeting and six directors thereafter (each a "Class C
Common Director"). Further, the Company must obtain the consent of the holders
of the Company's Series A, Series B and Series C Preferred Stock (collectively,
the "Preferred Stock") in connection with a variety of significant corporate
activities. All of the Company's stockholders (with the exception of employee
participants in the Company's Omnibus Stock Option Plan which, by its terms,
restricts in certain ways the resale of stock issued thereunder) are parties to
a Stockholders Agreement which governs a variety of matters, including voting as
to directors. Purchasers of Securities will also be subject to significant
contractual restrictions on the resale of such Securities until an underwritten
initial public offering for cash of Common Stock, and all shares will carry a
legend to reflect such restrictions. There can be no assurance that such an
offering will occur. See "Management--Stockholders Agreement" and "Description
of Capital Stock."
ABSENCE OF PUBLIC MARKET
It is not currently anticipated that any of the Securities described in
this Prospectus will be listed on an exchange or other public market or that a
trading market will develop for the Securities. Consequently, the price of the
Securities which may be obtained by a seller in a secondary resale may be
subject to volatility, and given the contractual restrictions or transfer
described in "--Voting Limitations; Restrictions on Resales of Securities" and
"Description of Capital Stock," the resale of such Securities may be difficult
to effect in any case.
PENNY STOCK RULES
As described in "--Absence of Public Market," it is not currently
anticipated that any of the Securities described in this Prospectus will be
listed on an exchange or other public market or that a trading market will
develop for the Securities. As it is not expected that any of the Securities
will be traded on an exchange or quoted on Nasdaq, the Securities will be
subject to Rule 15g-9 under the Exchange Act, which, among other things,
requires that brokers/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and receiving
any purchaser's written consent prior to any transaction. If the Securities
could also be deemed penny stocks under the Securities Enforcement and Penny
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<PAGE>
Stock Reform Act of 1990, this would require additional disclosure in connection
with trades in the Securities, including the delivery of a disclosure schedule
explaining the nature and risks of the penny stock market. Such requirements
could severely limit the liquidity of the Securities and the ability of the
purchasers in this offering to sell their Securities in the secondary market.
OWNERSHIP OF STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company own 100% of the Class A
Common Stock of the Company (which as of October 4, 1996 represents
approximately 16% of the outstanding capital stock of the Company). The holders
of Class A Common Stock are entitled to elect five of the 18 members of the
Board of Directors.
The executive officers and directors of the Company own, either directly or
indirectly through their equity interests in Medical Holdings Limited
Partnership ("MHLP") 23.4% of the Class B Common Stock (which as of October 4,
1996 represents approximately 10% of the Company's outstanding capital stock).
Five directors of the Company own 29.4% of the issued and outstanding capital
stock of BMGGP, Inc., the general partner of MHLP. MHLP owns 87.9% of the
Company's issued and outstanding Class B Common Stock (which as of October 4,
1996 represents 43.2% of the outstanding capital stock of the Company). The
holders of Class B Common are entitled to elect eight of the 18 members of the
Board of Directors.
Two directors of the Company are executive officers of the holder of Series
A Preferred Stock. The holder of Series A Preferred Stock is entitled to elect
two of the Company's directors. Two directors of the Company are executive
officers or directors of the parent company of the holder of Series B Preferred
Stock. The holder of Series B Preferred Stock is entitled to elect two of the
Company's directors. One of the directors of the Company is an executive officer
of the holder of Series C Preferred Stock. The holder of Series C Preferred
Stock is entitled to elect one of the Company's directors.
Accordingly, the executive officers and directors may have a significant
impact on the business, policies and affairs of the Company. See "Principal
Stockholders".
KEY EMPLOYEES
The Company depends to a significant extent on key management, technical
and marketing personnel, and depends particularly on the efforts of Mr. Gold and
Drs. Rifkin and Kimmel. The Company's growth and future prospects will depend in
large part upon its ability to attract, motivate and retain highly qualified
personnel. The loss of any key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect on the operating
results and financial condition of the Company. See "Management."
REGULATION
While the Company is not currently subject to regulation as an insurer or
health care provider, the insurance and health care business generally and the
Company's business described generally herein are subject to extensive and
pervasive Federal and state regulation pursuant to current statutes and
regulations. Health care regulation has been subject to rapid and pervasive
change in recent years. Congress and various state legislatures are expected to
continue to consider various legislative proposals for health care reform,
including proposals intended to control public and private spending on health
care as well as provide increased public access to the health care system and
maintain broad physician access to health care delivery systems. Changes in the
regulations or reinterpretations of existing regulations may significantly
affect the Company. For example, the staff of the Maryland Insurance Commission
has published its view that certain of the Company's (and similar Managed Care
entities') proposed methods of payment to physicians and other providers may
require the Company and such other Managed Care entities to subject themselves
to regulation as insurance companies. There can be no assurance that the
Company's efforts to conduct itself in such a manner so as not to subject itself
to regulation will be successful, and the imposition of such regulation could
have a material adverse effect on the Company. Regulation which affects the
IPAs, Core Medical Groups, hospitals and other providers of health care could
have a material adverse effect on the operating results and financial condition
of the Company.
Some of the Company's business relationships as presently contemplated may
not qualify for "safe harbor protection" under the Medicare Fraud and Abuse
Rules or for an exception under the Federal and Maryland laws discussed in
"Business--Regulation." Such laws are broadly drafted, and their application to
arrangements such as those described herein is often uncertain. Since inquiries
under such laws are highly factual, it is not possible to predict with certainty
how they may be applied to the arrangements in which the Company, the Core
Medical Groups and the Core Medical Group's employee physicians are anticipated
to participate. Although the Company believes that it is and will be in
compliance with these laws
10
<PAGE>
with respect to its own operations, including its contractual relationship with
Core Medical Groups, IPAs and other providers, there can be no assurance that
enforcement authorities will not assert that the Company, or certain
transactions into which the Company has or will have entered, has violated or is
violating such laws, or that if any such assertion were made, that the Company
would prevail, or whether any sanction imposed would have a material adverse
effect on the operations of the Company. Even the assertion of a violation of
such laws could have a material adverse effect on the operating results and
financial condition of the Company.
The Company enters into contracts with physicians, who are not employees of
Core Medical Groups, and other health care professionals as independent
contractors and, in accordance with federal and state tax guidelines pertaining
to independent contractors, and neither the Company nor any Core Medical Groups
withholds federal or state income taxes, make federal or state unemployment tax
payments or provide workers' compensation insurance with respect to such
independent contractors. However, a determination by taxing authorities to the
contrary with respect to the classification of such physicians or other health
care professionals as independent contractors could have a material adverse
effect on the operating results and financial condition of the Company.
Finally, the body of law applicable to the delivery of, and payment for,
health care services, aspects of which are summarized in "Business--Regulation,"
is subject to rapid substantive change. All such laws, regulations, and
interpretations are subject to amendment or other substantive change at any
time. There can be no assurance that the business of the Company could have a
material adverse effect on the operating results and financial condition of the
Company.
POTENTIAL EXPOSURE TO PROFESSIONAL LIABILITY; AVAILABILITY OF INSURANCE
In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
medical malpractice and related legal theories. Many of these lawsuits involve
large claims and substantial defense costs. The Company does not engage in the
practice of medicine or provide medical services, nor does it control the
practice of medicine or the provision of health care services by physicians and
other providers within its provider networks or the compliance with regulatory
requirements directly applicable to such providers and the provider network
entities with whom they contract. Nonetheless, the Company maintains
professional malpractice and general liability insurance in amounts deemed
appropriate by management based on the nature and risks of the Company's
business. In addition, each physician, physician network entity and other
provider is required to maintain professional liability insurance coverage, and
the Company generally is indemnified under each of the management agreements by
such entity for liabilities resulting from the performance of services by such
providers. Although the Company currently is not a party to any material
litigation relating to the practice of medicine, there can be no assurance that
the Company will not become involved in such litigation in the future, that any
claim or claims arising from such litigation will not exceed the Company's
insurance coverage or that such coverage will continue to be available, any of
which could have a material adverse effect on the Company.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws
and agreements to which the Company is a party could, together or separately,
discourage potential acquisition proposals or delay or prevent a change in
control of the Company, even when stockholders other than the Company's
principal stockholders consider such a transaction to be in their best interest.
Accordingly, such provisions may limit the price that certain investors might be
willing to pay in the future for Securities. See "Description of Capital Stock"
and "Management--Stockholders Agreement."
ANTITRUST CONSIDERATIONS
The Company and its Network Physicians, and other entities with which it
contracts are subject to the United States, state and District of Columbia
antitrust statutes as well as to the interpretations of such statutes by the
courts. Because the Company will be contracting with Payors and with providers
for the provision of health care services by providers who could be deemed to
compete for the provision of such services, and for other reasons, the Company,
Network Physicians and other entities with which it contracts could be subject
to public and private investigations and enforcement actions under such
statutes. The health care sector is undergoing significant change and is highly
competitive. See "Risk Factors--Competition." The Company has consulted with
counsel concerning the appropriateness of its contracting activities under such
statutes and believes that all of its present and proposed activities are
consistent with such statutes and interpretive guidelines issued by the
Department of Justice, the Federal Trade Commission and other regulatory
agencies. There can, however, be no assurance that the Company will not be
challenged on these grounds.
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USE OF PROCEEDS
Securities may be issued from time to time in connection with the
acquisition of medical practices or other transactions with physicians. In
exchange for such Securities (and other consideration), the Company expects to
receive certain assets and/or ownership interests of such practices, as well as
certain contractual rights. The Company will issue Securities only in connection
with the acquisition of medical practices or other transactions with physicians
and will not receive cash proceeds in connection with the issuance of the
Securities.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
Company's years ended June 30, 1994, June 30, 1995 and June 30, 1996 have been
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data presented below as of and for the period
ended June 30, 1993 have been derived from the unaudited financial statements of
the Company. The data set forth below are qualified in their entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements, the notes thereto and the other financial and statistical
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD ENDED (1) YEAR ENDED YEAR ENDED
JUNE 30, 1993 JUNE 30, 1994 JUNE 30, 1995
---------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net physician revenue.......................................... $ 417,568 $ 2,166,419 $ 3,315,332
Global capitation revenue...................................... -- -- --
---------------- ------------- -------------
Net revenues................................................... 417,568 2,166,419 3,315,332
Physician services and other provider costs.................... 102,574 681,901 1,760,245
Medical services expense....................................... -- -- --
Care center costs.............................................. 225,798 1,075,365 2,157,549
General and administrative..................................... 10,595 288,621 1,587,481
Depreciation and amortization.................................. 2,356 17,871 35,367
Interest and other income...................................... -- 85,442 199,166
Interest expense............................................... (9,199) (16,153) (30,690)
---------------- ------------- -------------
Income (loss) before taxes..................................... 67,046 171,950 (2,056,834)
---------------- ------------- -------------
Income tax expense............................................. -- -- --
---------------- ------------- -------------
Net income (loss).............................................. $ 67,046 $ 171,950 $ (2,056,834)
---------------- ------------- -------------
---------------- ------------- -------------
Net income (loss) per share.................................... $.06 $(.72)
------------- -------------
------------- -------------
Pro forma net income (2)....................................... $ 40,228 $ 103,170
---------------- -------------
---------------- -------------
Pro forma net income per share................................. $.01 $.03
----- -----
----- -----
Weighted average number of shares outstanding.................. 3,000,000 3,000,000 3,000,000
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 12,779 $ 104,614 $ 131,361
Working capital................................................ 116,991 285,460 62,180
Total assets................................................... 260,506 520,733 1,806,840
Long term obligations.......................................... 31,037 38,227 606,896
Redeemable convertible preferred stock......................... -- -- 2,113,300
Total stockholders' equity (deficit)........................... 132,796 307,746 (2,009,870)
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
STATEMENT OF OPERATIONS:
Net physician revenue.......................................... $ 9,902,528
Global capitation revenue...................................... 382,062
-------------
Net revenues................................................... 10,284,590
Physician services and other provider costs.................... 4,525,340
Medical services expense....................................... 662,671
Care center costs.............................................. 6,011,470
General and administrative..................................... 5,342,429
Depreciation and amortization.................................. 438,143
Interest and other income...................................... 291,553
Interest expense............................................... (242,513)
-------------
Income (loss) before taxes..................................... (6,646,423)
-------------
Income tax expense............................................. --
-------------
Net income (loss).............................................. $ (6,646,423)
-------------
-------------
Net income (loss) per share.................................... $(2.35)
-------------
-------------
Pro forma net income (2).......................................
Pro forma net income per share.................................
Weighted average number of shares outstanding.................. 3,063,205
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 1,400,837
Working capital................................................ 831,204
Total assets................................................... 11,323,248
Long term obligations.......................................... 5,807,942
Redeemable convertible preferred stock......................... 8,165,831
Total stockholders' equity (deficit)........................... (6,968,564)
</TABLE>
- ---------------
(1) BMGPA was formed in January 1993 and commenced operations in May 1993. The
financial information represents the period from inception of operations in
May 1993 through June 30, 1993.
(2) Reflects the effect on historical operations for 1993 and 1994 as if the
Company had been treated as a "C" corporation with an effective tax rate of
40%.
(3) Weighted average number shares restated to reflect two-for-one stock split
in fiscal 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
OVERVIEW. The Company was incorporated in June 1994 and commenced
operations in February 1995. The Company is the substitute corporate entity
formed to reorganize the business of Baltimore Medical Group, P.A. ("BMGPA").
BMGPA was incorporated in January of 1993.
As of June 30, 1996, there were approximately 637 Network Physicians in
five regional networks throughout the State of Maryland, including approximately
155 PCPs, 92 obstetrician/gynecologists and 390 specialist physicians. Of these,
74 were Equity Physicians, of which 48 had transferred their practice assets to
the Company or one of its subsidiaries and 26 had entered into binding
agreements to complete such transactions. As of October 4, 1996, there were
approximately 694 Network Physicians in six regional networks throughout the
state of Maryland, including approximately 176 PCPs, 95
obstetrician/gynecologists, and 423 specialist physicians. Of these, 90 were
Equity Physicians, of which 57 had transferred their practice assets to the
Company or one of its subsidiaries, 17 had entered into binding agreements to
complete such transactions and 16 were subject to a letter of intent with
respect to an acquisition which the Company believes will be completed by
December 31, 1996.
The Company provides services to its Network Physicians, who deliver health
care services to patients under various reimbursement mechanisms. The Company's
level of profitability depends on (i) increasing the number of Network
Physicians, (ii) attracting patients to enroll in benefit plans that enter into
Global Capitated Contracts with the Company (principally Medicare
beneficiaries), (iii) securing additional and maintaining Global Capitated
Contracts, with adequate reimbursement rates and (iv) generating earnings
through assisting Network Physicians in managing the delivery of high quality
care at a cost less than the reimbursement received under Global Capitated
Contracts.
SOURCE OF REVENUES AND EARNINGS. The Company derives substantially all of
its net revenue from (i) direct patient and third party billings and, in the
case of primary care physicians, the capitated gatekeeper payments for medical
services provided by physicians within the Core Medical Groups ("Net Physician
Revenue") and (ii) payments made by Payors to the Company pursuant to Full Risk
Contracts or Global Capitated Contracts ("Global Capitation Revenue").
Net Physician Revenue is recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between customary and usual rates for physician services and amounts
reimbursable by government sponsored healthcare programs (I.E., Medicare and
Medicaid), commercial insurance carriers and other health insurance programs.
Global Capitation Revenue is recognized when payments are received. As of June
30, 1996, approximately $1,200,000 of the Company's accounts receivable
represented amounts due from the Medicare and Medicaid programs.
The Company acquires certain medical practices from Equity Physicians and
enters into long-term contracts with Core Medical Groups who employ the
physicians. The agreements entered into as part of the acquisitions convey to
the Company perpetual, unilateral control over the assets and operations of the
various Core Medical Groups. The Company's PSO Agreements have a 30 year term
with unlimited 10 year renewals. Perpetual control by the Company is evidenced
by (i) the Company's exclusive right to manage each Core Medical Group's
business (other than matters involving clinical judgment and certain health care
services), (ii) its control over the admission and withdrawal of the members of
the Core Medical Group, (iii) its responsibility for all liabilities and
obligations of the Core Medical Group, (iv) its exclusive right to contract for
the Core Medical Groups, (v) the length of the original term of the PSO
Agreements, (vi) the Company's ownership of the assets used by the Core Medical
Group, (vii) the commonality between the stockholders, officers and directors of
the Company and the Core Medical Groups, (viii) the continuing investment of
capital by the Company, (ix) the employment of and the incurrence of expenses
for the majority of the non-physician personnel and (x) the nature of the
services provided to the Core Medical Groups by the Company. The Company's
financial relationship with each practice offers the physicians access to
capital, management expertise, sophisticated information systems and Managed
Care contracts. Notwithstanding the lack of any ownership of the equity
interests in such entities, consolidation of the Core Medical Groups is
necessary to present fairly the financial position and results of operations of
the Company because there exists a parent-subsidiary relationship by means other
than record ownership of any equity interests.
The historical results of operations presented herein are not necessarily
indicative of anticipated future results. Physicians, prior to becoming
employees of the Core Medical Groups, derived substantially all of their
revenues through activities related to Net Physician Revenue. The Company
derives minimal earnings from Net Physician Revenue as the proceeds from these
sources are paid to the Core Medical Groups for the accounts of the physicians
in Core Medical Groups ("Physician
14
<PAGE>
Services and Other Provider Costs") and are used by the Company to meet the
costs of services provided to the Core Medical Groups ("Care Center Costs"). A
central tenet of the Company's strategy is changing the revenue mix of its
Network Physicians from fee-for-service reimbursement to pre-paid arrangements,
principally those involving Global Capitated Contracts for Medicare
beneficiaries.
The Company's primary source of future earnings is expected to be Global
Capitation Revenue. Under such arrangements, the Company receives a fixed fee
from a Payor in exchange for undertaking the obligation to provide or arrange
for the provision of substantially all of the health care services required by
the Enrollees (the majority of expenses associated with such activities are
reported as "Medical Services Expense"). These services include not only
services provided by the Company's Network Physicians but also hospitalization,
specialty care and ancillary services which are subcontracted by the Company.
The inability of the Company to renew its current Payor contracts, to
maintain favorable terms of such contracts, to attract patients who enroll in
such benefit plans, to expand such contracts to other geographical areas in the
Baltimore and Washington metropolitan area and surrounding regions or to manage
successfully the cost of care would materially and adversely affect the
Company's revenues and primary source of earnings.
As of October 4, 1996, the Company is working cooperatively with two Payors
to attract both Medicare and commercial patients who enroll in benefit plans
that enter into Global Capitated Contracts with the Company. As of June 30, 1996
and as of October 4, 1996, there were not a sufficient number of patients
enrolled in benefit plans under the Company's Global Capitated Contracts to
cover its operating costs. To the extent patients do not enroll in such benefit
plans in adequate numbers, it will have a material adverse effect on the
operating results and financial condition of the Company.
The Company's ability to manage successfully the cost of care under such
contracts depends on the overall health of its patients, its ability to manage
appropriate and timely utilization of medical resources and its ability to
maintain favorable agreements with other health care providers (E.G., hospital
and ancillary services). To the extent the Company is unable to provide or
arrange for the provision of substantially all of the health care services
required by its patients at a cost less than the fixed fee received from a
Payor, it will have a material adverse effect on the operating results and
financial condition of the Company.
In the future, the Company expects to derive meaningful revenues and
earnings from other sources including (i) the management of Specialty Care Core
Medical Groups, (ii) the management fees growth of multi-specialty Core Medical
Group revenue, (iii) other management fees and (iv) the growth of Core Medical
Groups revenue from increased physician productivity.
ACQUISITIONS/OTHER PHYSICIAN TRANSACTIONS. The Company has acquired the
furniture, fixtures and equipment (at net book value, which the Company and each
Equity Physician agree approximates fair value), intangible assets, and the
accounts receivable of certain medical practices in exchange for consideration
of cash, stock and/or notes payable. In addition to such consideration,
substantially all direct costs associated with the acquisition are capitalized.
(See "History of the Company" for a description of the number of practices
acquired and the amount and form of consideration paid to consummate each
transaction.)
At the time of acquisition, Equity Physicians typically enter into 10-year
employment agreements with a Core Medical Group. Further, each Core Medical
Group enters into a PSO Agreement with the Company generally for 30 years, with
automatic terms of renewal, pursuant to which the Company provides management
and administrative services to the Core Medical Group and the Core Medical Group
agrees to provide medical services to the Company's patients.
Certain acquisitions are subject to reacquisition rights whereby the
physicians may rescind the transaction typically within a nine month period from
the date of closing. Pursuant to such reacquisition rights, such physicians may
repurchase substantially all of the assets previously acquired at the price paid
by the Company at the closing. To date, one physician had exercised his
reacquisition rights. In that instance, the practice had not actually been
consolidated into the operations of the Company and as a consequence had no
material financial effect on the Company. As of June 30, 1996, of the 44
physicians who had been granted reacquisition rights, 25 had such rights still
available. These physicians represented approximately $2,574,826 or 25% of the
Company's net revenue of $10,284,590. As of October 4, 1996, of the 53
physicians who had been granted reacquisition rights, 26 had such rights still
available. Although the Company does not believe that substantial rescissions
will occur, the exercise of such rights by a substantial number of physicians
would have a material and adverse effect on the operating results and financial
condition of the Company.
15
<PAGE>
Of the 74 Equity Physicians as of June 30, 1996, 26 had entered into
binding letters of intent to sell medical practices to the Company and become
employees of Core Medical Groups. As of the date of this Prospectus, 9 of these
physicians had consummated the aforementioned transactions. The Company expects
the remainder of these transactions to close by December 31, 1996.
The Company intends to continue acquiring certain medical practices and
obtaining managed care contracting rights and is currently in active discussions
with a number of primary and specialty care physicians. The Company intends to
begin management of Specialty Care Core Medical Groups pursuant to a medical
practice asset acquisition of and merger with a 16-physician cardiology practice
and the formation of a Cardiology Core Medical Group. The consideration in such
transaction will consist of shares of Class B Common Stock and a note payable
for the accounts receivable.
The Company also expects to derive revenues and earnings from the
participation of physicians in its IPAs. As of June 30, 1996, 29 Network PCPs
were participants in the Company's IPAs. As of October 4, 1996, 50 Network PCPs
were participants in the Company's IPAs. (See "Business--Development of
Integrated Health Care Delivery System--Independent Physician Associations").
RESULTS OF OPERATIONS
The Company's operating results are significantly affected by the number of
Network PCPs, the number of Network PCPs participating in Global Capitated
Contracts, the number of executed Global Capitated Contracts, and the number of
patients enrolled in benefit plans under Global Capitated Contracts with the
Company. The following table summarizes the Company's history with respect to
Network PCPs, executed Global Capitated Contracts and patients enrolled in
benefit plans under Global Capitated Contracts with the Company:
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Number of Network PCPs as of..................................................... 13(1) 24 155
Number of Network PCPs participating in Global Capitated Contracts
as of.......................................................................... 0 0 45(2)
Number of regional networks as of................................................ 1(1) 1 5
Number of Global Capitated Contracts as of....................................... 0 0 3
Number of Global Capitated Contract Patients:
Commercial..................................................................... 0 0 2,256
Medicare....................................................................... 0 0 740
</TABLE>
- ---------------
(1) Represents physicians included in BMGPA as of June 30, 1994.
(2) There is a lag between when physicians join networks and when they become
eligible to participate in Global Capitated Contracts as a result of the
credentialing process and other internal Company controls.
The increase in the number of Network Physicians has contributed to the
increase in revenue growth as well the increase in operating costs to support
physician growth. In preparation for the acquisition of medical practices and
other physician transactions, the Company had invested in the personnel and
infrastructure necessary to accommodate its anticipated growth, which resulted
in substantial increases in corporate expenses throughout 1996 and 1995.
The Company's three Global Capitated Contracts noted above were effective
January 1, April 1 and June 1, 1996, respectively. Since the Company executed
its Global Capitated Contracts in the latter half of the year ended June 30,
1996 and its Network PCPs experienced the lag time in becoming eligible to
participate in such contracts, the Company's global capitated revenue was less
than expected.
Due to the limited operating period of the Global Capitated Contracts, the
number of physicians eligible to participate in Global Capitated Contracts, the
resulting relatively small number of patients enrolled in benefit plans under
Global Capitated Contracts with the Company and the Company's limited experience
with the Payors, the Company has recognized a loss of approximately $280,000
related to such contracts for the year ended June 30, 1996.
Although the Company expects that it will derive earnings from such
contracts in the future given larger numbers of Network PCPs participating in
Global Capitated Contracts, the expected larger number of enrolled patients and
greater experience with the Payors, there can be no assurance that this will be
the case. (See "Risk Factors--Dependence on Managed Care"). Because of the
Company's limited operating history, the limited period in which it has been
assisting and managing Network Physicians, its limited experience with full and
shared-risk capitated arrangements and the effects of the acquisitions, the
Company does not believe that the period to period comparisons, percentage
relationships within periods and apparent trends set forth below are necessarily
indicative of future operations.
16
<PAGE>
The following table sets forth the percentages of net revenue represented
by certain items reflected in the Company's consolidated statements of
operations:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
<S> <C> <C> <C>
1994 1995 1996
------ ------ ------
Net physician revenue......................................................................... 100.0 % 100.0 % 96.3 %
Global capitation revenue..................................................................... 0.0 % 0.0 % 3.7 %
------ ------ ------
Net revenues.................................................................................. 100.0 % 100.0 % 100.0 %
Physician services and other provider costs................................................... 31.5 % 53.1 % 44.0 %
Medical services expense...................................................................... 0.0 % 0.0 % 6.4 %
Care center costs............................................................................. 49.6 % 65.1 % 58.4 %
General and administrative.................................................................... 13.3 % 47.9 % 51.9 %
Depreciation and amortization................................................................. 0.8 % 1.0 % 4.3 %
Interest and other income..................................................................... (3.9 %) (6.0 %) (2.8 %)
Interest expense.............................................................................. 0.8 % 0.9 % 2.4 %
Income tax expense............................................................................ -- -- --
------ ------ ------
Net income (loss)............................................................................. 7.9 % (62.0 %) (64.6 %)
------ ------ ------
------ ------ ------
</TABLE>
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995.
NET REVENUES. The Company's net revenues increased to $10,284,590 for the
year ended June 30, 1996 from $3,315,332 for the year ended June 30, 1995. This
trend was attributable to (i) the increase in net physician revenue to
$9,902,528 or 96.3% of net revenue from $3,315,332 or 100% of net revenue and
(ii) the increase in global capitation revenue to $382,062 or 3.7% of net
revenue from $0 over the prior year. These increases resulted primarily from the
increase during the year ended June 30, 1996, in the number of Network
Physicians who had consummated underlying transactions, from 24 to 88, as well
as the increase in the number of Network PCPs participating in Global Capitated
Contracts from 0 to 45 and the increase in the number of Global Capitated
Contracts from 0 to 3 over the same time period.
PHYSICIAN SERVICES AND OTHER PROVIDER COSTS. Physician services and other
provider costs were $4,525,340 or 44.0% of net revenue for the year ended June
30, 1996 compared to $1,760,245 or 53.1% of net revenue for the year ended June
30, 1995. The increases resulted from increases in the number of Network
Physicians who had consummated underlying transactions from 24 to 88 during the
year ended June 30, 1996. While these expenses are expected to increase as the
Company continues adding Network Physicians, the Company also expects that these
expenses will decline as a percentage of net revenues as the Company's medical
services expense grows as a result of the growth of the Company's Global
Capitated Contracts.
MEDICAL SERVICES EXPENSE. Medical services expense was $662,671 or 6.4% of
net revenue for the year ended June 30, 1996 compared to $0 or 0% of net revenue
for the year ended June 30, 1995. These increases resulted from the increase in
the number of Network PCPs participating in Global Capitated Contracts from 0 to
45 and the increase in the number of Global Capitated Contracts from 0 to 3 over
the same time period. The Company expects these expenses to increase as the
number of Network PCPs participating in and the number of patients enrolled in
benefit plans under Global Capitated Contracts with the Company grows.
CARE CENTER COSTS. Care center costs were $6,011,470 or 58.4% of net
revenue for the year ended June 30, 1996 compared to $2,157,549 or 65.1% of net
revenue for the year ended June 30, 1995. These increases resulted from the
increases in the number of Network Physicians who had consummated underlying
transactions from 24 to 88. While these expenses are expected to increase as the
Company continues adding Network Physicians, the Company expects that these
expenses will decline as a percentage of net revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5,342,429 or 51.9% of net revenue for the year ended June 30, 1996
compared to $1,587,481 or 47.9% of net revenue for the year ended June 30, 1995.
These increases resulted primarily from (i) increased compensation expenses from
expansion of the Company's corporate management team, as well as its marketing,
acquisitions, network development and care management departments and (ii)
additional costs incurred in adding physicians to the Company's networks and
attracting patients who enroll in benefit plans under Global Capitated
Contracts. While these expenses are expected to increase as the Company adds
Network Physicians, the Company expects that these expenses will decline as a
percentage of net revenues.
17
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $438,143 or 4.3% of net revenue for the year ended June 30, 1996
compared to $35,367 or 1.0% of net revenue for the year ended June 30, 1995.
These increases resulted primarily from intangibles acquired from, medical
practice assets acquired from and employment agreements executed with Equity
Physicians, as well as certain fixed asset additions. While these expenses are
expected to increase as the Company continues adding Equity Physicians, the
Company expects that these expenses will decline as a percentage of net revenue.
INTEREST AND OTHER INCOME. Interest and other income was $291,553 or 2.8%
of net revenue for the year ended June 30, 1996 compared to $199,166 or 6.0% of
net revenue for the year ended June 30, 1995.
INTEREST EXPENSE. Interest expense was $242,513 or 2.4% of net revenue for
the year ended June 30, 1996 compared to $30,690 or 0.9% of net revenue for the
year ended June 30, 1995. These increases resulted primarily from the increase
in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's loss and its allowance for
deferred tax assets, for the years ended June 30, 1996 and June 30, 1995, the
Company did not require a provision for income taxes.
NET INCOME (LOSS). The Company had a net loss of $6,646,423 for the year
ended June 30, 1996 compared to $2,056,834 for the year ended June 30, 1995.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994.
NET REVENUES. The Company's net revenues increased to $3,315,332 for the
year ended June 30, 1995 from $2,166,419 for the year ended June 30, 1994. This
increase resulted primarily from the increase in the number of Network PCPs from
13 to 24 over the same time period. The Company did not have any Global
Capitated Contracts during this time period.
PHYSICIAN SERVICES AND OTHER PROVIDER COSTS. Physician services and other
provider costs were $1,760,245 or 53.1% of net revenue for the year ended June
30, 1995 compared to $681,901 or 31.5% of net revenue for the year ended June
30, 1994. These increases resulted from the increases in the number of Network
PCPs from 13 to 24.
CARE CENTER COSTS. Care center costs were $2,157,549 or 65.1% of net
revenue for the year ended June 30, 1995 compared to $1,075,365 or 49.6% of net
revenue for the year ended June 30, 1994. These increases resulted from the
increases in the number of Network PCPs from 13 to 24.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1,587,481 or 47.9% of net revenue for the year ended June 30, 1995
compared to $288,621 or 13.3% of net revenue for the year ended June 30, 1994.
These increases resulted primarily from (i) increased compensation expenses from
development of the Company's corporate management team, as well as the formation
of its marketing, acquisitions, network development and care management
functions and (ii) additional organizational costs from developing physician
networks.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $35,367 or 1.0% of net revenue for the year ended June 30, 1995
compared to $17,871 or 0.8% of net revenue for the year ended June 30, 1994.
These increases resulted primarily from acquiring intangibles from, acquiring
medical practice assets from and executing employment agreements with Equity
Physicians, as well as purchasing certain fixed assets.
INTEREST AND OTHER INCOME. Interest and other income was $199,166 or 6.0%
of net revenue for the year ended June 30, 1995 compared to $85,442 or 3.9% of
net revenue for the year ended June 30, 1994.
INTEREST EXPENSE. Interest expense was $30,690 or 0.9% of net revenue for
the year ended June 30, 1995 compared to $16,153 or 0.8% of net revenue for the
year ended June 30, 1994. These increases resulted primarily from the increase
in the level of borrowings.
INCOME TAX EXPENSE. Because it incurred losses during 1995 and was an
S-corporation in 1994, the Company did not have a provision for income taxes.
NET INCOME (LOSS). The Company had a net loss of $2,056,834 for the year
ended June 30, 1995 compared to net income of $171,950 for the year ended June
30, 1994.
LIQUIDITY, CASH FLOW AND CAPITAL RESOURCES
OVERVIEW. The Company requires capital primarily to acquire certain medical
practices from Equity Physicians, to develop and install information systems for
care management functions (necessary for the management of provider risk-
18
<PAGE>
sharing contracts), for billing and collection services and to meet working
capital requirements to cover operating expenses. Through June 30, 1996, the
Company had met its cash requirements primarily through private placements of
preferred stock and through bank borrowings. As of June 30, 1996, the Company
had cash and cash equivalents of approximately $1,400,837, and as of September
30, 1996 had cash and cash equivalents of approximately $6,300,000. The Company
intends to meet its cash requirements after June 30, 1996 through a combination
of some or all of the following sources of capital: (i) up to $20,000,000 from
the proceeds of the sale of Series C Preferred Stock, (See "--Subsequent
Events"), (ii) up to $10,000,000 from the establishment of the First National
Bank Facility (See "--Subsequent Events"), (iii) up to $40,000,000 from the
private placement of subordinated notes (which may contain warrants) and (iv) up
to $20,000,000 from the private placement of Series D Preferred Stock (See
"--Subsequent Events").
Capitation arrangements generally have a favorable impact on cash flow
because the Company receives capitation revenue prior to incurring costs
associated with services provided under those contracts. Certain risk pool
arrangements negatively impact cash flow because certain medical service
expenses in connection with these arrangements are not finalized and settled by
the Company until significantly after it has received payment for the services.
LIQUIDITY. At June 30, 1996, the Company had working capital and available
credit facilities of approximately $1,431,204. At September 30, 1996, the
Company had working capital and available credit facilities of approximately
$5,500,000.
CASH FLOW. Net cash used in operating activities was $5,095,979 for the
year ended June 30, 1996 compared to $1,373,833 for the year ended June 30,
1995. The use of cash for operating activities resulted primarily from (i)
$6,646,423 in net losses, (ii) a $1,271,016 increase in accounts receivable
offset by (iii) a $2,689,914 increase in accrued and other liabilities.
Net cash used in investing activities was $2,006,362 for the year ended
June 30, 1996 compared to $380,362 for the year ended June 30, 1995. The Company
used $2,133,391 and $241,067 of cash for the acquisition of certain medical
practices and other fixed assets during the years ended June 30, 1996 and 1995,
respectively.
Net cash provided by financing activities was $8,371,817 for the year ended
June 30, 1996 compared to $1,780,942 for the year ended June 30, 1995. (See
"--Capital Resources".)
CAPITAL EXPENDITURES. The Company has entered into binding letters of
intent for the acquisition of certain medical practices which, if completed,
would require approximately $2,500,000 in cash and has not committed to any
material additional capital expenditures. Management intends to finance these
expenditures from available capital sources. If additional capital sources are
secured, the Company intends to acquire additional medical practices as well as
incur certain additional fixed assets (See "--Subsequent Events").
CAPITAL RESOURCES. On February 24, 1995, the Company issued 1,000,000
shares of Series A Preferred Stock to St. Joseph's Medical Center, Inc. (the
"Series A Preferred Stockholder") in exchange for $2,000,000 in cash and
$3,000,000 in a note (the "Series A Note"). The proceeds from this initial
issuance were used to fund the formation of the Company and for the acquisition
of certain medical assets from medical practices of certain Equity Physicians,
the incurrence of corporate expenses and the development of infrastructure in
conjunction with the Company's business strategy.
On September 27, 1995, the Company received $500,000 in cash payments on
the Series A Note from the Series A Preferred Stockholder. These proceeds were
used to fund corporate expenses and the continuing development of the Company's
infrastructure.
On December 1, 1995, the Company issued 355,556 shares of Series B
Preferred Stock to Med-Lantic Management Services, Inc. ("the Series B Preferred
Stockholder") in exchange for $4,000,000 in cash and entered into an agreement
("the NationsBank Credit Facility Agreement") with NationsBank of Maryland, N.A.
("NationsBank") as agent, which provides a revolving bank credit facility ("the
NationsBank Credit Facility") with a maximum availability of $4,000,000.
Advances under the NationsBank Credit Facility bear interest at the Company's
option at either NationsBank prime rate or the Eurodollar rate plus 0.75%. The
NationsBank Credit Facility expires on December 31, 1997, and is renewable, at
the sole discretion of NationsBank, for two additional periods of one year each.
Loans made pursuant to the NationsBank Credit Facility are guaranteed by
the Company's Series B Preferred Stockholder. In exchange for the guarantee of
the NationsBank Credit Facility, the Company issued 88,889 warrants to the
Series B Preferred Stockholder. The guarantee is collateralized by a security
interest in certain contract rights, including rights to the Company's patient
and global capitation receivables, under the PSO Agreements between the Company
and Core Medical
19
<PAGE>
Groups. Upon redemption of the Series B Preferred Stock in the event of the
issuance of junior preferred stock to a holder whose interest are deemed adverse
to the guarantor, the Company is required to obtain a release of the guarantee.
The proceeds from the issuance of the Series B Preferred Stock were used
for the acquisition of certain medical practices from Equity Physicians, the
incurrence of corporate expenses and the development of the Company's
infrastructure in conjunction with the Company's business strategy. The proceeds
from the NationsBank Credit Facility were used for the acquisition of certain
medical practices from Equity Physicians, the funding of operating expenses and
the funding of capital expenditures. At June 30, 1996 and September 30, 1996
approximately $3,400,000 and $3,600,000, respectively were outstanding under the
NationsBank Credit Facility.
On June 25, 1996, the Company received $1,000,000 in additional cash
payments on the Series A Note from the Series A Preferred Stockholder. These
proceeds were used to fund the incurrence of corporate expenses and the
continuing development of infrastructure in conjunction with the business
strategy.
The Company may receive up to $1,500,000 in additional cash payments on the
Series A Note from the Series A Preferred Stockholder, subject to borrowings
under the Bridge Loan Facility described below.
(For a discussion of the terms of conversion of the Preferred Stock into
Class C Common Stock, see "Description of Capital Stock".)
SUBSEQUENT EVENTS. On August 15, 1996, the Company established a $1,500,000
bridge loan facility (the "Bridge Loan Facility") with First National Bank of
Maryland, N.A. ("First National"). The Bridge Loan Facility is collateralized by
certain assets of the Company and its affiliates and is guaranteed by the Series
A Preferred Stockholder. Advances under this facility bear interest at a rate of
6.71% per annum. Unless extended, the Bridge Loan Facility matures on October
14, 1996. The Company intends to replace the Bridge Loan Facility with a
$10,000,000 credit facility with First National (the "First National Credit
Facility"). As of October 4, 1996, approximately $983,000 had been advanced
under the Bridge Loan Facility to fund corporate expenses. Although there can be
no assurances the Company will obtain the First National Credit Facility, the
Company is proceeding with the loan approval process with the First National
Bank. The Company believes, based on discussions with First National and the
Series A Preferred Stockholder, that if the loan approval process is not
completed before the maturity date of the Bridge Loan Facility, that the
maturity date will be extended until such time that the loan approval process is
completed. In the event the Company is unable or unwilling to secure the First
National Bank Credit Facility or the maturity date of the Bridge Loan Facility
is not extended, the Bridge Loan Facility will be repaid from the Company's
available cash.
On September 4, 1996, the Company issued 428,571 shares of Series C
Preferred Stock to Genesis Health Ventures, Inc. (the "Series C Preferred
Stockholder"), in exchange for $7,500,000 in cash. The Company will issue
142,857 additional shares of the Series C Preferred Stock in exchange for
$2,500,000 in cash prior to December 31, 1996 which represents an obligation of
Genesis that must be fulfilled unless the Company is in breach of any of its
loan agreements. The proceeds from these issuances (the "Initial Genesis
Funding") will be used to fund corporate expenses in conjunction with the
business strategy and the acquisition of medical practices or IPA contracting
rights. The Company may issue up to 500,000 additional shares of the Series C
Preferred Stock in exchange for up to $10,000,000 in cash (the "Additional
Genesis Funding") if certain Medicare capitated milestones are achieved.
The Company intends to obtain up to $40,000,000 from the proceeds of
private placement of Subordinated Notes (the "Subordinated Notes"). Although the
terms of the Subordinated Notes have not been negotiated, the Subordinated Notes
are expected to include warrants to purchase shares of Class C Common Stock and
mandatory and optional redemption features. The Company also intends to obtain
up to $20,000,000 from the proceeds of a private placement of Series D Preferred
Stock, the terms of which have not yet been negotiated. The Company's ability to
consummate the First National Credit Facility or the Subordinated Notes is
subject to the consent of the holders of the Series A, Series B and Series C
Preferred Stock under certain circumstances. (See "Risk Factors--Liquidity:
Restrictions on Financing".)
Until the Company and its Payors attract an adequate number of Capitated
Lives in Global Capitated Contracts, the Company expects to incur operating
losses and experience negative operating cash flows. The Company believes that
its cash on hand, the $2,500,000 to be received on or before December 27, 1996
from the holder of Series C Preferred Stock, and the balance remaining available
under the NationsBank Credit Facility, will be sufficient to meet the Company's
immediate working capital needs. However, in the event that the Company either
has not attracted an adequate number of Capitated Lives in Global Capitated
Contracts in order to offset operating expenses, or has not secured some
substantial portion of the additional capital described above, the Company's
operating results and financial condition could be materially and adversely
affected.
20
<PAGE>
In the event that the Company is successful in obtaining the additional
capital described above, in addition to the commitments for capital expenditures
described above (see "--Capital Expenditures"), the Company intends to expend
capital on improving information systems, expanding corporate infrastructure,
and to acquiring medical practices. There can be no assurance that the Company
will be able to establish a First National Credit Facility, consummate an
offering of Subordinated Notes, close the additional issuance of Series C
Preferred Stock pursuant to the Additional Genesis Funding, or consummate an
offering of Series D Preferred Stock on terms favorable or acceptable to the
Company. The inability of the Company to obtain such funding, either in whole or
part, would impair the Company's ability to make intended capital expenditures
and to execute its planned strategy and therefore could have a material adverse
effect on the Company's results of operations and financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results and financial condition of the Company could
be materially and adversely affected by a number of factors such as: risks
relating to the Company's growth strategy including competition for expansion
opportunities, integration risks, dependence on HMO Enrollee growth and the
ability to raise the capital required to support growth; the capitated nature of
revenues and control of healthcare costs; exposure to professional liability;
healthcare reform and government regulation; and the Company's ability to sell
its services profitably, successfully increase market share and manage expense
growth relative to revenue growth. See "Risk Factors."
BUSINESS
INDUSTRY
HCFA estimates that 1995 national health spending was approximately one
trillion dollars, with physicians controlling more than 80% of overall
expenditures. Physicians have traditionally provided medical care on a
fee-for-service basis, which provides few incentives for the efficient
utilization of resources and has contributed to increases in health care costs
that are significantly higher than historical inflation rates. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care, and employers, individuals and the government have increasingly
turned to HMOs and other forms of managed care in an attempt to manage health
care costs more effectively. The number of individuals enrolled in HMOs grew
from 12.5 million Enrollees in 1983 to 54.0 million in 1994, a 14.6% compound
annual growth rate. According to industry sources, there are over 600 HMOs
currently operating in the United States, covering approximately 20% of the U.S.
population. Moreover, Federal and State governments are increasingly using HMOs
to cover health benefits under Medicare and Medicaid programs. The Company
believes that overall enrollment in HMOs will continue to increase due to the
fact that HMOs generally offer lower overall premium costs than traditional
fee-for-service indemnity health insurance.
Health care in the United States historically has been delivered through a
fragmented system of health care providers, including individual or small groups
of PCPs and specialists. According to the American Medical Association,
approximately 565,000 physicians are actively involved in patient care in the
United States, with approximately 70% of these physicians, or 397,000,
practicing individually or in a two person group. Industry sources estimate that
the physician practice management market is $200 billion.
In an effort to manage their costs and minimize their risk, HMOs are
shifting from fee-for-service payments for physicians and are increasingly
utilizing "capitation" arrangements. Under capitation arrangements, physicians
receive a fixed monthly fee per assigned enrollee, and in return provide all
services required by such Enrollee in specified areas. Under these arrangements,
physicians assume the risk that they will be able to provide medical care at
costs less than the capitation payment. The Company believes that traditional
PCP and small group specialty practices are at a disadvantage in a managed care
environment because they typically have high operating costs, little bargaining
power with HMOs and other Payors and little or no information or data regarding
utilization or the total health care costs of treating their patients, and
therefore are unable to assess the business risks of managed care. In addition,
these physician practices almost always have insufficient capital to purchase
new technologies and lack the sophisticated systems necessary to track patient
data and performance and to contract effectively with HMOs and other managed
care entities. As a result, PCPs and specialist physicians are increasingly
abandoning traditional practices in favor of affiliating with larger
organizations, such as the Company.
Traditionally, the primary care or "general practice" physician has enjoyed
broad patient loyalty and continuity and has been the point of entry into the
health care system for many patients, including those who require the services
of a specialist physician. The traditional role of the PCP has been to refer the
patient to a specialist physician who is typically not affiliated with the PCP
in the practice of medicine. Fee-for-service reimbursement to, and therefore
compensation levels for, specialist
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physicians have significantly exceeded the compensation levels for PCPs. The
result is that, under a traditional fee-for-service environment, the PCP largely
controls the amount of care their patients receive without any information about
the cost or efficacy of the care or sharing in any of the revenues generated by
that care.
The Company believes that its strategy of establishing and consolidating
Core Medical Groups, IPAs and related networks based upon PCPs, and entering
into arrangements with specialist networks, to compete in the managed care
marketplace will result in significant revenues from capitated contracts with
HMOs and other Payors to pay for flexible managed care of patients.
STRATEGY
The Company's strategy is based upon the concept that recent changes in the
health care industry have created an opportunity to establish physician provider
groups and IPAs that can provide a broad range of medical services to patients
and prepaid Managed Care members, more efficiently and profitably than is
possible under the traditional "fee-for-service" or "HMO network" models. The
Company believes that the development of an integrated health care delivery
system will allow it to negotiate Global Capitated Contracts with HMOs and other
Payors that will enable the Company to reduce administrative costs and derive
revenues by encouraging preventive medicine and by the appropriate utilization
of medical resources. The key elements of this strategy are as follows:
INTEGRATING HEALTH CARE PROVIDERS INTO COMPREHENSIVE NETWORKS. The Company
consolidates individual or groups of PCPs, specialists, hospitals and other
providers in the Baltimore and Washington metropolitan areas and surrounding
regions into primary care-driven comprehensive health care networks, permitting
the Company to assume full risk under contracts with Managed Care Plans for
certain health care services. Physicians will enter employment, IPA, joint
venture or other contractual relationships with the Company, while the Company
will negotiate favorable rates, to the extent feasible, from hospitals and other
providers of medical services. All participants must agree to follow the
Company's PCP-driven clinical protocols and procedures, and are closely
supervised by the PCPs. The Company believes that its health care delivery
networks (i) provide physicians with greater access to managed care contracts by
facilitating contractual relationships with multiple HMOs or other Payors, (ii)
establish a single point of entry into an integrated health care delivery
network for HMOs and other Payors, and (iii) offer patients a comprehensive
range of high quality medical care. The Company's development of its healthcare
network is currently focused on the Baltimore and Washington metropolitan area
and surrounding areas. After the establishment of its network in this market,
the Company may expand outside of this region.
ATTRACTIVE TO PHYSICIANS. The Company seeks to be attractive to physicians,
and particularly to PCPs. The Company is dedicated to the creation of
professionally managed networks that grant physicians clinical autonomy and the
ability to practice medicine using clinical protocols and procedures developed
in cooperation with fellow physicians. The Company's strategy is to have a
network structure that allows physicians greater access to managed care
contracts and hospital case management than they could obtain independently, and
relieves physicians of burdensome administrative responsibilities.
FOCUS ON MANAGED CARE. The Company designs its physician-driven health care
delivery networks to meet the needs of HMOs, other Payors and patients, to
identify and recruit primary and specialty care physicians, hospitals and other
providers and to integrate such providers into networks that provide coordinated
medical coverage to such Payors' Enrollees. The Company seeks to benefit from
the desire of Payors and employers to reduce health care costs and risks, and
the trend toward prepaid managed health care. Rather than entering into an
exclusive arrangement with any single Payor, the Company seeks contracts with a
risk sharing arrangement, including Global Capitated Contracts, with each of the
HMO Payors in a region in which Network Physicians and other physicians operate
their medical practices. Because the Company's networks are PCP-driven and
patient-PCP relationships are typically strong, the Company expects that the
relatively large, pre-existing patient base of such PCP practices will be
attractive to Payors. The Company believes that its emphasis on wellness network
structure and management techniques (including the collection of meaningful
data, information systems, care utilization and quality management systems,
referral procedures, risk management programs, assistance with physician
credentialing and contracting with Payors) will enable it to effectively contain
costs and negotiate favorable capitation and shared risk arrangements.
MEDICARE MANAGED CARE. An important component of the Company's strategy is
the enrollment of Medicare-eligible persons in the Medicare managed care plans
with which the Company contracts. Reimbursement rates for Medicare patients are
considerably higher than for non-Medicare patients, reflecting the greater
historical expense of providing care to Medicare patients. HCFA estimates that
as of 1993 there were approximately 546,000 Medicare recipients in Maryland,
including 306,000 in the greater Baltimore area, and that only approximately
39,000 are currently enrolled in HMOs in the state of Maryland. The Company's
results of operations are highly dependent on its ability to convert its present
portion of Network
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Physicians' current Medicare fee-for-service patients to Medicare managed care
plans and attract new Medicare patients that enroll in Medicare HMOs with whom
the Company contracts.
The Company currently has a Medicare Global Capitated Contract with Health
Care Corporation of the Mid-Atlantic and a Medicare Global Capitated Contract
with Chesapeake Health Plan under which the Company receives capitation payments
on a per member per month basis for each subscriber who participates in one of
the plans and is enrolled with a Network Physician. For the Medicare patients
enrolled in the plans contracting with a Network Physician, the Company receives
capitation payment revenue, assumes the risk of the cost of providing care to
the patients, and seeks to earn revenues by encouraging preventative medicine,
high quality care and appropriate utilization of medical resources.
EFFECTIVELY MANAGE THE DELIVERY OF MEDICAL CARE. The Company seeks to
deliver quality medical care while controlling costs and ensuring patient
satisfaction. Accordingly, the Company seeks qualified physicians and
coordinates the provision of health care services among the physicians,
hospitals, and other providers within its networks. The Company seeks (i) to
change the focus of health care utilization to foster health promotion at the
PCP and care manager level, (ii) to reduce specialist and other provider costs
through early and aggressive intervention by affiliation with fewer specialists
who will benefit from increased Managed Care activities at lower reimbursement
rates, and (iii) to reduce hospital, particularly inpatient, costs through more
efficient utilization of lower cost components of the health care delivery
system when appropriate without sacrificing quality. In addition, the Company
will monitor the delivery of high-quality medical care through the development
and implementation of information systems tailored to managed care. The Company
believes that much of the high cost of health care is caused by the lack of
incentives in the health care system to help patients avoid high-cost, episodic
care, and excessive utilization of high cost services. The Company believes that
lower cost care, such as outpatient or home care, where appropriate, is both
preferable to the patient and less expensive to the Payor.
EXPANSION STRATEGY. The Company must actively develop or consolidate
existing and new markets through selective acquisitions and joint ventures. The
Company develops existing markets by (i) capturing additional revenues from
existing practices as patients migrate from traditional fee-for-service plans to
capitated managed care programs, (ii) adding new physicians to existing
networks, and (iii) contracting with Payors to expand the number of capitated
lives within existing physician practices.
HISTORY OF THE COMPANY
INITIAL TRANSACTIONS. The Company was incorporated in June 1994 and
commenced operations on February 24, 1995. The Company is the substitute
corporate entity formed to reorganize the business of Baltimore Medical Group,
P.A. ("BMGPA"). BMGPA was incorporated in January 1993 and commenced operations
in May 1993.
At the time of the initial formation of BMGPA, the physician owners created
BMGPA as a primary care-driven provider group that would ultimately create
enough critical mass effectively to compete in the rapidly changing health care
market. The physicians of BMGPA also planned the formation of one or more
business entities to provide the management, administrative, contracting,
recruiting and marketing services needed by the physicians. The Company was
organized to provide, or cause to be provided, all of the business services that
were required by BMGPA other than the provision of medical care to patients. In
February 1995, the Company commenced operations by (i) reorganizing BMGPA and
facilitating the transfer of its laboratory assets to Baltimore Medical Group,
LLC, the Company's first Core Medical Group, (ii) assuming exclusive management
responsibility and control over the practice assets and employees of the 15
BMGPA physicians, and (iii) issuing Class B Common Stock of the Company to a
partnership owned primarily by the 15 BMGPA physicians. Scott Rifkin, M.D., Alan
Kimmel, M.D., J. David Nagel, M.D., Peter LoPresti, D.O. and Robert Ancona,
M.D., five of the original members of Baltimore Medical Group, LLC, are
currently directors of the Company.
The Company received the BMGPA physicians' assets in a reorganization
through Medical Holdings Limited Partnership, a Maryland limited partnership
("MHLP"), a stockholder of the Company. In February 1995, at the time of the
establishment of Baltimore Medical Group, LLC, MHLP was formed and BMGPA
physicians transferred certain assets of their medical practices, excluding
laboratory and other ancillary assets, to MHLP in exchange for an aggregate
consideration of (i) limited partnership interests in MHLP that are currently
equal to approximately a 25.5% interest in MHLP, (ii) approximately $23,500 in
cash, and (iii) promissory notes with an aggregate face value of approximately
$471,200. In order to comply with applicable regulatory requirements, the
laboratory and other ancillary assets were transferred directly to Baltimore
Medical Group, LLC by BMGPA. MHLP simultaneously conveyed substantially all of
its remaining assets to the Company, and the Company issued to MHLP 1,100,000
shares of the Company's Class B Common Stock. As a result of a subsequent stock
split, MHLP now holds 2,200,000 shares of the Company's Class B Common Stock.
The physician owners of BMGPA became members and employees of Baltimore Medical
Group, LLC, and have continued the practice of medicine
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through Baltimore Medical Group, LLC. The Company and Baltimore Medical Group,
LLC entered into a PSO Agreement pursuant to which the Company provides Managed
Care contracting and practice management services to Baltimore Medical Group,
LLC, leases to Baltimore Medical Group, LLC, the assets used by the physicians
in their medical practices, and provides non-medical employees to Baltimore
Medical Group, LLC. See "Development of Integrated Health Care Delivery
System--Focus on Primary Care Physicians."
Under the Partnership Agreement and other documents related to MHLP, shares
of the Company's Class B Common Stock held by MHLP will be distributed to the
partners of MHLP upon a change in control of the Company, including an
underwritten public offering, or other event of liquidation of MHLP. The General
Partner of MHLP is BMGGP, Inc., a Maryland corporation, which owns a one percent
(1%) interest in MHLP. The stockholders of BMGGP, Inc., are 17 of the initial
members of Baltimore Medical Group, LLC, and the 17 initial limited partners of
MHLP, including Drs. Rifkin, Kimmel, Nagel, LoPresti and Ancona. Accordingly,
the members of Baltimore Medical Group, LLC, indirectly own shares of the Class
B Common Stock through their limited partnership interests in MHLP and, for the
initial 17 members of Baltimore Medical Group, LLC, as stockholders of BMGGP,
Inc.
Since the formation of Baltimore Medical Group, LLC and MHLP, additional
physicians have sold their medical practices and acquired limited partnership
interests in MHLP and membership interests in Baltimore Medical Group, LLC,
Carroll Medical Group, LLC, Cumberland Valley Medical Group, LLC or Doctors
Health Montgomery, LLC. In addition, such Equity Physicians have become
employees of one of these Core Medical Groups. In some instances, Equity
Physicians received shares of the Company's Class B Common Stock directly in
lieu of partnership interests in MHLP. Following the reorganization of BMGPA in
February 1995, the Company acquired 15 practices during calendar year 1995 for
an aggregate consideration of (i) limited partnership interests in MHLP that are
currently equal to approximately a 21% interest in MHLP, (ii) approximately
$78,300 in cash, and (iii) promissory notes with an aggregate face value of
approximately $572,800. From January 1, 1996 through October 4, 1996, the
Company acquired 26 additional practices for an aggregate consideration of (i)
limited partnership interests in MHLP that are currently equal to approximately
a 14.1% interest in MHLP, (ii) 304,000 shares of the Company's Class B Common
Stock, (iii) approximately $656,381 in cash, and (iv) promissory notes with an
aggregate face value of approximately $1,521,461.
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SET FORTH BELOW IS AN ORGANIZATIONAL CHART REFLECTING, AS OF OCTOBER 4,
1996, THE EQUITY, CONTRACTUAL AND OTHER RELATIONSHIPS AMONG THE COMPANY, ITS
STOCKHOLDERS, ITS CORE MEDICAL GROUPS, AND OTHER PARTICIPANTS IN THE COMPANY'S
INTEGRATED HEALTH CARE DELIVERY SYSTEM.
(Organizational chart appears here)
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The Company is constructing its Integrated Health Care Delivery System by
acquiring the assets and/or managed care contracting rights of medical practices
throughout the Baltimore-Washington metropolitan area and contiguous regions.
EXPANSION INTO CARROLL COUNTY, MARYLAND. In November 1995, the Company
acquired the practices of five primary care physicians and formed Carroll
Medical Group, LLC ("Carroll Medical Group") located in Carroll County,
Maryland. Like the majority of the Baltimore Medical Group, LLC physicians,
these doctors acquired cash and limited partnership interests in MHLP and became
members of and employed by Carroll Medical Group. Carroll Medical Group entered
into a PSO Agreement with the Company on terms substantially identical to the
Baltimore Medical Group, LLC PSO Agreement. In September 1996, an additional
physician joined Carroll Medical Group.
EXPANSION INTO MONTGOMERY COUNTY, MARYLAND. In February 1996, the Company
entered into binding letters of intent to acquire the primary care practices of
21 physicians in Montgomery County, Maryland. The Company consummated
transactions involving nine physicians through October 4, 1996 and formed
Doctors Health Montgomery, LLC ("Doctors Health Montgomery"). The Company
expects to consummate the remaining twelve transactions in October and November
1996. Doctors Health Montgomery entered into a PSO Agreement with the Company.
EXPANSION INTO ANNE ARUNDEL COUNTY, MARYLAND. In February 1996, the Company
entered into binding letters of intent to acquire the primary care practices of
nine physicians in Anne Arundel County, Maryland. The Company expects to
consummate these transactions in October 1996.
EXPANSION INTO ALLEGANY COUNTY, MARYLAND. In May 1996, the Company
consummated the acquisition of five primary care physician practices located in
Cumberland, Maryland, which on May 1, 1996, formed the Cumberland Valley Medical
Group ("CVMG"). Like Carroll Medical Group and Doctors Health Montgomery, CVMG
entered into a PSO Agreement with the Company on terms substantially identical
to the Baltimore Medical Group, LLC PSO Agreement. The Company is establishing
an IPA in Allegany County.
EXPANSION INTO WASHINGTON COUNTY, MARYLAND. The Company has established an
exclusive Managed Care contracting arrangement with Quality Healthcare IPA
("QHC"), an IPA representing approximately 19 primary care physicians in
Washington County, Maryland. Eleven of the 19 physicians have agreed to conduct
all managed care contracting through the Company and QHC on an exclusive basis.
Pursuant to the IPA agreement, the Company is the exclusive Managed Care
contracting entity on behalf of the IPA's PCPs, and is developing a network of
specialists.
EXPANSION INTO HARFORD COUNTY, MARYLAND. The Company has established a
Managed Care contracting arrangement with a group of 11 primary care physicians
in Harford County, Maryland. Pursuant to the IPA Agreement, the Company is the
exclusive Managed Care contracting entity for Medicare managed care patients of
this IPA.
EXPANSION INTO NORTHERN VIRGINIA. The Company has entered into a letter of
intent with an IPA based in Springfield, Virginia. Pursuant to the letter of
intent, the Company will form a Core Medical Group and an Exclusive IPA
consisting of primary care physicians to provide medical care throughout
Northern Virginia. As of October 4, 1996, the IPA had approximately 126 PCP
participating physicians, approximately 60 of whom have indicated an interest in
joining a Core Medical Group or conducting managed care contracting solely
through the Company. Completion of the transaction is subject, among other
things, to compliance with Virginia blue sky laws and due diligence.
JOINT CONTRACTING ARRANGEMENTS IN BALTIMORE. The Company has entered into a
Contracting and Managed Care Services Agreement with an organization which
operates health care facilities in Baltimore City and employs and contracts with
approximately 42 physicians in Maryland. Under the arrangement, the Company acts
as the organization's exclusive contracting entity for Medicare managed care
contracts. The arrangement involves a sharing of managed care surplus and
losses.
FORMATION OF CARDIOLOGY CORE MEDICAL GROUP. The Company has entered into a
letter of intent with the Board of Directors of a 16-physician cardiology
practice, providing services to patients in the Baltimore metropolitan area, to
acquire the practice assets pursuant to a merger. The practice would receive
shares of Class B Common Stock and the practice would become a separate Core
Medical Group dedicated to cardiology (the "Cardiology Core Medical Group"). The
Company believes that it is probable that the acquisition will be completed in
October or November 1996. The Company intends to acquire additional specialists
and create either stand-alone Core Medical Groups or integrate such acquired
specialists into existing Core Medical Groups.
The Company expects it will continue to expand by increasing the number of
physicians in each Core Medical Group, forming new Core Medical Groups, entering
into Non-Exclusive and Exclusive IPA Agreements with physicians and pursuing
acquisition and expansion opportunities in the Baltimore and Washington
metropolitan area and surrounding regions.
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OVERVIEW OF BUSINESS ACTIVITIES
The Company's Integrated Health Care Delivery Network includes PCPs and
other physicians who transfer certain medical practice assets to the Company and
become employees of a Core Medical Group, such as Baltimore Medical Group. PCPs
may also join Independent Practice Associations ("IPAs"). The Company also
enters into network contracts with specialists who agree to provide services to
managed care patients referred by PCPs and, in certain cases, acquires the
medical practices of such specialists. A Network Physician who becomes employed
by a Core Medical Group agrees to conduct his medical practice only through the
Core Medical Group and to permit the Company to act as his exclusive agent for
the purpose of negotiating managed care risk and other contracts in which the
PCP must participate. The PCP's obligation to participate in managed care
contracts negotiated by the Company is set forth in the PCP's Employment
Agreement with the Core Medical Group and the PSO Agreement between the Core
Medical Group and the Company. If a PCP joins a Company-sponsored IPA, the PCP
agrees to participate in managed care contracts negotiated and administered by
the Company on either an exclusive or non-exclusive basis.
When a physician becomes an employee of one of the Company's Core Medical
Groups, the Company transitions any primary care Managed Care contracts in which
the physician participates into the Company's group contract or the applicable
Core Medical Group contract if any is in effect with respect to that Payor. If
the Company or the Core Medical Group does not have a PCP group contract in
place with the Payor and the Payor allows the contract to be assigned to the
Company, the Company will maintain the contract on the physician's behalf under
the same contract terms. The reimbursement provisions under such contracts are
exclusively for primary care on either a fee-for-service or capitated basis.
The Company negotiates a variety of risk-sharing arrangements with HMOs and
other Payors, including global capitation contracts (and sub-capitation
contracts) pursuant to which (i) such Payors pay the Company a fixed amount per
Enrollee per month and the Company is responsible for meeting all of the primary
and specialty care, hospital and certain other related health care needs (or
specified portions thereof) of such Enrollee and (ii) the Company pays PCPs and
specialists, hospitals and other providers within its network or those having
other contractual arrangements with the Company for providing the required
medical care. The ability of the Company to achieve and maintain profitability
will depend to a great degree on (i) reducing the incidence of high cost acute
care episodes, primarily through wellness, prevention initiatives and aggressive
care management, and (ii) negotiating compensation arrangements that result in
payments to the Company that exceed the cost of care by the Company to PCPs,
specialists, hospitals and other providers. The Company will seek to achieve
this result by negotiating reduced fee-for-service, sub-capitation and other
arrangements with PCPs, specialists, hospitals and other health care providers,
creating economic incentives for all Network Physicians and other providers with
whom the Company contracts to utilize specialists and hospitals prudently,
carefully monitoring the quality and cost of care provided to patients and
developing programs to promote wellness among patients.
The Company intends to earn most of its revenues from sources other than
the primary care component of Global Capitated Contracts, such as the
non-primary care component of any capitation fees which are payable to the Core
Medical Group, revenues for other services provided by the Core Medical Group
that the Core Medical Group is not entitled to retain and amounts earned as a
bonus or shared risk distribution under managed care contracts. The Company may
negotiate and/or establish the amount of some of such revenue sources without
consultation with the Core Medical Group.
The Company intends to offset most of the cost of its centralized patient
data and information systems through profits earned from contracting and
practice management services and through profits earned from successful
management of global capitation agreements with HMOs, rather than through
separate fees charged for specific information systems and management services.
Physicians participating in the Company's networks may derive benefit from
the successful implementation of the Company's strategy in several ways. A
physician to whom Securities are issued in the various affiliation transactions
described elsewhere herein will benefit through the ownership of Securities if
the Company achieves and grows in profitability. A physician, whether or not he
becomes an owner of Securities, may also receive capitated income from the
Company's managed care contracts and may also receive cash bonus payments out of
the bonus pool established by the Company for Network Physicians.
As of October 4, 1996, there were 694 Network Physicians in six regional
networks throughout the state of Maryland, including approximately 176 PCPs, 95
obstetrician-gynecologists and 423 specialist physicians. Of these,
approximately 90 were Equity Physicians who had transferred, or entered into
binding letters of intent or otherwise agreed to convey, certain practice assets
of their practices to the Company and become employees of Core Medical Groups.
As of such time, the
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networks established by the Company were providing services in Central and
Western Maryland. As described in "Strategy--Expansion Strategy," the Company
intends to enter into selective medical practice acquisitions and other
contractual arrangements that will result in the Company operating in areas
beyond those in which it currently operates.
OPERATIONS
The Company's operations to date have consisted of recruiting and acquiring
PCP and other physician's practices, negotiating and managing risk, capitated or
fee-for-service contracts with HMOs and other Payors, contracting with
individual specialists, specialist networks and IPAs, developing and
implementing a marketing program to convert Medicare patients from traditional
fee-for-service insurance to Medicare HMO programs, and providing billing,
accounting, legal, contracting support and care management services to its
Equity Physicians and certain Network Physicians. Beginning in February 1995
with respect to Baltimore Medical Group, December 1995 with respect to Carroll
Medical, May 1996 with respect to Cumberland Valley Medical Group, June 1996
with respect to Quality Healthcare IPA, September 1996 with respect to the
Doctors Health Montgomery Medical Group, and October 1996 with respect to the
Harford County IPA physicians, the Company has negotiated managed care contracts
with HMOs and other Payors on behalf of the PCP practices of such medical
groups. The Company also manages primary care IPAs in Central and Western
Maryland.
The Company also maintains primary care only contracts on behalf of Network
PCPs under similar or improved non-risk contract terms. The reimbursement
provisions under such contracts are exclusively for primary care on either a
fee-for-service (FFS) or capitated basis. The Company currently maintains such
contracts for certain of its PCPs with Payors including Aetna, CIGNA, NYL Care,
Health Plus, Principal Healthcare of the MidAtlantic, Prudential, Blue
Cross-Blue Shield of Maryland, USA Health Network and Preferred Health Network.
The Company also has entered into new group fee-for-service contracts with
various Payors including Preferred Health Network, Metra Health, MAMSI, U.S.
Healthcare, USA Health Network, Employee Health Plan and John Hancock Health
Plan.
To date, the Company has entered into two Medicare Global Capitation
Contracts and one commercial Global Capitation Contract with Payors and is
continuing to negotiate Global Capitation Contracts with additional Payors who
conduct business in the Baltimore and Washington metropolitan area and
surrounding regions. Under these risk contracts, the Company receives a
capitation payment and must provide Enrollees with primary care and certain
specialist and hospitalization services.
In October 1995, the Company entered into a contract with
CareFirst--Freestate, an affiliate of Blue Cross-Blue Shield of Maryland
("CareFirst") pursuant to which the Company's PCPs provide medical services to
commercially insured Enrollees on a global capitated basis (the "CareFirst
Commercial Contract"). In this contract, the Company assumes risk for all
professional services and shares risk with CareFirst on institutional services.
In February 1996, the Company entered into a Global Capitated Contract with
CareFirst pursuant to which the Company's PCPs provide medical services to
Medicare patients on a global capitated basis (the "CareFirst Medicare
Contract"). The Company also receives capitation payments to provide all covered
medical services to members enrolled in that HMO and assigned to one of the
Company's PCPs. The CareFirst Medicare Contract provides that the Company will
receive a capitation payment per patient per month and pay for all medical
expenses for covered medical services based upon rates developed by the U.S.
Health Care Financing Administration ("HCFA").
In May 1996, the Company entered into a Global Capitated Contract with
Chesapeake Health Plan, an affiliate of United Healthcare, pursuant to which the
Company's PCPs will provide medical services to Medicare patients (the
"Chesapeake Contract"). Under the Chesapeake Contract, Chesapeake pays a
capitation payment (which may be increased based on enrollment) to the Company
on a per member per month basis based on the projected demographic distribution
of the patients enrolled with the PCPs, as well as the age, sex and Medicaid
eligibility of the subscribers enrolled with a Network PCP in Chesapeake's
Advantage 65 Medicare HMO programs. Under the contract, Chesapeake has delegated
to the Company the right to manage the utilization of medical services.
As of October 4, 1996, the Company had approximately 33,000 Capitated Lives
derived from the participation of 45 of the Company's 176 Network PCPs in the
Managed Care contracts of the Company, its subsidiaries and affiliates. Of these
33,000 capitated lives, approximately 30,000 participate in the Company's
commercial Gatekeeper Capitation contracts, approximately 2,200 participate in
commercial Global Capitation Contracts, and approximately 800 in Medicare Global
Capitation Contracts. The Company derives no earnings from the commercial
Gatekeeper Capitation Contracts and plans to
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convert the managed care lives in commercial gatekeeper contracts to Full Risk
and/or Global Capitated commercial contracts. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Sources of Revenues
and Earnings.") The Company believes that there are approximately 50,000
additional Medicare subscribers who are patients of the Company's Network PCPs.
The Company's ability to derive earnings from any of its capitated lives is
affected by whether the Network Physician is a member of a Core Medical Group or
a participant in an IPA.
The Company has developed and is implementing a marketing program in
conjunction with CareFirst and Chesapeake to enroll Medicare-eligible patients
in CareFirst's and Chesapeake's Medicare HMOs, respectively. The Company may
participate in other commercial and Medicare risk programs operated by other
HMOs and other Payors on a basis similar to the CareFirst and Chesapeake
arrangements.
The Company's operations also include the recruitment of specialists into
Core Medical Groups and/or developing a network of preferred provider
specialists who are paid on a discounted fee-for-service or subcapitated basis.
As of October 4, 1996, the Company had access to approximately 423 specialists
in its network pursuant to direct or indirect contractual arrangements. The
Company expects that an increasing percentage of the specialist networks will
enter into contracts that provide for compensation on a capitated basis. The
Company currently has capitated payment arrangements with Womancare IPA, a
Company-developed network of 95 physicians providing obstetrical/gynecological
services, and with outside providers of radiology and laboratory services. Under
the Company's agreements with the respective specialty network, the
participating specialist providers provide services to the Company's members
referred by a Network Physician, and the network is reimbursed on a capitated
basis. The Company owns a majority interest in Womancare IPA.
In addition, the Company's operations include the provision of traditional
management services to the individual medical practices of each Core Medical
Group, including administrative, legal and accounting services, lease
negotiations, and financial, billing and collection services. As of October 4,
1996, the Company has installed its information systems in 36 PCP offices to
facilitate development of a unified information system for referral management,
billing and collection activity, utilization review, and group purchasing and
risk management programs. As of October 4, 1996, the Company had assumed
responsibility for the billing operations of 34 PCP practices, representing 62
physicians, and one laboratory, which provides services to 31 physicians.
As of the date of this prospectus, the Company has not yet conducted
material operations through Doctors Health System-Medalie Equipment Corporation,
a wholly-owned subsidiary of the Company, except to transfer certain cardiology
equipment, to the subsidiary, or through Doctors Health System Primary Care IPA,
Inc., a wholly-owned subsidiary of the Company.
DEVELOPMENT OF INTEGRATED HEALTH CARE DELIVERY SYSTEM
CONTRACTS WITH PHYSICIANS.
The Company contracts with Network Physicians and other physicians in one
of several ways: (1) through the transfer of certain of the medical practice
assets and contracts to the Company, as a result of which the physician may
obtain, directly or indirectly, cash and/or an equity interest in the Company;
(2) through an Exclusive IPA arrangement, pursuant to which such physician
agrees to conduct all managed care contracting activity exclusively through the
Company and to take as patients any capitated patient referred by the Company up
to a certain level; (3) through a Non-Exclusive IPA arrangement, in which the
physician may contract with or through other IPAs but agrees to take all managed
care patients referred by the Company; or (4) a myriad of other contractual
arrangements involving an IPA, joint venture or other arrangement in which the
physician may contract with others and may also elect to accept or not any
patients referred by the Company. The Company's goal is to remain flexible and
to accommodate the needs of physicians in each local market.
The Company also enters into contracts with group practice entities,
clinics and IPAs through joint venture relationships as well as the contractual
relationships described above. The use of any particular contractual arrangement
is influenced by a number of factors, including the needs of the physicians, the
type of practice in which such physicians are engaged, the geographic location
of the practice, financial considerations, regulatory concerns, and pre-existing
contracts.
FOCUS ON PRIMARY CARE PHYSICIANS.
Consistent with the Company's primary care-driven strategy, the primary
focus of the Company's contractual arrangements with physicians has been
establishing relationships with PCPs. Since the Company's inception, entities
have been formed or consolidated to conduct group medical practices as Core
Medical Groups. Each Core Medical Group is comprised of a group of physicians
under common management and with a common information system and provider number
and is
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designed to provide a full and coordinated spectrum of medical services to
patients and meet Payors' needs. To date, Core Medical Groups have been formed
in five geographic markets in Maryland using a limited liability company
organizational structure.
From February of 1995 to December 31, 1995, the Company assumed exclusive
management responsibility for and became the sole contracting entity for an
additional 15 PCP practices through Baltimore Medical Group, LLC, and Carroll
Medical Group, for a total of 32 PCP practices. Since December 31, 1995, the
Company assumed, or entered into binding letters of intent to acquire certain
assets and became the sole contracting entity for an additional 42 PCP
practices. Thus, as of October 4, 1996, a total of approximately 74 PCPs have
transferred their medical practice assets and became employees of the various
Core Medical Groups, or have entered into binding letter agreements to transfer
their medical practices and become employees.
Although the details of each transaction may differ, the practice of the
Company upon establishment of a Core Medical Group is to enter into a Practice
Participation Agreement with the Core Medical Group and each of the Equity
Physicians who is a member of such Core Medical Group, pursuant to which the
following transactions occur:
TRANSFER OF MEDICAL PRACTICES. Under the Practice Participation Agreement,
an Equity Physician transfers to the Company certain medical practice assets as
well as contract rights under certain business contracts of the medical
practice, to the extent that such rights are assignable. Although the form of
consideration paid to such Physicians may vary, typically the Physician receives
a combination of cash and Securities of the Company. For a description of such
Securities, see "Description of Capital Stock." The amount and type of
consideration payable to each Physician is determined by negotiation between
such Equity Physician and the Company. Such transactions consist of an
acquisition by the Company of certain tangible and intangible assets of the
medical practice, including contract rights, and the collection by the Company
of the accounts receivable of the Physician.
EMPLOYMENT OF PHYSICIANS BY THE CORE MEDICAL GROUP. Each Physician enters
into an Employment Agreement with the Core Medical Group of which he is a
member. Typically, Employment Agreements have a term of 10 years, during which
time the Physician will be obligated to devote his full professional time to the
practice of medicine with, for and through such Core Medical Group. As an
inducement to sign the agreement and as an incentive to remain as an
employee-physician, each "full time" PCP also may receive additional shares or
options of Class B Common Stock. The Employment Agreement provides for the
payment of a base salary and benefits and for the eligibility of such Physician
to participate in distributions from a bonus pool (each, a "Core Medical Group
Bonus Pool"). Each Core Medical Group Bonus Pool is distributed by the
Management Committee of the Core Medical Group and rewards high clinical
quality, appropriate utilization, patient satisfaction and retention, and
general cooperation and attitude. The employed physician may be eligible to
participate in such distributions in such years in which such physician meets or
exceeds such standards as may reasonably be required by the Management
Committee. See "--Operation of the Core Medical Group".
The base salary of PCPs in most Core Medical Groups is generally an amount
equal to the sum of certain revenues collected on behalf of the Core Medical
Group by the Company in respect of the physician services provided by such
physician, less the allocated costs attributable to the medical practice of, and
provision of related health care services by, such physician. The Company and
certain of the Physicians employed by Doctors Health Montgomery agreed that
Doctors Health Montgomery will provide base salaries to such Physicians. In
return for its commitment to provide financial resources, if necessary, for such
Physician's salaries, the Company will receive a percentage of the growth in
revenues generated by their medical practices and other fees.
PSO AGREEMENT WITH THE CORE MEDICAL GROUP. The Company provides managed
care contracting and practice management services to the Core Medical Groups
(and indirectly to its Physicians) through 30 year PSO Agreements (with
automatic, renewable 10 year terms) entered into between the Company and each
Core Medical Group. The following is a summary of the principal provisions of a
PSO Agreement.
The PSO Agreement typically gives the Company the exclusive right to
provide to the Core Medical Group (i) all of the non-medical management and
financial services, including provision of non-physician employees, office space
and other facilities, equipment, assets, goods and supplies, that the Core
Medical Group and its Physicians will use to engage in the practice of medicine
and (ii) other related services.
Pursuant to a typical PSO Agreement, the Company is given discretion and
authority to manage and conduct the business affairs of the Core Medical Group
and is appointed the agent and attorney-in-fact of the Core Medical Group to
enable the Company to fulfill these functions. The Company negotiates for and
enters into agreements with Payors for health care services, including managed
care contracts providing for compensation on a capitated basis, that will
obligate both the Core
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Medical Group and its Physicians to provide medical services at the levels of
compensation negotiated solely by the Company. The Company also negotiates for,
and enters into agreements with, other providers of medical services for the
provision of medical services to the Core Medical Group or to the patients of
the Core Medical Group and for the provision of medical services to such
providers by the Core Medical Group and its Physicians, all on terms and for the
compensation determined solely by the Company. The Company has a broad range of
financial responsibility and authority by the Core Medical Group pursuant to the
PSO Agreement, leaving the Core Medical Group with the right to manage only
those professional components of its business requiring a license to practice
medicine.
PSO Agreements provide that the Company is entitled to an amount equal to
the difference between the cash it collects on behalf of the Core Medical Group
and each of its physicians in receivables which have been conveyed to the
Company and the amount paid out by the Company in respect of the business costs
and expenses of the Core Medical Group. The Company will pay that amount over to
itself in each month during which there is sufficient cash in the Core Medical
Group's accounts, in the discretion of the Company, to pay the amount after
satisfying all of the Core Medical Group's business costs and expenses,
including such reserves therefor as the Company deems appropriate, and including
all accruals for unpaid base salaries of the physicians of the Core Medical
Group for prior periods. The Company may reserve the right to charge separate
fees for additional services, as agreed between the Company and the Core Medical
Group.
PSO Agreements with PCP Core Medical Groups provide that the Company may
pay to the Core Medical Group, as a Managed Care Incentive Payment, an annual
negotiated amount of up to 25% of the total amount of all Company net income
before taxes and bonuses, attributable to the provision of health care to the
Core Medical Group's managed care patients during each calendar year, not to
exceed, in the aggregate, 25% of the base salaries paid to all PCPs of the Core
Medical Group. Such payments are not required if the Company has not earned net
income during the applicable years. Such payments may be utilized by the Core
Medical Group to fund the Core Medical Group Bonus Pool in which the physician
employees of the Core Medical Group may participate. See "--Employment of
Physicians by the Core Medical Group." It is anticipated that the full amount of
any Core Medical Group Bonus Pool will be paid out by the Core Medical Group to
its physicians as bonuses in each year.
PSO Agreements that will govern the Company's relationship with specialists
will typically provide for (i) a term of 30 years with automatic, renewable 10
year terms; (ii) a commitment among the specialist group and the Company to
develop innovative, risk sharing payment arrangements; and (iii) use of
commercially reasonable efforts to provide the specialist group with managed
care referrals. Such specialist PSO Agreements will also provide for payment of
a management fee consisting of a negotiated percentage of actual operating costs
of the specialist Core Medical Group (excluding compensation to the group's
Physicians) and a percentage of collections available after payment of operating
costs, the Company's operating cost percentage, and the physician compensation.
All of the PSO Agreements in effect have terms of 30 years (with automatic
10 year renewals) and generally may be terminated prior to expiration of its
term only under limited circumstances. Generally, absent insolvency, malfeasance
or a material uncured breach, the PSO Agreement cannot be terminated by the
Company or the Core Medical Group.
OPERATION OF THE CORE MEDICAL GROUP. Each physician joining a Core Medical
Group enters into an Operating Agreement or similar agreement with each of the
other physicians in the Core Medical Group. Pursuant to the Operating Agreement,
the business and affairs of the Core Medical Group are managed under the
direction and control of a Management Committee, one of whom is the Chief
Executive Officer of the Company (or his designee) serving EX OFFICIO. The
Management Committee has the power, among other things, to determine the amount
of any or all bonuses payable pursuant to the Core Medical Group Bonus Pool
which it delegates to a Bonus Committee. The Members of the Management Committee
are elected by the affirmative vote of the Physicians of the Core Medical Group
(other than the Company designees). The Bonus Committee also establishes, in
consultation with the Company and the bonus committees of other Core Medical
Groups, practice protocols.
INDEPENDENT PHYSICIAN ASSOCIATIONS.
The Company has expanded its network by contracting with physicians in a
variety of ways through IPAs in which IPA Participant Physicians authorize the
IPA to negotiate service contracts on their behalf. In some cases, the Company
contracts with or through an existing IPA, while in other cases the Company
assists physicians who may wish to establish an IPA. The models utilized by the
Company involving IPAs consist of Exclusive IPAs, pursuant to which a physician
is obligated to conduct all managed care contracting through the Company,
Non-Exclusive IPAs, pursuant to which a physician may contract for managed care
with others but agrees to take all patients referred by the Company, and other
contractual arrangements which may involve a physician contracting for managed
care through others or choosing to accept or deny patients
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referred by the Company. In some cases, the Company may issue Securities as
incentives for physicians to enter into Exclusive IPA Agreements. The Company
may also issue Securities as compensation for the recruitment of physicians to
join the Company's Core Medical Groups or Exclusive IPAs.
COMPANY CREATED IPAS; PREVIOUSLY EXISTING IPAS: The Company may assist in
the creation of an IPA or may contract with a previously existing IPA or
independent medical group. In the case of previously existing IPAs or groups, in
addition to being subject to the various types of contractual arrangements
discussed below to which the Company is a party, the IPA and its network
physicians will also be subject to a previously existing participation agreement
among the previously existing IPA and its network physicians. In such cases, the
previously existing IPA also enters into a network agreement with the Company
which governs the contractual relations between the IPA and the Company. The
network agreement will contain provisions unique to the situation of each
existing IPA with which the Company contracts but should typically contemplate
the provision of various management services by the Company to the IPA and the
appointment of the Company as the IPAs agent and attorney-in-fact for the
purpose of negotiating managed care contracts with risk sharing arrangements for
the IPA on an exclusive or non-exclusive basis and providing other services such
as billing and information systems.
ORGANIZATION OF THE IPA: The IPA is typically organized as a corporation or
limited liability company. Each of the IPA Participant Physicians enters into an
operating agreement among each of the other Participant Physicians in the IPA.
Pursuant to such operating agreement, each Participant Physician will agree to
be bound by the by-laws of the IPA which contain substantive requirements for
participation in the IPA.
EXCLUSIVE IPAS: The IPA Participant Physician enters into an Exclusive IPA
Agreement with the Company and the IPA in which he participates, pursuant to
which the Company markets the physician to Payors, and includes the physician in
its provider network. The IPA Participant Physician may choose to participate in
Exclusive IPA Agreements for either Medicare or commercial products offered by
HMOs with whom the Company contracts, pursuant to which such physician agrees to
contract exclusively with the Company for Medicare or commercial managed care
contracts, respectively. As of the date of this Prospectus, 42 physicians were
participating with the Company's Exclusive IPAs. Although there can be no
assurances, the Company expects that additional physicians will commit to
participate in Exclusive IPAs.
Under an Exclusive IPA Agreement, an initial primary care base capitation
rate and risk-sharing arrangements are negotiated between the Company and the
IPA. The IPA Participant Physician may also be eligible to participate in a
bonus pool. A one-time incentive payment, or periodic panel growth and managed
care bonuses which may include cash or Securities, may also be payable by the
Company pursuant to an Exclusive IPA Agreement. Further, the agreement may
contain a practice option, pursuant to which the physician may elect, subject to
the satisfaction of certain conditions, to sell his or her medical practice to
the Company.
NON-EXCLUSIVE IPAS: The IPA Participant Physician enters into a
Non-Exclusive IPA Agreement with the Company and the IPA, pursuant to which the
Company markets the physician to Payors under capitation contracts and includes
the physician in its provider network. The physician reserves the right to
contract directly with HMOs or other Payors, and to participate in other IPAs,
but usually agrees to accept managed care patients referred by the Company, up
to agreed-upon levels. Other provisions of the Non-Exclusive IPA Agreement may
be similar to the provisions of the Exclusive IPA Agreement.
JOINT VENTURE ARRANGEMENT. The Company has entered into a Contracting and
Managed Care Services Agreement with an organization which operates healthcare
facilities in Baltimore City, and employs and contracts with approximately 42
physicians in Maryland. Under the arrangement, the Company acts as the
organization's exclusive contracting entity for Medicare and Medicaid managed
care contracts. The arrangement involves a sharing of Managed Care surplus and
losses between the parties.
OTHER CONTRACTUAL ARRANGEMENTS. Although other contractual arrangements may
take a variety of forms, generally these arrangements involve the IPA
Participant Physician entering into an agreement with the Company pursuant to
which the Company markets the physician to Payors but the physician reserves the
right to participate in other IPAs and to determine whether to accept managed
care patients referred by the Company.
CONTRACTING WITH SPECIALISTS, HOSPITALS AND OTHER HEALTH CARE PROVIDERS
The Company contracts with specialists, hospitals and other providers of
health care services as part of its effort to develop an integrated health care
delivery network.
CONTRACTING WITH SPECIALISTS: The Company contracts with specialist
physicians for the provision of services to the Company and the Core Medical
Groups in a variety of ways, generally consisting of employment in a Core
Medical Group,
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or contractual arrangements involving reduced fee-for-fee service or
sub-capitated arrangements. Other than employment in a Core Medical Group and
the formation of a cardiology Core Medical Group (see "Business--History of the
Company--Formation of Cardiology Core Medical Group"), arrangements with
specialists typically have terms of between one and five years. Specialists may
under appropriate circumstances also receive an equity interest in the Company.
CONTRACTING WITH HOSPITALS AND OTHER PROVIDERS: The Company contracts with
hospitals ("Participant Hospitals") and other health care providers to
participate in its managed care networks. The Company envisions that many of its
arrangements with Participant Hospitals may involve "key hospital" arrangements.
The Company and the Participant Hospital will enter into a Hospital
Participation Agreement ("Hospital Participation Agreement"), pursuant to which
the Company will agree to make the hospital the referral hospital of choice for
specified categories of managed care patients and specified categories of
service. The Participant Hospital must meet cost and quality standards and agree
to cooperate with the Company in the implementation of utilization review, to
include preadmission guidelines and processes, patient care and cost tracking,
information exchanges and management reporting systems and the development of
innovative pricing arrangements. The Company also negotiates contractual
arrangements with other health care providers (for example, home health care
aides) as needed to deliver quality and cost-effective service to patients.
Although the term of such arrangements would vary, the Company expects to
negotiate discounted fee-for-service or sub-capitated arrangements with such
providers.
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Set forth below is an chart depicting the Integrated Health Care Delivery
System:
INTEGRATED HEALTH CARE DELIVERY SYSTEM
(Chart appears here)
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PHYSICIAN RECRUITMENT
The Company recruits physicians through direct marketing efforts, Core
Medical Groups, and IPAs. The Company has a physician recruitment staff managed
jointly by the Company's Chairman, who is Director of Development, and the
Executive Vice President of Strategic Planning. The Company also employs a
Director of Recruiting, recruiting assistants and other staff. The Company also
recruits PCPs through relationships with current Core Medical Group physicians,
IPA Participants and other contacts. The Company also seeks assistance from
recruiting consulting arrangements. Such recruiting consultants provide the
Company with access to potential Network Physicians.
MANAGED CARE CONTRACTING
CONTRACTS WITH PHYSICIANS, HOSPITALS AND OTHER PROVIDERS OF HEALTH CARE.
As discussed above in "--PSO Agreement with the Core Medical Group" and
"--Independent Practice Associations," the Company is authorized to negotiate
for and enter into agreements with Payors for health care services, including
managed care contracts providing for compensation on a capitated basis, that
will or may obligate Core Medical Groups and their respective physicians, IPAs
and their respective IPA Participant Physicians and other physicians to provide
medical services at the levels of compensation negotiated solely by the Company.
Further, as described above in "--Contracting with Specialists, Hospitals and
other Health Care Providers," the Company is also authorized to negotiate for
and enter into agreements with Payors for the provision of services available
from such providers.
The Company's goal is to enter into shared risk arrangements with HMOs and
other Payors and to enter into full capitation/full risk arrangements with such
Payors. The Company believes that its capabilities in information systems and
care management will allow it to operate successfully and manage patient care in
a rapidly changing environment. See "Control of Patient Data and Information
Systems." The Company believes that the access to the Company's information
management systems and bonus payments for Physicians in Core Medical Groups and
IPA Participant Physicians in IPAs will allow such physicians to exercise
appropriate control over the cost of health care, providing better care at lower
overall cost. See "--PSO Agreement with the Core Medical Group" and
"--Independent Practice Association."
CONTRACTS WITH PAYORS.
The Company enters into contracts with Payors on behalf of Network
Physicians. Global Capitated Contracts typically obligate the Company to provide
and pay for all physician services (except for negotiated carve-outs) and, in
certain contracts, hospital and ancillary services for a percentage of the
premium or a fixed capitated amount. The Company then subcontracts with
physicians and other health care providers to provide the required services in
compliance with the Company's care protocols when applicable. The payment from a
Payor to the Company is typically calculated based on the number of Members of
the HMO enrolled with the Company's PCPs. Such Payor contracts generally have
terms of approximately one year and, after the initial term, are renewable for
one-year terms unless canceled by either party. In its Payor contracts, the
Company currently attempts to assume risk for all services, except mental health
and pharmacy. Eye care, home health and durable medical equipment (DME) also may
be carved out of the Company's risk due to more competitive terms for these
services being available to Payors based on their existing national
relationships. The Payor in each contract also retains a percentage of the
premium to perform marketing, enrollment and some administrative services.
In entering into or renewing Payor contracts, the Company considers a
number of specific factors which affect capitated rates, the amount of the
shared risk and scope of covered services for which the Company is responsible.
These factors include, but are not limited to, the demographic risk profile of
the enrollee pool, the premium received by the Payor, prior financial
experience, cost and availability of stop-loss protection and an understanding
of the fee-for-service equivalent charges. In addition, the Company will work
with certain HMOs to establish preferential and/or partnership type
relationships in which incentives are provided in the contract to reward the
Company for accepting and retaining a high number of the plan's Enrollees. In
undertaking this process, the Company analyzes pertinent data in order to assess
the providers' contractual and economic opportunity and exposure, and then
conducts the negotiations on behalf of the physician networks.
CONTROL OF PATIENT DATA AND INFORMATION SYSTEMS
The Company recognizes the need for advanced information systems and
technology to allow it to operate successfully and manage patient care in a
rapidly changing environment. A significant investment has been made and will
continue to be made in systems that support the comprehensive automation of
traditional physician office functions, such as patient flow, electronic medical
records, and billing and collections.
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The Company's information systems strategy consists of using sophisticated
hardware and software to (i) monitor PCP referrals to specialists, hospitals and
other providers; (ii) collect information regarding PCP compliance with medical
care protocols; (iii) allow physician offices to use Company-installed hardware
for billing through the Company's billing and claims management staff; and (iv)
eventually provide the Company and its care management staff with direct
computer access to hospitals in order to facilitate quality and cost-effective
care of Core Medical Group patients.
The Company believes that its information systems will encourage exchange
of information among the Company's utilization review and care management staff
and physician practices, hospitals and other providers in the Company's provider
network to allow the Company to react promptly to changes in patient care
requirements, costs and utilization issues. The Company makes its information
systems available to all Core Medical Groups and Equity Physicians currently
participating in its networks and will make such systems available on a uniform
basis to other providers when they meet certain threshold requirements, while
also tailoring the system to meet unique needs of individual medical practices
to best serve the patients.
CARE MANAGEMENT
The Company seeks to promote the wellness of patients, control costs,
encourage patient satisfaction and provide better integrated health care with
services received in the health care system through its utilization review,
referral management and care management program. These programs seek to control
the cost of medical care through monitoring the appropriateness of inpatient
hospital admissions, referrals to specialists and use of ancillary services by
the Company's care management staff.
The Company's care management program also focuses on patient satisfaction
and cost savings by identifying patients whose diagnosis will require
significant medical care. Staff care managers coordinate all aspects of the care
of such patients, including development of a care plan in coordination with the
patient's primary care physician, by evaluating whether a particular treatment
is appropriate, whether there are alternate sites to provide the treatment, and
the availability of community resources to meet treatment needs. Management
believes effective care management will assist PCPs and other health care
professionals to slow the progression of the disease, ensure patient compliance
with the required treatment, reduce hospital admissions and lengths of stay, as
well as improve patient satisfaction. The Company believes that integrated
health care, with the PCP at its core, is both less expensive and provides
better health care for the vast majority of patients.
The Company employs 17 care management personnel with nursing, social work
and other patient care and management experience to assist in coordination of
quality health care for a potential population of 80,000 members.
COMPETITION
The Company's provider network competes with other provider networks and
medical groups, including those established by hospitals and other individual
physicians, and IPAs in obtaining managed care contracts with health maintenance
organizations and other Payors. The competitive factors that the Company
encounters include the number of physicians in each group, geographical coverage
of Network Physicians, the quality of care that can be provided to the Payors'
enrollees, and the ability to effectively manage care. The Company believes that
it can successfully compete with other entities seeking managed care contracts
with Payors because of the Company's large number of Network Physicians, thereby
providing Payors with an extensive network of providers to offer the Enrollees
of the Payors with whom the Company contracts. The Company also has an
increasing geographic coverage of Network Physicians with extensive coverage in
the Baltimore metropolitan area and Core Medical Groups (either existing or with
letters of intent) or IPAs in Allegany, Carroll, Anne Arundel, Harford, and
Montgomery Counties. However, a large number of physicians remain who may join
other provider networks and who may be competing for managed care contracts. The
Company also believes it can effectively compete with other networks because it
was one of the first established physician owned networks in Maryland, although
other provider networks in the region have recently been developed and the
Company expects others to be established.
The Company competes with certain HMOs, other Payors, other provider
networks, medical groups, and hospitals in acquiring physician practices.
Further, large established traditional indemnity insurance companies also are
entering the managed care field and may compete with the Company in acquiring
physician practices and developing physician networks. Competitive methods
include the type and amount of compensation offered to physicians in exchange
for their practices, the level of clinical autonomy afforded the physician,
terms of employment arrangements, the level and extent of care management
imposed on the physician, and the types of management services that will be
provided to physicians. The Company believes it can effectively compete with
other groups in acquiring physician practices because the Company is driven by
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primary care physicians and primary care strategies. Although other entities may
offer cash consideration for physician practices in amounts greater than the
Company, the Company believes that offering an equity interest in the Company to
its physicians provides an incentive of ownership which will encourage the
implementation of managed care. The Company believes its physician ownership
will attract greater numbers of physicians to its network, and because of the
significant percentage of the Company which is owned by physicians, such
physicians will be better able and more willing to implement managed care.
Further, the Company believes that it provides its Network Physicians with
greater clinical autonomy than may be offered by hospitals, HMOs or insurance
companies.
The Company also will compete with other management companies providing
management services to physicians. While many of these companies have greater
marketing and financial resources than the Company and may be better able to
provide services to its health care providers, the Company will provide
comprehensive business management services to its Equity Physicians and certain
of its other Network Physicians, including administrative, legal and accounting
services, billing and collection services, referral management, utilization
review, and computer systems and training, thereby providing such physicians
more time to devote to the practice of medicine. See "Risk
Factors--Competition."
EMPLOYEES
As of the date of this Prospectus, the Company had approximately 385
employees, of which approximaely 130 are full time employees in its headquarters
in Owings Mills, Maryland, approximately 195 of which the Company has assigned
to work in physician offices, and approximately 60 of which are physicians or
other health care providers employed by the Core Medical Groups.
PROPERTIES AND ASSETS
The Company leases approximately 25,800 square feet in Owings Mills,
Maryland for its corporate headquarters. The term of the lease continues until
2001. The Company also has entered into a sublease through 1999 and a lease
through 2002 for approximately 18,770 square feet in Baltimore, Maryland for its
billing and claims processing operation. The Company also leases physician
offices of varying sizes, generally ranging from approximately 900 square feet
to more than 5,000 square feet. The Company anticipates that as it continues to
grow, expanded facilities will be required. The Company does not anticipate
significant difficulties in obtaining additional or new facilities.
As of the date of this Prospectus, the Company's principal assets consist
of the assets of the medical practices of Equity Physicians, computer hardware
and software, the rights granted to it pursuant to the PSO Agreements,
contractual relations with providers and Payors, accounts receivable, and cash.
The Company has filed service mark applications to register its logo and
corporate names "Doctors Health System Managing Quality Health Care", "Doctors
Health, The Sure Sign of Caring", and "WomanCare".
LEGAL PROCEEDINGS
The Company is a party from time to time in lawsuits incidental to its
business. The Company is not currently subject to any material legal
proceedings.
REGULATION
Both the health care business generally and the activities of the Company,
including those by or with managed care entities, the Core Medical Groups and
their employee physicians, are subject to extensive and pervasive Federal and
state regulation. The Company believes that its operations are in material
compliance with applicable laws and regulations, as currently interpreted and
applied. However, federal and state laws and regulations, including the federal
"fraud and abuse" laws, federal and state law restrictions on physician self
referral, and the pervasive regulation of the activities of managed care
entities, tend to be broadly written and lack extensive judicial interpretation.
There can be no assurance that a review of the Company's operations and
structure by regulatory authorities or courts might not result in a
determination that could adversely affect the Company. Moreover, the regulatory
environment in which the Company operates has changed materially over the past
ten years, and future changes are likely, some of which could restrict the
Company's existing structure or business relationships, limit its growth, or
inhibit its financial operations or opportunities for success.
MEDICARE AND MEDICAID FRAUD AND ABUSE LIMITATIONS.
Under the Social Security Act, it is a felony, punishable by imprisonment
or fines or both, to make false statements of material fact in Medicare or
Medicaid billing or benefit determination matters, or knowingly and willfully to
offer, pay,
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solicit or receive, directly or indirectly, any form of remuneration in exchange
for referring any patients or arranging or furnishing any item or service
reimbursable by the Medicare or Medicaid programs (the "fraud and abuse" or
"anti-kickback" rules). Criminal prosecutions are controlled by the Justice
Department. The Department of Health and Human Services ("DHHS"), through the
Office of the Inspector General (the "OIG"), may bring civil actions for
monetary penalties and to exclude individuals from participating in the Medicare
or Medicaid programs for violations of the fraud and abuse rules. The fraud and
abuse rules are broadly drafted, and have been broadly interpreted by courts.
Read literally, the fraud and abuse rules may prohibit not only kick-backs but
many legitimate business arrangements and joint venture activities. Many States
have adopted rules similar to the fraud and abuse rules. While the Company
believes that its activities do not violate the fraud and abuse rules, there can
be no assurance that federal or state regulators might not challenge some of the
Company's activities.
Concerned that legitimate business arrangements were being stifled by the
fraud and abuse rules, Congress directed DHHS to promulgate regulations which
establish strictly defined "safe harbor" exceptions to the fraud and abuse
rules. Initial safe harbors were adopted in July 1991, and others have been
adopted and proposed from time to time. Some of these safe harbors are
applicable to the activities of the Core Medical Groups, its employee
physicians, and the Company, including provisions related to space and equipment
leases, personal service and management contracts, the sale of practices, bona
fide employment relationships, group practices and managed care contracting
activities. All lease and services agreements must be in writing, have terms of
at least one year, specify services to be provided, require payment consistent
with fair market value in arms length transactions which is not determined by
taking into account the volume or value of referrals of Medicare and Medicaid
business. The Company believes that its lease, management and physician practice
acquisition activities generally fall within the safe harbors. However, no
independent appraisal or fairness opinion concerning the fair market value of
such leases or services agreements or the reasonableness of the consideration
received by the Company therefor has been secured, and there can be no assurance
that federal or state regulators might not challenge some of the transactions or
practices of the Company. Failure to comply with a safe harbor exception with
respect to a transaction does not itself result in, or constitute a violation
of, the fraud and abuse rules.
FEDERAL AND MARYLAND LAW REGARDING RESTRICTIONS ON PHYSICIAN SELF-REFERRAL.
Maryland law and Federal law, generally referred to as the "Stark II"
legislation, as well as the law of some other states in which the Company may
operate in the future, prohibit "physician self-referrals," which may be defined
generally as referrals to another provider by a physician with a financial
interest in the provider. If a physician has a financial interest in, including
a direct or indirect ownership or investment interest, or a compensation
arrangement with a provider (including the physician's own Core Medical Group),
and no exception is applicable, the physician may not refer to the provider, and
neither the physician nor the provider may bill for any service rendered
pursuant to a prohibited self-referral. The fundamental difference between the
fraud and abuse rules and Stark II is that the former require some form of
intent to induce referrals to support a finding of violation, while Stark II
makes intent irrelevant. Under Stark II, if a physician refers a Medicare or
Medicaid patient or test to an entity in which he or she has a financial
interest, and if no exception applies, a violation has occurred.
Stark II extended a prior ban on physician self-referral on laboratory
services ("Stark I") to a broad list of designated health services payable under
Medicare and Medicaid, including radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy, durable medical
equipment, enteral and parenteral supplies, equipment, orthotics, outpatient
prescription drugs, home health services, and inpatient and outpatient hospital
services. If a prohibited self-referral occurs in Maryland, where the Company
currently operates, and such self-referral is not within an exception, (i)
neither the patient nor the Payor may be billed; (ii) Payors can recover all
amounts previously billed and paid in respect of non-excepted self-referrals;
and (iii) the referring physician and the provider are jointly and severally
liable to repay any amounts paid in respect of non-excepted self-referrals.
Federal law also imposes substantial monetary (up to $15,000 for each prohibited
referral and up to $100,000 for participating in a "circumvention scheme") and
other penalties for violations, including possible exclusion from the Medicare
and Medicaid programs.
The Maryland statute and Stark II have been recently enacted and there is
considerable uncertainty concerning how they will be interpreted, including
specifically how broadly the exemptions and exceptions to their application will
be applied. Regulations applying to Stark I and applicable to some, but not all,
of Stark II have recently been adopted. The Core Medical Groups, and the Equity
PCPs, as well as other entities that contract with the Company through
arrangements similar to the IPA arrangements described above, will have both an
ownership interest in and a compensation arrangement with the Company, and the
physicians will have similar relationships with the Core Medical Groups and with
IPAs. Physicians will refer
38
<PAGE>
patients among themselves within their practices and as part of the managed care
networks which the Company will establish. The Company believes that it is not
an entity to which referrals can be made, and that the referrals of patients by
participating physicians within the managed care networks managed by the Company
should fall within one or more of the exceptions permitted by Stark II and the
state self referral laws. Future regulations, statutes or interpretations might
require the Company to restructure its relationships with the Core Medical
Groups and other managed care networks, and violation of Stark II by the Company
or its Core Medical Groups could result in significant fines and financial
losses which could adversely affect the Company.
PROHIBITION AGAINST FEE SPLITTING.
Physicians must be licensed in order to practice medicine. Maryland law,
the law of many other states, and the ethical rules of the American Medical
Association prohibit fee splitting, which is generally defined as a physician
soliciting professional patronage through an agent or a person who profits from
the act of the represented physician, or from paying or agreeing to pay any sum
to any person for bringing or referring a patient. Similar language in other
states has been coupled with the corporate practice of medicine doctrine to
prohibit or question management agreements pursuant to which non-physicians in a
management company obtain substantial financial benefits from a physician
practice. The Company will operate as a management company on behalf of the Core
Medical Groups and, potentially, other physician groups, and will enter into
managed care contracts with managed care companies in which the Core Medical
Groups and other physician groups participate. The Company believes that, under
the currently applicable interpretations of Maryland law and ethical rules
applicable to the practice of medicine in Maryland, the activities of the
Company under its management agreements are not in conflict with or violation of
any applicable legal or ethical requirements imposed on the practice of
medicine.
ANTITRUST AND INSURANCE CONCERNS.
The Core Medical Groups and the physicians who are members of the IPAs with
which the Company contracts are separate legal entities and may be deemed to be
competitors subject to a range of antitrust laws which prohibit anti competitive
behavior, including price fixing, division of markets, and group boycotts and
refusals to deal. The managed care network contracting activities which are the
Company's main business are susceptible to antitrust challenge. The Department
of Justice and the Federal Trade Commission have published guidelines for the
formation and activities of managed care contracting networks, and the Company
intends to comply with those guidelines in developing networks. However, there
is no assurance that review of the Company's business by courts or state or
federal regulatory authorities, or private antitrust challenges by competitors,
will not result in a determination that could adversely affect the operation of
the Company and its managed care networks.
States heavily regulate the activities of insurance companies and health
maintenance organizations. The Company is not registered as an insurance company
or HMO with any state, and does not believe that its activities constitute the
business of insurance, but there can be no assurance that state regulators might
not challenge some of the Company's present or future activities as falling
within the business of insurance, or that the Company might not be required to
become a licensed insurer at some time in the future. See "Risk
Factors--Regulation." Some states impose requirements on entities which contract
with HMOs and insurers, and such requirements might impose significant costs on
the business of the Company, which might adversely affect the business or
operations of the Company.
FUTURE REGULATION.
The health care industry is subject to extensive regulation and is in a
state of change. A variety of legislative proposals substantially to reform the
payment for and delivery of health care services have been presented at both the
Federal and state levels in the past several years. Among issues addressed by
such legislation have been means to control or reduce public and private
spending on health care, to reform the payment methodology for health care goods
and services by both the public (Medicare and Medicaid) and private sectors,
limitations on federal spending for health care benefits, and universal access
to health care. Reform proposals may continue to be considered by the
legislatures of both the United States and states in the future; however, it is
uncertain what proposals may be made in the future or whether any such proposals
will be enacted as law. Elements of reform proposals, if acted upon by Federal,
State or private Payors for health care goods and services, may result in
reduced or limited payment for health care services or in controlled or limited
access to certain health care services generally. There can be no assurance what
effect such reforms may have on the business of the Company, and no assurance
can be given that any such reforms would not have an adverse effect on the
Company's revenues and/or earnings. There can be no assurance that future
statutes or regulations, or future interpretations of existing statutes or
regulations, will not make it difficult or impossible for the Company to conduct
its business in the manner presently contemplated and described herein. In any
such event, the management of the Company will attempt to restructure the
business of the Company in order to comply
39
<PAGE>
with any such new statutes, regulations or interpretations. There can be no
assurance, however, that the Company will be able to do so, or that such
restructuring will not adversely impact the business of the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Scott M. Rifkin, M.D. ............ 37 Chairman, Director, Executive Vice President and Director of
Development
Stewart B. Gold................... 54 President and Chief Executive Officer and Director
John R. Dwyer, Jr................. 40 Executive Vice President, Chief Financial Officer, Treasurer and
Director
Alan L. Kimmel, M.D. ............. 42 Executive Vice President for Medical Policy and Practice; Medical
Director and Director
Paul A. Serini.................... 38 Executive Vice President of Strategic Operations and Director of
Legal Affairs, Secretary and Director
Beth A. Beale..................... 41 Vice President of Managed Care Operations
Kyle R. Miller.................... 34 Vice President of Finance
Theresa A. Spoleti................ 37 Vice President of Managed Care Products and Services
Thomas F. Mapp.................... 40 Vice President and Corporate Counsel
James A. Gast..................... 34 Vice President of Administration
Robert Ancona, M.D. .............. 48 Director
Linda A. Dembiec.................. 42 Director
Mark H. Eig, M.D. ................ 46 Assistant Medical Director and Director
John W. Ellis, CPA................ 43 Director
Howard I. Goldman, M.D............ 42 Assistant Medical Director and Director
Robert G. Graw, Jr., M.D.......... 55 Vice President of Physician Practice Operations and Director
Richard R. Howard................. 47 Director
William D. Lamm, M.D. ............ 43 Assistant Medical Director and Director
Peter J. LoPresti, D.O............ 33 Director
J. David Nagel, M.D............... 56 Director
John S. Prout..................... 46 Director
D. Alexander Rocha, M.D........... 40 Director
Robert S. Zetzer.................. 65 Director
</TABLE>
Scott M. Rifkin, M.D. is the Chairman, Executive Vice President and
Director of Development and a Director of the Company. Dr. Rifkin is a
co-founder of Baltimore Medical Group, LLC and currently is the President and a
Management Committee member of Baltimore Medical Group, LLC. Baltimore Medical
Group, LLC was founded in February 1995. Dr. Rifkin has also served as Medical
Director of Fairfield Nursing Center since 1989 and as Director of Pre-Admission
Consultation Service at Union Memorial Hospital since 1990. Dr. Rifkin has been
engaged in the private practice of medicine since 1988. Dr. Rifkin is also an
expert in long-term care issues and has advised the State of Maryland on this
subject.
Stewart B. Gold is the Chief Executive Officer, President and a Director of
the Company. Prior to joining the Company in 1994, Mr. Gold was CEO and
President of Veritus Services Inc., an arm of Blue Cross of Western Pennsylvania
from 1992 to 1993, where he was responsible for for-profit ventures in managed
care, utilization and information systems. From 1991 to 1992, Mr. Gold served as
President and Chief Executive Officer of Health Care Affiliated Services, Inc.
John R. Dwyer, Jr., is the Executive Vice President, Chief Financial
Officer, and Treasurer of the Company, and has been a Director of the Company
since May 1996. Prior to joining the Company in May 1996, he was a principal in
the Washington based private investment bank of Graham, Hamilton & Dwyer, Inc.
Before joining Graham, Hamilton & Dwyer, Inc. in October 1990, Mr. Dwyer was the
President of Dimetrics, Inc., a wholly-owned subsidiary of Talley Industries in
California, a position he held since August 1987. Before joining Dimetrics,
Inc., Mr. Dwyer was the President of Merrick East, Inc. from April 1985 to July
1987, an entity subsequently acquired by Dimetrics. Before joining Merrick East,
Inc., Mr. Dwyer practiced law with Arent, Fox, Kinter, Plotkin and Kahn in
Washington, D.C. from September 1981 to March 1985.
40
<PAGE>
Alan L. Kimmel, M.D. serves as the Executive Vice President for Medical
Policy and Practice, Medical Director and a Director of the Company. Dr. Kimmel
is a co-founder of Baltimore Medical Group and the Company, is the Chairman of
Baltimore Medical Group and has had an active clinical practice of Internal
Medicine in Baltimore since 1982. Dr. Kimmel's professional memberships include
American College of Physicians, American Society of Internal Medicine, Baltimore
City Medical Society and the Southern Medical Association.
Paul A. Serini is the Company's Executive Vice President of Strategic
Operations and Director of Legal Affairs, a position he has held since February
1995, and has been a Director of the Company since May 1996. From 1990 to 1995,
Mr. Serini was a partner in the Baltimore and Washington offices of the law firm
of Venable, Baetjer and Howard, LLP, where he headed the business transaction
group's Health Care Strategic Business Unit.
Beth A. Beale has been the Company's Vice President of Managed Care
Operations since January of 1996. Prior to joining the Company in 1995, from
1991 to 1995 Ms. Beale was employed as the Vice President/Management Director of
HRS Maine, Inc., a joint venture company owned by Blue Cross of Western
Pennsylvania and Blue Cross/Blue Shield of Maine. HRS Maine provides health care
and workers' compensation cost management services for 200,000 employees.
Kyle R. Miller, the Company's Vice President of Finance, joined the Company
in August 1996. From 1984 until he joined the Company, Mr. Miller was employed
by Arthur Andersen, LLP, CPAs where he was a senior manager in the firm's health
care audit and business consulting division. Mr. Miller is a member of the
American Institute of Certified Public Accountants (AICPA).
Theresa A. Spoleti is the Company's Vice President of Managed Care and
Services, a position she has held since January of 1996. Prior to joining the
Company in 1995, Ms. Spoleti was Director of Management Services Organization,
then Director of Physician Alliances, at Greater Baltimore Medical Center, from
1992 to June of 1995. From 1987 to 1992 she was a principal in Management
Consulting at Health Care Systems Associates (HSA), Inc. in Potomac Maryland.
Thomas F. Mapp serves as Vice President and Corporate Counsel of the
Company. Prior to joining the Company in 1995, he was in the private practice of
law. From 1986 to 1994, Mr. Mapp practiced with the law firm of Venable, Baetjer
and Howard, LLP.
James A. Gast serves as Vice President of Administration. He has been with
the Company since February of 1996. Prior to joining the Company Mr. Gast served
as Corporate Counsel at The Bank of Baltimore from September 1991 until the bank
was acquired by First Fidelity Bancorporation. From 1988 to 1991, Mr. Gast
served as Corporate Counsel at Hale Intermodal Transport Co., an international
shipping company.
Robert Ancona, M.D. has served as a Director of the Company since February
of 1995. Dr. Ancona has been a physician in private practice since 1979.
Linda A. Dembiec has served as a Director of the Company since January
1996. Currently, she serves as Senior Vice President and Chief Financial Officer
of Medical Mutual Liability Insurance Society of Maryland, where she has served
since June 1990. Ms. Dembiec is a member of the Board of Directors of
Mid-Atlantic Medical Insurance Company. Ms. Dembiec is a Fellow of the Casualty
Actuarial Society and a member of the American Academy of Actuaries.
Mark H. Eig, M.D. has served as Director of the Company and Assistant
Medical Director since May 1996. Dr. Eig has practiced internal medicine and
critical care medicine in Silver Spring, Maryland since 1980. Dr. Eig currently
serves on the Board of Directors for the Jewish Social Service Home Health
Agency and as the Chairman for their Utilization Review Committee and
Professional Advisory Committee. Dr. Eig also serves as the Chairman for Holy
Cross Hospital Pharmacy and Therapeutics Committee and Montgomery County Medical
Society Emergency Medical Service Committee.
John W. Ellis, CPA has served as a Director of the Company since February
1995. Mr. Ellis is currently the Chief Financial Officer and Treasurer of St.
Joseph Medical Center, Inc., a position he has held since June 1992. Prior to
joining St. Joseph Medical Center, Mr. Ellis served as Vice President, Finance
of Maryland General Hospital from June 1989 to June 1992.
Howard I. Goldman, M.D. has served as a Director of the Company and as
Assistant Medical Director since July 1995. Dr. Goldman has been a physician in
private practice since 1991.
Robert G. Graw, Jr., M.D. is a Director of the Company, a position he has
held since May 1996. He has been in the private practice of General Pediatrics
and Pediatric Hematology and Oncology since 1975 in Davidsonville, Maryland.
Since April 1996, Dr. Graw has served as the Company's Vice President of Medical
Practice Operations. Dr. Graw is currently
41
<PAGE>
President and Managing Partner of the Pediatric Group, President of Nighttime
Pediatrics, Inc. and Nighttime Pediatrics North, and the Medical Advisor for the
Hospice Program, Anne Arundel General Hospital in Annapolis, Maryland.
Richard R. Howard has served as a Director of the Company since September
1996. He has served as a director of Genesis Health Ventures, Inc. since May
1985 and as Chief Operating Officer of Genesis Health Ventures, Inc. since June
1986. He joined Genesis Health Ventures, Inc. in September 1985 as Vice
President of Development. Mr. Howard's background in healthcare includes two
years as the Chief Financial Officer of HGCC. Mr. Howard's experience also
includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania and one
year with Equibank, Pittsburgh, Pennsylvania.
William D. Lamm, M.D. has served as a Director of the Company since May
1996 and has been in the private practice of medicine since 1983. Dr. Lamm's
professional memberships include The American Medical Association, the American
Academy of Family Practice and the Medical and Chirurgical Faculty of Maryland.
Dr. Lamm is President of the Medical Staff at Memorial Hospital and is on the
Board of Trustees with both Memorial Hospital and Western Maryland Health
System. Dr. Lamm has served as the Chairman of Cumberland Valley Medical Group,
LLC and Assistant Medical Director of the Company since May 1996.
Peter J. LoPresti, D.O. is a Director of the Company, a position he has
held since February 1995. Dr. LoPresti has been a physician in private practice
since 1992.
J. David Nagel, M.D. has served as a Director of the Company and as
Director of Legislative Affairs since February 1995. Dr. Nagel has been in the
private practice of medicine since 1968 and is a past president of the Medical
and Chirurgical Faculty of Maryland.
John S. Prout is a Director of the Company, a position he has held since
February 1995. Mr. Prout currently serves as President and Chief Executive
Officer of St. Joseph Medical Center, Inc., where he has served since July 1994.
From 1988 to 1993, Mr. Prout was Executive Vice President, Little Company of
Mary Hospital and Health Care Centers in Evergreen Park, Illinois.
D. Alexander Rocha, M.D. has served as a Director of the Company since May
1996 and is currently the President of North Carroll Family Physicians, where he
has served since November 1989. Dr. Rocha has been Chairman of Carroll Medical
Group, LLC since November 1995.
Robert S. Zetzer has served as a Director of the Company since January
1996. Mr. Zetzer is a Licensed Property and Casualty Insurance Advisor in
Maryland. He was appointed to Medical Mutual Liability Insurance Society of
Maryland's Board of Directors, in July 1975, by the Governor of Maryland. Mr.
Zetzer is currently a member of the Boards of Directors of Medical Mutual
Liability Insurance Society of Maryland, Mid-Atlantic Medical Insurance Company,
and Med-Lantic Management Services, Inc. and serves as Chairman of the Audit
Committee for both companies. He also serves on Medical Mutual's Executive
Committee. Mr. Zetzer formerly served as President of Stanley-Schuchhardt,
Inc./Zetzer Insurance in Baltimore, from 1948 to 1993, and as President of the
Grand Central Insurance Company in Maryland from 1958 to 1968. A graduate of the
University of Baltimore, Mr. Zetzer is a Lieutenant Colonel (Comptroller), U.S.
Air Force Reserve (Retired).
COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors has established an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE: The Audit Committee has responsibility for reviewing and
supervising the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors regarding the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices and meets with the Company's
independent public accountants. The members of the Audit Committee are Messrs.
Gold, Ellis, Dwyer, Serini, Ms. Dembiec, and Dr. Graw.
COMPENSATION COMMITTEE: The Compensation Committee has the responsibility
for reviewing the performance of officers of the Company and recommending to the
Board of Directors of the Company annual salary, option grants, and bonus
amounts for all officers of the Company. The Compensation Committee also has the
responsibility for oversight and administration of the Company's long-term
incentive plans and other compensatory plans. The members of the Compensation
Committee are Messrs. Gold and Ellis, Ms. Dembiec, and Drs. Rifkin and Eig.
DIRECTOR COMPENSATION.
The Company does not currently pay the Directors any fees for serving on
the Board of Directors, although the Company may consider a change in this
policy in the future.
42
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY.
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and each of the other four
most highly compensated executive officers during the fiscal year ended June 30,
1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION (1) UNDERLYING
----------------------- OPTION/SARS
SALARY($) BONUS($) (#)(2)
--------- -------- ------------
<S> <C> <C> <C>
Stewart B. Gold,
Chief Executive Officer......................................................... $ 203,848 $109,856 0
Paul A. Serini,
Executive Vice President........................................................ 165,885 37,125 50,080
Scott M. Rifkin, M.D.,
Chairman and Executive Vice President........................................... 126,923 65,068 100,000
Allan C. Sanders, CPA,
Vice President of Financial Affairs (3)......................................... 114,664 21,750 22,550
Theresa A. Spoleti,
Vice President of Managed Care Products and Services............................ 110,000 57,500 20,000
</TABLE>
- ---------------
(1) In accordance with SEC rules, perquisites constituting less than the lesser
of $50,000 or 10% of the total salary and bonuses are not reported.
(2) See "Option Grants," "Option Exercises and Year-End Values" and "Omnibus
Stock Option Plan" for disclosure regarding outstanding stock options.
(3) Mr. Sanders resigned from the Company effective July 23, 1996.
OPTION GRANTS.
Options granted to the Named Executive Officers during the fiscal year
ended June 30, 1996 are set forth in the following table. For disclosure
regarding the terms of stock options, see "Stock Option Plans." No stock
appreciation rights ("SARs") were granted during the fiscal year ended June 30,
1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT
ASSUMED
ANNUAL
RATES
OF
OPTIONS GRANTS IN LAST FISCAL YEAR STOCK
INDIVIDUAL GRANTS PRICE
------------------------------------------------------------------- APPRECIATION
NUMBER OF PERCENT OF FOR
SHARES TOTAL OPTIONS OPTION
UNDERLYING GRANTED TO EXERCISE TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION -----
NAME GRANTED(#)(1) IN FY 1996 ($/SHARE)(2) DATE 5%($)
- ------------------------------------------ -------------- ------------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C>
Stewart B. Gold........................... 0 0 N/A N/A N/A
Paul A. Serini............................ 50,080 24.9% .01 08/09/05 356
Scott M. Rifkin, M.D...................... 0 0 N/A N/A N/A
Allan C. Sanders, CPA..................... 22,550(4) 11.2% .01 08/09/05 160
Theresa A. Spoleti........................ 20,000 9.9% .01 (5) 126
<CAPTION>
NAME 10%($)
- ------------------------------------------ ------
<S> <C>
Stewart B. Gold........................... N/A
Paul A. Serini............................ 928
Scott M. Rifkin, M.D...................... N/A
Allan C. Sanders, CPA..................... 417
Theresa A. Spoleti........................ 319
</TABLE>
- ---------------
(1) Options are exercisable April 1, 1996 and 40% of the shares vest immediately
and 60% vest at 1/48 per month beginning May 15, 1996.
(2) The exercise price of each option was the fair market value of the
underlying Common Stock on the date of the grant, as determined by the Board
of Directors of the Company.
(3) Future value of current-year grants assuming the indicated percentage rates
per year over the applicable option term. The actual value realized may be
greater than or less than the potential realizable values set forth in the
table.
(4) 12,550 of such options were terminated as of July 23, 1996.
(5) 10,000 options expire on 08/09/05 and 10,000 options expire on 10/17/05.
43
<PAGE>
OPTION EXERCISES AND YEAR-END VALUES.
No stock options were exercised by the Named Executive Officers during the
fiscal year ended June 30, 1996. There were no SARs outstanding during the
fiscal year ended June 30, 1996. The following table sets forth certain
information regarding unexercised options held by each of the Named Executive
Officers as of June 30, 1996:
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
-----------------------------------------------
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS
UNDERLYING UNEXERCISED AT FISCAL
OPTIONS AT FISCAL YEAR-END(#) YEAR-END($)(1)
------------------------------ -----------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Stewart B. Gold................................................. 0 0 N/A
Paul A. Serini.................................................. 50,080 0 $ 149,739
Scott M. Rifkin................................................. 100,000 0 $ 299,000
Allan C. Sanders, CPA........................................... 22,550(2) 0 $ 67,424
Theresa A. Spoleti.............................................. 20,000 0 $ 59,800
<CAPTION>
NAME UNEXERCISABLE
- ---------------------------------------------------------------- -------------
<S> <C<C>
Stewart B. Gold................................................. N/A
Paul A. Serini.................................................. N/A
Scott M. Rifkin................................................. N/A
Allan C. Sanders, CPA........................................... N/A
Theresa A. Spoleti.............................................. N/A
</TABLE>
- ---------------
(1) Value determined by the Board of Directors of the Company.
(2) 12,550 options were canceled as of July 23, 1996.
STOCK OPTION PLANS.
OMNIBUS STOCK OPTION PLAN:
On August 9, 1995, the Company adopted the Omnibus Stock Option Plan (the
"Omnibus Plan"). All employees, officers, directors and other key contributors
to the Company may participate in the Omnibus Plan. The aggregate number of
shares of Common Stock which may be issued under the Omnibus Plan is 6,175,000.
The Omnibus Plan authorizes the grant of options to purchase Common Stock
intended to qualify as incentive stock options or non-qualified options as well
as stock appreciation rights and restricted or unrestricted share awards. The
Omnibus Plan is administered by the Compensation Committee of the Board of
Directors which, subject to the provisions of the Omnibus Plan, has full
authority (i) to select the individuals to participate in the Omnibus Plan, (ii)
grant awards provided under the Omnibus Plan, (iii) modify, renew or extend
outstanding grants in accordance with the Omnibus Plan, (iv) interpret the
Omnibus Plan, and (v) adopt, amend or rescind rules and regulations for carrying
out the Omnibus Plan.
The option exercise price for each option is determined by the Compensation
Committee, but in the case of incentive stock options shall not be less than
100% of the fair market value of the shares on the grant date and in the case of
non-qualified stock options shall be as determined by the Compensation
Committee. Incentive stock options may be granted only to employees of the
Company. The terms of each option may not exceed ten years from the grant date.
As of the date of this Prospectus, the Company has granted options to purchase
200,880 shares of Class A Common Stock under the Omnibus Plan and authorized the
issuance of additional options to purchase 5,000 shares of Class A Common Stock.
The exercise price of 130,880 of such options granted is $.01 per share, and
70,000 options have an exercise price of $11.00 per share. Of such options,
85,130 were granted on August 10, 1995, 33,250 shares were granted on October
18, 1995, 12,500 were granted on December 21, 1995, and 70,000 were granted in
May 1996. In April 1996, 2,500 options terminated due to termination of
employment as of June 1, 1996, 5,000 options were terminated June 30, 1996 due
to termination of employment, and 12,550 were terminated July 23, 1996 due to
termination of employment. As of the date of this Prospectus, 180,830 options to
purchase Class A Common Stock were issued and outstanding. The Company also has
granted options to purchase 117,000 shares of Class B Common Stock. 100,000 of
such options were issued in February 1995 at an exercise price of $.01 per
share, 5,000 of such options were issued as of October 1, 1995 at an exercise
price of $.01 per share, 3,000 of such options were issued on July 1, 1996 at an
exercise price of $.01 per share, 3,000 of such options were issued on September
12, 1996 at an exercise price of $15.00 per share, 2,000 of such options were
issued on October 1, 1996 at an exercise price of $15.00 per share and 4,000 of
such options were issued on October 3, 1996 at an exercise price of $15.00 per
share.
Pursuant to the Omnibus Plan, the Company may award shares of Common Stock
to such participants and in such amounts and for such consideration, including
no consideration or such minimum consideration as may be required by law, as it
determines. Restricted shares may be issued pursuant to the Omnibus Plan,
subject to forfeiture if the restrictions do not lapse.
The Company may also grant to any participant who holds an outstanding
stock option the right to surrender such option (to the extent such option is
otherwise exercisable) and to receive from the Company an amount equal to the
excess, if any, of
44
<PAGE>
the fair market value of the Class A Common Stock with respect to which such
option is surrendered on the date of such surrender over the exercise price of
the surrendered option.
Unless earlier terminated, the Omnibus Plan will terminate in 2005.
ISSUANCE OF WARRANTS:
On December 1, 1995, the Company issued to Medical Mutual Liability
Insurance Society of Maryland warrants to purchase 88,889 shares of Class A
Common Stock of the Company at an exercise price of $5.625 per share and issued
to each of Stephen Graham, Andrew Hamilton and John Dwyer, a director of the
Company, warrants to purchase 8,000 shares each of Class A Common Stock of the
Company at an exercise price of $11.25 per share.
EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with Messrs. Gold,
Serini and Sanders, Dr. Rifkin and Ms. Spoleti.
Pursuant to the employment agreement with Mr. Gold, Mr. Gold receives a
1996 base salary of $200,000 per annum, a $75,000 bonus and at least 40% of the
Company's bonus pool (the "Bonus Pool"). The Bonus Pool will be equal to 10% of
the amount of the excess, if any, of operating revenues of the Company over its
operating expenses. Mr. Gold has the authority and discretion to determine
awards to be made from the remainder of the Bonus Pool to employees of the
Company, including himself. Mr. Gold also received 150,000 shares of Class A
Common Stock (currently 600,000 shares as a result of the August 1995 stock
split), in which Mr. Gold was fully vested in May 1996. The employment agreement
with Mr. Gold terminates in April of 2000, and unless notice of termination is
given will be automatically extended for succeeding 12 month periods. In the
event that Mr. Gold is terminated by the Company other than for "cause," he will
be entitled to all or a portion of his base salary and bonus in accordance with
the terms of his employment agreement.
Pursuant to the employment agreement with Mr. Serini, Mr. Serini receives a
base salary of $175,000 per annum. Mr. Serini will be entitled to participate in
the Bonus Pool to the extent determined by the Chief Executive Officer, and the
standards by which such bonus will be determined for each applicable year will
be established upon agreement between Mr. Serini and the Chief Executive
Officer. For 1996, the Company and Mr. Serini have agreed upon a base bonus of
at least $50,000. Pursuant to the employment agreement, Mr. Serini received an
option to purchase 50,080 shares of Class A Common Stock. Mr. Serini may
exercise such option beginning on April 1, 1996, and will become fully vested in
such shares in April of 2000, or earlier under certain circumstances. The
employment agreement with Mr. Serini terminates in April of 2000, and unless
notice of termination is given will be automatically extended for succeeding 12
month periods. In the event that Mr. Serini is terminated by the Company other
than for "cause," he will be entitled to all or a portion of his base salary and
bonus in accordance with the terms of his employment agreement.
Pursuant to the employment agreement with Mr. Sanders, Mr. Sanders received
a base salary of $112,500 per annum. Pursuant to a stock option agreement, Mr.
Sanders received an option to purchase 22,550 shares of Class A Common Stock. In
connection with Mr. Sanders' resignation, 12,500 of such options were canceled.
The remaining 10,000 options are fully vested and exercisable. Mr. Sanders
resigned from the Company effective July 23, 1996 and his employment agreement
was terminated as of that date.
Pursuant to the employment agreement with Dr. Rifkin, Dr. Rifkin receives a
base salary of $100,000 per year and at least 5% of the Bonus Pool. Dr. Rifkin
also received 100,000 shares of the Company's Class A Common Stock and was
granted an option to purchase an additional 100,000 shares of the Company's
Class B common stock that will vest upon the earlier to occur of (i) a Change in
Control of the Company, (ii) termination of his employment without cause or
under circumstances constituting "constructive termination", or (iii) December
9, 1996. The employment agreement with Dr. Rifkin terminates in April 2000, and
unless notice of termination is given, will be automatically extended for
succeeding 12 month periods on the same terms as previously in effect. In the
event that Dr. Rifkin's employment is terminated by the Company other than "for
cause," he will be entitled to all or a portion of his base salary and bonus in
accordance with the terms of his employment agreement.
Pursuant to the employment agreement with Ms. Spoleti, Ms. Spoleti received
a base salary of $110,000 per year through June 4, 1996 and receives a Base
Salary of $140,000 per year thereafter. Ms. Spoleti is entitled to participate
in the Bonus Pool to the extent determined by the Chief Executive Officer, and
the standard by which such bonus will be determined for each applicable year
will be established upon agreement between Ms. Spoleti and the Company. Under
the agreement, Ms. Spoleti was granted an option to purchase 10,000 shares of
Class A Common Stock and is eligible to participate in
45
<PAGE>
the Company's Omnibus Stock Option Plan and receive options upon attainment of
certain performance criteria. The employment agreement with Ms. Spoleti
terminates in June 1998, and unless notice of termination is given, will be
automatically extended for succeeding 12 month periods on the same terms as
previously in effect. In the event that Ms. Spoleti's employment is terminated
by the Company without cause, she will be entitled to accrued Base Salary and
benefits and an amount equal to the Base Salary that would have been payable
through the end of the contract term, and options held by Ms. Spoleti will
become fully vested and exercisable, all in accordance with the terms of her
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Gold, the Company's President and Chief Executive Officer, is the only
officer or employee of the Company who serves on the Compensation Committee.
During the last completed fiscal year, the members of the Compensation Committee
were Messrs. Gold and Ellis, Ms. Dembiec and Dr. LoPresti. See " --Employment
Agreements" and "Certain Transactions."
STOCKHOLDERS AGREEMENT
In December 1995, the "Management Stockholders" (consisting of Mr. Gold and
Drs. Rifkin and Kimmel), Medical Holdings Limited Partnership ("MHLP"), St.
Joseph Medical Center ("SJMC"), Medical Mutual Liability Insurance Society of
Maryland ("Med Mutual"), Med-Lantic Management Services, Inc., Genesis Health
Ventures, Inc. ("Genesis") and certain physician stockholders of the Company
(collectively, the "Stockholders") entered into a Stockholders Agreement, which
was amended in September 1996 (the "Stockholders Agreement") to which the
Company is also a party which governs certain aspects of the Company's
management plans and operations.
Pursuant to the Stockholders Agreement, each of the Stockholders has agreed
to sell and transfer the stock of the Company held by them only pursuant to such
agreement. The Stockholders Agreement provides that upon the occurrence of the
termination of employment of any Management Stockholders (other than Drs. Kimmel
and Rifkin and except with respect to any "Involuntary Transfer" discussed
below), they will sell to the Company all of the stock then registered in the
name of such Management Stockholder. In the case of an "Involuntary Transfer"
(transfers defined in the Stockholders Agreement which include bankruptcy of a
Stockholder or transfer by divorce decree), the Company has the right for a 30
day period to purchase the stock held by such Stockholder. If the employment of
Mr. Gold is terminated, then the other Management Stockholders whose employment
with the Company has not been terminated have the option for a 60 day period to
purchase, in such proportions as they shall agree (or if they cannot so agree,
in proportion to their ownership of Class A Common Stock), on terms
substantially identical to those set forth in and for a price determined in
accordance with the Stockholders Agreement, the stock held by Mr. Gold. If all
of Mr. Gold's stock is not purchased by the other Management Stockholders, the
Company shall purchase all of Mr. Gold's stock. In such case the price that the
Company shall pay shall be as follows: (i) if Mr. Gold's employment is
terminated for cause (either pursuant to his employment agreement or pursuant to
law), or for reasons not constituting constructive termination, at a price equal
to the lower of acquisition cost or $1 per share, or (ii) if Mr. Gold's
employment is terminated by death, disability, the expiration of his employment
agreement, without good cause, or for reasons constituting constructive
termination under his employment agreement, then at an agreed upon price or at a
price determined through arbitration. In the event that the Company is required
to pay the price described in (ii), the Company, as a condition precedent to the
closing of such purchase, shall pay to SJMC and Med Mutual all of the dividends
then accrued but unpaid on the Series A Preferred Stock and Series B Preferred
Stock, respectively, plus all accrued and unpaid interest thereon.
In the event that the employment of Drs. Kimmel or Rifkin is terminated (a)
by the Company for cause as defined under his employment agreement or under
applicable law, or (b) by such employee stockholder for any reason not
constituting "constructive termination" as defined in his employment agreement,
such Stockholder shall sell to the Company all of the stock then registered in
such Stockholder's name, at a price equal to the lower of his acquisition cost
per share or $1 per share; provided, that such provisions do not apply to (x)
the 100,000 shares held by Dr. Kimmel as of the date of the Stockholders
Agreement or, (y) the 100,000 shares held by Dr. Rifkin on the date of the
Stockholders Agreement, or (z) the 100,000 shares to be obtained by Dr. Rifkin
pursuant to his employment agreement. Upon the death or disability of either
Rifkin or Kimmel, such stockholder (or his personal representative) may offer to
the other Management Stockholders the option to purchase all of the Class A
Common Stock then held on terms substantially identical to those contained in
the Stockholders Agreement. If the employment of Kimmel or Rifkin is terminated
(a) by the expiration of his employment agreement, or (b) by the Company without
good cause, or (c) for reasons constituting "constructive termination" under
their employment agreements, then such Stockholder must sell to the Company all
of the Stock then held by such stockholder which is acquired after the date of
the Stockholders Agreement at a price to be agreed upon between the parties, or
failing such agreement, at a price determined through arbitration. In such
event, the Company must pay to SJMC and Med-Lantic all
46
<PAGE>
of the dividends then accrued but unpaid on the Series A Preferred Stock and
Series B Preferred Stock, respectively, plus all accrued and unpaid interest
thereon.
The Stockholders Agreement also provides that if the employment of Mr. Gold
is terminated without good cause or by Mr. Gold for reasons constituting
constructive termination, and there occurs a "Change in Control," of the Company
within 24 months following such termination, the Company must pay to Mr. Gold,
in addition to the purchase price, the value of his fair, allocative share of
any consideration that would have been payable to such terminated stockholder as
a result of such Change in Control.
The Stockholders Agreement also provides that each of the holders of Class
A Common Stock agrees (i) to vote his shares to elect Stewart Gold, Alan Kimmel
and Scott Rifkin as three of the Company's Class A directors for as long as
their respective employment agreements are in force and (ii) if then serving as
a Class A Director, to offer to resign immediately upon termination of his
employment with the Company.
Purchasers of Securities hereunder also will be required to execute and
become a party to the Stockholders Agreement or otherwise be subject to
significant contractual restrictions on the resale of such Securities until an
initial public offering for cash of Common Stock.
CERTAIN TRANSACTIONS
Drs. Rifkin and Kimmel, who are directors, officers and stockholders of the
Company, and Drs. Ancona and Nagel, who are directors of the Company, are
members of the management committee, officers and employees of Baltimore Medical
Group, LLC. The Company and Baltimore Medical Group, LLC have entered into a PSO
Agreement and a Management Services Agreement pursuant to which Baltimore
Medical Group, LLC has accrued fees of $365,000 payable to the Company in
connection with certain professional management services rendered in 1995 and
the first six months of 1996. Dr. Lamm is the Chairman and an employee of
Cumberland Valley Medical Group, LLC, and an employee and director of the
Company. Dr. Rocha is the Chairman and an employee of Carroll Medical Group and
is a Director of the Company.
The Company has agreed that it would consult with Med Mutual and follow Med
Mutual's recommendation regarding the provision of medical malpractice coverage
to Equity Physicians and certain of its other Network Physicians. Such decisions
include, but are not limited to, the selection of the underwriter, the form of
the insurance policy and the premium payment provisions. Med Mutual has agreed
to provide medical malpractice coverage to the Company for premiums consistent
with its rates as approved by the Maryland Insurance Administration. In
addition, Med Mutual will consider alternative insurance programs to meet the
Company's special needs and will request the necessary approvals for such
alternative programs from the Maryland Insurance Administration. This agreement
terminates upon the earlier of a change in control of the Company or termination
of the loan guarantee provided by Med Mutual. If the Company breaches this
agreement, the Company may be required to pay Med Mutual $400,000 and Med Mutual
could require the Company to redeem all or a portion of the Series B Preferred
Stock at the price equal to the greater of the fair market value per share or
the sum of the issue price per share and all accumulated and unpaid interest and
dividends.
Pursuant to Stock Purchase Agreement dated September 4, 1996 (the "Stock
Purchase Agreement"), the Company agreed that it would (i) advise Genesis Health
Ventures, Inc., the Company's Series C Preferred stockholder ("Genesis"), of all
substantive discussions and plans with respect to the delivery of long term
care, pharmacy services, durable medical equipment and home health care services
(the "Services") for the Company, (ii) provide Genesis with all information
needed by Genesis to submit a proposal to provide the Services and (iii) provide
Genesis with an opportunity to provide the Services on commercially reasonable
terms. In addition, the Company has agreed that it will not enter into exclusive
arrangements with third parties that would preclude Genesis from competing to
provide Services to the Company. Genesis and the Company have agreed that
commitments regarding the Services shall not prevent the Company from purchasing
the Services from third parties other than Genesis.
Mr. Zetzer, a Director of the Company, is a director of Med Mutual and is a
director of its subsidiary Med-Lantic Management Services, Inc., which is the
sole holder of the Series B Preferred Stock. Ms. Dembiec, a director of the
Company, is Senior Vice President and Chief Financial Officer of Med Mutual.
Mr. Dwyer, who was named Executive Vice President, Chief Financial Officer
and Treasurer of the Company in May 1996, and is a Director of the Company, was
previously a principal of Graham, Hamilton & Dwyer ("GHD"), which provides
financial advisory services to the Company. In 1995, GHD received $100,000 for
such services, and in December 1995, the three principals of GHD each received
warrants to purchase 8,000 shares of Class A Common Stock. At that time, Mr.
Dwyer
47
<PAGE>
was a principal at GHD and provided investment advice to the Company. The
Company continues to have a relationship with GHD for the provision of financial
advisory services, and GHD may be compensated in an amount up to $340,000 in
1996 in the event that certain financing or acquisition transactions are
consummated. Pursuant to his prior affiliation with GHD, Mr. Dwyer will be
entitled to receive a portion of any such compensation received by GHD.
PRINCIPAL STOCKHOLDERS
The following tables set forth as of October 4, 1996, certain information
with respect to the beneficial ownership of each class of voting stock by: (i)
each person known by the Company to beneficially own more than 5% of each such
class; (ii) each director of the Company of each such class; (iii) each of the
Named Executive Officers of each such class; and (iv) all directors and
executive officers of each such class as a group. The Company believes that the
beneficial owners of the classes of stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares, except as noted below. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and includes
voting or investment power with respect to the shares. Shares of stock subject
to options currently exercisable or exercisable within 60 days of October 4,
1996 ("Current Options") are deemed outstanding for computing the percentage of
the person holding such options, but are not deemed outstanding for computing
the percentage of any other person.
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Stewart B. Gold................................................................................... 600,000 75.0%
Scott M. Rifkin, M.D.............................................................................. 100,000 12.5
Alan L. Kimmel, M.D............................................................................... 100,000 12.5
Paul A. Serini.................................................................................... 50,080(1) 5.9
Allan C. Sanders, CPA............................................................................. 10,000(1) 1.2
Directors and executive officers as a group (23).................................................. 887,580(2) 100
</TABLE>
- ---------------
(1) Consists of shares in respect of Current Options.
(2) Includes 87,580 shares in respect of Current Options and warrants to
purchase 8,000 shares.
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- ------------------------------------------------------------------------------------------------ --------- ----------------
<S> <C> <C>
Medical Holdings Limited Partnership (1)........................................................ 2,200,000 87.9%
Directors and executive officers as a group (23)................................................ 17,000(2) (3)
</TABLE>
- ---------------
(1) Drs. Rifkin, Kimmel, Nagel, LoPresti and Ancona, Directors of the Company,
are officers or directors of the managing general partner of Medical
Holdings Limited Partnership. Includes options for 100,000 shares of Common
Stock granted to Dr. Rifkin under his employment agreement.
(2) Represents 16,000 shares and 1,000 shares in respect of Current Options held
by Dr. Eig.
(3) Less than 1%.
SERIES A CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- ------------------------------------------------------------------------------------------------ --------- ----------------
<S> <C> <C>
St. Joseph Medical Center, Inc. (1)............................................................. 1,000,000(2) 100%
Directors and Executive Officers as a group (23)................................................ 0 0
</TABLE>
- ---------------
(1) Mr. Prout and Mr. Ellis, Directors of the Company, are officers of St.
Joseph Medical Center, Inc.
(2) Convertible into 1,000,000 shares of Class C Common Stock, assuming
conversion of all Preferred Stock, will equal 56% of the maximum outstanding
Class C Common Stock.
48
<PAGE>
SERIES B CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Med-Lantic Management Services, Inc. (1).......................................................... 355,556(2) 100%
Directors and Executive Officers as a group (23).................................................. 0 0
</TABLE>
- ---------------
(1) Mr. Zetzer, a Director of the Company, is a director of Medical Mutual
Liability Insurance Society of Maryland, Inc., the parent company of
Med-Lantic Management Services, Inc. Ms. Dembiec, a Director of the Company,
is an officer of Medical Mutual Liability Insurance Society of Maryland,
Inc.
(2) Convertible into 355,556 shares of Class C Common Stock, which, assuming
conversion of all Preferred Stock, will equal 19.9% of the maximum
outstanding Class C Common Stock.
SERIES C CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Genesis Health Ventures, Inc. (1)................................................................. 428,571(2) 100%
Directors and Executive Officers as a group (23).................................................. 0 0
</TABLE>
- ---------------
(1) Mr. Richard Howard, a Director of the Company, is President and Chief
Executive Officer of Genesis Health Ventures, Inc.
(2) Convertible into 428,571 shares of Class C Common Stock, which, assuming
conversion of all Preferred Stock, will equal 24% of the maximum outstanding
Class C Common Stock. The Company and Genesis Health Ventures, Inc. executed
an Option Agreement dated September 4, 1996 pursuant to which the Company
may issue Genesis an additional 642,857 shares of Series C Convertible
Preferred Stock.
The following tables set forth certain information with respect to the
ownership of the Company by physician stockholders in relation to other
stockholders. The information presented assumes conversion of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock to Class C Common Stock.
STOCKHOLDERS OF DOCTORS HEALTH SYSTEM, INC.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS A STOCKHOLDERS SHARES OWNERSHIP
- ------------------------------------------------------------------------------------------- --------- --------------------
<S> <C> <C>
Alan Kimmel, M.D. ......................................................................... 100,000 2.0
Scott Rifkin, M.D. ........................................................................ 100,000 2.0
Stewart B. Gold............................................................................ 600,000 11.8
<CAPTION>
CLASS B STOCKHOLDERS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Medical Holdings Limited Partnership....................................................... 2,200,000(1) 43.2
Other Primary Care Physicians.............................................................. 304,000 5.9
<CAPTION>
CLASS C STOCKHOLDERS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
St. Joseph Medical Center, Inc............................................................. 1,000,000 19.7
Med-Lantic Management Services, Inc........................................................ 355,556 7.0
Genesis Health Ventures, Inc............................................................... 428,571 8.4
Total.................................................................................... 5,088,127 100%
</TABLE>
- ---------------
(1) Includes an option to purchase 100,000 shares of the Company's Common Stock
pursuant to Dr. Rifkin's employment agreement.
PHYSICIAN AND NON-PHYSICIAN OWNERSHIP OF
DOCTORS HEALTH SYSTEM, INC.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNERSHIP
---------- --------------------
<S> <C> <C>
Physicians (Class A and Class B Stockholders)............................................. 2,704,000(1) 53.0
Management Stockholders (Stewart B. Gold)................................................. 600,000 11.8
Investor Stockholders (St. Joseph Medical Center, Inc., Med-Lantic Management
Services, Inc., and Genesis Health Ventures, Inc.)...................................... 1,784,127 35.2
Total................................................................................ 5,088,127 100%
</TABLE>
- ---------------
(1) Includes an option to purchase 100,000 shares of the Company's Common Stock
pursuant to Dr. Rifkin's employment agreement.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Class B Common Stock, par value
$0.01 per share; (ii) Options to purchase Class B Common Stock; and (iii) any
combination of the foregoing, either individually or as units consisting of one
or more of the types of Securities described in clauses (i) and (ii). The terms
of any specific offering of Securities, including the terms of any units
offered, will be set forth in a Prospectus Supplement relating to such offering.
The Company is authorized to issue 20,700,000 shares of Class A Common
Stock, par value $0.01 per share (the "Class A Common Stock"), 10,000,000 shares
of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock")
29,050,000 shares of Class C Common Stock, par value $0.01 per share (the "Class
C Common Stock") (the Class A Common Stock, the Class B Common Stock and the
Class C Common Stock are hereinafter collectively referred to as the "Common
Stock"), 1,000,000 shares of Series A Convertible Preferred Stock, par value
$5.00 per share (the "Series A Preferred Stock"), 355,556 shares of Series B
Convertible Preferred Stock, par value $11.25 per share (the "Series B Preferred
Stock"), 1,071,428 shares of Series C Convertible Preferred Stock, par value
$17.50 per share (the "Series C Preferred Stock") (the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock are hereinafter
collectively referred to as the "Preferred Stock"), and 1,000,000 shares of
other preferred stock having a par value of one cent ($0.01) per share. Shares
of the Preferred Stock are convertible into shares of Class C Common Stock.
As of October 4, 1996, 800,000 shares of Class A Common Stock are issued
and outstanding and held by three holders of record, 2,504,000 shares of Class B
Common Stock are issued and outstanding and held by fourteen holders of record,
1,000,000 shares of Series A Preferred Stock are issued and outstanding and held
by one holder of record, 355,556 shares of Series B Preferred Stock are issued
and outstanding and held by one holder of record and 428,571 shares of Series C
Preferred Stock are issued and outstanding and held by one holder of record.
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Company's Articles of Amendment
and Restatement (the "Charter") and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Subject to the rights, privileges and restrictions described below, each issued
and outstanding share of the Common Stock and the Preferred Stock entitles the
holder thereof to one vote on all matters to be voted on by the stockholders of
the Company. There are no preemptive rights or sinking fund provisions with
respect to any of the Company's capital stock.
All shares of the Company's capital stock are subject to significant
restrictions on transfer and will carry a legend to reflect such restrictions.
Except as permitted by the Stockholders Agreement of the Company and the
Charter, the Securities cannot be transferred. The Stockholders Agreement
contemplates that the Company may redeem shares of its stock upon an
"Involuntary Transfer" resulting generally from the insolvency of a stockholder
or upon divorce of an individual stockholder. Voluntary transfers are permitted
only after a stockholder offers its stock, upon the same terms and conditions
contained in the offer it wishes to accept, to all other stockholders on the
terms set out in the Stockholders Agreement. See "Management--Stockholders
Agreement." Individual Stockholders may in certain circumstances make estate
planning transfers for the benefit of themselves or family members on certain
conditions.
COMMON STOCK
Except as provided in the Charter, holders of Common Stock are entitled to
one vote per share with respect to all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Subject to preferences
that may be applicable to any outstanding shares of Preferred Stock, holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors, out of funds legally available therefor. Upon liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in assets available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of any
preferred stock then outstanding.
CLASS A COMMON STOCK
The holders of the Class A Common Stock are entitled to elect five of the
18 directors of the Company (each a "Class A Director"). The affirmative vote of
a majority of the stock of Class A Common Stock represented at a meeting at
which a quorum is present is sufficient to approve any matter with respect to
which such holders are entitled to vote; provided, that
50
<PAGE>
the affirmative vote of a plurality of all votes cast shall be sufficient to
elect a Class A Director. The holders of Class A Common Stock, at any annual
meeting or upon a special meeting called by the holders of not less than 25% of
the shares of Class A Common Stock then outstanding may remove any Class A
Director by the affirmative vote of 80% of all of the votes entitled to be cast
for such Class A Director.
CLASS B COMMON STOCK
The holders of the Class B Common Stock are entitled to elect eight of the
18 directors of the Company (each a "Class B Director"). The affirmative vote of
a majority of the stock of Class B Common Stock represented at a meeting at
which a quorum is present is sufficient to approve any matter with respect to
which such holders are entitled to vote; provided, that the affirmative vote of
a plurality of all votes cast shall be sufficient to elect a Class B Director.
The holders of Class B Common Stock, at any annual meeting or upon a special
meeting called by the holders of not less than 25% of the shares of Class B
Common Stock then outstanding may remove any Class B Director by the affirmative
vote of at least a majority of all of the votes entitled to be cast for such
Class B Director. Upon issuance in accordance with the terms of this Prospectus,
the shares of Class B Common Stock being offered hereby will be fully paid and
non-assessable.
CLASS C COMMON STOCK
Upon the conversion of all of the Series A Preferred Stock then outstanding
into shares of Class C Common Stock, the holders of such Class C Common Stock
into which such Series A Preferred Stock has been converted, voting as a single
sub-class (the "Series A Subclass"), shall be entitled to elect two of the 18
directors of the Company (each a "Converted Series A Class C Director"). Upon
the conversion of all of the Series B Preferred Stock then outstanding into
shares of Class C Common Stock, the holders of such Class C Common Stock into
which such Series B Preferred Stock has been converted, voting as a single
sub-class ("the Series B Subclass"), shall be entitled to elect two of the 18
directors of the Company (each a "Converted Series B Class C Director"). Upon
the conversion of all of the Series C Preferred Stock then outstanding into
shares of Class C Common Stock, the holders of such Class C Common Stock into
which such Series C Preferred Stock has been converted, voting as a single
sub-class ("the Series C Subclass"), shall, prior to the Company's 1998 annual
meeting of stockholders, be entitled to elect one of the 18 directors of the
Company. After the Company's 1998 annual meeting of stockholders, the Company
shall have 19 directors, and the Series C Subclass shall be entitled to elect
two directors of the Company (each a "Converted Series C Class C Director").
Except with respect to the election of Directors, the affirmative vote of a
majority of the stock of Class C Common Stock represented at a meeting at which
a quorum is present is sufficient to approve any matter with respect to which
such holders are entitled to vote; provided, that the affirmative vote of a
plurality of all votes cast by such Series A Subclass, Series B Subclass, or
Series C Subclass, as the case may be, shall be sufficient to elect a Converted
Series A Class C, Converted Series B Class C Director, or Converted Series C
Class C Director, respectively. The Series A Subclass, the Series B Subclass, or
the Series C Subclass, as the case may be, at any annual meeting or upon a
special meeting called by the holders of not less than 25% of the shares of such
subclass outstanding may remove the Converted Series A Class C, Converted Series
B Class C, or Converted Series C Class C Director, respectively, by the
affirmative vote of 80% of all of the votes entitled to be cast for such
director.
The Charter of the Company includes a provision pursuant to which, upon
completion of a "Qualified" or "Non-Qualified" Public Offering, each share of
the Company's Class A Common Stock, Class B Common Stock, and Class C Common
Stock shall be converted, without any action on the part of the stockholder or
the Company, into an identical share of the Company's Class A Common Stock, and
all special rights granted to the holders of Class A, Class B, and Class C
Common Stock and to all holders of Series A, Series B and Series C Preferred
Stock shall cease and terminate.
SERIES A, SERIES B AND SERIES C PREFERRED STOCK
VOTING RIGHTS. Except with respect to the election and removal of
directors, every holder of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock shall be entitled to cast that number of votes
equal to the full number of shares of Class C Common Stock into which such
holder's Preferred Stock is then convertible.
SERIES A DIRECTORS. The holders of Series A Preferred Stock voting as a
single class, are entitled to elect two directors (each, a "Series A Director").
The affirmative vote of a majority of the shares of Series A Preferred Stock
represented at a meeting at which a quorum is present is sufficient to approve
any matter with respect to which such holders are entitled to vote; provided,
that the affirmative vote of a plurality of all votes cast shall be sufficient
to elect Series A Directors. The holders of Series A Preferred Stock, at any
annual meeting or upon a special meeting called by the holders of not less than
25% of the shares of Series A Preferred Stock then outstanding, may remove any
Series A Director by the affirmative vote of at least 80% of all of the votes
entitled to be cast for such Series A Director.
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SERIES B DIRECTORS. The holders of Series B Preferred Stock, voting as a
single class, are entitled to elect two directors (each, a "Series B Director").
The affirmative vote of a majority of the shares of Series B Preferred Stock
represented at a meeting at which a quorum is present is sufficient to approve
any matter with respect to which such holders are entitled to vote; provided,
that the affirmative vote of a plurality of all votes cast shall be sufficient
to elect Series B Directors. The holders of Series B Preferred Stock, at any
annual meeting or upon a special meeting called by the holders of not less than
25% of the shares of Series B Preferred Stock then outstanding, may remove any
Series B Director by the affirmative vote of at least 80% of all of the votes
entitled to be cast for such Series B Director.
SERIES C DIRECTORS. The holders of Series C Preferred Stock, voting as a
single class, are entitled to elect one director until the Company's 1998 annual
meeting of stockholders and thereafter, shall be entitled to elect two directors
(each, a "Series C Director"). The affirmative vote of a majority of the shares
of Series C Preferred Stock represented at a meeting at which a quorum is
present is sufficient to approve any matter with respect to which such holders
are entitled to vote; provided, that the affirmative vote of a plurality of all
votes cast shall be sufficient to elect Series C Directors. The holders of
Series C Preferred Stock, at any annual meeting or upon a special meeting called
by the holders of not less than 25% of the shares of Series C Preferred Stock
then outstanding, may remove any Series C Director by the affirmative vote of at
least 80% of all of the votes entitled to be cast for such Series C Director.
SPECIAL DIRECTOR APPROVAL REQUIREMENT. Pursuant to the Charter, the Company
is generally prohibited from taking certain actions without the separate
affirmative vote of each of the Series A Directors, Series B Directors, and
Series C Directors including (i) the incurrence of certain indebtedness, (ii)
amendments of the Charter or By-Laws that adversely affect the holders of Series
A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock, as the
case may be, or Class C Common Stock, (iii) with respect to the Series A and
Series B Directors, amendments to any of the employment agreements between the
Company and a Management Stockholder, or (iv) with respect to the Series C
Directors, pay any dividend on the Series A or Series B Preferred Stock prior to
September 1, 1998 unless paid in connection with a redemption.
SPECIAL PREFERRED STOCKHOLDER APPROVAL REQUIREMENT. Pursuant to the
Charter, the Company is generally prohibited from taking certain actions (each a
"Preferred Stockholder Major Decision") without the separate affirmative vote of
a majority of the shares of Series A Preferred Stock and Series B Preferred
Stock, represented at a meeting, including (i) the adoption of any business plan
of the Company, (ii) the issuance of shares or rights to acquire shares to
employees of the Company which, when aggregated with all other such issuances,
exceeds 10% of the fully diluted shares of capital stock of the Company
(provided; that shares of Class A Common Stock and rights to acquire such shares
issued to the Management Stockholders and other executive employees in amounts
not to exceed 25% of the fully diluted shares of capital stock of the Company as
of December 1, 1995 shall not be counted toward such 10% limitation), (iii) the
issuance of shares of capital stock to any person or entity which has legitimate
business interests that are materially adverse to the holders of Series A
Preferred Stock or the Series B Preferred Stock, as the case may be, (iv) any
sale or other disposition of all or any substantial portion of its assets, or
(v) certain mergers or consolidations of the Company, (vi) any underwritten
public offering other than an offering which is based upon a total market
capitalization of the Company, at the time of such offering, of at least $25
million and from which the Company receives net proceeds of not less than $15
million. Additionally, the separate vote of the holders of Series A Preferred
Stock is required for any optional redemption of the Series B Preferred Stock,
unless the Company has previously redeemed the Series A Preferred Stock. The
Charter provides that notwithstanding the failure to obtain the approval of such
Preferred Stockholder Major Decisions, the Company may nonetheless take such
actions; provided that the Company provide advance written notice of the action
and subject to the right of the holders of each Series of Preferred Stock to
require the Company to redeem all of each such Series in accordance with the
terms of the Charter.
REDEMPTION. The Series A Preferred Stock, the Series B Preferred Stock and
the Series C Preferred Stock must be redeemed by the Company (unless such right
is waived in writing by the holder of Preferred Stock), or may be redeemed at
the request of the holders of Preferred Stock, in a number of different
circumstances, including: (i) sale of all or substantially all of the assets of
the Company; (ii) the filing by the Company of a voluntary or involuntary
petition in bankruptcy, unless dismissed within certain prescribed time periods;
(iii) the default by the Company of any obligation under certain material
indebtedness which results in the acceleration of the maturity of such
indebtedness or in any action to possess any property or assets of the Company
in respect of such indebtedness; (iv) the entry of a material judgment against
the Company, which is not dismissed, stayed, or fully bonded within 60 days; (v)
the failure by the Company to pay any amount due to the holders of the Preferred
Stock when due; (vi) any failure by the Company to perform its other material
obligations in respect of the Preferred Stock which is not cured within
prescribed time periods; (vii) with respect to the Series C Preferred Stock,
upon an initial public offering of the Company's equity securities; and (viii)
certain other events, including changes of control of various types.
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CONVERSION. All, but not less than all, of the shares of the Series A and
Series B Preferred Stock are convertible, one share for one share (subject to
increase if the Company issues shares at a dilutive price), into shares of Class
C Common Stock at the option of holders of the Series A and Series B Preferred
Stock at any time prior to 5:00 p.m. (EST) on February 24, 2000. However,
holders of the Series A Preferred Stock who have not made full payment in cash
to the Company for the shares of Series A Preferred Stock may not convert their
shares. All, but not less than all, of the shares of Series C Preferred Stock
are convertible, one share for one share (subject to increase if the Company
issues shares at a dilutive price), into shares of Class C Common Stock at the
option of holders of the Series C Preferred Stock at any time. Shares of
Preferred Stock will automatically be converted (unless redeemed), one share for
one share (subject to dilution adjustments), into shares of Class C Common Stock
upon the occurrence of a combination, consolidation or merger transaction
involving the Company in which the Company is not the survivor, the sale,
exchange or other disposition of all, or substantially all, of the Company's
assets, and upon the consummation of any public offering of securities of the
Company.
The special voting and approval rights of the holders of the Preferred
Stock and their rights to require the redemption of the Preferred Stock or to
convert such Preferred Stock into Class C Common Stock may prevent the Company
from consummating one or more transactions, including equity and debt financings
that could be beneficial to the Company's stockholders.
DIVIDENDS. Prior to April 1, 2000, cash dividends at the rate of $0.325 per
share per annum accrue on the Series A Preferred Stock. Such dividends are
cumulative and will accrue, whether or not earned or declared or payment is
legally available, from and after the 24th day of February, 1995 and bear
interest on accrued but unpaid amounts at the rate of 6.5% per annum, compounded
quarterly. Such accrued dividends and interest are payable only upon the
liquidation of the Company or the redemption or conversion of the Series A
Preferred Stock and if not paid prior to April 1, 2000, the amount of such
accrued but unpaid dividends and interest payments will become an unsecured
obligation of the Company. On or after April 1, 2000, holders of the Series A
Preferred Stock are entitled to receive, when and as declared by the directors
of the Company and when legally available, cash dividends at the per annum rate
of 100 basis points over the Wall Street Journal Prime Rate as of the last
business day prior to April 1, 2000 based on the original issue price of the
Series A Preferred Stock. So long as any shares of Series A Preferred Stock are
issued and outstanding, no dividends may be declared and no other distribution
may be made, with certain exceptions, with respect to any other class or series
of stock or equity interest of the Company without the consent of each director
elected by the holders of the Series A Preferred Stock.
Prior to April 1, 2000, cash dividends at the rate of $1.097 per share per
annum accrue on the Series B Preferred Stock. Such dividends are cumulative and
will accrue, whether or not earned or declared or payment is legally available,
from and after the first day of December, 1995 and bear interest on accrued but
unpaid amounts at the rate of 9.75% per annum, compounded quarterly. Such
dividends and interest are payable only after all dividends and interest accrued
on or with respect to the Series A Preferred Stock have been paid and only upon
the liquidation of the Company or the redemption or conversion of the Series B
Preferred Stock and if not paid prior to April 1, 2000, the amount of such
accrued but unpaid dividends and interest payments will become an unsecured
obligation of the Company. On and after April 1, 2000, holders of the Series B
Preferred Stock are entitled to receive, when and as declared by the directors
of the Company and when legally available, cash dividends at the per annum rate
of 100 basis points over the Wall Street Journal Prime Rate as of the last
business day prior to April 1, 2000 based upon the original issue price of the
Series B Preferred Stock.
Cash dividends at the rate of $1.40 per share per annum accrue on the
issued and outstanding Series C Preferred Stock and cash dividends at the rate
of $1.60 per share per annum shall accrue on shares to be issued pursuant to the
Option Agreement with Genesis. Such dividends are cumulative and will accrue,
whether or not earned or declared or payment is legally available, from and
after September 4, 1996 and bear interest on accrued but unpaid amounts at the
rate of 8.00% per annum. Such dividends and interest are payable only after all
dividends and interest accrued on or with respect to the Series A and Series B
Preferred Stock have been paid and only upon the liquidation of the Company or
the redemption or conversion of the Series C Preferred Stock and if not paid,
the amount of such accrued but unpaid dividends and interest payments will
become an unsecured obligation of the Company, bearing interest at the per annum
rate of 100 basis points over the Wall Street Journal Prime Rate as of the last
business day prior to such liquidation, redemption or conversion. All accrued
dividends and unpaid interest on the Series C Preferred Stock shall be canceled
and no longer be payable in the event the Company consummates a Qualified Public
Offering on or before August 30, 1998 at a price per share of not less than the
weighted average price paid or to be paid by the holders of Series C Preferred
Stock for all shares of Series C Preferred Stock then outstanding or subject to
the Option, plus all accrued but unpaid dividends and interest thereon. So long
as any shares of Series C Preferred Stock remain outstanding, no dividends shall
be declared or paid upon, nor shall any dividend or other distribution be made
with respect to, any shares or any other class or series of stock or equity
interest of the Company other
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than the Series A Preferred Stock or Series B Preferred Stock without the
consent of the Series C Preferred Director or Directors.
The Company may not issue any shares of capital stock which are senior in
dividend and/or liquidation rights to the Preferred Stock, and the Preferred
Stockholders have certain anti-dilution rights with respect to most issuances of
capital stock by the Company which are junior to the Preferred Stock and which
are issued for a share price less than the original per share price of the
Preferred Stock.
LIQUIDATION RIGHTS. Upon liquidation of the Company, holders of the Series
A Preferred Stock, if any, are entitled to receive a liquidating distribution
equal to the greater of (i) the sum of the fair market value per share of the
Series A Preferred Stock plus all accrued but unpaid dividends thereon, or (ii)
the sum of the original purchase price per share of the Series A Preferred Stock
plus all accrued but unpaid dividends thereon. After payment of such
preferential amount to the holders of the Series A Preferred Stock, holders of
the Series B Preferred Stock, if any, are entitled to receive a liquidating
distribution equal to the greater of (i) the sum of the fair market value per
share of the Series B Preferred Stock plus all accrued but unpaid dividends
thereon, or (ii) the sum of the original purchase price per share of the
Preferred Stock plus all accrued but unpaid dividends thereon. After payment of
such preferential amount to the holders of the Series A and Series B Preferred
Stock, holders of the Series C Preferred Stock, if any, are entitled to receive
a liquidating distribution in the amount of $17.50 per share of Series C
Preferred Stock issued pursuant to the Stock Purchase Agreement which is then
outstanding and $20.00 per share of Series C Preferred Stock issued pursuant to
the Option Agreement which is then outstanding, plus all accrued but unpaid
dividends and interest thereon. After payment of the preferential liquidation
amounts to the holders of Series A, Series B and Series C Preferred Stock, each
share of Common Stock is entitled to share ratably with all other shares of
Common Stock in the remaining net assets of the Company upon liquidation.
PERMITTED REDEMPTIONS
The Charter provides that the Company may effect the following redemptions
without the consent or approval of any of the Series A Preferred Directors, the
Series B Preferred Directors, the Series C Preferred Directors, the holders of
Series A Preferred Stock, the holders of Series B Preferred Stock and the
holders of Series C Preferred Stock:
(i) upon the payment in full of all accumulated and unpaid accrued
dividends and interest on all outstanding shares of Preferred
Stock, redemptions of shares of Class A Common Stock owned by any
"Management Stockholders" (Mr. Gold and Drs. Kimmel and Rifkin)
only and to the extent required by such Management Stockholder's
employment agreement, except that such redemptions may be made
without payment of accrued dividends and interest on outstanding
shares of Series C Preferred Stock if the Company completes a
Qualified Public Offering of its securities prior to August 30,
1998;
(ii) redemptions of shares of Class A Common Stock owned by any
employee (other than a Management Stockholder) when and as
approved by the Board or required by law or by the terms of any
agreement with such employee;
(iii) redemptions of Class B Common Stock issued by the Company to
MHLP, until such time as there are more than 66 physicians
holding limited partnership interests in MHLP;
(iv) redemptions under any other circumstances expressly contemplated
by the Stockholders Agreement, including any amendments thereto
(see "Stockholders Agreement");
(v) certain redemptions of Series A Preferred Stock; or
(vi) certain redemptions of Series B Preferred Stock in accordance
with the Charter; provided, that no such redemption shall be
permitted or effected unless and until the Company has elected
to redeem all of the issued and outstanding Series A Preferred
Stock and the price applicable to such redemption shall have
been paid in full or adequate provision made therefor.
(vii) certain redemptions of Series C Preferred Stock in accordance
with the Charter; provided, that no such redemption shall be
permitted or effected unless and until the Company has elected
to redeem all of the issued and outstanding Series A and Series
B Preferred Stock and the price applicable to such redemption
shall have been paid in full or adequate provision made
therefor.
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DESCRIPTION OF OPTIONS
GENERAL.
The Company may issue Options for the purchase of Class B Common Stock.
Options may be issued independently or together with any other Securities
covered by the Registration Statement and offered by this Prospectus and any
accompanying Prospectus Supplement and may be attached to or separate from such
other Securities. Each series of Options will be issued under a separate
agreement (each, an "Option Agreement") to be entered into between the Company
and the holder of such Options, all as set forth in the Prospectus Supplement
relating to the particular issue of offered Options.
The applicable Prospectus Supplement will describe the terms of such
Options, including the following where applicable: (i) the offering price; (ii)
the aggregate number of shares purchasable upon exercise of such Options; (iii)
the designation and terms of the Securities with which such Options are being
offered, if any, and the number of such Options being offered with each such
Security; (iv) if applicable, the date on and after which such Options and the
related Securities will be transferable separately; (v) the number of shares of
Class B Common Stock purchasable upon exercise of each such Option and the price
at which such number of shares of Class B Common Stock may be purchased upon
such exercise; (vi) the date on which the right to exercise such Options shall
commence and the expiration date on which such right shall expire; (vii) certain
federal income tax consequences; and (viii) any other material terms of such
Options.
Prior to the exercise of any Option to purchase Class B Common Stock,
holders of such Options will not have any rights of holders of the Class B
Common Stock purchasable upon such exercise, including the right to receive
payments of dividends, if any, on the Class B Common Stock purchasable upon such
exercise or to exercise any applicable right to vote.
EXERCISE OF OPTIONS.
Each Option will entitle the holder thereof to purchase such number of
shares of Class B Common Stock, at such exercise price as shall in each case be
set forth in, or calculable from, the Prospectus Supplement relating to the
offered Options. After the close of business on the expiration date (or such
later date to which such Expiration Date may be extended by the Company),
unexercised Options will become void.
Options may be exercised by delivering to the Company payment, as provided
in the applicable Prospectus Supplement, of the amount required to purchase the
Class B Common Stock purchasable upon such exercise together with certain
information set forth on the reverse side of the Option Certificate. Upon
receipt of such payment and the definitive Option Certificates properly
completed and duly executed, the Company will, as soon as practicable, issue and
deliver the Class B Common Stock purchasable upon such exercise. If fewer than
all of the Options represented by such Option Certificate are exercised, a new
Option Certificate will be issued for the remaining amount of Options.
AMENDMENTS AND SUPPLEMENTS TO OPTION AGREEMENTS.
Each Option Agreement may be amended or supplemented without the consent of
the holders of the Options issued thereunder to effect changes that are not
inconsistent with the provisions of the Options and that do not adversely affect
the interests of the holders of the Options.
OPTION ADJUSTMENTS.
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Class B Common Stock covered by,
an Option are subject to adjustment in certain events, including: (i) the
issuance of Common Stock as a dividend or distribution on the Common Stock; (ii)
subdivisions and combinations of the Common Stock; and (iii) the distribution to
all holders of Common Stock of evidences of indebtedness or assets of the
Company (excluding certain cash dividends and distributions described below).
The terms of any such adjustment will be specified in the related Prospectus
Supplement for such Options.
NO RIGHTS AS STOCKHOLDERS.
Holders of Options will not be entitled by virtue of being such holders, to
vote, to consent, to receive dividends, to receive notice as stockholders with
respect to any meeting of stockholders for the election of directors of the
Company of any other matter, or to exercise any rights whatsoever as
stockholders of the Company.
55
<PAGE>
EXISTING SECURITIES HOLDERS.
The Company may issue, as a dividend at no cost, such Options to holders of
record of the Company's Securities or any class thereof on the applicable record
date. If Options are so issued to existing holders of Securities, the applicable
Prospectus Supplement will describe, in addition to the terms of the Options and
the Securities issuable upon exercise thereof, the provisions, if any, for a
holder of such Options who validly exercises all Options issued to such holder
to subscribe for unsubscribed Securities (issuable pursuant to unexercised
Securities Options issued to other holders) to the extent such Securities
Options have not been exercised.
PLAN OF DISTRIBUTION
Securities may be issued from time to time in connection with the
affiliation of medical practices with the Company. The Company may sell
Securities (a) directly to one or more purchasers, or (b) through agents. A
Prospectus Supplement will set forth the specific terms of the offering of the
Securities offered thereby, including, without limitation, to the extent
applicable (1) in the case of Options, the Class B Common Stock for which each
such Option is exercisable, and the exercise price, duration, detachability,
restrictions and call provisions of each such Option; and (2) in the case of any
offering of Securities, to the extent applicable, the offering price or prices,
certain Federal income tax consequences and the agents or dealers, if any,
participating in the offering and sale of the Securities.
It is anticipated that the affiliations of the medical practices will
involve (a) in the case of the acquisition of medical practices, the receipt by
the Company primarily of enumerated tangible assets of such practices and
related contracts and leases, and (b) in the case of contractual arrangements,
the receipt of the contractual consideration specified in the relevant contract.
The Company will not receive cash proceeds from the issuance of the Securities.
The terms of an affiliation are determined by negotiations between the
Company's representatives and physicians. Factors taken into account in such
transactions include the established size, quality and reputation of the
practice and the market value of the Company's estimate of the Class B Common
Stock. It is anticipated that shares of Class B Common Stock issued in any such
affiliation will, in most cases, be valued at a price reasonably related to the
current market value of the Class B Common Stock, either at the time that the
terms of the affiliation agreement are tentatively agreed upon, or at or about
the time of closing, or during the period or periods prior to delivery of the
shares.
It is not expected that underwriting discounts or commissions will be paid
by the Company except that finder's fees may be paid to persons from time to
time in connection with specific acquisitions. The Company may issue all or a
portion of any offering of its Securities through agents or directly to other
purchasers. The related Prospectus Supplement for each offering of Securities
will set forth the name of any agents involved in the issuance of such
Securities and any applicable fee, commission or indemnification agreement with
any such party.
The Securities issued hereunder will be new issue of securities with no
established trading market. The Company does not currently intend to apply for
the listing of any Securities on any national securities exchange. No assurance
can be given as to the liquidity of the trading market for any such Securities.
The Securities offered hereby will be subject to certain contractual
restrictions on resale, including the Stockholders Agreement. See "Description
of Capital Stock", "Risk Factor--Voting Limitations; Restrictions on Resale of
Securities" and "--Absence of Public Market" and "--Penny Stock Rules."
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
EXPERTS
The Registrant's financial statements as of June 30, 1996, 1995 and 1994
and for the years then ended included in this Prospectus have been so included
in reliance on the report of Grant Thornton LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The statements of operations and cash flows of practices A, B, C and D for
the year ended December 31, 1994, practice E for the year ended April 30, 1995,
practices F, G and H for the year ended December 31, 1995, the financial
statements of practice I as of July 31, 1996 and 1995, and for the years then
ended and, the financial statements of practice J as of June 30, 1996 and for
the year then ended included in this Prospectus have been so included in
reliance on the report of Grant Thornton LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
56
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DOCTORS HEALTH SYSTEM, INC.
JUNE 30, 1994, 1995 AND 1996
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
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<S> <C>
DOCTORS HEALTH SYSTEM, INC.
Report of Independent Certified Public Accountants..................................................................... F-3
Consolidated Financial Statements
Balance Sheets....................................................................................................... F-4
Statements of Operations............................................................................................. F-5
Statements of Stockholders' Equity................................................................................... F-6
Statements of Cash Flows............................................................................................. F-7
Notes to Consolidated Financial Statements............................................................................. F-8
Schedule II--Valuation and Qualifying Accounts......................................................................... F-23
1995 ACQUISITIONS
PRACTICE A (1)
Report of Independent Certified Public Accountants..................................................................... F-24
Statement of Operations................................................................................................ F-25
Statement of Cash Flows................................................................................................ F-26
Notes to Financial Statements.......................................................................................... F-27
PRACTICE B (1)
Report of Independent Certified Public Accountants..................................................................... F-29
Statement of Operations................................................................................................ F-30
Statement of Cash Flows................................................................................................ F-31
Notes to Financial Statements.......................................................................................... F-32
PRACTICE C (1)
Report of Independent Certified Public Accountants..................................................................... F-34
Statement of Operations................................................................................................ F-35
Statement of Cash Flows................................................................................................ F-36
Notes to Financial Statements.......................................................................................... F-37
1996 ACQUISITIONS
PRACTICE D (1)
Report of Independent Certified Public Accountants..................................................................... F-39
Statement of Operations................................................................................................ F-40
Statement of Cash Flows................................................................................................ F-41
Notes to Financial Statements.......................................................................................... F-42
PRACTICE E (1)
Report of Independent Certified Public Accountants..................................................................... F-44
Statement of Operations................................................................................................ F-45
Statement of Cash Flows................................................................................................ F-46
Notes to Financial Statements.......................................................................................... F-47
PRACTICE F (1)
Report of Independent Certified Public Accountants..................................................................... F-49
Statement of Operations................................................................................................ F-50
Statement of Cash Flows................................................................................................ F-51
Notes to Financial Statements.......................................................................................... F-52
PRACTICE G (1)
Report of Independent Certified Public Accountants..................................................................... F-54
Statement of Operations................................................................................................ F-55
Statement of Cash Flows................................................................................................ F-56
Notes to Financial Statements.......................................................................................... F-57
</TABLE>
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(1) The individuals or entities have requested the confidentiality of their
financial results.
F-1
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
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<S> <C>
PRACTICE H (1)
Report of Independent Certified Public Accountants..................................................................... F-59
Statement of Operations................................................................................................ F-60
Statement of Cash Flows................................................................................................ F-61
Notes to Financial Statements.......................................................................................... F-62
PROBABLE ACQUISITIONS
PRACTICE I (1)
Report of Independent Certified Public Accountants..................................................................... F-64
Balance Sheets....................................................................................................... F-65
Statements of Operations............................................................................................. F-66
Statements of Stockholders' Equity................................................................................... F-67
Statements of Cash Flows............................................................................................. F-68
Notes to Financial Statements.......................................................................................... F-69
</TABLE>
<TABLE>
<S> <C>
PRACTICE J (1)
Combined Financial Statements
Report of Independent Certified Public Accountants..................................................................... F-72
Combined Balance Sheet............................................................................................... F-73
Combined Statement of Operations..................................................................................... F-74
Combined Statement of Stockholders' Deficit.......................................................................... F-75
Combined Statement of Cash Flows..................................................................................... F-76
Notes to Combined Financial Statements................................................................................. F-77
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Description............................................................................................................ F-80
Consolidated Pro Forma Financial Statements
Balance Sheet........................................................................................................ F-81
Balance Sheet--Supplemental Schedules
Acquisitions Completed Subsequent to June 30, 1996................................................................ F-82
Probable Acquisitions............................................................................................. F-83
Notes to Balance Sheet............................................................................................ F-84
Statement of Operations.............................................................................................. F-85
Statement of Operations--Supplemental Schedules
Acquisitions Completed During the Year Ended June 30, 1996........................................................ F-86
Acquisitions Completed Subsequent to June 30, 1996................................................................ F-87
Probable Acquisitions............................................................................................. F-88
Notes to Statement of Operations.................................................................................. F-89
</TABLE>
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(1) The individuals or entities have requested the confidentiality of their
financial results.
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
DOCTORS HEALTH SYSTEM, INC.
We have audited the accompanying consolidated balance sheets of Doctors
Health System, Inc. (a Maryland corporation, formerly Baltimore Medical Group,
P.A.), as of June 30, 1996, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Doctors Health
System, Inc. as of June 30, 1996, 1995 and 1994, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
We have also audited Schedule II--Valuation and Qualifying Accounts for the
years ended June 30, 1996, 1995 and 1994. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
GRANT THORNTON LLP
Baltimore, Maryland
October 3, 1996
F-3
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes 1, 3 and 9)...................................... $104,614 $ 131,361 $ 1,400,837
Accounts receivable (net of allowance of $40,000, $65,000 and $360,000 for
doubtful accounts, respectively) (notes 1, 2, 6 and 7)......................... 338,572 644,413 3,004,629
Other receivables................................................................. 9,545 219,158 611,025
Prepaid expenses.................................................................. 7,489 163,762 132,752
-------- ----------- -----------
Total current assets........................................................... 460,220 1,158,694 5,149,243
PROPERTY AND EQUIPMENT, net (notes 1, 2, 5, 6 and 7)................................ 50,245 271,460 2,510,301
OTHER ASSETS
Intangibles (net of accumulated amortization of $0, $33 and $62,917, respectively)
(notes 1 and 2)................................................................ -- 1,287 2,387,150
Deferred charges (net of accumulated amortization of $0, $9,916, and $151,368,
respectively) (note 1)......................................................... -- 158,084 697,652
Note receivable (note 4).......................................................... -- -- 300,000
Accrued interest receivable....................................................... -- 67,752 253,976
Deposits.......................................................................... 10,268 149,563 24,926
-------- ----------- -----------
10,268 376,686 3,663,704
-------- ----------- -----------
TOTAL ASSETS................................................................... $520,733 $ 1,806,840 $11,323,248
-------- ----------- -----------
-------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable (note 6)............................................................ $109,104 $ 118,613 $ 353,915
Current maturities of capital lease obligations (notes 5, 7 and 8)................ 13,937 15,524 110,917
Accounts payable.................................................................. 25,092 76,212 350,794
Accrued medical services.......................................................... -- -- 550,520
Other accrued expenses............................................................ 26,627 886,165 2,951,893
-------- ----------- -----------
Total current liabilities...................................................... 174,760 1,096,514 4,318,039
LONG-TERM OBLIGATIONS
Note payable (note 7)............................................................. -- -- 3,400,000
Notes payable and purchase obligations--related parties (notes 7 and 14).......... -- 584,406 2,077,364
Capital lease obligations, less current maturities (notes 5, 7 and 8)............. 38,227 22,490 330,578
-------- ----------- -----------
38,227 606,896 5,807,942
COMMITMENTS AND CONTINGENCIES (note 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK (notes 7, 9, 10, and 14)
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000 shares
(liquidation value $3,500,000)................................................. -- 5,113,300 5,438,305
Less subscription receivable...................................................... -- (3,000,000) (1,500,000)
-------- ----------- -----------
-- 2,113,300 3,938,305
9.75% cumulative, Series B, $11.25 par value, authorized and issued 355,556 shares
(liquation value $4,000,000)................................................... -- -- 4,227,526
-------- ----------- -----------
-- 2,113,300 8,165,831
STOCKHOLDERS' EQUITY (DEFICIT) (notes 11, 12 and 13)
Preferred Stock, $.01 par value; authorized 1,000,000 shares, no shares issued.... -- -- --
Common Stock
Class A, $1 par value, 1,250 shares issued and outstanding in 1994 and $.01 par
value, authorized 20,700,000 shares, issued and outstanding 800,000 shares in
1995 and 1996, respectively................................................... 1,250 8,000 8,000
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 0
shares, 2,200,000 shares and 2,398,000 shares, respectively................... -- 22,000 23,980
Class C, $.01 par value; authorized 29,050,000; no shares issued............... -- -- --
Additional paid in capital..................................................... 17,500 (158,732) 2,079,548
Retained earnings (accumulated deficit)........................................ 288,996 (1,881,138) (9,080,092)
-------- ----------- -----------
Total stockholders' equity (deficit)......................................... 307,746 (2,009,870) (6,968,564)
-------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)......................... $520,733 $ 1,806,840 $11,323,248
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Net physician revenue (note 15)................................................. $2,166,419 $ 3,315,332 $ 9,902,528
Global capitation revenue....................................................... -- -- 382,062
---------- ----------- -----------
2,166,419 3,315,332 10,284,590
---------- ----------- -----------
EXPENSES
Physician services and other provider costs..................................... 681,901 1,760,245 4,525,340
Medical services expense........................................................ -- -- 662,671
Care center costs............................................................... 1,075,365 2,157,549 6,011,470
General and administrative...................................................... 288,621 1,587,481 5,342,429
Depreciation and amortization................................................... 17,871 35,367 438,143
---------- ----------- -----------
2,063,758 5,540,642 16,980,053
---------- ----------- -----------
Income (Loss) from operations................................................ 102,661 (2,225,310) (6,695,463)
OTHER INCOME (EXPENSE)
Interest and other income....................................................... 85,442 199,166 291,553
Interest expense................................................................ (16,153) (30,690) (242,513)
---------- ----------- -----------
69,289 168,476 49,040
---------- ----------- -----------
Income (loss) before income taxes............................................ 171,950 (2,056,834) (6,646,423)
Income tax expense (note 16).................................................... -- -- --
---------- ----------- -----------
NET INCOME (LOSS).......................................................... $ 171,950 $(2,056,834) $(6,646,423)
---------- ----------- -----------
---------- ----------- -----------
Net income (loss) per share....................................................... $.06 $(.72) $(2.35)
---------- ----------- -----------
---------- ----------- -----------
Pro forma net income (1).......................................................... $ 103,170
----------
----------
Pro forma income per share........................................................ $0.03
----------
----------
Weighted average number of shares outstanding (note 19)........................... 3,000,000 3,000,000 3,063,205
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ---------------
(1) Pro forma net income reflects the historical operations for 1994 as if the
Company had been treated as a C Corporation with an effective tax rate of
40%.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK-- COMMON STOCK-- RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS/
------------------ -------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ------- --------- ------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993............ 1,250 $ 1,250 -- $ -- $ 17,500 $ 117,046 $ 135,796
Net income for the year........... -- -- -- -- -- 171,950 171,950
------- ------- --------- ------- ---------- ------------ -----------
BALANCE AT JUNE 30, 1994............ 1,250 1,250 -- -- 17,500 288,996 307,746
Net loss for the year............. -- -- -- -- -- (2,056,834) (2,056,834)
Issuance of BMGPA common stock.... 200 200 -- -- 2,800 -- 3,000
Termination of BMGPA operations... (1,450) (1,450) -- -- (20,300) -- (21,750)
Issuance of common stock.......... 200 2 198 200
Cancellation of common stock...... (200) (2) -- (2)
Issuance of common stock (1)...... 800,000 8,000 2,200,000 22,000 -- -- 30,000
Issuance costs, Series A Preferred
Stock.......................... -- -- -- -- (165,000) -- (165,000)
Series A Preferred Stock dividend
accretion...................... -- -- -- -- -- (113,300) (113,300)
Members' capital
contributions.................. -- -- -- -- 4,750 -- 4,750
Capital related to acquired
practices...................... -- -- 1,320 1,320
------- ------- --------- ------- ---------- ------------ -----------
BALANCE AT JUNE 30, 1995............ 800,000 8,000 2,200,000 22,000 (158,732) (1,881,138) (2,009,870)
Net loss for the year............. -- -- -- -- -- (6,646,423) (6,646,423)
Issuance of common stock purchase
warrants for services (note
11)............................ -- -- -- -- 370,000 -- 370,000
Issuance costs, Series B Preferred
Stock.......................... -- -- -- -- (90,000) -- (90,000)
Issuance of Class B Common
Stock.......................... -- -- 198,000 1,980 592,020 -- 594,000
Series A Preferred Stock dividend
accretion...................... -- -- -- -- -- (325,005) (325,005)
Series B Preferred Stock dividend
accretion...................... -- -- -- -- -- (227,526) (227,526)
Members' capital
contributions.................. -- -- -- -- 6,000 -- 6,000
Capital related to acquired
practices...................... -- -- -- -- 1,360,260 -- 1,360,260
------- ------- --------- ------- ---------- ------------ -----------
BALANCE AT JUNE 30, 1996............ 800,000 $ 8,000 2,398,000 $23,980 $2,079,548 $ (9,080,092) $(6,968,564)
------- ------- --------- ------- ---------- ------------ -----------
------- ------- --------- ------- ---------- ------------ -----------
</TABLE>
- ---------------
(1) All DHS share amounts have been restated to give effect to a two-for-one
stock split.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................ $ 171,950 $(2,056,834) $(6,646,423)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Depreciation and amortization................................................. 17,278 35,367 438,143
Provision for uncollectible accounts receivables.............................. 10,000 25,000 295,000
Loss on disposal of assets.................................................... -- 11,603 --
Changes in assets and liabilities, net of effects of medical practice
receivables acquired
Accounts receivable......................................................... (168,860) 257,701 (1,271,016)
Prepaid expenses and other receivables...................................... 25,081 (400,834) (542,581)
Accounts payable............................................................ 6,948 51,120 252,004
Accrued and other liabilities............................................... 20,400 871,044 2,689,914
Organizational costs and deferred charges................................... -- (168,000) (311,020)
--------- ----------- -----------
Net cash provided by (used in) operating activities...................... 82,797 (1,373,833) (5,095,979)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............................................... (22,464) (241,067) (2,133,391)
Deposits......................................................................... (8,485) (139,295) 127,029
--------- ----------- -----------
Net cash used in investing activities.................................... (30,949) (380,362) (2,006,362)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible preferred stock............. -- 1,835,000 5,410,000
Net proceeds from issuance of common stock....................................... 3,000 198 --
Borrowings under notes payable................................................... 48,431 -- 3,400,000
Repayments under notes payable................................................... -- (36,427) --
Principal payments on capital lease obligations.................................. (11,444) (14,150) (88,809)
Payment on notes payable......................................................... -- (8,429) (55,374)
Issuance of note receivable...................................................... -- -- (300,000)
Members' capital contributions................................................... -- 4,750 6,000
--------- ----------- -----------
Net cash provided by financing activities................................ 39,987 1,780,942 8,371,817
Net increase in cash and cash equivalents................................ 91,835 26,747 1,269,476
Cash and cash equivalents at beginning of period................................... 12,779 104,614 131,361
--------- ----------- -----------
Cash and cash equivalents at end of period......................................... $ 104,614 $ 131,361 $ 1,400,837
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994, 1995 AND 1996
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Doctors Health System, Inc., a Maryland corporation, and its subsidiaries
and affiliates (collectively "the Company") are engaged in operating care
centers, managing physician groups and developing a regional integrated health
care delivery system through contracts with primary care physicians ("PCPs"),
specialist physicians, hospitals and other providers. The Company was
incorporated in June, 1994 and commenced operations on February 24, 1995. The
Company is the substitute corporate entity formed to reorganize the business of
Baltimore Medical Group, P.A. ("BMGPA"). BMGPA was incorporated in January,
1993. The accompanying financial statements reflect the operations of BMGPA
prior to the commencement of operations by DHS.
The Company conducts its operations through the following wholly owned and
majority owned subsidiaries and affiliated medical groups under long-term
physician service agreements ("PSO Agreements"):
SUBSIDIARIES
<TABLE>
<S> <C>
Doctors Health System Primary Care IPA, Inc. 100.0% owned
(inactive during 1996 and 1995)...................................................
Doctors Health System--Medalie Equipment 100.0% owned
Corporation (incorporated in 1996)................................................
Mishner Newco, Inc. (incorporated in January 1996).................................. 100.0% owned
Williams Newco, Inc. (incorporated in May 1996)..................................... 100.0% owned
WomanCare IPA, LLC 87.5% owned
(formed in May 1995; inactive during 1995)........................................
</TABLE>
AFFILIATES
Baltimore Medical Group, LLC (Baltimore Medical, formed in February
1995)
Carroll Medical Group, LLC (Carroll Medical, formed in November 1995)
Cumberland Valley Medical Group, LLC (Cumberland Valley Medical, formed
in May 1996)
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
BASIS OF PRESENTATION/PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its subsidiaries
and affiliates. The Company has adopted a June 30th year end. The agreements
entered into as part of the acquisitions convey to the Company perpetual,
unilateral control over the assets and operation of the various Core Medical
Groups (CMGs). The Company's PSO Agreements have a 30 year term with unlimited
10 year renewals. Perpetual control by the Company is evidenced by (i) the
Company's exclusive right to manage each CMG's business (other than matters
involving clinical judgment and certain health care services), (ii) its control
over the admission and withdrawal of the members of the CMGs, (iii) its
responsibility for all liabilities and obligations of the CMGs, (iv) its
exclusive right to contract for the CMGs, (v) the length of the original term of
the PSO Agreements, (vi) the Company's ownership of the assets used by the CMGs,
(vii) a high degree of commonality between the shareholders, officers and
directors of the Company and the CMGs, (viii) the continuing investment of
capital by the Company, (ix) the employment of and the incurrence of expenses
for the non-physician personnel and (x) the nature of the services provided to
the CMGs by the Company. Pursuant to the PSO Agreements, the Company provides
the CMGs with capital, management expertise, sophisticated information systems
and managed care contracts. Notwithstanding the lack of any ownership of the
equity interests in such entities, consolidation of the CMGs is necessary to
present fairly the financial position and results of operations of the Company
because there exists a parent-subsidiary relationship by means other than record
ownership of equity interests. All intercompany accounts and transactions have
been eliminated in the consolidation.
F-8
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
REVENUES AND MEDICAL SERVICE EXPENSE RECOGNITION
Net physician revenue of the Company consists primarily of fees for medical
services provided by the physicians under fee-for-service type arrangements or
under capitated gatekeeper contracts with various managed care payors including
health maintenance organizations (HMOs). Fee-for-service revenues are generated
from direct patient and third-party billings and are recognized when services
are performed. These revenues are recorded net of adjustments and allowances
resulting from the difference between the customary and usual rates for
physician services and amounts reimbursable by govenment-sponsored healthcare
programs (principally, the Medicare and Medicaid programs), commercial insurance
carriers and other health insurance programs. During 1996, the Company estimates
that approximately 42% of net physician revenues were received under
government-sponsored healthcare programs and 21% were received under various
contracts with Blue Shield. The captitated gatekeeper revenue is prepaid monthly
based on the number of Enrollees and recognized as net physician revenue during
the month when services are provided (normally the same month as receipt).
In addition, the Company has three global capitated contracts with HMOs
whereby it receives monthly capitation fees based on the number of Enrollees
electing any one of the Company's primary care physicians. The captitation
revenue under these contracts is prepaid monthly based on the number of
Enrollees and recognized as global capitation revenue during the month of
receipt.
The Company's commercial capitation contract also includes a provision to
share in the risk for hospitalization, whereby the Company can earn additional
incentive revenue or incur medical service expenses based upon the Enrollees'
utilization of hospital services. Estimated shared-risk amounts receivable or
payable from the HMO are recorded based upon hospital utilization and associated
costs incurred by assigned HMO Enrollees, compared to budgeted costs.
Differences between actual contract settlements and estimated receivables or
payables relating to the risk-sharing arrangement are recorded in the year of
settlement. Included in accrued medical services as of June 30, 1996 is
approximately $68,000 of estimated amounts due to the HMO under this
arrangement. Also, as of June 30, 1996, the Company has included in accrued
medical services a provision of approximately $77,000 which represents an
estimate of the loss to be incurred over the remaining term of the commercial
capitation contract. Under the Company's two Medicare full risk capitation
contracts, the Company has assumed responsibility for managing and paying for
substantially all of the medical care for the respective payors' Enrollees.
The Company is responsible for some or all of the medical services provided
by its physicians and other providers to which it refers its patients who are
covered under global capitated contracts. The cost of medical services is
recognized in the period in which it is provided and includes an estimate of the
cost of services which have been incurred but not yet reported. The estimate for
accrued medical services is based on projections of costs using historical
studies of claims paid. Estimates are continually monitored and reviewed and, as
settlements are made or estimates are adjusted, differences are reflected in
current operations. As of June 30, 1996, approximately $400,000 was recorded as
accrued medical services for incurred but not reported services.
The Company purchases reinsurance which limits the amount of risk it
ultimately bears by providing reimbursement payments once medical services
provided to an individual Enrollee exceed an agreed-upon amount. Estimates of
reinsurance recoveries as of June 30, 1996 under this arrangement were
approximately $23,000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from third party
payors for patient medical services provided by physician groups, including
receivables assigned by such physician groups pursuant to PSO Agreements. Such
amounts are recorded net of contractual allowances and estimated bad debts.
As of June 30, 1996, approximately $1,200,000 of the Company's accounts
receivable represented amounts due from the Medicare and Medicaid programs in
respect of which the Company has legal rights to the proceeds.
F-9
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
MEDICAL SUPPLIES
The Company expenses the cost of routine medical and laboratory supplies
when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, ranging from three to ten
years. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter. Leased
property under capital leases is amortized over the lives of the respective
leases or over the service lives of the assets, whichever is shorter. The
straight-line method of depreciation is followed for substantially all assets
for financial reporting purposes and accelerated methods are used for tax
purposes.
DEFERRED CHARGES AND INTANGIBLE ASSETS
Deferred charges include (i) deferred loan acquisition costs, (ii) deferred
physician employment contract costs and (iii) organization costs. These costs
are being amortized to operations using the straight-line basis over the term of
the Series B Preferred shareholder's loan guarantee (25 months), the term of the
employment agreements (generally 10 years) and five years for organization
costs.
Intangible assets consist of the excess of the purchase price paid over the
fair value of net assets acquired. The Company's policy is to amortize
intangibles over a 10 to 40 year period. The intangibles acquired during 1995
and 1996 are being amortized using the straight-line method over 20 years.
Management does not believe that any current factors indicate an impairment of
intangibles acquired. Management will review the carrying value at each future
reporting period to determine if any impairment has occurred.
INCOME TAXES
The Company is a corporation subject to federal and state income taxes. The
Company's year-end for tax reporting purposes is December 31. Deferred income
taxes result from the future tax consequences associated with temporary
differences between the amount of assets and liabilities recorded for financial
accounting and income tax purposes. Currently, these temporary differences
relate primarily to net operating loss carryforwards and depreciation
differences. Future use of the net operating loss carryforwards by the Company
may be limited due to certain changes in control as provided for in the Internal
Revenue Code.
Certain of the consolidated subsidiaries are limited liability companies
(LLCs), which are treated as partnerships for federal and state income tax
purposes. The Company's compensation plans for physicians result in these
entities reporting little or no taxable income. To the extent that additional
amounts are paid to member physicians to cover income tax expense incurred, they
will be reported as distributions. These amounts are not deductible for federal
or state income tax purposes.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which requires that long-lived assets and
certain identifiable intangibles held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If this review indicates
that the carrying amount of the long-lived assets may not be recoverable, the
carrying value of those assets would be reduced to fair value. The Company will
implement the standard when it becomes effective (effective date is for fiscal
years beginning after December
F-10
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
15, 1995), and does not believe implementation of the standard would have a
material impact on the Company's financial statements.
In October 1995, FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. Under the fair value method, compensation expense is
measured at the grant date based on the fair value of the award. Under the
intrinsic value method, compensation expense is equal to the excess, if any, of
the quoted market price of the stock at the grant date over the amount the
employee must pay to acquire the stock. Entities electing to measure
compensation costs using the intrinsic value method must make pro forma
disclosures for fiscal years beginning after December 15, 1995, of net income
and earnings per share as if the fair value method had been applied. The Company
has elected to account for stock-based compensation programs using the intrinsic
value method and, therefore, the standard will have no effect on the
consolidated financial statements.
NOTE 2--ACQUISITIONS
During the years ended June 30, 1995 and 1996, the Company acquired certain
operating assets and assumed certain operating liabilities of physician groups
located in Maryland. The acquisitions have been accounted for by the purchase
method of accounting, and accordingly, the purchase price has been allocated to
the assets acquired based on the estimated fair values at the dates of
acquisition. Accounts receivable acquired were valued at their net realizable
values based upon analyses made by the Company. The estimated fair value of
assets acquired, liabilities assumed and consideration paid are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
ASSETS ACQUIRED, NET JUNE 30, 1995 JUNE 30, 1996
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Accounts receivable, net.................................... $ 134,349 $ 1,384,200
Fixed assets, net........................................... 33,283 138,188
Liabilities assumed......................................... (16,865) (101,454)
Intangible assets........................................... 1,320 2,448,747
------------- -------------
$ 152,087 $ 3,869,681
------------- -------------
------------- -------------
<CAPTION>
CONSIDERATION:
- ------------------------------------------------------------
<S> <C> <C>
Cash........................................................ $ 20,810 $ 291,221
Notes payable............................................... 129,957 1,624,200
Fair value of common stock interest issued.................. 1,320 1,954,260
------------- -------------
$ 152,087 $ 3,869,681
------------- -------------
------------- -------------
</TABLE>
The operating results of acquired physicians during the year ended June 30,
1995 have been included in operations since their respective dates of
acquisition. Had the acquisition occurred as of July 1, 1994, the effect on the
Company's revenues, net loss and loss per share, for the year ended June 30,
1995, would not have been material. Had the acquisitions completed during the
year ended June 30, 1996 occurred as of July 1, 1995, the Company's net revenues
for the year ended June 30, 1996 would have increased. Unaudited pro-forma
results for the year ended June 30, 1996 would have been: net revenues of
$14,043,000 and the net loss for the period would have been $6,629,058 or
$(2.34) per share.
Generally the contracts with individual physicians provide for a nine month
period during which the parties may cancel the contract. If this option is
exercised, the Company and the physician would be restored to their respective
positions before the acquisition. Expenses and fees incurred for professional
services in connection with acquisitions are considered part of the acquisition
cost and are capitalized in the financial statements as deferred acquisition
costs. During 1995 and 1996, the Company has capitalized costs of approximately
$22,000 and $43,000, respectively, as part of the acquisitions. In the event
that a physician exercises his option to leave or retire, the Company charges
any unamortized deferred costs associated with the acquisition to operations in
the period when notice of withdrawal is received. At June 30, 1996, 25
physicians have remaining reacquisition options for periods expiring through
February 1997. Total assets at June 30, 1996 and revenues for
F-11
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2--ACQUISITIONS--CONTINUED
the year ended June 30, 1996 attributable to physicians with reacquisition
rights amounted to $1,349,499 and $2,574,826, respectively. Subsequent to June
30, 1996, reacquisition rights for 8 of the 25 physicians, or $277,533 in total
assets and $1,062,921 in revenues, have expired without recission. During 1995,
one physician canceled his interest in the Company. This cancellation did not
require the disbursement of cash or other assets since the transaction was never
funded.
NOTE 3--OPERATING MATTERS AND LIQUIDITY
It is reasonably possible that future near term events may result in
changes in estimates that would be material to the financial statements.
OPERATING LOSSES; LIQUIDITY
The foregoing business description discusses the current nature of the
Company's operations. Until there are an adequate number of capitated patients
in the Company's global capitated contracts, the Company expects to incur
operating losses and experience negative operating cash flows. The Company
believes that its cash on hand, the $2,500,000 to be received on or before
December 27, 1996 from the holder of its Series C Preferred Stock, and the
amount of remaining availability under the NationsBank Credit Facility described
in Note 7, will be sufficient to meet the Company's immediate working capital
needs. However, in the event that the Company either has not attracted an
adequate number of capitated patients in global capitated contracts in order to
offset operating expenses, or has not secured some substantial portion of the
additional capital outlined in Note 19 or other capital, the Company's
operations and liquidity would be adversely affected.
INVESTMENT IN TANGIBLE ASSETS AND INFRASTRUCTURE
For the year ended June 30, 1996, the majority of the Company's revenue
resulted from the delivery of health care services on a fee-for-service basis
and gatekeeper capitated income. In order to achieve its business objectives and
to recover amounts that have been invested in tangible assets, the formation of
the infrastructure and development of the business, it is necessary for
management to renew its current global capitated contracts and increase the
number of enrolled lives. In the event these contracts are not renewed and
expanded to other geographical areas in the Baltimore and Washington
metropolitan area and surrounding regions or the Company does not increase the
number of enrolled lives, the Company would most likely be unable to generate
sufficient revenues to cover its ordinary and necessary expenses or would not
require all of the assets owned or leased.
NOTE 4--NOTE RECEIVABLE
The note receivable results from an advance to a medical practice which the
Company has a binding letter of intent to acquire for the approximate value of a
portion of the practice's net realizable accounts receivable. The note was
issued to secure the Company's right to repayment of the face amount of the note
in the event that the Company does not complete the acquisition of the medical
practice. Interest on the note is calculated based on the prime rate (8.25% as
of June 30, 1996). The note matures on March 1, 1997. Upon consummation of the
purchase of the physician's practice by the Company the note receivable will be
cancelled and the advance will be treated as part of the consideration paid,
accordingly, this note has been reflected as a non-current asset.
F-12
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment at cost, as of June 30 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Furniture and fixtures............................... $43,469 $ 88,161 $ 976,430
Computer equipment................................... -- 104,802 1,156,829
Computer software.................................... -- 4,404 265,259
Medical equipment.................................... 24,763 24,763 86,307
Leasehold improvements............................... -- 68,364 279,957
------- -------- ----------
68,232 290,494 2,764,782
Less accumulated depreciation and amortization....... 17,987 19,034 254,481
------- -------- ----------
Property and equipment, net.......................... $50,245 $271,460 $2,510,301
------- -------- ----------
------- -------- ----------
</TABLE>
NOTE 6--NOTES PAYABLE
The Company had an agreement with a commercial bank that provided for a
line of credit for $150,000 that matured on February 29, 1996. In February 1996,
the Company and the bank agreed to revise the terms that extended the maturity
to February 28, 1997, reduced the borrowing limit to $100,000 and reduced the
interest rate to the bank's prime rate. Prior to the revision, interest accrued
on advances at the bank's prime rate plus 1 1/2% per annum (10.2% effective rate
at June 30, 1996) and is payable monthly. The line is collateralized by
specified accounts receivable and certain equipment. Advances under the line
were $100,674, $64,248 and $50,000 at June 30, 1994, 1995 and 1996,
respectively. The Company is required to be out of the line for 90 days
annually.
In connection with the acquisitions of individual medical practice assets
and other transactions, the Company is obligated on short-term notes payable to
physicians and others aggregating approximately $303,915 at June 30, 1996.
NOTE 7--LONG-TERM OBLIGATIONS
Long-term obligations at June 30 are comprised as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Note payable......................................... $ -- $ -- $3,400,000
Notes payable and purchase obligations--related
parties............................................ -- 584,406 2,077,364
Capital lease obligations (note 8)................... 52,164 38,014 441,495
------- -------- ----------
52,164 622,420 5,918,859
Less current maturities of capital lease
obligations........................................ 13,937 15,524 110,917
------- -------- ----------
$38,227 $606,896 $5,807,942
------- -------- ----------
------- -------- ----------
</TABLE>
In December 1995, the Company entered into a loan agreement with
NationsBank, N.A. (the NationsBank Credit Facility), under which the Company may
request advances up to a maximum of $4 million. Interest on advances is payable
monthly and is calculated based on the bank's prime rate, unless the Company
designates a portion of the advances to be subject to the Eurodollar rate plus
.75% (effective rate of 6.2% at June 30, 1996). All advances are due at December
31, 1997. The Company has outstanding advances under this agreement of
$3,400,000 at June 30, 1996. The bank has the right to offset the Company's
demand deposit accounts with the bank against any past due amounts.
The NationsBank Credit Facility is guaranteed by the holder of the
Company's Series B Preferred Stock. The guarantee is collateralized by a
security interest in all receivables and the PSO Agreements between the Company
and Baltimore Medical. The guarantee agreement also provides for certain
restrictions on the Company, including limitations on incurring additional debt
and reduction of amounts due from the Series A Preferred Stockholder. Upon
redemption of the Series B
F-13
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7--LONG-TERM OBLIGATIONS--CONTINUED
Preferred Stock in connection with issuance of "junior stock" to a holder whose
interests are deemed adverse to the guarantor, then the Company is required to
obtain a release of the guarantee. As consideration for the guarantee, the
Company issued a warrant valued at $370,000 for the purchase of its common stock
(see note 13).
The Company is obligated on notes payable to various physicians, who are
members of either Baltimore Medical, Carroll Medical or Cumberland Valley
Medical, in connection with the original purchase of the accounts receivable
from the physicians' former practices by Medical Holdings Limited Partnership
(MHLP) or other subsidiaries. The notes bear interest at rates ranging from
9.75% to 10% and the notes mature at the earlier of seven years from the date of
closing or any of the following events: (i) termination of the respective
Professional Services Employment Agreements, (ii) a liquidating distribution to
the stockholders of the Company, (iii) combination, consolidation or merger
where the Company is not the survivor, (iv) disposal of substantially all of the
Company' assets, or (v) a public offering with a certain cash issuance amount to
the Company. The notes may be reduced or adjusted based on receivable
collections and may be prepaid without penalty. The Company does not expect to
conclude an underwritten public offering of the Company's securities for cash
before June 30, 1997. Accordingly, these notes have been classified as long-term
obligations.
NOTE 8--CAPITAL LEASE OBLIGATIONS
The Company has entered into capital leases for computer equipment and
software and for laboratory equipment. These leases are noncancelable and have
terms that expire at various dates through 2000. Assets under capital leases as
of June 30 were approximately:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Software................................................ $ -- $ -- $220,000
Computer equipment...................................... -- -- 380,290
Laboratory equipment.................................... 45,185 24,763 24,763
------- ------- --------
45,185 24,763 625,053
Less accumulated depreciation........................... 11,505 1,475 123,890
------- ------- --------
$33,680 $23,288 $501,163
------- ------- --------
------- ------- --------
</TABLE>
Following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the minimum payments as of
June 30, 1996:
<TABLE>
<S> <C>
1997.......................................................................... $165,743
1998.......................................................................... 161,751
1999.......................................................................... 152,036
2000.......................................................................... 77,817
--------
557,347
Less amount representing interest............................................. 115,852
--------
Present value of future minimum lease payments................................ $441,495
--------
--------
Current maturities............................................................ $110,917
Long-term obligations......................................................... 330,578
--------
$441,495
--------
--------
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
MALPRACTICE COVERAGE
The Company has purchased a claims-made policy with coverage limits of $1
million per medical professional per incident and $3 million annual aggregate
per medical professional. This policy expires on January 1, 1997 and it is
management's intention to obtain renewal coverage. The Company has obtained
retroactive coverage for physicians that were not
F-14
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9--COMMITMENTS AND CONTINGENCIES--CONTINUED
previously covered by the current carrier (prior to the physician's affiliation
with the Company). The financial statements include an estimate to cover future
costs that may arise from claims that have been incurred but not reported.
Management believes that losses and costs related to unknown incidents not
provided for, if any, would not be material to the financial position, liquidity
or results of operations of the Company.
Pursuant to an agreement dated December 1, 1995, the prior written approval
of the Series B Preferred Stockholder is required in connection with decisions
regarding medical malpractice coverage for the Company, participating physicians
and affiliated entities. Such decisions include, but are not limited to, the
selection of the underwriter, the form of the insurance policy and the premium
payment provisions. The Company must make certain payments to the Series B
Preferred Stockholder if the required approval is not obtained: the Series B
Preferred Stockholder could require the Company to pay it $400,000 and to redeem
all or a portion of the Series B Preferred Stock at the price equal to the
greater of the fair market value per share or the sum of the issue price per
share and all accumulated and unpaid interest and dividends. The Series B
Preferred Stockholder agrees to provide medical malpractice coverage to the
Company for premiums consistent with its rates as approved by the Maryland
Insurance Administration. In addition, the Series B Preferred Stockholder will
consider alternative insurance programs to meet the Company's special needs and
will request the necessary approvals for such alternative programs from the
Maryland Insurance Administration. This agreement terminates upon the earlier of
a change in control of the Company or termination of the loan guarantee provided
by the Series B Preferred Stockholder.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1996, the Company adopted a 401(k) Plan (the Plan)
covering all its employees. Subject to certain limitations, participants may
elect to defer a portion of their compensation as contributions to the Plan. The
Company will make matching contributions of 50% of each participant's
contribution up to six percent of the participant's salary. Participants vest in
the Company's contributions at the rate of 20% per year beginning in fiscal
1997. Contributions of $160,000 were expensed in fiscal 1996.
Effective February 1, 1996, the Company adopted a Flexible Benefits Plan
covering all full-time employees. Subject to certain limitations, the Company
may make "non-elective contributions" on behalf of employees and employees may
elect to defer a portion of their compensation as "flexible pay contributions"
to pay for certain covered expenses.
OPERATING LEASES
The Company conducts its operations at leased facilities and uses leased
office equipment under noncancelable operating leases. Certain of the leased
facilities are owned by physicians who have membership interests in affiliates.
The operating leases have initial terms that expire at various times through
2008 and, generally, provide for renewal for various periods at stipulated
rates. Some of the operating leases provide that the Company pay taxes,
maintenance, insurance and other occupancy costs applicable to leased premises.
Total rent expense for all operating leases approximated $134,850, $207,110 and
450,808 for 1994, 1995 and 1996, respectively. Effective October 1, 1996, the
Company entered into a 35 month operating lease for additional corporate office
space. Lease payments for the additional office space approximate $189,000 per
year. Minimum rental commitments, excluding sublease income, under operating
leases as of June 30, 1996, with existing or renewable terms greater than one
year are as follows (the Company has $46,800 of minimum rental commitments due
in 1997 to related parties):
<TABLE>
<S> <C>
1997.......................................................................... $ 705,100
1998.......................................................................... 815,600
1999.......................................................................... 844,100
2000.......................................................................... 817,300
2001.......................................................................... 710,000
Thereafter.................................................................... 688,200
</TABLE>
F-15
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9--COMMITMENTS AND CONTINGENCIES--CONTINUED
CASH AND CASH EQUIVALENTS
The Company maintains its cash balances in two financial institutions in
Maryland. At times the cash balances may exceed the federally insured limits.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
NOTE 10--REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 6.5% cumulative Series A shares and
9.75% cumulative Series B shares of redeemable convertible preferred stock at
June 30, 1996.
PREFERRED STOCK CONVERSION AND REDEMPTION RIGHTS
Both Series A Redeemable Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock are convertible to Class C Common on a
share for share basis at the holder's option, at any time before February 25,
2000. In addition, the Preferred Stock is automatically converted to Class C
Common Stock on a share for share basis upon the occurrence of certain events,
including a public offering of the Company's stock. Only the fully-paid shares
are subject to conversion.
Between March 1 and June 1, 2000, the Series A and Series B Redeemable
Convertible Preferred Stockholders have the right to require the Company to
redeem all of their shares at the greater of fair value (as determined by an
independent appraiser selected jointly by the parties) or the issuance price
plus unpaid dividends and interest thereon. Upon expiration of these rights, and
if the shares are not otherwise converted to Class C Common Stock, the Company
has the right to redeem the outstanding shares of Series A Preferred Stock at
the issuance price plus unpaid dividends and interest thereon. It may also
redeem the Series B Preferred Stock on the same terms that the holders could
require the Company to pay on a requested redemption by the holders.
In addition, upon the occurrence of certain events, the Series A and Series
B Redeemable Convertible Preferred Stockholders have the right to require the
Company, and the Company has the right, to redeem all of the respective
preferred shares then held. In the event of any non-compliance (as defined) the
Preferred Stock is mandatorily redeemable. If the Company decides to take
certain actions without the approval of the Series A and Series B Redeemable
Convertible Preferred Stockholders then the Preferred Stockholders have the
right to require the Company to redeem all of their outstanding shares. In the
foregoing instances the redemption price is the greater of fair value or the
issuance price plus unpaid dividends and interest thereon. If the Company elects
to enforce certain non-competition covenants with the Series B Preferred
Stockholder, then the holder may require the Company to redeem the shares held
for the greater of $4.8 million or par value plus unpaid dividends and interest
thereon. If the Company issues Series A Junior Stock or Series B Junior Stock to
holders deemed to have interests adverse to the respective Preferred
Stockholder, then the holder may require the Company to redeem their shares at
the greater of: (i) the purchase price of the adverse junior stock on a fully
diluted basis, (ii) fair value, or (iii) one and one-half (1 1/2) times the
liquidation preference.
SERIES A PREFERRED STOCK SUBSCRIPTION RECEIVABLE
As partial consideration for the issuance of Series A Preferred Stock, the
Company received a note in the original amount of $3 million ($3 and $1.5
million balances outstanding at June 30, 1995 and 1996). The note bears interest
at 6.5% per annum, compounded quarterly, and interest is payable only to the
extent that the Company pays dividends on the Series A Preferred Stock. The
parties have the right to offset like amounts of dividends and interest.
Scheduled note payments are subject to deferral at the option of the
Company until February 14, 1998, but interest continues to accrue on any unpaid
balance. As of June 30, 1996 the Company had elected to defer payments of
$375,000 scheduled for 1996. Upon redemption or conversion of Series A Preferred
Stock, any unpaid principal on the note is to be canceled in an amount equal to
five dollars times the number of shares converted or redeemed. The Company has
the option to require payment of any outstanding principal and interest on
February 14, 1998, or the Company may elect to redeem the outstanding Series A
Preferred Stock and cancel the remaining principal and interest.
F-16
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10--REDEEMABLE CONVERTIBLE PREFERRED STOCK--CONTINUED
PREFERRED STOCK DIVIDENDS
Series A Redeemable Convertible Preferred Stock accrues dividends quarterly
at the rate of thirty-two and one half cents ($0.325) per share per annum
beginning on February 24, 1995. Unpaid dividends accrue interest at the rate of
6.5% per annum, compounded quarterly, and may be offset by the Company against
any unpaid interest that is owed by the holders of the Series A Redeemable
Convertible Preferred Stock under the related note receivable.
Series B Redeemable Convertible Preferred Stock accrues dividends quarterly
at the rate of one dollar and nine and seven tenths cents ($1.097) per share per
annum beginning December 1, 1995. Unpaid dividends accrue interest at the rate
of 9.75% per annum, compounded quarterly.
Until April 1, 2000, payment of dividends on Series A Preferred Stock and
Series B Preferred Stock are only permitted in the event of redemption,
conversion or liquidation, and, in any event, dividends on Series B Preferred
Stock may only be paid after all dividends and interest on the Series A
Redeemable Convertible Preferred Stock have been satisfied. Beginning April 1,
2000, dividends on Series A Preferred Stock and Series B Preferred Stock will
accrue at a rate equal to the prime rate plus 100 basis points.
Cumulative Series A and Series B Redeemable Convertible Preferred Stock
accrued and undeclared dividends at June 30 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Series A.......................................................... $ 113,300 $ 438,305
Series B.......................................................... -- 227,526
--------- ---------
$ 113,300 $ 665,831
--------- ---------
--------- ---------
</TABLE>
The Company's cumulative Series A and Series B Preferred Stock are subject
to redemption; accordingly, for financial reporting purposes accrued dividends
are reflected as an accretion in the value of the preferred stock with a
corresponding reduction in stockholders' equity to reflect redemption value.
PREFERRED STOCK LIQUIDATION PREFERENCES
Upon liquidation or dissolution of the Company, the Series A and Series B
Preferred Stockholders are entitled to receive a liquidating distribution in an
amount equal to the greater of: (i) the fair value (as defined) per share of the
respective series of preferred stock or (ii) the original purchase price per
share of the respective stock. The distribution will also include all unpaid
cumulative dividends and accrued interest thereon; however, the total
distributable amount due to each preferred stockholder is limited to the amount
of cash paid to the Company for the purchase of the respective shares. No
distribution will be paid to the Series B Preferred Stockholder until all
amounts due to the Series A Preferred Stockholder have been fully paid.
NOTE 11--STOCKHOLDERS' EQUITY
All of the Company stockholders are parties to an agreement dated December
1, 1995 (see Note 19 for September 4, 1996 amendment), that restricts transfer
of the Company stock. The agreement terminates upon occurrence of certain
specified events, including a public offering of the Company stock. Under the
terms of the stockholders' agreement, the Company may be required to purchase
shares of the Company's capital stock in certain circumstances, such as: (i)
Class A Common Stock owned by management stockholders, in the event of their
death or disability, if other management stockholders do not exercise their
rights to acquire the shares offered, in which case the Company is required to
purchase all of the offered shares at fair value (as agreed to by the parties or
as determined by an independent appraisal); (ii) Class A Common Stock purchased
by Dr. Rifkin or Dr. Kimmel after December 1, 1995, if their employment is
terminated, in which case the Company is required to purchase these shares at
fair value (as agreed to by the parties or as determined by an independent
appraisal); (iii) Class A Common Stock owned by other management stockholders if
their employment is terminated and the remaining management stockholders do not
exercise their rights to acquire the shares offered, then the Company is
required to purchase all of the shares offered. If termination is without cause,
the purchase price is based on fair value (as agreed to by the parties
F-17
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 11--STOCKHOLDERS' EQUITY--CONTINUED
or as determined by an independent appraisal). If termination is with cause,
then the purchase price is the lesser of $1 per share or the original issuance
cost of the shares. At June 30, 1996, 600,000 shares of Class A Common Stock
were subject to such repurchase requirement. If the Company is required to
purchase shares of the management stockholder under the foregoing circumstances,
then all accrued dividends due to Series A and Series B Preferred Stockholders
must first be paid; (iv) All classes of capital stock--upon the occurrence of an
involuntary transfer involving any of its outstanding capital stock, the Company
has the right of first refusal to purchase the offered shares at fair value (as
agreed to by the parties or as determined by an independent appraisal).
All classes of Common Stock have the same preferences, rights and voting
powers. A portion of the Class A Common Stock is reserved for issuance upon
exercise of warrants, and a portion of the Class C Common Stock is reserved for
issuance to the holders of Series A Preferred Stock and Series B Preferred Stock
upon conversion of those shares of stock.
OTHER OWNERS' EQUITY
The consolidated financial statements include the consolidated accounts of
the Company and its commonly owned or controlled subsidiaries.
Baltimore Medical, Carroll Medical and Cumberland Valley Medical are LLCs
organized under the laws of the State of Maryland in February 1995, November
1995 and May 1996, respectively. Each LLC will continue in existence until
December 31, 2025, unless terminated sooner in accordance with their respective
operating agreements. At June 30, 1996, the LLCs were the primary contracting
entities the Company contracts with for the delivery of health care services.
The contracts with the LLCs provide for exclusivity with the Company, and the
LLCs are precluded from contracting with any other party. At June 30, 1996 and
1995, members' capital were as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Baltimore Medical Group, LLC........................................... $ 4,750 $ 8,250
Carroll Medical Group, LLC............................................. -- 1,250
Cumberland Valley Medical Group, LLC................................... -- 1,250
</TABLE>
Doctors Health System Primary Care IPA, Inc., (DHS Primary Care) a
wholly-owned subsidiary of the Company, was organized in March, 1995, to form a
non-exclusive network of primary care and specialist physicians to provide
health care services. DHS Primary Care had not commenced operations at June 30,
1996.
NOTE 12--STOCK OPTIONS
The Company has an Omnibus Stock Plan (the Plan) which is accounted for
under APB Opinion 25 and related Interpretations with respect to employee
transactions and transactions with others. The Plan permits the Company to grant
incentive and non-qualified stock options, stock appreciation rights (SARs) and
restricted or unrestricted share awards to directors, officers, employees and
other key contributors to the Company. SARs entitle the optionee to surrender
unexercised stock options for cash or stock equal to the excess of the fair
value of the surrendered shares over the option value of such shares. The Plan
is administered by a committee (the Committee) appointed by the Company's Board
of Directors. Subject to adjustment as provided in the Plan, the aggregate
number of shares of the Company Common Stock which may be awarded is limited to
6,175,000. Shares under any grants that expire unexercised are available for
further grant.
The exercise price and exercise period for stock options is determined by
the Committee, provided that the exercise period may not exceed 10 years from
the grant date and the exercise price for incentive stock options may not be
less than 100% of the fair value of the shares on the date the option is
granted. Incentive stock options are granted only to employees of the Company.
In August and October 1995, the Company granted incentive stock options, to
purchase Class A Common Stock, to ten employees for a total of 118,380 shares at
the exercise price of $0.01 per share, the estimated fair value of the shares at
the date of grant based on the financial position and liquidity of the Company
and the limited marketability of the shares. The options become exercisable on
various dates ranging from April 1, 1996 through April 1, 2000. Upon exercise,
68,832 shares
F-18
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 12--STOCK OPTIONS--CONTINUED
will be fully vested and nonforfeitable; the remainder vest ratably over four
years. Options may expire or become exercisable, and shares issued may be fully
vested, at earlier dates upon occurrence of certain specified events, including
a change in control of the Company or the employee's death, disability,
retirement, or termination without cause. During 1996, employees forfeited
20,050 Class A Common Stock options.
In December 1995, the Company granted non-qualified stock options to
purchase Class A Common Stock to three employees for a total of 12,500 shares at
the exercise price of $0.01 per share. The options become exercisable on
December 21, 1996. Upon exercise, 5,000 shares issued will be fully vested and
nonforfeitable; the remainder vest ratably over four years. Options may expire
or become exercisable, and shares issued may be fully vested, at earlier dates
upon occurrence of certain specified events, including a change in control of
the Company or the employee's death, disability, retirement, or termination
without cause. The Company will recognize compensation expense as the shares
vest in future periods, based upon the option price and fair value at the date
of grant. The fair value of the common stock at the time of grant in December
1995, $3.00 per share, was based on a discounted value of the per share price of
the Company's Series B Redeemable Convertible Preferred Stock.
In May 1996, the Company granted incentive stock options to purchase Class
A Common Stock for 70,000 shares with an exercise price of $11.00 per share to
an employee, which was deemed to be in excess of management's estimate of fair
value at the date of grant.
As of June 30, 1996, the Company has also granted options to purchase
105,000 shares of Class B Common Stock. In February 1995, the Company granted an
incentive stock option to purchase 100,000 shares of Class B Common Stock to an
officer of the Company at an exercise price of $0.01 per share, and in October
1995, the Company granted an incentive stock option to purchase 5,000 shares of
Class B Common Stock to a physician at an exercise price of $0.01 per share. The
estimated fair value of the stock was determined to be equal to the exercise
prices on the July 1994 and October 1995 grant dates.
NOTE 13--COMMON STOCK PURCHASE WARRANTS
In consideration for the guarantee of a loan agreement, the Company issued
on December 1, 1995 a warrant to its Series B Preferred Stockholder for the
purchase of 88,889 shares of the Company Class A Common Stock at $5.625 per
share. The warrant expires on December 1, 2005 and is exercisable (i) if the
holder does not receive notice of a change in control within thirty days after
the change is effective or (ii) ninety days prior to the filing of a
registration statement for a public offering that includes shares held by
management stockholders. The warrant was valued at the present value of the
difference between the estimated fair value of the common stock subject to the
warrant and the aggregate strike price, discounted at the interest savings rate
(the difference between the rate obtained on the loan agreement and the rate of
interest that management believes would have been available without the
guarantee). At June 30, 1996, this amount ($370,000) is reflected as additional
paid-in capital and a deferred charge, which is being amortized on the interest
method over 25 months (the length of the guarantee).
On December 1, 1995, in consideration for certain consulting services, the
Company issued warrants for the purchase of 24,000 shares of the Company common
stock at $11.25 per share (a price greater than management's estimate of fair
value at the date of grant). A value was not attributed to these warrants at the
time of issue. These warrants expire December 1, 2005, and are exercisable if
there is a change in control of the Company.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current assets
and current liabilities approximate fair values because of the short maturity of
those instruments. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
F-19
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS--CONTINUED
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A PREFERRED STOCK
SUBSCRIPTION RECEIVABLE
The Series A and Series B Preferred Stock are carried at issue price plus
accrued dividends, and have features unique to these securities including, but
not limited to, the right to appoint directors and the right to approve certain
significant activities of the Company. There is no quoted market price for the
Series A or Series B Preferred Stock.
The carrying value of the Series A Preferred Stock subscription receivable
is based on the issue price of the related Series A Preferred Stock. In
December, 1995, the Company issued Series B Preferred Stock with the same rights
and privileges as the Series A Preferred Stock, other than the dividend rate and
related interest rate, for consideration greater than the per share value
received for the Series A Preferred Stock. Since both classes of Preferred Stock
are convertible to Class C Common Stock, it is not practical to determine if the
related stock subscription will be realized in cash, included in the conversion
to Common Stock or offset against the issued Series A Preferred Stock, thereby
reducing the number of shares outstanding. Furthermore, the Company has the
right to defer or cancel payment of the stock subscription receivable.
LONG-TERM OBLIGATIONS
Long-term obligations, excluding capital lease obligations, were incurred
by the Company when individual physicians joined the Company's core medical
groups. These notes are payable upon an initial public offering of the Company's
stock or a change in control as defined in the stockholders' agreement. The fair
value of these obligations is assumed to approximate recorded value because
there have not been any significant changes in circumstances since the
obligations were recorded.
NOTE 15--NET PHYSICIAN REVENUE
Net physician revenue consists of:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Gross physician revenue........................................................... $2,919,179 $ 3,840,893 $13,613,426
Less: Provision for contractual and other adjustments........................... (868,992) (1,040,575) (5,056,105)
Gatekeeper capitated income....................................................... 116,232 515,014 1,345,207
---------- ----------- -----------
Net physician revenue............................................................. $2,166,419 $ 3,315,332 $ 9,902,528
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE 16--INCOME TAXES
The Company has accumulated net losses from operations of $8,414,261.
Significant temporary differences between the determination of this loss for
financial reporting and income tax purposes include depreciation, the allowance
for uncollectible receivables, and certain accrued liabilities. These losses may
be carried forward for 15 years and expire at various dates through 2010. Under
federal tax law, certain changes in ownership of the Company, which may not be
within the Company's control, may operate to restrict future utilization of
these carryforwards. Since the ultimate realization of income tax benefits are
uncertain, they have been fully reserved at June 30, 1995 and 1996. Deferred tax
assets (liabilities) at June 30, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Tax benefit of NOL carryforward.................... $ -- $ 830,000 $ 2,236,800
Depreciation....................................... -- (60,000) (360,000)
Allowance for doubtful receivables................. -- -- 118,000
Accrued liabilities................................ -- -- 236,000
Other (net)........................................ -- -- 40,000
-------- --------- -----------
-- 770,000 2,270,800
Less valuation allowance........................... -- (770,000) (2,270,800)
-------- --------- -----------
Net deferred tax asset........................... $ -- $ -- $ --
-------- --------- -----------
-------- --------- -----------
</TABLE>
F-20
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 16--INCOME TAXES--CONTINUED
Baltimore Medical Group, P.A. was established as an S Corporation and its
earnings (losses) were taxed at the shareholder level. Accordingly, no tax
provision has been recorded in 1994.
NOTE 17--EARNINGS PER SHARE
The weighted average common shares outstanding presented for the years
1994, 1995, and 1996 were 3,000,000, 3,000,000 and 3,063,205, respectively.
Stock options and warrants have been excluded in fiscal 1995 and 1996 since they
are anti-dilutive. The weighted average shares in fiscal 1994 and 1995 have been
restated for all periods to reflect the two-for-one stock split in fiscal 1995.
The net loss for purposes of the calculation of loss per share has been adjusted
for the redeemable preferred stock dividends.
NOTE 18--SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Cash paid for interest................................................................... $ 16,153 $ 14,654 $ 187,612
SIGNIFICANT SUPPLEMENTARY NONCASH INVESTING AND FINANCING INFORMATION
Liabilities assumed in connection with purchase of medical practice assets............... $ -- $ 184,322 $ 1,732,546
Assets acquired under capital leases..................................................... -- -- 600,290
Issuance of common stock purchase warrants for services.................................. -- -- 370,000
Common stock issued in connection with purchase of medical practice assets............... -- -- 1,980
</TABLE>
NOTE 19--SUBSEQUENT EVENTS
AMENDED ARTICLES OF INCORPORATION
SERIES C PREFERRED STOCK
The Company amended and restated its charter on September 4, 1996. The
amended and restated articles authorize the Company to issue 63,176,984 shares
of capital stock as follows:
<TABLE>
<CAPTION>
SHARES PAR
AUTHORIZED VALUE
---------- ------
<S> <C> <C>
Redeemable Convertible Preferred Series A......................... 1,000,000 $ 5.00
Redeemable Convertible Preferred Series B......................... 355,556 11.25
Redeemable Convertible Preferred Series C......................... 1,071,428 17.50
Preferred Stock................................................... 1,000,000 0.01
Class A Common.................................................... 20,700,000 0.01
Class B Common.................................................... 10,000,000 0.01
Class C Common.................................................... 29,050,000 0.01
----------
63,176,984
----------
----------
</TABLE>
On September 4, 1996, the Company issued 428,571 shares of Series C
Preferred Stock to Genesis Health Ventures, Inc. (the "Series C Preferred
Stockholder"), in exchange for $7,500,000 in cash. The Company will issue
142,857 additional shares of the Series C Preferred Stock in exchange for
$2,500,000 in cash prior to December 31, 1996 which represents an obligation of
Genesis that must be fulfilled unless the Company is in breach of any of its
loan agreements. The proceeds from these issuances will be used to fund the
incurrence of corporate expenses in conjunction with the business strategy and
the acquisition of medical practices or IPA contracting rights. The Company may
issue up to 500,000 additional shares of the Series C Preferred Stock in
exchange for up to $10,000,000 in cash if certain Medicare capitated milestones
are attained. Genesis Health Ventures, Inc. became a party to the stockholders
agreement effective September 4, 1996.
F-21
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 19--SUBSEQUENT EVENTS--CONTINUED
FINANCING
On August 15, 1996, the Company established a $1,500,000 bridge loan
facility (the "Bridge Loan Facility") with First National Bank of Maryland, N.A.
("First National"). The Bridge Loan Facility is collateralized by certain assets
of the Company and its affiliates and is guaranteed by the Series A Preferred
Stockholder. Advances under this facility bear interest at a rate of 6.71% per
annum. The Bridge Loan Facility matures on October 14, 1996 and management is
currently negotiating with First National to replace the Bridge Facility with a
$10,000,000 credit facility (the "First National Credit Facility"). As of
October 1, 1996, approximately $983,000 had been advanced under the Bridge Loan
Facility to fund corporate expenses in conjunction with the Company's strategy.
Although there can be no assurances the Company will obtain the First National
Credit Facility, the Company is proceeding with the loan approval process with
First National and the Company believes, based on conversations with First
National and the Series A Preferred Stockholder, if the loan approval process is
not completed before the maturity date of the Bridge Loan Facility, that the
maturity date will be extended until such time that the loan approval process is
completed. In the event the Company is unable or unwilling to secure the First
National Credit Facility or the maturity date of the Bridge Loan Facility is not
extended, the Bridge Loan Facility is expected to be repaid on or before October
14, 1996 from the Company's available cash.
ACQUISITIONS
The Company intends to continue its ongoing acquisition of primary care and
specialty practices. The Company is currently engaged in negotiations with
several providers of health care services. Certain of these acquisitions provide
for the purchase of the businesses under terms and conditions similar to those
that the Company has entered into previously. When the Company closes one of the
acquisitions that it is currently negotiating it will guarantee the indebtedness
of the business acquired of approximately $850,000 and assume $325,000 in
outstanding debt.
The Company will issue approximately 483,000 shares of the Company's Class
B Common Stock having as estimated fair value of $3,381,000 as part of the
consideration paid on all of the businesses it is in negotiation with. Of this
total approximately 195,000 shares having an estimated fair value of $1,365,000
represent 10 limited partnership interests in MHLP and the remaining 288,000
shares to be issued by the Company have an estimated fair value of $2,016,000.
Certain of the individual physicians involved in these acquisitions will be
granted options to purchase additional shares of the Company's Class B Common
Stock in the event certain agreed upon performance criteria are met. These
agreements which have not yet closed provide for a total of 53,000 option
shares. In addition, 14,000 shares of Class B Common Stock have been reserved
for future issuance to physician employees of one of the practices purchased
subsequent to June 30, 1996.
In the event that all of the acquisitions are consumated under the terms
currrently agreed upon the Company will acquire assets of approximately
$5,000,000.
F-22
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------------------------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994
Allowance for doubtful receivable.......................... $ 30,000 $ 10,000 $ -- $ -- $ 40,000
---------- ---------- -------- ---------- ----------
Valuation allowances on deferred tax assets................ -- -- -- -- --
---------- ---------- -------- ---------- ----------
Year ended June 30, 1995
Allowance for doubtful receivable.......................... 40,000 25,000 -- -- 65,000
---------- ---------- -------- ---------- ----------
Valuation allowances on deferred tax assets................ -- 770,000 -- -- 770,000
---------- ---------- -------- ---------- ----------
Year ended June 30, 1996
Allowance for doubtful receivable.......................... 65,000 295,000 -- -- 360,000
---------- ---------- -------- ---------- ----------
Valuation allowances on deferred tax assets................ 770,000 1,500,800 -- -- 2,270,800
---------- ---------- -------- ---------- ----------
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practices A:
We have audited the accompanying statements of operations and cash flows of
Practice A (the "Practice") for the year ended December 31, 1994. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice A for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 17, 1996
F-24
<PAGE>
PRACTICE A
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO FEBRUARY 24,
1994 1995
------------ ---------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings...................................................................... $258,530 $ 27,342
------------
EXPENSES
Salaries and benefits....................................................................... 165,837 11,069
Medical supplies............................................................................ 5,074 104
Insurance................................................................................... 13,563 2,260
Depreciation................................................................................ 5,229 872
General and administrative.................................................................. 37,323 18,125
Provision for bad debts..................................................................... 6,748 1,125
Other....................................................................................... 2,520 279
------------ ---------------
Total Expenses........................................................................... 236,924 33,834
------------ ---------------
Net Income............................................................................. $ 22,236 $ (6,492)
------------ ---------------
------------ ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-25
<PAGE>
PRACTICE A
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................................... $ 22,236
Adjustments to reconcile net income to net cash provided by operating activities
Provision for bad debts.................................................................................. 6,748
Depreciation............................................................................................. 5,229
Changes in assets and liabilities:
Accounts receivable................................................................................... (7,080)
Prepaid expenses...................................................................................... (8,617)
Accounts payable and accrued expenses................................................................. (916)
------------
Net cash provided by operating activities................................................................ 17,600
CASH FLOWS FROM FINANCING ACTIVITIES
Shareholder distributions.................................................................................. (31,312)
------------
Net cash used by financing activities.................................................................... (31,312)
------------
Net decrease in cash and cash equivalents....................................................................... (13,712)
Cash and cash equivalents at beginning of period................................................................ 46,628
------------
Cash and cash equivalents at end of period...................................................................... $ 32,916
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-26
<PAGE>
PRACTICE A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements is as follows:
BUSINESS
Practice A (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets (5 years). Depreciation is computed using
accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is an S Corporation ; accordingly, income tax liabilities are
the responsibility of the individual shareholder.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under an operating lease with a
partnership of which the shareholder is a limited partner. The lease expires in
2001.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to $33,582 for each of the next
five years.
Rent expense paid for operating leases for the year ended December 31, 1994
was $19,261.
F-27
<PAGE>
PRACTICE A
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3--INCOME TAXES
The Practice is an S Corporation. As a result, the Practice is not subject
to corporate income taxes, except for taxes on capital gains, if any.
Accordingly, no provisions have been made in the accompanying statement of
operations for federal and state income taxes since such taxes are liabilities
of the individual owner and the amounts thereof depend upon his tax situation.
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the owners could be changed if adjustments in the distributable
income were ultimately sustained by the taxing authorities.
NOTE 4--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have claims made insurance coverage
for their professional malpractice claims which is paid for them by the
Practice. Such insurance provides for coverage to the extent individual claims
do not exceed $1,000,000 per incident and $3,000,000 in the aggregate per year,
depending on the physician's coverage.
NOTE 5--SUBSEQUENT EVENT
Effective February 24, 1995, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice B:
We have audited the accompanying statements of operations and cash flows of
Practice B (the "Practice") for the year ended December 31, 1994. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice B for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 17, 1996
F-29
<PAGE>
PRACTICE B
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO
1994 MAY 31, 1995
------------ ---------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings....................................................................... $219,706 $ 163,403
EXPENSES
Salaries and benefits........................................................................ 55,044 27,037
Medical supplies............................................................................. 8,228 2,019
Insurance.................................................................................... 7,366 4,972
Depreciation................................................................................. 6,862 1,095
Interest..................................................................................... 1,471 1,149
Provision for bad debts...................................................................... 3,274 1,364
General and administrative................................................................... 22,739 16,751
Other........................................................................................ 8,386 3,318
------------ ---------------
Total Expenses............................................................................ 113,370 57,705
------------ ---------------
Proprietor's Net Income (note 6)........................................................ $106,336 $ 105,698
------------ ---------------
------------ ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-30
<PAGE>
PRACTICE B
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................................... $106,336
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation............................................................................................. 6,862
Provision for bad debts.................................................................................. 3,274
Changes in assets and liabilities:
Accounts receivable................................................................................... 2,632
Prepaid expense....................................................................................... (1,200)
------------
Net cash provided by operating activties................................................................. 117,904
CASH FLOWS FROM FINANCING ACTIVITIES
Owners' equity distributions.................................................................................. (116,101)
------------
Net cash used by financing activities...................................................................... (116,101)
------------
Net increase in cash and cash equivalents....................................................................... 1,803
Cash and cash equivalents at beginning of period................................................................ --
------------
Cash and cash equivalents at end of period...................................................................... $ 1,803
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-31
<PAGE>
PRACTICE B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statements is as follows:
BUSINESS
Practice B (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed using the accelerated
methods. The estimated useful lives for property plant and equipment are as
follows:
<TABLE>
<S> <C>
Furniture and fixtures.......................................................... 7 years
Computer equipment.............................................................. 5 years
Office equipment................................................................ 5 years
</TABLE>
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a sole proprietorship; accordingly, income tax liabilities
are the responsibility of owner.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under an operating lease which
expires in 1995.
F-32
<PAGE>
PRACTICE B
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2--OPERATING LEASE--CONTINUED
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to $7,548 in 1995.
Rent expense paid for operating leases for the year ended December 31, 1994
was $14,311.
NOTE 3--INCOME TAXES
The Practice is a sole proprietorship. As a result, the Practice is not
subject to corporate income taxes. Accordingly, no provisions have been made in
the accompanying statement of operations for federal and state income taxes
since such taxes are liabilities of the individual owner and the amounts thereof
depend upon his tax situation.
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the owner could be changed if adjustments in the distributable
income were ultimately sustained by the taxing authorities.
NOTE 4--BENEFIT PLAN
The Practice has a defined contribution plan covering employees who meet
the minimum length of service and age requirements. Contributions to the plan
amounted to $361 in 1994.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physician has claims made insurance coverage for professional
malpractice claims which is paid for by the Practice. Such insurance provides
for coverage to the extent individual claims do not exceed $1,000,000 per
incident and $3,000,000 in the aggregate per year, depending on the physician's
coverage.
NOTE 6--PROPRIETOR'S NET INCOME
Proprietor's net income represents net income prior to owner's
compensation.
NOTE 7--SUBSEQUENT EVENT
Effective June 1, 1995, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice C:
We have audited the accompanying statements of operations and cash flows of
Practice C (the "Practice") for the year ended December 31, 1994. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice C for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 17, 1996
F-34
<PAGE>
PRACTICE C
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR PERIOD FROM
ENDED JANUARY 1, 1995
DECEMBER 31, TO
1994 MAY 31, 1995
------------ ---------------
<S> <C> <C>
(UNAUDITED)
Revenues
Net physician billings....................................................................... $379,668 $ 163,782
Expenses
Salaries and benefits........................................................................ 87,886 34,832
Medical supplies............................................................................. 7,860 2,208
Insurance.................................................................................... 6,350 1,955
Depreciation................................................................................. 17,535 4,502
Interest..................................................................................... 1,430 236
Provision for bad debts...................................................................... 6,273 3,611
General and administrative................................................................... 60,706 19,002
------------ ---------------
Total Expenses............................................................................ 188,040 66,346
------------ ---------------
Proprietor's Net Income (note 6)........................................................ $191,628 $ 97,436
------------ ---------------
------------ ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-35
<PAGE>
PRACTICE C
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1994
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................................... $ 191,628
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation............................................................................................. 17,535
Provision for bad debts.................................................................................. 6,273
Changes in assets and liabilities:
Accounts receivable................................................................................... (2,806)
Accrued pension contribution.......................................................................... (4,548)
------------
Net cash provided by operating activities................................................................ 208,082
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment......................................................................................... (8,533)
------------
Net cash used by investing activities.................................................................... (8,533)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt..................................................................................... (13,566)
Owners' equity distributions.................................................................................. (181,920)
------------
Net cash used by financing activities.................................................................... (195,486)
------------
Net increase in cash and cash equivalents....................................................................... 4,063
Cash and cash equivalents at beginning of period................................................................ 35,386
------------
Cash and cash equivalents at end of period...................................................................... $ 39,449
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-36
<PAGE>
PRACTICE C
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows:
BUSINESS
Practice C (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets, which range from 5 to 7 years. Depreciation is
computed using the straight-line and the accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a sole proprietorship; accordingly, income tax liabilities
are the responsibility of owner.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under an operating lease which
expires in 1996.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to $25,470 in 1995 and $15,034 in
1996.
Rent expense paid for operating leases for the year ended December 31, 1994
was $24,276.
F-37
<PAGE>
PRACTICE C
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3--INCOME TAXES
The Practice is a sole proprietorship. As a result, the Practice is not
subject to corporate income taxes. Accordingly, no provisions have been made in
the accompanying statement of operations for federal and state income taxes
since such taxes are liabilities of the individual owner and the amounts thereof
depend upon his tax situation.
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the owner could be changed if adjustments in the distributable
income were ultimately sustained by the taxing authorities.
NOTE 4--BENEFIT PLAN
The Practice has a defined contribution plan covering the employees.
Contributions to the plan amounted to $28,884 in 1994.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have insurance coverage for their
professional malpractice claims which is paid for them by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
NOTE 6--PROPRIETOR'S NET INCOME
Proprietor's net income represents net income prior to owner's
compensation.
NOTE 7--SUBSEQUENT EVENT
Effective June 1, 1995, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice D:
We have audited the accompanying statements of operations and cash flows of
Practice D (the "Practice") for the year ended December 31, 1994. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice D, for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 20, 1996
F-39
<PAGE>
PRACTICE D
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995 TO
1994 NOVEMBER 30, 1995
------------ -------------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings.................................................................... $422,748 $ 511,084
Capitation revenue........................................................................ 348,000 418,160
Other revenue............................................................................. 21,300 15,100
------------ -------------------
Total Revenues......................................................................... 792,048 944,344
EXPENSES
Salaries and benefits..................................................................... 432,904 608,479
Medical supplies.......................................................................... 36,259 50,958
Insurance................................................................................. 11,416 14,369
Depreciation and amortization............................................................. 17,234 9,401
Interest.................................................................................. 7,007 4,108
General and administrative................................................................ 145,740 169,098
Provision for bad debts................................................................... 37,184 34,119
Other..................................................................................... 10,235 27,447
------------ -------------------
Total Expenses......................................................................... 697,979 917,979
------------ -------------------
Income from operations................................................................. 94,069 26,365
OTHER EXPENSES
Loss on abandonment of assets............................................................. (40,059) --
------------ -------------------
Net Income............................................................................. $ 54,010 $ 26,365
------------ -------------------
------------ -------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-40
<PAGE>
PRACTICE D
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................................... $ 54,010
Adjustments to reconcile net income to net cash provided by operating activities
Loss on abandonment of assets............................................................................ 40,059
Provision for bad debts.................................................................................. 37,184
Depreciation and amortization............................................................................ 17,234
Changes in assets and liabilities:
Accounts receivable................................................................................... (71,861)
Prepaid expenses...................................................................................... (4,624)
Other assets.......................................................................................... (3,346)
------------
Net cash provided by operating activities................................................................ 68,656
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long term debt................................................................................. (17,174)
Payments on notes to affiliate............................................................................. (13,531)
Shareholder distributions.................................................................................. (42,736)
------------
Net cash used by financing activities.................................................................... (73,441)
------------
Net decrease in cash and cash equivalents..................................................................... (4,785)
Cash and cash equivalents at beginning of period.............................................................. 13,672
------------
Cash and cash equivalents at end of period.................................................................... $ 8,887
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-41
<PAGE>
PRACTICE D
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows:
BUSINESS
Practice D (the "Practice") is a group physician medical practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The Practice has agreements with various Health Maintenance Organizations
(HMO's) to provide medical services to subscribing participants. Under these
agreements, the Practice receives monthly capitation payments based on the
number of each HMO's participants, regardless of services actually performed by
the practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets (7 years for furniture and equipment). Depreciation
is computed using the straight-line and the accelerated methods.
COVENANT NOT TO COMPETE
The covenant not to compete relates to amounts paid to a former shareholder
upon his departure from the Practice. The agreement is being amortized on the
straight-line method over five years, which is equal to the term of the
agreement.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is an S corporation; accordingly, income tax liabilities are
the responsibility of shareholders.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--LOSS ON ABANDONMENT OF ASSETS
In October of 1994, the Practice entered into a lease agreement for new
office space (See Note 3). As a result of the new lease, the net book value of
the leasehold improvements of the existing lease have been written off as of
December 31, 1994.
F-42
<PAGE>
PRACTICE D
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3--OPERATING LEASE
In October 1994, the practice entered into an operating lease agreement for
approximately 2,942 square feet of office space. The lease expires in 2005.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to the following:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------- -------
<S> <C>
1995........................................................................... $30,118
1996........................................................................... 40,158
1997........................................................................... 40,158
1998........................................................................... 40,158
1999........................................................................... 40,158
</TABLE>
Rent expense paid for operating leases for the year ended December 31, 1994
was $34,625.
NOTE 4--INCOME TAXES
The Practice is an S corporation. As a result, the Practice is not subject
to corporate income taxes, except for taxes on capital gains, if any.
Accordingly, no provisions have been made in the accompanying statement of
operations for federal and state income taxes since such taxes are liabilities
of the individual shareholders and the amounts thereof depend upon their tax
situation.
The practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the shareholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have insurance coverage for their
professional malpractice claims which is paid for them by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
NOTE 6--SUBSEQUENT EVENT
Effective December 1, 1995, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice E:
We have audited the accompanying statements of operations and cash flows of
Practice E (the "Practice") for the year ended April 30, 1995. These financial
statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice E for the year ended April 30, 1995, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 12, 1996
F-44
<PAGE>
PRACTICE E
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR MAY 1, 1995
ENDED TO
APRIL JANUARY 30,
30, 1995 1996
-------- ------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings............................................................................ $378,731 $254,187
EXPENSES
Salaries and benefits............................................................................. 248,430 211,113
Medical supplies.................................................................................. 3,730 2,815
Insurance......................................................................................... 18,766 15,852
Depreciation...................................................................................... 7,186 3,538
Interest.......................................................................................... 960 989
General and administrative........................................................................ 95,639 55,588
Provision for bad debts........................................................................... 11,690 9,978
-------- ------------
Total Expenses................................................................................. 386,401 299,873
-------- ------------
Net Loss..................................................................................... $ (7,670) $(45,686)
-------- ------------
-------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-45
<PAGE>
PRACTICE E
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
1995
----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................................................... $ (7,670 )
Adjustments to reconcile net loss to net cash used in operating activities..................................
Depreciation.............................................................................................. 7,186
Provision for bad debts................................................................................... 11,690
Changes in assets and liabilities:
Accounts receivable.................................................................................... (165 )
Accounts payable....................................................................................... (11,157 )
----------
Net cash used in operating activities..................................................................... (116 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets....................................................................................... (1,750 )
----------
Net cash used by investing activities..................................................................... (1,750 )
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt........................................................................... (5,995 )
----------
Net cash used by financing activities....................................................................... (5,995 )
----------
Net decrease in cash and cash equivalents........................................................................ (7,861 )
Cash and cash equivalents at beginning of period................................................................. 40,888
----------
Cash and cash equivalents at end of period....................................................................... $ 33,027
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-46
<PAGE>
PRACTICE E
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows:
BUSINESS
Practice E (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed using the accelerated
methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a C corporation. As a result, the Practice is subject to
corporate income taxes, including taxes on capital gains, if any. The Practice's
tax returns are subject to examination by federal and state taxing authorities.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under an operating lease which
expires in 1997.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one amount to $22,452 in 1996 and $11,226 in 1997.
Rent expense paid for operating leases for the year ended April 30, 1995
was $22,452.
F-47
<PAGE>
PRACTICE E
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 3--INCOME TAXES
The Practice is a C corporation. As a result, the Practice is subject to
corporate income taxes, including taxes on capital gains, if any. The Practices'
tax returns are subject to examination by federal and state taxing authorities.
The Practice has historically distributed all residual profits as compensation
to its owners. As a result the Practice has paid negligible or no income taxes.
The owners of the Practice believe this trend will continue in the future.
Accordingly, the Practice does not provide for income tax assets or liabilities.
NOTE 4--BENEFIT PLAN
The Practice has a defined contribution plan covering the employees.
Contributions to the plan amounted to $20,850 in 1995.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have insurance coverage for their
professional malpractice claims which is paid for them by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
NOTE 6--SUBSEQUENT EVENT
Effective January 30, 1996, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice F:
We have audited the accompanying statements of operations and cash flows of
Practice F (the "Practice") for the year ended December 31, 1995. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice F for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 18, 1996
F-49
<PAGE>
PRACTICE F
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996 TO
DECEMBER 31, 1995 FEBRUARY 28, 1996
----------------- ------------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings................................................................ $ 1,257,997 $211,792
EXPENSES
Salaries and benefits................................................................. 899,966 153,029
Medical supplies...................................................................... 76,036 5,880
Insurance............................................................................. 10,967 848
Depreciation and amortization......................................................... 6,690 517
Interest.............................................................................. 6,533 505
General and administrative............................................................ 178,008 23,795
Provision for bad debts............................................................... 65,555 10,925
Other................................................................................. 26,634 2,060
----------------- ------------------
1,270,389 197,559
----------------- ------------------
(Loss) income from operations......................................................... (12,392) 14,233
OTHER INCOME AND EXPENSES
Other income.......................................................................... 5,714 898
Loss on disposal of fixed assets...................................................... (18,643) --
Write off of goodwill................................................................. (43,650) --
----------------- ------------------
(56,579) 898
----------------- ------------------
Net (loss) income..................................................................... $ (68,971) $ 15,131
----------------- ------------------
----------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENT
F-50
<PAGE>
PRACTICE F
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31, 1995
----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................................................... $(68,971)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization............................................................................. 6,690
Provision for bad debts................................................................................... 65,555
Loss on abandonment of goodwill........................................................................... 34,920
Loss on disposal of fixed assets.......................................................................... 18,643
Changes in assets and liabilities:
Accounts receivable.................................................................................... (31,748)
Goodwill............................................................................................... 8,730
Accounts payable....................................................................................... (109)
----------
Net cash provided by operating activities................................................................. 33,710
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment..................................................................... (1,716)
----------
Net cash used in investing activities....................................................................... (1,716)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of treasury stock....................................................................... 1,000
Repayments of long-term debt................................................................................... (30,753)
----------
Net cash used by financing activities..................................................................... (29,753)
----------
Net increase in cash and cash equivalents........................................................................ 2,241
Cash and cash equivalents at beginning of period................................................................. 11,744
----------
Cash and cash equivalents at end of period....................................................................... $ 13,985
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-51
<PAGE>
PRACTICE F
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows.
BUSINESS
Practice F (the "Practice") is a group medical practice providing medical
services.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for service basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Furniture and fixtures, computer equipment, and
office equipment are depreciated over useful lives ranging from 5 to 7 years.
Depreciation is computed using the straight-line and the accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a C corporation. As a result, the Practice is subject to
corporate income taxes, including taxes on capital gains, if any. The Practice's
tax returns are subject to examination by federal and state taxing authorities.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under operating leases with
terms through 2001.
F-52
<PAGE>
PRACTICE F
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------- -------
<S> <C>
1996......................................................... $85,655
1997......................................................... 89,510
1998......................................................... 93,537
1999......................................................... 97,747
2000......................................................... 62,817
</TABLE>
Rent expense paid for operating leases for the year ended December 31, 1995
was $89,741.
NOTE 3--LOSS ON DISPOSAL OF ASSETS
During 1995 the Practice terminated the operation of a location it had
previously acquired. There being no remaining value associated with the assets,
the leasehold improvements and goodwill associated with said location were
expensed.
NOTE 4--INCOME TAXES
The Practice is a C corporation for federal income tax purposes. The
physician owners of the Practice have a policy of distributing all residual
profits of the Practice as additional compensation. The Practice historically
has not incurred any significant income tax liabilities and there is no
indication that this trend will not continue in the future. Accordingly, the
Practice does not provide for income tax assets or liabilities.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have insurance coverage for their
professional malpractice claims which is paid for them by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
NOTE 6--SUBSEQUENT EVENT
Effective February 28, 1996, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO PRACTICE G:
We have audited the accompanying statements of operations and cash flows of
Practice G (the "Practice") for the year ended December 31, 1995. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice G for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 12, 1996
F-54
<PAGE>
PRACTICE G
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER JANUARY 1, 1996 TO
31, 1995 APRIL 30, 1996
---------- ------------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings...................................................................... $375,246 $125,082
EXPENSES
Salaries and benefits....................................................................... 59,893 23,532
Medical supplies............................................................................ 19,052 8,300
Insurance................................................................................... 8,747 2,131
Depreciation................................................................................ 3,269 1,090
Interest.................................................................................... 7,040 1,979
General and administrative.................................................................. 48,260 15,497
Provision for bad debts..................................................................... 44,273 14,758
Other....................................................................................... 9,286 2,638
---------- ------------------
Total Expenses........................................................................... 199,820 69,925
---------- ------------------
Proprietors' Net Income (note 5)............................................................ $175,426 $ 55,157
---------- ------------------
---------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-55
<PAGE>
PRACTICE G
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31, 1995
----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................................................... $ 175,426
Adjustments to reconcile net income to net cash provided by operating activities
Provision for doubtful accounts............................................................................. 44,273
Depreciation................................................................................................ 3,269
Changes in assets and liabilities:
Accounts receivable....................................................................................... (75,699 )
----------
Net cash provided by operating activities.............................................................. 147,269
CASH FLOWS FROM INVESTING ACTIVITIES
Net repayment on long-term debt................................................................................ (23,258 )
Owners' equity distributions................................................................................... (124,011 )
----------
Net cash used by financing activities.................................................................. (147,269 )
----------
Net increase in cash and cash equivalents........................................................................ --
Cash and cash equivalents at beginning of period................................................................. --
----------
Cash and cash equivalents at end of period....................................................................... $ --
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-56
<PAGE>
PRACTICE G
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows:
BUSINESS
Practice G (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets, which are 5 years for furniture and automobiles,
and 31.5 years for the office building. Depreciation is computed using the
straight-line method and the accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a sole proprietorship; accordingly, income tax liabilities
are the responsibility of owner.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--INCOME TAXES
The Practice is a sole proprietorship. As a result, the Practice is not
subject to corporate income taxes. Accordingly, no provisions have been made in
the accompanying statement of operations for federal and state income taxes
since such taxes are liabilities of the individual owner and the amounts thereof
depend upon his tax situation.
F-57
<PAGE>
PRACTICE G
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NOTE 2--INCOME TAXES--CONTINUED
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the owner could be changed if adjustments in the distributable
income were ultimately sustained by the taxing authorities.
NOTE 3--INTERNAL REVENUE SERVICE ASSESSMENTS
The Proprietor has been assessed with past-due taxes, interest and
penalties in the amount of $164,000 as of December 31, 1995. This amount is not
related to the Practice and therefore has not been reflected in the accompanying
statement of operations.
NOTE 4--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physician has claims made insurance coverage for professional
malpractice claims which is paid for by the Practice. Such insurance provides
for coverage to the extent individual claims do not exceed $1,000,000 per
incident and $3,000,000 in the aggregate per year, depending on the physician's
coverage.
NOTE 5--PROPRIETOR'S NET INCOME
Proprietor's net income represents net income prior to owner's
compensation.
NOTE 6--SUBSEQUENT EVENT
Effective May 1, 1996, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-58
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice H:
We have audited the accompanying statements of operations and cash flows of
Practice H (the "Practice") for the year ended December 31, 1995. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations and cash flows
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of operations
and cash flows. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations and cash flows. We believe that our
audit of the statements of operations and cash flows provides a reasonable basis
for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of Practice H for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 12, 1996
F-59
<PAGE>
PRACTICE H
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER JANUARY 1, 1996 TO
31, 1995 APRIL 30, 1996
---------- ------------------
<S> <C> <C>
(UNAUDITED)
REVENUES
Net physician billings...................................................................... $320,886 $ 89,825
Interest and other income................................................................... 5,198 1,233
---------- ----------
Total Revenues.............................................................................. 326,084 91,058
EXPENSES
Salaries and benefits....................................................................... 35,254 8,928
Medical supplies............................................................................ 11,520 3,401
Insurance................................................................................... 7,158 914
Depreciation................................................................................ 1,575 120
General and administrative.................................................................. 22,403 8,033
Provision for bad debts..................................................................... 17,316 5,772
Other....................................................................................... 6,736 1,673
---------- ----------
Total Expenses.............................................................................. 101,962 28,841
---------- ----------
Proprietor's Net Income (note 6)......................................................... $224,122 $ 62,217
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-60
<PAGE>
PRACTICE H
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................................... $ 224,122
Adjustments to reconcile net income to net cash provided by operating activities
Provision for bad debts.................................................................................. 17,316
Depreciation............................................................................................. 1,575
Changes in assets and liabilities:
Accounts receivable................................................................................... (9,545)
------------
Net cash provided by operating activities................................................................ 233,468
CASH FLOWS FROM FINANCING ACTIVITIES
Owners' equity distributions.................................................................................. (201,963)
------------
Net cash used by financing activities.................................................................... (201,963)
------------
Net increase in cash and cash equivalents....................................................................... 31,505
Cash and cash equivalents at beginning of period................................................................ --
------------
Cash and cash equivalents at end of period...................................................................... $ 31,505
------------
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-61
<PAGE>
PRACTICE H
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the financial statement is as follows:
BUSINESS
Practice H (the "Practice") is a physician operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its statements of operations and cash flows on the
accrual basis of accounting.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets (5 years). Depreciation is computed using the
accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is a sole proprietorship; accordingly, income tax liabilities
are the responsibility of owner.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 2--OPERATING LEASE
The Practice is the lessee of office space under an operating lease with a
related party which expires in 1997.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to $15,000 in 1996 and $6,250 in
1997.
Rent expense paid for operating leases for the year ended December 31, 1995
was $15,000.
F-62
<PAGE>
PRACTICE H
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1995
NOTE 3--INCOME TAXES
The Practice is a sole proprietorship. As a result, the Practice is not
subject to corporate income taxes. Accordingly, no provisions have been made in
the accompanying statement of operations for federal and state income taxes
since such taxes are liabilities of the individual owner and the amounts thereof
depend upon his tax situation.
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the owner could be changed if adjustments in the distributable
income were ultimately sustained by the taxing authorities.
NOTE 4--BENEFIT PLAN
The Practice has a defined contribution plan covering the employees.
Contributions to the plan amounted to $831 in 1995.
NOTE 5--COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have claims made insurance coverage
for their professional malpractice claims which is paid for them by the Company.
Such insurance provides for coverage to the extent individual claims do not
exceed $1,000,000 per incident and $3,000,000 in the aggregate per year,
depending on the physician's coverage.
NOTE 6--PROPRIETOR'S NET INCOME
Proprietor's net income represents net income prior to owner's
compensation.
NOTE 7--SUBSEQUENT EVENT
Effective May 1, 1996, Doctors Health System, Inc. of Owings Mills,
Maryland acquired certain assets of the Practice in an asset purchase
transaction.
F-63
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice I:
We have audited the accompanying balance sheets of Practice I (the
"Practice"), as of July 31, 1996 and 1995 and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the financial position of Practice I as of July 31,
1996 and 1995, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 25, 1996
F-64
<PAGE>
PRACTICE I
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
<S> <C> <C>
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................................... $ 187,340 $ 176,440
Accounts receivable, net of an allowance for doubtful accounts of $204,487 in 1995 and
$336,547 in 1996........................................................................... 817,948 1,346,188
Due from stockholder.......................................................................... 13,608 1,012
Prepaid expenses.............................................................................. 80,403 100,060
Deferred tax asset............................................................................ 34,172 --
----------- -----------
Total Current Assets....................................................................... 1,133,471 1,623,700
PROPERTY AND EQUIPMENT
Furniture and fixtures........................................................................ 327,479 355,697
Leasehold improvements........................................................................ 294,322 295,602
Equipment..................................................................................... 839,103 839,103
Equipment under capital lease................................................................. 246,985 246,985
----------- -----------
1,707,889 1,737,387
Less accumulated depreciation and amortization................................................ (1,227,374) (1,347,223)
----------- -----------
480,515 390,164
OTHER ASSETS 201,967 134,398
----------- -----------
Total Assets............................................................................... $ 1,815,953 $ 2,148,262
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses......................................................... $ 26,511 $ 117,302
Accrued retirement............................................................................ 368,843 428,530
Current portion of long-term debt............................................................. 222,673 108,372
Accrued salaries and benefits................................................................. 160,025 232,606
Deferred tax liability........................................................................ 283,220 473,828
----------- -----------
Total Current Liabilities.................................................................. 1,061,272 1,360,638
Long-term debt, net of current portion.......................................................... 343,726 116,366
Deferred compensation payable................................................................... -- 157,508
----------- -----------
Total Liabilities.......................................................................... 1,404,998 1,634,512
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, 100,000 shares authorized; 1,200 shares and 1,400 shares, respectively, issued
and outstanding, $1 par value.............................................................. 1,200 1,400
Additional paid-in capital.................................................................... 238,800 278,600
Retained earnings............................................................................. 170,955 233,750
----------- -----------
Total Stockholders' Equity................................................................. 410,955 513,750
----------- -----------
Total Liabilities and Stockholders' Equity................................................. $ 1,815,953 $ 2,148,262
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-65
<PAGE>
PRACTICE I
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
<S> <C> <C>
1995 1996
----------- -----------
REVENUES
Net physician revenue........................................................................... $ 7,477,377 $ 8,152,224
Other income.................................................................................... 38,538 59,780
----------- -----------
Total Revenues............................................................................... 7,515,915 8,212,004
EXPENSES
Salaries and benefits........................................................................... 5,313,405 5,636,879
Medical supplies................................................................................ 162,542 212,347
Insurance....................................................................................... 268,891 278,941
Depreciation and amortization................................................................... 171,827 140,755
Interest........................................................................................ 71,691 41,873
General and administrative...................................................................... 1,088,066 996,277
Provision for bad debts......................................................................... 204,487 336,547
Other........................................................................................... 112,944 67,883
----------- -----------
Total Expenses............................................................................... 7,393,853 7,711,502
----------- -----------
Net Income Before Taxes......................................................................... 122,062 500,502
----------- -----------
Income Taxes....................................................................................
Current...................................................................................... 77,424 48,524
Deferred..................................................................................... 167,308 224,780
----------- -----------
244,732 273,304
----------- -----------
Net (Loss) Income.......................................................................... $ (122,670) $ 227,198
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-66
<PAGE>
PRACTICE I
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1994...................................................... $1,200 $ 238,800 $ 293,625 $ 533,625
Net loss..................................................................... (122,670) (122,670)
------ ---------- --------- ---------
BALANCE, JULY 31, 1995....................................................... 1,200 238,800 170,955 410,955
Issuance of stock............................................................ 200 39,800 40,000
Net income................................................................... 227,198 227,198
Stockholders' distributions.................................................. (164,403) (164,403)
------ ---------- --------- ---------
BALANCE, JULY 31, 1996....................................................... $1,400 $ 278,600 $ 233,750 $ 513,750
------ ---------- --------- ---------
------ ---------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-67
<PAGE>
PRACTICE I
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ................................................................................ $(122,670) 227,198
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization.................................................................. 171,827 140,755
Provision for bad debts........................................................................ 204,487 336,547
Deferred taxes................................................................................. 167,308 224,780
Changes in assets and liabilities:
Accounts receivable.......................................................................... (242,383) (864,787)
Prepaid expenses............................................................................. 77,674 (19,657)
Other assets................................................................................. 123,070 67,570
Accounts payable and accrued expenses........................................................ (94,606) 90,790
Accrued retirement........................................................................... (93,583) 59,687
Accrued salaries and benefits................................................................ 58 72,581
--------- ---------
Net cash provided by operating activities................................................. 191,182 335,464
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment........................................................ (190,969) (57,299)
--------- ---------
Net cash used by investing activities..................................................... (190,969) (57,299)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt.................................................................... 564,999 --
Repayments of long-term debt...................................................................... (491,926) (341,661)
Payments (to)/from stockholder.................................................................... (43,662) 12,596
Proceeds from issuance of common stock............................................................ -- 40,000
--------- ---------
Net cash provided by (used by) financing activities....................................... 29,411 (289,065)
--------- ---------
Net increase (decrease) in cash and cash equivalents...................................... 29,624 (10,900)
Cash and cash equivalents at beginning of period.................................................... 157,716 187,340
--------- ---------
Cash and cash equivalents at end of period.......................................................... $ 187,340 $ 176,440
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-68
<PAGE>
PRACTICE I
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements are as follows:
BUSINESS
Practice I (the "Practice") is a Maryland corporation which was
incorporated on November 1, 1972 for the purpose of operating a private medical
practice.
BASIS OF ACCOUNTING
The Practice presents its financial statements on the accrual basis of
accounting.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity date of three months or
less to be cash equivalents.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
DEPRECIATION METHOD
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets which range from 5 to 7 years for furniture and
equipment. Leasehold improvements are amortized over the life of the lease.
Depreciation is computed using the straight-line and the accelerated methods.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
The Practice is taxable under the provisions of the Internal Revenue Code.
The Practice recognizes deferred income tax on all significant timing
differences between financial and income tax reporting.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
2. MERGER OF PRACTICES
Effective September 11, 1995, the Practice merged with another Maryland
medical corporation. The business combination was accounted for by the
pooling-of-interest method.
F-69
<PAGE>
PRACTICE I
NOTES TO FINANCIAL STATEMENTS--CONTINUED
2. MERGER OF PRACTICES--CONTINUED
Effective August 8, 1996, a medical corporation which merged in 1995,
exercised its option to withdraw from the Practice, as permitted under the
Agreement of Merger. Under the terms of the withdrawal, the withdrawing medical
corporation departs with the same stockholders' equity it had when the merger
occurred. The departing firm receives their fixed assets, as well as a note
collateralized by one of the fixed assets, and the remaining equity balance will
be paid through a deferred compensation arrangement. This deferred compensation
arrangement is fully accrued at July 31, 1996.
Since the merger has been rescinded and the departing corporation is not a
participant in the acquisition disclosed in Note 7, the assets, liabilities and
operations of the withdrawing corporation have not been included herein.
3. INCOME TAXES
The Practice accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109. Deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net current deferred tax assets:
Net operating loss carryforward................................................................... $ 34,172 $ --
Net current deferred tax liabilities:
Cash to accrual adjustments....................................................................... (283,220) (473,828)
--------- ---------
$(249,048) $(473,828)
--------- ---------
--------- ---------
</TABLE>
The variance in the tax rate reflected in the financial statements compared
to the combined federal and state statutory rate is primarily related to the
cash basis of accounting for income tax purposes.
4. OPERATING LEASES
The Practice conducts its operations at leased facilities and uses leased
office equipment under noncancelable operating leases. The operating leases have
initial terms that expire at various periods through 2001 and, generally,
provide for renewal for various periods at stipulated rates. Some of the
operating leases provide that the Practice pay taxes, maintenance, insurance,
and other occupancy costs applicable to leased premises. Total rent expense for
all operating leases approximated $369,569 in 1996 and $307,637 in 1995. Minimum
rental commitments, excluding sublease income, under operating leases as of July
31, 1996 are as follows:
<TABLE>
<CAPTION>
UNAFFILIATED RELATED PARTY
------------ -------------
<S> <C> <C>
1997.......................................................... $112,649 159,078
1998.......................................................... 112,649 159,078
1999.......................................................... 100,553 159,078
2000.......................................................... 56,006 159,078
2001.......................................................... 20,133 98,508
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians in the Practice have claims made insurance coverage for
professional malpractice claims which is paid for by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
F-70
<PAGE>
PRACTICE I
NOTES TO FINANCIAL STATEMENTS--CONTINUED
6. LONG TERM DEBT
Long-term debt outstanding as of July 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Note payable to bank, payable in monthly installments of $8,333 plus interest at the bank's
prime plus 3/4%, beginning October 1994. The note is secured by all assets of the Practice $ 316,667 $ 216,362
Letter of Credit with Bank bearing interest at the bank's prime plus 3/4%, with no specified
repayment terms. The Line is secured by all assets of the Practice. The amount available to
borrow against the line of credit is approximately $333,383 and $500,000 at July 31, 1996 and
1995, respectively........................................................................... 166,617 --
Note payable to Shareholder, payable in monthly installments of $2,225 including interest at
8.5%, beginning January, 1993, uncollateralized.............................................. 35,182 8,376
Capital lease obligation, requiring a monthly payment of $4,962 through June 1996.............. 47,933 --
--------- ---------
Total.......................................................................................... 566,399 244,738
Less current portion........................................................................... (222,673) (108,372)
--------- ---------
Total long-term debt........................................................................... $ 343,726 $ 116,366
--------- ---------
--------- ---------
</TABLE>
Following are the maturities of long-term debt for each of the next five
years:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------------ --------
<S> <C>
1997.......................................................................... $108,372
1998.......................................................................... 100,007
1999.......................................................................... 16,359
--------
$224,738
--------
--------
</TABLE>
7. RETIREMENT PLAN
The Practice contributes to a defined contribution retirement plan for all
employees who are at least twenty-one years old and who have one year of service
with the Practice. Employer contributions are determined at the discretion of
the Practice. Contributions to the plan totalled $428,530 and $368,843 for the
years ended July 31, 1996 and 1995, respectively.
8. SUBSEQUENT EVENT
The Practice has entered into a preliminary agreement to sell its assets
and practice to Doctors Health System, Inc. of Owings Mills, Maryland. The
agreement is subject to the parties entering into a binding purchase agreement.
F-71
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Practice J:
We have audited the accompanying combined balance sheet of Practice J (the
"Practice") as of June 30, 1996 and the related combined statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the combined financial position of Practice J as of
June 30, 1996, and the combined results of their operations and their combined
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Baltimore, Maryland
September 20, 1996
F-72
<PAGE>
PRACTICE J
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents--note 1............................................................................. $ 237,123
Accounts receivable, net of allowance for doubtful accounts of $30,000--note 1................................ 432,000
Prepaid expenses and other current assets..................................................................... 19,839
----------
Total Current Assets....................................................................................... 688,962
PROPERTY AND EQUIPMENT--note 1
Furniture and fixtures........................................................................................ 181,197
Leasehold improvements........................................................................................ 662,537
Equipment..................................................................................................... 214,199
----------
1,057,933
Less accumulated depreciation................................................................................. (314,184)
----------
743,749
OTHER ASSETS.................................................................................................... 27,145
----------
Total Assets.................................................................................................... $1,459,856
----------
----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.............................................................................................. $ 317,620
Notes payable--note 2......................................................................................... 2,059,727
----------
Total Current Liabilities.................................................................................. 2,377,347
Stockholders' (Deficit)--note 6................................................................................. (917,491)
----------
Total Liabilities and Stockholders' (Deficit)................................................................... $1,459,856
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-73
<PAGE>
PRACTICE J
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1996
----------
<S> <C>
REVENUES
Net physician revenue......................................................................................... $3,557,946
EXPENSES
Salaries and benefits......................................................................................... 2,217,177
Medical supplies.............................................................................................. 541,341
Insurance..................................................................................................... 131,564
Depreciation and amortization................................................................................. 98,330
Interest...................................................................................................... 188,822
General and administrative.................................................................................... 707,998
Provision for bad debts....................................................................................... 30,000
----------
Total Expenses............................................................................................. 3,915,232
----------
Loss from operations..................................................................................... (357,286)
OTHER INCOME AND EXPENSES
Other loss.................................................................................................... (21,349)
----------
Net Loss...................................................................................................... $ (378,635)
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-74
<PAGE>
PRACTICE J
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
BALANCE, JUNE 30, 1995......................................................................................... $(538,856)
Net loss....................................................................................................... (378,635)
-------------
BALANCE, JUNE 30, 1996......................................................................................... $(917,491)
-------------
-------------
</TABLE>
F-75
<PAGE>
PRACTICE J
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
JUNE 30,
1996
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................................................................... $(378,635)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization............................................................................... 98,330
Provision for bad debts..................................................................................... 30,000
Changes in assets and liabilities:
Accounts receivable....................................................................................... (34,001)
Prepaid assets............................................................................................ (19,839)
Other assets.............................................................................................. (10,374)
Accounts payable.......................................................................................... 141,941
---------
Net cash used in operating activities.................................................................. (172,578)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets....................................................................................... (59,255)
---------
Net cash used in investing activities.................................................................. (59,255)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt............................................................................................. 296,307
---------
Net cash provided by financing activities.............................................................. 296,307
---------
Net increase in cash and cash equivalents.............................................................. 64,474
Cash and cash equivalents at beginning of period................................................................. 172,649
---------
Cash and cash equivalents at end of period....................................................................... $ 237,123
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-76
<PAGE>
PRACTICE J
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
preparation of the financial statements are as follows:
BASIS OF ACCOUNTING
Practice J (the "Practice") is engaged in the business of providing health
care services and managing physician practices.
The Practice presents its combined financial statements on the accrual
basis of accounting.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
multiple entities which are under common control.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Practice considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
During the year ended June 30, 1996, the Practice maintained cash balances
in several local banks. At times these balances exceeded the federally insured
limits. The Practice has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
REVENUE RECOGNITION
Revenues for services rendered are generated from direct patient payment
and third party billing and are recognized when services are performed. These
revenues are recorded net of adjustments and allowances resulting from the
difference between the customary and usual rates for physician services and
amounts reimbursable by government agencies (i.e., Medicare and Medicaid),
commercial insurance carriers and other health insurance programs.
The majority of the Practices' revenues were derived from medical care
delivered on a fee for services basis. The Practice has negotiated agreements
with managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the Practice.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from federal and state
government agencies, commercial insurance companies, other health insurance
programs and private pay patients. Accounts receivable reflect an allowance for
uncollectible accounts based on historical information, current payor mix, and
trends in the health care industry.
DEPRECIATION METHOD
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. The straight-line method of
depreciation is followed for substantially all assets for financial reporting
purposes and accelerated methods are used for tax purposes. Routine maintenance
and repairs are charged to expense as incurred.
MEDICAL SUPPLIES
The Practice expenses the cost of routine medical and laboratory supplies
when purchased.
F-77
<PAGE>
PRACTICE J
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INCOME TAXES
The Practice is not a taxpaying entity for federal income tax purposes, and
thus no income tax expense has been recorded on the statement of operations.
Income from the partnership is taxed to the physicians through their individual
returns.
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
2. NOTES PAYABLE
The Practice has $1,759,727 in Notes Payable which are payable on demand.
The bank has not called the notes at the statement date and the Practice is
currently negotiating a refinance and consolidation.
The Practice has a $300,000 note payable which matures March 1, 1997. The
Practice pays 8.25% interest only on this note monthly.
3. INCOME TAXES
The Practice entities have elected to adopt the provisions of Subchapter S
of the Internal Revenue Code of 1986 or to be taxed as partnerships. As a
result, the Practice is not subject to corporate income taxes, except for taxes
on certain capital gains, if any. Accordingly, no provisions have been made in
the accompanying statement of operations for federal and state income taxes
since such taxes are liabilities of the individual stockholder and the amounts
thereof depend upon his tax situation.
The Practices' tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
4. COMMITMENTS AND CONTINGENCIES
MALPRACTICE INSURANCE
The physicians employed by the Practice have insurance coverage for their
professional malpractice claims which is paid for them by the Practice. Such
insurance provides for coverage to the extent individual claims do not exceed
$1,000,000 per incident and $3,000,000 in the aggregate per year, depending on
the physician's coverage.
Upon termination of employment, physicians are not required to purchase
insurance coverage for the remaining outstanding exposure related to incidents
which may be incurred, but reported subsequent to the termination of their
employment. Accordingly, the Practice has reserved to provide for this self
insured exposure.
5. STOCKHOLDERS' (DEFICIT)
The combined equity of Practice J consists of the equity in five medical
practices. The owners equity of the practices comprising Practice J are as
follows:
<TABLE>
<S> <C>
Enterprise 1, common stock........................... $ 200
Enterprise 2, retained earnings...................... (120,474)
Enterprise 3, partners' capital...................... (723,457)
Enterprise 4, partners' capital...................... (83,435)
</TABLE>
F-78
<PAGE>
PRACTICE J
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
5. STOCKHOLDERS' (DEFICIT)--CONTINUED
<TABLE>
<S> <C>
Enterprise 5, partners' capital...................... 9,675
---------
$(917,491)
---------
---------
</TABLE>
6. OTHER INCOME
The Practice receives a monthly fee equal to the lesser of its general and
administrative expenses or $50,000, from Doctors Health Systems, Inc. The amount
has been included in other income.
7. OPERATING LEASE
The practice is the lessee of office space under operating leases with
affiliated entities, which have terms through 1999.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year amount to the following:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------- -------
<S> <C>
1997........................... $99,413
1998........................... 99,413
1999........................... 96,275
2000........................... 90,000
2001........................... 22,500
</TABLE>
Rent expense paid for operating leases for the year ended June 30, 1996 was
$100,460.
8. RELATED PARTY TRANSACTION
The Practice has administrative services provided by an affiliated entity.
The amount paid to the related party for these services approximated $260,000 in
1996.
9. SUBSEQUENT EVENT
The Practice has entered into a letter of intent to sell its assets and
practice to Doctors Health Systems, Inc. The agreement is subject to the parties
entering into a binding purchase agreement.
F-79
<PAGE>
PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED BUSINESSES
The following pro forma consolidated balance sheet as of June 30, 1996, and
the pro forma consolidated statement of operations for the year ended June 30,
1996, give effect to (1) issuance of Series C Redeemable Convertible Preferred
Stock subsequent to June 30, 1996, (2) the acquisition of physician practices
during the year ended June 30, 1996, (3) the acquisition of physician practices
subsequent to June 30, 1996 and (4) the proposed acquisition of physician
practices subsequent to June 30, 1996, which are probable (collectively the
"Acquired Businesses") by Doctors Health System, Inc. (DHS). These transactions
are reflected as of June 30, 1996 for the pro forma consolidated balance sheet
and as of July 1, 1995, for the pro forma consolidated statements of operations.
The pro forma information is based on the respective historical financial
statements of Doctors Health System, Inc. and the Acquired Businesses, giving
effect to the completed and proposed acquisitions under the purchase method of
accounting and the assumptions and adjustments described in the accompanying
notes to the pro forma consolidated financial statements.
The unaudited pro forma consolidated financial statements have been
prepared by the DHS based on the audited financial statements of certain of the
acquisitions or probable acquisitions, which statements are included elsewhere
in this Prospectus, and the unaudited financial statements of other acquisitions
or probable acquisitions, which statements are not included herein (as they are
not significant), adjusted where necessary, with respect to pre-acquisition
periods, to the basis of accounting used in the DHS's Audited Financial
Statements.
Management of DHS does not believe that the pro forma consolidated
financial statements are indicative of the results that actually would have
occurred if the combinations had been in effect on the dates indicated or which
may be obtained in the future. The pro forma consolidated financial statements
should be read in conjunction with the financial statements and notes of DHS and
the respective Acquired Businesses contained elsewhere herein.
F-80
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ISSUANCE OF
SERIES C
REDEEMABLE
CONVERTIBLE ACQUISITIONS
PREFERRED STOCK COMPLETED
SUBSEQUENT TO SUBSEQUENT TO PROBABLE
HISTORICAL JUNE 30, 1996 JUNE 30, 1996 ACQUISITIONS
(A) (B) (C) (D) REFERENCE
----------- --------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................ $ 1,400,837 $10,000,000 $ (416,799) $ (626,783 )
Accounts receivable (net of allowance for
doubtful accounts of $360,000,)........ 3,004,629 -- 330,920 2,102,906
Other receivables........................ 611,025 -- -- --
Prepaid expenses......................... 132,752 -- -- 100,060
----------- --------------- ------------- ------------
Total current assets................... 5,149,243 10,000,000 (85,879) 1,576,183
PROPERTY AND EQUIPMENT, net................ 2,510,301 -- 51,799 1,278,612
OTHER ASSETS
Intangibles (net of accumulated
amortization of $62,917)............... 2,387,150 -- 1,289,000 2,446,192
Deferred charges (net of accumulated
amortization of $151,368).............. 697,652 -- -- --
Note receivable.......................... 300,000 (300,000 )
Accrued interest receivable.............. 253,976 -- -- (8,525 )
Deposits................................. 24,926 -- -- --
----------- --------------- ------------- ------------
3,663,704 0 1,289,000 2,137,667
----------- --------------- ------------- ------------
TOTAL ASSETS......................... $11,323,248 $10,000,000 $ 1,254,920 $ 4,992,462
----------- --------------- ------------- ------------
----------- --------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable............................ $ 353,915 $ -- $ -- $ --
Current maturities of long-term
obligations............................ 110,917 -- -- 433,372
Accounts payable......................... 350,794 -- -- 117,302
Accrued medical services................. 550,520 -- -- --
Other accrued expenses................... 2,951,893 -- -- 196,316
----------- --------------- ------------- ------------
TOTAL CURRENT LIABILITIES.............. 4,318,039 -- -- 746,990
----------- --------------- ------------- ------------
LONG-TERM OBLIGATIONS
Note Payable............................. 3,400,000 -- -- --
Notes payable and purchase
obligations--related parties........... 2,077,364 -- 330,920 1,670,906
Capital lease obligations, less current
maturities............................. 330,578 -- -- 116,366
----------- --------------- ------------- ------------
5,807,942 -- 330,920 1,787,272
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK 6.5%
cumulative, Series A, $5 par value,
authorized and issued 1,000,000 shares
(liquidation value $2,500,000)........... 5,438,305 -- -- --
Less subscription receivable--........... (1,500,000) -- -- --
----------- --------------- ------------- ------------ ---------
3,938,305
9.5% cumulative, Series B, $11.25 par
value, authorized and issued 355,556
shares (liquidation value
$4,000,000)............................ 4,227,526 -- -- --
8% cumulative, Series C, $17.50 par
value, 1,071,428 authorized, 571,428
shares issued (liquidation value
$10,000,000)........................... 10,000,000 -- --
----------- --------------- ------------- ------------
8,165,831 10,000,000 -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 1,000,000 shares, no shares
issued................................. -- -- -- --
Common Stock
Class A, $.01 par value; authorized
20,700,000 shares, issued and
outstanding 800,000 shares........... 8,000 -- -- --
Class B, $.01 par value; authorized
10,000,000; issued and outstanding
2,398,000 shares..................... 23,980 -- 1,320 3,510 (E)
Class C, $.01 par value; authorized
29,050,000; no shares issued and
outstanding.......................... -- -- -- --
Additional paid in capital............... 2,079,548 -- 922,680 2,454,690 (E)
Accumulated deficit...................... (9,080,092) -- -- --
----------- --------------- ------------- ------------
TOTAL STOCKHOLDERS' EQUITY........... (6,968,564) -- 924,000 2,458,200
----------- --------------- ------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $11,323,248 $10,000,000 $ 1,254,920 $ 4,992,462
----------- --------------- ------------- ------------
----------- --------------- ------------- ------------
<CAPTION>
PRO FORMA
AS ADJUSTED
JUNE 30,
1996
-----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................ $10,357,255
Accounts receivable (net of allowance for
doubtful accounts of $360,000,)........ 5,438,455
Other receivables........................ 611,025
Prepaid expenses......................... 232,812
-----------
Total current assets................... 16,639,547
PROPERTY AND EQUIPMENT, net................ 3,840,712
OTHER ASSETS
Intangibles (net of accumulated
amortization of $62,917)............... 6,122,342
Deferred charges (net of accumulated
amortization of $151,368).............. 697,652
Note receivable.......................... --
Accrued interest receivable.............. 245,451
Deposits................................. 24,926
-----------
7,090,371
-----------
TOTAL ASSETS......................... $27,570,630
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable............................ $ 353,915
Current maturities of long-term
obligations............................ 544,289
Accounts payable......................... 468,096
Accrued medical services................. 550,520
Other accrued expenses................... 3,148,209
-----------
TOTAL CURRENT LIABILITIES.............. 5,065,029
-----------
LONG-TERM OBLIGATIONS
Note Payable............................. 3,400,000
Notes payable and purchase
obligations--related parties........... 4,079,190
Capital lease obligations, less current
maturities............................. 446,944
-----------
7,926,134
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK 6.5%
cumulative, Series A, $5 par value,
authorized and issued 1,000,000 shares
(liquidation value $2,500,000)........... 5,438,305
Less subscription receivable--........... (1,500,000 )
-----------
3,938,305
9.5% cumulative, Series B, $11.25 par
value, authorized and issued 355,556
shares (liquidation value
$4,000,000)............................ 4,227,526
8% cumulative, Series C, $17.50 par
value, 1,071,428 authorized, 571,428
shares issued (liquidation value
$10,000,000)........................... 10,000,000
-----------
18,165,831
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 1,000,000 shares, no shares
issued................................. --
Common Stock
Class A, $.01 par value; authorized
20,700,000 shares, issued and
outstanding 800,000 shares........... 8,000
Class B, $.01 par value; authorized
10,000,000; issued and outstanding
2,398,000 shares..................... 28,810
Class C, $.01 par value; authorized
29,050,000; no shares issued and
outstanding.......................... --
Additional paid in capital............... 5,456,918
Accumulated deficit...................... (9,080,092 )
-----------
TOTAL STOCKHOLDERS' EQUITY........... (3,586,364 )
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $27,570,630
-----------
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-81
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ACQUISITIONS COMPLETED SUBSEQUENT TO JUNE 30, 1996
JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------------------
PHYSICIAN K PHYSICIAN L PHYSICIAN M TOTAL
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................. $(152,605) $(243,059) $ (21,135) $ (416,799)
Accounts receivable, net.............................................. 112,984 70,936 147,000 330,920
Other receivables..................................................... -- --
Prepaid expenses...................................................... -- --
----------- ----------- ----------- ----------
Total current assets............................................... (39,621) (172,123) 125,865 (85,879)
PROPERTY AND EQUIPMENT, net............................................. 47,605 3,059 1,135 51,799
OTHER ASSETS
Intangibles, net...................................................... 399,000 422,000 468,000 1,289,000
Deferred charges, net................................................. -- -- -- --
Accrued interest receivable........................................... -- -- -- --
Deposits.............................................................. -- -- -- --
----------- ----------- ----------- ----------
399,000 422,000 468,000 1,289,000
----------- ----------- ----------- ----------
TOTAL ASSETS..................................................... $ 406,984 $ 252,936 $ 595,000 $1,254,920
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable.......................................................... $ -- $ -- $ -- $ --
Current maturities of long-term obligations........................... -- -- -- --
Accounts payable...................................................... -- -- -- --
Accrued medical claims................................................ -- -- -- --
Other accrued expenses................................................ -- -- -- --
----------- ----------- ----------- ----------
Total current liabilities.......................................... -- -- -- --
LONG-TERM OBLIGATIONS
Notes Payable......................................................... -- -- -- --
Notes payable--related parties........................................ 112,984 70,936 147,000 330,920
Notes payable and purchase obligations--related parties............... -- -- -- --
Capital lease obligations less current maturities..................... -- -- -- --
----------- ----------- ----------- ----------
112,984 70,936 147,000 330,920
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued
1,000,000 shares (liquidation value $2,500,000).................... -- -- -- --
Less subscription receivable--..................................... -- -- -- --
9.5% cumulative, Series B, $11.25 par value, authorized and issued
355,556 shares (liquidation value $4,000,000)...................... -- -- -- --
----------- ----------- ----------- ----------
-- -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized 1,000,000 shares, no
shares issued......................................................
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares....................................... -- -- -- --
Class B, $.01 par value; authorized 10,000,000; issued and
outstanding 2,200,000 shares..................................... 420 260 640 1,320
Class C, $.01 par value; authorized 29,050,000; no shares issued
and outstanding.................................................. -- -- -- --
Additional paid in capital............................................ 293,580 181,740 447,360 922,680
Accumulated deficit................................................... -- -- -- --
----------- ----------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY....................................... 294,000 182,000 448,000 924,000
----------- ----------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 406,984 $ 252,936 $ 595,000 $1,254,920
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-82
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
PROBABLE ACQUISITIONS
JUNE 30, 1996
<TABLE>
<CAPTION>
PRACTICE J PRACTICE I ALL OTHERS (D)
---------- ---------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ (231,482) $ -- $ (395,301)
Accounts receivable...................................................... 432,000 1,346,188 324,718
Other receivables........................................................ -- -- --
Prepaid expenses......................................................... -- 100,060 --
---------- ---------- --------------
Total current assets................................................... 200,518 1,446,248 (70,583)
PROPERTY AND EQUIPMENT, net................................................ 743,749 524,562 10,301
OTHER ASSETS
Intangibles, net......................................................... 480,258 754,934 1,211,000
Deferred charges......................................................... -- -- --
Note Receivable.......................................................... (300,000) -- --
Accrued interest receivable.............................................. (8,525) -- --
Deposits................................................................. -- -- --
---------- ---------- --------------
171,733 754,934 1,211,000
---------- ---------- --------------
TOTAL ASSETS........................................................... $1,116,000 $2,725,744 $1,150,718
---------- ---------- --------------
---------- ---------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable............................................................. $ -- $ -- $ --
Current maturities of long-term obligations.............................. 325,000 108,372 --
Accounts payable......................................................... -- 117,302 --
Accrued medical claims................................................... -- -- --
Other accrued expenses................................................... -- 196,316 --
---------- ---------- --------------
Total current liabilities.............................................. 325,000 421,990 --
LONG-TERM OBLIGATIONS
Notes Payable............................................................ -- -- --
Notes payable and purchase obligations--related parties.................. -- 1,346,188 324,718
Capital lease obligations, less current maturities....................... -- 116,366 --
---------- ---------- --------------
-- 1,462,554 324,718
COMMITMENTS AND CONTINGENCIES..............................................
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000).................................. -- -- --
Less subscription receivable............................................. -- -- --
9.5% cumulative, Series B, $11.26 par value, authorized and issued
355,556 shares (liquidation value $4,000,000).......................... -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued................................................................. -- -- --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares........................................... -- -- --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares..................................................... 1,130 1,200 1,180
Class C, $.01 par value; authorized 20,060,000; no shares issued and
outstanding.......................................................... -- -- --
Additional paid in capital............................................... 789,870 840,000 824,820
Accumulated deficit...................................................... -- -- --
---------- ---------- --------------
TOTAL STOCKHOLDERS' EQUITY............................................. 791,000 841,200 826,000
---------- ---------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $1,116,000 $2,725,744 $1,150,718
---------- ---------- --------------
---------- ---------- --------------
<CAPTION>
TOTAL
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ (626,783)
Accounts receivable...................................................... 2,102,906
Other receivables........................................................ --
Prepaid expenses......................................................... 100,060
----------
Total current assets................................................... 1,576,183
PROPERTY AND EQUIPMENT, net................................................ 1,278,612
OTHER ASSETS
Intangibles, net......................................................... 2,446,192
Deferred charges......................................................... --
Note Receivable.......................................................... (300,000)
Accrued interest receivable.............................................. (8,525)
Deposits................................................................. --
----------
2,137,667
----------
TOTAL ASSETS........................................................... $4,992,462
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable............................................................. $ --
Current maturities of long-term obligations.............................. 433,372
Accounts payable......................................................... 117,302
Accrued medical claims................................................... --
Other accrued expenses................................................... 196,316
----------
Total current liabilities.............................................. 746,990
LONG-TERM OBLIGATIONS
Notes Payable............................................................ --
Notes payable and purchase obligations--related parties.................. 1,670,906
Capital lease obligations, less current maturities....................... 116,366
----------
1,787,272
COMMITMENTS AND CONTINGENCIES..............................................
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000).................................. --
Less subscription receivable............................................. --
9.5% cumulative, Series B, $11.26 par value, authorized and issued
355,556 shares (liquidation value $4,000,000).......................... --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued................................................................. --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares........................................... --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares..................................................... 3,510
Class C, $.01 par value; authorized 20,060,000; no shares issued and
outstanding.......................................................... --
Additional paid in capital............................................... 2,454,690
Accumulated deficit...................................................... --
----------
TOTAL STOCKHOLDERS' EQUITY............................................. 2,458,200
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $4,992,462
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL OF THESE FINANCIAL STATEMENTS.
F-83
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
A. Represents the historical audited consolidated balance sheet of the Company
at June 30, 1996.
B. To reflect the issuance of Series C Redeemable Convertible Preferred Stock.
This amount represents the proceeds of $7.5 million received on September 4,
1996 and the $2.5 million to be received on or before December 27, 1996. See
subsequent events (Note 19) footnote on page F-21.
C. Represents the acquisitions completed subsequent to June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
ACQUISITIONS
COMPLETED
SUBSEQUENT
ASSETS ACQUIRED, NET: TO JUNE 30, 1996
----------------
<S> <C>
Accounts receivable, net.................................................................................. 330,920
Fixed assets, net......................................................................................... 51,799
Intangible assets......................................................................................... 1,289,000
----------------
$1,671,719
----------------
----------------
CONSIDERATION:
Cash...................................................................................................... 416,799
Fair value of common stock issued......................................................................... 924,000
Notes payable............................................................................................. 330,920
----------------
$1,671,719
----------------
----------------
</TABLE>
D. Represents the probable acquisitions which have not yet been completed. All
others represents Probable Acquisitions which are not significant to the
Unaudited pro Forma Balance Sheet. See "Management's Discussion and Analysis
of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
PROBABLE
ASSETS ACQUIRED, NET: ACQUISITIONS
------------
<S> <C>
Accounts receivable, net..................................................................................... 2,102,906
Prepaids..................................................................................................... 100,060
Fixed assets, net............................................................................................ 1,278,612
Liabilities assumed.......................................................................................... (863,356)
Intangible assets............................................................................................ 2,446,192
------------
$ 5,064,414
------------
------------
CONSIDERATION:
Cash......................................................................................................... 626,783
Fair value of common stock issued............................................................................ 2,458,200
Notes payable................................................................................................ 1,670,906
Note Receivable applied to purchase price.................................................................... 308,525
------------
$ 5,064,414
------------
------------
</TABLE>
E. The estimated fair value of the stock issued in the acquisitions was $7.00
and was based on a discounted price of the Series C Redeemable Convertible
Preferred Stock issued on September 4, 1996.
F. Practices A through H are not included in the Pro Forma Consolidated Balance
Sheets as they were acquired prior to June 30, 1996.
F-84
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ACQUISITIONS ACQUISITIONS
COMPLETED COMPLETED
PRIOR TO JUNE 30, SUBSEQUENT TO PROBABLE
HISTORICAL 1996 JUNE 30, 1996 ACQUISITIONS
(A) (B) (C) (D) ADJUSTMENTS REFERENCE
----------- ----------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Net physician revenue..... $ 9,902,528 $ 3,758,937 $ 2,999,504 $ 15,553,419 $ --
Global capitation
revenue................ 382,062 -- -- -- --
----------- ----------------- ------------- ------------ ----------- -----------
10,284,590 3,758,937 2,999,504 15,553,419 --
EXPENSES
Physician and other
provider costs.......... 4,525,340 1,607,241 1,216,963 6,211,929 410,000 (F) (J)
Medical services
expense................ 662,671 -- -- -- --
Care center costs......... 6,011,470 923,911 716,084 4,324,405 --
General and
administrative......... 5,342,429 1,110,933 1,102,573 4,709,346 (778,000) (E) (H) (J)
Depreciation and
amortization........... 438,143 47,755 8,933 283,980 289,000 (G)
----------- ----------------- ------------- ------------ -----------
16,980,053 3,689,840 3,044,553 15,529,660 (79,000)
Income (loss) from
operations........ (6,695,463) 69,097 (45,049) 23,759 79,000
Other income (expense)
Interest and other
income................. 291,553 31,240 1,751 160,916 (100,000) (J)
Interest and other
expense................ (242,513) (80,872) (4,835) (86,441) --
----------- ----------------- ------------- ------------ -----------
49,040 (49,632) (3,084) 74,475 (100,000)
Income (loss) before
income taxes...... (6,646,423) 19,465 (48,133) 98,234 (21,000)
Income tax expense.......... -- -- -- -- -- (L)
----------- ----------------- ------------- ------------ -----------
NET (LOSS) INCOME.... $(6,646,423) $ 19,465 $ (48,133) $ 98,234 $ (21,000) (I)
----------- ----------------- ------------- ------------ -----------
----------- ----------------- ------------- ------------ -----------
<CAPTION>
PRO FORMA
AS ADJUSTED
JUNE 30,
1996
-----------
<S> <C>
REVENUES
Net physician revenue..... $32,214,388
Global capitation
revenue................ 382,062
-----------
32,596,450
EXPENSES
Physician and other
provider costs.......... 13,971,473
Medical services
expense................ 662,671
Care center costs......... 11,975,870
General and
administrative......... 11,487,281
Depreciation and
amortization........... 1,067,811
-----------
39,165,106
Income (loss) from
operations........ (6,568,656)
Other income (expense)
Interest and other
income................. 385,460
Interest and other
expense................ (414,661)
-----------
(29,201)
Income (loss) before
income taxes...... (6,597,857)
Income tax expense.......... --
-----------
NET (LOSS) INCOME.... $(6,597,857)
-----------
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-85
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS COMPLETED PRIOR TO JUNE 30, 1996
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ALL OTHERS
PHYSICIAN D PHYSICIAN E PHYSICIAN F PHYSICIAN H PHYSICIAN G (B)
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Net physician revenue................... $ 425,672 $ 146,391 $ 834,069 $ 238,703 $ 313,562 $1,800,540
Global capitation revenue............... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
425,672 146,391 834,069 238,703 313,562 1,800,540
EXPENSES
Physician and other provider costs........ 11,948 82,705 337,982 178,176 203,910 792,520
Medical services expense................ -- -- -- -- -- --
Care center costs....................... 246,990 18,399 258,708 19,870 46,000 333,944
General and administrative.............. 147,934 43,470 241,160 42,117 61,375 574,877
Depreciation and amortization........... 2,858 2,065 4,435 1,331 2,277 34,789
----------- ----------- ----------- ----------- ----------- ----------
409,730 146,639 842,285 241,494 313,562 1,736,130
----------- ----------- ----------- ----------- ----------- ----------
Income (loss) from operations...... 15,942 (248) (8,216) (2,791) -- 64,410
Other income (expense)
Interest and other income............... 6,917 1,943 -- 2,791 -- 19,589
Interest and other expense.............. (1,882) (577) (37,513) -- -- (40,900)
----------- ----------- ----------- ----------- ----------- ----------
5,035 1,366 (37,513) 2,791 -- (21,311)
Income (loss) before income
taxes........................... 20,977 1,118 (45,729) -- -- 43,099
Income tax expense........................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS).................. $ 20,977 $ 1,118 $ (45,729) $ -- $ -- $ 43,099
----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------
<CAPTION>
TOTAL
----------
<S> <C>
REVENUES
Net physician revenue................... $3,758,937
Global capitation revenue............... --
----------
3,758,937
EXPENSES
Physician and other provider costs........ 1,607,241
Medical services expense................ --
Care center costs....................... 923,911
General and administrative.............. 1,110,933
Depreciation and amortization........... 47,755
----------
3,689,840
----------
Income (loss) from operations...... 69,097
Other income (expense)
Interest and other income............... 31,240
Interest and other expense.............. (80,872)
----------
(49,632)
Income (loss) before income
taxes........................... 19,465
Income tax expense........................ --
----------
NET INCOME (LOSS).................. $ 19,465
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-86
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS COMPLETED SUBSEQUENT TO JUNE 30, 1996
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRACTICE
PRACTICE K L PRACTICE M TOTAL
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Net physician revenue................................................ $1,029,671 $862,464 $1,107,369 $2,999,504
Global capitation revenue............................................ -- -- -- --
---------- -------- ---------- ----------
1,029,671 862,464 1,107,369 2,999,504
EXPENSES
Physician and other provider costs................................... 457,696 305,600 453,667 1,216,963
Medical services expenses............................................ -- -- -- --
Care center costs.................................................... 169,704 301,178 245,202 716,084
General and administrative........................................... 391,201 301,969 409,403 1,102,573
Depreciation and amortization........................................ 7,639 828 466 8,933
---------- -------- ---------- ----------
1,026,240 909,575 1,108,738 3,044,553
---------- -------- ---------- ----------
Income (loss) from operations..................................... 3,431 (47,111) (1,369) (45,049)
Other income (expense)
Interest and other income............................................ 382 -- 1,369 1,751
Interest and other expense........................................... (1,163) (3,672) -- (4,835)
---------- -------- ---------- ----------
(781) (3,672) 1,369 (3,084)
---------- -------- ---------- ----------
Income (loss) before income taxes................................. 2,650 (50,783) -- (48,133)
Income tax expense..................................................... -- -- -- --
---------- -------- ---------- ----------
NET INCOME (LOSS)................................................. $ 2,650 $(50,783) $ -- $ (48,133)
---------- -------- ---------- ----------
---------- -------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-87
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PROBABLE ACQUISITIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRACTICE PRACTICE ALL OTHERS
J I (D) TOTAL
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net physician revenue............................................. $ 3,457,946 $8,095,987 $3,999,486 $15,553,419
Global capitation revenue......................................... -- -- -- --
------------- ---------- ---------- -----------
3,457,946 8,095,987 3,999,486 15,553,419
EXPENSES
Physician and other provider costs................................ 455,724 4,197,543 1,558,662 6,211,929
Medical services expenses......................................... -- -- -- --
Care center costs................................................. 1,761,453 1,412,380 1,150,572 4,324,405
General and administrative........................................ 1,599,725 1,887,406 1,222,215 4,709,346
Depreciation and amortization..................................... 98,330 143,344 42,306 283,980
------------- ---------- ---------- -----------
3,915,232 7,640,673 3,973,755 15,529,660
------------- ---------- ---------- -----------
Income (loss) from operations................................ (457,286) 455,314 25,731 23,759
Other income (expense)
Interest and other income......................................... 100,000 58,010 2,906 160,916
Interest and other expense........................................ (21,349) (44,358) (20,734) (86,441)
------------- ---------- ---------- -----------
78,651 13,652 (17,828) 74,475
Income (loss) before income taxes............................ (378,635) 468,966 7,903 98,234
Income tax expense (note 14)........................................ -- -- -- --
------------- ---------- ---------- -----------
NET INCOME (LOSS)............................................ $ (378,635) $ 468,966 $ 7,903 $ 98,234
------------- ---------- ---------- -----------
------------- ---------- ---------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-88
<PAGE>
DOCTORS HEALTH SYSTEMS, INC. AND ACQUIRED BUSINESSES
STATEMENT OF OPERATIONS
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
A. Represents the audited historical consolidated statement of operations of
the Company for the year ended June 30, 1996.
B. Represents the historical statement of operations of each of the recent
acquisitions from July 1, 1995, to the date the acquisitions were completed
by the Company. All Others represent recent acquisitions which individually
are not significant to the Unaudited pro Forma Consolidated Statement of
Operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Acquisitions/Affiliations" for a summary of the
Recent Acquisitions.
C. Represents the historical statement of operations for the year ended June
30, 1996 of each of the acquisitions made subsequent to June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and
consolidated Results of Operations--Acquisitions/Other Physician
Transactions" for a summary of the Recent Acquisitions.
D. Represents the historical statement of operations of each of the probable
acquisitions, for the year ended, June 30, 1996. All Others represent
probable acquisitions which individually are not significant to the
Unaudited Pro Forma Consolidated Statement of Operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions/Other Physician Transactions" for a summary of the
Probable Acquisitions.
E. To reduce the cost of providing services to affiliated health care centers
in the amount of $455,000 for the percentage specified in the service
agreements with the affiliated physician group.
F. To record additional compensation and operating expense related to
compensation arrangements made with certain physicians.
G. To adjust depreciation expense by $183,000 and amortization expense by
$106,000 for the year ended June 30, 1996 based on the allocation of the
purchase price of the acquisitions among property and equipment and
intangibles resulting from excess of cost over fair value of assets
acquired. Intangibles are being amortized using the straight-line method
over 20 years.
H. To record reduction of $223,000 of retirement benefit expense resulting from
discontinuance of individual practice retirement plans.
I. The statements of operations of sole proprietor's reflect regular
distributions of all residual profits. Accordingly, distributions are
reflected as physicians compensation in the physician and other provider
costs line item.
J. To adjust for monthly payments made by the Company to a practice to offset
physician and other care center costs for the period between July 1, 1995
and the commencement of the agreement.
K. Practices A, B and C are not included in the Pro Forma Consolidated
Statement of Operations as they are fiscal year 1995 acquisitions.
L. In light of the Company's loss for the year ended June 30, 1996, no tax
provision was recorded in the Pro Forma Consolidated Statement of
Operations.
F-89
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 2
Forward-Looking Statements..................... 2
Prospectus Summary............................. 3
Glossary....................................... 4
Risk Factors................................... 6
Use of Proceeds................................ 12
Selected Consolidated Financial Data........... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 21
Management..................................... 40
Certain Transactions........................... 47
Principal Stockholders......................... 48
Description of Capital Stock................... 50
Plan of Distribution........................... 56
Legal Matters.................................. 56
Experts........................................ 56
Financial Statements........................... F-1
</TABLE>
[DOCTORS HEALTH SYSTEM, INC. LOGO]
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth a statement of all expenses payable by the
Registrant in connection with the registration, issuance and distribution of the
Securities offered hereby, other than the underwriting discount.
<TABLE>
<S> <C>
SEC Registration Fee........................................................................................... $ 24,848.48
Accounting Fees and Expenses................................................................................... *
Legal Fees and Expenses........................................................................................ *
Printing and Engraving Expenses................................................................................ *
Blue Sky Fees and Expenses..................................................................................... *
Miscellaneous Fees and Expenses................................................................................ *
-----------
Total..................................................................................................... $ *
-----------
-----------
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that the Registrant may indemnify any director who was, is or is threatened to
be made a named defendant or respondent to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director of the
Registrant, or while a director, is or was serving at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan, against reasonable expenses
(including attorneys' fees), judgments, penalties, fines and settlements,
actually incurred by the director in connection with such action, suit or
proceeding, unless it is established that: (i) the act or omission of the
director was material to the matter giving rise to such action, suit or
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the director actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. If the action, suit or proceeding was one by or in the
right of the Registrant, no indemnification shall be made with respect to any
action, suit or proceeding in which the director shall have been adjudged to be
liable to the Registrant. A director also may not be indemnified with respect to
any action, suit or proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official capacity,
in which the director is adjudged to be liable on the basis that a personal
benefit was improperly received. Unless limited by the Registrant's Charter: (i)
a court of appropriate jurisdiction, upon application of a director, may order
such indemnification as the court shall deem proper if it determines that the
director is fairly and reasonably entitled to indemnification in view of all of
the relevant circumstances, regardless of whether the director has met the
standards of conduct required by Section 2-418; and (ii) the Registrant shall
indemnify a director if such director is successful on the merits or otherwise
in defense of any action, suit or proceeding referred to above. However, with
respect to any action, suit or proceeding by or in the right of the Registrant
or in which the director was adjudged to be liable on the basis that a personal
benefit was improperly received, the Registrant may only indemnify the director
for any expenses (including, attorneys' fees) incurred in connection with such
action, suit or proceeding.
Section 2-418 of the MGCL further provides that unless limited by the
Registrant's Charter, the Registrant: (i) shall (a) indemnify an officer of the
Registrant if such officer is successful on the merits or otherwise in defense
of any action, suit or proceeding referred to above, and (b) indemnify an
officer of the Registrant if a court of appropriate jurisdiction, upon
application of an officer, shall order indemnification; (ii) may indemnify and
advance expenses to an officer, employee or agent of the Registrant to the same
extent that it may indemnify directors; and (iii) may indemnify and advance
expenses to an officer, employee or agent who is not a director to such further
extent, consistent with law, as may be provided by the Charter, Bylaws, general
or specific action of the Registrant's Board of Directors or contract.
The Registrant's Bylaws provide that, to the maximum extent permitted by
the MGCL, as from time to time amended, the Registrant shall indemnify (i) its
current and former directors, officers, agents and employees, and (ii) those
persons who, at the request of the Registrant, serve or have served another
corporation, partnership, joint venture, trust or other enterprise in one or
more of such capacities, against any and all liabilities incurred in connection
with their services in such capacities,
II-1
<PAGE>
to the extent determined appropriate by the Board of Directors. The Bylaws
further provide that, to the extent required by the Charter or applicable law,
the Registrant shall indemnify such individuals.
The Registrant's Charter provides that, to the fullest extent permitted by
the MGCL, as amended or interpreted, no director or officer of the Registrant
shall be personally liable to the Registrant or its stockholders for monetary
damages in connection with events occurring at the time such person served as a
director or officer. The Registrant's Charter also provides that, to the maximum
extent permitted by the MGCL, as from time to time amended, the Registrant shall
indemnify its current and former directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities. The Registrant also may, if approved by the Board of Directors,
indemnify officers, employees, agents and persons who serve or have served at
its request with another corporation, partnership or other entity.
The provisions in the Charter and Bylaws do not eliminate the duty of care.
In appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief remain available under Maryland law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Registrant or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under the MGCL. These provisions also do not
affect a director's or officer's responsibilities under any other law, such as
the federal or state securities laws or state or federal environmental laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1994, the Company issued 150,000 shares of its Class A Common
Stock to Stewart B. Gold (which pursuant to a stock split are currently 600,000
shares of Class A Common Stock). Additionally, the Company issued to Scott
Rifkin and Alan Kimmel 25,000 shares each of Class A Common Stock (which
pursuant to a stock split are currently 100,000 shares of Class A Common Stock).
The shares were issued for $200 in cash and in consideration for services
performed for the Company as founders of the Company.
In February of 1995, the Company issued 1,100,000 shares of its Class B
Common Stock (now 2,200,000 shares as a result of a stock split) to Medical
Holdings Limited Partnership in consideration of the transfer of receivables,
equipment, and other assets of medical practices from MHLP to the Company with
an aggregate value of approximately $492,000.
In February of 1995, the Company issued to St. Joseph Medical Center, Inc.,
a Maryland non-profit, non-stock corporation, 500,000 shares of Series A
Preferred Stock (now 1,000,000 shares and convertible to 1,000,000 shares of
Class C Common Stock, subject to certain dilutive events) for $2 million in cash
and a note in the principal amount of $3 million.
In December of 1995, the Company issued to Med-Lantic Management Services,
Inc. 355,556 shares of the Company's Series B Preferred Stock and Warrants to
Medical Mutual Liability Insurance Society of Maryland to purchase 88,889 shares
of Class A Common Stock in consideration of $4 million in cash and a loan
guarantee in the amount of $4 million.
In 1995 and 1996 (August 10, 1995, October 18, 1995, December 21, 1995 and
May 1996), the Company issued options to purchase a total of 200,880 shares of
Class A Common Stock and authorized the issuance of options to purchase an
additional 5,000 shares of Class A Common Stock to certain employees who joined
the Company at the early stages of its development at an exercise price of $0.01
per share, none of which have been exercised as of the date of this Registration
Statement. The options were issued in consideration of services performed and to
be performed for the Company.
In December 1995, the Company paid $40,000 in cash and issued warrants to
purchase a total of 24,000 shares of Class A Common Stock in the aggregate to
Stephen Graham, Andrew Hamilton and John Dwyer as compensation for investment
advice rendered to the Company.
In January 1996, the Company issued 33,000 shares of its Class B Common
Stock to a primary care physician, and in February 1996, issued an aggregate of
132,000 shares of its Class B Common Stock to four primary care physicians, in
connection with the mergers of their medical practices into wholly-owned
subsidiaries of the Company. The aggregate amount of consideration transferred
to the Company for the issuance of the shares was approximately $495,000.
In May 1996, the Company issued 33,000 shares of Class B Common Stock to a
primary care physician, in connection with the merger of his medical practice
into a wholly-owned subsidiary of the Company. The amount of consideration
transferred to the Company for the issuance of the shares was approximately
$99,000.
In September 1996, the Company issued 428,571 shares of Series C Preferred
Stock to Genesis Health Ventures, Inc. for $7.5 million in cash.
II-2
<PAGE>
In September 1996, the Company issued to Dr. Mark Eig, a director of the
Company, 16,000 shares and 1,000 options to purchase shares of the Company's
Class B Common Stock in consideration of the merger of his medical practice into
a wholly-owned subsidiary of the Company. The amount of consideration
transferred to the Company for the issuance of the shares was approximately
$112,000.
In September 1996, the Company issued an aggregate of 26,000 shares and
2,000 options to purchase shares of the Company's Class B Common Stock to two
primary care physicians in consideration of the merger of their medical
practices into wholly-owned subsidiaries of the Company. The aggregate amount of
consideration transferred to the Company was approximately $182,000.
In October 1996, the Company issued an aggregate 64,000 shares of the
Company's Class B Common Stock to four primary care physicians in consideration
of the merger of their medical practices into a wholly owned subsidiary of the
Company. The amount of consideration transferred to the Company for the issuance
of the shares was approximately $448,000.
The sale and issuance of shares listed above were exempt from registration
under the Securities Act by virtue of Sections 4(2) and 3(b) of the Securities
Act and in reliance on Rule 701 and Regulation D promulgated thereunder. The
recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate restrictive legends were affixed to stock certificates and
options issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 (a) Articles of Amendment and Restatement of the Registrant, dated December 8, 1995.*
(b) Articles of Amendment and Restatement of the Registrant, dated September 4, 1996 (filed herewith).
3.2 (a) Amended Bylaws of the Registrant.*
(b) Amended Bylaws of the Registrant, as of September 4, 1996 (filed herewith).
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 (a) Stockholders Agreement dated December 1, 1995, by and among the Registrant, Stewart Gold, Scott Rifkin, Alan
Kimmel, Medical Holdings Limited Partnership, St. Joseph Medical Center, Inc., Medical Mutual Liability
Insurance Society of Maryland, and Med-Lantic Management Services, Inc.*
(b) Amended Stockholders Agreement, dated September 4, 1996 (filed herewith).
10.2 Registration Rights Agreement dated December 1, 1995 , by and among the Registrant, Medical Mutual Liability
Insurance Society of Maryland and Med-Lantic Management Services, Inc.*
10.3 Securities Purchase Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.4 Registration Rights Agreement dated February 24, 1995 by and between the Registrant and St. Joseph Medical Center,
Inc. and amendment thereto dated December 1, 1995.*
10.5 Baltimore Medical Group, LLC Operating Agreement dated February 24, 1995.*
10.6 Agreement of Limited Partnership of Medical Holdings Limited Partnership dated February 24, 1995.*
10.7 Stockholders Agreement between BMGGP, Inc. and Stockholders dated as of February 24, 1995.*
10.8 Financing Transaction Agreement dated as of February 24, 1995 by and among the Registrant and Baltimore Medical
Group, LLC, BMG Limited Partnership, BMGGP, Inc., and St. Joseph Medical Center, Inc.*
10.9 Form of Exclusive Physician Participation Agreement.*
10.10 Form of Non-Exclusive Physician Participation Agreement.*
10.11 Amended and Restated Physician Services Organization Agreement of Baltimore Medical Group, LLC.*
10.12 Form of Practice Participation Agreement.*
10.13 Form of Professional Services Employment Agreement.*
10.14 Form of Specialist Physician Employment Agreement.*
10.15 Form of Medical Director Employment Agreement.*
10.16 Form of Specialist Physician Network Agreement.*
10.17 Major Decision Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.18 Promissory Note dated as of December 1, 1995 by and between the Registrant and Medical Mutual Liability Insurance
Society of Maryland.*
10.19 Non-negotiable, non-transferable Promissory Note dated February 24, 1995 by and between the Registrant and St.
Joseph Medical Center, Inc.*
10.20 Loan Agreement dated as of December 1, 1995, by and between the Registrant and NationsBank, N.A.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
10.21 Guaranty Agreement dated December 1, 1995 by and between Medical Mutual Liability Insurance Society of Maryland
and NationsBank, N.A.*
10.22 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Stewart B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul A. Serini and amendment
thereto dated January 1, 1996.*
10.25 Employment Agreement dated as of March 20, 1995 by and between the Registrant and Allan C. Sanders, CPA.*
10.26 Employment Agreement between the Registrant and Theresa A. Spoleti (filed herewith).
10.27 Form of Employment Agreement.*
10.28 Form of Practice Transfer Agreement.*
10.29(a) Form of Offer Letter.*
(b) Amended Form of Offer Letter (filed herewith).
10.30 Free State Health Plan, Inc., IPA Service Agreement (subject to confidentiality request for certain portions of
the exhibit) (filed herewith).
10.31 Binding Letter of Intent with Health Care Corporation of the Mid-Atlantic for Medicare Risk Service Agreement
(subject to confidentiality request for certain portions of the exhibit) (filed herewith).
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (subject to
confidentiality request for certain portions of the exhibit) (filed herewith).
10.33 Form of Reacquisition Agreement.*
10.34 Amended and Restated Physician Services Organization Agreement of Carroll Medical Group, LLC (filed herewith).
10.35 Amended and Restated Physician Services Organization Agreement of Cumberland Valley Medical Group, LLC (filed
herewith).
10.36 Physician Services Organization Agreement of Doctors Health Montgomery, LLC (filed herewith).
10.37 Stock Purchase Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996 (filed
herewith).
10.38 Registration Rights Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996
(filed herewith).
10.39 Option Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996 (filed
herewith).
10.40 IPA Percentage of Premium Service Agreement with Chesapeake Health Plan, dated as of June 1, 1996 (subject to
confidentiality request for certain portions of the exhibit) (filed herewith).
10.41 $1,500,000 Promissory Note to First National Bank (filed herewith).
10.42 Credit Enhancement Letter dated August 15, 1996 between the Registrant and St. Joseph Medical Center (filed
herewith).
10.43 Employment Agreement dated as of May 1,1996 between the Registrant and John R. Dwyer, Jr. (filed herewith).
10.44 Primary Care Limited Participation Agreement (filed herewith).
10.45 Medicare HMO--Primary Care Limited Participation Agreement (filed herewith).
11 Computation of Earnings Per Common and Common Equivalent Share (filed herewith).
23.1 Consent of Grant Thornton LLP (filed herewith).
23.2 Consent of Venable, Baetjer and Howard, LLP.**
24.1 Power of Attorney.*
24.2 Power of Attorney of Mark H. Eig, M.D. *
24.3 Power of Attorney of Robert G. Graw, Jr., M.D.*
24.4 Power of Attorney of William Lamm, M.D.*
24.5 Power of Attorney of Alexander Rocha, M.D.*
24.6 Power of Attorney of Richard Howard.**
27 Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
II-4
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represents no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, on October 11, 1996.
DOCTORS HEALTH SYSTEM, INC.
/s/ Stewart B. Gold____________________
Name: Stewart B. Gold
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------------------- ----------------------
<C> <S> <C>
/s/ STEWART B. GOLD Chief Executive Officer; President; Director October 11, 1996
- ------------------------------------------------------ (Principal Executive Officer)
STEWART B. GOLD
/s/ SCOTT M. RIFKIN Chairman October 11, 1996
- ------------------------------------------------------
SCOTT M. RIFKIN, M.D.
/s/ JOHN R. DWYER, JR. Chief Financial Officer; Treasurer and October 11, 1996
- ------------------------------------------------------ Director (Principal Financial Officer)
JOHN R. DWYER, JR.
/s/ PAUL A. SERINI Director; Executive Vice President of October 11, 1996
- ------------------------------------------------------ Strategic Operations and Director of Legal
PAUL A. SERINI Affairs
/s/ KYLE R. MILLER Vice President of Finance (Principal October 11, 1996
- ------------------------------------------------------ Accounting Officer)
KYLE R. MILLER
/s/ ALAN L. KIMMEL Executive Vice President for Medical Policy October 11, 1996
- ------------------------------------------------------ and Practice; Director
ALAN L. KIMMEL, M.D.
/s/ JOHN S. PROUT Director October 11, 1996
- ------------------------------------------------------
JOHN S. PROUT
/s/ JOHN W. ELLIS Director October 11, 1996
- ------------------------------------------------------
JOHN W. ELLIS
/s/ J. DAVID NAGEL Director October 11, 1996
- ------------------------------------------------------
J. DAVID NAGEL, M.D.
/s/ PETER J. LOPRESTI Director October 11, 1996
- ------------------------------------------------------
PETER J. LOPRESTI, D.O.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------------------- ----------------------
<C> <S> <C>
/s/ HOWARD L. GOLDMAN Director October 11, 1996
- ------------------------------------------------------
HOWARD L. GOLDMAN, M.D.
/s/ ROBERT L. ANCONA Director October 11, 1996
- ------------------------------------------------------
ROBERT L. ANCONA, M.D.
/s/ LINDA A. DEMBIEC Director October 11, 1996
- ------------------------------------------------------
LINDA A. DEMBIEC
/s/ ROBERT S. ZETZER Director October 11, 1996
- ------------------------------------------------------
ROBERT S. ZETZER
/s/ WILLIAM D. LAMM Director October 11, 1996
- ------------------------------------------------------
WILLIAM D. LAMM, M.D.
/s/ D. ALEXANDER ROCHA Director October 11, 1996
- ------------------------------------------------------
D. ALEXANDER ROCHA, M.D.
/s/ MARK H. EIG Director October 11, 1996
- ------------------------------------------------------
MARK H. EIG, M.D.
/s/ ROBERT G. GRAW Director October 11, 1996
- ------------------------------------------------------
ROBERT G. GRAW, JR., M.D.
/s/ RICHARD R. HOWARD Director October 11, 1996
- ------------------------------------------------------
RICHARD R. HOWARD
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
3.1 (a) Articles of Amendment and Restatement of the Registrant, dated December 8, 1995.*
(b) Articles of Amendment and Restatement of the Registrant, dated September 4, 1996 (filed herewith).
3.2 (a) Amended Bylaws of the Registrant.*
(b) Amended Bylaws of the Registrant, as of September 4, 1996 (filed herewith).
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 (a) Stockholders Agreement dated December 1, 1995, by and among the Registrant, Stewart Gold, Scott Rifkin,
Alan Kimmel, Medical Holdings Limited Partnership, St. Joseph Medical Center, Inc., Medical Mutual
Liability Insurance Society of Maryland, and Med-Lantic Management Services, Inc.*
(b) Amended Stockholders Agreement, dated September 4, 1996 (filed herewith).
10.2 Registration Rights Agreement dated December 1, 1995 , by and among the Registrant, Medical Mutual
Liability Insurance Society of Maryland and Med-Lantic Management Services, Inc.*
10.3 Securities Purchase Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual
Liability Insurance Society of Maryland.*
10.4 Registration Rights Agreement dated February 24, 1995 by and between the Registrant and St. Joseph Medical
Center, Inc. and amendment thereto dated December 1, 1995.*
10.5 Baltimore Medical Group, LLC Operating Agreement dated February 24, 1995.*
10.6 Agreement of Limited Partnership of Medical Holdings Limited Partnership dated February 24, 1995.*
10.7 Stockholders Agreement between BMGGP, Inc. and Stockholders dated as of February 24, 1995.*
10.8 Financing Transaction Agreement dated as of February 24, 1995 by and among the Registrant and Baltimore
Medical Group, LLC, BMG Limited Partnership, BMGGP, Inc., and St. Joseph Medical Center, Inc.*
10.9 Form of Exclusive Physician Participation Agreement.*
10.10 Form of Non-Exclusive Physician Participation Agreement.*
10.11 Amended and Restated Physician Services Organization Agreement of Baltimore Medical Group, LLC.*
10.12 Form of Practice Participation Agreement.*
10.13 Form of Professional Services Employment Agreement.*
10.14 Form of Specialist Physician Employment Agreement.*
10.15 Form of Medical Director Employment Agreement.*
10.16 Form of Specialist Physician Network Agreement.*
10.17 Major Decision Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.18 Promissory Note dated as of December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.19 Non-negotiable, non-transferable Promissory Note dated February 24, 1995 by and between the Registrant and
St. Joseph Medical Center, Inc.*
10.20 Loan Agreement dated as of December 1, 1995, by and between the Registrant and NationsBank, N.A.*
10.21 Guaranty Agreement dated December 1, 1995 by and between Medical Mutual Liability Insurance Society of
Maryland and NationsBank, N.A.*
10.22 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Stewart B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul A. Serini and
amendment thereto dated January 1, 1996.*
10.25 Employment Agreement dated as of March 20, 1995 by and between the Registrant and Allan C. Sanders, CPA.*
10.26 Employment Agreement between the Registrant and Theresa A. Spoleti (filed herewith).
10.27 Form of Employment Agreement.*
10.28 Form of Practice Transfer Agreement.*
10.29(a) Form of Offer Letter.*
(b) Amended Form of Offer Letter (filed herewith).
10.30 Free State Health Plan, Inc., IPA Service Agreement (subject to confidentiality request for certain
portions of the exhibit) (filed herewith).
10.31 Binding Letter of Intent with Health Care Corporation of the Mid-Atlantic for Medicare Risk Service
Agreement (subject to confidentiality request for certain portions of the exhibit) (filed herewith).
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (subject to
confidentiality request for certain portions of the exhibit) (filed herewith).
10.33 Form of Reacquisition Agreement.*
10.34 Amended and Restated Physician Services Organization Agreement of Carroll Medical Group, LLC (filed
herewith).
10.35 Amended and Restated Physician Services Organization Agreement of Cumberland Valley Medical Group, LLC
(filed herewith).
10.36 Physician Services Organization Agreement of Doctors Health Montgomery, LLC (filed herewith).
10.37 Stock Purchase Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996
(filed herewith).
10.38 Registration Rights Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4,
1996 (filed herewith).
10.39 Option Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996 (filed
herewith).
10.40 IPA Percentage of Premium Service Agreement with Chesapeake Health Plan, dated as of June 1, 1996 (subject
to confidentiality request for certain portions of the exhibit) (filed herewith).
10.41 $1,500,000 Promissory Note to First National Bank (filed herewith).
10.42 Credit Enhancement Letter dated August 15, 1996 between the Registrant and St. Joseph Medical Center (filed
herewith).
10.43 Employment Agreement dated as of May 1,1996 between the Registrant and John R. Dwyer, Jr. (filed herewith).
10.44 Primary Care Limited Participation Agreement (filed herewith).
10.45 Medicare HMO--Primary Care Limited Participation Agreement (filed herewith).
11 Computation of Earnings Per Common and Common Equivalent Share (filed herewith).
23.1 Consent of Grant Thornton LLP (filed herewith).
23.2 Consent of Venable, Baetjer and Howard, LLP.**
24.1 Power of Attorney.*
24.2 Power of Attorney of Mark H. Eig, M.D. *
24.3 Power of Attorney of Robert G. Graw, Jr., M.D.*
24.4 Power of Attorney of William Lamm, M.D.*
24.5 Power of Attorney of Alexander Rocha, M.D.*
24.6 Power of Attorney of Richard Howard.**
27 Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
II-9
<PAGE>
Exhibit 3.1(b)
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
DOCTORS HEALTH SYSTEM, INC.
Doctors Health System, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland as follows:
FIRST: The Corporation desires to amend and restate its charter in its
entirety by striking out Articles FIRST through SEVENTH of the Articles of
Incorporation and by substituting in lieu thereof the following:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called the
"Corporation") is: "DOCTORS HEALTH SYSTEM, INC."
ARTICLE II
PURPOSES FOR WHICH CORPORATION FORMED
The purposes for which the Corporation is formed are to carry
on any and all business, transactions and activities permitted by the Maryland
General Corporation Law ("MGCL") which may be deemed desirable by the Board of
Directors of the Corporation (the "Board"), as well as all activities and things
necessary and incidental thereto, to the full extent empowered by the MGCL.
ARTICLE III
RESIDENT AGENT AND PRINCIPAL OFFICE
The post office address of the principal office of the
Corporation in this State is 10451 Mill Run Circle, Tenth Floor, Owings Mills,
Maryland 21117. The resident agent of the Corporation in this State is Paul A.
Serini, whose post office address is 10451 Mill Run Circle, Tenth Floor, Owings
Mills, Maryland 21117. Said resident agent is a citizen of the State of
Maryland, and actually resides therein.
<PAGE>
ARTICLE IV
AUTHORIZED STOCK
The Corporation is authorized to issue Sixty-Three Million,
One Hundred and Seventy Six Thousand, Nine Hundred Eight Four (63,176,984)
shares of capital stock, of which Twenty Million Seven Hundred Thousand
(20,700,000) shares are Class A Common Stock, par value of One Cent ($0.01) per
share (the "Class A Common Stock"), Ten Million (10,000,000) shares are Class B
Common Stock, par value of One Cent ($0.01) per share (the "Class B Common
Stock"), Twenty-Nine Million Fifty Thousand (29,050,000) shares are Class C
Common Stock, par value of One Cent ($0.01) per share (the "Class C Common
Stock") (the Class A Common Stock, the Class B Common Stock and the Class C
Common Stock collectively being the "Common Stock"), One Million (1,000,000)
shares are Series A Convertible Preferred Stock, par value of Five Dollars
($5.00) per share (the "Series A Preferred Stock"), Three Hundred Fifty-Five
Thousand Five Hundred Fifty-Six (355,556) shares are Series B Convertible
Preferred Stock, par value of Eleven Dollars and Twenty-Five Cents ($11.25) per
share (the "Series B Preferred Stock"), One Million Seventy One Thousand Four
Hundred and Twenty Eight (1,071,428) shares are Series C Convertible Preferred
Stock, par value of Seventeen Dollars and Fifty Cents ($17.50) and One Million
(1,000,000) shares are Preferred Stock, par value of One Cent ($0.01) per share
("Preferred Stock"). Upon conversion of the Common Stock pursuant to Article IV,
Section A.4, the Corporation shall thereafter be authorized to issue Sixty-Three
Million, One Hundred and Seventy Six Thousand, Nine Hundred Eight Four
(63,176,984) shares of Class A Common Stock. The aggregate par value of all
shares having par value which the Corporation is authorized to issue prior to
conversion of the Common Stock pursuant to Section A.4 of this Article IV is
Twenty Eight Million Three Hundred Fifty Seven Thousand Four Hundred and Ninety
Five Dollars ($28,357,495).
The stockholders of the Corporation shall be entitled to vote
on such matters as specifically provided herein or as otherwise required by the
MGCL. Except as otherwise provided herein, with respect to such matters
requiring the vote of stockholders of the Corporation under the MGCL, the
affirmative vote of stockholders holding two-thirds (2/3) of the shares of
outstanding capital stock of the Corporation shall be required to authorize
approval of such matters. The preferences, voting powers, restrictions,
limitations as to dividends, rights and qualifications of the Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Preferred Stock are as follows:
2
<PAGE>
A. COMMON STOCK.
Except as expressly set forth herein, shares of Class A Common
Stock, shares of Class B Common Stock and shares of Class C Common Stock shall
have the same preferences, rights and voting powers, and shall be identical in
all respects and will entitle the holders thereof to the same rights and
privileges. Sufficient shares of Class C Common Stock shall from time to time be
reserved by the Corporation for issuance to the holders of the shares of Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock upon
conversion of all of the shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock into shares of Class C Common Stock.
1. VOTING RIGHTS.
General Provisions. Except as otherwise provided
herein, every holder of Common Stock shall be entitled to cast, in person or by
proxy, one vote for each share of Common Stock held of record by such holder on
all matters to be voted on by stockholders. The holders of shares of Common
Stock shall vote together with the holders of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock on all matters
submitted to a vote of stockholders and not as a separate series or class,
except as otherwise provided herein.
(b) Class A Common Stock. The holders of shares of
Class A Common Stock, voting as a single class, shall be entitled to elect five
(5) directors of the Corporation (the "Class A Common Directors"). The
affirmative vote of a majority of the shares of Class A Common Stock represented
in person or by proxy at a meeting at which a quorum of Class A Common Stock is
present shall be sufficient to approve any matter with respect to which such
holders are entitled to vote; provided, however, that the affirmative vote of a
plurality of all votes cast shall be sufficient to elect a Class A Common
Director. Each share of Class A Common Stock may be voted for as many
individuals as there are Class A Common Directors to be elected. The holders of
Class A Common Stock, at any annual meeting or upon a call of a special meeting
of holders of Class A Common Stock by holders of not less than twenty-five
percent (25%) of the shares of Class A Common Stock then outstanding, may remove
any Class A Common Director at any time and from time to time with or without
cause, voting as a single class, by the affirmative vote of eighty percent (80%)
of all of the votes entitled to be cast for the election of a Class A Common
Director, and may elect a successor to fill any resulting vacancies for the
remainder of the term of such director. If any Class A Common Director shall
cease to be a director for any reason (including death, resignation, removal or
any other cause), the vacancy shall be filled by a vote of the remaining Class A
Common Directors (unless, with respect to removal, the holders of Class A Common
Stock have elected a successor Class A Common Director pursuant to the
provisions hereof). If there are no such remaining directors, then upon a call
of a
3
<PAGE>
special meeting of holders of Class A Common Stock, by any such holder, the
vacancy shall be filled by the vote of the holders of Class A Common Stock,
voting as a single class.
(c) Class B Common Stock. The holders of shares of
Class B Common Stock, voting as a single class, shall be entitled to elect eight
(8) directors of the Corporation (the "Class B Common Directors"). The
affirmative vote of a majority of the shares of Class B Common Stock represented
in person or by proxy at a meeting at which a quorum of Class B Common Stock is
present shall be sufficient to approve any matter with respect to which said
holders are entitled to vote; provided, however, that the affirmative vote of a
plurality of all votes cast shall be sufficient to elect a Class B Common
Director. Each share of Class B Common Stock may be voted for as many
individuals as there are Class B Common Directors to be elected. The holders of
Class B Common Stock, at any annual meeting or upon a call of a special meeting
of holders of Class B Common Stock by holders of not less than twenty-five
percent (25%) of the shares of Class B Common Stock then outstanding, may remove
any Class B Common Director at any time and from time to time with or without
cause, voting as a single class, by the affirmative vote of a majority of all of
the votes entitled to be cast for the election of a Class B Common Director, and
may elect a successor to fill any resulting vacancies for the remainder of the
term of such director. If any Class B Common Director shall cease to be a
director for any reason (including death, resignation, removal or any other
cause), the vacancy shall be filled by a vote of the remaining Class B Common
Directors (unless, with respect to removal, the holders of Class B Common Stock
have elected a successor Class B Common Director pursuant to the provisions
hereof). If there are no such remaining directors, then upon a call of a special
meeting of holders of Class B Common Stock, by any such holder, the vacancy
shall be filled by the vote of the holders of Class B Common Stock, voting as a
single class.
(d) Class C Common Stock. Upon conversion of all of
the shares of Series A Preferred Stock then outstanding into shares of Class C
Common Stock, the holders of Shares of Class C Common Stock who were formerly
holders of Series A Preferred Stock ("Converted Series A Class C Common
Stockholders"), voting as a single sub-class, shall be entitled to elect two (2)
Directors of the Corporation ("Converted Series A Class C Common Directors").
Upon conversion of all of the shares of Series B Preferred Stock then
outstanding into shares of Class C Common Stock, the holders of shares of Class
C Common Stock who were formerly holders of Series B Preferred Stock ("Converted
Series B Class C Common Stockholders"), voting as a single sub-class, shall be
entitled to elect two (2) Directors of the Corporation ("Converted Series B
Class C Common Directors"). Upon conversion of all of the shares of Series C
Preferred Stock then outstanding into shares of Class C Common Stock, the
holders of shares of Class C Common Stock who were formerly holders of Series C
Preferred Stock ("Converted Series C Class C Common Stockholders"), voting
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as a single sub-class, shall be entitled to elect one (1) Director of the
Corporation prior to the Corporation's 1998 annual meeting of shareholders and
two (2) Directors thereafter ("Converted Series C Class C Common Directors"). It
is the intent of this Section that upon conversion of all of the shares of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
then outstanding into shares of Class C Common Stock, the holders of shares of
Class C Common Stock, separately voting as sub-classes, shall be entitled to
elect five (5) Directors prior to the Corporation's 1998 annual meeting of
shareholders and six (6) Directors thereafter (all such directors elected by the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock being hereinafter referred to as the "Class C Common
Directors"). The affirmative vote of a majority of the shares of Class C Common
Stock represented in person or by proxy at a meeting at which a quorum of Class
C Common Stock is present shall be sufficient to approve any matter with respect
to which said holders are entitled to vote, except for matters relating to the
election or removal of directors. When the Converted Series A Class C Common
Stockholders, the Converted Series B Class C Common Stockholders or Converted
Series C Class C Common Stockholders vote on the election of Converted Series A
Class C Common Directors, Converted Series B Class C Common Directors or
Converted Series C Class C Common Directors, respectively, the affirmative vote
of a plurality of all votes cast shall be sufficient to elect a Converted Series
A Class C Common Director, Converted Series B Class C Common Director, or
Converted Series C Class C Common Director, respectively. Each share of
Converted Series A Class C Common Stock, Converted Series B Class C Common Stock
and Converted Series C Class C Common Stock may be voted for as many individuals
as there are Converted Series A Class C Common Directors, Converted Series B
Class C Common Directors and Converted Series C Class C Common Directors,
respectively, to be elected. At any annual meeting or upon a call of a special
meeting of holders of Converted Series A Class C Common Stock, Converted Series
B Class C Common Stock or Converted Series C Class C Common Stock by holders of
not less than twenty-five percent (25%) of the shares of Converted Series A
Class C Common Stock, Converted Series B Class C Common Stock or Converted
Series C Class C Common Stock then outstanding, the Converted Series A Class C
Common Stockholders, Converted Series B Class C Common Stockholders or the
Converted Series C Class C Common Stockholders may remove any Converted Series A
Class C Common Director, Converted Series B Class C Common Director or Converted
Series C Class C Common Director, respectively, at any time and from time to
time with or without cause, voting as sub-class, by the affirmative vote of
eighty percent (80%) of all of the votes entitled to be cast for the election of
a Converted Series A Class C Common Director, Converted Series B Class C Common
Director or Converted Series C Class C Common Director, respectively, and may
elect a successor to fill any resulting vacancies for the remainder of the term
of such director. If any Converted Series A Class C Common Director, Converted
Series B Class C Common Director or Converted Series C Class C Common Director
shall cease to be a director for any reason (including death, resignation,
removal or any other cause), the
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vacancy shall be filled by a vote of the remaining Converted Series A Class C
Common Director, Converted Series B Class C Common Director or Converted Series
C Class C Common Director (unless with respect to removal, the holders of
Converted Series A Class C Common Stock, Converted Series B Class C Common Stock
or Converted Series C Class C Common Stock have elected a successor Converted
Series A Class C Common Director, Converted Series B Class C Common Director or
Converted Series C Class C Common Director pursuant to the provisions hereof).
If there is no such remaining director, then upon a call of a special meeting of
holders of Converted Series A Class C Common Stock, Converted Series B Class C
Common Stock or Converted Series C Class C Common Stock, by any such holder, the
vacancy shall be filled by the vote of the holders of Converted Series A Class C
Common Stock, Converted Series B Class C Common Stock or Converted Series C
Class C Common Stock, voting as a sub-class.
(e) Effect of Conversion. Upon conversion of all of
the shares of Common Stock into shares of Class A Common Stock pursuant to
Section A.4 of this Article IV, every such holder of Class A Common Stock shall
be entitled to cast, in person or by proxy, one vote for each share of Class A
Common Stock held of record by such holder on all matters to be voted on the
Stockholders and none of the additional voting rights provided to holders of
shares of Common Stock pursuant to Section A.1(b), (c) and (d) of this Article
IV, or to holders of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock pursuant to Section B.1, Section C.1 and/or Section D.1
of this Article IV, shall be applicable to such Class A Common Stock or to
holders thereof. From and after such conversion, none of the rights to
dividends, redemption, conversion or liquidation applicable to the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock pursuant
to Sections B.2-5, C.2-5 and D.2-5 of this Article IV shall be applicable to
such Class A Common Stock or to any holder thereof. Such Class A Common Stock
shall have the dividend rights and liquidation rights set forth in Sections 2
and 3 of this Article IV.A.
2. DIVIDENDS.
Subject to the provisions of law and these Articles,
dividends may be declared and paid on the Common Stock of the Corporation at
such time and in such amounts as the Board of Directors may deem advisable,
provided, in all events, that no dividends may be paid with respect to shares of
Common Stock until such time as all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock have been redeemed by the
Corporation or converted into shares of Common Stock as provided herein,
including therein payment of all accrued and unpaid dividends on said shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock.
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3. LIQUIDATION RIGHTS.
In the event of the dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation
and the preferential amounts required to be paid to the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, as
provided for in Sections B.5, C.5 and D.5 of this Article IV, each share of
Common Stock shall be entitled to share ratably with all other shares of Common
Stock in all remaining net assets of the Corporation.
4. CONVERSION OF CLASS A COMMON STOCK, CLASS B COMMON
STOCK, AND CLASS C COMMON STOCK.
Simultaneously with the consummation of any Qualified or
Non-Qualified Public Offering (as such terms are defined in Section B.1.(d)
below) effected by the Corporation in accordance with the provisions of Sections
B, C and D of this Article IV, each share of the Corporation's Class A Common
Stock, Class B Common Stock, and Class C Common Stock shall be converted,
without any action on the part of the holder thereof or the Corporation, into an
identical share of the Corporation's Class A Common Stock, and all references in
these articles to Class A, Class B and Class C Common Stock, respectively, shall
be deemed to refer to the Corporation's Class A Common Stock, and all special
rights granted to the holders of Class A, Class B, and Class C Common Stock and
to all holders of Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock hereunder shall cease and terminate. At least twenty (20) days
prior written notice of the date fixed and place determined for conversion shall
be sent by first class mail, postage prepaid, to the address of every holder of
shares of Common Stock as shown in the records of the Corporation. On or before
the date fixed for conversion, each holder of shares of Common Stock shall
surrender the Certificates representing such shares to the Corporation at the
place designated in such notice and shall thereafter receive certificates for
the number of full shares of Class A Common Stock to which such holder is
entitled.
5. CERTAIN PERMITTED REDEMPTIONS.
Notwithstanding anything herein to the contrary, the
Corporation shall be permitted to effect redemptions (each a "Permitted
Redemption") of its capital stock without the consent or approval of the Series
A Preferred Directors, the Series B Preferred Directors, the Series C Preferred
Directors, the holders of Series A Preferred Stock, the holders of the Series B
Preferred Stock or the holders of Series C Preferred Stock, and without granting
to the Series A Preferred Stockholders, the Series B Preferred Stockholders or
the Series C Preferred Stockholders any redemption or other rights (other than
as set forth below):
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(a) upon the payment in full of all accumulated and
unpaid accrued dividends and interest on all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock for all
past dividend periods and the then current dividend period, to effect a
redemption of shares of Class A Common Stock owned by any Management Stockholder
(as defined in Section B.1(c)(iv) hereof) as and to the extent required by
Section 4 of such Management Stockholder's Management Employment Agreement (as
defined in Section B.1(c)(iv) hereof); provided, however, that any such
redemption may be made without any payment of accrued dividends or interest on
outstanding shares of Series C Preferred Stock if the Company completes a
Qualified Public Offering on or before August 30, 1998.
(b) to effect redemptions of shares of Class A Common
Stock owned by any employee (other than one of the Management Stockholders) when
and as approved by the Board or required by law or by the terms of any
employment, stock grant or similar agreement with such employee upon such
employee's death, disability, termination of employment, or otherwise;
(c) from and after the time that there are, and
continue to be, more than sixty-six (66) physicians who hold, directly or
indirectly through their professional corporations, limited partner interests in
Medical Holdings Limited Partnership, a Maryland Limited Partnership (the "LP")
(or an option to purchase such an Interest) (each a "Physician Interest
Holder"), shares of Class B Common Stock issued by the Corporation to the LP
upon the termination of the status of any physician as a Physician Interest
Holder, until such time as the number of Physician Interest Holders is reduced
to sixty-six (66) or below, in the amount deemed necessary by the Board of
Directors at such time to ensure that the withdrawal of the Physician Interest
Holder increases the percentage ownership interests in the Corporation of all
other Stockholders of the Corporation to the same extent that the indirect
percentage ownership interests in the Corporation of the remaining Physician
Interest Holders are increased. Such redemption shall be for a redemption price,
if any, equal to the amount that the Corporation requires the LP to pay to such
withdrawing Physician Interest Holder upon his termination;
(d) under any other circumstances expressly
contemplated in the amended and restated Stockholders Agreement dated as of
September 4, 1996 among all of the Stockholders of the Corporation, including
any amendments thereto (the "Stockholders Agreement");
(e) under any circumstances expressly contemplated in
Section B.3(a), (b) or (c) hereof with respect to the Series A Preferred Stock;
(f) under any circumstances expressly contemplated in
Section C.3(a), (b) or (c) hereof with respect to the Series B Preferred Stock,
provided,
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however, that no such redemption, whether at the option of any holder
of the Series B Preferred Stock or at the option of the Corporation or
otherwise, shall be permitted or effected unless and until the Corporation shall
have elected to redeem all of the issued and outstanding shares of Series A
Preferred Stock prior to the effectiveness of such redemption of Series B
Preferred Stock and the Series A Redemption Price applicable to such redemption
shall have been paid in full or adequate provision therefor shall have been
made; and provided further, however, that nothing in this subsection shall
permit the Corporation to redeem the Series A Preferred Stock without consent of
the holders thereof under any circumstances not expressly permitted under
Section B.3 hereof.
(g) upon the exercise by a Series B Preferred
Stockholder of rights to require the Corporation to redeem its Series B
Preferred Stock under the circumstances expressly contemplated in Section 5.3(e)
of the Securities Purchase Agreement between the Corporation and Series B
Preferred Stockholder dated as of December 1, 1995 (the "Securities Purchase
Agreement"); provided, however, that no such redemption shall be permitted or
effected unless and until the Corporation shall have elected to redeem all of
the issued and outstanding shares of Series A Preferred Stock prior to the
effectiveness of such redemption of Series B Preferred Stock and the Series A
Redemption Price applicable to such redemption shall have been paid in full or
adequate provision therefore shall have been made; and provided further,
however, that nothing in this subsection shall permit the Corporation to redeem
the Series A Preferred Stock without consent of the holders thereof under any
circumstances not expressly permitted under Section B.3 hereof.
.
(h) under any circumstances expressly contemplated in
Section D.3 hereof with respect to the Series C Preferred Stock, provided,
however, that no such redemption shall be permitted or effected unless and until
the Corporation shall have elected to redeem all of the issued and outstanding
shares of Series A Preferred Stock and Series B Preferred Stock prior to the
effectiveness of such redemption of Series C Preferred Stock and the Series A
Redemption Price and Series B Redemption Price applicable to such redemptions
shall have been paid in full or adequate provision therefor shall have been
made; and provided further, however, that nothing in this subsection shall
permit the Corporation to redeem the Series A Preferred Stock or Series B
Preferred Stock without consent of the holders thereof under any circumstances
not expressly permitted hereunder.
B. SERIES A PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions. Holders of Series A Preferred
Stock shall be entitled to notice of each meeting of all of the Corporation's
stockholders, but shall
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not be entitled to notice of special or other meetings of any class of
Common Stock or of Series B Preferred Stock or Series C Preferred Stock. The
holders of shares of Series A Preferred Stock shall vote together with the
holders of shares of Common Stock and Series B Preferred Stock and Series C
Preferred Stock on all matters submitted to a vote of stockholders and not as a
separate series or class, except as otherwise provided herein. Except as
otherwise provided herein, on all matters to be voted on by the Corporation's
stockholders, every holder of Series A Preferred Stock shall be entitled to
cast, in person or by proxy, that number of votes equal to the full number of
shares of Class C Common Stock into which such holder's Series A Preferred Stock
is then convertible.
(b) Series A Preferred Stock Directors. The holders
of shares of Series A Preferred Stock, voting as a single class, shall be
entitled to elect two (2) directors of the Corporation (the "Series A Preferred
Stock Directors"). Where the holders of Series A Preferred Stock vote as a
class, the affirmative vote of a majority of the shares of Series A Preferred
Stock represented in person or by proxy at a meeting at which a quorum of Series
A Preferred Stock is present shall be sufficient to approve any matter with
respect to which said holders are entitled to vote; provided, however, that the
affirmative vote of a plurality of all votes cast in person or by proxy by the
holders of Series A Preferred Stock shall be sufficient to elect a Series A
Preferred Stock Director. The holders of Series A Preferred Stock, at any
properly called annual or special meeting or upon a call of a special meeting of
holders of Series A Preferred Stock by holders of not less than twenty-five
percent (25%) of the shares of Series A Preferred Stock then outstanding, may
remove any Series A Preferred Stock Director at any time and from time to time,
voting as a single class, by the affirmative vote of eighty percent (80%) of all
votes entitled to be cast for the election of a Series A Preferred Stock
Director, and may elect a successor to fill any resulting vacancies for the
remainder of the term of such Series A Preferred Stock Director. If any Series A
Preferred Stock Director shall cease to be a director for any reason (including
death, resignation, removal or any other cause), the vacancy shall be filled by
a vote of the remaining Series A Preferred Stock Director (unless, with respect
to removal, the holders of Series A Preferred Stock have elected a successor
Series A Preferred Stock Director pursuant to the provisions hereof). If there
is no such remaining director, then upon a call of a special meeting of holders
of Series A Preferred Stock, by any such holder, the vacancy shall be filled by
the vote of the holders of Series A Preferred Stock, voting as a single class.
(c) Actions Requiring Series A Preferred Stock
Director Votes. Provided that no Series A Preferred Stockholder is, and has for
thirty (30) days been, in Default under or pursuant to and as defined in any
promissory note delivered to the Corporation by such Series A Preferred
Stockholder in partial consideration for the Corporation's issuance of Series A
Preferred Stock to such Stockholder, without the
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affirmative vote of each of the Series A Preferred Stock Directors, the
Corporation shall not:
(i) incur or permit any of its Subsidiaries (as
defined in Section B.1(d)(v)) to incur any Indebtedness (as defined in Section
B.1(d)(i)) as a result of which the outstanding Indebtedness of the Corporation
would on a consolidated basis exceed One Million Dollars ($1,000,000) in the
aggregate; other than (A) Indebtedness owing to the Investor named in that
certain Financing Transaction Agreement dated as of February 24, 1995, or any of
its affiliates; or (B) Indebtedness incurred under and pursuant to that certain
Credit Agreement and the related Credit Agreement Document as those terms are
defined in the Securities Purchase Agreement dated December 1, 1995 between the
Corporation and the Series B Stockholder (the "Securities Purchase Agreement");
or (C) Indebtedness not exceeding $20,000,000 incurred under and pursuant to one
or more revolving credit facilities guaranteed by the Series A Preferred
Stockholder and/or any other guarantors reasonably acceptable to the Series A
Preferred Stockholder; or
(ii) issue any shares of its capital stock with
liquidation or dividend rights senior to (or PARI PASSU with) the liquidation or
dividend rights of the Series A Preferred Stock; or
(iii) effect any amendment to these Amended and
Restated Articles of Incorporation or to the By-Laws of the Corporation that
adversely affects the holders of the Series A Preferred Stock or the Class C
Common Stock; or
(iv) effect any amendment to any of the Amended
Employment Agreements dated February 24, 1995 by and between the Corporation and
each of Stewart Gold ("Gold"), Scott Rifkin ("Rifkin") and Alan Kimmel
("Kimmel") (collectively, the "Management Employment Agreements"; and Gold,
Rifkin and Kimmel each being a "Management Stockholder" and collectively being
the "Management Stockholders"), or settle or compromise any claim or dispute of
the Corporation with respect thereto; or
(v) obligate the Corporation to do any of the
foregoing.
(d) Definitions. Except as otherwise expressly
provided, for purposes of these Amended and Restated Articles, the following
words shall have the meanings set forth:
(i) Unless excluded as set forth below,
"INDEBTEDNESS" shall mean (without duplication):
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(A) all indebtedness of the Corporation (as
calculated on a consolidated basis by including
all Indebtedness of each Subsidiary, whether or
not such inclusion is required under generally
accepted or other applicable accounting
principles) for borrowed money, the deferred
purchase price of property or services, all
obligations, contingent or otherwise, incurred
in connection with letters of credit, credit
facilities, acceptance or similar facilities,
any agreement to purchase, redeem, exchange,
convert or otherwise acquire any capital stock
or equity securities (including, without
limitation, any warrants, rights, or options to
acquire such capital stock or securities of any
person or entity other than a Subsidiary) now or
hereafter outstanding,
(B) all obligations of the Corporation and its
Subsidiaries evidenced by bonds, notes,
debentures, loan agreements, credit agreements,
lines of credit or other similar instruments
(including any debt securities convertible into
or exchangeable for equity securities of the
Corporation);
(C) all indebtedness of the Corporation and its
Subsidiaries created or arising under any
conditional sale or other title retention
agreement with respect to property acquired
(even if the rights and remedies of the seller
or lender under such agreement in the event of
default are limited to repossession or sale of
such property);
(D) all obligations of the Corporation and its
Subsidiaries under interest rate contracts of
the Corporation;
(E) all obligations under leases of the Corporation
and its Subsidiaries that are capitalized by the
Corporation's accountants under generally
accepted accounting principles;
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(F) all guarantees or surety agreements given by the
Corporation and its Subsidiaries; and
(G) all obligations relating to the redemption or
purchase of any capital stock of the Corporation
or its Subsidiaries (other than (x) shares of
Series A Preferred Stock, or (y) capital stock
of a wholly-owned Subsidiary, or (z) Permitted
Redemptions pursuant to Section A.5 hereof).
Indebtedness shall specifically exclude, in every case, (1)
trade payables and other accrued current liabilities arising in the ordinary
course of business; and (2) any of the foregoing that
(H) are incurred by the Corporation or any
Subsidiary on commercially reasonable terms
which do not contemplate issuance of stock or
other equity interests of the Corporation, and
(I) have been approved as part of any Business Plan
(or any approved amendments thereto) for or with
respect to any calendar year. To the extent any
of the foregoing are or have been approved in
part (including as to a portion of any such
Indebtedness) in any such Business Plan (or
amendment), the approved portion only shall not
be deemed to constitute "Indebtedness" for
purposes hereof.
(ii) "QUALIFIED PUBLIC OFFERING" shall mean
any public underwritten offering of the Corporation's Common Stock pursuant to
an effective registration statement filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "1933 Act")
based upon a total market capitalization of the Corporation, at the time of such
offering, of at least Twenty-Five Million Dollars ($25,000,000), from which the
Corporation receives net proceeds of not less than Fifteen Million Dollars
($15,000,000).
(iii) "NON-QUALIFIED PUBLIC OFFERING" shall
mean any underwritten public offering of the Corporation's Common Stock pursuant
to any effective registration statement filed with Securities and Exchange
Commission pursuant to the 1933 Act that is not a Qualified Public Offering.
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(iv) "BUSINESS PLAN" means each plan for the
conduct and operation of the business of the Corporation, or any portion
thereof, which shall include a budget and contain narrative descriptions and
approximate schedules for all significant activities proposed to be undertaken
by the Corporation for the period of time set forth therein, in reasonably
sufficient detail to enable the officers and directors of the Corporation to
make informed decisions with respect to any recommendation of, consent to, or
approval of, such plan and any related budget. The term "Business Plan" shall
include the "April 30 Business Plan" which was delivered to and reviewed by the
Series A Preferred Stockholder, and either has been delivered to and reviewed by
the professional advisors of the Series A Preferred Stockholder or the Series A
Preferred Stockholder has had the opportunity to, but elected not to, have its
professional advisors review such April 30 Business Plan, and such April 30
Business Plan has been approved by the holders of the Series A Preferred Stock
for purposes of (A) Article IV Section B.1(c)(i) hereof and (B) Article IV
Section B.1(e)(i)(A) hereof.
(v) "SUBSIDIARY" means any corporation,
partnership, limited liability company, joint venture or other business entity
in which the Corporation, directly or indirectly, whether through another
Subsidiary or otherwise, by virtue of equity ownership, contract or otherwise,
has the right to elect a majority of the board of directors or other governing
body or owns at least 50.0% of the total equity interests thereof.
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(e) Series A Preferred Stockholder Major Decisions.
(i) GENERAL PROVISIONS. Provided that no Series A
Preferred Stockholder is, and has for thirty (30) days been, in Default under or
pursuant to and as defined in any promissory note delivered to the Corporation
by such Series A Preferred Stockholder in partial consideration for the
Corporation's issuance of Series A Preferred Stock to such Stockholder, the
Corporation shall not take any of the following actions (each, a "Series A
Preferred Stockholder Major Decision") without first submitting such Series A
Preferred Stockholder Major Decision to a vote by the holders of Series A
Preferred Stock, voting separately as a class:
(A) the adoption of the Corporation's Business Plan
(as defined in Section B.1.(d)(iv) hereof) for any 12-month period or for
calendar years 1998 and 1999, or any amendment or periodic update to any
approved Business Plan;
(B) the issuance by the Corporation from time to time
after the date hereof of shares of its capital stock or options, warrants or
other rights to acquire any such shares, to employees of the Corporation,
directly or under any plan for the benefit of the foregoing or the issuance of
any such shares or options into an employee stock bonus pool in an amount which,
when aggregated with all other such issuances to employees of the Corporation,
exceeds ten percent (10%) of the fully diluted shares of capital stock of the
Corporation as of the date of such issuance; PROVIDED, HOWEVER, that shares of
Class A Common Stock (and options, warrants and rights to acquire shares of
Class A Common Stock) that have been, and will after the date hereof be, issued
to the three Management Stockholders and other executive employees of the
Corporation in amounts not to exceed twenty-five percent (25%) of the fully
diluted shares of capital stock of the Corporation as of the date hereof (the
"25% Management Stock Amount") shall NOT be counted toward such ten percent
(10%) limitation, such issuances to the Management Stockholders and other
executive employees being expressly authorized and consented to by the holders
of the Series A Preferred Stock;
(C) the cessation of the business of the Corporation;
(D) the issuance of shares of capital stock of the
Corporation with liquidation and dividend rights junior to those afforded to the
Series A Preferred Stock ("Series A Junior Stock") to any person or entity (a
"Series A Adverse Junior Stock Purchaser") which has legitimate business
interests that are materially adverse to the holders of Series A Preferred Stock
or any affiliate thereof ("Series A Adverse Junior Stock");
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(E) any sale, transfer or other disposition by the
Corporation of all or any substantial portion of its assets whether by asset or
stock sale or otherwise;
(F) any conveyance, transfer or lease by the
Corporation of all or any substantial portion of its assets to any person, or to
any corporation, partnership or other entity;
(G) the consolidation or merger by the Corporation
with or into another corporation or entity, or the consolidation or merger of
another corporation or entity with or into the Corporation, where as a result of
such transactions the voting stockholders of the Corporation immediately prior
to such transaction would not hold sufficient voting stock in the surviving
entity immediately after such transaction to elect a controlling constituency of
the Board of Directors (or other governing body) in a transaction where the
Corporation is not the survivor;
(H) any Non-Qualified Public Offering;
(I) unless the Corporation has previously elected to
redeem all of the outstanding shares of Series A Preferred Stock and has paid or
adequately provided for payment of the Series A Redemption Price, any optional
redemption of Series B Preferred Stock pursuant to Section C.3(c) hereof; and/or
(J) any agreement by the Corporation to do any of the
foregoing.
(ii) CORPORATION ENTITLED TO TAKE CERTAIN ACTIONS
WITHOUT APPROVAL OF SERIES A PREFERRED STOCKHOLDERS. If a Series A Preferred
Stockholder Major Decision, other than an issuance of Series A Adverse Junior
Stock, is not approved by the holders of a majority of the then outstanding
shares of Series A Preferred Stock pursuant to the provisions of subparagraph
(i) hereof, then the Corporation shall nonetheless be entitled to take any of
such actions constituting such a Series A Preferred Stockholder Major Decision,
but shall provide written notice to that effect to the holders of Series A
Preferred Stock no later than ninety (90) days prior to the date such action is
to be effective and the holders of Series A Preferred Stock shall be entitled,
by delivery of a written notice to the Corporation at the principal office of
the Corporation not less than twenty-one (21) days prior to the date such action
is to be effective, to require the Corporation to redeem all, but not less than
all, of the then issued and outstanding shares of Series A Preferred Stock
pursuant to the provisions of Section B.3(a)(ii) hereof.
(iii) SERIES A ADVERSE JUNIOR STOCK; SPECIAL
PROVISIONS. If the Series A Preferred Stockholders do not approve an issuance of
Series A Junior
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Stock that they believe is Series A Adverse Junior Stock pursuant to the
provisions of subparagraph (i) hereof, then, upon the affirmative vote of a
majority of the directors of the Corporation other than the Series A Preferred
Directors, the Corporation shall be entitled, for a period of sixty (60) days
following the election of the holders of Series A Preferred Stock, not to
approve an issuance of such stock, and to require arbitration under the
expedited procedures set forth herein of whether the Series A Preferred
Stockholders or their affiliates have legitimate business interests that are
materially adverse to such Purchaser. Such arbitration shall be conducted by
three arbitrators, two of whom (the "Party Designated Arbitrators") shall be
selected by the parties, and the third of whom shall be a "Neutral Arbitrator"
selected by the Party Designated Arbitrators. The Corporation shall designate
its Party Designated Arbitrator in a written notice to the holders of Series A
Preferred Stock, and within five (5) days thereafter, such holders of Series A
Preferred Stock shall designate its Party Designated Arbitrator. Within five (5)
days thereafter, the two Party Designated Arbitrators shall agree upon and
appoint a Neutral Arbitrator, who shall be an attorney experienced in the health
care business. The only issue to be determined in the arbitration shall be
whether the proposed recipient of Series A Junior Stock has legitimate business
interests which are materially adverse to the holders of Series A Preferred
Stock. The arbitration shall be concluded within sixty (60) days of the date of
the Corporation's written notice. The determination of the arbitrators so
appointed shall be final and conclusive upon the parties. If the arbitrators
determine that the proposed purchaser is a Series A Adverse Junior Stock
Purchaser, then the Corporation may nonetheless proceed to issue such shares of
Series A Adverse Junior Stock to such purchaser, but shall provide written
notice to that effect to the holders of Series A Preferred Stock no later than
30 days prior to the date such issuance is consummated, and the holders of
Series A Preferred Stock shall thereupon become entitled to exercise their
rights to require the Corporation to redeem all, but not less than all, of the
issued and outstanding shares of Series A Preferred Stock pursuant to the
provisions of Section B.3.(a)(iii) hereof.
(f) Method of Approval. Whenever any action described
herein requires the action of holders of Series A Preferred Stock, such action
shall be deemed to have occurred upon the approval of holders of a majority of
the then issued and outstanding shares of Series A Preferred Stock at a duly
convened meeting of such stockholders or by their written consent in accordance
with the then applicable provisions of the MGCL, and the Corporation, in
undertaking any action with respect to such holders, shall be entitled to rely
upon a certificate signed by such holders to that effect.
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2. DIVIDENDS.
(a) Accrual of Dividends Before April 1, 2000.
Beginning as of February 24, 1995 and prior to April 1, 2000, cash dividends at
the rate of thirty-two and one half cents ($0.325) per share per annum shall
accrue on the Series A Preferred Stock (whether or not earned or declared or
payment is legally available therefor) in equal quarterly installments,
commencing on the first day of April, 1995, and continuing thereafter on the
first day of each month of July, October, January and April and shall accrue
interest at the rate of 6.5% (based upon a 365 day year) compounded quarterly on
all such unpaid dividend amounts.
(b) Payment of Dividends Before April 1, 2000.
Dividends and interest accrued on or with respect to accrual dates occurring
prior to April 1, 2000 shall be payable (either as part of a Redemption Price
(as defined below) or liquidation payment, or otherwise) prior to April 1, 2000
only upon (i) the liquidation of the Corporation as herein provided, or (ii) the
redemption or conversion of such share of Series A Preferred Stock, and if not
paid upon liquidation, redemption or conversion on or prior to April 1, 2000,
the amount of all such accrued dividends and interest payments shall from and
after April 1, 2000 become an unsecured obligation of the Corporation, bearing
interest at the rate, and being payable at the times, set forth with respect to
dividend payments in Section 2(c) below.
(c) Payment of Dividends on or After April 1, 2000.
Beginning on April 1, 2000, cash dividends, at the per annum rate of 100 basis
points over The Wall Street Journal Prime Rate as of the last business day prior
to April 1, 2000, shall accrue on the original issue price of all shares of
Series A Preferred Stock outstanding (whether or not earned or declared by the
Board), in equal quarterly installments on the first day of each month of April,
July, October and January. All such accrued dividends shall be declared by the
Board (if funds are at such time legally available therefor) and shall be
payable to each holder of Series A Preferred Stock on each such scheduled
quarterly date (as set forth above) if, at the time of payment funds for the
full payment of such quarterly dividend on all shares of Series A Preferred
Stock then outstanding are legally available therefor under the laws of the
State of Maryland as then in effect.
(d) Right of Set Off Against Dividends, Redemptions,
Liquidation, etc. The Corporation may set off against any amounts due and
payable to any holder of Series A Preferred Stock (including, but not limited
to, any dividend payments, Redemption Prices, liquidation payments or other
amounts) all or any part of any accrued but unpaid interest on any unpaid
principal amount owed to the Corporation by any holder, or prior holder, of
shares of Series A Preferred Stock pursuant to the terms of any promissory
note(s) delivered by such holder(s) to the Corporation for the issuance of such
shares of Series A Preferred Stock.
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(e) Declaration Date. The date on which the Board
shall consider the payment of a particular quarterly dividend on the Series A
Preferred Stock pursuant to Section B.2.(c) hereof shall be any date that is
prior to the date on which such quarterly dividend would be payable if declared,
and which is not more than seventy-five (75) days prior to such quarterly
dividend payment date.
(f) Reduction of Capital. If at any time the Board
considers the payment of any quarterly dividend pursuant to Section B.2.(c)
hereof (i) funds for the full payment of such quarterly dividend are not then
legally available therefor under the laws of the State of Maryland as then in
effect as applied to the then effective capitalization of the Corporation, and
(ii) funds for the payment of such quarterly dividend would be legally available
if the stated capital accounts of the Corporation were reduced or capital
surplus was revalued, then, in such event, the Board shall reduce the stated
capital at least to the extent necessary to declare and pay such dividend or
cause a revaluation of capital surplus if such reduction of capital or valuation
of surplus would be permissible under the laws of the State of Maryland as then
in effect and unless the exercise of the Board's fiduciary duty prevents such
reduction.
(g) Limitation on other Dividends; Payments. So long
as any shares of Series A Preferred Stock remain outstanding, no dividends shall
be declared or paid upon, nor shall any dividend or other distribution be made
with respect to, any shares of any other class or series of stock or equity
interest of the Corporation or any Subsidiary without the consent of each of the
Series A Preferred Stock Directors and no shares of any class of stock or equity
interest of the Corporation or any Subsidiary other than the shares of Series A
Preferred Stock shall be redeemed, retired, purchased or otherwise acquired by
the Corporation, except purchases of the Corporation's interests in a Subsidiary
at the time of its organization. Notwithstanding the foregoing, the Corporation
may (i) effect Permitted Redemptions pursuant to Section A.5, and (ii) redeem
shares of capital stock of or equity interests in any wholly-owned Subsidiary.
3. REDEMPTION.
(A) OPTIONAL REDEMPTION BY HOLDERS.
(i) Permitted Time for Optional Redemption. At the
written request of any holder of Series A Preferred Stock, sent by such holder
to the Corporation at the principal office of the Corporation, during the
ninety-two (92) day period beginning on March 1, 2000, and ending on June 1,
2000, the Corporation shall, within ninety (90) days of the date of such request
(a "Series A Redemption Date") redeem for cash out of any funds legally
available therefor all, but not less than all, of
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the then issued and outstanding shares of Series A Preferred Stock held by the
holders making such request, at an amount per share of Series A Preferred Stock
equal to the greater of (A) the then "fair market value" (as such term is
defined in Section 3(d)(viii) below) of such share, including, for purposes of
calculating such fair market value, the sum of all accumulated and unpaid
interest and dividends on such share of Series A Preferred Stock, whether or not
such dividends have been declared by the Corporation to the date such share is
actually redeemed and taking into account any right of set off of the
Corporation referred to in Section B.2(d) hereof, or (B) the sum of the issue
price of such share plus all accumulated and unpaid interest and dividends
thereon, whether or not such dividends have been declared by the Corporation
(subject to any right of set off of the Corporation referred to in Section
B.2(d) hereof), to the date such share is actually redeemed.
(ii) Permitted Redemption Resulting from Certain
Unapproved Series A Preferred Stockholder Major Decisions. If the Corporation
elects to take any action constituting a Series A Preferred Stockholder Major
Decision (other than the issuance of Series A Adverse Junior Stock) without the
approval of the holders of Series A Preferred Stock (as permitted pursuant to
the provisions of Section B.1.(e)(ii) hereof), the Corporation shall give notice
of such election to each holder of Series A Preferred Stock at least ninety (90)
days prior to the date such action is to be effective, and the holders of Series
A Preferred Stock shall be entitled, by delivery of a written notice to the
Corporation at the principal office of the Corporation not less than twenty-one
(21) days prior to the date such action is to be effective, to request the
Corporation to redeem, and the Corporation shall redeem out of any funds legally
available therefor, all (but not less than all) of the then issued and
outstanding shares of Series A Preferred Stock then held by the holders
requesting redemption, at an amount per share of Series A Preferred Stock equal
to the greater of (A) the then fair market value of such share (including, for
purposes of calculating such fair market value, the sum of all accumulated and
unpaid interest and dividends on such share of Series A Preferred Stock, whether
or not such dividends have been declared by the Corporation to the date such
share is actually redeemed and taking into account any right of set off of the
Corporation referred to in Section B.2(d) hereof), or (B) the sum of the issue
price of such share plus all accumulated and unpaid interest and dividends
thereon, whether or not such dividends have been declared by the Corporation
(subject to any right of set off of the Corporation referred to in Section
B.2(d) hereof), to the date such share is actually redeemed. To the extent that
net cash proceeds are received by the Corporation as the result of the taking of
such action constituting such a Series A Preferred Stockholder Major Decision,
other than the Series A Preferred Stockholder Major Decisions described in
Section B.3(a)(iii) below, which shall be treated as provided therein, (i) the
Corporation shall pay any redemption price in cash to the holders of Series A
Preferred Stock, such cash to be paid pro rata among the holders of Series A
Preferred Stock requesting such redemption (with such redemption being a
condition precedent to the Corporation's receipt of such net proceeds) upon the
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occurrence of such action (a "Series A Redemption Date"). To the extent that
such net cash proceeds received by the Corporation as a result of taking such
Series A Preferred Stockholder Major Decision are insufficient to enable the
Corporation to make full payment in cash, the Corporation may pay the balance
due with respect to the redemption of such shares within 180 days of such
request.
(iii) Effect of Issuance of Series A Adverse Junior
Stock. If the Corporation elects to issue shares of Series A Adverse Junior
Stock after a determination by the arbitrators appointed pursuant to Section
B.1.(e)(iii) hereof that the purchaser thereof is a Series A Adverse Junior
Stock Purchaser, then the holders of Series A Preferred Stock shall be entitled,
by delivery of a written notice to the Corporation at the principal office of
the Corporation within ninety (90) days after the date of issuance of such
shares by the Corporation, to request the Corporation to redeem, and the
Corporation shall redeem, all but not less than all of the issued and
outstanding shares of Series A Preferred Stock held by holders requesting
redemption. Such redemption payment shall be made in cash prior to or
contemporaneously with such issuance if a request for redemption is made thirty
(30) or more days prior to the date specified for issuance by the Corporation in
its notice of issuance, and otherwise no sooner than 180 days after the date of
such request but in all events within one (1) year of such request (a "Series A
Redemption Date"). The redemption price shall in all events be an amount per
share of Series A Preferred Stock equal to the greater of (A) the purchase price
per share of Series A Adverse Junior Stock to be paid, on a fully diluted basis,
by the purchaser of such shares, or (B) the then fair market value of such share
of Series A Preferred Stock as calculated pursuant to subparagraph (i) hereof,
or (C) the product of (I) one and one half (1.5) times the sum of (II) the
liquidation preference of such shares, including therein all accumulated and
unpaid dividends and interest thereon (whether or not such dividends have been
declared by the Corporation but subject to any right of set off of the
Corporation pursuant to Section B.2(d) hereof) to the date such share is
actually redeemed. Interest shall accrue on the amount of the fair market value
per share at a rate of six and one half percent (6.5%) per annum from the date
such holders of Series A Preferred Stock deliver notice of their redemption
request to the Corporation until the full payment of all amounts payable with
respect to such redemption has been paid in cash by the Corporation.
(iv) Permitted Special Event Redemptions. Upon the
occurrence of a "Special Event Redemption," as set forth in Section 12.8 of that
certain Finance Transaction Agreement between the Corporation, the original
holder of the Series A Preferred Stock and others, dated as of February 24,
1995, the holders of the Series A Preferred Stock shall have a period of sixty
(60) days from the occurrence of such a Special Event Redemption to request the
Corporation to redeem, and the Corporation shall redeem, out of any funds
legally available therefor, all (but not less than all) of the then issued and
outstanding shares of Series A Preferred Stock, at an amount per share equal to
the sum of the issue price plus all accumulated and unpaid
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interest and dividends thereon (subject to any right of set off of the
Corporation referred to in Section B.2(d) hereof), whether or not such dividends
have actually been declared. The Corporation shall be entitled to satisfy any
redemption obligations owing under this Section (b)(iv) by delivering to the
holders of Series A Preferred Stock a promissory note (or notes) with a term
equal to the longer of (A) 24 full months from the date of such request, or (B)
the number of full months remaining from the date of such request through
February 28, 1998 (collectively, the "Final Maturity Date"). Compound interest
shall accrue on any such note at the rate of 6 1/2 % per annum. The principal
amount of such note shall be amortized ratably on a 60 month basis. Accrued and
unpaid interest shall be payable, together with equal monthly installments of
principal, on the fifth day of each month following the issuance of such note,
with a final payment of all accrued and unpaid interest plus all remaining
unpaid principal due on the Final Maturity Date. Such note will be prepayable
without premium, will be subordinated to all then existing or thereafter created
Indebtedness, and will contain certain such customary default and other clauses
as are customary in promissory notes of such type and amount.
(B) MANDATORY REDEMPTION BY THE CORPORATION. Upon the
occurrence of any Non-Compliance (as defined in Section B.6), the Corporation
shall redeem all, but not less than all, of the shares of Series A Preferred
Stock then held by each holder at the redemption price as calculated pursuant to
the provisions of Section B.3.(a)(i), within ten (10) business days after the
occurrence of such Non-Compliance. Any such redemption shall not be in lieu of
or in any way limit any other rights which such holders may have (at law or in
equity) in connection with the event giving rise to their right of redemption.
(C) OPTIONAL REDEMPTION BY THE CORPORATION.
(i) Redemption in 2000. If the holders of Series A
Preferred Stock fail to request redemption of their shares of Series A Preferred
Stock within the ninety-two (92) day period provided in Section B.3(a)(i) hereof
for such optional redemption, and if such shares have not otherwise been
converted to shares of Class C Common Stock, then the Corporation may, out of
funds legally available therefor, upon at least thirty (30) days prior notice
delivered at any time after the expiration of such applicable period (a "Series
A Redemption Date"), redeem all, but not less than all, of the outstanding
shares of Series A Preferred Stock at an amount per share of Series A Preferred
Stock equal to the issue price of such share plus an amount equal to the amount
of all accumulated and unpaid dividends and interest on such share of Series A
Preferred Stock, whether or not such dividends have been declared by the
Corporation to the date such share is actually redeemed, minus any amount which
the Corporation is entitled to set off pursuant to the provisions of Section
B.2(d) hereof.
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(ii) REDEMPTION UPON REDUCTION OF NOTE. If the
Corporation elects to defer receipt of all or any portion of any scheduled
payment of principal due and payable to the Corporation under any promissory
note made by any holder of Series A Preferred Stock in favor of and delivered to
the Corporation in consideration for the issuance by the Corporation of Series A
Preferred Stock to such holder (each a "Deferred Payment Amount"), then the
Corporation may, in its discretion and consistent with the provisions of any
such note, redeem a number of shares of Series A Preferred Stock from the maker
of such note determined by dividing the total amount of all then outstanding
Deferred Payment Amounts by five dollars ($5.00), at a redemption price of five
dollars ($5.00) for each such share, and set off all or any portion of such
Deferred Payment Amounts against any such Redemption Price (as defined below)
due hereunder. The Corporation shall give at least thirty (30) days notice to
the Series A Preferred Stockholders of any redemption pursuant to this
subsection (ii), which notice shall specify a redemption date (also a Series A
"Redemption Date").
(iii) REDEMPTION OF REMAINING SHARES OF SERIES A
PREFERRED STOCK UPON AUTOMATIC CONVERSION. To the extent that shares of Series A
Preferred Stock are not converted into shares of Class C Common Stock pursuant
to the provisions of Section B.4.(b) upon the occurrence of the events set forth
therein, the Corporation may redeem such remaining shares of Series A Preferred
Stock upon at least ten (10) days prior notice to the holders of Series A
Preferred Stock, which notice shall specify a redemption date (also a Series A
"Redemption Date"). The redemption price for such shares shall equal, and shall
be paid by, cancellation of the entire unpaid principal amount of the promissory
note delivered by the holder of such shares to the Corporation in partial
consideration for the issuance of such shares.
(D) GENERAL PROVISIONS FOR REDEMPTIONS.
(i) Series A REDEMPTION PRICE. Each amount payable by
the Corporation pursuant to Section B.3(a) through (c) hereof respectively, is
referred to as the "Series A Redemption Price".
(ii) EFFECT OF REDEMPTION. Provision for payment of
the Series A Redemption Price for shares of Series A Preferred Stock having been
made by the Corporation, and for so long as there shall be no default in the
payment of deferred portions of the Redemption Price, then (A) the shares of
Series A Preferred Stock designated for redemption in any notice shall not be
entitled to any dividends accruing after the specified Redemption Date, and (B)
on such Redemption Date all rights of the respective holders of such shares, as
stockholders of the Corporation by reason of the ownership of such shares of
Series A Preferred Stock, shall cease, except the right to receive the
Redemption Price upon presentation and surrender of the respective certificates
representing such shares.
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(iii) DEFERRED PAYMENT FOR CERTAIN APPROVED SERIES A
PREFERRED STOCKHOLDER MAJOR DECISIONS. On any Series A Redemption Date resulting
from the failure of the holders of Series A Preferred Stock to approve (A) a
sale of all or substantially all of the assets of the Corporation whether by
asset or stock sale, or otherwise, for consideration other than all cash or (B)
the Corporation having conveyed, transferred or leased all or any substantial
portion of its assets to any person or entity, or (C) a consolidation or merger
referred to in Section B.1(e)(i)(G) above, the Corporation may, at its election,
in lieu of making payment in full in cash, prior to the consummation of any such
transaction, pay to each holder of shares of Series A Preferred Stock an amount
in cash equal to one-half (1/2) of the total Series A Redemption Price, and may
issue a promissory note of the Corporation in an amount equal to the balance of
such Series A Redemption Price; provided, however, that in the case of (A)
above, the Corporation shall be obligated to pay to the holders of the Series A
Preferred Stock an additional PRO RATA amount of cash (and shall be entitled to
reduce the principal amount of any note referred to in (iv) below), if and to
the extent it receives any cash as a result of such a transaction.
(iv) PROMISSORY NOTE. Any promissory note referred to
in subparagraph (iii), above, shall be payable in two (2) equal annual
installments, commencing on the one (1) year anniversary of the Series A
Redemption Date, of principal and interest and such interest shall accrue at the
then prime rate (the "Prime Rate") of the Corporation's primary banking
institution (or, if there be no such institution, the prime rate of interest as
published in the Wall Street Journal, from time to time) plus one hundred (100)
basis points. The obligations of the Corporation to make payment under such note
shall be secured by a perfected security interest in the Corporation's accounts
receivable (not more than 90 days' due at the date of perfection) with an
aggregate value of not less that 120% of all amounts payable under such note
from time to time, which recurring interest lien shall be subordinated only with
respect to payments and priority to any lien(s) granted to (A) any of the
Corporation's lending financial institutions, incurred in accordance with these
designations, or (B) a Series B Preferred Stockholder pursuant to a Final Credit
Enhancement Agreement dated December 1, 1995.
(v) RETIREMENT OF SHARES. Shares of Series A
Preferred Stock that have been redeemed, purchased or otherwise acquired by the
Corporation shall be retired and may not be reissued.
(vi) EFFECT OF LEGAL RESTRICTIONS ON PAYMENT. If the
Redemption Price for any such shares cannot be paid in full because the
Corporation is prohibited by law from making such payment, then those funds that
are legally available will be used to pay (ratably if necessary) accrued but
unpaid interest, then accrued but unpaid dividends, and then to redeem the
maximum possible number of shares of Series A Preferred Stock ratably among the
holders thereof determined by multiplying the total
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number of shares of Series A Preferred Stock to be redeemed times a fraction,
the numerator of which shall be the total number of such shares then held by
each such holder and the denominator of which shall be the total number of such
shares then outstanding. The shares of Series A Preferred Stock not redeemed
shall remain outstanding and be entitled to all rights and preferences provided
herein; provided, however, at any time thereafter when additional funds of the
Corporation are legally available for the redemption of such shares of Series A
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available. If fewer than the total number of
shares of Series A Preferred Stock represented by any certificate are redeemed,
a new certificate representing the number of unredeemed shares will be issued to
the holder thereof without cost to such holder within three business days after
surrender of the certificate representing the redeemed shares of Series A
Preferred Stock.
(vii) RESTRICTIONS ON CORPORATE ACTIONS. If the
Corporation for any reason fails to redeem any shares of Series A Preferred
Stock in accordance with this Section B.3 on or prior to the Redemption Date
specified herein, then, notwithstanding anything to the contrary contained in
these Articles of Incorporation, the Corporation may not incur any Indebtedness
(unless the proceeds of such incurrence of Indebtedness are used to make all
overdue redemption payments in respect of the Series A Preferred Stock,
including payments of accrued but unpaid dividends or interest) without the
prior written consent of the holders of the Series A Preferred Stock voting
separately as a class; provided, however, that, subject to the restriction set
forth in Section B.1(c)(i), if such restriction is then in force, the
Corporation may incur Indebtedness without the aforesaid approval if (A) the
proceeds of such borrowing are used to pay obligations of the Corporation
arising in the ordinary course of business as they become due and payable, or
otherwise to maintain the operations of the Corporation at the then current
level and not to expand the operation of the Corporation in any material
respect, whether through expansion or enhancement of, or addition, to the
Corporation's then current activities, facilities, equipment or other capital
assets, or otherwise, (B) the Corporation provides prior written notice of such
borrowing to all holders of Series A Preferred Stock, which notice shall include
a statement of the intended use of the proceeds of such borrowing, and (C)
promptly upon request therefor, the Corporation shall provide to any holder of
Series A Preferred Stock a certificate signed by the President and Chief
Financial Officer of the Corporation certifying as to the allocation and use of
the proceeds of any such borrowing.
(viii) APPRAISAL. Within fourteen (14) days of any
written request of any holder of shares of Series A Preferred Stock from time to
time, an appraiser or appraisers shall be jointly selected by the holders of
Series A Preferred Stock (the "Transferring Stockholder"), on the one hand, and
the Corporation on the other hand, and such jointly selected appraiser or
appraisers shall determine the fair market value
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of the Series A Preferred Stock. The fair market value of the Series A Preferred
Stock shall be such amount as of such date as the appraisers determine, using
such methods as the appraisers appointed hereunder determine, in the exercise of
their sole discretion, is appropriate taking into account any liquidation,
conversion, preferences or other rights attendant to such class (which shall
specifically include the value of any Class C Common Stock into which such
shares of Series A Preferred Stock may at such time be converted). If the
Transferring Stockholder, on the one hand, and the Corporation on the other
hand, do not agree upon the selection of an appraiser or appraisers, within the
period therein stated, then, within seven (7) days after the expiration of the
fourteen (14) day period, the Transferring Stockholder shall appoint an
appraiser, and the Corporation shall appoint a second appraiser. The two (2)
appraisers so appointed shall appoint a third appraiser within seven (7) days
after both shall have been appointed. If either the Transferring Stockholder or
the Corporation shall fail to so appoint an appraiser, the appraiser duly
appointed by the other shall serve as the sole appraiser and such appraiser
shall determine the fair market value of the Series A Preferred Stock and such
determination shall be binding, final and conclusive on all parties. The said
appraiser(s) shall, within sixty (60) days after the last appointment thereof
determine the fair market value of the Series A Preferred Stock as otherwise
provided herein and the determination of such appraiser shall be determinative
of the fair market value of the Series A Preferred Stock and shall be binding,
final and conclusive on all parties. If the appraisers cannot agree on the fair
market value of the Series A Preferred Stock, within the time allotted, then
such fair market value shall be the median or the two appraisals closest in
value to each other. All expenses incurred in the appraisal process shall be
borne and paid equally by the Transferring Stockholder and the Corporation.
(ix) MULTIPLE HOLDERS OF SERIES A PREFERRED STOCK. If
the Series A Preferred Stock is at any time held by more than one person or
entity, the request for redemption pursuant to this Section B.3 by the holders
of at least fifty-one percent (51%) of the then issued and outstanding shares of
Series A Preferred Stock shall constitute the request for redemption by the
holders of all of the then issued and outstanding shares of Series A Preferred
Stock and all such holders of Series A Preferred Stock shall redeem their shares
of Series A Preferred Stock pursuant to this Section B.3 upon the receipt of
notice from holders of at least fifty-one percent (51%) of the then issued and
outstanding shares of Series A Preferred Stock.
4. CONVERSION RIGHTS.
(A) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions. All, but not less than all,
of the issued and outstanding shares of Series A Preferred Stock shall be
convertible, without the payment of any additional consideration, into shares of
Class C Common Stock, at the
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option of the holders of the shares of Series A Preferred Stock, at any time
prior to 5:00 P.M. (EST) on February 24, 2000; provided, however, that issued
and outstanding shares of Series A Preferred Stock may not be converted into
shares of Class C Common Stock as otherwise permitted herein if, at the time of
such requested conversion, the Corporation has not received cash in full payment
for all shares of Series A Preferred Stock outstanding at such time (including
payment in full of all amounts of principal and interest under any note given in
partial consideration for such shares, but less any accrued but unpaid dividends
with respect thereto); and provided, further, however, that if such conversion
occurs at any time during the 60 day period referred to in Section 3(a)(ii)
(other than as the result of the adoption of a Business Plan as set forth in
Section 1(e)(i)(A) (above) or pursuant to Section 3(a)(iii) above, after the
Corporation elects to take any action constituting a Series A Preferred
Stockholder Major Decision without the approval of the holders of the Series A
Preferred Stock, such conversion shall not be deemed to be an "optional
conversion" governed by the provisions of this Section 4(a), but shall be
governed by the provisions relating to "Automatic Conversions" set forth in
Section 4(b) below. Each such share of Series A Preferred Stock shall be
convertible at such time into one fully-paid and nonassessable share of Class C
Common Stock, subject to adjustment as provided in Section B.4.(e) below (the
"Series A Conversion Rate"). The holders of shares of Series A Preferred Stock
requesting conversion of shares into shares of Class C Common Stock shall send a
written notice to the Corporation, at the principal office of the Corporation,
requesting such conversion. The holders shall, as soon thereafter as
practicable, deliver the certificates therefor, duly endorsed for transfer, at
the principal office of the Corporation or any transfer agent for the Series A
Preferred Stock. The Corporation shall, as soon as practicable thereafter, issue
and deliver to the holders a certificate or certificates for the number of such
shares of Class C Common Stock to which the holders shall be entitled, a check
payable to the holders in the amount of any cash in lieu of issuance of any
fractional share, and the amount of any cumulative dividends and interest
accrued but unpaid on such shares. The conversion shall be deemed to have been
made immediately prior to the close of business on the date of receipt of the
notice. The persons entitled to receive the shares of Class C Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Class C Common Stock on such date, and the
shares of Series A Preferred Stock converted shall immediately be canceled and
may not be reissued.
(ii) Multiple Holders of Series A Preferred Stock. If
the Series A Preferred Stock is at any time held by more than one person or
entity, the request for conversion pursuant to this Section B.4 by the holders
of at least fifty-one percent (51%) of the then issued and outstanding shares of
Series A Preferred Stock shall constitute the request for conversion by the
holders of all of the then issued and outstanding shares of Series A Preferred
Stock and all such holders of Series A Preferred Stock shall convert their
shares of Series A Preferred Stock pursuant to this
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Section B.4 upon the receipt of notice from holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series A Preferred
Stock.
(B) AUTOMATIC CONVERSION. If the holders of Series A
Preferred Stock have not earlier exercised their rights to require the
Corporation to redeem their shares of Series A Preferred Stock pursuant to the
provisions of Section B.3.(a) hereof, such number of outstanding shares of
Preferred Stock equal to the product of the number of outstanding shares of
Series A Preferred Stock multiplied by a fraction, the numerator of which shall
be the total amount of cash paid to the Corporation by such holders to purchase
shares of Series A Preferred Stock (but not including the payment of any
interest to the Corporation) and the denominator of which shall be $5 million,
shall, together with all other then outstanding shares of the Corporation's
preferred stock or other capital stock with rights to convert into shares of
Common Stock, be converted into fully-paid and nonassessable shares of Class C
Common Stock at the Series A Conversion Rate upon the earlier to occur of the
closing or other consummation of (i) any Qualified Public Offering, (ii) any
Non-Qualified Public Offering, (iii) any combination, consolidation or merger
where the Corporation is not the survivor, (iv) any sale, exchange or other
disposition of all or substantially all of the Corporation's assets, whether by
asset or stock sale or otherwise, or (v) any election by the holders of Series A
Preferred Stock to effect an "Optional Conversion" during any period during
which the holders of the Series A Preferred Stock may cause the Corporation to
redeem shares of their Series A Preferred Stock pursuant to the provisions of
Section 3(a)(ii) or 3(a)(iii), above. In the case of the occurrence of any of
(i) through (v) above, all remaining shares of Series A Preferred Stock which
have not been converted into shares of Class C Common Stock, shall be subject to
mandatory redemption by the Corporation pursuant to the provisions of Section
B.3.(iii) hereof. Shares of Class C Common Stock received pursuant to this
Section 4.(b) shall be subject to the provisions of Article IV, Section A.4 in
the event of a Qualified Public Offering or Non-Qualified Public Offering, and
shall thereupon immediately be reclassified as shares of Class A Common Stock.
At least twenty (20) days prior written notice of the date fixed and place
designated for conversion shall be sent by first class mail, postage prepaid, to
the address of each holder of shares of Series A Preferred Stock as shown in the
records of the Corporation. On or before the date fixed for conversion, each
holder of shares of Series A Preferred Stock shall surrender the certificates
representing such shares to the Corporation at the place designated in such
notice and shall thereafter receive certificates for the number of full shares
of Common Stock to which such holder is entitled. Until such time as holders of
certificates theretofore representing shares of Series A Preferred Stock have
surrendered them for exchange as provided herein, no dividends shall be paid
with respect to any shares represented by such certificates and no payment for
fractional shares shall be made.
(c) NO FRACTIONAL SHARES. No fractional shares of
Common Stock shall be issued upon conversion of shares of Series A Preferred
Stock. In lieu of any
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fractional share, the Corporation shall pay a cash adjustment in respect of such
fractional interest equal to the fair market value of such fractional interest
as determined by the Board.
(d) PAYMENT; DIVIDENDS. At the time of the conversion
of any shares of Series A Preferred Stock, whether mandatory or optional, the
Corporation shall pay to the holder of such shares of Series A Preferred Stock
the sum of all interest and cumulative dividends accrued but unpaid with respect
to such shares, whether or not such dividends shall have been declared by the
Corporation to the date of conversion (subject to the Corporation's right of set
off referred to in Section B.2(d) hereof).
(e) ADJUSTMENTS; ANTIDILUTION. The number of shares
of Class C Common Stock issuable upon the conversion of the Series A Preferred
Stock shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(i) DIVIDENDS, SPLITS. If the Corporation declares a
dividend payable in its shares of its Common Stock, splits any of its Common
Stock or combines any of its outstanding shares of Common Stock into a smaller
number, then the number of fully-paid and nonassessable shares of Class C Common
Stock into which each share of Series A Preferred Stock may be converted shall
forthwith be adjusted by multiplying one (1) by a fraction (A) the numerator of
which shall be the total number of outstanding shares of Common Stock
immediately after such dividend, stock split or combination, and (B) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately prior to such dividend, stock split or combination.
(ii) REORGANIZATION, RECLASSIFICATION. In the event
of a reorganization, share exchange, or reclassification, other than a change in
par value, or from par value to no par value, or from no par value to par value
or a transaction described in subsection (iii) or (iv) below, each share of
Series A Preferred Stock shall, after such reorganization, share exchange or
reclassification, be convertible into the kind and number of shares of stock or
other securities or property of the Corporation to which the holder of Series A
Preferred Stock would have been entitled if the holder had held the Class C
Common Stock issuable upon conversion of its Series A Preferred Stock
immediately prior to such reorganization, share exchange, or reclassification,
or to which the Series A Preferred Stock is actually entitled, but not both.
(iii) CONSOLIDATION, MERGER, SALE OF ASSETS. In the
event of a merger or consolidation or sale, exchange or other disposition of
all, or substantially all of the Corporation's assets, to which the Corporation
is a party, each share of Series A Preferred Stock shall, after such merger or
consolidation, be convertible into the kind and number of shares of stock and/or
other securities, cash or other property to which the holder of such share of
Series A Preferred Stock would have been entitled if the holder had held the
Class C Common Stock issuable upon conversion of its shares of
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Series A Preferred Stock immediately prior to such consolidation or merger or
sale of assets, or to which the Series A Preferred Stock is actually entitled,
but not both.
(iv) CERTAIN ISSUANCES OF ADDITIONAL SHARES OF COMMON
STOCK. If the Corporation shall issue any additional shares of Common Stock --
other than securities to be issued (i) to the public pursuant to any Qualified
Public Offering or Non-Qualified Public Offering, (ii) to officers, directors,
or employees of the Corporation as part of a stock option plan, restricted stock
plan, employee stock purchase plan, employment agreement, or other employee
stock plan or agreement, implemented by the Board, provided that the aggregate
numbers of such shares issued shall not exceed ten percent (10%) of the fully
diluted capital stock of the Corporation calculated as of the time of the
issuance, (iii) to Management Stockholders and other executive employees of the
Corporation, of an amount of Class A Common Stock not in excess of the 25%
Management Stock Amount, (iv) upon conversion of any shares of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or
the exercise of that certain Stock Warrant granted by the Company to the Series
B Preferred Stockholder, of even date herewith, to purchase 88,889 shares of
Class A Common Stock at an exercise price that is equal to or exceeds the
"conversion price" including any adjustment thereof, (v) upon the exercise of
that certain Stock Warrant granted by the Company to John R. Dwyer, Jr., Stephen
X. Hamilton and D. Andrew Hamilton December 1, 1995 to purchase in the aggregate
24,000 shares of Class A Common Stock, or (vi) to the LP pursuant to Article XIV
of the Practice Participation Agreement in respect of the issuance of Medical
Holdings Limited Partnership of the Limited Partner Interests (or options to
purchase such Interests) from and after the time that more than sixty-six (66)
but less than one hundred (100) physicians hold such Limited Partner Interests
(or options to acquire such Interests) directly or indirectly through their
professional corporations -- for a consideration per share of Common Stock less
than the "conversion price", as adjusted or as previously adjusted, in effect on
the date immediately prior to such issuance, then and in such event, such
conversion price shall be adjusted, concurrently with such issuance, to a price
equal to the quotient obtained by DIVIDING:
(1) an amount equal to (x) the sum of (A)
the total number of shares of Common Stock outstanding
immediately prior to such issuance or sale, plus (B) the total
number of shares of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or exchangeable
for, or evidencing the right to purchase shares of, Common
Stock outstanding immediately prior to such issuance or sale,
multiplied by the (C) conversion price in effect immediately
prior to such issuance or sale, plus (y) the consideration, if
any, received or deemed to be received by the Corporation upon
such issuance or sale; BY
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(2) the sum of (A) total number of shares of
Common Stock outstanding immediately after such issuance or
sale, plus (B) the total number of shares of Common Stock
issuable upon exercise of all options, warrants and other
rights convertible or exchangeable for, or evidencing the
right to purchase shares of, Common Stock outstanding
immediately after such issuance or sale.
For purposes of this Section B.4, the conversion price shall initially be $5.00
per share.
No adjustment of the conversion price shall be made under this Section
B.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance of any such warrants, options or other rights
or upon the issuance of any convertible securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to Sections 4(v) or 4(vi)
hereof.
(v) ISSUANCE OF WARRANTS, OPTIONS OR OTHER RIGHTS. If
the Corporation at any time shall issue any warrants, options or other rights to
subscribe for or purchase any additional shares of Common Stock and the price
per share for which additional shares of Common Stock may at any time thereafter
be issuable pursuant to such warrants, options or other rights shall be less
than the conversion price per share in effect immediately prior to such
issuance, then such issue shall be deemed an issuance (as of the date of issue
of such warrants, options or other rights) of the total maximum number of shares
of Common Stock issuable pursuant to such warrants, options or other rights, and
the conversion price shall thereupon be adjusted as provided in Section
B.4.(e)(iv) hereof on the basis that the aggregate consideration for the
additional shares of Common Stock issuable pursuant to such warrants, options or
other rights, plus the minimum consideration to be received by the Corporation
for the issuance of additional shares of Common Stock pursuant to such warrants,
options, or other rights shall be deemed to be the consideration received by the
Corporation for the issuance of such warrants, options, or other rights.
(vi) CERTAIN ISSUANCES OF CONVERTIBLE SECURITIES. In
case the Corporation shall issue any securities convertible into Common Stock
and the consideration per share for which such additional shares of Common Stock
may at any time thereafter be issuable pursuant to the terms of such convertible
securities shall be less than the conversion price per share in effect
immediately prior to such issuance, then upon such issuance of such securities
the conversion price shall be adjusted as provided in Section B.4.(e)(iv) hereof
on the basis that (i) the maximum number of additional shares of Common Stock
necessary to effect the conversion or exchange of all such convertible
securities shall be deemed to have been issued as of the date of
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issuance of such convertible securities, and (ii) the aggregate consideration
for such maximum number of additional shares of Common Stock plus the minimum
consideration received by the Corporation for the issuance of such additional
shares of Common Stock pursuant to the terms of such convertible securities
shall be deemed to be the consideration received by the Corporation for the
issuance of such convertible securities. No adjustment of the conversion price
shall be made under this subsection upon the issuance of any convertible
securities which are issued pursuant to the exercise of any warrants, options or
other subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or other
rights pursuant to Section B.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES A CONVERSION RATE. Upon
each adjustment of the conversion price under the provisions of this Section
B.4.(e), the Series A Conversion Rate shall be adjusted to an amount determined
by dividing $5.00 by such adjusted conversion price. For example, if, as a
result of any of the foregoing, the conversion price was reduced to $4.00, each
share of Series A Preferred Stock would then be convertible into 1.25 shares of
Class C Common Stock.
(viii) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS
UNDER THIS SECTION. The following provisions will be applicable to the making of
adjustments in conversion prices hereinabove provided in this Section B.4.(e):
(1) COMPUTATION OF CONSIDERATION. To the extent that
any additional shares of Common Stock or any convertible securities or any
warrants, options or other rights to subscribe for or purchase any additional
shares of Common Stock or any convertible securities shall be issued for cash
consideration, the consideration received by the Corporation therefor shall be
deemed to be the amount of the cash received by the Corporation therefor, or, if
such additional shares of Common Stock or convertible securities are offered by
the Corporation for subscription, the subscription price. To the extent that
such issuance shall be for a consideration other than cash, then the amount of
such consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Corporation's Board
after receipt of a fairness opinion, appraisal or similar independent third
party advice determined by a person or entity jointly selected by the Series A
Preferred Directors, the Series B Preferred Directors, the Series C Preferred
Directors and the other directors pursuant to procedures substantially similar
to those set forth in Section 6 of the Stockholders Agreement. The consideration
for any additional shares of Common Stock issuable pursuant to any warrants,
options or other rights to subscribe for or purchase the same shall be the
consideration received by the Corporation for issuing such warrants, options or
other rights, plus the additional consideration payable to the Corporation upon
the exercise of such warrants, options or other rights. The consideration for
any additional shares of Common Stock issuable pursuant to the terms of any
convertible securities shall be the consideration paid or
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payable to the Corporation in respect of the subscription for or purchase of
such convertible securities, plus the additional consideration, if any, payable
to the Corporation upon the exercise of the right of conversion or exchange in
such convertible securities. In case of the issuance at any time of any
additional shares of Common Stock or convertible securities in payment or
satisfaction of any dividend upon any class of stock preferred as to dividends
in a fixed amount, the Corporation shall be deemed to have received for such
additional shares of Common Stock or convertible securities a consideration
equal to the amount of such dividend so paid or satisfied.
(2) READJUSTMENT OF CONVERSION PRICE. Upon the
expiration of the right to convert or exchange any convertible securities, or
upon the expiration of any rights, options or warrants, without conversion,
exchange or exercise, the issuance of which convertible securities, rights,
options or warrants effected an adjustment in the conversion price, such
conversion price shall forthwith be readjusted and thereafter be the price which
it would have been (but reflecting any other adjustments in the conversion price
made pursuant to the provisions of this Section B.4.(e) after the issuance of
such convertible securities, rights, options or warrants) had the adjustment of
the conversion price made upon the issuance or sale of such convertible
securities or issuance of rights, options or warrants been made on the basis of
the issuance only of the number of additional shares of Common Stock actually
issued upon conversion or exchange of such convertible securities, or upon the
exercise of such rights, options or warrants, and thereupon only the number of
additional shares of Common Stock actually so issued, if any, shall be deemed to
have been issued and only the consideration actually received by the Corporation
(computed as set forth in subsection B.4.(e)(viii)(1) hereof) shall be deemed to
have been received by the Corporation. If the purchase price provided for in any
such rights, options or warrants, or the additional consideration (if any)
payable upon the conversion or exchange of any convertible securities, or the
rate at which any convertible securities are convertible into or exchangeable
for shares of Common Stock changes at any time (other than under or by reason of
provisions designed to protect against dilution), the conversion price in effect
at the time of the change shall be adjusted to the conversion price that would
have been in effect at such time had such rights, options, warrants or
convertible securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
(3) OTHER ACTION AFFECTING COMMON STOCK. If the
Corporation shall take any action affecting the outstanding number of shares of
Common Stock, other than an action described in any of the foregoing subsections
4(e)(i) to (vii) hereof, inclusive, which in the opinion of the Corporation's
Board would have a materially adverse effect upon the rights of the holders of
the Series A Preferred Stock, the conversion price shall be adjusted in such
manner and at such time as the Board may determine to be equitable in the
circumstances.
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(ix) NOTICES OF ADJUSTMENTS. Whenever the conversion
rate and conversion price is adjusted as herein provided, an officer of the
Corporation shall compute the adjusted conversion rate and conversion price in
accordance with the foregoing provisions and shall prepare a written instrument
setting forth such adjusted conversion rate and conversion price and showing in
detail the facts upon which such adjustment is based, and such written
instrument shall promptly be delivered to the record holders of the Series A
Preferred Stock, who shall approve such conversion rates and prices within 30
days of receipt. If holders of Series A Preferred Stock do not object in writing
during such 30 day period, they shall be deemed to have approved such conversion
rates and prices for all purposes hereof.
(f)RESERVATION OF SHARES. The Board shall at all
times reserve and keep available, out of its authorized but unissued shares of
Class C Common Stock, solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock, the full number of shares of Class C Common
Stock deliverable by the Corporation upon the conversion of all shares of Series
A Preferred Stock from time to time outstanding and otherwise issuable under
rights granted from the Corporation then existing.
(g)NO IMPLIED MODIFICATION OF TERMS. The provisions
of this Section B.4. shall not give, or be deemed to give, the Corporation the
power or authority to issue any shares of its capital stock or other securities
or to take any other action that it is expressly prohibited from issuing by
another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, the holders
of shares of the Series A Preferred Stock shall be entitled to receive out of
the assets of the Corporation available for distribution to stockholders, before
any distribution or payment shall be made in respect of the holders of shares of
Common Stock or any other class or series of stock ranking junior to the Series
A Preferred Stock, a liquidating distribution in an amount equal to the greater
of (i) the sum of the "fair market value" per share of Series A Preferred Stock,
which shall include an amount per share equal to all cumulative dividends and
interest accrued but unpaid thereon, whether or not such dividends and interest
shall have been declared by the Corporation, to the date fixed for such
distribution or payment (but subject to reduction to the extent the Corporation
exercises its right of set off referred to in Section B.2(d) hereof); or (ii)
the sum of the original purchase price per share of Series A Preferred Stock
plus an amount equal to all cumulative dividends and interest accrued but unpaid
thereon to the date fixed for such distribution or payment; provided, however,
in either such event the amount of cash payable by the Corporation shall not
exceed the amount of cash paid to the
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Corporation by all holders of such shares with respect to the purchase of such
shares, including the payment of any interest with respect thereto, through and
including the date of liquidation. The holders of shares of Series A Preferred
Stock shall not be entitled to receive any additional distributive amounts upon
such liquidation, dissolution or winding up of the affairs of the Corporation
resulting in any distribution of assets to stockholders.
(b) If, upon any such liquidation, dissolution or
winding up of the affairs of the Corporation, the assets of the Corporation to
stockholders shall be insufficient to permit the payment in full to the holders
of Series A Preferred Stock of the amounts to which they are entitled, then all
of such available assets shall be distributed to the holders of shares of Series
A Preferred Stock ratably in proportion to the liquidation payment otherwise due
under Section B.5.(a) to each such holder and no amounts shall be distributed in
respect of any other share of capital stock of the Corporation until all amounts
distributable to holders of Series A Preferred Stock have been distributed.
(c) The purchase or redemption by the Corporation of
stock of any class, in any manner permitted by law, shall not for the purpose of
this Section B.5. be regarded as a liquidation, dissolution or winding up of the
Corporation. Neither the consolidation nor merger of the Corporation with or
into any other corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for the purpose of
this Section B.5.
(d) At least thirty (30) days prior written notice of
any such liquidation, dissolution or winding up of the affairs of the
Corporation stating a payment date, the amount of the liquidation payments and
the place where said liquidation payments shall be payable, shall be sent by
first class mail, postage prepaid, to each holder of Series A Preferred Stock at
his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of Non-Compliance" shall mean,
with respect to the Corporation, the occurrence of any of the events,
occurrences or circumstances listed below; provided, however, that any such
event, occurrence or circumstance shall constitute "Non-Compliance" if, and only
if, (i) in the case of any event, occurrence or circumstance involving the
non-payment of moneys (other than dividend and accrued interest payments due and
payable to the holders of Series A Preferred Stock), within thirty (30) calendar
days following written notice of such non-payment, such moneys have not been
paid by or on behalf of the Corporation; and (ii) in the case of any event,
occurrence or circumstance not involving the non-payment of moneys, substantial
efforts have not been commenced by or on behalf of the Corporation to cure such
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event, occurrence, or circumstance within a reasonable time after notice thereof
(but in no event later than 30 days), and having been so commenced, there is a
failure within a reasonable time to prosecute to completion with diligence and
continuity the curing of such event, occurrence or circumstances, or a period of
more than 90 days has occurred without such cure being completed to the
satisfaction of the holders of the Series A Preferred Stockholders; provided,
further, however, that, for purposes of (i) and (ii) above the occurrence of any
of the events, occurrences or circumstances described in subparagraphs (5), (6)
(7), (8), (9) or (10), below shall constitute Non-Compliance immediately upon
its occurrence or upon the happening of such event or circumstances, without any
requirement of notice or passage of time except as specifically set forth in
such item:
(1) any failure of the Corporation to make any
payment required to be made by it to the holders of Series A Preferred Stock
hereunder when due;
(2) any material default by the Corporation in the
payment of any other material obligation of the Corporation to any holder of
Series A Preferred Stock;
(3) the Corporation otherwise breaches or otherwise
fails to perform or observe in any material respect any material covenant or
agreement set forth herein or in the Registration Rights Agreement between the
Corporation and the initial holders of the Series A Preferred Stock dated
February 24, 1995 or in any Collateral Agreement (as defined therein).
(4) beginning on April 1, 2000, whenever dividends
accruing after such date on the Series A Preferred Stock shall be in arrears in
an aggregate amount equal to at least 4 quarterly dividends thereon;
(5) institution by the Corporation of proceedings of
any nature under any laws or regulations, whether now existing or subsequently
enacted or amended, for the relief of debtors wherein the Corporation is seeking
relief as debtor;
(6) a general assignment by the Corporation for the
benefit of creditors;
(7) the institution by the Corporation of a case or
other proceeding under any section or chapter of the Federal Bankruptcy Code as
now existing or hereafter amended or becoming effective;
(8) the institution against the Corporation of a case
or other proceeding under any section or chapter of the Federal Bankruptcy Code
as now
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existing or hereafter amended or becoming effective, which proceeding is
not dismissed, stayed or discharged within a period of ninety (90) calendar days
after the filing thereto;
(9) the appointment of a receiving, custodian,
trustee or like officer to take possession of the assets of the Corporation, if
the tendency of said receivership would reasonably tend to have a materially
adverse effect upon the performance by the Corporation of its obligations
hereunder, which receivership imposition;
(10) admission by the Corporation in writing of its
inability to pay its debts as they mature or the Corporation is adjudicated as
insolvent;
(11) attachment, execution or other judicial seizure
of all or any substantial part of the Corporation's assets, such attachment,
execution or seizure in any case remaining undismissed or undischarged for a
period of fifteen (15) calendar days after the levy thereof; provided, however,
that said attachment, execution or seizure shall not constitute an Event of
Non-Compliance hereunder if the Corporation posts a bond sufficient in amount to
satisfy or secure the payment of such claim or judgment within sixty (60)
calendar days after the levy thereof and the Corporation's assets are thereby
released from the lien of such attachment;
(12) one or more judgments or decrees is entered
against the Corporation or any of its Subsidiaries involving in the aggregate a
liability (to the extent not paid or covered by current insurance) of the
greater of (A) $100,000 with respect to 1995; $200,000 with respect to 1996;
$300,000 with respect to 1997; $400,000 with respect to 1998; and $500,000 with
respect to each year thereafter or (B) ten percent (10%) of the net operating
earnings of the Corporation for the immediately preceding fiscal year, as
calculated by the independent certified public accountants employed by the
Corporation, and all such judgments or decrees have not been vacated,
discharged, stayed or bonded pending appeal within 60 days from the entry
thereof;
(13) defaults shall have occurred under any
agreements, indentures, or instruments under which the Corporation then has any
outstanding Indebtedness in excess of the greater of (A) $100,000 with respect
to 1995; $200,000 with respect to 1996; $300,000 with respect to 1997; $400,000
with respect to 1998; and $500,000 with respect to each year thereafter or (B)
ten percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation in the aggregate and if not
already matured at its final maturity in accordance with its terms, such
Indebtedness shall have been accelerated; and/or
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(14) any holder of Indebtedness of the Corporation
equal to the greater of (A) $100,000 with respect to 1995; $200,000 with respect
to 1996; $300,000 with respect to 1997; $400,000 with respect to 1998; and
$500,000 with respect to each year thereafter or (B) or ten percent (10%) of the
net operating earnings of the Corporation for the immediately preceding fiscal
year, as calculated by the independent certified public accountants employed by
the Corporation, after a default under such Indebtedness shall commence
proceedings, or take any action (including by way of set-off) to retain in
satisfaction of such Indebtedness or to collect, seize, dispose of, or apply in
satisfaction of such Indebtedness, assets of the Corporation having a fair
market value in excess of the greater of (A) $100,000 with respect to 1995;
$200,000 with respect to 1996; $300,000 with respect to 1997; $400,000 with
respect to 1998; and $500,000 with respect to each year thereafter or (B) ten
percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation, individually or in the aggregate
(including funds on deposit or held pursuant to lock-box and other similar
arrangements).
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C. SERIES B PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions. Holders of Series B Preferred
Stock shall be entitled to notice of each meeting of all of the Corporation's
stockholders, but shall not be entitled to notice of special or other meetings
of any class of Common Stock or of Series A Preferred Stock or Series C
Preferred Stock. The holders of shares of Series B Preferred Stock shall vote
together with the holders of shares of Common Stock and Series A Preferred Stock
and Series C Preferred Stock on all matters submitted to a vote of stockholders
and not as a separate series or class, except as otherwise provided herein.
Except as otherwise provided herein, on all matters to be voted on by the
Corporation's stockholders, every holder of Series B Preferred Stock shall be
entitled to cast, in person or by proxy, that number of votes equal to the full
number of shares of Class C Common Stock into which such holder's Series B
Preferred Stock is then convertible.
(b) Series B Preferred Stock Directors. The holders
of shares of Series B Preferred Stock, voting as a single class, shall be
entitled to elect two (2) directors of the Corporation (the "Series B Preferred
Stock Directors"). Where the holders of Series B Preferred Stock vote as a
class, the affirmative vote of a majority of the shares of Series B Preferred
Stock represented in person or by proxy at a meeting at which a quorum of Series
B Preferred Stock is present shall be sufficient to approve any matter with
respect to which said holders are entitled to vote; provided, however, that the
affirmative vote of a plurality of all votes cast in person or by proxy by the
holders of Series B Preferred Stock shall be sufficient to elect a Series B
Preferred Stock Director. The holders of Series B Preferred Stock, at any annual
meeting or upon a call of a special meeting of holders of Series B Preferred
Stock by holders of not less than twenty-five percent (25%) of the shares of
Series B Preferred Stock then outstanding, may remove any Series B Preferred
Stock Director at any time and from time to time, voting as a single class, by
the affirmative vote of eighty percent (80%) of all votes entitled to be cast
for the election of a Series B Preferred Stock Director, and may elect a
successor to fill any resulting vacancies for the remainder of the term of such
Series B Preferred Stock Director. If any Series B Preferred Stock Director
shall cease to be a director for any reason (including death, resignation,
removal or any other cause), the vacancy shall be filled by a vote of the
remaining Series B Preferred Stock Director (unless, with respect to removal,
the holders of Series B Preferred Stock have elected a successor Series B
Preferred Stock Director pursuant to the provisions hereof). If there is no such
remaining director, then upon a call of a special meeting of holders of Series B
Preferred Stock, by any such holder, the vacancy shall be filled by the vote of
the holders of Series B Preferred Stock, voting as a single class.
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(c) Actions Requiring Series B Preferred Stock
Director Votes. Without the affirmative vote of each of the Series B Preferred
Stock Directors, the Corporation shall not:
(i) incur or permit any of its Subsidiaries (as
defined in Section B.1(d)(v)) to incur any Indebtedness (as defined in Section
B.1(d)(i)) as a result of which the outstanding Indebtedness of the Corporation
would on a consolidated basis exceed One Million Dollars ($1,000,000) in the
aggregate; other than (A) Indebtedness owing to the Investor named in that
certain Financing Transaction Agreement dated as of February 24, 1995, or any of
its affiliates, or (B) Indebtedness incurred under and pursuant to that certain
Credit Agreement and the related Credit Agreement Documents as defined in the
Securities Purchase Agreement, or (C) Indebtedness not exceeding $20,000,000
incurred under and pursuant to one or more revolving credit facilities
guaranteed by the Series A Preferred Stockholder and/or any other guarantors
reasonably acceptable to the Series B Preferred Stockholder; or
(ii) issue any shares of its capital stock with
liquidation or dividend rights senior to (or PARI PASSU with) the liquidation or
dividend rights of the Series B Preferred Stock; or
(iii) effect any amendment to these Amended and
Restated Articles of Incorporation or to the By-Laws of the Corporation that
adversely affects the holders of the Series B Preferred Stock or the Class C
Common Stock; or
(iv) effect any amendment to any of the Amended
Employment Agreements dated February 24, 1995 by and between the Corporation and
each of Stewart Gold ("Gold"), Scott Rifkin ("Rifkin") and Alan Kimmel
("Kimmel") (collectively, the "Management Employment Agreements"; and Gold,
Rifkin and Kimmel each being a "Management Stockholder" and collectively being
the "Management Stockholders"), or settle or compromise any claim or dispute of
the Corporation with respect thereto; or
(v) obligate the Corporation to do any of the
foregoing.
(d) Definitions. For purposes of this Section C, the
definitions set forth in Section B.1.(d) shall be applicable except that:
(i) In Section B.1(d)(i)(G)(x), the phrase "Series B
Preferred Stock" shall be substituted for "Series A Preferred Stock;"
(ii) "QUALIFIED PUBLIC OFFERING" shall mean any
public underwritten offering of the Corporation's Common Stock pursuant to an
effective registration statement filed with the Securities and Exchange
Commission pursuant to
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the Securities Act of 1933, as amended (the "1933 Act") based upon a total
market capitalization of the Corporation, at the time of such offering, of at
least Forty-Five Million Dollars ($45,000,000).
(iii) "BUSINESS PLAN" means each plan for the conduct
and operation of the business of the Corporation, or any portion thereof, which
shall include a budget and contain narrative descriptions and approximate
schedules for all significant activities proposed to be undertaken by the
Corporation for the period of time set forth therein, in reasonably sufficient
detail to enable the officers and directors of the Corporation to make informed
decisions with respect to any recommendation of, consent to, or approval of,
such plan and any related budget. The term "Business Plan" shall include the
"April 30 Business Plan" which was delivered to and reviewed by the Series B
Preferred Stockholder, and either has been delivered to and reviewed by the
professional advisors of the Series B Preferred Stockholder or the Series B
Preferred Stockholder has had the opportunity to, but elected not to, have its
professional advisors review such April 30 Business Plan, and such April 30
Business Plan has been approved by the holders of the Series B Preferred Stock
for purposes of (A) Article IV Section C.1(c)(i) hereof and (B) Article IV
Section C.1(e)(i)(A) hereof. The Corporation's April 30 Business has been
approved by the holder of the Series B Preferred Stock for purposes of (A)
Section C.1(c)(i) hereof; and (B) Section C.1(e)(i)(A) hereof.
(e) Series B Preferred Stockholder Major Decisions.
(i) GENERAL PROVISIONS. The Corporation shall not
take any of the following actions (each, a "Series B Preferred Stockholder Major
Decision") without first submitting such Series B Preferred Stockholder Major
Decision to a vote by the holders of Series B Preferred Stock, voting separately
as a class:
(A) the adoption of the Corporation's Business Plan
(as defined in Section C.1.(d)(iv) hereof) for any 12-month period or for
calendar years 1998 and 1999, or any amendment or periodic update to any
approved Business Plan;
(B) the issuance by the Corporation from time to time
after the date hereof of shares of its capital stock or options, warrants or
other rights to acquire any such shares, to employees of the Corporation,
directly or under any plan for the benefit of the foregoing or the issuance of
any such shares or options into an employee stock bonus pool in an amount which,
when aggregated with all other such issuances to employees of the Corporation,
exceeds ten percent (10%) of the fully diluted shares of capital stock of the
Corporation as of the date of such issuance; PROVIDED, HOWEVER, that shares of
Class A Common Stock (and options, warrants and rights to acquire shares of
Class A Common Stock) that have been, and will after the date hereof be, issued
to the three Management Stockholders and other executive employees of the
Corporation in amounts not to exceed twenty-five percent (25%) of
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the fully diluted shares of capital stock of the Corporation as of the date
hereof (the "25% Management Stock Amount") shall NOT be counted toward such ten
percent (10%) limitation, such issuances to the Management Stockholders and
other executive employees being expressly authorized and consented to by the
holders of the Series B Preferred Stock;
(C) the cessation of the business of the Corporation;
(D) the issuance of shares of capital stock of the
Corporation with liquidation and dividend rights junior to those afforded to the
Series B Preferred Stock ("Series B Junior Stock") to any person or entity (a
"Series B Adverse Junior Stock Purchaser") which is actively engaged in
substantially the same business or businesses in which any corporation which
owns more that fifty percent (50%) of the voting capital stock of the holder of
Series B Preferred Stock is actively engaged ("Series B Adverse Junior Stock");
(E) any sale, transfer or other disposition by the
Corporation of all or any substantial portion of its assets whether by asset or
stock sale or otherwise;
(F) any conveyance, transfer or lease by the
Corporation of all or any substantial portion of its assets to any person, or to
any corporation, partnership or other entity;
(G) the consolidation or merger by the Corporation
with or into another corporation or entity, or the consolidation or merger of
another corporation or entity with or into the Corporation, where as a result of
such transactions the voting stockholders of the Corporation immediately prior
to such transaction would not hold sufficient voting stock in the surviving
entity immediately after such transaction to elect a controlling constituency of
the Board of Directors (or other governing body) in a transaction where the
Corporation is not the survivor;
(H) any Non-Qualified Public Offering;
(I) any agreement by the Corporation to do any of the
foregoing.
(J) any amendment subsequent to the date hereof to
that certain Physician Services Organization Agreement by and between Baltimore
Medical Group, LLC and BMG Limited Partnership, dated as of February 24, 1995
(which has been assigned by BMG Limited Partnership (now Medical Holdings
Limited Partnership) to the Corporation) (the "PSO Agreement"), that materially
adversely
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affects the Series B Preferred Stockholder in its capacity as the Series B
Preferred Stockholder.
(K) Such other actions or proposed actions by the
Corporation that the Series B Preferred Stockholder and the Corporation shall,
in a written agreement between them (a "Major Decision Agreement"), agree shall
constitute additional Series B Preferred Stock Major Decisions requiring the
affirmative vote or consent of the Series B Preferred Stockholder. A Major
Decision Agreement may provide remedies to the Series B Preferred Stockholder
for the Corporation's failure or refusal to secure the affirmative vote or
consent of the Series B Preferred Stockholder for any such additional Major
Decision, in addition to the remedies otherwise provided by these Articles.
(ii) CORPORATION ENTITLED TO TAKE CERTAIN ACTIONS
WITHOUT APPROVAL OF SERIES B PREFERRED STOCKHOLDERS. If a Series B Preferred
Stockholder Major Decision, other than an issuance of Series B Adverse Junior
Stock, is not approved by the holders of a majority of the then outstanding
shares of Series B Preferred Stock pursuant to the provisions of subparagraph
(i) hereof, then the Corporation shall nonetheless be entitled to take any of
such actions constituting such a Series B Preferred Stockholder Major Decision,
but shall provide written notice to that effect to the holders of Series B
Preferred Stock no later than ninety (90) days prior to the date such action is
to be effective and the holders of Series B Preferred Stock shall be entitled,
by delivery of a written notice to the Corporation at the principal office of
the Corporation not less than twenty-one (21) days prior to the date such action
is to be effective, to require the Corporation to redeem all, but not less than
all, of the then issued and outstanding shares of Series B Preferred Stock
pursuant to the provisions of Section C.3(a)(ii) hereof.
(iii) SERIES B ADVERSE JUNIOR STOCK; SPECIAL
PROVISIONS. If the Series B Preferred Stockholders do not approve an issuance of
Series B Junior Stock that they believe is Series B Adverse Junior Stock
pursuant to the provisions of subparagraph (i) hereof, then, upon the
affirmative vote of a majority of the directors of the Corporation other than
the Series B Preferred Directors, the Corporation shall be entitled, for a
period of sixty (60) days following the election of the holders of Series B
Preferred Stock, not to approve an issuance of such stock, and to require
arbitration under the expedited procedures set forth herein of whether the
Series B Preferred Stockholders or their affiliates have legitimate business
interests that are materially adverse to such Purchaser. Such arbitration shall
be conducted by three arbitrators, two of whom (the "Party Designated
Arbitrators") shall be selected by the parties, and the third of whom shall be a
"Neutral Arbitrator" selected by the Party Designated Arbitrators. The
Corporation shall designate its Party Designated Arbitrator in a written notice
to the holders of Series B Preferred Stock, and within five (5) days thereafter,
such holders of Series B Preferred Stock shall designate its Party Designated
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Arbitrator. Within five (5) days thereafter, the two Party Designated
Arbitrators shall agree upon and appoint a Neutral Arbitrator, who shall be an
attorney experienced in the health care business. The only issue to be
determined in the arbitration shall be whether the proposed recipient of Series
B Junior Stock has legitimate business interests which are materially adverse to
the holders of Series B Preferred Stock. The arbitration shall be concluded
within sixty (60) days of the date of the Corporation's written notice. The
determination of the arbitrators so appointed shall be final and conclusive upon
the parties. If the arbitrators determine that the proposed purchaser is a
Series B Adverse Junior Stock Purchaser, then the Corporation may nonetheless
proceed to issue such shares of Series B Adverse Junior Stock to such purchaser,
but shall provide written notice to that effect to the holders of Series B
Preferred Stock no later than 30 days prior to the date such issuance is
consummated, and the holders of Series B Preferred Stock shall thereupon become
entitled to exercise their rights to require the Corporation to redeem all, but
not less than all, of the issued and outstanding shares of Series B Preferred
Stock pursuant to the provisions of Section C.3.(a)(iii) hereof.
(f) Method of Approval. Whenever any action described
herein requires the action of holders of Series B Preferred Stock, such action
shall be deemed to have occurred upon the approval of holders of a majority of
the then issued and outstanding shares of Series B Preferred Stock at a duly
convened meeting of such stockholders or by their written consent in accordance
with the then applicable provisions of the MGCL, and the Corporation, in
undertaking any action with respect to such holders, shall be entitled to rely
upon a certificate signed by such holders to that effect.
2. DIVIDENDS.
(a) Accrual of Dividends Before April 1, 2000.
Beginning as of December 1, 1995 and prior to April 1, 2000, cash dividends at
the rate of One Dollar and Nine and Seven-Tenths Cents ($1.097) per share per
annum shall accrue on the Series B Preferred Stock (whether or not earned or
declared or payment is legally available therefor) in equal quarterly
installments, commencing on the first day of January 1996, and continuing
thereafter on the first day of each month of April, July, October, January and
shall accrue interest at the rate of 9.75% (based upon a 365 day year)
compounded quarterly on all such unpaid dividend amounts.
(b) Payment of Dividends Before April 1, 2000.
Dividends and interest accrued on or with respect to accrual dates occurring
prior to April 1, 2000 shall be payable (either as part of a Series B Redemption
Price (as defined below) or liquidation payment, or otherwise) prior to April 1,
2000 only after all dividends and interest accrued on or with respect to the
Series A Preferred Stock have been fully paid and only upon (i) the liquidation
of the Corporation as herein provided, or (ii) the
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redemption or conversion of such share of Series B Preferred Stock, and if not
paid upon liquidation, redemption or conversion on or prior to April 1, 2000,
the amount of all such accrued dividends and interest payments shall from and
after April 1, 2000 become an unsecured obligation of the Corporation, bearing
interest at the rate, and being payable at the times, and upon the conditions,
set forth with respect to dividend payments in Section 2(c) below.
(c) Payment of Dividends on or After April 1, 2000.
Beginning on April 1, 2000, cash dividends, at the per annum rate of 100 basis
points over The Wall Street Journal Prime Rate as of the last business day prior
to April 1, 2000, shall accrue on the original issue price of all shares of
Series B Preferred Stock outstanding (whether or not earned or declared by the
Board), in equal quarterly installments on the first day of each month of April,
July, October and January. All such accrued dividends shall be declared by the
Board (if funds are at such time legally available therefor) and shall be
payable to each holder of Series B Preferred Stock on each such scheduled
quarterly date (as set forth above) if, at the time of payment (i) all dividends
and interest accrued on or declared with respect to the Series A Preferred Stock
have been fully paid, and (ii) funds for the full payment of such quarterly
dividend on all shares of Series B Preferred Stock then outstanding are legally
available therefor under the laws of the State of Maryland as then in effect.
(d) Declaration Date. The date on which the Board
shall consider the payment of a particular quarterly dividend on the Series B
Preferred Stock pursuant to Section C.2.(c) hereof shall be any date that is
prior to the date on which such quarterly dividend would be payable if declared,
and which is not more than seventy-five (75) days prior to such quarterly
dividend payment date.
(e) Reduction of Capital. If at any time the Board
considers the payment of any quarterly dividend pursuant to Section C.2.(c)
hereof (i) funds for the full payment of such quarterly dividend are not then
legally available therefor under the laws of the State of Maryland as then in
effect as applied to the then effective capitalization of the Corporation, and
(ii) funds for the payment of such quarterly dividend would be legally available
if the stated capital accounts of the Corporation were reduced or capital
surplus was revalued, then, in such event, the Board shall reduce the stated
capital at least to the extent necessary to declare and pay such dividend or
cause a revaluation of capital surplus if such reduction of capital or valuation
of surplus would be permissible under the laws of the State of Maryland as then
in effect and unless the exercise of the Board's fiduciary duty prevents such
reduction.
(f) Limitation on other Dividends; Payments. So long
as any shares of Series B Preferred Stock remain outstanding, (i) no dividends
shall be declared or paid upon, nor shall any dividend or other distribution be
made with respect
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to, any shares of any other class or series of stock or equity interest of the
Corporation other than the Series A Preferred Stock or any Subsidiary without
the consent of each of the Series B Preferred Stock Directors, and (ii) no
shares of any class of stock or equity interest of the Corporation or any
Subsidiary other than the shares of Series B Preferred Stock and Series A
Preferred Stock shall be redeemed, retired, purchased or otherwise acquired by
the Corporation, except purchases of the Corporation's interests in a Subsidiary
at the time of its organization. Notwithstanding the foregoing, the Corporation
may (iv) effect Permitted Redemptions pursuant to Section A.5; and (v) may
redeem shares of capital stock of or equity interests in any wholly-owned
Subsidiary.
3. REDEMPTION.
(a) OPTIONAL REDEMPTION BY HOLDERS.
(i) Permitted Time for Optional Redemption. At the
written request of any holder of Series B Preferred Stock, sent by such holder
to the Corporation at the principal office of the Corporation, during the
ninety-two (92) day period beginning on March 1, 2000, and ending on June 1,
2000, the Corporation shall, within ninety (90) days of the date of such request
(a "Series B Redemption Date") redeem for cash out of any funds legally
available therefor all, but not less than all, of the then issued and
outstanding shares of Series B Preferred Stock held by the holders making such
request, at an amount per share of Series B Preferred Stock equal to the greater
of (A) the then "fair market value" (as such term is defined in Section 3(d)(ix)
below) of such share, including, for purposes of calculating such fair market
value, the sum of all accumulated and unpaid interest and dividends on such
share of Series B Preferred Stock, whether or not such dividends have been
declared by the Corporation to the date such share is actually redeemed, or (B)
the sum of the issue price of such share plus all accumulated and unpaid
interest and dividends thereon, whether or not such dividends have been declared
by the Corporation to the date such share is actually redeemed.
(ii) Permitted Redemption Resulting from Certain
Unapproved Series B Preferred Stockholder Major Decisions. If the Corporation
elects to take any action constituting a Series B Preferred Stockholder Major
Decision (other than the issuance of Series B Adverse Junior Stock) without the
approval of the holders of Series B Preferred Stock (as permitted pursuant to
the provisions of Section B.1.(e)(ii) hereof), the Corporation shall give notice
of such election to each holder of Series B Preferred Stock at least ninety (90)
days prior to the date such action is to be effective, and the holders of Series
B Preferred Stock shall be entitled, by delivery of a written notice to the
Corporation at the principal office of the Corporation not less than twenty-one
(21) days prior to the date such action is to be effective, to request the
Corporation
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to redeem, and the Corporation shall redeem out of any funds legally available
therefor, all (but not less than all) of the then issued and outstanding shares
of Series B Preferred Stock then held by the holders requesting redemption, at
an amount per share of Series B Preferred Stock equal to the greater of (A) the
then fair market value of such share (including, for purposes of calculating
such fair market value, the sum of all accumulated and unpaid interest and
dividends on such share of Series B Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed) or (B) the sum of the issue price of such share plus all
accumulated and unpaid interest and dividends thereon, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed. To the extent that net cash proceeds are received by the
Corporation as the result of the taking of such action constituting such a
Series B Preferred Stockholder Major Decision, other than the Series B Preferred
Stockholder Major Decisions described in Section C.3(a)(iii) below, which shall
be treated as provided therein, (i) the Corporation shall pay any redemption
price in cash to the holders of Series B Preferred Stock, such cash to be paid
pro rata among the holders of Series B Preferred Stock requesting such
redemption (with such redemption being a condition precedent to the
Corporation's receipt of such net proceeds) upon the occurrence of such action
(a "Series B Redemption Date"). To the extent that such net cash proceeds
received by the Corporation as a result of taking such Series B Preferred
Stockholder Major Decision are insufficient to enable the Corporation to make
full payment in cash, the Corporation may pay the balance due with respect to
the redemption of such shares within 180 days of such request.
(iii) Effect of Issuance of Series B Adverse Junior
Stock. If the Corporation elects to issue shares of Series B Adverse Junior
Stock after a determination by the arbitrators appointed pursuant to Section
C.1(e)(iii) hereof that the purchaser thereof is a Series B Adverse Junior Stock
Purchaser, then the holders of Series B Preferred Stock shall be entitled, by
delivery of a written notice to the Corporation at the principal office of the
Corporation within ninety (90) days after the date of issuance of such shares by
the Corporation, to request the Corporation to redeem, and the Corporation shall
redeem, all but not less than all of the issued and outstanding shares of Series
B Preferred Stock held by holders requesting redemption. Such redemption payment
shall be made in cash prior to or contemporaneously with such issuance if a
request for redemption is made thirty (30) or more days prior to the date
specified for issuance by the Corporation in its notice of issuance, and
otherwise no sooner than 180 days after the date of such request but in all
events within one (1) year of such request (a "Series B Redemption Date"). The
Corporation shall also, on or before the effective date of such redemption,
secure the complete and unconditional release of all then effective guarantees
of indebtedness of the Corporation by the redeeming Series B Stockholder and
shall also pay or cause to be paid in full all of the monies owed by the
Corporation to such redeeming Series B Stockholder pursuant to or as a result of
such guarantee or any instrument, agreement or other document
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executed and delivered by the Corporation to the redeeming Series B Stockholder
to induce the redeeming Series B Stockholder to enter into such guarantee. The
redemption price shall in all events be an amount per share of Series B
Preferred Stock equal to the greater of (A) the purchase price per share of
Series B Adverse Junior Stock to be paid, on a fully diluted basis, by the
purchaser of such shares, or (B) the then fair market value of such share of
Series B Preferred Stock as calculated pursuant to subparagraph (i) hereof, or
(C) the product of (I) one and one half (1.5) times the sum of (II) the
liquidation preference of such shares, including therein all accumulated and
unpaid dividends and interest thereon (whether or not such dividends have been
declared by the Corporation) to the date such share is actually redeemed.
Interest shall accrue on the amount of the fair market value per share at a rate
of nine and three-fourths percent (9.75%) per annum from the date such holders
of Series B Preferred Stock deliver notice of their redemption request to the
Corporation until the full payment of all amounts payable with respect to such
redemption has been paid in cash by the Corporation.
(iv) Redemption Pursuant to Securities Purchase
Agreement. Upon the written request of the holder of Series B Preferred Stock
pursuant to Section 5.3(e) the Securities Purchase Agreement, the Corporation
shall redeem the then issued and outstanding shares of Series B Preferred Stock
held by such holder according to the terms of the Securities Purchase Agreement.
(B) MANDATORY REDEMPTION BY THE CORPORATION. Upon the
occurrence of any Non-Compliance (as defined in Section C.6), the Corporation
shall redeem all, but not less than all, of the shares of Series B Preferred
Stock then held by each holder at the redemption price as calculated pursuant to
the provisions of Section C.3.(a)(i), within ten (10) business days after the
occurrence of such Non-Compliance. Any such redemption shall not be in lieu of
or in any way limit any other rights which such holders may have (at law or in
equity) in connection with the event giving rise to their right of redemption.
(C) OPTIONAL REDEMPTION BY THE CORPORATION.
(i) Optional Redemption in 2000. If the holders of
Series B Preferred Stock fail to request redemption of their shares of Series B
Preferred Stock within the ninety-two (92) day period provided in Section
C.3(a)(i) hereof for such optional redemption, and if such shares have not
otherwise been converted to shares of Class C Common Stock, then the Corporation
may, upon at least thirty (30) days prior notice delivered at any time after the
expiration of such applicable period (a Series B "Redemption Date"), redeem all,
but not less than all, of the outstanding shares of Series B Preferred Stock at
redemption price per share of Series B Preferred Stock equal to the greater of
(i) the then "fair market value" (calculated, if the Corporation and the Series
B Preferred Stockholder are unable to agree, according to
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the procedures set forth in Section 3(d)(ix) below) of such share, including for
purposes of calculating such fair market value, the sum of all accumulated and
unpaid interest and dividends on such share of Series B Preferred Stock, whether
or not such dividends have been declared by the Corporation to the date such
share is actually redeemed, or (ii) the sum of the issue price of such share
plus an amount equal to the amount of all accumulated and unpaid dividends and
interest on such share of Series B Preferred Stock, whether or not such
dividends have been declared by the Corporation to the date such share is
actually redeemed.
(ii) Redemption Pursuant to Securities Purchase
Agreement. The Corporation may redeem the then issued and outstanding shares of
Series B Preferred Stock pursuant to and according to the terms and provisions
of Section 5.3(e) of the Securities Purchase Agreement.
(D) GENERAL PROVISIONS FOR REDEMPTIONS.
(i) Series B REDEMPTION PRICE. Each amount payable by
the Corporation pursuant to Section C.3(a) through (c) hereof respectively, is
referred to as the "Series B Redemption Price".
(ii) EFFECT OF REDEMPTION. Provision for payment of
the Series B Redemption Price for shares of Series B Preferred Stock having been
made by the Corporation, and for so long as there shall be no default in the
payment of deferred portions of the Series B Redemption Price, then (A) the
shares of Series B Preferred Stock designated for redemption in any notice shall
not be entitled to any dividends accruing after the specified Redemption Date,
and (B) on such Redemption Date all rights of the respective holders of such
shares, as stockholders of the Corporation by reason of the ownership of such
shares of Series B Preferred Stock, shall cease, except the right to receive the
Redemption Price upon presentation and surrender of the respective certificates
representing such shares.
(iii) DEFERRED PAYMENT FOR CERTAIN APPROVED SERIES B
PREFERRED STOCKHOLDER MAJOR DECISIONS. On any Series B Redemption Date resulting
from the failure of the holders of Series B Preferred Stock to approve (A) a
sale of all or substantially all of the assets of the Corporation whether by
asset or stock sale, or otherwise for consideration other than all cash or (B)
conveyance, transfer, or lease by the Corporation of all or any substantial
portion of its assets to any person or entity, or (C) a consolidation or merger
referred to in Section C.1(e)(1)(G) above, the Corporation may, at its election,
in lieu of making payment in full in cash, prior to the consummation of any such
transaction, pay to each holder of shares of Series B Preferred Stock an amount
in cash equal to one-half (1/2) of the total Series B Redemption Price, and may
issue a promissory note of the Corporation in an amount equal to the balance of
such Series B Redemption Price; provided however, that in the
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case of (A) above the Corporation shall be obligated to pay to the holders of
the Series B Preferred Stock an additional pro rata amount of cash (and shall be
entitled to reduce the principal amount of any note referred to in (iv) below),
if an to the extent it receives any cash as a result of such a transaction.
(iv) PROMISSORY NOTE. Any promissory note referred to
in subparagraph (iii), above, shall be payable in two (2) equal annual
installments, commencing on the one (1) year anniversary of the Series B
Redemption Date, of principal and interest and such interest shall accrue at the
then prime rate (the "Prime Rate") of the Corporation's primary banking
institution (or, if there be no such institution, the prime rate of interest as
published in the Wall Street Journal, from time to time) plus one hundred (100)
basis points. The obligations of the Corporation to make payment under such note
shall be secured by a perfected security interest in the Corporation's accounts
receivable (not more than 90 days' due at the date of perfection) with an
aggregate value of not less that 120% of all amounts payable under such note
from time to time, which recurring interest lien shall be subordinated only with
respect to payments and priority to any lien(s) granted to any of the
Corporation's lending financial institutions, incurred in accordance with these
designations.
(v) RETIREMENT OF SHARES. Shares of Series B
Preferred Stock that have been redeemed, purchased or otherwise acquired by the
Corporation shall be retired and may not be reissued.
(vi) SUBORDINATION OF SERIES B REDEMPTION PRICE. If,
at the time the Series B Redemption Price is payable to the holders of the
Series B Preferred Stock, the Series A Redemption Price is also payable to the
holders of the Series A Preferred Stock or the Series A Preferred Stock has been
designated for redemption pursuant to the terms of Section B.3, no payment shall
be made to the holders of Series B Preferred Stock in respect of the Series B
Redemption Price unless and until the Series A Redemption Price shall have been
paid in full to the holders of the Series A Preferred Stock.
(vii) EFFECT OF LEGAL RESTRICTIONS ON PAYMENT. If the
Redemption Price for any such shares cannot be paid in full because the
Corporation is prohibited by law from making such payment, then those funds that
are legally available will be used to pay (ratably if necessary) accrued but
unpaid interest, then accrued but unpaid dividends, and then to redeem the
maximum possible number of shares of Series B Preferred Stock ratably among the
holders thereof determined by multiplying the total number of shares of Series B
Preferred Stock to be redeemed times a fraction, the numerator of which shall be
the total number of such shares then held by each such holder and the
denominator of which shall be the total number of such shares then outstanding.
The shares of Series B Preferred Stock not redeemed shall remain
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outstanding and be entitled to all rights and preferences provided herein;
provided, however, at any time thereafter when additional funds of the
Corporation are legally available for the redemption of such shares of Series B
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available. If fewer than the total number of
shares of Series B Preferred Stock represented by any certificate are redeemed,
a new certificate representing the number of unredeemed shares will be issued to
the holder thereof without cost to such holder within three business days after
surrender of the certificate representing the redeemed shares of Series B
Preferred Stock.
(viii) RESTRICTIONS ON CORPORATE ACTIONS. If the
Corporation for any reason fails to redeem any shares of Series B Preferred
Stock in accordance with this Section C.3 on or prior to the Redemption Date
specified herein, then, notwithstanding anything to the contrary contained in
these Articles of Incorporation, the Corporation may not incur any Indebtedness
(unless the proceeds of such incurrence of Indebtedness are used to make all
overdue redemption payments in respect of the Series B Preferred Stock,
including payments of accrued but unpaid dividends or interest) without the
prior written consent of the holders of the Series B Preferred Stock voting
separately as a class; provided, however, that, subject to the restriction set
forth in Section C.1(c)(i), if such restriction is then in force, the
Corporation may incur Indebtedness without the aforesaid approval if (A) the
proceeds of such borrowing are used to pay obligations of the Corporation
arising in the ordinary course of business as they become due and payable, or
otherwise to maintain the operations of the Corporation at the then current
level and not to expand the operation of the Corporation in any material
respect, whether through expansion or enhancement of, or addition, to the
Corporation's then current activities, facilities, equipment or other capital
assets, or otherwise, (B) the Corporation provides prior written notice of such
borrowing to all holders of Series B Preferred Stock, which notice shall include
a statement of the intended use of the proceeds of such borrowing, and (C)
promptly upon request therefor, the Corporation shall provide to any holder of
Series B Preferred Stock a certificate signed by the President and Chief
Financial Officer of the Corporation certifying as to the allocation and use of
the proceeds of any such borrowing.
(ix) APPRAISAL. Within fourteen (14) days of any
written request of any holder of shares of Series B Preferred Stock from time to
time, the fair market value of the Series B Preferred Stock shall be determined
by an appraiser or appraisers shall according to the terms and procedures of
Section B.3(d)(viii), except that all references shall be to Series B Preferred
Stock and Stockholders rather than Series A Preferred Stock and Stockholders.
(x) MULTIPLE HOLDERS OF SERIES B PREFERRED STOCK. If
the Series B Preferred Stock is at any time held by more than one person or
entity, the request for
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redemption pursuant to this Section C.3 by the holders of at least fifty-one
percent (51%) of the then issued and outstanding shares of Series B Preferred
Stock shall constitute the request for redemption by the holders of all of the
then issued and outstanding shares of Series B Preferred Stock and all such
holders of Series B Preferred Stock shall redeem their shares of Series B
Preferred Stock pursuant to this Section C.3 upon the receipt of notice from
holders of at least fifty-one percent (51%) of the then issued and outstanding
shares of Series B Preferred Stock.
4. CONVERSION RIGHTS.
(A) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions. All, but not less than all,
of the issued and outstanding shares of Series B Preferred Stock shall be
convertible, without the payment of any additional consideration, into shares of
Class C Common Stock, at the option of the holders of the shares of Series B
Preferred Stock, at any time prior to 5:00 P.M. (EST) on FEBRUARY 24, 2000;
provided, however, that if such conversion occurs at any time during the 60 day
period referred to in Section 3(a)(ii) (other than as the result of the adoption
of a Business Plan as set forth in Section 1(e)(i)(A) (above) or pursuant to
Section 3(a)(iii) above, after the Corporation elects to take any action
constituting a Series B Preferred Stockholder Major Decision without the
approval of the holders of the Series B Preferred Stock, such conversion shall
not be deemed to be an "optional conversion" governed by the provisions of this
Section 4(a), but shall be governed by the provisions relating to "Automatic
Conversions" set forth in Section 4(b) below. Each such share of Series B
Preferred Stock shall be convertible at such time into one fully-paid and
nonassessable share of Class C Common Stock, subject to adjustment as provided
in Section C.4.(e) below (the "Series B Conversion Rate"). The holders of shares
of Series B Preferred Stock requesting conversion of shares into shares of Class
C Common Stock shall send a written notice to the Corporation, at the principal
office of the Corporation, requesting such conversion. The holders shall, as
soon thereafter as practicable, deliver the certificates therefor, duly endorsed
for transfer, at the principal office of the Corporation or any transfer agent
for the Series B Preferred Stock. The Corporation shall, as soon as practicable
thereafter, issue and deliver to the holders a certificate or certificates for
the number of such shares of Class C Common Stock to which the holders shall be
entitled, a check payable to the holders in the amount of any cash in lieu of
issuance of any fractional share, and the amount of any cumulative dividends and
interest accrued but unpaid (unless, and to the extent, the Corporation elects
to issue additional shares of Class C Common Stock in lieu of such dividends and
interest pursuant to Section C.4(d)) on such shares. The conversion shall be
deemed to have been made immediately prior to the close of business on the date
of receipt of the notice. The persons entitled to receive the shares of Class C
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Class C Common Stock
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on such date, and the shares of Series B Preferred Stock converted shall
immediately be canceled and may not be reissued.
(ii) Multiple Holders of Series B Preferred Stock. If
the Series B Preferred Stock is at any time held by more than one person or
entity, the request for conversion pursuant to this Section C.4 by the holders
of at least fifty-one percent (51%) of the then issued and outstanding shares of
Series B Preferred Stock shall constitute the request for conversion by the
holders of all of the then issued and outstanding shares of Series B Preferred
Stock and all such holders of Series B Preferred Stock shall convert their
shares of Series B Preferred Stock pursuant to this Section C.4 upon the receipt
of notice from holders of at least fifty-one percent (51%) of the then issued
and outstanding shares of Series B Preferred Stock.
(B) AUTOMATIC CONVERSION. If the holders of Series B
Preferred Stock have not earlier exercised their rights to require the
Corporation to redeem their shares of Series B Preferred Stock pursuant to the
provisions of Section C.3.(a) hereof, all of the outstanding shares of Series B
Preferred Stock shall, together with all other then outstanding shares of the
Corporation's preferred stock or other capital stock with rights to convert into
shares of Common Stock, be converted into fully-paid and nonassessable shares of
Class C Common Stock at the Series B Conversion Rate upon the earlier to occur
of the closing or other consummation of (i) any Qualified Public Offering, (ii)
any Non-Qualified Public Offering, (iii) any combination, consolidation or
merger where the Corporation is not the survivor, (iv) any sale, exchange or
other disposition of all or substantially all of the Corporation's assets,
whether by asset or stock sale or otherwise, or (v) any election by the holders
of Series B Preferred Stock to effect an "Optional Conversion" during any period
during which the holders of the Series B Preferred Stock may cause the
Corporation to redeem shares of their Series B Preferred Stock pursuant to the
provisions of Section 3(a)(ii) or 3(a)(iii), above. In the case of the
occurrence of any of (i) through (v) above, all shares of Series B Preferred
Stock which have not been converted into shares of Class C Common Stock, shall
be subject to mandatory redemption by the Corporation pursuant to the provisions
of Section C.3.(iii) hereof. Shares of Class C Common Stock received pursuant to
this Section 4.(b) shall be subject to the provisions of Article IV, Section A.4
in the event of a Qualified Public Offering or Non-Qualified Public Offering,
and shall thereupon immediately be reclassified as shares of Class A Common
Stock. At least twenty (20) days prior written notice of the date fixed and
place designated for conversion shall be sent by first class mail, postage
prepaid, to the address of each holder of shares of Series B Preferred Stock as
shown in the records of the Corporation. On or before the date fixed for
conversion, each holder of shares of Series B Preferred Stock shall surrender
the certificates representing such shares to the Corporation at the place
designated in such notice and shall thereafter receive certificates for the
number of full shares of Common Stock to which such holder is entitled. Until
such time as holders of certificates theretofore representing shares of
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Series B Preferred Stock have surrendered them for exchange as provided herein,
no dividends shall be paid with respect to any shares represented by such
certificates and no payment for fractional shares shall be made.
(c) NO FRACTIONAL SHARES. No fractional shares of
Common Stock shall be issued upon conversion of shares of Series B Preferred
Stock. In lieu of any fractional share, the Corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair market value
of such fractional interest as determined by the Board.
(d) PAYMENT OF DIVIDENDS AND INTEREST. At the time of
the conversion of any shares of Series B Preferred Stock, whether mandatory or
optional, and after payment in full by the Corporation of all amounts of
interest and cumulative dividends accrued but unpaid with respect to Series A
Preferred Stock, the Corporation shall pay to the holder of such shares of
Series B Preferred Stock the sum of all interest and cumulative dividends
accrued but unpaid with respect to such Series B Preferred Stock, whether or not
such dividends shall have been declared by the Corporation to the date of
conversion.
(e) ADJUSTMENTS; ANTIDILUTION. The number of shares
of Class C Common Stock issuable upon the conversion of the Series B Preferred
Stock shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(i) DIVIDENDS, SPLITS. If the Corporation declares a
dividend payable in its shares of its Common Stock, splits any of its Common
Stock or combines any of its outstanding shares of Common Stock into a smaller
number, then the number of fully-paid and nonassessable shares of Class C Common
Stock into which each share of Series B Preferred Stock may be converted shall
forthwith be adjusted by multiplying one (1) by a fraction (A) the numerator of
which shall be the total number of outstanding shares of Common Stock
immediately after such dividend, stock split or combination, and (B) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately prior to such dividend, stock split or combination.
(ii) REORGANIZATION, RECLASSIFICATION. In the event
of a reorganization, share exchange, or reclassification, other than a change in
par value, or from par value to no par value, or from no par value to par value
or a transaction described in subsection (iii) or (iv) below, each share of
Series B Preferred Stock shall, after such reorganization, share exchange or
reclassification, be convertible into the kind and number of shares of stock or
other securities or property of the Corporation to which the holder of Series B
Preferred Stock would have been entitled if the holder had held the Class C
Common Stock issuable upon conversion of its Series B Preferred Stock
immediately prior to such reorganization, share exchange, or reclassification,
or to which the Series B Preferred Stock is actually entitled, but not both.
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(iii) CONSOLIDATION, MERGER, SALE OF ASSETS. In the
event of a merger or consolidation or sale, exchange or other disposition of
all, or substantially all of the Corporation's assets, to which the Corporation
is a party, each share of Series B Preferred Stock shall, after such merger or
consolidation, be convertible into the kind and number of shares of stock and/or
other securities, cash or other property to which the holder of such share of
Series B Preferred Stock would have been entitled if the holder had held the
Class C Common Stock issuable upon conversion of its shares of Series B
Preferred Stock immediately prior to such consolidation or merger or sale of
assets, or to which the Series B Preferred Stock is actually entitled, but not
both.
(iv) CERTAIN ISSUANCES OF ADDITIONAL SHARES OF COMMON
STOCK. If the Corporation shall issue any additional shares of Common Stock --
other than securities to be issued (i) to the public pursuant to any Qualified
Public Offering or Non-Qualified Public Offering, (ii) to officers, directors,
or employees of the Corporation as part of a stock option plan, restricted stock
plan, employee stock purchase plan, employment agreement, or other employee
stock plan or agreement, implemented by the Board, provided that the aggregate
numbers of such shares issued shall not exceed ten percent (10%) of the fully
diluted capital stock of the Corporation calculated as of the time of the
issuance, (iii) to Management Stockholders and other executive employees of the
Corporation, of an amount of Class A Common Stock not in excess of the 25%
Management Stock Amount, (iv) upon conversion of any shares of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock or the
exercise of any warrant to purchase shares of Common Stock held by the holder of
Series B Preferred Stock pursuant to the terms hereof, or (v) to the LP pursuant
to Article XIV of the Practice Participation Agreement in respect of the
issuance of Medical Holdings Limited Partnership of the Limited Partner
Interests (or options to purchase such Interests) from and after the time that
more than sixty-six (66) but less than one hundred (100) physicians hold such
Limited Partner Interests (or options to acquire such Interests) directly or
indirectly through their professional corporations -- for a consideration per
share of Common Stock less than the "conversion price," as adjusted or as
previously adjusted, in effect on the date immediately prior to such issuance,
then and in such event, such conversion price shall be adjusted, concurrently
with such issuance, to a price equal to the quotient obtained by DIVIDING:
(1) an amount equal to (x) the sum of (A)
the total number of shares of Common Stock outstanding
immediately prior to such issuance or sale, plus (B) the total
number of shares of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or exchangeable
for, or evidencing the right to purchase shares of, Common
Stock outstanding immediately prior to such issuance or sale,
multiplied by (C) the conversion price in effect immediately
prior to such issuance or sale, plus (y) the consideration, if
any, received or
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deemed to be received by the Corporation upon such issuance or
sale; BY
(2) the sum of (A) the total number of
shares of Common Stock outstanding immediately after such
issuance or sale, plus (B) the total number of shares of
Common Stock issuable upon exercise of all options, warrants
and other rights convertible or exchangeable for, or
evidencing the right to purchase shares of, Common Stock
outstanding immediately after such issuance or sale.
For purposes of this Section C.4, the conversion price shall initially be $11.25
per share.
No adjustment of the conversion price shall be made under this Section
C.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance of any such warrants, options or other rights
or upon the issuance of any convertible securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to Sections 4(v) or 4(vi)
hereof.
(v) ISSUANCE OF WARRANTS, OPTIONS OR OTHER RIGHTS. If
the Corporation at any time shall issue any warrants, options or other rights to
subscribe for or purchase any additional shares of Common Stock and the price
per share for which additional shares of Common Stock may at any time thereafter
be issuable pursuant to such warrants, options or other rights shall be less
than the conversion price per share in effect immediately prior to such
issuance, then such issue shall be deemed on issuance (as of the date of issue
of such warrants, options or other rights) of the total maximum number of shares
of Common Stock issuable pursuant to such warrants, options or other rights, and
the conversion price shall thereupon be adjusted as provided in Section
C.4.(e)(iv) hereof on the basis that the aggregate consideration for the
additional shares of Common Stock issuable pursuant to such warrants, options or
other rights, plus the minimum consideration to be received by the Corporation
for the issuance of additional shares of Common Stock pursuant to such warrants,
options, or other rights shall be deemed to be the consideration received by the
Corporation for the issuance of such warrants, options, or other rights.
(vi) CERTAIN ISSUANCES OF CONVERTIBLE SECURITIES. In
case the Corporation shall issue any securities convertible into Common Stock
and the consideration per share for which such additional shares of Common Stock
may at any time thereafter be issuable pursuant to the terms of such convertible
securities shall be less than the conversion price per share in effect
immediately prior to such issuance,
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then upon such issuance of such securities the conversion price shall be
adjusted as provided in Section C.4.(e)(iv) hereof on the basis that (i) the
maximum number of additional shares of Common Stock necessary to effect the
conversion or exchange of all such convertible securities shall be deemed to
have been issued as of the date of issuance of such convertible securities, and
(ii) the aggregate consideration for such maximum number of additional shares of
Common Stock plus the minimum consideration received by the Corporation for the
issuance of such additional shares of Common Stock pursuant to the terms of such
convertible securities shall be deemed to be the consideration received by the
Corporation for the issuance of such convertible securities. No adjustment of
the conversion price shall be made under this subsection upon the issuance of
any convertible securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants,
options or other rights pursuant to Section C.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES B CONVERSION RATE. Upon
each adjustment of the conversion price under the provisions of this Section
C.4.(e), the conversion rate shall be adjusted to an amount determined by
dividing $11.25 by such adjusted conversion price. For example, if, as a result
of any of the foregoing, the conversion price were reduced to $9.00, each share
of Series B Preferred Stock would then be convertible into 1.25 shares of Class
C Common Stock.
(viii) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS
UNDER THIS SECTION. The following provisions will be applicable to the making of
adjustments in conversion prices hereinabove provided in this Section B.4.(e):
(1) COMPUTATION OF CONSIDERATION. To the extent that
any additional shares of Common Stock or any convertible securities or any
warrants, options or other rights to subscribe for or purchase any additional
shares of Common Stock or any convertible securities shall be issued for cash
consideration, the consideration received by the Corporation therefor shall be
deemed to be the amount of the cash received by the Corporation therefor, or, if
such additional shares of Common Stock or convertible securities are offered by
the Corporation for subscription, the subscription price. To the extent that
such issuance shall be for a consideration other than cash, then the amount of
such consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Corporation's Board
after receipt of a fairness opinion, appraisal or similar independent
third-party advice determined by a person or entity jointly selected by the
Series B Preferred Directors, the Series A Preferred Directors, the Series C
Preferred Stock Directors and the other directors pursuant to procedures
substantially similar to those set forth in Section 6 of the Stockholders
Agreement. The consideration for any additional shares of Common Stock issuable
pursuant to any warrants, options or other rights to subscribe for or purchase
the same shall be the consideration received by the
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Corporation for issuing such warrants, options or other rights, plus the
additional consideration payable to the Corporation upon the exercise of such
warrants, options or other rights. The consideration for any additional shares
of Common Stock issuable pursuant to the terms of any convertible securities
shall be the consideration paid or payable to the Corporation in respect of the
subscription for or purchase of such convertible securities, plus the additional
consideration, if any, payable to the Corporation upon the exercise of the right
of conversion or exchange in such convertible securities. In case of the
issuance at any time of any additional shares of Common Stock or convertible
securities in payment or satisfaction of any dividend upon any class of stock
preferred as to dividends in a fixed amount, the Corporation shall be deemed to
have received for such additional shares of Common Stock or convertible
securities a consideration equal to the amount of such dividend so paid or
satisfied.
(2) READJUSTMENT OF CONVERSION PRICE. Upon the
expiration of the right to convert or exchange any convertible securities, or
upon the expiration of any rights, options or warrants, without conversion,
exchange or exercise, the issuance of which convertible securities, rights,
options or warrants effected an adjustment in the conversion price, such
conversion price shall forthwith be readjusted and thereafter be the price which
it would have been (but reflecting any other adjustments in the conversion price
made pursuant to the provisions of this Section C.4.(e) after the issuance of
such convertible securities, rights, options or warrants) had the adjustment of
the conversion price made upon the issuance or sale of such convertible
securities or issuance of rights, options or warrants been made on the basis of
the issuance only of the number of additional shares of Common Stock actually
issued upon conversion or exchange of such convertible securities, or upon the
exercise of such rights, options or warrants, and thereupon only the number of
additional shares of Common Stock actually so issued, if any, shall be deemed to
have been issued and only the consideration actually received by the Corporation
(computed as set forth in subsection C.4.(e)(viii)(1) hereof) shall be deemed to
have been received by the Corporation. If the purchase price provided for in any
such rights, options or warrants, or the additional consideration (if any)
payable upon the conversion or exchange of any convertible securities, or the
rate at which any convertible securities are convertible into or exchangeable
for shares of Common Stock changes at any time (other than under or by reason of
provisions designed to protect against dilution), the conversion price in effect
at the time of the change shall be adjusted to the conversion price that would
have been in effect at such time had such rights, options, warrants or
convertible securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
(3) OTHER ACTION AFFECTING COMMON STOCK. If the
Corporation shall take any action affecting the outstanding number of shares of
Common Stock, other than an action described in any of the foregoing subsections
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4(e)(i) to (vii) hereof, inclusive, which in the opinion of the Corporation's
Board would have a materially adverse effect upon the rights of the holders of
the Series B Preferred Stock, the conversion price shall be adjusted in such
manner and at such time as the Board may determine to be equitable in the
circumstances.
(ix) NOTICES OF ADJUSTMENTS. Whenever the conversion
rate and conversion price is adjusted as herein provided, an officer of the
Corporation shall compute the adjusted conversion rate and conversion price in
accordance with the foregoing provisions and shall prepare a written instrument
setting forth such adjusted conversion rate and conversion price and showing in
detail the facts upon which such adjustment is based, and such written
instrument shall promptly be delivered to the record holders of the Series B
Preferred Stock, who shall approve such conversion rates and prices within 30
days of receipt. If holders of Series B Preferred Stock do not object in writing
during such 30 day period, they shall be deemed to have approved such conversion
rates and prices for all purposes hereof.
(f)RESERVATION OF SHARES. The Board shall at all
times reserve and keep available, out of its authorized but unissued shares of
Class C Common Stock, solely for the purpose of effecting the conversion of the
shares of Series B Preferred Stock, the full number of shares of Class C Common
Stock deliverable by the Corporation upon the conversion of all shares of Series
B Preferred Stock from time to time outstanding and otherwise issuable under
rights granted from the Corporation then existing.
(g)NO IMPLIED MODIFICATION OF TERMS. The provisions
of this Section C.4. shall not give, or be deemed to give, the Corporation the
power or authority to issue any shares of its capital stock or other securities
or to take any other action that it is expressly prohibited from issuing by
another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, the holders
of shares of the Series B Preferred Stock shall be entitled to receive out of
the assets of the Corporation available for distribution to stockholders, before
any distribution or payment shall be made in respect of the holders of shares of
Common Stock or any other class or series of stock ranking junior to the Series
B Preferred Stock, a liquidating distribution in an amount equal to the greater
of (i) the sum of the "fair market value" per share of Series B Preferred Stock,
which shall include an amount per share equal to all cumulative dividends and
interest accrued but unpaid thereon, whether or not such dividends and interest
shall have been declared by the Corporation, to the date fixed for such
distribution or payment; or (ii) the sum of the original purchase price per
share of Series B Preferred Stock plus an amount equal to all cumulative
dividends and interest
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accrued but unpaid thereon to the date fixed for such distribution or payment;
provided, however, in either such event the amount of cash payable by the
Corporation shall not exceed the amount of cash paid to the Corporation by all
holders of such shares with respect to the purchase of such shares, including
the payment of any interest with respect thereto, through and including the date
of liquidation; and provided further, however, that no liquidating distribution
shall be paid in respect of Series B Preferred Stock unless and until all
amounts due to holders of Series A Preferred Stock as a liquidating distribution
pursuant to Section B.5(a) shall have been fully paid. The holders of shares of
Series B Preferred Stock shall not be entitled to receive any additional
distributive amounts upon such liquidation, dissolution or winding up of the
affairs of the Corporation resulting in any distribution of assets to
stockholders.
(b) If, upon any such liquidation, dissolution or
winding up of the affairs of the Corporation, the assets of the Corporation to
stockholders shall be insufficient to permit the payment in full to the holders
of Series B Preferred Stock of the amounts to which they are entitled, then all
of such available assets shall be distributed to the holders of shares of Series
B Preferred Stock ratably in proportion to the liquidation payment otherwise due
under Section C.5.(a) to each such holder and no amounts shall be distributed in
respect of any other share of capital stock of the Corporation other than Series
A Preferred Stock until all amounts distributable to holders of Series B
Preferred Stock have been distributed.
(c) The purchase or redemption by the Corporation of
stock of any class, in any manner permitted by law, shall not for the purpose of
this Section C.5. be regarded as a liquidation, dissolution or winding up of the
Corporation. Neither the consolidation nor merger of the Corporation with or
into any other corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for the purpose of
this Section C.5.
(d) At least thirty (30) days prior written notice of
any such liquidation, dissolution or winding up of the affairs of the
Corporation stating a payment date, the amount of the liquidation payments and
the place where said liquidation payments shall be payable, shall be sent by
first class mail, postage prepaid, to each holder of Series B Preferred Stock at
his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of Non-Compliance" shall mean,
with respect to the Corporation, the occurrence of any of the events,
occurrences or circumstances listed below; provided, however, that any such
event, occurrence or circumstance shall constitute "Non-Compliance" if, and only
if, (i) in the case of any event, occurrence or circumstance involving the
non-payment of moneys (other than dividend and accrued
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interest payments due and payable to the holders of Series B Preferred Stock),
within thirty (30) calendar days following written notice of such non-payment,
such moneys have not been paid by or on behalf of the Corporation; and (ii) in
the case of any event, occurrence or circumstance not involving the non-payment
of moneys, substantial efforts have not been commenced by or on behalf of the
Corporation to cure such event, occurrence, or circumstance within a reasonable
time after notice thereof (but in no event later than 30 days), and having been
so commenced, there is a failure within a reasonable time to prosecute to
completion with diligence and continuity the curing of such event, occurrence or
circumstances, or a period of more than 90 days has occurred without such cure
being completed to the satisfaction of the holders of the Series B Preferred
Stockholders; provided, further, however, that, for purposes of (i) and (ii)
above the occurrence of any of the events, occurrences or circumstances
described in subparagraphs (5), (6) (7), (8), (9) or (10), below shall
constitute Non-Compliance immediately upon its occurrence or upon the happening
of such event or circumstances, without any requirement of notice or passage of
time except as specifically set forth in such item:
(1) any failure of the Corporation to make any
payment required to be made by it to the holders of Series B Preferred Stock
hereunder when due;
(2) any material default by the Corporation in the
payment of any other material obligation of the Corporation to any holder of
Series B Preferred Stock; including specifically but without limitation payment
obligations pursuant to any contract, agreement or other business transaction
entered into between the Corporation and any holder of Series B Preferred Stock
in the ordinary course of the Business of the Corporation.
(3) the Corporation otherwise breaches or otherwise
fails to perform or observe in any material respect any material covenant or
agreement set forth herein or in the Registration Rights Agreement between the
Corporation and the initial holders of the Series B Preferred Stock dated on or
about November 30, 1995 or in any Collateral Agreement (as defined therein).
(4) beginning on April 1, 2000, whenever dividends
accruing after such date on the Series B Preferred Stock shall be in arrears in
an aggregate amount equal to at least 4 quarterly dividends thereon;
(5) institution by the Corporation of proceedings of
any nature under any laws or regulations, whether now existing or subsequently
enacted or amended, for the relief of debtors wherein the Corporation is seeking
relief as debtor;
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(6) a general assignment by the Corporation for the
benefit of creditors;
(7) the institution by the Corporation of a case or
other proceeding under any section or chapter of the Federal Bankruptcy Code as
now existing or hereafter amended or becoming effective;
(8) the institution against the Corporation of a case
or other proceeding under any section or chapter of the Federal Bankruptcy Code
as now existing or hereafter amended or becoming effective, which proceeding is
not dismissed, stayed or discharged within a period of ninety (90) calendar days
after the filing thereto;
(9) the appointment of a receiving, custodian,
trustee or like officer to take possession of the assets of the Corporation, if
the tendency of said receivership would reasonably tend to have a materially
adverse effect upon the performance by the Corporation of its obligations
hereunder, which receivership imposition;
(10) admission by the Corporation in writing of its
inability to pay its debts as they mature or the Corporation is adjudicated as
insolvent;
(11) attachment, execution or other judicial seizure
of all or any substantial part of the Corporation's assets, such attachment,
execution or seizure in any case remaining undismissed or undischarged for a
period of fifteen (15) calendar days after the levy thereof; provided, however,
that said attachment, execution or seizure shall not constitute an Event of
Non-Compliance hereunder if the Corporation posts a bond sufficient in amount to
satisfy or secure the payment of such claim or judgment within sixty (60)
calendar days after the levy thereof and the Corporation's assets are thereby
released from the lien of such attachment;
(12) one or more judgments or decrees is entered
against the Corporation or any of its Subsidiaries involving in the aggregate a
liability (to the extent not paid or covered by current insurance) of the
greater of (A) $100,000 with respect to 1995; $200,000 with respect to 1996;
$300,000 with respect to 1997; $400,000 with respect to 1998; and $500,000 with
respect to each year thereafter or (B) ten percent (10%) of the net operating
earnings of the Corporation for the immediately preceding fiscal year, as
calculated by the independent certified public accountants employed by the
Corporation, and all such judgments or decrees have not been vacated,
discharged, stayed or bonded pending appeal within 60 days from the entry
thereof;
(13) defaults shall have occurred under any
agreements, indentures, or instruments under which the Corporation then has any
outstanding
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Indebtedness in excess of the greater of (A) $100,000 with respect to 1995;
$200,000 with respect to 1996; $300,000 with respect to 1997; $400,000 with
respect to 1998; and $500,000 with respect to each year thereafter or (B) ten
percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation in the aggregate and if not
already matured at its final maturity in accordance with its terms, such
Indebtedness shall have been accelerated; and/or
(14) any holder of Indebtedness of the Corporation
equal to the greater of (A) $100,000 with respect to 1995; $200,000 with respect
to 1996; $300,000 with respect to 1997; $400,000 with respect to 1998; and
$500,000 with respect to each year thereafter or (B) or ten percent (10%) of the
net operating earnings of the Corporation for the immediately preceding fiscal
year, as calculated by the independent certified public accountants employed by
the Corporation, after a default under such Indebtedness shall commence
proceedings, or take any action (including by way of set-off) to retain in
satisfaction of such Indebtedness or to collect, seize, dispose of, or apply in
satisfaction of such Indebtedness, assets of the Corporation having a fair
market value in excess of the greater of (A) $100,000 with respect to 1995;
$200,000 with respect to 1996; $300,000 with respect to 1997; $400,000 with
respect to 1998; and $500,000 with respect to each year thereafter or (B) ten
percent (10%) of the net operating earnings of the Corporation for the
immediately preceding fiscal year, as calculated by the independent certified
public accountants employed by the Corporation, individually or in the aggregate
(including funds on deposit or held pursuant to lock-box and other similar
arrangements).
D. SERIES C PREFERRED STOCK.
1. VOTING RIGHTS.
(a) General Provisions. Holders of Series C Preferred
Stock shall be entitled to notice of each meeting of all of the Corporation's
stockholders, but shall not be entitled to notice of special or other meetings
of any class of Common Stock or of Series A Preferred Stock or Series B
Preferred Stock. The holders of shares of Series C Preferred Stock shall vote
with the holders of shares of Common Stock and Series A Preferred Stock and
Series B Preferred Stock on all matters submitted to a vote of stockholders and
not as a separate series or class, except as otherwise provided herein. Except
as otherwise provided herein, on all matters to be voted on by the Corporation's
stockholders, every holder of Series C Preferred Stock shall be entitled to
cast, in person or by proxy, that number of votes equal to the full number of
shares of Class C Common Stock into which such holder's Series C Preferred Stock
is then convertible.
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(b) Series C Preferred Stock Directors. The holders
of shares of Series C Preferred Stock, voting as a single class, shall be
entitled to elect one (1) director of the Corporation until the Corporation's
1998 annual meeting of shareholders, and such director shall, under the
Corporation's By-laws, be entitled to serve on the Executive Committee of the
Corporation's Board of Directors until such time as there is a Qualified Public
Offering. At and after the Corporation's 1998 annual meeting of shareholders,
the holders of the Series C Preferred Stock, voting as a class, shall be
entitled to elect a total of two (2) Directors of the Corporation (such
individual director, or two directors, being referred to as the "Series C
Preferred Stock Directors") and one of such Directors shall, under the
Corporation's Bylaws, be entitled to serve on the Executive Committee of the
Corporation's Board of Directors until the occurrence of a Qualified Public
Offering. Where the holders of Series C Preferred Stock vote as a class, the
affirmative vote of a majority of the shares of Series C Preferred Stock
represented in person or by proxy at a meeting at which a quorum of Series C
Preferred Stock is present shall be sufficient to approve any matter with
respect to which said holders are entitled to vote; provided, however, that the
affirmative vote of a plurality of all votes cast in person or by proxy by the
holders of Series C Preferred Stock shall be sufficient to elect a Series C
Preferred Stock Director. The holders of Series C Preferred Stock, at any annual
meeting or upon a call of a special meeting of holders of Series C Preferred
Stock by holders of not less than twenty-five percent (25%) of the shares of
Series C Preferred Stock then outstanding, may remove any Series C Preferred
Stock Director at any time and from time to time, voting as a single class, by
the affirmative vote of eighty percent (80%) of all votes entitled to be cast
for the election of a Series C Preferred Stock Director, and may elect a
successor to fill any resulting vacancies for the remainder of the term of such
Series C Preferred Stock Director. If any Series C Preferred Stock Director
shall cease to be a director for any reason (including death, resignation,
removal or any other cause), the vacancy shall be filled by a vote of the
remaining Series C Preferred Stock Director or, if no Series C Preferred Stock
Director remains, by a vote of the holders of Series C Preferred Stock (unless,
with respect to removal, the holders of Series C Preferred Stock have elected a
successor Series C Preferred Stock Director pursuant to the provisions hereof).
If there is no such remaining director, then upon a call of a special meeting of
holders of Series C Preferred Stock, by any such holder, the vacancy shall be
filled by the vote of the holders of Series C Preferred Stock, voting as a
single class.
(c) Actions Requiring Votes of the Series C Preferred
Stock Director or Stockholder. Without the affirmative vote of each of the
Series C Preferred Stock Directors (or the sole Series C Preferred Stock
Director, when applicable) or the holders of Series C Preferred Stock, the
Corporation shall not:
(i) incur or permit any of its Subsidiaries (as
defined in Section B.1(d)(v)) to incur any Indebtedness (as defined in Section
B.1(d)(i)) as a result of which the outstanding Indebtedness of the Corporation
would on a consolidated
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basis exceed One Million Dollars ($1,000,000) in the aggregate; other than (A)
Indebtedness that is subordinated in right of dividends, redemption and
liquidation to the Series C Preferred Stock and/or (B) Indebtedness contemplated
in the Corporation's Operating Plan (the "Operating Plan") included in Section
3.6(b) of the Disclosure Schedule attached to the Stock Purchase Agreement dated
as of September 4, 1996 by and between the Company and the Series C Preferred
Stockholder (the "Stock Purchase Agreement") and attached thereto, as reduced by
the amount of the Series C Preferred Stockholder's investment in the
Corporation, which reduction shall be in an amount up to Twenty Million Dollars
($20,000,000); or
(ii) issue any shares of its capital stock with
liquidation, redemption or dividend rights senior to (or PARI PASSU with) the
liquidation, redemption or dividend rights of the Series C Preferred Stock; or
(iii) effect any amendment to these Amended and
Restated Articles of Incorporation or to the By-Laws of the Corporation that
adversely affects the holders of the Series C Preferred Stock or the Class C
Common Stock; or
(iv) pay any dividend with respect to the Series A
Preferred Stock or the Series B Preferred Stock prior to September 1, 1998
unless paid in connection with a redemption; or
(v) obligate the Corporation to do any of the
foregoing.
For purposes of this Section D.1(c), the holders of the Series C Preferred Stock
may take action to enforce their rights under this Section D.1(c) at a duly
called meeting of the Corporation's stockholders; provided, however, that the
exercise of such rights shall not require a meeting of the Corporation's
stockholders.
(d) Definitions. For purposes of this Section D, the
definitions set forth in Section B.1.(d) shall be applicable except that:
(i) In Section B.1(d)(i)(G)(x), the phrase "Series C
Preferred Stock" shall be substituted for "Series A Preferred Stock;"
(ii) "QUALIFIED PUBLIC OFFERING" shall mean any
public underwritten offering of the Corporation's Common Stock pursuant to an
effective registration statement filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "1933 Act")
based upon a total market capitalization of the Corporation, at the time of such
offering, of at least 100 Million Dollars ($100,000,000), from which the Company
receives net proceeds of not less than Twenty-Five Million Dollars
($25,000,000).
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(e) Method of Approval. Whenever any action described
herein requires the action of holders of Series C Preferred Stock, such action
shall be deemed to have occurred upon the approval of holders of a majority of
the then issued and outstanding shares of Series C Preferred Stock at a duly
convened meeting of such stockholders, or by their written consent (without
necessity for a meeting), and the Corporation, in undertaking any action with
respect to such holders, shall be entitled to rely upon a certificate signed by
such holders to that effect.
2. DIVIDENDS.
(a) Accrual of Dividends. Subject to the provisions
of Sections 2(b) and 2(c) below, cash dividends shall accrue on shares of Series
C Preferred Stock issued pursuant to the Stock Purchase Agreement at the rate of
One Dollar and Forty Cents ($1.40) per share per annum and on shares of Series C
Preferred Stock issued pursuant to the Option Agreement at the rate of One
Dollar and Sixty Cents ($1.60) per share per annum, beginning on the date of
issuance of such shares (whether or not earned or declared or payment is legally
available therefor) and shall accrue interest at the rate of 8% (based upon a
365-day year) compounded quarterly on all such unpaid dividend amounts.
(b) Payment of Dividends. Unless canceled pursuant to
the provisions of Section 2(c) below, dividends and interest accrued on or with
respect to accrual dates shall be payable (either as part of a Series C
Redemption Price (as defined below) or liquidation payment, or otherwise) only
after all dividends and interest accrued on or with respect to the Series A
Preferred Stock and Series B Preferred Stock have been fully paid and only upon
(i) the liquidation of the Corporation as herein provided, or (ii) the
redemption or conversion of such shares of Series C Preferred Stock, and if not
paid upon liquidation, redemption or conversion, the amount of all such accrued
dividends and interest payments shall become an unsecured obligation of the
Corporation, bearing interest at the per annum rate of 100 basis points over The
Wall Street Journal Prime Rate as of the last business day prior to such
liquidation, redemption or conversion and such interest shall be payable on the
first day of each month of January, April, July and October if, at the time of
payment (i) all dividends and interest accrued on or declared with respect to
the Series A Preferred Stock and the Series B Preferred Stock have been fully
paid, and (ii) funds for the full payment of such quarterly dividend on all
shares of Series C Preferred Stock then outstanding are legally available
therefor under the laws of the State of Maryland as then in effect.
(c) Cancellation of Accrued Dividends. All accrued
dividends and unpaid interest shall be canceled and no longer be payable in the
event the Company consummates a Qualified Public Offering on or before August
30, 1998 at a price per share of not less than the weighted average price paid
or to be paid by the Series C Preferred Stockholder for all shares of Series C
Preferred Stock then
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outstanding or subject to the Option, plus all accrued but unpaid dividends and
interest thereon.
(d) Reduction of Capital. If at any time when a
dividend on shares of Series C Preferred Stock would otherwise be payable (i)
funds for the full payment of such dividend are not then legally available
therefor under the laws of the State of Maryland as then in effect as applied to
the then effective capitalization of the Corporation, and (ii) funds for the
payment of such dividend would be legally available if the stated capital
accounts of the Corporation were reduced or capital surplus was revalued, then,
in such event, the Board shall reduce the stated capital at least to the extent
necessary to declare and pay such dividend or cause a revaluation of capital
surplus if such reduction of capital or valuation of surplus would be
permissible under the laws of the State of Maryland as then in effect and unless
the exercise of the Board's fiduciary duty prevents such reduction.
(e) Limitation on other Dividends; Payments. So long
as any shares of Series C Preferred Stock remain outstanding, (i) no dividends
shall be declared or paid upon, nor shall any dividend or other distribution be
made with respect to, any shares of any other class or series of stock or equity
interest of the Corporation or any Subsidiary, other than the Series A Preferred
Stock or Series B Preferred Stock, without the consent of each of the Series C
Preferred Stock Directors (or the sole Series C Preferred Stock Director, when
applicable), and (ii) no shares of any class of stock or equity interest of the
Corporation or any Subsidiary other than the shares of Series C Preferred Stock,
Series B Preferred Stock and Series A Preferred Stock shall be redeemed,
retired, purchased or otherwise acquired by the Corporation, except purchases of
the Corporation's interests in a Subsidiary at the time of its organization.
Notwithstanding the foregoing, the Corporation may (i) effect Permitted
Redemptions pursuant to Section A.5; and (ii) may redeem shares of capital stock
of or equity interests in any wholly-owned Subsidiary.
3. REDEMPTION.
(A) OPTIONAL REDEMPTION BY HOLDERS. If, without the
approval of the Series C Preferred Stock Directors, the Corporation elects to
consummate either (1) an initial underwritten public offering of the
Corporation's equity securities, (2) a merger, consolidation or similar
combination transaction in which the Company is not the survivor, or (3) a sale,
transfer or other disposition by the Corporation of all or substantially all of
the Corporation's assets, whether by asset or stock sale or otherwise, at a
price per share equal to or less than the weighted average price paid or to be
paid by the Series C Preferred Stockholder for all shares of Series C Preferred
Stock then outstanding or subject to the Option, plus all accrued but unpaid
dividends and interest thereon, then the Corporation shall give notice of such
election to each holder of Series C Preferred Stock at least 30 (30) days prior
to the date such action is
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to be effective, and the holders of Series C Preferred Stock shall be entitled,
by delivery of a written notice to the Corporation at the principal office of
the Corporation not less than twenty-one (21) days prior to the date such action
is to be effective, to request the Corporation to redeem, and the Corporation
shall redeem out of any funds legally available therefor, all (but not less than
all) of the then issued and outstanding shares of Series C Preferred Stock then
held by the holders requesting redemption, at an amount per share of Series C
Preferred Stock outstanding equal to the greater of (A) the then fair market
value of such share (including, for purposes of calculating such fair market
value, the sum of all accumulated and unpaid interest and dividends on such
share of Series C Preferred Stock, whether or not such dividends have been
declared by the Corporation to the date such share is actually redeemed) or (B)
the weighted average price paid by the Series C Preferred Stockholder for each
share of Series C Preferred Stock then outstanding, plus all accrued but unpaid
dividends and interest thereon, whether or not such dividends have been declared
by the Corporation to the date such share is actually redeemed. To the extent
that net cash proceeds are received by the Corporation as the result of the
taking of such action, (i) the Corporation shall pay any redemption price in
cash to the holders of Series C Preferred Stock, such cash to be paid pro rata
among the holders of Series C Preferred Stock requesting such redemption (with
such redemption being a condition precedent to the Corporation's receipt of such
net proceeds) upon the occurrence of such action (a "Series C Redemption Date").
To the extent that such net cash proceeds received by the Corporation as a
result of taking such action are insufficient to enable the Corporation to make
full payment in cash, the Corporation may pay the balance due with respect to
the redemption of such shares within 180 days of such request.
(B) MANDATORY REDEMPTION BY THE CORPORATION. Upon the
occurrence of any Event of Non-Compliance (as defined in Section D.6), the
Corporation shall redeem all, but not less than all, of the shares of Series C
Preferred Stock then held by each holder at an amount per share of Series C
Preferred Stock outstanding equal to the greater of (A) the then fair market
value of such share (including, for purposes of calculating such fair market
value, the sum of all accumulated and unpaid interest and dividends on such
share of Series C Preferred Stock, whether or not such dividends have been
declared by the Corporation to the date such share is actually redeemed) or (B)
the weighted average price paid by the Series C Preferred Stockholder for each
share of Series C Preferred Stock then outstanding, plus all accrued but unpaid
dividends and interest thereon, within ten (10) business days after the
occurrence of such Non-Compliance. Any such redemption shall not be in lieu of
or in any way limit any other rights which such holders may have (at law or in
equity) in connection with the event giving rise to their right of redemption.
(C) GENERAL PROVISIONS FOR REDEMPTIONS.
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(i) Series C REDEMPTION PRICE. Each amount payable by
the Corporation pursuant to Section D.3 hereof is referred to as the "Series C
Redemption Price".
(ii) EFFECT OF REDEMPTION. Provision for payment of
the Series C Redemption Price for shares of Series C Preferred Stock having been
made by the Corporation, and for so long as there shall be no default in the
payment of deferred portions of the Series C Redemption Price, then (A) the
shares of Series C Preferred Stock designated for redemption in any notice shall
not be entitled to any dividends accruing after the specified Redemption Date,
and (B) on such Redemption Date all rights of the respective holders of such
shares, as stockholders of the Corporation by reason of the ownership of such
shares of Series C Preferred Stock, shall cease, except the right to receive the
Redemption Price upon presentation and surrender of the respective certificates
representing such shares.
(iii) RETIREMENT OF SHARES. Shares of Series C
Preferred Stock that have been redeemed, purchased or otherwise acquired by the
Corporation shall be retired and may not be reissued.
(iv) SUBORDINATION OF SERIES C REDEMPTION PRICE. If,
at the time the Series C Redemption Price is payable to the holders of the
Series C Preferred Stock, the Series A Redemption Price and/or Series B
Redemption Price is also payable to the holders of the Series A Preferred Stock
or Series B Preferred Stock or the Series A Preferred Stock or Series B
Preferred Stock has been designated for redemption pursuant to the terms hereof,
no payment shall be made to the holders of Series C Preferred Stock in respect
of the Series C Redemption Price unless and until the Series A Redemption Price
and Series B Redemption Price shall have been paid in full to the holders of the
Series A Preferred Stock and Series B Preferred Stock.
(v) EFFECT OF LEGAL RESTRICTIONS ON PAYMENT. If the
Redemption Price for any such shares cannot be paid in full because the
Corporation is prohibited by law from making such payment, then those funds that
are legally available will be used to pay (ratably if necessary) accrued but
unpaid interest, then accrued but unpaid dividends, and then to redeem the
maximum possible number of shares of Series C Preferred Stock ratably among the
holders thereof determined by multiplying the total number of shares of Series C
Preferred Stock to be redeemed times a fraction, the numerator of which shall be
the total number of such shares then held by each such holder and the
denominator of which shall be the total number of such shares then outstanding.
The shares of Series C Preferred Stock not redeemed shall remain outstanding and
be entitled to all rights and preferences provided herein; provided, however, at
any time thereafter when additional funds of the Corporation are legally
available for the redemption of such shares of Series C Preferred Stock, such
funds will be used, at the end of the next succeeding fiscal quarter, to redeem
the balance of such shares, or such portion thereof for which funds are then
legally available. If fewer
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than the total number of shares of Series C Preferred Stock represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed shares will be issued to the holder thereof without cost to such
holder within three business days after surrender of the certificate
representing the redeemed shares of Series C Preferred Stock.
(vi) RESTRICTIONS ON CORPORATE ACTIONS. If the
Corporation for any reason fails to redeem any shares of Series C Preferred
Stock in accordance with this Section D.3 on or prior to the Redemption Date
specified herein, then, notwithstanding anything to the contrary contained in
these Articles of Incorporation, the Corporation may not incur any Indebtedness
(unless the proceeds of such incurrence of Indebtedness are used to make all
overdue redemption payments in respect of the Series C Preferred Stock,
including payments of accrued but unpaid dividends or interest) without the
prior written consent of the holders of the Series C Preferred Stock voting
separately as a class; provided, however, that, subject to the restriction set
forth in Section D.1(c)(i), the Corporation may incur Indebtedness without the
aforesaid approval if (A) the proceeds of such borrowing are used to pay
obligations of the Corporation arising in the ordinary course of business as
they become due and payable, or otherwise to maintain the operations of the
Corporation at the then current level and not to expand the operation of the
Corporation in any material respect, whether through expansion or enhancement
of, or addition, to the Corporation's then current activities, facilities,
equipment or other capital assets, or otherwise, (B) the Corporation provides
prior written notice of such borrowing to all holders of Series C Preferred
Stock, which notice shall include a statement of the intended use of the
proceeds of such borrowing, and (C) promptly upon request therefor, the
Corporation shall provide to any holder of Series C Preferred Stock a
certificate signed by the President and Chief Financial Officer of the
Corporation certifying as to the allocation and use of the proceeds of any such
borrowing.
(vii) MULTIPLE HOLDERS OF SERIES C PREFERRED STOCK.
If the Series C Preferred Stock is at any time held by more than one person or
entity, the request for redemption pursuant to this Section D.3 by the holders
of at least fifty-one percent (51%) of the then issued and outstanding shares of
Series C Preferred Stock shall constitute the request for redemption by the
holders of all of the then issued and outstanding shares of Series C Preferred
Stock and all such holders of Series C Preferred Stock shall redeem their shares
of Series C Preferred Stock pursuant to this Section D.3 upon the receipt of
notice from holders of at least fifty-one percent (51%) of the then issued and
outstanding shares of Series C Preferred Stock.
(viii) APPRAISAL. Within fourteen (14) days of any
written request of any holder of shares of Series C Preferred Stock from time to
time, the fair market value of the Series C Preferred Stock shall be determined
by an appraiser or appraisers according to the terms and procedures of Section
B.3(d)(viii), except that all
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references shall be to Series C Preferred Stock and Stockholders rather than
Series A Preferred Stock and Stockholders.
4. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION BY HOLDER.
(i) General Provisions. All, but not less than all,
of the issued and outstanding shares of Series C Preferred Stock shall be
convertible, without the payment of any additional consideration, into shares of
Class C Common Stock, at the option of the holders of the shares of Series C
Preferred Stock, at any time. Each such share of Series C Preferred Stock shall
be convertible at such time into one fully-paid and nonassessable share of Class
C Common Stock, subject to adjustment as provided in Section D.4.(e) below (the
"Series C Conversion Rate"). The holders of shares of Series C Preferred Stock
requesting conversion of shares into shares of Class C Common Stock shall send a
written notice to the Corporation, at the principal office of the Corporation,
requesting such conversion. The holders shall, as soon thereafter as
practicable, deliver the certificates therefor, duly endorsed for transfer, at
the principal office of the Corporation or any transfer agent for the Series C
Preferred Stock. The Corporation shall, as soon as practicable thereafter, issue
and deliver to the holders a certificate or certificates for the number of such
shares of Class C Common Stock to which the holders shall be entitled, a check
payable to the holders in the amount of any cash in lieu of issuance of any
fractional share, and the amount of any cumulative dividends and interest
accrued but unpaid on such shares (unless, and to the extent, the Corporation is
entitled to cancel accrued dividends as herein provided). The conversion shall
be deemed to have been made immediately prior to the close of business on the
date of receipt of the notice. The persons entitled to receive the shares of
Class C Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Class C Common Stock
on such date, and the shares of Series C Preferred Stock converted shall
immediately be canceled and may not be reissued.
(ii) Multiple Holders of Series C Preferred Stock. If
the Series C Preferred Stock is at any time held by more than one person or
entity, the request for conversion pursuant to this Section D.4 by the holders
of at least fifty-one percent (51%) of the then issued and outstanding shares of
Series C Preferred Stock shall constitute the request for conversion by the
holders of all of the then issued and outstanding shares of Series C Preferred
Stock and all such holders of Series C Preferred Stock shall convert their
shares of Series C Preferred Stock pursuant to this Section D.4 upon the receipt
of notice from holders of at least fifty-one percent (51%) of the then issued
and outstanding shares of Series C Preferred Stock.
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(b) AUTOMATIC CONVERSION. If the holders of Series C
Preferred Stock have not earlier exercised their rights to require the
Corporation to redeem their shares of Series C Preferred Stock pursuant to the
provisions of Section D.3.(a), all of the outstanding shares of Series C
Preferred Stock shall, together with all other then outstanding shares of the
Corporation's preferred stock or other capital stock with rights to convert into
shares of Common Stock, be converted into fully-paid and nonassessable shares of
Class C Common Stock at the Series C Conversion Rate upon the earlier to occur
of the closing or other consummation of (i) any Qualified Public Offering, (ii)
any Non-Qualified Public Offering, (iii) any combination, consolidation or
merger where the Corporation is not the survivor, or (iv) any sale, exchange or
other disposition of all or substantially all of the Corporation's assets,
whether by asset or stock sale or otherwise. Shares of Class C Common Stock
received pursuant to this Section 4.(b) shall be subject to the provisions of
Article IV, Section A.4 in the event of a Qualified Public Offering or
Non-Qualified Public Offering, and shall thereupon immediately be reclassified
as shares of Class A Common Stock. At least twenty (20) days prior written
notice of the date fixed and place designated for conversion shall be sent by
first class mail, postage prepaid, to the address of each holder of shares of
Series C Preferred Stock as shown in the records of the Corporation. On or
before the date fixed for conversion, each holder of shares of Series C
Preferred Stock shall surrender the certificates representing such shares to the
Corporation at the place designated in such notice and shall thereafter receive
certificates for the number of full shares of Common Stock to which such holder
is entitled. Until such time as holders of certificates theretofore representing
shares of Series C Preferred Stock have surrendered them for exchange as
provided herein, no dividends shall be paid with respect to any shares
represented by such certificates and no payment for fractional shares shall be
made.
(c) NO FRACTIONAL SHARES. No fractional shares of
Common Stock shall be issued upon conversion of shares of Series C Preferred
Stock. In lieu of any fractional share, the Corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair market value
of such fractional interest as determined by the Board.
(d) PAYMENT OF DIVIDENDS AND INTEREST. At the time of
the conversion of any shares of Series C Preferred Stock, and after payment in
full by the Corporation of all amounts of interest and cumulative dividends
accrued but unpaid with respect to Series A Preferred Stock and Series B
Preferred Stock, the Corporation shall, to the extent not canceled pursuant to
Section 2(c), pay to the holder of such shares of Series C Preferred Stock the
sum of all interest and cumulative dividends accrued but unpaid and then due
with respect to such Series C Preferred Stock, whether or not such dividends
shall have been declared by the Corporation to the date of conversion.
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(e) ADJUSTMENTS; ANTIDILUTION. The number of shares
of Class C Common Stock issuable upon the conversion of the Series C Preferred
Stock shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(i) DIVIDENDS, SPLITS. If the Corporation declares a
dividend payable in its shares of its Common Stock, splits any of its Common
Stock or combines any of its outstanding shares of Common Stock into a smaller
number, then the number of fully-paid and nonassessable shares of Class C Common
Stock into which each share of Series C Preferred Stock may be converted shall
forthwith be adjusted by multiplying one (1) by a fraction (A) the numerator of
which shall be the total number of outstanding shares of Common Stock
immediately after such dividend, stock split or combination, and (B) the
denominator of which shall be the total number of outstanding shares of Common
Stock immediately prior to such dividend, stock split or combination.
(ii) REORGANIZATION, RECLASSIFICATION. In the event
of a reorganization, share exchange, or reclassification, other than a change in
par value, or from par value to no par value, or from no par value to par value
or a transaction described in subsection (iii) or (iv) below, each share of
Series C Preferred Stock shall, after such reorganization, share exchange or
reclassification, be convertible into the kind and number of shares of stock or
other securities or property of the Corporation to which the holder of Series C
Preferred Stock would have been entitled if the holder had held the Class C
Common Stock issuable upon conversion of its Series C Preferred Stock
immediately prior to such reorganization, share exchange, or reclassification,
or to which the Series C Preferred Stock is actually entitled, but not both.
(iii) CONSOLIDATION, MERGER, SALE OF ASSETS. In the
event of a merger or consolidation or sale, exchange or other disposition of
all, or substantially all of the Corporation's assets, to which the Corporation
is a party, each share of Series C Preferred Stock shall, after such merger or
consolidation, be convertible into the kind and number of shares of stock and/or
other securities, cash or other property to which the holder of such share of
Series C Preferred Stock would have been entitled if the holder had held the
Class C Common Stock issuable upon conversion of its shares of Series C
Preferred Stock immediately prior to such consolidation or merger or sale of
assets, or to which the Series C Preferred Stock is actually entitled, but not
both.
(iv) CERTAIN ISSUANCES OF ADDITIONAL SHARES OF COMMON
STOCK. If the Corporation shall issue any additional shares of Common Stock --
other than securities to be issued (i) to the public pursuant to any Qualified
Public Offering or Non-Qualified Public Offering, (ii) to officers, directors,
or employees of the Corporation as part of a stock option plan, restricted stock
plan, employee stock purchase plan, employment agreement, or other employee
stock plan or agreement, implemented by the Board, (iii) upon conversion of any
shares of the Series A Preferred Stock or Series B Preferred Stock or the
exercise of any warrant to purchase shares of Common Stock
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held by the holder of any Series A Preferred Stock or Series B Preferred Stock,
or(iv) to the LP pursuant to Article XIV of the Practice Participation Agreement
in respect of the issuance of Medical Holdings Limited Partnership of the
Limited Partner Interests (or options to purchase such Interests) from and after
the time that more than sixty-six (66) but less than one hundred (100)
physicians hold such Limited Partner Interests (or options to acquire such
Interests) directly or indirectly through their professional corporations, or
(v) to any physician or physician group in consideration for the acquisition of
physician practices (or other contracting arrangements) approved by the Board of
Directors -- for a consideration per share of Common Stock less than the
"conversion price," as adjusted or as previously adjusted, in effect on the date
immediately prior to such issuance, then and in such event, such conversion
price shall be adjusted, concurrently with such issuance, to a price equal to
the quotient obtained by DIVIDING:
(1) an amount equal to (x) the sum of (A)
the total number of shares of Common Stock outstanding
immediately prior to such issuance or sale, plus (B) the total
number of shares of Common Stock issuable upon exercise of all
options, warrants and other rights convertible or exchangeable
for, or evidencing the right to purchase shares of, Common
Stock outstanding immediately prior to such issuance or sale,
multiplied by (C) the conversion price in effect immediately
prior to such issuance or sale, plus (y) the consideration, if
any, received or deemed to be received by the Corporation upon
such issuance or sale; BY
(2) the sum of (A) the total number of
shares of Common Stock outstanding immediately after such
issuance or sale, plus (B) the total number of shares of
Common Stock issuable upon exercise of all options, warrants
and other rights convertible or exchangeable for, or
evidencing the right to purchase shares of, Common Stock
outstanding immediately after such issuance or sale.
For purposes of this Section D.4, the conversion price per share shall be equal
to the weighted average price paid or to be paid by the Series C Preferred
Stockholder for each share of Series C Preferred Stock then outstanding or
subject to the Option, plus all accrued but unpaid dividends and interest
thereon.
No adjustment of the conversion price shall be made under this Section
D.4.(e)(iv) upon the issuance of any additional shares of Common Stock that are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any such adjustments shall previously
have been made upon the issuance
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of any such warrants, options or other rights or upon the issuance of any
convertible securities (or upon the issuance of any warrants, options or any
rights therefor).
Notwithstanding the foregoing provisions of this Section D.4.(e)(iv) and the
provisions of Sections D.4.(e)(v) and D.4.(e)(vi), the anti-dilution protection
afforded by this Section D.4.(e)(iv) shall apply to issuances of (A) shares of
the Company's capital stock, (B) warrants, options or other rights to subscribe
for or purchase any additional shares of capital stock, or (C) securities
convertible into such stock, made to (1) founders, officers, directors and
employees of the Company in excess of the equivalent of 1,486,000 shares of
Common Stock at purchase, exercise or conversion prices less than 80% of the
fair market value of a share of Common Stock at the time of issuance and (2)
physicians in connection with acquisition transactions and other contracting
arrangements at purchase, exercise or conversion prices less than 80% of the
fair market value of a share of Common Stock at the time of issuance. For
purposes of this Section, the fair market value of a share of the Common Stock
as of September 4, 1996 shall be equal to $17.50.
(v) ISSUANCE OF WARRANTS, OPTIONS OR OTHER RIGHTS. If
the Corporation at any time shall issue any warrants, options or other rights to
subscribe for or purchase any additional shares of Common Stock and the price
per share for which additional shares of Common Stock may at any time thereafter
be issuable pursuant to such warrants, options or other rights shall be less
than the conversion price per share in effect immediately prior to such
issuance, then such issue shall be deemed an issuance (as of the date of issue
of such warrants, options or other rights) of the total maximum number of shares
of Common Stock issuable pursuant to such warrants, options or other rights, and
the conversion price shall thereupon be adjusted as provided in Section
D.4.(e)(iv) hereof on the basis that the aggregate consideration for the
additional shares of Common Stock issuable pursuant to such warrants, options or
other rights, plus the minimum consideration to be received by the Corporation
for the issuance of additional shares of Common Stock pursuant to such warrants,
options, or other rights shall be deemed to be the consideration received by the
Corporation for the issuance of such warrants, options, or other rights.
(vi) CERTAIN ISSUANCES OF CONVERTIBLE SECURITIES. In
case the Corporation shall issue any securities convertible into Common Stock
and the consideration per share for which such additional shares of Common Stock
may at any time thereafter be issuable pursuant to the terms of such convertible
securities shall be less than the conversion price per share in effect
immediately prior to such issuance, then upon such issuance of such securities
the conversion price shall be adjusted as provided in Section D.4.(e)(iv) hereof
on the basis that (i) the maximum number of additional shares of Common Stock
necessary to effect the conversion or exchange of all such convertible
securities shall be deemed to have been issued as of the date of issuance of
such convertible securities, and (ii) the aggregate consideration for such
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maximum number of additional shares of Common Stock plus the minimum
consideration received by the Corporation for the issuance of such additional
shares of Common Stock pursuant to the terms of such convertible securities
shall be deemed to be the consideration received by the Corporation for the
issuance of such convertible securities. No adjustment of the conversion price
shall be made under this subsection upon the issuance of any convertible
securities which are issued pursuant to the exercise of any warrants, options or
other subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or other
rights pursuant to Section D.4.(e)(v) hereof.
(vii) ADJUSTMENT OF SERIES C CONVERSION RATE. Upon
each adjustment of the conversion price under the provisions of this Section
D.4.(e), the conversion rate shall be adjusted to an amount determined by
dividing the conversion price then in effect by such adjusted conversion price.
(viii) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS
UNDER THIS SECTION. The following provisions will be applicable to the making of
adjustments in conversion prices hereinabove provided in this Section D.4.(e):
(1) COMPUTATION OF CONSIDERATION. To the extent that
any additional shares of Common Stock or any convertible securities or any
warrants, options or other rights to subscribe for or purchase any additional
shares of Common Stock or any convertible securities shall be issued for cash
consideration, the consideration received by the Corporation therefor shall be
deemed to be the amount of the cash received by the Corporation therefor, or, if
such additional shares of Common Stock or convertible securities are offered by
the Corporation for subscription, the subscription price. To the extent that
such issuance shall be for a consideration other than cash, then the amount of
such consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Corporation's Board
after receipt of a fairness opinion, appraisal or similar independent
third-party advice determined by a person or entity jointly selected by the
Series C Preferred Directors, the Series A Preferred Directors, the Series B
Preferred Directors and the other directors pursuant to procedures substantially
similar to those contained in Section 6 of the Stockholders Agreement. The
consideration for any additional shares of Common Stock issuable pursuant to any
warrants, options or other rights to subscribe for or purchase the same shall be
the consideration received by the Corporation for issuing such warrants, options
or other rights, plus the additional consideration payable to the Corporation
upon the exercise of such warrants, options or other rights. The consideration
for any additional shares of Common Stock issuable pursuant to the terms of any
convertible securities shall be the consideration paid or payable to the
Corporation in respect of the subscription for or purchase of such convertible
securities, plus the additional consideration, if any, payable to the
Corporation upon the exercise of the right of conversion or exchange in such
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convertible securities. In case of the issuance at any time of any additional
shares of Common Stock or convertible securities in payment or satisfaction of
any dividend upon any class of stock preferred as to dividends in a fixed
amount, the Corporation shall be deemed to have received for such additional
shares of Common Stock or convertible securities a consideration equal to the
amount of such dividend so paid or satisfied.
(2) READJUSTMENT OF CONVERSION PRICE. Upon the
expiration of the right to convert or exchange any convertible securities, or
upon the expiration of any rights, options or warrants, without conversion,
exchange or exercise, the issuance of which convertible securities, rights,
options or warrants effected an adjustment in the conversion price, such
conversion price shall forthwith be readjusted and thereafter be the price which
it would have been (but reflecting any other adjustments in the conversion price
made pursuant to the provisions of this Section D.4.(e) after the issuance of
such convertible securities, rights, options or warrants) had the adjustment of
the conversion price made upon the issuance or sale of such convertible
securities or issuance of rights, options or warrants been made on the basis of
the issuance only of the number of additional shares of Common Stock actually
issued upon conversion or exchange of such convertible securities, or upon the
exercise of such rights, options or warrants, and thereupon only the number of
additional shares of Common Stock actually so issued, if any, shall be deemed to
have been issued and only the consideration actually received by the Corporation
(computed as set forth in subsection D.4.(e)(viii)(1) hereof) shall be deemed to
have been received by the Corporation. If the purchase price provided for in any
such rights, options or warrants, or the additional consideration (if any)
payable upon the conversion or exchange of any convertible securities, or the
rate at which any convertible securities are convertible into or exchangeable
for shares of Common Stock changes at any time (other than under or by reason of
provisions designed to protect against dilution), the conversion price in effect
at the time of the change shall be adjusted to the conversion price that would
have been in effect at such time had such rights, options, warrants or
convertible securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
(3) OTHER ACTION AFFECTING COMMON STOCK. If the
Corporation shall take any action affecting the outstanding number of shares of
Common Stock, other than an action described in any of the foregoing subsections
4(e)(i) to (vii) hereof, inclusive, which in the opinion of the Corporation's
Board would have a materially adverse effect upon the rights of the holders of
the Series C Preferred Stock, the conversion price shall be adjusted in such
manner and at such time as the Board may determine to be equitable in the
circumstances.
(ix) NOTICES OF ADJUSTMENTS. Whenever the conversion
rate and conversion price is adjusted as herein provided, an officer of the
Corporation shall
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compute the adjusted conversion rate and conversion price in accordance with the
foregoing provisions and shall prepare a written instrument setting forth such
adjusted conversion rate and conversion price and showing in detail the facts
upon which such adjustment is based, and such written instrument shall promptly
be delivered to the record holders of the Series C Preferred Stock, who shall
approve such conversion rates and prices within 30 days of receipt. If holders
of Series C Preferred Stock do not object in writing during such 30 day period,
they shall be deemed to have approved such conversion rates and prices for all
purposes hereof.
(f)RESERVATION OF SHARES. The Board shall at all
times reserve and keep available, out of its authorized but unissued shares of
Class C Common Stock, solely for the purpose of effecting the conversion of the
shares of Series C Preferred Stock, the full number of shares of Class C Common
Stock deliverable by the Corporation upon the conversion of all shares of Series
C Preferred Stock from time to time outstanding and otherwise issuable under
rights granted from the Corporation then existing.
(g)NO IMPLIED MODIFICATION OF TERMS. The provisions
of this Section D.4. shall not give, or be deemed to give, the Corporation the
power or authority to issue any shares of its capital stock or other securities
or to take any other action that it is expressly prohibited from issuing by
another provision hereof.
5. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, the holders
of shares of the Series C Preferred Stock shall be entitled to receive out of
the assets of the Corporation available for distribution to stockholders, before
any distribution or payment shall be made in respect of the holders of shares of
Common Stock or any other class or series of stock ranking junior to the Series
C Preferred Stock, a liquidating distribution in an amount equal to $17.50 per
share of Series C Preferred Stock issued pursuant to the Stock Purchase
Agreement which is then outstanding and $20.00 per share of Series C Preferred
Stock issued pursuant to the Option Agreement which is then outstanding, plus
all accrued but unpaid dividends and interest thereon; provided, however, that
the amount of cash payable by the Corporation shall not exceed the amount of
cash paid to the Corporation by all holders of such shares with respect to the
purchase of such shares, including the payment of any interest with respect
thereto, through and including the date of liquidation; and provided further,
however, that no liquidating distribution shall be paid in respect of Series C
Preferred Stock unless and until all amounts due to holders of Series A
Preferred Stock and Series B Preferred Stockholders as a liquidating
distribution and to holders and guarantors of senior indebtedness of the
Corporation contemplated in the Operating Plan shall have been fully paid. The
holders of shares of Series C Preferred Stock shall not be entitled to
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receive any additional distributive amounts upon such liquidation, dissolution
or winding up of the affairs of the Corporation resulting in any distribution of
assets to stockholders.
(b) If, upon any such liquidation, dissolution or
winding up of the affairs of the Corporation, the assets of the Corporation to
stockholders shall be insufficient to permit the payment in full to the holders
of Series C Preferred Stock of the amounts to which they are entitled, then all
of such available assets shall be distributed to the holders of shares of Series
C Preferred Stock ratably in proportion to the liquidation payment otherwise due
under Section D.5.(a) to each such holder and no amounts shall be distributed in
respect of any other share of capital stock of the Corporation other than Series
A Preferred Stock and Series B Preferred Stock until all amounts distributable
to holders of Series C Preferred Stock have been distributed.
(c) The purchase or redemption by the Corporation of
stock of any class, in any manner permitted by law, shall not for the purpose of
this Section D.5. be regarded as a liquidation, dissolution or winding up of the
Corporation. Neither the consolidation nor merger of the Corporation with or
into any other corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for the purpose of
this Section D.5.
(d) At least thirty (30) days prior written notice of
any such liquidation, dissolution or winding up of the affairs of the
Corporation stating a payment date, the amount of the liquidation payments and
the place where said liquidation payments shall be payable, shall be sent by
first class mail, postage prepaid, to each holder of Series C Preferred Stock at
his address as shown on the records of the Corporation.
6. EVENTS OF NON-COMPLIANCE; NON-COMPLIANCE.
(a) DEFINITION. "Event of Non-Compliance" shall mean,
with respect to the Corporation, the occurrence of any of the events,
occurrences or circumstances listed below; provided, however, that any such
event, occurrence or circumstance shall constitute "Non-Compliance" if, and only
if, (i) in the case of any event, occurrence or circumstance involving the
non-payment of moneys (other than dividend and accrued interest payments due and
payable to the holders of Series C Preferred Stock), within thirty (30) calendar
days following written notice of such non-payment, such moneys have not been
paid by or on behalf of the Corporation; and (ii) in the case of any event,
occurrence or circumstance not involving the non-payment of moneys, substantial
efforts have not been commenced by or on behalf of the Corporation to cure such
event, occurrence, or circumstance within a reasonable time after notice thereof
(but in no event later than 30 days), and having been so commenced, there is a
failure within a reasonable time to prosecute to completion with diligence and
continuity the curing of
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such event, occurrence or circumstances, or a period of more than 90 days has
occurred without such cure being completed to the satisfaction of the holders of
the Series C Preferred Stockholders; provided, further, however, that, for
purposes of (i) and (ii) above the occurrence of any of the events, occurrences
or circumstances described in subparagraphs (4) through (9) below shall
constitute Non-Compliance immediately upon its occurrence or upon the happening
of such event or circumstances, without any requirement of notice or passage of
time except as specifically set forth in such item:
(1) any failure of the Corporation to make any
payment required to be made by it to the holders of Series C Preferred Stock
hereunder when due;
(2) any material default by the Corporation in the
payment of any other material obligation of the Corporation to any holder of
Series C Preferred Stock; including specifically but without limitation payment
obligations pursuant to any contract, agreement or other business transaction
entered into between the Corporation and any holder of Series C Preferred Stock
in the ordinary course of the Business of the Corporation.
(3) the Corporation otherwise breaches or otherwise
fails to perform or observe in any material respect any material covenant or
agreement set forth herein or in the Registration Rights Agreement dated as of
September 4, 1996 between the Corporation and the initial holders of the Series
C Preferred Stock or the Stockholders Agreement;
(4) institution by the Corporation of proceedings of
any nature under any laws or regulations, whether now existing or subsequently
enacted or amended, for the relief of debtors wherein the Corporation is seeking
relief as debtor;
(5) a general assignment by the Corporation for the
benefit of creditors;
(6) the institution by the Corporation of a case or
other proceeding under any section or chapter of the Federal Bankruptcy Code as
now existing or hereafter amended or becoming effective;
(7) the institution against the Corporation of a case
or other proceeding under any section or chapter of the Federal Bankruptcy Code
as now existing or hereafter amended or becoming effective, which proceeding is
not dismissed, stayed or discharged within a period of ninety (90) calendar days
after the filing thereto;
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(8) the appointment of a receiving, custodian,
trustee or like officer to take possession of the assets of the Corporation, if
the tendency of said receivership would reasonably tend to have a materially
adverse effect upon the performance by the Corporation of its obligations
hereunder, which receivership imposition;
(9) admission by the Corporation in writing of its
inability to pay its debts as they mature or the Corporation is adjudicated as
insolvent;
(10) attachment, execution or other judicial seizure
of all or any substantial part of the Corporation's assets, such attachment,
execution or seizure in any case remaining undismissed or undischarged for a
period of fifteen (15) calendar days after the levy thereof; provided, however,
that said attachment, execution or seizure shall not constitute an Event of
Non-Compliance hereunder if the Corporation posts a bond sufficient in amount to
satisfy or secure the payment of such claim or judgment within sixty (60)
calendar days after the levy thereof and the Corporation's assets are thereby
released from the lien of such attachment;
(11) one or more judgments or decrees is entered
against the Corporation or any of its Subsidiaries involving in the aggregate a
liability (to the extent not paid or covered by current insurance) of the
greater of $1,000,000, or (B) ten percent (10%) of the net operating earnings of
the Corporation for the immediately preceding fiscal year, as calculated by the
independent certified public accountants employed by the Corporation, and all
such judgments or decrees have not been vacated, discharged, stayed or bonded
pending appeal within 60 days from the entry thereof; or
(12) any holder of Indebtedness of the Corporation
equal to the greater of $1,000,000 or (B) or ten percent (10%) of the net
operating earnings of the Corporation for the immediately preceding fiscal year,
as calculated by the independent certified public accountants employed by the
Corporation, after a default under such Indebtedness shall commence proceedings,
or take any action (including by way of set-off) to retain in satisfaction of
such Indebtedness or to collect, seize, dispose of, or apply in satisfaction of
such Indebtedness, assets of the Corporation having a fair market value in
excess of the greater of (A) $1,000,000 or (B) ten percent (10%) of the net
operating earnings of the Corporation for the immediately preceding fiscal year,
as calculated by the independent certified public accountants employed by the
Corporation, individually or in the aggregate (including funds on deposit or
held pursuant to lock-box and other similar arrangements).
E. PREFERRED STOCK. Subject to such rights and restrictions as may be
granted to, and benefit, the Class A Common Stock, the Class B Common Stock, the
Class C Common Stock, the Series A Preferred Stock, the Series B Preferred Stock
and the Series C Preferred Stock, the Board shall have the power to classify or
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reclassify all remaining shares of Preferred Stock pursuant to the powers
granted by the provisions of Article V, Section 2 and Section 3 hereof.
ARTICLE V
BOARD OF DIRECTORS
1. NUMBER. The Corporation shall, until the 1998 annual
shareholders meeting, have eighteen (18) directors. Beginning with and following
the Corporation's 1998 annual shareholders meeting, the Corporation shall have
nineteen (19) directors. Prior to the 1998 annual shareholder's meeting five (5)
of such directors shall be Class A Common Directors, eight (8) shall be Class B
Common Directors, two (2) shall be Series A Preferred Directors, two (2) shall
be Series B Preferred Directors and one (1) shall be a Series C Preferred
Director. After the Corporation's 1998 annual shareholders meeting, five (5) of
such directors shall be Class A Common Directors, eight (8) shall be Class B
Common Directors, two (2) shall be Series A Preferred Directors, two (2) shall
be Series B Preferred Directors and two (2) shall be Series C Preferred
Directors. These numbers may not be increased or decreased except as provided
herein. The Corporation shall have (a) two (2) Converted Series A Class C Common
Directors only upon conversion of all shares of Series A Preferred Stock into
shares of Class C Common Stock as otherwise provided herein, (b) two (2)
Converted Series B Class C Common Directors only upon conversion of all shares
of Series B Preferred Stock into shares of Class C Common Stock as otherwise
provided herein and (c) one (1) Converted Series C Class C Common Director prior
to the Corporation's 1998 annual shareholders meeting and, thereafter, two (2)
Converted Series C Class C Common Directors only upon conversion of all shares
of Series C Preferred Stock into shares of Class C Common Stock as otherwise
provided herein. Upon conversion of all shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock into shares of Class C
Common Stock as otherwise provided herein, the Series A Preferred Directors, the
Series B Preferred Directors and the Series C Preferred Director or Directors
who are duly elected and qualify as of the time of such conversion shall be and
become, respectively, the Converted Series A Class C Common Directors, the
Converted Series B Class C Common Directors and the Converted Series C Class C
Common Directors, who shall serve until their successors are duly chosen and
qualify. Except as otherwise provided herein, the number of directors, and the
number of directors that may be elected by the holders of each of the Class A
Common Stock, the Class B Common Stock, the Converted Series A Class C Common
Stock, the Converted Series B Class C Common Stock, the Converted Series C Class
C Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and
the Series C Preferred Stock may be changed only by an amendment to the charter
approved by the vote of stockholders entitled to vote at least two-thirds (2/3)
of the shares of each of the Class A Common Stock, the Class B Common Stock, the
Converted Series A Class C Common Stock, the Converted Series B Class C Common
Stock, the Converted Series
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C Class C Common Stock, the Series A Preferred Stock, the Series B Preferred
Stock or the Series C Preferred Stock, as the case may be.
2. BOARD AUTHORIZATION OF STOCK ISSUANCE. Subject to
such rights and restrictions as may be granted to, and benefit, the Class A
Common Stock, Class B Common Stock, Class C Common Stock, the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock hereunder,
the Board is hereby empowered to authorize the issuance from time to time of
shares of its stock of any class or series, whether now or hereafter authorized,
and securities convertible into shares of its stock, of any class of classes,
whether now or hereafter authorized, for such consideration as the Board may
deem advisable.
3. CLASSIFICATION OF STOCK. Subject to such rights
and restrictions as may be granted to, and benefit, the Class A Common Stock,
the Class B Common Stock, the Class C Common Stock, the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock hereunder,
until such time, if any, as all Common Stock is automatically converted to Class
A Common Stock pursuant to Article IV, Section A.4 hereto, the Board shall have
the power to classify or reclassify any unissued stock (including but not
limited to authorized but unissued shares of Preferred Stock), whether now or
hereafter authorized, by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such stock. Upon any such
classification or reclassification, the Board shall cause the Corporation to
file articles supplementary with the Maryland State Department of Assessments
and Taxation, containing such provisions, if any, as may at such time be
required by the MGCL.
4. CONFLICT OF INTEREST. No contract or other
transaction between the Corporation and any other corporation, partnership,
individual or other entity and no act of the Corporation shall in any way be
affected or invalidated by the fact that any of the directors of the Corporation
are directors, principals, partners or officers of such other entity, or are
pecuniarily or otherwise interested in such contract, transaction or act;
provided that (i) the existence of such relationship or such interest shall be
disclosed to the Board or to a committee of the Board if the matter involves a
committee decision, and the contract, transaction or act shall be authorized,
approved or ratified by a majority of disinterested directors on the Board or on
such committee, as the case may be, even if the number of disinterested
directors constitutes less than a quorum, or (ii) the contract, transaction or
act shall be authorized, ratified or approved in any other manner provided by
the MGCL.
ARTICLE VI
PROVISIONS CONCERNING CERTAIN RIGHTS OF THE CORPORATION
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AND THE SHAREHOLDERS
1. RIGHT TO AMEND CHARTER. Subject to (a) the rights
granted to the holders of Series A Preferred Stock as exercised by the Series A
Preferred Directors pursuant to Article IV, Section B.1(c), and (b) the rights
granted to the holders of Series B Preferred Stock as exercised by the Series B
Preferred Directors pursuant to Article 4, Section C.1(c), and (c) the rights
granted to the holders of Series C Preferred Stock as exercised by the Series C
Preferred Directors pursuant to Article 4, Section D.1(c), the Corporation
reserves the right to make, from time to time, any amendments of its charter
which may now or hereafter be authorized by law, including any amendments which
alter the contract rights of any holder of class of outstanding stock as
expressly set forth in the charter.
2. ADDITIONAL ISSUANCES; PREEMPTIVE RIGHTS. No holder
of stock of any class shall be entitled to preemptive rights to subscribe for or
purchase or receive any part of any new or additional issue of stock of any
class of the Corporation or securities convertible into stock of any class of
the Corporation.
3. INAPPLICABILITY OF THE MARYLAND CONTROL SHARE AND
BUSINESS COMBINATION STATUTES. The Corporation elects not to be governed by
Subtitle 6 of Title 3 of the MGCL with respect to any "business combination" as
defined in such Subtitle, and any acquisition of any shares of stock of the
Corporation, including any acquisition of voting rights or other interests in
any such stock, shall be exempt from the provisions of Title 3, Subtitle 7 of
the MGCL. Accordingly, the provisions of Title 3, Subtitle 6 (Business
Combination) and Subtitle 7 (Control Share) of the MGCL shall not apply to this
Corporation.
4. CONSENT. Where the consent or approval of any
stockholder or director of the Corporation is required hereunder, such consent
or approval may be given or withheld in such stockholder's or director's sole
discretion.
ARTICLE VII
INDEMNIFICATION AND LIMITATION OF LIABILITY
1. MANDATORY INDEMNIFICATION. To the maximum extent
permitted by the MGCL, as from time to time amended, the Corporation shall
indemnify its currently acting and its former directors and officers against any
and all liabilities and expenses incurred in connection with their services in
such capacities.
2. DISCRETIONARY INDEMNIFICATION. If approved by the
Board, the Corporation may indemnify its officers, employees, agents and persons
who serve and have served, at its request as a director, officer, partner,
trustee, employee or agent of
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another corporation, partnership, joint venture or other enterprise as may be
determined by the Board.
3. ADVANCING EXPENSES PRIOR TO A DECISION. The
Corporation shall advance expenses to its directors and officers entitled to
mandatory indemnification to the maximum extent permitted by the MGCL and may in
the discretion of the Board advance expenses to officers, employees, agents and
others who may be granted indemnification.
4. OTHER PROVISIONS FOR INDEMNIFICATION. The Board
may, by resolution or agreement, make further provision for indemnification of
directors, officers, employees and agents of the Corporation.
5. LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS.
To the maximum extent that limitations on the liability of directors and
officers are permitted by the MGCL, as from time to time amended, no director or
officer of the Corporation shall have any liability to the Corporation or its
stockholders for money damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
6. EFFECT OF AMENDMENT OR REPEAL. No amendment or
repeal of this Section, or the adoption of any provision of the Corporation's
charter inconsistent with this Section, shall apply to or affect in any respect
the liability of any director or officer of the Corporation with respect to any
alleged act or omission which occurred prior to such amendment, repeal or
adoption.
SECOND: The Board of Directors of the Corporation, by unanimous
resolution filed with the minutes of proceedings of the Board at a duly called
meeting held on August 28, 1996, at which all of the Directors were present and
voted, adopted a resolution declaring that the amendments set forth in the
foregoing amendment and restatement of the charter were advisable, approved the
amendment and restatement of the charter hereinabove set forth, and directed
that it be submitted for action thereon by the stockholders.
THIRD: The stockholders of the Corporation, at a duly called meeting
held on August 28, 1996 at which all of the stockholders entitled to vote
thereon were present or represented, by unanimous resolution filed with the
records of the Corporation, approved the amendment and restatement of the
charter of the Corporation hereinabove set forth.
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FOURTH: (a) The total number of shares of all classes of stock of the
Corporation HERETOFORE authorized, and the number and par value of the shares of
each class were as follows:
Sixty-Two Million One Hundred Five
Thousand Five Hundred Fifty-Six (62,105,556) shares
of capital stock, consisting of Twenty Million Seven
Hundred Thousand (20,700,000) shares of Class A
Common Stock, having a par value of One Cent ($0.01)
per share, Ten Million (10,000,000) shares are Class
B Common Stock, having a par value of One Cent
($0.01) per share, Twenty-Nine Million Fifty
Thousand (29,050,000) shares of Class C Common
Stock, having a par value of One Cent ($0.01) per
share, One Million (1,000,000) shares of Series A
Convertible Preferred Stock, having a par value of
Five Dollars ($5.00) per share, Three Hundred
Fifty-Five Thousand Five Hundred Fifty-Six (355,556)
shares are Series B Convertible Preferred Stock,
having a par value of Eleven Dollars and Twenty-Five
Cents ($11.25) per share and One Million (1,000,000)
shares of Preferred Stock, having a par value of One
Cent ($0.01) per share.
(b) The total number of shares of all classes of stock of the
Corporation as increased, and the number and par value of the shares of each
class, are as follows:
Sixty-Three Million One Hundred Seventy
Six Thousand Nine Hundred Eighty-Four (63,176,984)
shares of capital stock, consisting of Twenty
Million Seven Hundred Thousand (20,700,000) shares
of Class A Common Stock, having par value of One
Cent ($0.01) per share, Ten Million (10,000,000)
shares of Class B Common Stock, having a par value
of One Cent ($0.01) per share, Twenty-Nine Million
Fifty Thousand (29,000,050) shares of Class C Common
Stock, having a par value of One Cent ($0.01) per
share, One Million (1,000,000) shares of Series A
Convertible Preferred Stock, having a par value of
Five Dollars ($5.00) per share, Three Hundred
Fifty-Five Thousand Five Hundred Fifty-Six (355,556)
shares of Series B Convertible Preferred Stock,
having a par value of Eleven Dollars and Twenty-Five
Cents ($11.25) per share, One Million, Seventy One
Thousand, Four Hundred and Twenty-Eight (1,071,428)
shares of Series C Convertible Preferred Stock,
having a par value of Seventeen Dollars and Fifty
Cents ($17.50) per share, and One
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Million (1,000,000) shares of Preferred
Stock, having a par value of One cent
($0.01) per share.
The aggregate par value of all shares of all classes
of stock of the Corporation heretofore authorized was Nine Million Six Hundred
Seven Thousand Five Hundred Five Dollars ($9,607,505). The aggregate par value
of all shares of all classes of stock having a par value, as amended by this
Amendment, is Twenty Eight Million Three Hundred Fifty Seven Thousand Four
Hundred and Ninety-Five Dollars ($28,357,495). This amendment increases the
aggregate par value of all shares of all classes of stock of the Corporation.
FIFTH: A description, as amended, of each class of
stock which the Corporation is authorized to issue, including the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, is set forth
in Article FIRST above.
SIXTH: The names of the directors of the Corporation
currently in office are: (a) Class A Common Directors: Scott Rifkin, M.D., Alan
Kimmel, M.D., Paul Serini, John Dwyer and Stewart Gold; (b) Class B Common
Directors: J. David Nagel, M.D., Howard Goldman, M.D., Peter LoPresti, M.D.,
Robert Graw, M.D., Mark Eig, M.D., Alexander Rocha, M.D., William Lamm, M.D. and
Robert Ancona, M.D.; (c) Series A Preferred Directors: John Prout and John
Ellis; (d) Series B Preferred Directors: Linda Dembiec and Robert Zetzter.
IN WITNESS WHEREOF, the Corporation has caused these
Articles of Amendment and Restatement to be executed in its name and on its
behalf by its President and attested by its Secretary on the 4th day of
September, 1996.
The undersigned acknowledges these Articles of
Amendment and Restatement to be the act of the Corporation, and states, under
penalties for perjury, that the matters and facts set forth herein with respect
to authorization and approval thereof are true in all material respects, to the
best of his knowledge, information and belief.
ATTEST: DOCTORS HEALTH SYSTEM, INC.
__________________________ By:___________________________
Paul A. Serini, Secretary Stewart B. Gold, President
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Exhibit 3.2(b)
BYLAWS
OF
DOCTORS HEALTH SYSTEM, INC.
ARTICLE I.
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS.
The annual meeting of the stockholders of the Corporation
shall be held on such date within the month of May as may be fixed from time to
time by the Board of Directors. Not less than ten nor more than 90 days' written
or printed notice stating the place, day and hour of each annual meeting shall
be given in the manner provided in SECTION 1 OF ARTICLE IX hereof. The business
to be transacted at the annual meetings shall include the election of directors,
consideration and action upon the reports of officers and directors, and any
other business within the power of the Corporation. All annual meetings shall be
general meetings at which any business may be considered without being specified
as a purpose in the notice unless otherwise required by law.
SECTION 2. SPECIAL MEETINGS CALLED BY CHAIRMAN OF THE BOARD, PRESIDENT OR BOARD
OF DIRECTORS.
At any time in the interval between annual meetings, special
meetings of stockholders may be called by the Chairman of the Board, or by the
President and Chief Executive Officer, or by the Board of Directors. Not less
than ten days' nor more than 90 days' written notice stating the place, day and
hour of such meeting and the matters proposed to be acted on thereat shall be
given in the manner provided in SECTION 1 OF ARTICLE IX. No business shall be
transacted at any special meeting except that specified in the notice.
SECTION 3. SPECIAL MEETING CALLED BY STOCKHOLDERS.
Upon the request in writing delivered to the Secretary by the
stockholders entitled to cast at least two-thirds of all the votes entitled to
be cast at the meeting, it shall be the duty of the Secretary to call forthwith
a special meeting of all of the stockholders. Upon the request in writing
delivered to the
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Secretary and to the holders of the Class, the holders of at least twenty-five
(25%) of the shares of any Class may call a special meeting to vote on such
matters as may properly be considered by such Class of stockholder, voting as a
Class. Such request shall state the purpose of such meeting and the matters
proposed to be acted on thereat, and no other business shall be transacted at
any such special meeting. The Secretary shall inform such stockholders of the
reasonably estimated costs of preparing and mailing the notice of the meeting,
and upon payment to the Corporation of such costs, the Secretary shall give not
less than ten nor more than 90 days' notice of the time, place and purpose of
the meeting in the manner provided in SECTION 1 OF ARTICLE IX. If, upon payment
of such costs the Secretary shall fail to issue a call for such meeting within
ten days after the receipt of such payment (unless such failure is excused by
law), then the stockholders entitled to cast two-thirds or more of the
outstanding shares entitled to vote may do so upon giving not less than ten
days' nor more than 90 days' notice of the time, place and purpose of the
meeting in the manner provided in SECTION 1 OF ARTICLE IX.
SECTION 4. PLACE OF MEETINGS.
All meetings of stockholders shall be held at the principal
office of the Corporation in the State of Maryland or at such other place within
the United States as may be fixed from time to time by the Board of Directors
and designated in the notice.
SECTION 5. QUORUM.
At any meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast two-thirds of the votes thereat shall
constitute a quorum. In the absence of a quorum, the stockholders present in
person or by proxy, by majority vote and without notice other than by
announcement, may adjourn the meeting from time to time, but not for a period
exceeding 120 days until a quorum shall attend.
SECTION 6. ADJOURNED MEETINGS.
A meeting of stockholders convened on the date for which it
was called (including one adjourned to achieve a quorum as above provided in
SECTION 5 OF THIS ARTICLE) may be adjourned from time to time without further
notice to a date not more than 120 days after the record date, and any business
may be transacted at any adjourned meeting which could have been transacted at
the meeting as originally called.
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SECTION 7. VOTING.
Holders of any Class A Common Stock then issued and
outstanding, voting as a class, shall be entitled to elect six (6) directors of
the Corporation (each a "Class A Common Director"). The affirmative vote of a
plurality of all votes cast by shares of Class A Common Stock at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Class A Common Director. Each share of Class A Common Stock may be voted
for as many individuals as there are Class A Common Directors to be elected.
Holders of any Class B Common Stock then issued and
outstanding, voting as a class, shall be entitled to elect eight (8) directors
of the Corporation (each a "Class B Common Director"). The affirmative vote of a
plurality of all votes cast by shares of Class B Common Stock at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Class B Common Director. Each share of Class B Common Stock may be voted
for as many individuals as there are Class B Common Directors to be elected.
If the holders of Series A Convertible Preferred Stock have
not converted such Series A Convertible Preferred Stock to Class C Common Stock
pursuant to Article IV, Section B.4 of the Corporation's Charter, holders of any
Series A Convertible Preferred Stock then issued and outstanding, voting as a
class, shall be entitled to elect two (2) directors of the Corporation (each a
"Series A Preferred Director"). The affirmative vote of a plurality of all votes
cast by shares of Series A Convertible Preferred Stock at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Series A Preferred Director. Each share of Series A Convertible
Preferred Stock may be voted for as many individuals as there are Series A
Preferred Directors to be elected. Holders of any Series A Convertible Preferred
Stock, then issued and outstanding, voting as a class, shall also be entitled to
vote upon and approve those matters set forth in Article IV, Section B of the
Corporation's Charter.
If the holders of Series A Convertible Preferred Stock have
converted such Series A Convertible Preferred Stock to Class C Common Stock
(such Class C Common Stock issued as a result of the conversion of Series A
Convertible Preferred Stock into Class C Common Stock is referred to hereinafter
as "Converted Series A Class C Common Stock") pursuant to Article IV, Section
B.4 of the Corporation's Charter, such holders of Converted Series A Class C
Common Stock then issued and outstanding, voting as a class, shall be entitled
to elect two (2) directors of the Corporation (each a "Converted Series A Class
C Common Director"). The affirmative vote of a plurality of all votes cast
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by shares of Converted Series A Class C Common Stock at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Converted Series A Class C Common Director. Each share of Converted
Series A Class C Common Stock may be voted for as many individuals as there are
Converted Series A Class C Common Directors to be elected.
If the holders of Series B Convertible Preferred Stock have
not converted such Series B Convertible Preferred Stock to Class C Common Stock
pursuant to Article IV, Section C.4 of the Corporation's Charter, holders of any
Series B Convertible Preferred Stock then issued and outstanding, voting as a
class, shall be entitled to elect two (2) directors of the Corporation (each a
"Series B Preferred Director"). The affirmative vote of a plurality of all votes
cast by shares of Series B Convertible Preferred Stock at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Series B Preferred Director. Each share of Series B Convertible
Preferred Stock may be voted for as many individuals as there are Series B
Preferred Directors to be elected. Holders of any Series B Convertible Preferred
Stock, then issued and outstanding, voting as a class, shall also be entitled to
vote upon and approve those matters set forth in Article IV, Section C of the
Corporation's Charter.
If the holders of Series B Convertible Preferred Stock have
converted such Series B Convertible Preferred Stock to Class C Common Stock
(such Class C Common Stock issued as a result of the conversion of Series B
Convertible Preferred Stock into Class C Common Stock is referred to hereinafter
as "Converted Series B Class C Common Stock") pursuant to Article IV, Section
C.4 of the Corporation's Charter, such holders of Converted Series B Class C
Common Stock then issued and outstanding, voting as a class, shall be entitled
to elect two (2) directors of the Corporation (each a "Converted Series B Class
C Common Director"). The affirmative vote of a plurality of all votes cast by
shares of Converted Series B Class C Common Stock at a meeting of stockholders
duly called and at which a quorum is present shall be sufficient to elect a
Converted Series B Class C Common Director. Each share of Converted Series B
Class C Common Stock may be voted for as many individuals as there are Converted
Series B Class C Common Directors to be elected.
If the holders of Series C Convertible Preferred Stock have
not converted such Series C Convertible Preferred Stock to Class C Common Stock
pursuant to Article IV, Section D.4 of the Corporation's Charter, holders of any
Series C Convertible Preferred Stock then issued and outstanding, voting as a
class, shall be entitled to elect one (1) director of the Corporation until the
annual meeting of the stockholders in May 1998. At and after the annual meeting
of the stockholders in May 1998, such holders of any Series C Convertible
Preferred Stock then issued and outstanding, voting as a class, shall
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be entitled to elect a total of two (2) directors of the Corporation (such
individual director or two directors shall be referred to as the "Series C
Preferred Directors"). The affirmative vote of a plurality of all votes cast by
shares of Series C Convertible Preferred Stock at a meeting of stockholders duly
called and at which a quorum is present shall be sufficient to elect a Series C
Preferred Director. Each share of Series C Convertible Preferred Stock may be
voted for as many individuals as there are Series C Preferred Directors to be
elected. Holders of any Series C Convertible Preferred Stock, then issued and
outstanding, voting as a class, shall also be entitled to vote upon and approve
those matters set forth in Article IV, Section D of the Corporation's Charter.
If the holders of Series C Convertible Preferred Stock have
converted such Series C Convertible Preferred Stock to Class C Common Stock
(such Class C Common Stock issued as a result of the conversion of Series C
Convertible Preferred Stock into Class C Common Stock is referred to hereinafter
as "Converted Series C Class C Common Stock") pursuant to Article IV, Section
D.4 of the Corporation's Charter, such holders of Converted Series C Class C
Common Stock then issued and outstanding, voting as a class, shall be entitled
to elect one (1) director of the Corporation until the annual meeting of the
stockholders in May 1998. At and after the annual meeting of the stockholders in
May 1998, such holders of Converted Series C Class C Common Stock then issued
and outstanding, voting as a class, shall be entitled to elect two (2) directors
of the Corporation (such individual director or two directors shall be referred
to as the "Converted Series C Class C Common Directors"). The affirmative vote
of a plurality of all votes cast by shares of Converted Series C Class C Common
Stock at a meeting of stockholders duly called and at which a quorum is present
shall be sufficient to elect a Converted Series C Class C Common Director. Each
share of Converted Series B Class C Common Stock may be voted for as many
individuals as there are Converted Series C Class C Common Directors to be
elected.
Two-thirds of the votes cast at a meeting of stockholders,
duly called and at which a quorum is present, shall be sufficient to take or
authorize action upon any other matter which may properly come before the
meeting, unless more than two-thirds of votes cast is required by statute or by
the Charter. The Board of Directors may fix the record date for the
determination of stockholders entitled to vote in the manner provided in ARTICLE
VIII, SECTION 3 of these Bylaws. Unless otherwise provided in the Charter, each
outstanding share of stock, regardless of class, shall be entitled to one vote
on each matter submitted to a vote at a meeting of stockholders.
SECTION 8. PROXIES.
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A stockholder may vote the shares owned of record either in
person or by proxy. The proxy shall be in writing and shall be signed by the
stockholder or by the stockholder's duly authorized attorney-in-fact or be in
such other form as may be permitted by the Maryland General Corporation Law,
including documents conveyed by electronic transmission. A copy, facsimile
transmission or other reproduction of the writing or transmission may be
substituted for the original writing or transmission for any purpose for which
the original transmission could be used. Every proxy shall be dated, but need
not be sealed, witnessed or acknowledged. No proxy shall be valid after 11
months from its date, unless otherwise provided in the proxy. In the case of
stock held of record by more than one person, any co-owner or co-fiduciary may
execute the proxy without the joinder of the co-owner(s) or co-fiduciary(ies),
unless the Secretary of the Corporation is notified in writing by any co-owner
or co-fiduciary that the joinder of more than one is to be required. At all
meetings of stockholders, the proxies shall be filed with and verified by the
Secretary of the Corporation, or, if the meeting shall so decide, by the
Secretary of the meeting.
SECTION 9. ORDER OF BUSINESS.
At all meetings of stockholders, any stockholder present and
entitled to vote in person or by proxy shall be entitled to require, by written
request to the Chairman of the meeting, that the order of business shall be as
follows:
(1) Organization
(2) Proof of notice of meeting or of waivers thereof. (The
certificate of the Secretary of the Corporation, or the affidavit of any other
person who mailed or published the notice or caused the same to be mailed or
published, shall be proof of service of notice.)
(3) Submission by Secretary of the Corporation of a list of
the stockholders entitled to vote, present in person or by proxy.
(4) A reading of unapproved minutes of preceding meetings and
action thereon.
(5) Reports.
(6) If an annual meeting, or a special meeting called
for that purpose, the election of directors.
(7) Unfinished business.
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(8) New business.
(9) Adjournment.
SECTION 10. REMOVAL OF DIRECTORS.
At any properly called annual or special stockholders'
meeting, the holders of any Class A Common Stock then outstanding, by the
affirmative vote of 80% of all the votes entitled to be cast for the election of
a Class A Common Director, may remove any Class A Common Director or Directors
from office, with or without cause, and may elect a successor or successors to
fill any resulting vacancies for the remainder of the term.
At any properly called annual or special stockholders'
meeting, the holders of any Class B Common Stock then outstanding, by the
affirmative vote of a majority of all the votes entitled to be cast for the
election of a Class B Common Director, may remove any Class B Common Director or
Directors from office, with or without cause, and may elect a successor or
successors to fill any resulting vacancies for the remainder of the term.
At any properly called annual or special stockholders'
meeting, the holders of any Converted Series A Class C Common Stock then
outstanding, by the affirmative vote of eighty percent (80%) of all the votes
entitled to be cast for the election of a Converted Series A Class C Common
Director, may remove any Converted Series A Class C Common Director or Directors
from office, with or without cause, and may elect a successor or successors to
fill any resulting vacancies for the remainder of the term.
At any properly called annual or special stockholders'
meeting, the holders of any Converted Series B Class C Common Stock then
outstanding, by the affirmative vote of eighty percent (80%) of all the votes
entitled to be cast for the election of a Converted Series B Class C Common
Director, may remove any Converted Series B Class C Common Director or Directors
from office, with or without cause, and may elect a successor or successors to
fill any resulting vacancies for the remainder of the term.
At any properly called annual or special stockholders'
meeting, the holders of any Converted Series C Class C Common Stock then
outstanding, by the affirmative vote of eighty percent (80%) of all the votes
entitled to be cast for the election of a Converted Series C Class C Common
Director, may remove any Converted Series C Class C Common Director or Directors
from office, with
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or without cause, and may elect a successor or successors to fill any resulting
vacancies for the remainder of the term.
At any properly called annual or special stockholders'
meeting, or at a special meeting of holders of Series A Convertible Preferred
Stock called by not less than twenty-five percent (25%) of such shares, the
holders of any Series A Convertible Preferred Stock then outstanding, by the
affirmative vote of eighty percent (80%) of all the votes entitled to be cast
for the election of a Series A Preferred Director, may remove any Series A
Preferred Director or Directors from office, with or without cause, and may
elect a successor or successors to fill any resulting vacancies for the
remainder of the term.
At any properly called annual or special stockholders'
meeting, or at a special meeting of holders of Series B Convertible Preferred
Stock called by not less than twenty-five percent (25%) of such shares the
holders of any Series B Convertible Preferred Stock then outstanding, by the
affirmative vote of eighty percent (80%) of all the votes entitled to be cast
for the election of a Series B Preferred Director, may remove any Series B
Preferred Director or Directors from office, with or without cause, and may
elect a successor or successors to fill any resulting vacancies for the
remainder of the term.
At any properly called annual or special stockholders'
meeting, or at a special meeting of holders of Series C Convertible Preferred
Stock called by not less than twenty-five percent (25%) of such shares the
holders of any Series C Convertible Preferred Stock then outstanding, by the
affirmative vote of eighty percent (80%) of all the votes entitled to be cast
for the election of a Series C Preferred Director, may remove any Series C
Preferred Director or Directors from office, with or without cause, and may
elect a successor or successors to fill any resulting vacancies for the
remainder of the term.
SECTION 11. INFORMAL ACTION BY STOCKHOLDERS.
Any action required or permitted to be taken at any meeting of
stockholders may be taken without a meeting if a consent in writing setting
forth such action is signed by all the stockholders entitled to vote thereon and
such consent is filed with the records of stockholders' meetings.
ARTICLE II.
DIRECTORS
SECTION 1. POWERS.
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The business and affairs of the Corporation shall be managed
under the direction of its Board of Directors. All powers of the Corporation may
be exercised by or under the authority of the Board of Directors except as
conferred on or reserved to the stockholders by law, by the Charter or by these
Bylaws. A director need not be a stockholder. The Board of Directors shall keep
minutes of its meetings and full and fair accounts of its transactions.
SECTION 2. NUMBER; TERM OF OFFICE; REMOVAL.
The number of directors of the Corporation shall be eighteen
(18); such number may NOT be increased or decreased by vote of the Board of
Directors. The first directors of the Corporation shall hold their office until
the first annual meeting of the Corporation, or until their successors are
elected and qualify, and thereafter the directors shall hold office for the term
of one year, or until their successors are elected and qualify. A director may
be removed from office as provided in ARTICLE I, SECTION 10 of these Bylaws.
SECTION 3. ANNUAL MEETING; REGULAR MEETINGS.
As soon as practicable after each annual meeting of
stockholders, the Board of Directors shall meet for the purpose of organization
and the transaction of other business. No notice of the annual meeting of the
Board of Directors need be given if it is held immediately following the annual
meeting of stockholders and at the same place. Other regular meetings of the
Board of Directors may be held at such times and at such places, within or
without the State of Maryland, as shall be designated in the notice for such
meeting by the party making the call. All annual and regular meetings shall be
general meetings, and any business may be transacted thereat.
SECTION 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by
(i) the Chairman of the Board, (ii) the President and Chief Executive Officer,
(iii) any Class of Directors, in each case by majority vote of the directors of
such Class, or (iv) a majority of all directors.
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SECTION 5. QUORUM; VOTING.
A majority of the Board of Directors shall constitute a quorum
for the transaction of business at every meeting of the Board of Directors; but,
if at any meeting there be less than a quorum present, a majority of those
present may adjourn the meeting from time to time, but not for a period
exceeding ten days at any one time or 60 days in all, without notice other than
by announcement at the meeting, until a quorum shall attend. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally called.
Except as hereinafter provided or as otherwise provided by the Charter or by
law, directors shall act by a vote of a majority of those members in attendance
at a meeting at which a quorum is present, and, in the case of directors of a
class voting as a Class, a majority of the directors of such Class.
SECTION 6. NOTICE OF MEETINGS.
Notice of the time and place of every regular and special
meeting of the Board of Directors shall be given to each director in the manner
provided in SECTION 2 OF ARTICLE IX hereof. Subsequent to each Board meeting,
and as soon as practicable thereafter, each director shall be furnished with a
copy of the minutes of said meeting. At least 24 hours' notice shall be given of
all meetings except for a meeting which is held immediately following the annual
meeting of stockholders, which requires no advance notice. The purpose of any
meeting of the Board of Directors need not be stated in the notice.
SECTION 7. VACANCIES.
(a) If the office of a director becomes vacant for any reason
other than removal or increase in the size of the Board, such vacancy may be
filled by the Board by a vote of a majority of the directors then in office who
are of the same Class as the director with respect to which such vacancy has
occurred, although such majority is less than a quorum of the Board.
(b) If the vacancy occurs as a result of the removal of a
director, the holders of that Class of stock entitled to elect and remove such
director may elect a successor or may delegate that authority to the appropriate
Class A Common Directors, Class B Common Directors, Converted Series A Class C
Common Directors, Converted Series B Class C Common Directors, Series A
Preferred Directors, or Series B Preferred Directors, as the case may be.
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(c) If the vacancy occurs as a result of an increase in the
number of directors, it may be filled by unanimous vote of the entire Board of
Directors holding office prior to the increase.
(d) If the offices of the entire Board of Directors shall
become vacant, any stockholder may call a special stockholders meeting in the
same manner that the Chairman of the Board or the President and Chief executive
Officer may call such meeting, and directors of the appropriate Class or Classes
for the unexpired term may be elected at such special meeting in the manner
provided for their election at annual meetings.
(e) A director elected by the Board of Directors or by a
particular Class of directors to fill a vacancy shall serve until the next
annual meeting of stockholders and until a successor is elected and qualifies as
herein provided. A director elected by the stockholders or by holders of a
particular Class of Stock to fill a vacancy shall serve for the unexpired term
and until a successor is elected and qualifies.
SECTION 8. RULES AND REGULATIONS.
The Board of Directors may adopt such rules and regulations
for the conduct of its meetings and the management of the affairs of the
Corporation as it may deem proper and not inconsistent with the laws of the
State of Maryland, these Bylaws and the Charter.
SECTION 9. EXECUTIVE COMMITTEE.
The Board of Directors shall create an Executive Committee,
consisting of seven (7) persons, composed of (a) two Class A Common Directors,
selected by the Class A Common Directors, voting as a class, (b) one Class B
Common Director, selected by the Class B Common Directors voting as a class, (c)
the President and Chief Executive Officer of the Corporation, (d) one Series A
Preferred Director, (or Converted Series A Class C Common Director) selected by
the Series A Preferred Directors (or Converted Series A Class C Common Director)
voting as a class, (e) one Series B Preferred Director (or Converted Series B
Class C Common Director), selected by the Series B Preferred Directors (or
Converted Series B Class C Common Director) voting as a class; and (f) until the
consummation of a Qualified Transaction as defined in the Option Agreement dated
September 4, 1996 by and between Genesis Health Ventures, Inc. and the
Corporation, one Series C Preferred Director (or Converted Series C Class C
Common Director), selected by the Series C Preferred Directors (or Converted
Series C Class C Common Director) voting as a class. The Executive Committee
shall hold office at the pleasure of the Board
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of Directors. Between sessions of the Board of Directors, such Committee shall
have all of the powers of the Board of Directors in the management of the
business and affairs of the Corporation, except those powers specifically denied
by law. The taking of any action by the Executive Committee shall be conclusive
evidence that the Board of Directors was not in session at the time of such
action. The Executive Committee shall hold formal meetings and keep minutes of
all of its proceedings. A copy of such minutes shall, after approval by the
members of the Committee, be sent to all directors as a matter of information.
Any action taken by the Executive Committee within the limits permitted by law
shall have the force and effect of Board action unless and until revised or
altered by the Board. The presence of all members of the Committee from time to
time shall be necessary to constitute a quorum. Action by the Executive
Committee shall require the affirmative votes of at least two-thirds of its
members. Action may also be taken without a meeting if a unanimous written
consent is signed by all of the members of the Committee, and if such consent is
filed with the records of the Committee. The President and Chief Executive
Officer of the Corporation shall serve as the Committee's Chairman, unless the
Board of Directors shall have designated a different Chairman.
SECTION 10. PHYSICIAN ACQUISITION COMMITTEE.
The Board of Directors shall create a Physician Acquisition
Committee, composed of one Class A Common Director, one Class B Common Director
and, one director selected from among Series A Preferred Directors or Series B
Preferred Directors (or upon conversion of either such class, Converted Series A
Class C Common Directors or Converted Series B Class C Common Directors). The
Physician Acquisition Committee shall hold office at the pleasure of the Board
of Directors. Between sessions of the Board of Directors, such Committee shall
have all of the powers of the Board of Directors with respect to the matters set
forth in Article XIV of that certain Practice Participation Agreement, dated
February 24, 1995, by and among the Corporation and certain other parties, a
copy of which is and shall remain on file with the books and records of the
Corporation. The taking of any action by the Physician Acquisition Committee
with respect to matters within the purview of the Committee shall be conclusive
evidence that the Board of Directors was not in session at the time of such
action. The Physician Acquisition Committee shall hold formal meetings and keep
minutes of all of its proceedings. A copy of such minutes shall, after approval
by the members of the Committee, be sent to all directors as a matter of
information. Any action taken by the Physician Acquisition Committee within the
limits permitted hereby and by law shall have the force and effect of Board
action unless and until revised or altered by the Board. The presence of a
majority of all members of the Committee from time to time shall be necessary to
constitute a quorum. Action by the Physician
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Acquisition Committee shall require the affirmative vote of the Class A Common
Director Committee member, and of at least one remaining member or members.
Action may also be taken without a meeting if a unanimous written consent is
signed by all of the members of the Committee, and if such consent is filed with
the records of the Committee. The Corporation's President and Chief Executive
Officer shall serve as the Class A Common Director Committee member and as the
Committee's Chairman, unless the Board of Directors shall have designated a
different Chairman.
SECTION 11. COMPENSATION.
A director may receive a stated salary or an attendance fee
for each meeting of the Board of Directors or any committee thereof attended,
plus reimbursement of reasonable expenses of attendance. The amount of the
salary or attendance fee and any entitlement to reimbursement of expenses shall
be determined by resolution of the Board; provided, however, that nothing herein
contained shall be construed as precluding a director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 12. PLACE OF MEETINGS.
Regular or special meetings of the Board may be held within or
without the State of Maryland, as the Board may from time to time determine. The
time and place of meeting may be fixed by the party calling the meeting.
SECTION 13. INFORMAL ACTION BY THE DIRECTORS.
Any action required or permitted to be taken at any meeting of
the Board may be taken without a meeting, if a written consent to such action is
signed by all members of the Board and such consent is filed with the minutes of
the Board.
SECTION 14. TELEPHONE CONFERENCE.
Members of the Board of Directors or any committee thereof may
participate in a meeting of the Board or such committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear, and be heard by, each other at the same
time. Participation by such means shall constitute presence in person at the
meeting.
ARTICLE III.
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OFFICERS
SECTION 1. IN GENERAL.
The Board of Directors shall choose a Chairman of the Board
from among its Class A Common Directors. Any director serving as Chairman of the
Board must be a primary care physician authorized to practice medicine in one or
more states, and must never have had his or her license limited or suspended by
action of any regulatory body.
The Board of Directors shall elect a President and Chief
Executive Officer, a Treasurer, a Secretary, and may elect one or more Vice
Presidents, Assistant Secretaries and Assistant Treasurers as the Board may from
time to time deem appropriate. All officers shall hold office only during the
pleasure of the Board or until their successors are chosen and qualify. Any two
of the above offices, except those of President and Vice President, may be held
by the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity when such instrument is required to be
executed, acknowledged or verified by any two or more officers. The Board of
Directors may from time to time appoint such other agents and employees with
such powers and duties as the Board may deem proper. In its discretion, the
Board of Directors may leave unfilled any offices except those of President and
Chief Executive Officer, Treasurer and Secretary.
SECTION 2. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall assist the Board and other
officers of the Corporation in conceiving and designing policies and procedures,
all as determined and/or authorized by the Board, shall serve as the
Corporation's chief spokesperson and industry representative and shall preside
over the meetings of the Board and of the stockholders if present at the
meeting.
SECTION 3. PRESIDENT AND CHIEF EXECUTIVE OFFICER.
The President and Chief Executive Officer shall have the
responsibility for the implementation of the policies determined by the Board
and the active management of the business and general supervision and direction
of all of the affairs of the Corporation. In the absence of the Chairman of the
Board, the President and Chief Executive Officer shall preside over the meetings
of the Board and of the stockholders if present at the meeting, and shall
perform such other duties as may be assigned by the Board of Directors or the
Executive Committee. The President and Chief Executive Officer shall have the
authority on the Corporation's behalf to endorse securities owned by the
Corporation and
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to execute any documents requiring the signature of an executive officer. The
President and Chief Executive Officer shall perform such other duties as the
Board of Directors may direct.
SECTION 4. VICE PRESIDENTS.
The Vice Presidents, in the order of priority designated by
these Bylaws or the Board of Directors, shall be vested with all the power and
may perform all the duties of the President and Chief Executive Officer in the
latter's absence. They may perform such other duties as may be prescribed by the
Board of Directors, the Executive Committee or the President and Chief Executive
Officer. The Corporation shall establish the positions of Executive Vice
President and Director of Medical Affairs, Executive Vice President and Director
of Development, Executive Vice President and Director of Legal Affairs,
Executive Vice President and Director of Finance, and such other Executive Vice
President classifications as it deems appropriate. Unless the Board designates
another officer, the Executive Vice President and Director of Finance shall be
the Chief Financial Officer of the Corporation. The Executive Vice President and
Director of Medical Affairs must be a primary care physician authorized to
practice medicine in one or more states, and must never have had his or her
license limited or suspended by action of any regulatory body.
SECTION 5. TREASURER.
The Treasurer shall have general supervision over the
Corporation's finances, and shall perform such other duties as may be assigned
by the Board of Directors or the President and Chief Executive Officer. Unless
there exists an Executive Vice President and Director of Finance, or the Board
designates another officer, the Treasurer shall be the Chief Financial Officer
of the Corporation. If required by resolution of the Board, the Treasurer shall
furnish a bond (which may be a blanket bond) with such surety and in such
penalty for the faithful performance of duty as the Board of Directors may from
time to time require, the cost of such bond to be paid by the Corporation.
SECTION 6. SECRETARY.
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors and shall attend to the giving and
serving of all notices of the Corporation required by law or these Bylaws. The
Secretary shall maintain at all times in the principal office of the Corporation
at least one copy of the Bylaws with all amendments to date, and shall make the
same, together with the minutes of the meeting of the stockholders, the annual
statement of affairs of the Corporation and any voting trust or other
stockholders
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agreement on file at the office of the Corporation, available for inspection by
any officer, director or stockholder during reasonable business hours. The
Secretary shall perform such other duties as may be assigned by the Board of
Directors or the President and Chief Executive Officer.
SECTION 7. ASSISTANT TREASURER AND ASSISTANT SECRETARY.
The Board of Directors may designate from time to time
Assistant Treasurers and Assistant Secretaries, who shall perform such duties as
may from time to time be assigned to them by the Board of Directors or the
President and Chief Executive Officer.
SECTION 8. COMPENSATION; REMOVAL; VACANCIES.
The Board of Directors shall have power to fix the
compensation of all officers of the Corporation. It may authorize any committee
or officer, upon whom the power of appointing subordinate officers may have been
conferred, to fix the compensation of such subordinate officers. The Board of
Directors shall have the power, upon the affirmative vote of two-thirds (2/3) of
all members of the Board of Directors, at any regular or special meeting to
remove any officer if, in the judgment of the Board, the best interests of the
Corporation will be served by such removal. The Board of Directors may authorize
any officer to remove subordinate officers. The Board of Directors may authorize
the Corporation's employment of an officer for a period in excess of the term of
the Board. The Board of Directors at any regular or special meeting shall have
power to fill a vacancy occurring in any office for the unexpired portion of the
term.
SECTION 9. SUBSTITUTES.
The Board of Directors may, from time to time in the absence
of any one of its officers or at any other time, designate any other person or
persons on behalf of the Corporation to sign any contracts, deeds, notes or
other instruments in the place or stead of any of such officers, and may
designate any person to fill any one of said offices, temporarily or for any
particular purpose; and any instruments so signed in accordance with a
resolution of the Board shall be the valid act of the Corporation as fully as if
executed by any regular officer.
ARTICLE IV.
RESIGNATION
Any director or officer may resign from office at any time.
Such resignation shall be made in writing and shall take effect from the time of
its
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receipt by the Corporation, unless some time be fixed in the resignation, and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE V.
COMMERCIAL PAPER, ETC.
All bills, notes, checks, drafts and commercial paper of all
kinds to be executed by the Corporation as maker, acceptor, endorser or
otherwise, and all assignments and transfers of stock, contracts, or written
obligations of the Corporation, and all negotiable instruments, shall be made in
the name of the Corporation and shall be signed by any one or more of the
following officers as the Board of Directors may from time to time designate:
the President and Chief Executive Officer, any Vice President, or the Treasurer,
or such other person or persons as the Board of Directors or Executive Committee
may from time to time designate.
ARTICLE VI.
FISCAL YEAR
The fiscal year of the Corporation shall cover such period of
12 months as the Board of Directors may determine. In the absence of any such
determination, the accounts of the Corporation shall be kept on a calendar year
basis.
ARTICLE VII.
SEAL
The seal of the Corporation shall be in the form of two
concentric circles inscribed with the name of the Corporation and the year and
state in which it is incorporated. The Secretary or Treasurer, or any Assistant
Secretary or Assistant Treasurer, shall have the right and power to attest to
the corporate seal. In lieu of affixing the corporate seal to any document, it
shall be sufficient to meet the requirements of any law, rule or regulation
relating to a corporate seal to affix the word "(SEAL)" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
ARTICLE VIII.
STOCK
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SECTION 1. ISSUE.
Each stockholder shall be entitled to a certificate or
certificates which shall represent and certify the number and class of shares of
stock owned in the Corporation. Each certificate shall be signed by the
President and Chief Executive Officer or any Vice President and be countersigned
by the Secretary or any Assistant Secretary or the Treasurer or any Assistant
Treasurer. The signatures of the Corporation's officers and its corporate seal
appearing on stock certificates may be facsimiles if each such certificate is
authenticated by the manual signature of an officer of a duly authorized
transfer agent. Stock certificates shall be in such form, not inconsistent with
law and the Charter, as shall be approved by the Board of Directors. In case any
officer of the Corporation who has signed any certificate ceases to be an
officer of the Corporation, whether by reason of death, resignation or
otherwise, before such certificate is issued, then the certificate may
nevertheless be issued by the Corporation with the same effect as if the officer
had not ceased to be such officer as of the date of such issuance.
SECTION 2. TRANSFERS.
The Board of Directors shall have power and authority to make
all such rules and regulations as the Board may deem expedient concerning the
issue, transfer and registration of stock certificates. The Board of Directors
may appoint one or more transfer agents and/or registrars for its outstanding
stock, and their duties may be combined. No transfer of stock shall be
recognized or binding upon the Corporation until recorded on the books of the
Corporation, or, as the case may be, of its transfer agent and/or of its
registrar, upon surrender and cancellation of a certificate or certificates for
a like number of shares.
SECTION 3. RECORD DATES FOR DIVIDENDS AND STOCKHOLDERS'
MEETING.
The Board of Directors may fix a date not exceeding 90 days
preceding the date of any meeting of stockholders, any dividend payment date or
any date for the allotment of rights, as a record date for the determination of
the stockholders entitled to notice of and to vote at such meeting, or entitled
to receive such dividends or rights, as the case may be, and only stockholders
of record on such date shall be entitled to notice of and to vote at such
meeting or to receive such dividends or rights, as the case may be. In the case
of a meeting of stockholders, the record date shall be fixed not less than ten
days prior to the date of the meeting.
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SECTION 4. NEW CERTIFICATES.
In case any certificate of stock is lost, stolen, mutilated or
destroyed, the Board of Directors may authorize the issuance of a new
certificate in place thereof upon such indemnity to the Corporation against loss
and such other terms and conditions as it may deem advisable. The Board of
Directors may delegate such power to any officer or officers of the Corporation
or to any transfer agent or registrar of the Corporation; but the Board of
Directors, such officer or officers or such transfer agent or registrar may, in
their discretion, refuse to issue such new certificate save upon the order of
some court having jurisdiction.
ARTICLE IX.
NOTICE
SECTION 1. NOTICE TO STOCKHOLDERS.
Whenever by law or these Bylaws notice is required to be given
to any stockholder, such notice shall be in writing and may be given to each
stockholder by personal delivery or at the stockholder's residence or usual
place of business, or by mailing it by registered or certified mail, postage
prepaid, and addressed to the stockholder at the address appearing on the books
of the Corporation or its transfer agent. Such leaving or mailing of notice
shall be deemed the time of giving such notice.
SECTION 2. NOTICE TO DIRECTORS AND OFFICERS.
Whenever by law or these Bylaws notice is required to be given
to any director or officer, such notice may be given in any one of the following
ways: by personal notice to such director or officer, by telephone communication
with such director or officer personally, by telecopy, addressed to such
director or officer at the address appearing on the books of the Corporation, or
by registered or certified mail, by depositing the same in writing in the post
office or in a letter box in a postage paid, sealed wrapper addressed to such
director or officer at the address appearing on the books of the Corporation.
The time when such notice shall be consigned to a communication company for
delivery shall be deemed to be the time of the giving of such notice; if mailed,
such notice shall be deemed given when received.
SECTION 3. WAIVER OF NOTICE.
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Notice to any stockholder or director of the time, place
and/or purpose of any meeting of stockholders or directors required by these
Bylaws may be dispensed with if such stockholder shall either attend in person
or by proxy, or if such director shall attend in person, or if such absent
stockholder or director shall, in writing filed with the records of the meeting
either before or after the holding thereof, waive such notice.
ARTICLE X.
VOTING OF STOCK IN OTHER CORPORATIONS
Any stock in other corporations, which may from time to time
be held by the Corporation, may be represented and voted at any meeting of
stockholders of such other corporations by the President and Chief Executive
Officer or a Vice-President or by proxy or proxies appointed by the President
and Chief Executive Officer or a Vice-President, or otherwise pursuant to
authorization thereunto given by a resolution of the Board of Directors adopted
by a vote of a majority of the directors.
ARTICLE XI.
INDEMNIFICATION
To the maximum extent permitted by the Maryland General
Corporation Law, as from time to time amended, the Corporation shall indemnify
its currently acting and its former directors, officers, agents and employees
and those persons who, at the request of the Corporation serve or have served
another corporation, partnership, joint venture, trust or other enterprise in
one or more of such capacities against any and all liabilities incurred in
connection with their services in such capacities to the extent determined
appropriate by the Board of Directors. To the extent required by the Charter or
applicable law, the Corporation shall indemnify such individuals.
ARTICLE XII.
AMENDMENTS
Except as expressly prohibited herein or in the Corporation's
Charter, these Bylaws may be added to, altered, amended, repealed or suspended
by a vote of a majority of the Board of Directors at any regular or special
meeting of the Board.
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APPROVED BY THE BOARD OF DIRECTORS
AND STOCKHOLDERS OF DOCTORS HEALTH
SYSTEM, INC., AUGUST 29, 1996.
EFFECTIVE AT CLOSING ON SEPTEMBER 4, 1996.
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Exhibit 10.1(b)
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
of
DOCTORS HEALTH SYSTEMS, INC.
dated as of September 4, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Recitals; Definitions......................................................Error! Bookmark not defined.
(a) Recitals..........................................................................................2
(b) Certain Definitions...............................................................................2
(c) Other Defined Terms...............................................................................3
2. Stock, Warrants and Options Covered; Additional Parties...............................................3
3. Purchase and Sale.....................................................................................3
4. Death, Disability and Termination of Employment of a Management Stockholder; Involuntary Transfers....4
(a) General...........................................................................................4
(b) Further Assurances................................................................................5
(c) Disability........................................................................................5
(d) Involuntary Transfers; Payment....................................................................5
(e) Payment Upon Termination of Employment of Management Stockholder Other than Rifkin or Kimmel......6
(f) Termination of Employment, Death, Disability of Rifkin and Kimmel.................................7
(i) Termination of Employment Without Good Cause.................................................7
(ii) Death; Disability............................................................................7
(iii) Termination of Employment Under Other Circumstances..........................................8
(g) Price Adjustments Following A Change in Control of DHS............................................8
5. Voluntary Transfers of Stock..........................................................................9
(a) Stock Restricted..................................................................................9
(b) Delegation Rights.................................................................................9
(c) Voluntary Transfers by Management Stockholders....................................................9
(i) Option of Other Management Stockholders......................................................9
(ii) Option of the Holders of Class B Common Stock...............................................10
(iii) Option of the Holders of Convertible Preferred Stock........................................11
(iv) Option of DHS...............................................................................11
(v) Transfers to Third Parties..................................................................12
(d) Voluntary Transfers by the Holders of Class B Common Stock.......................................12
(i) Option of Other Stockholders................................................................12
(ii) Option of DHS...............................................................................13
(iii) Transfers to Third Parties..................................................................14
(e) Voluntary Transfers by the Holders of Convertible Preferred Stock................................14
(i) Option of DHS...............................................................................14
(ii) Option of the Holders of Convertible Preferred Stock........................................15
</TABLE>
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<TABLE>
<S> <C>
(iii) Transfers to Third Parties..................................................................15
6. Purchase Price of Stock for Purposes of Involuntary Transfers and Sections 4(e)(ii) and 4(f)(ii).....16
(a) Agreement of the Parties.........................................................................16
(b) Appraisal........................................................................................17
7. Payment of Purchase Price............................................................................17
(a) Cash Portion.....................................................................................18
(b) Promissory Note..................................................................................18
(c) Debt Due From Stockholder........................................................................18
(d) Involuntary Transfers............................................................................19
(e) Closing..........................................................................................19
8. Life Insurance.......................................................................................19
(a) Purchase and Ownership of Policies...............................................................19
9. Voting by Stockholders...............................................................................20
(a) Sale of Stockholder's Stock......................................................................20
(b) Class A Directors................................................................................21
(c) Issuance of Additional Shares of Stock...........................................................21
10. Specific Performance................................................................................22
11. Guarantee of Certain Management Stockholders........................................................22
12. Severability........................................................................................23
13. Endorsement of Certificate..........................................................................23
14. Term................................................................................................23
15. Notices.............................................................................................24
16. Amendment...........................................................................................24
17. Miscellaneous.......................................................................................24
18. Interpretation......................................................................................24
19. Wills...............................................................................................25
20. Cancellation of Prior Agreement.....................................................................25
</TABLE>
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AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS RESTATED STOCKHOLDERS AGREEMENT is executed as of this
4th day of September 1996, by and among DOCTORS HEALTH SYSTEM, INC., a Maryland
corporation ("DHS"), STEWART GOLD ("GOLD"), SCOTT RIFKIN ("RIFKIN"), ALAN KIMMEL
("KIMMEL") (Gold, Rifkin and Kimmel being collectively, the "MANAGEMENT
STOCKHOLDERS" or individually, a "MANAGEMENT STOCKHOLDER"), MEDICAL HOLDINGS
LIMITED PARTNERSHIP, a Maryland limited partnership (the "LP"), ST. JOSEPH
MEDICAL CENTER, INC., a Maryland non-profit, non-stock corporation (the "SERIES
A INVESTOR"), MED-LANTIC MANAGEMENT SERVICES, INC., a Maryland corporation (the
"SERIES B INVESTOR"), and GENESIS HEALTH VENTURES, INC., a Pennsylvania
corporation (the "SERIES C INVESTOR") (the Management Stockholders, the LP, the
Series A Investor, the Series B Investor and the Series C Investor each being a
"STOCKHOLDER" and collectively being the "STOCKHOLDERS"). As used in this
Agreement, the terms "Stockholder" and "Stockholders" shall include any
successors, assigns, transferees (whether by sale, gift, or other disposition),
heirs, and personal representatives of a Stockholder, whether permitted by the
terms hereof or otherwise.
WHEREAS, DHS has authorized capital stock consisting of Twenty
Million, Seven Hundred Thousand (20,700,000) shares of Class A Common Stock,
with a par value of one cent ($0.01) per share, of which Eight Hundred Thousand
(800,000) shares are issued and owned by the Management Stockholders in the
proportions set forth on Exhibit 1 attached hereto and made a part hereof (the
"CLASS A COMMON STOCK"); Ten Million (10,000,000) shares of Class B Common
Stock, with a par value of one cent ($0.01) per share, of which Two Million Two
Hundred Thousand (2,200,000) shares are issued and owned by the LP (the "CLASS B
COMMON STOCK"); Twenty-Nine Million, Fifty Thousand (29,050,000) shares of Class
C Common Stock, with a par value of one cent ($0.01) per share, of which no
shares are issued or outstanding (the "CLASS C COMMON STOCK"); One Million
(1,000,000) shares of Series A Convertible Preferred Stock with a par value of
Five Dollars ($5.00) per share, One Million (1,000,000) of which are owned by
the Series A Investor (the "SERIES A PREFERRED STOCK"); Three Hundred Fifty-Five
Thousand Five Hundred Fifty-Six (355,556) shares of Series B Convertible
Preferred Stock with a par value of Eleven Dollars and Twenty-Five Cents
($11.25) per share, Three Hundred Fifty-Five Thousand Five Hundred Fifty-Six
(355,556) of which are owned by the Series B Investor (the "SERIES B PREFERRED
STOCK"), One Million Seventy-One Thousand Four Hundred Twenty-Eight (1,071,428)
shares of Series C Convertible Preferred Stock with a par value of Seventeen
Dollars and Fifty Cents ($17.50) per share, One Million Seventy-One Thousand
Four Hundred Twenty-Eight (1,071,428) of which will be owned by the Series C
Investor (the "SERIES C PREFERRED STOCK") (the Series A Preferred Stock, the
Series B
<PAGE>
Preferred Stock and the Series C Preferred Stock are hereinafter collectively
referred to as the "CONVERTIBLE PREFERRED STOCK"); and One Million (1,000,000)
shares of preferred stock, with a par value of One Cent ($0.01) per share, of
which no shares are issued and outstanding (the Class A Common Stock, the Class
B Common Stock, the Class C Common Stock, the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the preferred stock
each being a "CLASS" and collectively being the "STOCK"); and
WHEREAS, the Stockholders own all of the issued and
outstanding shares of DHS and, with DHS, desire to assure continuity and to
perpetuate harmony in DHS's management, policies and operations; and
WHEREAS, each Stockholder desires to facilitate the prompt
liquidation of the Management Stockholders' Stock in the event of the death of a
Management Stockholder, or, if necessary, during such Management Stockholder's
lifetime; and
WHEREAS, the Stockholders desire to maintain ownership and
control of DHS among themselves for the purposes of insuring continuity of
management among themselves; and
WHEREAS, the Stockholders and DHS deem it in their best
interests to impose certain restrictions and obligations on themselves in order
to effectuate the foregoing purposes; and
WHEREAS, certain of the Stockholders and DHS entered into a
Stockholders Agreement dated December 1, 1995, and in connection with the
issuance to the Series C Investor of the Series C Preferred Stock, the
Stockholders and DHS wish to enter into this Restated Stockholders Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below, and other good and valuable consideration the
receipt and sufficiency of which are acknowledged, the parties, intending to be
legally bound, covenant and agree as follows:
1. RECITALS; DEFINITIONS.
(a) RECITALS. The foregoing recitals are made a part of
this Agreement.
(b) CERTAIN DEFINITIONS.
"CHANGE IN CONTROL" shall mean the earlier to occur of the
following: (i) a liquidating distribution to DHS' stockholders (or similar
event); (ii) a contribution, consolidation or merger where DHS is not the
survivor; (iii) any sale, exchange or other disposition of all, or substantially
all, of DHS'
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assets; or (iv) any public offering of DHS' securities at a company value of at
least $25,000,000 with proceeds to DHS of at least $15,000,000.
"DHS AMENDED AND RESTATED ARTICLES" shall mean the Articles of
Amendment and Restatement of DHS filed with the Maryland State Department of
Assessments and Taxation and effective on September 4, 1996
(c) OTHER DEFINED TERMS. When used in this Agreement with its
initial letter capitalized, a word that is not defined in this Section 1 shall
have the meaning set forth elsewhere in this Agreement. When a word used in this
Agreement with its initial letter capitalized is not defined in this Agreement,
such word shall have the meaning set forth in the Definition Appendix attached
to this Agreement as Appendix A.
2. STOCK, WARRANTS AND OPTIONS COVERED; ADDITIONAL PARTIES.
Except as otherwise provided herein, all of the provisions of this Agreement
shall apply to, and the term "Stock" shall include, the Stock and all other
shares of capital stock and rights, including warrants and options, to acquire
shares of capital stock and all other equity securities now owned or which may
be issued hereafter to the Stockholders in consequence of any additional
issuance, purchase, exchange or reclassification of shares, corporate
reorganization, or any other form of recapitalization, consolidation, merger,
share split, share dividend, or which are acquired by Stockholders in any other
manner. For purposes of this Agreement, the term "Stock" shall include (i)
beneficial interests held by any beneficiary in any trust permitted to be a
transferee hereunder, (ii) that certain Stock Warrant No. 1 executed and
delivered on November 28, 1995 by DHS to the Series B Investor granting to the
Series B Investor the right to acquire Eighty Eight Thousand Eight Hundred
Eighty Nine (88,889) shares of the Class A Common Stock of the Company (the
"WARRANT"), and (iii) the option of the Series C Investor to purchase Five
Hundred Thousand (500,000) shares of Series C Preferred Stock from DHS pursuant
to the Option Agreement dated as of September 4, 1996 between DHS and the Series
C Investor (the "OPTION"). The parties hereto acknowledge and agree that upon
conversion of shares of Convertible Preferred Stock into shares of Class C
Common Stock all references to "Stock" and all references to "Convertible
Preferred Stock" herein shall include all such shares of Class C Common Stock,
and all references to "holders of Convertible Preferred Stock" shall include
"holders of Class C Common Stock." DHS acknowledges and agrees that it will not
issue any additional shares of its capital stock (or options) to any person or
entity which is not a party to this Agreement without requiring, as a condition
precedent to such issuance, that such person or entity execute a counterpart to
this Agreement (provided that non-executive employees of DHS to whom shares of
capital stock are issued pursuant to any employment agreement or any stock
option, stock purchase or similar plan of DHS shall not be required to execute
this Agreement so long as DHS, as a condition of such issuance, retains rights
to repurchase such shares of capital stock under substantive terms
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and conditions consistent with those granted to DHS herein), and any member of
DHS' executive management team who is granted shares (or options) shall be
deemed a "Management Stockholder" for purposes hereof.
3. PURCHASE AND SALE. DHS agrees to purchase and redeem, and
each Stockholder agrees to sell and transfer, the Stock in the manner and upon
the terms provided in this Agreement. No purchase, sale, gift, endorsement,
assignment, transfer, pledge, encumbrance or other disposition, whether
voluntary, involuntary or by operation of law, including, without limitation,
any transfer pursuant to a divorce decree, of any shares of Stock of any
Stockholder shall be valid and binding except as provided in, and in accordance
with, the terms and conditions of this Agreement. Any purported transfer by any
Stockholder of the Stock or issuance of capital stock by the Company other than
in accordance with this Agreement shall be null and void, and DHS shall refuse
to recognize any such transfer and shall not reflect on its records any change
in record ownership of the Stock pursuant to any such transfer. Any transferee
of the Stock becoming the owner of the Stock in compliance with this Agreement
shall thereafter be deemed a Stockholder. The personal representative of a
deceased Stockholder shall automatically be subject to the terms and conditions
of this Agreement. Notwithstanding the foregoing, the holders of Convertible
Preferred Stock are entitled, pursuant to the terms of the DHS Amended and
Restated Articles, to exercise rights to convert shares of Convertible Preferred
Stock into shares of Class C Common Stock, and to require DHS to purchase shares
of Convertible Preferred Stock under certain circumstances, and no such
conversion or redemption shall give any person any rights under this Agreement.
4. DEATH, DISABILITY AND TERMINATION OF EMPLOYMENT OF A
MANAGEMENT STOCKHOLDER; INVOLUNTARY TRANSFERS
(a) GENERAL.
(i) Upon the occurrence of the termination of
employment of any Management Stockholder (except with respect to each
of Rifkin and Kimmel, the termination of whose employment is governed
by Section 4(f) hereof) with DHS for any reason, other than an
"Involuntary Transfer" (as defined below) including, but not limited
to, death or "disability" (as defined in Section 4(c) below), such
Management Stockholder or other Stockholder, as the case may be, shall
sell, and DHS shall purchase, all of the Stock then registered in such
Stockholder's name at the price provided in Section 4(e) or Section 6
hereof, as the case may be, and upon the terms provided in Section 7
hereof.
(ii) Upon the occurrence of an "Involuntary Transfer"
(as defined in Section 4(d) below) of the Stock of any Stockholder (the
"INVOLUNTARY TRANSFER STOCKHOLDER"), DHS shall have the right, for a
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period of thirty (30) days from the date of such occurrence, to
purchase such Stock by providing written notice to such effect to such
Involuntary Transfer Stockholder and to any court which has then
exercised jurisdiction over such Involuntary Transfer Stockholder with
respect to its Stock, or to any assignee, trustee in bankruptcy or
successor in interest, as the case may be, and such Involuntary
Transfer Stockholder shall be obligated if DHS elects to exercise its
right to purchase such Stock to sell all but not less than all of the
Stock then registered in such Involuntary Transfer Stockholder's name
at the price provided in Section 6 hereof and upon the terms provided
in Section 7 hereof. If DHS elects not to exercise its purchase
pursuant to this Section 4(a)(ii) within such thirty (30) day period,
it shall immediately provide written notice to that effect to all of
the other stockholders (the "NON-INVOLUNTARY TRANSFER STOCKHOLDERS"),
who shall have the option to purchase, and such Involuntary Transfer
Stockholder shall be obligated to sell to the extent such option is
exercised, all of the shares of such Stock at the price provided in
Section 6 hereof and upon the terms provided in Section 7 hereof. If
more than one Non-Involuntary Transfer Stockholder desires to so
purchase, then they shall purchase in such proportions as they may
agree. In the absence of agreement, each of the Non-Involuntary
Transfer Stockholders desiring to purchase such stock shall be entitled
to purchase up to that number of shares of such Stock which is equal to
the product of his percentage interest of all of the shares of DHS
Capital Stock then held by such Non-Involuntary Transfer Stockholders
multiplied by the number of shares of stock available for purchase
hereunder. The Non-Involuntary Transfer Stockholders shall have the
right to exercise their respective options for a period of thirty (30)
days following their receipt of DHS' notice that it has elected not to
purchase such Stock by providing notice in the manner required of DHS
as otherwise set forth in this Section 4(a)(ii).
(b) FURTHER ASSURANCES. Each Management Stockholder hereby
agrees that he and/or his personal representative, and each trustee of any
permitted trust hereunder, shall be bound to take any and all action necessary
to enable DHS to purchase his Stock pursuant to the provisions of this Section
4.
(c) DISABILITY. For purposes of this Section 4, "DISABILITY"
with respect to a Management Stockholder shall have the meaning set forth in
said Management Stockholder's DHS Employment Agreement or other employment
agreement with DHS, and if no such agreement exists, as determined by DHS' Board
of Directors in the exercise of its reasonable discretion.
(d) INVOLUNTARY TRANSFERS; PAYMENT. For purposes of this
Section 4, the occurrence of any of the following events shall constitute an
"INVOLUNTARY TRANSFER": (i) if any portion of a Stockholder's Stock is attached
or taken in execution, or (ii) if a Stockholder applies for the benefit of, or
files a case under, any provision of the federal bankruptcy law or any other law
relating
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to insolvency or relief of debtors, or (iii) if a case or proceeding is brought
against a Stockholder under any provision of the federal bankruptcy law or any
other law relating to insolvency or relief of debtors which is not dismissed
within sixty (60) days after the commencement thereof, or (iv) if a Stockholder
makes an assignment for the benefit of creditors, or (v) if any portion of a
Stockholder's Stock is made subject to a charging order, or (vi) if any portion
of a Management Stockholder's Stock or other Stock held by a natural person is
transferred pursuant to a divorce decree. For purposes of this Section 4(d), the
occurrence of any of the foregoing events described in Sections 4(d)(i) through
(v) above, (A) with respect to the General Partner of the LP, shall constitute
an Involuntary Transfer with respect to the LP of the Class B Common Stock, (B)
with respect to the Series A Investor, shall constitute an Involuntary Transfer
of the Series A Preferred Stock or the Class C Common Stock, as the case may be,
(C) with respect to the Series B Investor, shall constitute an Involuntary
Transfer of the Series B Preferred Stock, the Warrant or the Class C Common
Stock, as the case may be, and (D) with respect to the Series C Investor, shall
constitute an Involuntary Transfer of the Series C Preferred Stock, the Option
or the Class C Common Stock, as the case may be. If any Stockholder has actual
knowledge of an Involuntary Transfer by a Stockholder of his or its Stock, such
Stockholder shall give written notice to such effect to DHS, and the giving of
such written notice shall constitute the occurrence of such event for purpose of
the time period set forth in this Section 4(d).
(e) PAYMENT UPON TERMINATION OF EMPLOYMENT OF MANAGEMENT
STOCKHOLDER OTHER THAN RIFKIN OR KIMMEL. If the employment of a Management
Stockholder other than Rifkin or Kimmel with DHS is terminated, then the
Management Stockholders whose employment with DHS has not been terminated shall
have the option, for a period of sixty (60) days from the date of such
termination, to purchase (in such proportions as they shall agree upon or, if
they cannot agree, in proportion to their ownership of DHS Class A Common Stock
other than the stock of the terminated Management Stockholder) and, if such
option is accepted, such terminated Management Stockholder shall sell all of the
shares of Stock held by such terminated Management Stockholder (the "TERMINATED
MANAGER'S STOCK") on terms substantially identical to those set forth in Section
7 hereof (other than subsections (c) and (d) thereof) and for a price determined
in accordance with Subsections (i) and (ii) of this Section 4(e). If all of the
Terminated Manager's Stock is not purchased by the other Management
Stockholders, DHS shall purchase, within ninety (90) days after the date of said
termination, and such terminated Management Stockholder shall sell, all of the
Terminated Manager's Stock upon the following terms and at the following prices:
(i) if such Management Stockholder's employment is
terminated (A) by DHS for any of the specific reasons enumerated in
Section 4.3(a) of such Management Stockholder's DHS Employment
Agreement, or, if no such agreement is then in effect, for "good cause"
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under applicable law, or (B) by the Management Stockholder for any
reason not constituting "constructive termination" as defined in
Section 4.4(b) of such Management Stockholder's DHS Employment
Agreement, then at a price equal to the lower of such Management
Stockholder's acquisition cost for his Stock or One Dollar ($1.00) per
share, and upon the terms set forth in Section 7 hereof; or
(ii) if such Management Stockholder's employment is
terminated (A) by death, or by "disability" (as defined herein), or (B)
by expiration of the term of such DHS Employment Agreement, or (C) by
DHS without good cause as contemplated by Section 4.3(b) of such
Employment Agreement, or (D) by the Management Stockholder for reasons
constituting "constructive termination" under such Agreement, then at
the price set forth in Section 6 hereof, and upon the terms set forth
in Section 7 hereof.
If DHS is required, pursuant to the provisions of this Section 4(e), to purchase
the Terminated Manager's Stock at a price determined pursuant to Subsection (ii)
hereof, DHS shall, as a condition precedent to the closing of such purchase, on
or before the Closing Date for its acquisition of the Terminated Manager's
Stock, pay to (A) the Series A Investor all of the dividends then accrued but
unpaid on the Series A Preferred Stock plus all accrued and unpaid interest
thereon (whether by payment of cash or set off of any accrued but unpaid
interest under the Promissory Note issued by the Series A Investor to DHS), or
otherwise make provision for the payment of such dividends that is acceptable to
the Series A Investor, in its reasonable discretion, (B) the Series B Investor
all of the dividends then accrued but unpaid on the Series B Preferred Stock
plus all accrued and unpaid interest thereon or otherwise make provision for the
payment of such dividends that is acceptable to the Series B Investor, in its
reasonable discretion, and (C) the Series C Investor all of the dividends then
accrued but unpaid on the Series C Preferred Stock plus all accrued and unpaid
interest thereon or otherwise make provision for the payment of such dividends
that is acceptable to the Series C Investor, in its reasonable discretion.
Notwithstanding the foregoing, in the event DHS has paid the Series C Investor
as set forth in this paragraph prior to the consummation of a Qualified Public
Offering on or before August 30, 1998 as defined in the Articles of Amendment
and Restatement dated September 4, 1996, then on or before the consummation of a
Qualified Public Offering on or before August 30, 1998 (at a price per share not
less than the weighted average price paid or to be paid by the Series C Investor
for all shares of Series C Preferred Stock then oustanding) the Series C
Investor shall pay DHS an amount equal to the amount of dividends and interest
paid to the Series C Investor pursuant to this Section.
(f) TERMINATION OF EMPLOYMENT, DEATH, DISABILITY OF RIFKIN AND
KIMMEL.
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(i) TERMINATION OF EMPLOYMENT WITHOUT GOOD CAUSE.
Except as set forth in the proviso to this sentence, if the employment
of Rifkin or Kimmel, as the case may be, with DHS is terminated (A) by
DHS for any of the specific reasons enumerated in Section 4.3(a) of his
respective DHS Employment Agreement (or, if no such agreement is then
in effect, for "good cause" under applicable law), or (B) by Rifkin or
Kimmel, as the case may be, for any reason not constituting
"constructive termination" as defined in Section 4.4(b) of such DHS
Employment Agreement, then Rifkin or Kimmel, as the case may be, shall
sell, and DHS shall purchase, all of the stock then registered in
Rifkin's or Kimmel's name, as the case may be, at a price equal to the
lower of Rifkin's or Kimmel's, as the case may be, acquisition cost for
his Stock or One Dollar ($1.00) per share, and upon the terms provided
in Section 7 hereof; provided, however, that the provisions of this
paragraph 4(f)(i) shall not apply to any shares of capital stock of DHS
held by Rifkin or Kimmel on the date hereof (or received as a
distribution on or in respect of such shares after the date hereof as
the result of any recapitalization, stock split or similar event).
(ii) DEATH; DISABILITY. Upon each of (A) the death of
Rifkin or Kimmel, as the case may be, and the appointment and
qualification of such deceased stockholder's personal representative,
and (B) the "Disability" of Rifkin or Kimmel (as such term is defined
in each such shareholder's current employment agreement with DHS or, if
there is none, as reasonably determined by the Board of Directors of
DHS), as the case may be, such personal representative, Rifkin or
Kimmel, as the case may be, may, for a period of sixty (60) days from
the date of such appointment and qualification or disability, as the
case may be, offer to the other Management Stockholders the option to
purchase (in such proportions as they shall agree upon or, if they
cannot agree, in proportion to their ownership of the DHS Class A
Common Stock), all of the shares of Stock held by such personal
representative, Rifkin or Kimmel, as the case may be, on terms
substantially identical to those set forth in Section 7 hereof (other
than Subsections (c) and (d) thereof) and at a price determined in
accordance with the terms of Section 6 hereof. If the option to
purchase all of the shares of Stock so offered is not exercised or
accepted within such sixty (60) day period, then such personal
representative, Rifkin or Kimmel, as the case may be, shall be entitled
to sell, by providing written notice to DHS, and DHS shall be required
to purchase upon receipt of such notice, all or any portion of such
shares of Stock held by Rifkin or Kimmel, as the case may be, as such
number of shares is set forth in such written notice, at the price and
upon the terms provided in Sections 6 and 7 hereof.
(iii) TERMINATION OF EMPLOYMENT UNDER OTHER
CIRCUMSTANCES. If Rifkin's or Kimmel's employment is terminated (A)
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by expiration of the term of his respective DHS Employment Agreement,
or (B) by DHS without good cause as contemplated by Section 4.3(b) of
such Employment Agreements, or (C) by Rifkin or Kimmel, as the case may
be, for reasons constituting "constructive termination" under such
Agreements, then DHS shall purchase, within ninety (90) days after the
date of such termination, and Rifkin and Kimmel shall sell, as the case
may be, those shares (and only those shares) of capital stock of DHS
acquired by Rifkin or Kimmel, as the case may be, after the date hereof
(other than as a distribution on or in respect of shares held on the
date hereof through a recapitalization, stock split, or similar event)
at the price set forth in Section 6 hereof, and upon the terms set
forth in Section 7 hereof.
If DHS is required, pursuant to the provisions of this Section 4(f), to purchase
the Terminated Manager's Stock at a price determined pursuant to Subsection (ii)
hereof, DHS shall, as a condition precedent to the closing of such purchase, on
or before the Closing Date for its acquisition of the Terminated Manager's
Stock, pay to (A) the Series A Investor all of the dividends then accrued but
unpaid on the Series A Preferred Stock plus all accrued and unpaid interest
thereon (whether by payment of cash or set off of any accrued but unpaid
interest under the Promissory Note issued by the Series A Investor to DHS), or
otherwise make provision for the payment of such dividends that is acceptable to
the Series A Investor, in its reasonable discretion, (B) the Series B Investor
all of the dividends then accrued but unpaid on the Series B Preferred Stock
plus all accrued and unpaid interest thereon or otherwise make provision for the
payment of such dividends that is acceptable to the Series B Investor, in its
reasonable discretion, and (C) the Series C Investor all of the dividends then
accrued but unpaid on the Series C Preferred Stock plus all accrued and unpaid
interest thereon or otherwise make provision for the payment of such dividends
that is acceptable to the Series C Investor, in its reasonable discretion.
Notwithstanding the foregoing, in the event DHS has paid the Series C Investor
as set forth in this paragraph prior to the consummation of a Qualified Public
Offering on or before August 30, 1998 as defined in the Articles of Amendment
and Restatement dated September 4, 1996, then on or before the consummation of a
Qualified Public Offering on or before August 30, 1998 (at a price per share not
less than the weighted average price paid or to be paid by the Series C Investor
for all shares of Series C Preferred Stock then oustanding) the Series C
Investor shall pay DHS an amount equal to the amount of dividends and interest
paid to the Series C Investor pursuant to this Section.
(g) PRICE ADJUSTMENTS FOLLOWING A CHANGE IN CONTROL OF DHS. If
the employment of a Management Stockholder other than Rifkin or Kimmel with DHS
is terminated pursuant to the provisions in Section 4(e)(ii)(C) or (D) above,
and there occurs a Change in Control of DHS within the first twenty-four months
following the date of such termination, DHS agrees to pay or cause to be paid to
such terminated Management Stockholder (or to his heirs,
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legatees and/or guardians), in addition to the purchase price for such
terminated Management Stockholder's Stock as determined pursuant to Section 7
hereof, the value of such terminated Management Stockholder's fair, allocative,
share of any consideration that would have been payable to such terminated
Management Stockholder (less any such consideration actually received by such
Management Stockholder as a result of a sale of his Stock, whether to another
Management Stockholder, DHS or another person) or to DHS upon, and as a result
of, such a Change in Control of DHS within such twenty-four month period. Such
payment shall be made by DHS when and as DHS or the other DHS Stockholders
receive consideration as a result of such a Change in Control, and shall be paid
by DHS based upon such terminated Management Stockholder's pro-rata equity
interest in DHS at the time of termination. Any payment by DHS pursuant to this
Section 4(f) may, at DHS' option, be made by delivery of (i) cash, (ii) a
promissory note with a term of not more than ten years and interest at a rate
calculated pursuant to Section 1274(d) of the Internal Revenue Code of 1986, or
(iii) an appropriate in-kind distribution of any consideration received as a
result of such Change in Control. The parties hereto acknowledge and agree that
each Partner of the LP who has entered into a Professional Service Employment
Agreement with the LLC shall be entitled to receive, and pursuant to Section
7.3.3(i) of the Limited Partnership Agreement has received, the benefit of the
substantive provisions set forth in this Section 4(g), upon the sale of his
Limited Partner Interest in the LP due to the termination of his employment with
BMG resulting from a termination by the LLC without good cause or a
"constructive termination," as defined therein.
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5. VOLUNTARY TRANSFERS OF STOCK.
(a) STOCK RESTRICTED. Subject to the rights of the holders of
Convertible Preferred Stock set forth in the DHS Amended and Restated Articles,
each Stockholder agrees that, during his lifetime or its corporate existence or
otherwise, he or it will not sell, transfer, exchange, assign or otherwise
dispose of (by sale, gift, or otherwise), or mortgage, hypothecate, lien,
pledge, encumber or otherwise cause a security interest to be created in any of
his or its Stock, except upon satisfaction of the conditions set forth in this
Section 5 and Section 4 above. Notwithstanding the foregoing, (i) each
Management Stockholder shall be entitled to transfer all or any portion of his
shares of Stock to a trust solely for the benefit of himself, his spouse and/or
his lineal descendants provided that, as a condition of said transfer, (A) the
agreement governing said trust requires transfers of any beneficial interests
therein (other than among such permitted persons) to be treated as transfers of
Stock hereunder and subject to the terms hereof, and (B) all trustees of said
trust execute and deliver to the parties hereto a counterpart of this Agreement
and otherwise agree to be bound by all of the terms and provisions hereof with
respect to the Stock, and (ii) each holder of Convertible Preferred Stock and of
Class B Common Stock may transfer its Convertible Preferred Stock or Class B
Common Stock, as the case may be, to any entity all of the ownership interests
in which are owned by such holder, provided that such transferee executes and
delivers to the parties hereto a counterpart of this Agreement and otherwise
agrees to be bound by all of the terms and provisions hereof.
(b) DELEGATION RIGHTS. If DHS is unable to exercise any of its
purchase rights hereunder, it shall be entitled to delegate such rights to such
of the Stockholders who desire to purchase stock upon the occurrence of the
events set forth in Sections 4(a)(i) or (ii) hereof, provided such stockholders,
as a condition of such obligation, shall be entitled to purchase such stock pro
rata as consolidated pursuant to Section 4(a)(ii) hereof.
(c) VOLUNTARY TRANSFERS BY MANAGEMENT STOCKHOLDERS.
(i) OPTION OF OTHER MANAGEMENT STOCKHOLDERS. A
Management Stockholder shall have the right to receive a bona fide
offer to purchase (which he is willing to accept) (a "MANAGEMENT
OFFER") from any independent third person capable of consummating such
a sale of all, but not less than all, of his Stock (the "MANAGEMENT
OFFERED STOCK"). Before accepting a Management Offer, such Management
Stockholder shall first offer in writing (the "MANAGEMENT STOCKHOLDER'S
Offer") to sell the Management Offered Stock to the other Management
Stockholders (the "OTHER MANAGEMENT STOCKHOLDERS") at the price and on
the terms on which such selling Management Stockholder proposes to
transfer the Management Offered Stock to the proposed third party
transferee. The Management Stockholder's Offer shall set forth (A) the
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number of shares of the Management Offered Stock, (B) the name and
address of the proposed transferee, (C) the amount of consideration to
be received by the selling Stockholder, and (D) the method of proposed
payment. A copy of the Management Stockholder's Offer shall
simultaneously also be sent to all of the other Stockholders and to
DHS.
The Other Management Stockholders shall have the
option to acquire all or any of the shares of Management Offered Stock
at the price and upon the terms provided in the Management
Stockholder's Offer. If more than one Other Management Stockholder
desires to purchase the Management Offered Stock, such Management
Offered Stock shall be purchased by them in such proportions as they
may agree. In the absence of agreement, each of the Other Management
Stockholders desiring to purchase the Management Offered Stock shall be
entitled to purchase up to that number of shares of Management Offered
Stock which is equal to the product of such number of shares of
Management Offered Stock divided by the number of other Management
Stockholders desiring to purchase such shares of Stock. The Other
Management Stockholders shall have the right to exercise their
respective options to purchase the Management Offered Stock, for a
period of thirty (30) days following their receipt of the Management
Stockholder's Offer, by notifying the selling Management Stockholder in
writing of their respective intentions to purchase at Closing (as
defined in Section 7(e) hereof) all or any shares of the Management
Offered Stock.
(ii) OPTION OF THE HOLDERS OF CLASS B COMMON STOCK.
If the Other Management Stockholders do not accept the Management
Stockholder's Offer to purchase all of the shares of Management Offered
Stock within the period of thirty (30) days provided in Section
5(c)(i), then the selling Management Stockholder, immediately
thereafter, shall be deemed to have made an offer (the "MANAGEMENT
STOCKHOLDER'S SECOND OFFER") to sell all of the remaining shares of the
Management Offered Stock (the "REMAINING MANAGEMENT OFFERED STOCK") to
the holders of Class B Common Stock at the price and upon the terms
provided in the Management Stockholder's Offer. The holders of the
Class B Common Stock shall have the option, for a period of fifteen
(15) days after the earlier to occur of (A) expiration of the thirty
(30) day period provided in Section 5(c)(i), or (B) notification by all
of the Other Management Stockholders to the holders of Class B Common
Stock to the effect that the Other Management Stockholders, in the
aggregate, have elected to purchase less than all of the shares of
Management Offered Stock as provided in Section 5(c)(i), to purchase
all of the Remaining Management Offered Stock, upon written
notification to the selling Management Stockholder, at the price and
upon the terms provided in this Section 5(c). If more than one holder
of Class B Common Stock desires to purchase the Remaining Management
Offered Stock, such
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Remaining Management Offered Stock shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each of the
holders of Class B Common Stock desiring to purchase the Remaining
Management Offered Stock shall be entitled to purchase up to that
number of shares of Remaining Management Offered Stock which is equal
to the product of his percentage interest of all of the shares of Class
B Common Stock held by all such holders of Class B Common Stock times
the number of shares of Remaining Management Offered Stock available
for purchase hereunder. The holders of Class B Common Stock shall have
the right to exercise their respective options to purchase the
Remaining Management Offered Stock by notifying the selling Management
Stockholder in writing of their respective intentions to purchase at
Closing (as defined in Section 7(e) hereof) all or any shares of the
Remaining Management Offered Stock.
(iii) OPTION OF THE HOLDERS OF CONVERTIBLE PREFERRED
STOCK. If the holders of Class B Common Stock do not accept the
Management Stockholder's Second Offer to purchase all of the shares of
Remaining Management Offered Stock within the period of fifteen (15)
days provided in Section 5(c)(ii), then the selling Management
Stockholder, immediately thereafter, shall be deemed to have made an
offer (the "MANAGEMENT STOCKHOLDER'S THIRD OFFER") to sell all of the
remaining shares of the Remaining Management Offered Stock (the
"AVAILABLE MANAGEMENT OFFERED STOCK") to the holders of Convertible
Preferred Stock at the price and upon the terms provided in the
Management Stockholder's Offer. The holders of Convertible Preferred
Stock shall have the option, for a period of fifteen (15) days after
the earlier to occur of (A) expiration of the fifteen (15) day period
provided in Section 5(c)(ii), or (B) notification by all of the holders
of Class B Common Stock to the holders of Convertible Preferred Stock
to the effect that the holders of Class B Common Stock have elected to
purchase less than all of the shares of Remaining Management Offered
Stock as provided in Section 5(c)(ii), to purchase all of the Available
Management Offered Stock, upon written notification to the selling
Management Stockholder, at the price and upon the terms provided in
this Section 5(c). If more than one holder of Convertible Preferred
Stock desires to purchase the Available Management Offered Stock, such
Available Management Offered Stock shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each of the
holders of Convertible Preferred Stock desiring to purchase the
Available Management Offered Stock shall be entitled to purchase up to
that number of shares of Available Management Offered Stock which is
equal to the product of his percentage interest of all of the shares of
Convertible Preferred Stock held by all such holders of Convertible
Preferred Stock times the number of shares of Available Management
Offered Stock available for purchase hereunder. The holders of
Convertible Preferred Stock shall have the
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right to exercise their respective options to purchase the Available
Management Offered Stock by notifying the selling Management
Stockholder in writing of their respective intentions to purchase at
Closing (as defined in Section 7(e) hereof) all or any shares of the
Available Management Offered Stock.
(iv) OPTION OF DHS. If the holders of Convertible
Preferred Stock do not accept the Management Stockholder's Third Offer
to purchase all of the shares of Available Management Offered Stock
within the period of fifteen (15) days provided above in Section
5(c)(iii), then the selling Management Stockholder, immediately
thereafter, shall be deemed to have made an offer (the "FINAL
MANAGEMENT STOCKHOLDER'S OFFER") to sell all of the remaining shares of
the Available Management Offered Stock (the "FINAL MANAGEMENT OFFERED
STOCK") to DHS at the price and upon the terms provided in the
Management Stockholder's Offer. DHS shall have the option, for a period
of fifteen (15) days after the earlier to occur of (i) expiration of
the fifteen (15) day period provided in Section 5(c)(iii), or (ii)
notification by all of the holders of Convertible Preferred Stock to
DHS to the effect that the holders of Convertible Preferred Stock have
elected to purchase less than all of the shares of Available Management
Offered Stock as provided in Section 5(c)(iii), to purchase all or some
of the Final Management Offered Stock, upon written notification to the
selling Management Stockholder, at the price and upon the terms
provided in the Management Stockholder's Offer.
(v) TRANSFERS TO THIRD PARTIES. If (A) a Management
Stockholder elects to transfer all of his shares of Management Stock;
(B) said Management Stockholder strictly complies with the provisions
of Sections 5(c)(i) through 5(c)(iv) above; (C) the Remaining
Management Stockholders, the holders of Class B Common Stock, the
holders of Convertible Preferred Stock and DHS elect to purchase, in
the aggregate, less than all of the shares of Management Offered Stock;
and (D) the Management Stockholder who desires to transfer the
Management Offered Stock complies with the terms of this Section
5(c)(v), then all of the Management Offered Stock remaining unsold
pursuant to the rights of refusal contained in this Section 5(c) may be
sold by the selling Management Stockholder to the third party named in
the Management Stockholder's Offer within a period of thirty (30) days
after the expiration of the fifteen (15) day period provided in Section
5(c)(iv). Such remaining Management Offered Stock may be transferred to
the third party named in the Management Stockholder's Offer; provided
that (X) such shares are sold at the price and on the terms set forth
in the Management Stockholder's Offer; (Y) the shares so transferred
shall remain subject to all of the provisions of this Agreement; and
(Z) the third party transferee shall execute an instrument acceptable
to counsel for DHS, pursuant to
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which such third party becomes a party to this Agreement and agrees to
be bound by all of the provisions and terms or conditions hereof.
(d) VOLUNTARY TRANSFERS BY THE HOLDERS OF CLASS B COMMON STOCK.
(i) OPTION OF OTHER STOCKHOLDERS. Each holder of
Class B Common Stock shall have the right to receive a bona fide offer
to purchase (which it is willing to accept) (a "CLASS B COMMON OFFER")
from any independent third person capable of consummating such a sale
of all, but not less than all, of its Class B Common Stock (the "CLASS
B COMMON OFFERED STOCK"). Before accepting a Class B Common Offer, the
holder of Class B Common Stock shall first offer in writing (the "CLASS
B COMMON STOCKHOLDER'S OFFER") to sell the Class B Common Offered Stock
to the other Stockholders (the "OTHER STOCKHOLDERS") at the price and
on the terms on which such selling Class B Common Stockholder proposes
to transfer the Class B Common Offered Stock to the proposed third
party transferee. The Class B Common Stockholder's Offer shall set
forth (A) the number of shares of the Class B Common Offered Stock, (B)
the name and address of the proposed transferee, (C) the amount of
consideration to be received by the holder of Class B Common Stock, and
(D) the method of proposed payment. A copy of the Class B Common
Stockholder's Offer shall simultaneously also be sent to DHS.
The Other Stockholders shall have the option to
acquire all or any of the shares of Class B Common Offered Stock at the
price and upon the terms provided in the Class B Common Stockholder's
Offer. If more than one Other Stockholder desires to purchase the Class
B Common Offered Stock, such Class B Common Offered Stock shall be
purchased by them in such proportions as they may agree. In the absence
of agreement, each of the Other Stockholders desiring to purchase the
Class B Common Offered Stock shall be entitled to purchase up to that
number of shares of Class B Common Offered Stock which is equal to the
product of his percentage interest of all of the shares of DHS Capital
Stock then held by all such Other Stockholders times the number of
shares of Class B Common Offered Stock available for purchase
hereunder. The Other Stockholders shall have the right to exercise
their respective options to purchase the Class B Common Offered Stock,
for a period of thirty (30) days following their receipt of the Class B
Common Stockholder's Offer, by notifying such holder of Class B Common
Stock in writing of their respective intentions to purchase at Closing
(as defined in Section 7(e) hereof) all or any shares of the Class B
Common Offered Stock.
(ii) OPTION OF DHS. If the Other Stockholders do not
accept the Class B Common Stockholder's Offer to purchase all of the
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shares of Class B Common Offered Stock within the period of thirty (30)
days provided above in Section 5(d)(i), then the holders of Class B
Common Stock, immediately thereafter, shall be deemed to have made an
offer (the "FINAL CLASS B COMMON STOCK OFFER") to sell all of the
remaining shares of the Class B Common Offered Stock (the "REMAINING
CLASS B COMMON OFFERED STOCK") to DHS at the price and upon the terms
provided in the Class B Common Stockholder's Offer. DHS shall have the
option, for a period of fifteen (15) days after the earlier to occur of
(i) expiration of the thirty (30) day period provided in Section
5(d)(i), or (ii) notification by all of the Other Stockholders to DHS
to the effect that the Other Stockholders have elected to purchase less
than all of the shares of Class B Common Offered Stock as provided in
Section 5(d)(i), to purchase all of the Remaining Class B Common
Offered Stock, upon written notification to such holder of Class B
Common Stock, at the price and upon the terms provided in the Class B
Common Stockholder's Offer.
(iii) TRANSFERS TO THIRD PARTIES. If (A) the holder
of Class B Common Stock elects to transfer all of its shares of Class B
Common Stock; (B) the holder of Class B Common Stock strictly complies
with the provisions of Sections 5(d)(ii) and (iii); (C) the Other
Stockholders and DHS elect to purchase, in the aggregate, less than all
of the shares of Class B Common Offered Stock; and (D) the holder of
Class B Common Stock complies with the terms of this Section 5(c)(iii),
then all of the Class B Common Offered Stock may be sold by the holder
of Class B Common Stock to the third party named in the Class B Common
Stockholder's Offer within a period of fifteen (15) days after the
expiration of the fifteen (15) day period provided in Section 5(d)(ii).
Such Class B Common Offered Stock may be transferred to the third party
named in the Class B Common Stockholder's Offer; provided that (X) such
shares are sold at the price and on the terms set forth in the Class B
Common Stockholder's Offer; (Y) the shares so transferred shall remain
subject to all of the provisions of this Agreement; and (Z) the third
party transferee shall execute an instrument acceptable to counsel for
DHS, pursuant to which such third party becomes a party to this
Agreement and agrees to be bound by all of the provisions and terms or
conditions hereof.
(e) VOLUNTARY TRANSFERS BY THE HOLDERS OF CONVERTIBLE
PREFERRED STOCK. Notwithstanding any other provision of this Agreement or any
other agreement to which DHS and either of the Series A Investor, the Series B
Investor or the Series C Investor are parties, no shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be,
may be voluntarily transferred pursuant to this Section 5(e) or otherwise if, at
the time of such attempt to transfer, (1) the Series A Investor, the Series B
Investor or the Series C Investor, respectively, has not made full payment to
DHS in cash for all shares of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock, as the case may be, held by the Series A Investor,
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the Series B Investor or the Series C Investor, respectively, including all
amounts of principal and interest under any note given in partial consideration
for such shares, or (2) any holder of Convertible Preferred Stock proposing to
sell such stock pursuant to this Section 5(e) holds, at the time of such attempt
at transfer, rights to purchase additional shares of Convertible Preferred
Stock.
(i) OPTION OF DHS. Except as otherwise herein
provided, each holder of Convertible Preferred Stock shall have the
right to receive a bona fide offer to purchase (which it is willing to
accept) (a "CONVERTIBLE PREFERRED STOCK OFFER"), from any independent
third person capable of consummating such a sale, any or all of its
shares of Convertible Preferred Stock (the "PREFERRED OFFERED STOCK").
Before accepting a Convertible Preferred Stock Offer, the holder of
Convertible Preferred Stock shall first offer in writing (the
"CONVERTIBLE PREFERRED STOCKHOLDER'S Offer") to sell the Preferred
Offered Stock to DHS at the price and on the terms on which the holder
of Convertible Preferred Stock proposes to transfer the Preferred
Offered Stock to the proposed third party transferee. The Convertible
Preferred Stockholder's Offer shall set forth (A) the number of shares
of the Preferred Offered Stock, (B) the name and address of the
proposed transferee, (C) the amount of consideration to be received by
the holder of Convertible Preferred Stock, and (D) the method of
proposed payment.
DHS shall have the option to acquire all, but not
less than all, of the shares of Preferred Offered Stock at the price
and upon the terms provided in the Convertible Preferred Stockholder's
Offer. DHS shall have the right to exercise its option to purchase the
Preferred Offered Stock, for a period of thirty (30) days following its
receipt of the Convertible Preferred Stockholder's Offer, by notifying
all of the holders of Convertible Preferred Stock in writing of its
intention to purchase at Closing (as defined in Section 7(e) hereof)
all or any shares of the Preferred Offered Stock.
(ii) OPTION OF THE HOLDERS OF CONVERTIBLE PREFERRED
STOCK. If DHS does not accept the Convertible Preferred Stockholder's
Offer to purchase all of the Shares of Preferred Offered Stock within
the period of thirty (30) days provided in Section 5(e)(i), then the
selling holder of Convertible Preferred Stock, immediately thereafter,
shall be deemed to have made an offer (the "SECOND CONVERTIBLE
PREFERRED STOCKHOLDER'S OFFER") to sell all of the remaining shares of
the Preferred Offered Stock (the "REMAINING PREFERRED OFFERED STOCK")
to the other holders of Convertible Preferred Stock at the price and
upon the terms provided in the Convertible Preferred Stockholder's
Offer. The other holders of Convertible Preferred Stock shall have the
option, for a period of fifteen (15) days after the earlier to occur of
(A) expiration of the thirty (30) day period provided in Section
5(e)(ii), or (B) notification by DHS to
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the holders of Convertible Preferred Stock to the effect that DHS has
elected to purchase less than all of the shares of Remaining Preferred
Offered Stock as provided in Section 5(e)(ii), to purchase all of the
Remaining Preferred Offered Stock upon written notification to the
selling holder of Remaining Preferred Offered Stock, at the price and
upon the terms provided in the Convertible Preferred Stockholder's
Offer. If more than one holder of Convertible Preferred Stock desires
to purchase the Remaining Preferred Offered Stock, such Remaining
Preferred Offered Stock shall be purchased by them in such proportions
as they may agree. In the absence of agreement, each of the holders of
Convertible Preferred Stock desiring to purchase the Remaining
Preferred Offered Stock shall be entitled to purchase up to that number
of shares of Remaining Preferred Offered Stock which is equal to the
product of his percentage interest of all of the shares of Convertible
Preferred Stock held by all such holders of Convertible Preferred Stock
times the number of shares of Remaining Preferred Offered Stock
available for purchase hereunder. The holders of Convertible Preferred
Stock shall have the right to exercise their respective options to
purchase the Remaining Preferred Offered Stock by notifying the selling
holder of Convertible Preferred Stock in writing of their respective
intentions to purchase at Closing (as defined in Section 7(e) hereof)
all or any shares of the Remaining Preferred Offered Stock.
(iii) TRANSFERS TO THIRD PARTIES. If (A) the holder
of Convertible Preferred Stock elects to transfer all of its shares of
Convertible Preferred Stock; (B) the holder of Convertible Preferred
Stock strictly complies with the provisions of Sections 5(e)(i) and
(ii); (C) DHS does not exercise its right to purchase all, but not less
than all, of the shares of Preferred Offered Stock and the holders of
Convertible Preferred Stock elect to purchase, in the aggregate, less
than all of the shares of the Remaining Preferred Offered Stock; and
(D) the holder of Convertible Preferred Stock complies with the terms
of this Section 5(e)(iii), then all, but not less than all, of the
shares of the Remaining Preferred Offered Stock may be sold by the
holder of Convertible Preferred Stock to the third party named in the
Convertible Preferred Stockholder's Offer within a period of thirty
(30) days after the expiration of the fifteen (15) day period provided
in Section 5(e)(ii). Such Remaining Preferred Offered Stock may be
transferred to the third party named in the Convertible Preferred
Stockholder's Offer; provided that (X) such shares are sold at the
price and on the terms set forth in the Convertible Preferred
Stockholder's Offer; (Y) the shares so transferred shall remain subject
to all of the provisions of this Agreement; and (Z) the third party
transferee shall execute an instrument reasonably acceptable to counsel
for DHS, pursuant to which such third party becomes a party to this
Agreement and agrees to be bound by all of the provisions and terms or
conditions hereof.
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(f) The closing for any purchase by a Stockholder or DHS of
shares proposed to be voluntarily transferred by a Stockholder pursuant to a
bona fide third party offer under this Section 5 shall be held at 10:00 a.m. at
the principal offices of DHS in Owings Mills, Maryland, on the date set forth
for the closing in the bona fide offer. In the event that no such date is set
forth in the bona fide offer, the closing shall be held at the principal offices
of DHS in Owings Mills, Maryland, at 10:00 a.m., not later than the 30th day
after the last to expire of the time periods for giving of notice provided for
under this Section 5 and applicable to such proposed voluntary transfer.
6. PURCHASE PRICE OF STOCK FOR PURPOSES OF INVOLUNTARY
TRANSFERS AND SECTIONS 4(E)(II) AND 4(F)(II).
(a) AGREEMENT OF THE PARTIES. With respect to purchases
governed by the provisions of Section 4(d), Section 4(e)(ii) and Section
4(f)(ii) hereof, if the purchaser of Stock hereunder, on the one hand, and the
transferring Stockholder, on the other hand, agree in writing as to the purchase
price for the Stock to be sold pursuant to Section 4(d), 4(e)(ii) or Section
4(f)(ii) hereof, as the case may be, such agreed price shall be the purchase
price for such Stock. If no agreement on the purchase price of such Stock can be
reached within thirty (30) days from the date of the occurrence of the
applicable event under the provisions of Section 4(d), or 4(e)(ii) or, with
respect to the occurrence of an event governed by Section 4(f)(ii), within
thirty (30) days after the receipt of the notice required to be determined
thereunder, as the case may be (provided that, with respect to the death of a
Management Stockholder other than Rifkin or Kimmel, such thirty (30) day period
shall commence upon the appointment and qualification of such deceased
Management Stockholder's personal representative), then the purchase price of
said Stock shall be determined pursuant to Section 6(b) hereof.
(b) APPRAISAL.
(i) If the purchase price of Stock to be sold
pursuant to Section 4(d), 4(e)(ii) or 4(f)(ii) is not agreed upon as
provided in Section 6(a) within the time period stated therein, then
within fourteen (14) days thereafter an appraiser or appraisers shall
be jointly selected by the transferring Stockholder, on the one hand,
and DHS on the other hand, and such jointly selected appraiser or
appraisers shall determine the "fair market value of the Stock," which
determination shall be binding and conclusive upon all parties. For
purposes of this Section 6(b), the "FAIR MARKET VALUE OF THE STOCK"
shall be an amount equal to the "Fair Market Value Per Share" of the
Class being sold and purchased hereunder, multiplied by the number of
shares of Stock of said Class of the transferring Stockholder which are
being sold and purchased hereunder. "FAIR MARKET VALUE PER SHARE" shall
be an amount as of the Disposition Date as determined by appraisal
using such methods as
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the appraisers appointed hereunder determine, in the exercise of their
sole discretion, is appropriate pursuant to this Section 6(b), taking
into account any liquidation preferences or other rights attendant to
such class, any minority stockholder discount, majority stockholder
premium or marketability or other discount or premium, as the case may
be. "DISPOSITION DATE" shall be the last day of the calendar month
immediately preceding the event giving rise to the purchase of the
Stock under Section 4 hereof.
(ii) If the transferring Stockholder, on the one
hand, and DHS on the other hand, do not agree upon the selection of an
appraiser or appraisers, as provided in Section 6(b)(i), within the
period therein stated, then, within seven (7) days after the expiration
of the fourteen (14) day period provided for in Section 6(b)(i) hereof,
the transferring Stockholder shall appoint an appraiser, and DHS shall
appoint a second appraiser. The two (2) appraisers so appointed shall
appoint a third appraiser within seven (7) days after both shall have
been appointed. If either the transferring Stockholder or DHS shall
fail to so appoint an appraiser, the appraiser duly appointed by the
other shall serve as the sole appraiser and such appraiser shall
determine the fair market value of the Stock and such determination
shall be binding, final and conclusive on all parties. The said
appraisers so appointed (or the sole appraiser if any party fails to
select an appraiser as provided above), shall, within thirty (30) days
after the last appointment thereof determine the fair market value of
the Stock and the determination of such appraiser shall be
determinative of the fair market value of the Stock for the purposes of
this Agreement and shall be binding, final and conclusive on all
parties. If the appraisers cannot agree on the fair market value of the
Stock, within the time allotted, then such fair market value shall be
the median of the two appraisals closest in value to each other.
(iii) All expenses incurred in the appraisal process
shall be borne and paid equally by the transferring Stockholder, and
DHS.
7. PAYMENT OF PURCHASE PRICE. The payment of any purchase
price for Stock transferred pursuant to Section 4 hereof may be made on such
terms as are agreed upon by the parties but, absent such agreement shall be
made as follows:
(a) CASH PORTION.(a) CASH PORTION. Subject to the terms of
Section 7(d) hereof and, with respect to any Involuntary Transfer, subject to
such other terms and conditions as may be required by any court which has then
exercised jurisdiction over any Involuntary Transfer Stockholder with respect to
its Stock, or to any assignee, trustee in bankruptcy or successor in interest,
as the case may be, (i) in the event of any transfer pursuant to Section 4
(other than as a result of the death of a Management Stockholder), (A) where DHS
is the purchaser, ten
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percent (10%) of the total purchase price of the Stock shall be paid in cash by
DHS on the Closing Date, as defined in Section 7(e) hereof, and (B) where any
party other than DHS is the purchaser, the entire amount of the purchase price
of the Stock shall be paid by check by such purchaser(s) on the Closing Date,
and (ii) in the event of any transfer as a result of the death of a Management
Stockholder, DHS shall pay by check on the Closing Date the greater of (A) the
proceeds of any life insurance policy or policies (but not in excess of the
purchase price to be paid by DHS hereunder) owned by DHS on which the deceased
Management Stockholder is the named insured and DHS is the applicant, owner and
beneficiary, and which policy or policies were purchased for the purpose of
using the proceeds thereof to purchase the shares of Stock of the deceased
Management Stockholder upon his death (rather than to reimburse DHS for the loss
of the services to be provided to DHS by the deceased Management Stockholder),
or (B) ten percent (10%) of the total purchase price of the Stock held by such
deceased Management Stockholder. Notwithstanding the foregoing, if DHS is a
purchaser hereunder but is unable, under applicable law, to make all or any
portion of any payment otherwise due hereunder on the Closing Date, DHS shall
pay such portion, if any, as applicable law permits, and the balance of such
payment shall be payable pursuant to the provisions of Section 7(b) hereof.
(b) PROMISSORY NOTE. The balance of the purchase price shall
be represented by a promissory note of DHS, payable in seven (7) equal annual
installments of principal and interest, the first of which shall be due and
payable on the first anniversary of delivery of such note. The note shall be
substantially in the form of the promissory note attached hereto and made a part
hereof as EXHIBIT A, and contain terms and conditions substantially similar to
the terms and conditions contained therein. Interest shall accrue on, and be
payable with, the unpaid balance of said note from the Closing Date at a rate
equal to the applicable federal rate for long-term debt instruments then
existing on the date of issuance under Code Section 1274(d)(1). As security for
payment of the amounts due under such promissory note, DHS shall pledge to the
selling Stockholder such shares of Stock being acquired until such time as all
payments due thereunder have been paid in full, provided that such selling
Stockholder shall not be entitled to exercise any voting or other rights with
respect to such shares of Stock so long as DHS is not in default of any payment
due under such note.
(c) DEBT DUE FROM STOCKHOLDER.(c) DEBT DUE FROM STOCKHOLDER.
Any debt due by the transferring Stockholder to DHS shall be payable according
to its terms, as shall any debt due by DHS to the transferring Stockholder;
except, however, that, regardless of the terms of any such debt due by the
Stockholder to DHS, any cash payment due under Section 7(a) hereof, as well as
any insurance proceeds payable under Section 8 hereof, with respect to the
purchase of the transferring Stockholder's Stock shall, instead of being paid to
the transferring Stockholder, be first applied to the discharge of any such
indebtedness, until all such
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indebtedness is fully discharged. The provisions of this Section 7(c) shall also
apply to any purchases of Stock by DHS pursuant to Section 5 hereof.
(d) INVOLUNTARY TRANSFERS. DHS shall settle with an assignee,
trustee in bankruptcy, attaching court or officer or successor in interest
holding Stock received in an Involuntary Transfer by taking any or all such
Stock in execution and paying to them the purchase price for each share of such
Stock calculated pursuant to Section 6, but not exceeding the Stockholder's
indebtedness and proper items of expense. The balance of the value of such
Stock, if any, shall be distributable to the Stockholder with such payments to
be applied in the order due in accordance with Section 7.
(e) CLOSING. Closing on the sale of any shares of Stock sold
pursuant to Section 4 of this Agreement shall, unless otherwise agreed to in
writing by the purchaser(s) and the transferring Stockholder, or otherwise
provided in this Agreement, be held at the principal place of business of DHS
(i) thirty (30) days from (A) the date that the last applicable period for
exercising an unexercised option to purchase has lapsed, (B) the date an option
to purchase is accepted or exercised, or (C) with respect to a sale as the
result of the disability of Rifkin or Kimmel pursuant to Section 4(f)(ii), the
date of delivery of the notice required thereunder, or (C) the occurrence of any
event set forth in Section 4(a) (other than death of a Management Stockholder),
or (ii) with respect to the death of a Management Stockholder, ninety (90) days
after the appointment and qualification of a deceased Management Stockholder's
personal representative (collectively, the "CLOSING DATE"); provided that, if an
appraiser or appraisers are appointed to determine the purchase price pursuant
to Section 6, then the Closing shall take place on a date no later than thirty
(30) days from the receipt by the selling Stockholder and the purchaser of the
determination of the fair market value of the Stock if such Closing Date would
occur later than the Closing Date otherwise determined pursuant to this Section
7(e). At the Closing, upon payment of the purchase price (including delivery of
the notes), the certificates representing the Stock to be purchased and sold
hereunder shall be delivered by the selling Stockholder (or his personal or
legal representatives, as the case may be) to the purchaser(s), appropriately
endorsed in blank for transfer. If the certificates representing any shares of
Stock to be so transferred have not been surrendered by the selling Stockholder,
all rights of the holder thereof with respect to said Stock (including voting
rights) nonetheless shall cease and terminate.
8. LIFE INSURANCE.
(a) PURCHASE AND OWNERSHIP OF POLICIES. As soon as practicable
following the execution of this Agreement, DHS shall use its commercially
reasonable best efforts to purchase a life insurance policy on the life of each
Management Stockholder in such amounts, if any, as DHS' Board of Directors deems
reasonable and appropriate. DHS shall be the owner and
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beneficiary of each such policy, and any proceeds received thereunder shall be
held by DHS in trust for the purposes of satisfying DHS' purchase obligations
hereunder. Each Management Stockholder agrees to cooperate with DHS in
obtaining, and in keeping in full force and effect, all such policies. Once a
policy has been purchased, DHS shall maintain all such insurance policies in
full force and effect and shall not, without the prior written consent of the
respective Management Stockholder, cancel any such policy or take or omit to
take any action which might give rise to the termination or cancellation
thereof. DHS shall pay premiums on all insurance policies as they become due.
DHS may, when it deems appropriate, apply any dividends declared and paid on
such policies to the payment of premiums. No party hereto shall have any
obligations hereunder to the extent a Management Stockholder is either
uninsurable or may not be insured as herein contemplated at upon commercially
reasonable terms. Notwithstanding the foregoing, DHS may, in lieu of or in
addition to policies of insurance acquired, owned and administered as set forth
above, in the discretion of its Board of Directors, provide as benefits to its
employees, including Management Stockholders, such other and additional policies
of insurance or other insurance benefit plans on such other or additional terms
and conditions, including ownership of policies of insurance in whole or in part
by employees, including Management Stockholders, as it deems reasonable and
appropriate.
(b) Option to Purchase Policies. If a Management Stockholder
transfers all of his Stock during his lifetime pursuant to Sections 4 or 5, or
if this Agreement is terminated without being superseded by a similar agreement
prior to such Management Stockholder's death, such Management Stockholder, or
any designee of such Management Stockholder, shall have the right, during the
sixty (60) day period beginning with the date of transfer or termination of this
Agreement, to purchase any life insurance policy insuring his life owned by DHS
by paying DHS an amount equal to the cash surrender value of such policy
(determined after payment of all policy loans incurred to pay premiums due
thereunder and interest thereon) as of the date of purchase, plus the unearned
portion of any premiums which shall have been paid thereon.
9. VOTING BY STOCKHOLDERS.
(a) SALE OF STOCKHOLDER'S STOCK. If any vote, consent,
determination or other action is required or permitted to be made by the
Stockholders and/or by DHS pursuant to the terms of this Agreement in order to
authorize and permit DHS to exercise any of its rights hereunder, any
Stockholder who would, upon exercise of said rights by DHS, thereby become
obligated to sell his Stock, shall cast his vote and otherwise act, (i) as a
Stockholder, by voting his stock in the same manner as do the holders of a
majority of shares of Stock other than his own, and, (ii) as a director, by
voting in the same manner as do a majority of the directors other than himself.
A Stockholder who becomes obligated to sell his shares of Stock hereunder shall
execute such instruments as may be necessary or appropriate to effect any action
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required or permitted to be taken by the Stockholders and the directors of DHS
pursuant to the terms of this Agreement.
(b) CLASS A DIRECTORS. Each of the present and future holders
of Class A Common Stock hereby agrees (i) to vote his shares of Stock to elect
Stewart Gold, Alan Kimmel, and Scott Rifkin, as three of DHS' Class A Common
Stock Directors for as long as their respective Employment Agreements with DHS
are in full force and effect, and (ii) if then serving as a Class A Common Stock
Director, to offer to resign as a director immediately upon termination of his
employment with DHS.
(c) ISSUANCE OF ADDITIONAL SHARES OF STOCK. Subject to such
rights of the Series A Preferred Stock Directors pursuant to Article IV, Section
B.1(c) of the DHS Amended and Restated Articles, to such rights of the Series B
Preferred Stock Directors pursuant to Article IV, Section C.1(c) of the DHS
Amended and Restated Articles, to such rights of the Series C Preferred Stock
Directors pursuant to Article IV, Section D.1(c) of the DHS Amended and Restated
Articles, to such rights of the holders of Series A Preferred Stock pursuant to
Article IV, Section B.1(e) of the DHS Amended and Restated Articles, to such
rights of the holders of Series B Preferred Stock pursuant to Article IV,
Section C.1(e) of the DHS Amended and Restated Articles, and to such rights of
the holders of Series C Preferred Stock pursuant to Article IV, Section D.1(e)
DHS Amended and Restated Articles, to exercise their respective rights with
respect to the matters set forth therein, each Stockholder agrees (i) to vote
his or its shares of Stock, (ii) to use commercially reasonable best efforts to
cause his or its Affiliates to vote their shares of Stock, and (iii) if serving
as a Director of DHS, to vote as a Director, to cause DHS to issue additional
shares of stock to the Persons and in the amounts as are necessary:
(1) to comply with the provisions of a public
offering of DHS Common Stock pursuant to a registration statement filed
with the Securities and Exchange Commission;
(2) to fund or comply with the provisions of a stock
option plan, restricted option plan, employee stock purchase plan,
stock bonus plan or other employee stock plan or benefit approved and
implemented by the Board for the benefit of officers, directors or
employees of DHS, provided that the aggregate numbers of shares issued
in respect of all such plans shall not exceed ten percent (10%) of the
fully diluted capital stock of DHS calculated as of the time of the
issuance and after giving effect thereto;
(3) upon conversion of any shares of Convertible
Preferred Stock;
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(4) for the acquisition of another corporation by DHS
by merger, purchase of substantially all of the assets of such
corporation or other reorganization resulting in the ownership by DHS
of not less than fifty percent (50%) of the voting power of such
corporation;
(5) as a result of a stock split, stock dividend or
reclassification of shares of Common Stock distributable on a pro rata
basis to all holders of Common Stock, with respect to any shares of
Stock which have been repurchased by DHS and are being resold; and/or
(6) to permit BMGGP, Inc., as General Partner of the
LP, to issue Additional Limited Partner Interests upon acquisition of
additional Medical Practices from and after the time that there are
sixty-six (66) physicians who hold Limited Partner Interests in the LP
(including options to purchase Limited Partner Interests) directly or
indirectly through their professional corporations.
10. SPECIFIC PERFORMANCE. Because the shares of Stock cannot
be readily purchased or sold in the open market, irreparable damage would result
in the event this Agreement is not specifically enforced. Therefore, the rights
to, or obligations of, any party shall be enforceable in a court by a decree of
specific performance, and appropriate injunctive relief may be applied for and
granted in connection therewith. Such remedies, and all other remedies provided
for in this Agreement, shall, however, be cumulative and not exclusive and shall
be in addition to any other remedies which any party may have under this
Agreement or otherwise. Notwithstanding any other provision of this Agreement,
including, without limitation, the provisions of this Section 9, holders of
Convertible Preferred Stock shall have no obligation to vote for any matter
which requires the consent of such Stockholders or of the directors of DHS
elected by them under the Amended and Restated Articles of Incorporation of DHS.
11. GUARANTEE OF CERTAIN MANAGEMENT STOCKHOLDERS.
(a) Pursuant to the terms and conditions of Gold, Rifkin and
Kimmel's respective DHS Employment Agreements, such Management Stockholders are
each required to secure, or to assist the other officers and employees of DHS in
securing, financing for DHS to satisfy DHS' capital requirements as set forth in
its financial projections. The parties hereto have entered into the transactions
contemplated by the Practice Participation Agreement on the assumption that DHS
would receive cash as a result of equity financing in an amount of not less than
$5 million on or before February 28, 1998 (the "FINAL MATURITY DATE").
(b) If DHS does not receive at least $5 million of cash as a
result of equity financing proceeds by the Final Maturity Date, the amount of
equity
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financing proceeds actually received by DHS on or before such date shall be
subtracted from $5 million (such positive difference being the "remainder"),
and each of Gold, Rifkin and Kimmel shall present to DHS for cancellation, and
DHS shall immediately cancel that number of shares of Class A Common Stock held
by each such Management Stockholder equal to the product of the number of fully
diluted shares of Class A Common Stock held by such Management Stockholder on
the Closing Date, times a fraction, (i) the numerator of which shall be such
remainder, and (ii) the denominator of which shall be 5 million.
(c) Each of the parties hereto acknowledges and agrees that
any transfer of shares of Class A Common Stock pursuant to the provisions of
this Section 11 shall not be subject to the limitations and restrictions on
transfer, and the rights granted to the other Stockholders and DHS with respect
to transfers, as otherwise provided in Section 5 hereof.
(d) Each of the Management Stockholders and DHS hereby agree
that the provisions of this Section 11 shall be deemed to be amendments to each
Management Stockholder's respective DHS Employment Agreement, and hereby becomes
a part thereof.
(e) For purposes of this Section 11, an equity financing shall
include any transaction in which Capital Stock of DHS is issued in return for
cash.
12. SEVERABILITY. It is the express intention of the parties
that the agreements contained herein shall have the widest application possible.
If any agreement contained herein is found by a court having jurisdiction to be
unreasonable in scope or character, the agreement shall not be rendered
unenforceable thereby, but the parties shall in good faith negotiate a
modification to the agreement that preserves the essence of the agreement of the
parties contained herein with retroactive effect to render such agreement
reasonable and such agreement shall be enforced as thus modified. If the court
having jurisdiction will not review the agreement, then the parties shall
mutually agree to a revision having an effect as close as permitted by law to
the provision declared unenforceable. The parties further agree that in the
event a court having jurisdiction determines, despite the express intent of the
parties, that any portion of any covenant or agreement contained herein is not
enforceable, the remaining provisions of this Agreement shall nonetheless remain
valid and unenforceable.
13. ENDORSEMENT OF CERTIFICATE. Upon the execution of this
Agreement, each certificate of Stock of DHS now registered in the name of a
Stockholder and subject hereto shall be endorsed by the Secretary of Company as
follows:
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"This certificate is transferable only upon compliance with
the provisions of a restrictive agreement dated September 4, 1996, by
and among Doctors Health System, Inc. and certain of its stockholders,
a copy of which is on file in the office of the Secretary of DHS and is
available upon request of any stockholder without charge."
All certificates for any shares of Stock hereinafter issued to Stockholders
shall bear the same endorsement, and this Agreement shall cover all such stock.
14. TERM. Anything contained herein to the contrary
notwithstanding, this Agreement shall terminate, and all rights and obligations
shall cease, except for rights and obligations under any then extant promissory
note pursuant to Section 7 hereof, upon the occurrence of any of the following
events:
(i) The written agreement of each of the then parties hereto;
or
(ii) The cessation of DHS' business; or
(iii) The bankruptcy, liquidation, receivership, or
dissolution of, or assignment for the benefit of creditors by, DHS;
(iv) Any Change in Control of DHS; or
(v) The consummation of any public offering of DHS Capital
Stock.
15. NOTICES. All notices, offers, acceptances, requests and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed by certified or registered mail to a
Stockholder, as may be required, at their addresses on DHS records, and to DHS
at DHS's principal place of business. Any party hereto may change his or its
address for notice by giving notice thereof in the manner hereinabove provided.
16. AMENDMENT. Any term or condition set forth in this
Agreement may be amended, modified or altered, and additional terms and
conditions may be incorporated into this Agreement only with the express written
consent of all of DHS and the Stockholders. All of such amendments,
modifications, alterations or additions shall be effective as of the date of
such unanimous consent, shall be in writing, and shall be provided to each of
the parties hereto.
17.MISCELLANEOUS. This Agreement embodies the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof. This Agreement shall be binding upon, and inure to the benefit of, and
shall be enforceable by, the heirs, successors, assigns, and personal
representatives of the parties hereto. This Agreement shall be
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governed by, and construed in accordance with, the laws of the State of
Maryland, without regard to principles of conflicts of law. In case any term of
this Agreement shall be held invalid, illegal or unenforceable in whole or in
part, neither the validity of the remaining part of such term nor the validity
of the remaining terms of this Agreement shall in any way be affected thereby.
Each of the parties agrees that he will consent to and approve any amendments of
the DHS Amended and Restated Articles or by-laws of DHS which may be necessary
or advisable in order to conform any of the provisions of this Agreement or any
amendments hereto to the applicable laws of the State of Maryland as now or
hereafter enacted. Each Stockholder agrees to vote his shares of Stock in DHS
and to execute and deliver such documents as may be necessary in order to
implement the provisions of the preceding sentence. Nothing set forth or
referred to herein expressed or implied is intended or shall be construed to
convey upon or give to any person other than the parties and their successors or
permitted assigns, any rights or remedies under or by reasons of this Agreement.
Each of the Stockholders agrees that, if DHS is able to enter into any
arrangement with a Management Stockholder or another Stockholder, regarding the
repurchase of such Management Stockholder's or other Stockholder's capital stock
that is manifestly more favorable to DHS than the arrangements set forth herein,
to execute and deliver to an amendment to this Stockholders Agreement reflecting
such arrangement.
18. INTERPRETATION. The parties and their respective legal
counsel and accountants actively participated in the negotiation and drafting of
this Agreement, and in the event of any ambiguity or mistake herein, or any
dispute among the parties with respect to the provisions hereof, no provision in
this Agreement shall be construed unfavorable against any of the parties on the
ground that it or its counsel was the drafter thereof.
19. WILLS. Each Management Stockholder shall promptly execute
a will or codicil to his will authorizing and directing his personal
representatives to perform all of his obligations under this Agreement, but the
failure to execute such a will shall not affect the rights of the remaining
Stockholders or the obligations of their personal representatives, heirs,
descendants, or estates, as provided in this Agreement.
20.CANCELLATION OF PRIOR AGREEMENT. This Agreement supersedes
and replaces that certain Stockholders Agreement by and among DHS, the
Management Stockholders, the LP, the Series A Investor and the Series B
Investor, dated December 1, 1995 (the "OLD STOCKHOLDERS AGREEMENT") in its
entirety. The Old Stockholders Agreement is hereby cancelled, rescinded and
abrogated.
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IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as an instrument under seal as of the date first above written.
WITNESS/ATTEST: DOCTORS HEALTH SYSTEM, INC.
By
Stewart Gold, President
MANAGEMENT STOCKHOLDERS:
Stewart Gold, individually
Scott M. Rifkin, individually
Alan Kimmel, individually
MEDICAL HOLDINGS LIMITED
PARTNERSHIP
By: BMGP, Inc., its General Partner
By
Scott M. Rifkin, President
ST. JOSEPH MEDICAL CENTER, INC.
By:
Name:
Title:
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MED-LANTIC MANAGEMENT
SERVICES, INC.
By:
Name:
Title:
GENESIS HEALTH VENTURES, INC.
By:
Name:
Title:
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Exhibit 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, entered into on September 9, 1996
(the "Signing Date") to be effective as of June 5, 1995 (the "Effective Date"),
between DOCTORS HEALTH SYSTEM, INC., a Maryland corporation (the "Company"), and
THERESA SPOLETI (the "Executive").
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BACKGROUND
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The Company is engaged, directly or through service contracts
with others, in the business of (i) negotiating contracts to provide health care
services and products, (ii) managing health care providers and (iii) providing
health care services and products (the "Business").
The Executive is experienced in designing and implementing
globally capitated health care products and serving in a leadership capacity in
the administration of health care management.
The Company desires to hire Executive, and the Executive
desires to be employed by the Company, on the terms and conditions set forth in
this Agreement.
1. EMPLOYMENT, DUTIES AND ACCEPTANCE.
1.1 EMPLOYMENT.
(a) On the Effective Date, the Company shall
employ the Executive as its Vice President of Managed Care Products and
Services. In such capacity, the Executive shall report directly to and be
subject to the supervision and direction of the President and Chief Executive
Officer of the Company (the "CEO"). The Executive shall have overall
responsibility and authority for development and implementation of the managed
care products and services (including network Independent Physician
Associations) offered by the Company. The Executive shall perform her duties
faithfully and to the best of her abilities.
(b) The Executive shall, subject to SECTION
1.1(c) hereof, devote her full working time and creative energies to the
performance of her duties hereunder and will at all times devote such additional
time and efforts as are reasonably sufficient for fulfilling the significant
responsibilities entrusted to her. So
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long as such activities, in the aggregate, do not interfere with the performance
by the Executive of her duties hereunder: (i) the Executive shall be permitted a
reasonable amount of time to supervise her personal, passive, investments;
(ii) the Executive shall be permitted a reasonable amount of time to
participate (as board member, officer or volunteer) in civic, political and
charitable activities; and (iii) the Executive shall be permitted to deliver
lectures to and teach at educational institutions and business organizations.
1.2 PLACE OF EMPLOYMENT. The Executive's principal
place of employment shall be in the Baltimore, Maryland metropolitan area,
subject to such travel as may be reasonably required by her employment pursuant
to the terms hereof. The Executive shall not be required to relocate outside of
the Baltimore, Maryland metropolitan area during the Term unless the Company
provides relocation benefits.
2. TERM OF EMPLOYMENT. The term of the Executive's employment
under this Agreement (the "Term") shall commence on the Effective Date and shall
end on June 4, 1998, unless sooner terminated, or extended, as herein provided.
Not later than April 1, 1998 (and each April 1 of each calendar year during any
Extension Period (defined below)), the Company and the Executive shall enter
into good faith negotiations to determine whether and on what terms to extend or
renew this Agreement beyond June 4 of such calendar year. If by February 1, 1998
(and February 1 of any calendar year occurring during an Extension Period)
either party gives written notice to the other of its desire to terminate this
Agreement as of June 4, then this Agreement shall so terminate, and the
Executive shall be permitted a reasonable amount of time during the balance of
the Term within which to explore alternative employment opportunities. If no
such written notice to terminate is given by either party by February 1, 1998
(or by February 1 of any calendar year occurring during an Extension Period),
then the Term shall, without further act or deed, automatically be extended upon
the same terms and conditions as previously in effect, for an additional 12
month period, commencing on June 5 of the applicable calendar year and ending on
June 4 of the immediately following calendar year. Each such 12 month extension
during the Term is referred to herein as an "Extension Period", and shall
constitute a part of the Term of this Agreement for all purposes, including the
provisions regarding extensions contained in this SECTION 2.
3. COMPENSATION.
3.1 SALARY. As compensation for all services to be
rendered pursuant to this Agreement, the Company shall pay to the Executive,
during the Term, a "Base Salary" (as defined in this SECTION 3.1) less such
deductions as shall be required to be withheld by applicable laws and
regulations. The "BASE SALARY" shall be a salary of $110,000 per annum from the
Effective Date to June 4, 1996 and $140,000 from June 5, 1996 to the end of the
Term. The Base Salary shall accrue from and after
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the Effective Date, and shall be payable during the Term, in arrears in equal
bi-weekly installments.
3.2 BONUS POOL.
(a) Beginning with the calendar year 1996,
the Company shall establish for the benefit of the Executive and certain other
Company employees a "Bonus Pool" with respect to each calendar year, or portion
thereof, that occurs during the Term (each a "Bonus Year").
(b) During the Term, except as otherwise
provided herein, the Executive shall be entitled to participate in the Bonus
Pool to the extent determined by the CEO; provided, however, that the bonus
award which the Executive shall receive for the first Bonus Year shall be an
amount determined with reference to performance criteria set forth in a letter
agreement between the Executive and the Corporation. However, in no event shall
the Bonus exceed 25% of the Base Salary. All amounts allocated to the Executive
pursuant to this SECTION 3.2 shall become payable to the Executive and are
hereinafter collectively referred to as the "Bonus". The amount of the
Executive's Bonus for each Bonus Year, if any, shall be determined by the first
day of March, and paid by the fifteenth day of March, next following the Bonus
Year for which the Bonus is payable.
3.3 STOCK OPTIONS.
(a) Upon the adoption by the Company of an
Omnibus Stock Option Plan or other stock benefit plan (the "Plan") which affords
to key employees of the Company the opportunity to participate in the Company's
growth through stock ownership, the Company will grant to the Executive options
(the "Options") to purchase 10,000 shares of the Company's Class A Common Stock
(the "Initial Option Shares"). Additional Option Shares may be granted to the
Executive as described below.
(b) Notwithstanding anything herein to the
contrary, the date of grant (the "Grant Date") of such Options shall be
coincident with the date of adoption of the Plan by the Company, and the
exercise price of such Options shall be determined, as described in greater
detail below, with respect to the fair market value of the Option Shares as of
the Grant Date. As soon as practicable after the Executive is notified by the
Company of such fair market value, but in no event later than three (3) days
following such notification, the Executive shall inform the Company in writing
of the Executive's election to receive "Qualified Incentive Stock Options"
issued under the Plan, or to receive "Non-Qualified Stock Options", whether
under the Plan or otherwise, or some combination of the two as the Executive and
the CEO may reasonably agree.
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(c) Additional Options (the "Additional
Options") may be issued to you pursuant to the Company's Omnibus Stock Option
Plan from time to time as determined by the CEO. The grant of any Additional
Options shall be subject to and based upon the broad criteria described in
paragraph 3.3(d) of this Agreement and the Additional Options shall have the
effect of providing you the opportunity to own 50 percent of an assumed fully
diluted physician ownership position in the Company (approximately 50 percent of
.758 percent of the outstanding Common Stock of all classes of the Company). The
Additional Options will be granted upon the successful inauguration of one or
more of the Company's globally capitated products. The Executive will be deemed
to have satisfied this requirement when any physician groups associated with the
Company have any patients (subscribers) directly or indirectly enrolled in
capitation services for the Company providing primary, specialty, ancillary,
acute and subacute care.
(d) All of the Executive's Options shall be
exercisable for a period of ten (10) years from the date they are granted to the
Executive. All shares issued to the Executive pursuant to the exercise of the
Options granted under this SECTION 3.3 shall be subject to the vesting and
forfeiture provisions set forth in this SECTION 3.3. Two-fifths of the Initial
Option Shares shall vest upon the first anniversary of the Effective Date. The
remaining Initial Option Shares shall vest equally during each month from June
5, 1997 to June 4, 2001, so long as the Executive remains employed with the
Company. The Additional Options shall be granted after June 4, 1996 if the
capitation requirements described in SECTION 3.3(c) have been satisfied. The
Additional Options shall vest over a period of five years from the grant date in
equal annual installments on each anniversary of the grant date. Except as
otherwise set forth herein, the Executive shall not be entitled to transfer any
Options, or shares that are subject to forfeiture, until such share has vested
in the Executive. Notwithstanding the foregoing, all Options shall, at the
Executive's election, immediately become exercisable, and all shares shall,
notwithstanding anything to the contrary herein, vest in the Executive and no
longer be subject to restriction or forfeiture, upon occurrence of any initial
public offering of Company securities, a liquidating distribution of the
Company, a combination, consolidation or merger where the Company is not the
survivor, any sale or issuance of Company securities that places a majority of
the voting power of shares in the control of persons or entities not having such
control on the date hereof, or any sale, exchange or other disposition of all or
substantially all of the Company's assets (each a "Change in Control").
(e) The Initial Option Shares and the
Additional Options shall have an exercise price per share equal to (i) in the
case of "Qualified Incentive Stock Options", the fair market value of a share of
the Company's Class A Common Stock as of the Grant Date, as determined by the
Company in good faith, and (ii) in the case of "Non-Qualified Stock Options", an
amount determined by the CEO and the Plan's Committee. The payment of any
exercise price for Options granted to the
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Executive hereunder may be made by the Executive in cash or, if the Executive so
requests in writing, by delivery to the Company of a full-recourse promissory
note of the Executive secured by the shares received upon exercise of the
Options. Any such promissory note shall have a term of ten years, shall accrue
(but not be payable until due) interest at the "applicable Federal rate" for
income tax purposes, and shall be subject to mandatory prepayment by the
Executive upon any disposition of shares for cash upon exercise of any Options
or upon any termination of the Executive's employment pursuant to SECTION
4.3(a).
(f) All Options granted hereunder may be
exercised in whole or in part, and, except as otherwise set forth herein, in any
combination of Qualified Incentive Stock Options and Non-Qualified Stock
Options, as the Executive may elect to exercise.
(g) The Executive agrees to and shall
execute a stockholder's agreement restricting her ability to transfer shares of
the Company's Class A Common Stock, or any other shares of the Company's stock
which the Executive may own or in which the Executive may have an interest, in
form substantially similar to the stockholders agreement attached hereto as
APPENDIX A (the "Stockholder's Agreement").
(h) Nothing in this SECTION 3.3 shall
adversely effect the Executive's right to participate, together with other key
employees of the Company, in any future grants of options, stock or other equity
related vehicles by the Company pursuant to the Plan as in effect from time to
time. All such future grants shall be subject to the terms of the Plan as in
effect at the time of grant.
3.4 WITHHOLDING. The Company is authorized to
withhold from the amount of any Salary, Bonuses, and any other things of value
paid to or for the benefit of the Executive, all sums authorized by the
Executive or required to be withheld by law, court decree, or executive order,
including (but not limited to) such things as income taxes, employment taxes,
and employee contributions to fringe benefit plans sponsored by the Company.
3.5 PARTICIPATION IN EXECUTIVE BENEFIT PLANS. The
Executive shall be permitted during the Term, if and to the extent legally
eligible, to participate in any group life, health, hospitalization or
disability insurance plan, health program, automobile allowance, pension plan or
similar benefit plan of the Company which may be available to other comparable
executives or professional employees, including physicians, of the Company
generally on the same terms as such other executives. All group life, health,
hospitalization and disability plan or policy premiums applicable to
participation in such plans or policies by the Executive and her spouse and
children (subject to reasonable policy and plan limitations) shall be paid by
the Company.
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3.6 VACATION. The Executive will receive four (4)
weeks vacation per year, to be scheduled and taken at the Executive's option at
such times as her duties may permit. Should the Company's policy provide for
more vacation to comparable executives the Executive will be accorded such
higher vacation. Unused vacation time shall not be cumulated or carried over nor
shall the Executive receive any compensation for unused vacation time.
3.7 EXPENSES. Subject to such policies as may from
time to time be established by the Board, the Company shall pay or reimburse the
Executive for all ordinary, necessary and reasonable expenses approved by the
CEO in advance (including, without limitation, travel, meetings, dues,
subscriptions, fees, educational expenses, mobile telephones, professional
insurance, and the like) actually incurred or paid by the Executive during the
Term in the performance of the Executive's services under this Agreement
(including, without limitation, expenses incident to attendance at board or
management meetings of the Company, or its Subsidiaries or Affiliates). The
Executive shall present expense statements or vouchers or such other supporting
information as the Board may require prior to payment for such expenses.
3.8 SIGNING BONUS. The parties acknowledge and
confirm that the Company has paid the Executive a signing bonus in consideration
of the termination of her employment with another employer prior to the
Effective Date and the loss of an incentive bonus made available by such
employer.
4. TERMINATION.
4.1 TERMINATION UPON DEATH. If the Executive dies
during the Term, the Executive's employment shall terminate as of the date of
death of the Executive.
4.2 TERMINATION UPON DISABILITY. Notwithstanding
any other provision of this Agreement, if during the Term the Executive becomes
physically, mentally or emotionally disabled, whether totally or partially, as
determined by an independent qualified physician, so that the Executive is, in
the good faith determination of the Board, substantially unable to perform her
services hereunder for (i) a period of three consecutive months, or (ii) shorter
periods aggregating three months during any twelve month period, the Company may
at any time after the last day of the three consecutive months of disability or
on the last day of the shorter period aggregating three months of disability, by
written notice to the Executive, terminate the Executive's employment hereunder
as of the date such written notice becomes effective.
4.3 TERMINATION AT ELECTION OF COMPANY.
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(a) Notwithstanding any other provision of
this Agreement, the Company may terminate the Executive's employment hereunder
at any time upon: (i) the continued failure or refusal by, or manifest inability
of, the Executive to perform her duties after reasonable prior notice to the
Executive; (ii) the Executive engaging in any acts or omissions involving
dishonesty or acts or omissions that demonstrate a lack of integrity; (iii) the
conviction of the Executive of a felony; (iv) the Executive engaging in acts or
omissions that demonstrably and materially injure the business and affairs of
the Company, monetarily or otherwise; and/or (v) any knowing material
misrepresentation made by the Executive to the Company or any material breach by
the Executive of her obligations hereunder.
(b) In addition to the Company's right to
terminate the Executive's employment pursuant to SECTION 4.3(a), and
notwithstanding any other provision of this Agreement, the Company may, for any
or for no reason, terminate the Executive's employment upon 60 days prior
written notice to the Executive.
4.4 TERMINATION BY THE EXECUTIVE.
(a) Provided that the Executive has
delivered to the Company at least sixty (60) days prior written notice setting
forth in reasonable detail any alleged material breach by the Company of this
Agreement or acts or omissions engaged in by the Company constituting
"constructive termination" of the Executive's employment with the Company, which
breach, acts or omissions have not been cured by the Company as of the end of
such period to the reasonable satisfaction of the Executive, then,
notwithstanding any other provision of this Agreement, the Executive shall be
entitled to terminate her employment for such reasons, effective immediately
upon the delivery by the Executive to the Company of a notice to the effect that
such breach, acts or omissions have not been cured to the reasonable
satisfaction of the Executive; provided, however, that if such constructive
termination is caused by the Executive's incapacity or inability to serve due to
a disability of the type described in SECTION 4.2 above and the Company elects
to terminate the Executive pursuant to the provisions of SECTION 4.2, the
Executive shall, for purposes of this Agreement, be deemed to have been
terminated pursuant to the provisions of SECTION 4.2 and not of this SECTION
4.4.
(b) For purposes of this SECTION 4.4,
"constructive termination" shall be limited to those circumstances where (i) the
Company creates working conditions that a reasonable person in the Executive's
position would consider unreasonable or intolerable which is not remedied by the
Company within sixty (60) days after notice thereof given by the Executive; and
(ii) such working conditions are not generally applicable to other executives of
the Company.
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4.5 COMPENSATION AND BENEFITS FOLLOWING
TERMINATION OF EMPLOYMENT.
(a) In the event of termination of the
Executive's employment for any reason other than a termination pursuant to
SECTION 4.3(b) (termination by the Company) or SECTION 4.4 (or a termination
caused merely by the expiration of the Term): (i) all compensation and other
benefits payable or provided hereunder shall cease as of the date of
termination; (ii) Base Salary (if any) then payable or accrued through the date
of termination; (iii) all accrued benefits (if any) then payable to the
Executive pursuant to the terms of any plans or arrangements referred to in
SECTION 3.5 shall be paid to the Executive (or to her heirs, legatees and/or
legal representatives) through the date of termination; and (iv) except in the
event of termination due to death (SECTION 4.1) or Disability (SECTION 4.2), any
Options that remain unexcercised and any shares of stock that remain unvested
pursuant to SECTION 3.3 shall immediately be forfeited to the Company. In the
event of termination due to death (SECTION 4.1) or Disability (SECTION 4.2), any
Options that remain unexcercised and any shares of stock that remain unvested
pursuant to SECTION 3.3 shall immediately be excercisable by the Executive (or
her heirs, legatees and/or legal representatives), and fully vested in the
Executive, and upon issuance all such shares shall be subject to the Company's
Stockholders Agreement then in effect.
(b) In the event of termination of the
Executive's employment pursuant to SECTION 4.3(b) or SECTION 4.4 (each a
"WRONGFUL TERMINATION"), the Executive (or, in the event of the Executive's
subsequent death or disability, her heirs, legatees and/or legal
representatives) shall receive (i) all accrued Base Salary and benefits (if any)
then payable to the Executive pursuant to the terms of any plans or arrangements
referred to in SECTION 3.5; (ii) as liquidated damages, an amount equal to the
Base Salary which the Executive would have earned through the end of the
contractual employment term then in effect in equal monthly installments or, at
the election, of the Company in a lump sum; and (iii) subject to the provisions
of the Company's Amended and Restated Articles (as in effect on the date
hereof), the Company's By-laws (as in effect on the date hereof), the
Stockholder's Agreement, and, if issued under a Plan, any Plan then in effect,
any Options that remain unexcercised and any shares of stock that remain
unvested pursuant to SECTION 3.3 shall immediately (and thereafter) be fully
excercisable and vest in the Executive and no longer be subject to forfeiture.
Any amounts then outstanding under any Promissory Note referred to in SECTION
3.3 above shall remain due and payable to the Company in accordance with the
terms of such Promissory Note.
5. CERTAIN COVENANTS OF THE EXECUTIVE.
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5.1 NECESSITY FOR COVENANTS. The Executive
acknowledges that (i) the Company, its Subsidiaries and its Affiliates (as
defined in SECTION 5.2) are engaged in the business, directly or through service
contracts with others, of providing primary and specialized medical and related
health care services and related products (the "Company Business"), and will in
the future be engaged in the Company Business; (ii) her employment pursuant to
this Agreement will give her access to customers and suppliers of, and trade
secrets of and confidential information concerning, the Company, its
Subsidiaries and its Affiliates; and (iii) the agreements and covenants
contained in this SECTION 5 are essential to protect the business and goodwill
of the Company, its Subsidiaries and its Affiliates. The Executive confirms to
the Company that she was not subject to any non-competition or contractual
confidentiality agreements in effect prior to the Effective Date which would
prevent the Executive's employment by the Company under the terms and conditions
set forth herein. In order to induce the Company to enter into this Agreement
and pay the compensation and other benefits at the levels requested by the
Executive, the Executive enters into the following covenants:
5.2 DEFINITIONS.
(a) For purposes of SECTIONS 5.3 through 5.8
only, the term "Company" shall include the Company and all of the Company's
Subsidiaries and Affiliates.
(b) "Provider" shall mean any health care
service provider or Affiliate thereof to whom the Company provided management or
other services.
(c) "Payor" means any insurer, employer,
health maintenance organization, preferred provider organization, health benefit
plan or other entity or organization to which, or to whose members, insured's,
employees, enrollees, beneficiaries or other persons affiliated with it
(collectively "Beneficiaries"), the Company provides services or products.
(d) "Service Area" means the geographic area
in which the Company provides health care services and in which the
Beneficiaries of those services generally reside, which shall include all areas
within a 25 mile radius of the site of any Provider's office.
(e) "Subsidiary" means any person or entity
in which the Company owns, beneficially or otherwise, an equity interest of more
than 50%.
(f) "Affiliate" means a Subsidiary of the
Company; a person or entity which is owned, controlled, or operated by the
Company; any person
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owning an equity interest in the Company; any person who has appointed the
Company as its exclusive agent for the provision of professional services and
the collection of revenues therefrom; and any partner, member, employee, owner
or agent of any Affiliate and any person or entity which is under common
ownership, control or operation with the specified person or entity.
5.3 RESTRICTIONS. During the Term and, unless the
Executive's employment is terminated other than pursuant to SECTIONS 4.3(b) or
4.4 hereof, for a period of twelve (12) months after the Executive's employment
hereunder is terminated (the "Termination Date") (the "Restricted Period"), the
Executive shall not, directly or indirectly, for her self or on behalf of any
other person, firm, corporation or other entity, whether as a principal, agent,
employee, stockholder, partner, officer, member, director, sole proprietor, or
otherwise:
(a) call upon or solicit any Provider for
the purpose of persuading the Provider to engage the Executive or any other
person, firm, corporation or other entity to provide services which are the same
or similar to those the Company provided to the Provider;
(b) call upon or solicit any Payor for the
purpose of persuading the Payor to engage any person or entity other that the
Company to provide health care services to the Payor with respect to any of its
Beneficiaries in the Service Area;
(c) solicit, participate in or promote the
solicitation of any person who was employed by the Company or a Provider at any
time during the twelve (12) months preceding the Termination Date to leave the
employ of the Company, or hire or engage any of those persons;
(d) make any disparaging remarks about the
Company's business, services or personnel;
(e) interfere in any way with the Company's
business, prospects or personnel; or
(f) become affiliated with or, subject to
SECTION 5.16 hereof, render services to any person engaged in any business that
competes with the Company Business within the Service Area, directly or
indirectly, in any capacity, including, without limitation, as an individual,
partner, shareholder, officer, director, principal, agent, employee, trustee or
consultant; provided, however, that the Executive may own, directly or
indirectly, solely as an investment, securities which are publicly traded if the
Executive (a) is not a controlling person of, or a member of a group which
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controls, the issuer and (b) does not, directly or indirectly, own 5% or more of
any class of securities of the issuer.
5.4 TRADE SECRETS AND CONFIDENTIAL INFORMATION
5.4.1 TRADE SECRETS DEFINED. The term "Trade
Secrets," as used in this Agreement, includes, without limitation, (i) all
information concerning billing practices and procedures of the Company, (ii) the
rates and amounts that the Company pays to its personnel, (iii) information
about the Company's contracts with insurers, health maintenance organizations,
employers, and other payors, (iv) all formulae, compilations, programs, devices,
lists, methods, techniques or processes of the Company, and (v) all other
information of the Company that would be deemed to be "trade secrets" within the
meaning of the Maryland Uniform Trade Secrets Act (the "Act").
5.4.2 CONFIDENTIAL INFORMATION DEFINED. Any
other information not qualifying as a Trade Secret, but relating to the business
of the Company which is disclosed by the Company to the Executive, or is
discovered by the Executive in the course of employment, is Confidential
Information.
5.4.3 DUTY TO MAINTAIN SECRECY AND
CONFIDENTIALITY. During the Period of the Executive's employment with the
Company, the Executive shall maintain the secrecy and confidentiality of the
Trade Secrets and the Confidential Information and shall not (i) divulge,
furnish or make accessible to anyone or in any way or use, for her own benefit
or for the benefit of any other individual firm or entity (other than in the
ordinary course of the Company's business), any Trade Secret or Confidential
Information; (ii) take or permit any action to be taken which would reduce the
value of the Trade Secrets or Confidential information to the Company; or
(iii) otherwise misappropriate or suffer the misappropriation of the Trade
Secrets or the Confidential information, within the meaning of the Act. After
Termination Date, Executive shall continue to maintain the secrecy and
confidentiality of such information, but only to the extent that the Executive
is prohibited from directly or indirectly competing with Company pursuant to
the provisions of SECTION 5.3.
5.4.4 INFORMATION WHICH IS PUBLICLY KNOWN.
Notwithstanding anything herein to the contrary, the obligations of secrecy and
confidentiality set forth herein shall not apply to any information which is now
generally publicly known or which subsequently becomes generally publicly known
other than as a direct or indirect result of the breach of this Agreement by the
Executive, or which is required by law or order of any court to be disclosed.
5.5 PROPERTY OF THE COMPANY. All memoranda, notes,
lists, records and other documents or papers (and all copies thereof), including
but not
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limited to, such items stored in computer memories, on microfiche or by
any other means, made or compiled by or on behalf of the Executive, or made
available to the Executive concerning the Company Business, are and shall be the
property of the Company and shall be delivered to the Company promptly upon the
termination of the Executive's employment with the Company or at any other time
on request; provided however, that the Executive may inspect during normal
business hours such records as shall be necessary for the purpose of assisting
the Executive to file, or prepare for an audit of, her personal income tax
returns.
5.6 EXECUTIVE'S IDEAS, ETC. All inventions,
prototypes, discoveries, improvements, innovations and the like ("Inventions")
and all works of original authorship or images that are fixed in any tangible
medium of expression and all copies thereof ("Works") which are designed,
created or developed by Executive, solely or in conjunction with others, in the
course of performance of the Executive's duties which relate to the Company
Business, shall be made or conceived for the exclusive benefit of and shall be
the exclusive property of the Company. The Executive shall immediately notify
the Company upon the design, creation or development of all Inventions and
Works. At any time thereafter, the Executive, at the request and expense of the
Company, shall execute and deliver to the Company all documents or instruments
which may be necessary to secure or perfect the Company's title to or interest
in the Inventions and Works, including but not limited to applications for
letters of patent, and extensions, continuations or reissues thereof,
applications for copyrights and documents or instruments of assignment or
transfer. All Works are agreed and stipulated to be "works made for hire," as
that term is used and understood within the Copyright Act of 1976, as amended.
To the extent any Works are not deemed to be works made for hire as defined
above, and to the extent that title to or ownership of any Invention or Work and
all other rights therein are not otherwise vested exclusively in the Company,
the Executive shall, without further consideration but at the expense of the
Company, assign and transfer to the Company the Executive's entire right, title
and interest (including copyrights and patents) in or to those Inventions and
Works.
5.7 RIGHTS AND REMEDIES UPON BREACH. If the
Executive breaches, or threatens to commit a breach of, any of the provisions of
SECTIONS 5.1 through 5.6 (the "Restrictive Covenants"), the Company shall, in
addition to its right immediately to terminate this Agreement, have the right
and remedy (which right and remedy shall be independent of others and severally
enforceable, and which shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company under law or in equity) to have the
Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach could cause irreparable injury to the Company or its
Affiliates and that money damages may not provide adequate remedy to the
Company.
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5.8 COVENANTS CURRENTLY BINDING EXECUTIVE. The
Executive warrants that her employment by the Company will not (a) violate any
non-disclosure agreements, covenants against competition, or other restrictive
covenants made by the Executive to or for the benefit of any previous employer
or partner, or (b) violate or constitute a breach or default under, any statute,
law, judgment, order, decree, writ, injunction, deed, instrument, contract,
lease, license or permit to which the Executive is a party or by which the
Executive is bound.
5.9 LITIGATION. There is no litigation, proceeding
or investigation of any nature (either civil or criminal) which is pending or,
to the best of the Executive's knowledge, threatened against or affecting the
Executive or which would adversely affect her ability to substantially perform
the duties herein.
5.10 REVIEW. The Executive has received or been
given the opportunity to review the provisions of this Agreement, and the
meaning and effect of each provision, with independent legal counsel of the
Executive's choosing.
5.11 SEVERABILITY OF COVENANTS. The Executive
acknowledges and agrees that the Restrictive Covenants are reasonable and valid
in geographical and temporal scope and in all respects. If any court determines
that any of the Restrictive Covenants, or any part thereof, is invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
5.12 BLUE-PENCILING. If any court determines that
any of the Restrictive Covenants, or any part thereof, is unenforceable because
of the duration or geographic scope of such provision, such court shall have the
power to reduce the duration or scope of such provision, as the case may be,
and, in its reduced form, such provision shall then be enforceable and shall be
enforced. If any such court declines to so revise such covenant, the parties
agree to negotiate in good faith a modification that will make such duration or
scope enforceable.
5.13 ENFORCEABILITY IN JURISDICTIONS. The parties
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the geographical scope of such
Covenants. If the courts of any one or more of such jurisdictions hold any
Restrictive Covenant unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties that such determination not bar or
in any way affect the Company's right to the relief provided above in the courts
of any other jurisdiction within the geographical scope of such Covenants, as to
breaches of such Covenants in such other respective jurisdictions, such
Covenants as they relate to each jurisdiction being, for this purpose, severable
into diverse and independent covenants.
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5.14 EXTENSION. If the Executive violates any
Restrictive Covenant, the Company shall not be deprived of the full benefit of
the period of the covenant. Accordingly, the duration of that covenant shall be
extended by the period of any violation of that covenant.
5.15 REMEDIES. The Company shall be entitled to
injunctive or other equitable relief because it will be caused irreparable
injury and damage by a breach of the provisions of any of the Restrictive
Covenants. The right to injunctive relief shall include the right to both
preliminary and permanent injunctions. The Company shall not be required to post
a bond or other similar assurance if it brings an action to enforce the
provisions of any of the Restrictive Covenants. The Company's right to equitable
relief shall not preclude any other rights or remedies which the Company may
have, all of which rights and remedies are cumulative.
6. DISPUTE RESOLUTION.
6.1 COSTS OF LITIGATION. If either party files
suit or brings an arbitration proceeding to enforce its rights under this
Agreement, the prevailing party shall be entitled to recover from the other
party all expenses incurred by it in preparing for and in trying the case,
including, but not limited to, investigative costs, court costs and reasonable
attorney's fees.
6.2 CONSENT TO JURISDICTION. The parties submit to
the jurisdiction and venue of the courts of the State of Maryland.
6.3 NO JURY TRIAL. NEITHER PARTY SHALL ELECT A
TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS AGREEMENT.
6.4 ARBITRATION. Any dispute between the Company
and the Executive concerning any part of this Agreement may, if all parties to
such dispute expressly agree in writing, be resolved pursuant to the procedure
set forth in Schedule 6.4.
7. OTHER PROVISIONS.
7.1 NOTICES. Any notice or other communication
required or which may be given hereunder shall be in writing and shall be
delivered personally, telegraphed, telexed, sent by facsimile transmission or
sent by certified, registered or express mail, postage paid, and shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, four days after the date of mailing, as follows:
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(i) if to the Company, to:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attention: President and CEO
with copies to:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland
Attention: Corporate Counsel
(ii) if to the Executive, to:
Theresa Spoleti
1501 Heather Hill Lane
Hunt Valley, Maryland 21030
Any party may by notice given in accordance with this Section
to the other party designate another address or person for receipt of notices
hereunder.
7.2 ENTIRE AGREEMENT. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings, written or oral, with
respect thereto, including the Prior Agreement.
7.3 WAIVERS AND AMENDMENTS. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
Executive and a duly authorized officer of the Company (each, in such capacity,
a party) or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder.
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7.4 GOVERNING LAW. This Agreement has been
negotiated and is to be performed in the State of Maryland, and shall be
governed and construed in accordance with the laws of the State of Maryland
applicable to agreements made and to be performed entirely within such State.
7.5 COUNTERPARTS. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
7.6 CONFIDENTIALITY. Neither party shall disclose
the contents of this Agreement or of any other agreement they have
simultaneously entered into to any person, firm or entity, except the agents or
representatives of the parties, or except as required by law.
7.7 WORD FORMS. Whenever used herein, the singular
shall include the plural and the plural shall include the singular. The use of
any gender, tense or conjugation shall include all genders, tenses and
conjugations.
7.8 HEADINGS. The Section headings have been
included for convenience only, are not part of this Agreement, and are not to be
used to interpret any provision hereof.
7.9 BINDING EFFECT AND BENEFIT. This Agreement
shall be binding upon and inure to the benefit of the parties, their successors,
heirs, personal representatives and other legal representatives. Neither the
Executive nor the Company may assign this Agreement without the prior written
consent of the other.
7.10 SEPARABILITY. The covenants contained in this
Agreement are separable, and if any court of competent jurisdiction declares any
of them to be invalid or unenforceable, that declaration of invalidity or
unenforceability shall not affect the validity or enforceability of any of the
other covenants, each of which shall remain in full force and effect.
7.11 CONSENT OR APPROVAL. Whenever under the terms
of this Agreement the approval or consent of the Company is required or the
Company must make any determination, the Company, unless this Agreement
specifically requires otherwise, may not unreasonably withhold or delay that
consent or approval.
7.12 BACKGROUND. The Background is a part of this
Agreement.
[SIGNATURES ON NEXT PAGE]
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IN WITNESS WHEREOF, the parties, intending to be legally
bound, have executed this Agreement or caused it to be executed and attested by
their duly authorized officers as a document under seal on the day and year
first above written.
ATTEST/WITNESS: DOCTORS HEALTH SYSTEM, INC.
_____________________________ By:_______________________(SEAL)
Stewart B. Gold, President
EXECUTIVE:
_____________________________ _________________________(SEAL)
Theresa Spoleti
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SCHEDULE 6.4
ARBITRATION PROCEDURE
1. INSTITUTION OF ARBITRATION PROCEEDING.
1.1. Any party to this Agreement (an "Initiating Party") may initiate
an arbitration proceeding (the "Proceeding") to resolve a dispute subject to
resolution under this Schedule (a "Dispute") by giving written notice (the
"Dispute Notice") to the other party (the "Responding Party") to such Dispute.
The Dispute Notice shall describe the substance of the Dispute with sufficient
specificity to give the Responding Party adequate notice of its nature. Unless
otherwise specified, time periods specified in this Schedule 6.4 shall be
calculated from the date of the Dispute Notice (the "Commencement Date").
2. SELECTION OF ARBITRAL PANEL.
2.1. The Arbitral Panel (the "Panel") shall consist of three
arbitrators, two of whom (the "Party Designated Arbitrators") shall be selected
by the parties pursuant to SECTION 2.2 hereof. The third arbitrator shall be a
"Neutral Arbitrator" selected by the Party Designated Arbitrators pursuant to
SECTION 2.3 hereof.
2.2. The Initiating Party shall designate its Party Designated
Arbitrator in the Dispute Notice. Within fifteen days of the Commencement Date,
the Responding Party shall designate its Party Designated Arbitrator.
2.3. Within forty-five days of the Commencement Date, the two Party
Designated Arbitrators shall agree upon and appoint a Neutral Arbitrator who
shall be an accountant and a partner in an international, "Big Six" accounting
firm.
2.4. Each party agrees promptly to disclose to the other party any
circumstances known to it which would cause reasonable doubt regarding the
impartiality of an individual under consideration or appointed as the Neutral
Arbitrator and any such individual shall also promptly disclose to the parties
any such circumstances.
2.5. During the process of selecting the Neutral Arbitrator and
thereafter during the course of this Proceeding, ex parte communications with
the Neutral Arbitrator or any individual under consideration as the Neutral
Arbitrator are prohibited and shall be disclosed by the party making any ex
parte communication, the Neutral Arbitrator or any individual under
consideration as a Neutral Arbitrator immediately upon discovery.
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3. PRE-HEARING PROCEDURES.
3.1. Within fifteen days of the appointment of the Neutral Arbitrator,
the Panel may convene a Pre-Hearing Conference to, inter alia, familiarize the
Neutral Arbitrator with the nature of the Dispute between the Parties, determine
the need for and the nature of discovery and establish a procedural schedule for
the further conduct of the Proceeding.
4. DISCOVERY.
4.1. Discovery, appropriately limited by the nature of the Dispute, is
expressly contemplated and permitted. However, the Parties acknowledge and agree
that one of the benefits of resolving Disputes through arbitration is the
opportunity reasonably to limit discovery. The Parties further agree that they
will endeavor to agree upon procedures and a schedule for discovery that will
result in a prompt and fair hearing under these procedures.
4.2. Discovery requests and responses need not be served upon the Panel
but the Panel shall promptly convene upon motion of either party to resolve
discovery disputes, if any.
4.3. Discovery will be completed within sixty days of the Pre-Hearing
Conference.
5. SUBMISSION OF EVIDENCE AND HEARING.
5.1. The Panel may receive evidence in the form of written statements
filed prior to Hearing for cross-examination on such statements or may receive
oral testimony at Hearing. Each party shall be entitled to submit rebuttal
testimony. The Panel may also permit opening and closing statements of counsel
at Hearing.
5.2. The Panel shall convene for Hearing the evidence and argument of
the parties at a time and place to be established by the Panel. The Hearing
shall be held no later than thirty days after the close of discovery or thirty
days after the Pre-Hearing Conference if there is no discovery.
5.3. At the Hearing, and for all other purposes related to the
Proceeding, the Initiating Party shall be deemed the party seeking affirmative
relief, shall go first and shall bear the burdens of proof and of persuasion.
5.4. The Hearing shall be transcribed.
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6. POST-HEARING PROCEDURES.
6.1. The Panel may request Post-Hearing briefs and, if it does so,
shall establish a schedule for submission of such briefs at the close of
Hearing.
6.2. Within thirty days of the later of the close of the Hearing or its
receipt of Post-Hearing briefs, the Panel shall issue a written Decision and
Award which shall include findings of fact and explain the reasons for the
Decision.
7. CONFIDENTIALITY.
7.1. Unless otherwise agreed, the Proceeding and all information and
documents relating to it shall be kept confidential by the Parties, the Panel,
witnesses and all other persons involved with the Proceeding. Specifically, but
without limitation, the Confidential Information of the parties shall be
safeguarded and maintained as confidential by all participants in the
Proceeding.
8. COSTS.
8.1. The Neutral Arbitrator's fees and expenses, and all expenses of
the Pre-Hearing Conference, Hearing or any other aspect of the Proceeding not
directly attributable to either party, such as the cost of transcription of
Panel Hearings and rental of Hearing rooms, shall be borne equally by the
parties.
8.2. The Panel shall in its Decision and Award determine whether and to
what extent either party is a prevailing party and entitled to an award of its
costs, including attorneys' fees.
9. MISCELLANEOUS.
9.1. The parties may agree at any time to depart from these procedures,
including the time periods herein established. Although not favored, the Panel
may also permit departures from these procedures and time periods absent
agreement of the parties to prevent a miscarriage of justice.
9.2. Until the Neutral Arbitrator is appointed, any issue relating to
the Proceeding that is not provided for in these procedures shall be governed by
the Commercial Arbitration Rules of the American Arbitration Association. Once
the Neutral Arbitrator is appointed, the Panel is empowered to resolve all
issues not contemplated by these procedures and upon which the parties cannot
agree.
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9.3. The Panel may grant any remedy or relief that it deems just and
equitable and within the scope of the agreement of the parties, including, but
not limited to, specific performance of a contract, injunctive relief or other
equitable relief.
9.4. These procedures contemplate a two-party Proceeding. If there are
more than two parties to a Proceeding, and they are unable by unanimous
agreement to align themselves as two parties, each party shall be entitled to
all the rights of a party hereunder, including specifically but without
limitation the right to appoint a Party Designated Arbitrator, and the Neutral
Arbitrator shall have a number of votes as to all matters decided by the Panel
equal to the sum of (i) the votes of all Party Designated Arbitrators, and (ii)
one.
9.5. The Panel may, in its discretion, convene and act by conference
call for all purposes other than taking oral testimony.
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Exhibit 10.29(b)
[FORM OFFER LETTER]
Dear Physician:
We appreciate your interest in becoming affiliated with Doctors Health
System, Inc. and are prepared to make you the following offer:
1. ______ shares of the Class B Common Stock of Doctors Health.
[2. Option to purchase __________ shares of Class B Common Stock at an
exercise price of $_______ per share.]
3. Cash in the amount of $_________, [of which $_________ represents
the depreciated book value of your assets.]
A Prospectus describing Doctors Health and its affiliates is enclosed.
Please direct your attention to Pages ___ to ___ of the Prospectus which
describes the risk factors which you should consider in evaluating an investment
in the securities offered under the Prospectus and this letter.
Again, thank you for your interest. If you have any questions regarding
this offer, please feel free to call ________________ at _________________.
Very truly yours,
-------------------------------
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. The Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Exhibit 10.30
Certain confidential portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment.
FREE STATE HEALTH PLAN, INC.
IPA SERVICE AGREEMENT
This Agreement is made and entered into on the 1st day of November
1995, by and between Free State Health Plan, Inc., a corporation organized under
the laws of the State of Maryland, (hereinafter referred to as "HMO") and
Doctors Health System, (hereinafter referred to as "IPA"), a legal entity
organized under the laws of the State of Maryland and performing the function of
an individual practice association as described in the Federal Health
Maintenance Organization Act of 1973, as amended, and the regulations
promulgated thereunder.
WHEREAS, HMO is in Maryland a state licensed and federally qualified
health maintenance organization under the Maryland Health Maintenance
Organization Act and the Federal Health Maintenance Organization Act of 1973 as
amended; and
WHEREAS, IPA is an individual practice association which has as one of
its objectives the delivery or arranging for the delivery of basic health
services to those who enroll in the HMO (hereinafter called "Members"); and
WHEREAS, IPA has entered into arrangements or contracts with health
professionals, a majority of whom are licensed to practice medicine, surgery or
osteopathy in the State of Maryland; and
WHEREAS, IPA desires to enter into a written service agreement with HMO
to arrange for the provision of basic health services to the Members of the HMO.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein stated, it is agreed by and between the parties hereto as
follows:
Article I - GENERAL
A. Purpose. The purpose of the HMO is to offer prepaid health care
benefits through a coordinated system of arrangements with health care
providers that will afford a reasonable choice of primary care
physicians, assure access to medical services and health care resources and
monitor the quality of health care provided to the HMO subscribers and their
families, in groups or as individuals.
B. HMO Service Area. Subject to approval by the U.S. Department
of Health and Human Services ("DHHS") and the Maryland Department of Health
and Mental Hygiene, and subject to the HMO's ability to arrange for the
services, the service area will consist of the entire State of Maryland.
C. IPA Service Area. The service area designated (see Attachment A
for detailed description) is used as an enrollment guideline by the HMO and as
the criteria by which an emergency room visit will be categorized as
in-area or out-of-area. The HMO will screen applications to determine the
ability of the applicant to use the IPA properly and efficiently. The
applicant's place of residence, place of employment, marital status and
access to transportation to the IPA will be considered in the screening process.
D. Relationship of IPA and HMO. Each party to this Agreement
retains its own identity and full autonomy in carrying out its responsibilities
under the Agreement and in the management of its affairs. Neither party shall
act as the agent or employee of the other party except as specified in this
Agreement. Except as specifically provided herein, neither the IPA
<PAGE>
nor the HMO is authorized to bind the other with third parties. Neither the
IPA nor the HMO shall be liable to any other party for any act, or failure to
act, of the other party to this Agreement.
E. Malpractice Liability. Neither the IPA nor HMO shall be liable
for the expense of defending any action for alleged professional malpractice
against the other, or for any costs resulting from the loss of such lawsuit.
Both HMO and IPA agree for themselves, their successors and assigns that if
the act of one results in any claim, demand, loss, damage or liability upon or
to the other then, and in that event, the party whose act causes such claim
or liability shall indemnify and hold harmless the other party which is made
or held liable thereby. However, neither the IPA nor the HMO limits its right
to file a cross or counterclaim or implead the other as a third party defendant
in such a suit. It shall be the responsibility of the IPA, each physician
and other health professional who is an independent contractor with the IPA
to maintain, in force, policies of malpractice as described in Article IV,
Section O herein.
Article II - DEFINITIONS
A. "Physician" - means a Primary Care Physician, Specialist
Physician or Consulting Physician as defined in paragraphs B, C and E below.
B. "Primary Care Physician" - means any physician (usually a
general practitioner, internist, pediatrician, or family practice physician)
who is an employee of, shareholder of, or under contract with IPA and who has
entered into an arrangement with IPA to provide certain basic health services to
Members.
C. "Specialist Physician" - means a physician (usually either
Board certified or Board eligible in a medical or surgical sub-specialty) who
is an employee of, shareholder of, or under contract with IPA and who has
entered into an arrangement with IPA to provide certain specialist health
services to Members.
D. "IPA Physician" - means a physician who is either a Primary
Care Physician, or a Specialist Physician who is an employee or shareholder of
IPA.
E. "Consultant Physician" - means a physician who is neither
a shareholder nor employee of IPA, but who has entered into a written
agreement with IPA to accept referrals of Members from Primary Care Physicians
and provide certain specialist services.
F. "Emergency Services" - means those health care services that
are provided in a hospital emergency facility after the sudden onset of a
medical condition that manifests itself by symptoms of sufficient severity,
including severe pain, that the absence of immediate medical attention could
reasonably be expected by a prudent layperson, who possesses an average
knowledge of health and medicine, to result in:
1. Placing the patient's health in serious jeopardy;
2. Serious impairment to bodily functions; or
3. Serious dysfunction of any bodily organ or part.
G. "Member or Enrollee" - means any person enrolled in the
prepaid program of the HMO who has selected the IPA as his/her provider of
Medical Services.
<PAGE>
Article III - HMO RESPONSIBILITIES
A. Administration of Agreement. The HMO agrees to perform or have
performed all necessary accounting, marketing, enrollment, information
management, data reporting and other functions appropriate to the administration
of the HMO and this Agreement. However, the internal administrative tasks of the
IPA necessary to support their responsibilities under this Agreement and all
functions relating thereto shall be performed by the IPA. Allowance for
administrative costs are included in the capitation payment set forth in
Attachment B, Compensation to IPA, annexed hereto.
B. Benefit Determinations. The HMO retains authority and
responsibility, after appropriate consultation with IPA, to make all
benefit determinations. All communication to Members regarding benefit
determinations, bills, and other matters relating to the HMO shall be made
by HMO exclusively. All benefit determinations and communications with
Members shall be made by HMO in a timely fashion.
C. Medical Services - Exclusive Domain of IPA. The HMO agrees not
to intervene in any manner in the rendition of medical service by the IPA,
it being agreed that the IPA shall have the sole responsibility in connection
therewith and that nothing contained herein shall interfere with the
professional relationship between an HMO Member and his/her Physician. Under
no circumstances shall a decision by HMO to deny benefits hereunder (pursuant
to Article III. B.) be deemed an interference with the relationship between HMO
Member and Physician.
D. Collection of Premiums and Other Income. The HMO agrees to collect
all premiums and other items of income to which the HMO is entitled except for
any copayments which may be required of Members at the time of service. Such
copayments, if any, will be collected by IPA when medical services requiring
copayments are rendered. Cancellation of enrollment for persons who fail to make
copayments will be solely at discretion of HMO. HMO agrees to give consideration
to recommendations by IPA related to disenrollment.
E. Coordination of Benefits. IPA shall establish and implement a
system for coordination of benefits in accordance with those rules established
under HMO's Group Medical and Hospital Service Agreement. IPA shall
identify and inform HMO of Members for whom coordination of benefits
opportunities exist. HMO hereby authorizes IPA to seek payment, on a
fee-for-service basis or otherwise, from any insurance carrier,
organization, or government agency which is primarily responsible for the
payment or provision of professional Health Care Services provided by IPA
under this Agreement which can be recovered by reason of coordination of
benefits, motor vehicle injury, workmen's compensation, temporary
disability, occupational disease, or similar exclusionary or limiting
provisions, to the extent authorized by Medical and Hospital Service Agreement
and not otherwise prohibited by law. For other services which are Plan Benefits,
HMO shall seek such payments. Both parties agree to exchange coordination of
benefits information on Members in a manner that will allow each party to
maximize coordination of benefits recoveries under this Section.
F. Compensation to IPA. The amount and conditions of all
compensation to be paid to the IPA during the term of the contract are set
forth in Attachment B annexed hereto.
G. HMO Medical Director. For the purposes of determining benefits
to be provided by IPA to HMO Members under this Agreement, HMO shall appoint a
Medical Director who will perform the following functions, in consultation
with IPA's Medical Director:
<PAGE>
1. Review and approve existing referral procedures and
documentation of those procedures for Specialty Physician services prior to the
signing of and any changes to this Agreement;
2. Review and approve existing criteria and
procedures comprising a Quality Assurance, peer and utilization review system
for IPA prior to the signing of and any changes to this Agreement;
3. Review and approve, for the purposes of payment,
all elective hospital admissions, outpatient surgery, DME, home health or any
other equipment or services paid by HMO directly (not covered by
capitation). IPA agrees that all elective admissions shall be pre-certified and
authorized by the HMO Medical Director prior to admission, and that the
cost of any elective inpatient hospital admission made without being
pre-certified may be deducted from subsequent capitation payments to IPA or
recovered by any other means necessary. HMO shall give IPA not less than
thirty (30) days prior written notice of its intent to deduct the cost
of such hospital admissions from capitation payments to IPA, during which
period the parties will attempt to resolve any dispute related to such proposed
deduction. The sanctions provided for under this paragraph 3 shall not be
invoked by HMO in cases where the uncertified elective inpatient hospital
admission is found to have been appropriate, unless IPA's failure to
obtain precertification becomes recurring and habitual in which case said
sanctions will be applied;
4. Review qualifications for all providers utilized by
IPA;
5. Serve as Chairman of the Medical Advisory Committee;
6. Monitor ongoing compliance of IPA providers with
procedures and practices approved by Medical Advisory Committee;
7. In consultation with IPA, HMO Medical Director
shall have final authority to select and contract with Physician
Specialists and Consultants for services not covered by capitation but for
which IPA shares risk; and
8. Any approval by HMO's Medical Director required
under paragraphs 1 and 2 of this Section III G shall not be unreasonably
withheld or unreasonably delayed.
H. Public and Governmental Relations. The HMO shall be solely
responsible for the advertising and promotion, public relations and governmental
requirements relating to this Agreement, specifically including assuring
compliance with applicable laws and regulations relating to the organization and
operation of the HMO. Such requirements shall include the satisfaction of all
reporting requirements to State and Federal agencies and organizations insuring
the solvency of the HMO. The IPA shall provide the HMO with all necessary
information on a timely basis to meet such requirements and otherwise fully
cooperate in assuring ongoing compliance with operational and reporting
requirements of regulatory agencies.
I. HMO's Professional Liability And Other Insurance. HMO, at its
sole cost and expense, shall procure and maintain such policies of general
liability and professional liability insurance and other insurance as shall be
necessary to insure HMO and its employees against any claim or claims for
damages arising by reason of personal injuries or death occasioned directly
or indirectly in connection with the performance of any service by HMO, the
use of any property and facilities or equipment provided by HMO, and the
activities performed by HMO in connection with this Agreement. Memoranda of the
above insurance policies as well as all reinsurance and insolvency policies,
if any, shall be provided to IPA upon IPA's request.
<PAGE>
HMO shall notify IPA of any malpractice claims against HMO initiated by
Members who have selected IPA as their primary provider of care.
J. Notifications. The parties agree that each will promptly
notify the other in the event of any of the following, and that upon any such
event, either party may, but shall not be required to, terminate this
Agreement upon thirty (30) days' prior written notice to the other:
1. failure to maintain insurance required under this
Agreement;
2. withdrawal or suspension of, or failure to renew,
or notice of intent to withdraw, suspend, or fail to renew a certificate of
authority to operate as a health maintenance organization from the Insurance
Commissioner of the State of Maryland, or any other appropriate State authority;
3. dissolution, termination of existence, insolvency
or business failure of either party, commission of an act of bankruptcy by, or
appointment of a receiver or other legal representative for any part of the
property of either party; or
4. assignment for the benefit of creditors or
commencement of any proceeding under any bankruptcy or insolvency law by either
party; entry of an order for relief against either party, or commencement of
any proceedings under any bankruptcy or insolvency law against either party.
K. Benefit Statements. HMO will provide IPA with a concise summary
benefit description for each type of group and individual Member agreement under
which IPA will be requested to render services under this Agreement. The summary
statements will identify Covered Services, any and all copayments, deductibles
or other charges and payments, and all exclusions, limitations or conditions
applicable to Covered Services. Summary statements will be replaced or updated
if modifications or amendments are made in the agreements to which they relate.
HMO will supply IPA with copies of the group and individual Member agreements
and any and all amendments, modifications and revisions thereto to which the
summary statements relate.
L. Utilization Reports. HMO agrees to provide IPA with information
relevant to IPA generated by HMO's management information systems upon request
by IPA. IPA shall provide a list of requested reports to HMO periodically and
HMO shall use best efforts to provide such reports without cost to IPA;
provided, however, if incremental costs are incurred in HMO for the generation
of any such report, HMO and IPA shall mutually agree on reasonable reimbursement
therefor.
M. Facilities List. HMO agrees to provide IPA with a list of approved
health care providers, hospitals, skilled nursing facilities, home health
agencies, hospices and other health care facilities, which list shall be amended
from time to time as necessary or appropriate. Said list is attached hereto as
Attachment L.
Article IV - IPA RESPONSIBILITIES
A. Health Care Services. IPA agrees to provide or arrange for the
provision of health care services as described in Attachment C of this Agreement
to each HMO Member who selects IPA as his/her provider of medical services. IPA
further agrees to provide additional medical services which may be required
during the course of this Agreement by State or Federal law governing the HMO,
provided that the monthly capitation paid by HMO to IPA for medical services
shall be adjusted by amounts mutually acceptable to the parties to cover such
additional services. IPA agrees to accept from the HMO the mutually agreed upon
<PAGE>
monthly capitation payment set forth in Attachment B as payment in full for the
services described in Attachment C. IPA will participate to the maximum extent
possible in the home care and other alternative care programs of the HMO.
B. Peer Review and Quality Assurance Plans. In addition to the
Health Care Services to be rendered by IPA as described above, the duties
of IPA hereunder shall include planning and conducting systematic peer review
relating to utilization and quality of care rendered by IPA Physicians and
allied health professionals engaged by IPA including establishment of
an appropriate enforcement mechanism for all final peer review
decisions of IPA and consultation with HMO regarding the maintenance,
review, storage, and retrieval of records relating thereto. HMO (through HMO's
Medical Director) and IPA shall jointly develop a format for an ongoing peer
review and quality assurance plan that is consistent with the Federal HMO
Law requirements. The procedures instituted by IPA shall be approved by
the HMO's Medical Director. The effectiveness of the peer review and quality
assurance plans shall be monitored by the HMO's Medical Director, who may
request modifications to such plans when reasonably required. The peer review
and quality assurance plans shall be designed in such a way that they:
1. Stress health outcomes to the extent
consistent with accepted standards of professional practices prevailing in
the service area;
2. Provide review by IPA Physicians of the process
followed in the provision of Health Care Services;
3. Utilize systematic data collection of
performance and patient results, provide interpretation of such data to the
practitioners, and institute needed changes;
4. Include written procedures for taking appropriate remedial
action whenever it is determined that inappropriate or substandard services have
been provided or that services which should have been furnished have not been
provided;
5. Provide for a system of prior authorization by the
IPA Medical Director for referrals to health professionals outside the IPA; and
6. The IPA agrees to adopt the Quality Assurance plan as
annexed hereto in Attachment J.
C. Selection of Primary Care Physician. IPA agrees that
each Member seeking care shall be required to select a Primary Care
Physician as his/her personal Primary Care Physician for coordinating
his/her overall health care needs.
D. On-Call Services. IPA agrees to provide on-call physician
services 24 hours daily.
E. Reporting Requirements. The IPA agrees to deliver to the HMO
such information in the formats prescribed at such intervals as
specified in Attachment D, annexed hereto. Data may be submitted in hard
copy form, on computer printout or on magnetic tapes as mutually agreeable.
The HMO agrees to provide in a timely manner the IPA with any information
or clarification necessary for the IPA to perform its obligations under this
Paragraph E.
F. Physician Agreements. With the exception of its employees,
IPA shall enter into written service arrangements with all health
professionals providing care under or by
<PAGE>
reason of this IPA Service Agreement. Such agreements, at a minimum, shall
provide for the following which IPA shall also require of its employees:
1. The health professionals shall provide services
in accordance with a compensation arrangement established by the entity;
2. To the extent feasible, the health professionals
will share records, equipment, and professional, technical and administrative
staff;
3. To the extent feasible, the health professionals
will participate in continuing education programs arranged by the IPA; and
4. The health professionals will look solely to the IPA for
compensation for services provided to Members, except for applicable copayments
to be collected by the health professionals or IPA as the case may be. This
provision shall survive the termination of this Agreement regardless of the
cause of such termination.
5. The health professionals will participate in and be bound
by HMO's Quality Assurance Peer Review, Credentialing, Grievance, Risk
Management, and Utilization Review programs.
6. The health professionals will continue to provide medically
necessary services for a period of thirty (30) days notwithstanding the
inability of the HMO to pay amounts due to the IPA.
G. Consultant or Specialty Referral Physician Agreements. The IPA
agrees to identify and contract with those Physicians who are not shareholders
or employees of the IPA and are needed for HMO patient consultations or referral
for specialty services, by entering into written agreements with such
Physicians, (a list of which is attached hereto as Attachment I),which conform
to the requirements of Article IV, Section F. The HMO reserves the right, at its
sole discretion, to forbid the use by IPA of a particular consultant or
specialty physician from treating HMO members. The IPA will pay Consultant and
Specialty Referral Physicians for services rendered and obtain appropriate
patient encounter data from such Consultant or Specialty Referral Physician for
IPA records and for reporting to the HMO. HMO shall provide IPA with a current
list of consultants or specialty physicians selected by HMO to provide
non-capitated services, which list shall be updated from time to time as
appropriate or necessary.
H. Compensation from HMO Solely. IPA shall look solely to HMO for
compensation for Covered Services provided hereunder and shall at no time seek
compensation from Members for such services, except for the copayments permitted
under the Medical Health Benefits Certificate and Hospital Service Agreement
with HMO. IPA can seek compensation from Members for non-covered services. This
provision shall survive the termination of this Agreement regardless of the
cause of such termination. IPA agrees that all benefit determinations shall be
made by HMO and in a timely manner.
I. Communications with Members. IPA agrees that all communications
relating to benefit determinations, access, complaints and grievances and
records related to such complaints shall be referred to the HMO in accordance
with the Grievance Procedure set forth in Attachment E to this Agreement and
referred to in Article IV, Section T for response by the HMO. Any such response
by HMO shall be made in a timely manner and only after consultation with IPA. No
materials, pamphlets or explanatory letters, regarding the HMO are to be
distributed to Members unless approved in advance by HMO, such approval not to
be unreasonably withheld.
<PAGE>
J. Thirty (30) Day Provision of Services. IPA will continue to
provide medically necessary services for a period of thirty (30) days
notwithstanding the inability of the HMO to pay the capitation amount due.
K. Continuing Education. IPA agrees to encourage, and contribute
to, the continuing education of the IPA Physicians including participation to
the maximum extent possible in HMO continuing education programs.
L. IPA Medical Director. IPA shall provide a physician who shall
serve as Medical Director at each of IPA's Health Center(s). The duties of
the IPA Medical Director shall include but not be limited to (a) assumption
of the day-to-day administrative responsibilities with regard to IPA
Health Care Services obligations hereunder; (b) responsibility for maintenance
of continuing education programs; (c) responsibility for the supervision and
maintenance of medical and other records of services rendered by IPA
Physicians and allied health professionals who are non-physician support
personnel; (d) monitoring the quality assurance/peer review and utilization
review procedures conducted in accordance with Section B of this Article
IV; (e) request for clinical authorization and approval of hospital
admissions and outpatient surgical procedures according to criteria
developed by the HMO's Medical Director; and (f) when requested, assisting
HMO's Medical Director in determining final rulings regarding the medical
necessity of outpatient emergency room treatment which was not authorized by an
IPA Physician. The Certification Appeals Process as outlined in the HMO
Provider Services Manual is available for disputed cases.
M. Administrative and Support Staff. IPA shall provide adequate
administrative and support personnel for IPA Physicians, monitoring of
coordination of benefits, and patient satisfaction. IPA will, at its sole
expense, engage nurses, technicians, other non-physician support personnel, and
clerical and administrative personnel reasonably required by IPA to perform its
obligations under this Agreement. Selected IPA support personnel shall undergo
indoctrination programs developed by HMO to facilitate administration of this
Agreement.
N. Health Center Administrator. IPA shall provide a Health Center
Administrator. The Health Center Administrator shall have the primary
responsibility and authority for the administrative functions of IPA's
performance under this Agreement, including the coordination of health service
delivery, appointment scheduling, and providing the HMO with coordination of
benefits data on Members as required by Article III, Section E, above, as well
as other data that the HMO may require. The Health Center Administrator shall
have the responsibility for responding to HMO in a timely fashion to Member
grievances/complaints regarding Health Care Services as such items are referred
to him/her under HMO's procedures. If the Health Center Administrator is a
health practitioner, he/she shall not have additional clinical duties after
Health Center enrollment reaches 5,000.
O. Malpractice Insurance and Liability. IPA shall provide and
maintain such policies of malpractice insurance as shall be necessary to
insure IPA and those health professionals who are its employees against any
claim or claims for damages arising by reason of personal injuries or death
occasioned directly or indirectly in connection with the performance of any
service by IPA. The amounts and extent of such insurance coverage shall be at
minimum at least one million dollars ($1,000,000) per occurrence and three
million dollars ($3,000,000) aggregate. Any reduction in such coverage shall
require the approval of the HMO, such approval not to be unreasonably
withheld. IPA further agrees that each Physician and other health professional
contracting with IPA shall provide HMO copies of such policies of malpractice
insurance as shall be necessary to insure such Physicians and other health
professionals and their employees against any claim or claims for damages
arising by reason of personal injury or death occasioned directly or
indirectly in connection with the
<PAGE>
performance of any service by Physician or other health professional. IPA
shall notify HMO of any malpractice claims pending against the IPA initiated by
HMO Members. The HMO may at its sole discretion confirm with the IPA's
malpractice carrier any of the aforementioned HMO malpractice claims.
P. Roster of Providers and Credentialing. IPA agrees to
maintain on record with the HMO a current schedule of the Physicians and other
providers and to provide HMO a curriculum vitae, specifying at least the
physician's name, specialty and board status, Maryland license number,
location where services will be provided, hospital affiliation, relationship
to IPA, and malpractice history, and otherwise comply with HMO's
credentialing requirements. The schedule is annexed hereto as Attachment F.
The IPA will use reasonable efforts to notify the HMO thirty (30) days prior to
any additions, deletions or other changes to the information provided
pursuant to this paragraph. With the exception of malpractice history,
IPA agrees that HMO may publicize the information contained in this roster
to all Members and prospective Members.
The HMO at its direction may delegate to the IPA the
credentialing function for the IPA's physicians. The IPA is then responsible to
notify the HMO promptly of any differences or changes from the initial
information provided. The HMO has the right to perform (and IPA will allow)
audits of the credentialing process of the IPA.
Except as permitted herein, HMO shall not include any
description of IPA or of its facilities, services or health professionals or any
reference to IPA, direct or indirect, in any HMO marketing materials or
communications to Members or prospective Members without the prior written
approval of IPA which approval shall not be unreasonably withheld or delayed.
Q. Physician Requirements and Responsibilities. It is mutually
agreed that IPA and its Physicians will adhere to the following requirements:
1. All Physicians shall be duly licensed to practice
medicine or osteopathy in the State of Maryland. Evidence of such licensing
shall be submitted to HMO upon request. In addition, Physicians, where
appropriate, must meet all qualifications and standards for membership on the
medical staff of at least one of the hospitals which has contracted with HMO
and shall be required to maintain staff membership and full admission
privileges in accordance with the rules and regulations of such hospital and
be acceptable to such hospital and successfully qualify under HMO's physician
credentialing process. Any IPA Primary, Specialty or Consultant Physician,
employed or contracted, who have their privileges revoked, suspended, abridged
or restricted in any way, for any reason, are forbidden from treating any HMO
Members upon notification from the HMO. HMO shall enter into arrangements to
obtain hospital services for Members with certain hospitals to be mutually
agreed upon by IPA and HMO. A list of such hospitals shall be published in
membership materials;
2. Physicians will have, where appropriate, a current
narcotics number issued by the appropriate authority;
3. Except in cases of emergency or medical necessity, IPA
agrees to use only those health care providers, inpatient, skilled nursing,
hospitals and other facilities which have contracted with HMO. The HMO will not
pay for non-capitated services when referred by IPA to providers or facilities
with which the HMO does not have a valid contract and which do not appear on
HMO's list of contracted providers and facilities as amended from time to time
unless specifically approved in writing by HMO. Said list is attached hereto as
Attachment L. Within these limitations, IPA will attempt to accommodate the
requests of Members as to their choice of health professional or facility;
<PAGE>
4. HMO and IPA together, shall from time to time jointly
review methods and details of staffing and scheduling to ensure appropriate
access at all times.
5. An IPA Physician will be forbidden from treating HMO
Members should health care services provided by that Physician be determined to
be sub-standard by the credentialing process, the HMO Quality Improvement
Committee or the HMO Peer Review Committee. Physician may appeal the
determination through the Grievance Procedure, an individual copy of which will
be furnished upon request.
R. Specification of Facilities and Hours of Operation. IPA agrees to
maintain such facilities for such hours of operation as specified in Attachment
G annexed hereto. With the exception of any increase in its hours of operation
(which shall nonetheless be communicated to HMO), any additions, deletions or
other changes in facilities or their hours of operation by the IPA must be
communicated to HMO in writing ninety (90) days prior to becoming effective. HMO
Members will not be authorized to receive care at such facilities prior to
approval by HMO. IPA shall treat HMO Members on an equal basis with its other
patients which shall be consistent with community HMO standards for waiting
times and service access. This includes the IPA providing at its costs all
handicap access as required by federal and state regulations such as
interpretation services for the hearing disabled.
S. Administrative, Accounting, and Medical Records -
Confidentiality. Physicians and other health professionals shall maintain
adequate medical records for Members treated by IPA Physicians and other
health professionals. Subject to all applicable privacy and confidentiality
requirements, such medical records shall be made available to each Physician and
other health professionals treating the Member, and upon request to any proper
committee of the IPA or HMO, for review to determine whether their content and
quality are acceptable, as well as for peer review or grievance review.
IPA and HMO agree that medical records of Members shall be treated as
confidential so as to comply with all Federal and State laws and regulations
regarding the confidentiality of patient records. HMO, however, shall have the
right, upon written request, to inspect, at all reasonable times, any
accounting, administrative and medical records maintained by IPA pertaining
to HMO, to Members and to IPA's participation hereunder subject to all
confidentiality requirements. IPA and HMO agree that a request pursuant to
this Article IV, Section R shall be in writing and shall identify the records
or information to be reviewed. HMO shall, upon the request of IPA, provide IPA
with access to HMO accounting, administrative and medical records pertaining
solely to IPA's participation in HMO and pertaining to the general performance
of HMO. Under no circumstances shall IPA have access to information or
records of any type which pertain to the participation or performance of
providers other than IPA. IPA further agrees that, in the event an examination
concerning the quality of health care services is conducted by the appropriate
State officials, as required by State law, IPA and Physicians shall submit in
a timely fashion, any required books and records and facilitate in every way
such examination.
T. Complaint and Grievance Procedure. IPA shall cooperate with HMO
in HMO's complaint and grievance procedure and shall abide by such
grievance procedure, a copy of which is annexed hereto as Attachment E. It is
understood that claims which relate to IPA and are subject to resolution by
the HMO under the grievance procedure may, in accordance with the terms of this
Agreement, be charged to IPA after full investigation under the complaint
and grievance procedure. HMO has the right to recover payment of these
claims through reduction of capitation payments. The IPA shall submit to the
HMO complaint and grievance information to meet the requirements of DHHS and
other appropriate regulatory agencies. Medical information shall be
provided to the HMO as appropriate and without violation of pertinent State
and Federal laws regarding the confidentiality of medical records. HMO's
grievance procedure is also available to IPA for purposes of requesting
disenrollment of a non-
<PAGE>
compliant Member (including but not limited to one who consistently fails
to make copayments) or challenging a benefit determination. HMO agrees
to give consideration to recommendations by IPA related to disenrollment
or benefit determinations.
U. Physician-Patient Relationship Maintained. Physicians
shall maintain the relationship of physician and patient with Members,
without intervention in any manner by HMO or its agents or employees, and
Physicians shall be solely responsible for all medical advice to and treatment
of Members and for the performance of all medical services set forth in
Attachment C, in accordance with accepted professional standards and
practices.
V. Physician/Member Ratios. IPA shall, at all times,
maintain a sufficient number of IPA Physicians who are primary care
physicians so as to ensure there shall be at least one full-time
equivalent primary care IPA Physician for each 1,800 Members, adjusted
for demographics of enrolled membership at the health center. IPA agrees
to comply with HMO policies and protocols for the use of mid-level
practitioners and the availability of physicians during health center hours
of operation and after hours coverage. Any changes in these policies and
protocols shall be communicated by the HMO to the IPA at least thirty (30) days
prior to their implementation.
W. General Compliance Requirements. In addition to the
services to be rendered by the IPA as described above, the duties of the IPA
hereunder shall include (1) planning and conducting systematic peer review
relating to utilization and quality of care rendered by its Physicians,
including establishment of an appropriate enforcement mechanism for all final
peer review and quality assurance decisions of IPA in a manner approved by
HMO (such approval not to be unreasonably withheld or delayed) and in
accordance with applicable state and federal law; (2) consultation with
HMO with regard to the subjects of recordkeeping, review storage and
retrieval; implementation of a discharge planning system for Members
admitted to hospitals under contract with HMO; (3) consultation with HMO
regarding better contact and more complete working relationships among the
various entities involved in HMO's program and the community; (4)
consultation with HMO and advice with regard to the special characteristics
and problems of the IPA and HMO as a prepaid health care plan; and (5)
cooperation with the HMO in collection of Coordination of Benefits, Subrogation
and Workmen's Compensation recoveries.
X. Compliance With HMO Policies and Procedures and
Consequences of Non-Compliance. IPA recognizes HMO's right to establish
administrative policies and procedures and agrees to be bound by them as
well as comply with all applicable state and federal laws and regulations
pertaining to the practice of medicine and Health Maintenance Organizations.
HMO will consult with IPA concerning any significant proposed changes in
HMO's administrative policies and procedures prior to implementation of such
policies and procedures.
HMO agrees to compensate IPA in the event any policy
implemented hereunder results in IPA incurring significant additional
administrative expenses. Significant additional administrative expenses shall be
defined as expenses which exceed $1,000 per contract year. Such additional
expenses shall be proven to HMO's satisfaction and shall be reimbursable in a
manner mutually agreeable to the parties. In the event IPA fails to comply with
HMO Administrative Policies and Procedures and continues to do so after
receiving fifteen (15) days notice in writing from the HMO of such
non-compliance, HMO shall have the right to withhold up to ten percent (10%) of
the capitation owed to IPA each month until such non-compliance has been
resolved or action to resolve such non-compliance has been initiated. HMO's
right or resort to this remedy shall not act as a limitation on any other right
of HMO, all such rights and remedies being cumulative.
<PAGE>
Y. Effects of Complaints/Malpractice. IPA agrees to remove a
physician from the roster of physicians servicing HMO Members in the event said
physician is the object of recurring Member complaints adjudicated in favor of
complainant according to HMO's grievance procedures and/or malpractice claims
adjudicated in favor of the complainant by the Maryland Health Claims
Arbitration Office or by a court of competent jurisdiction.
Z. Compliance with HMO Quality Improvement Program and
Consequences of Non-Compliance. IPA recognizes HMO's right to establish
quality assurance and service standards and agrees to be bound by them. These
standards are set out in Attachment J and will be amended by HMO from time to
time. In the event IPA or an individual physician (primary care or
specialist) fails to comply with HMO Quality Improvement Program and
continues to do so after receiving thirty (30) days notice in writing from HMO
of such non-compliance, then HMO shall have the right to withhold up to ten
percent (10%) of the capitation owed to IPA each month and/or restrict a
physician from use by the IPA in treating HMO Members until such
non-compliance has been resolved or action to resolve such
non-compliance has been initiated. HMO's right or resort to this remedy shall
not act as a limitation on any right of HMO, all such rights and remedies being
cumulative.
AA. Non-Payment of Authorized Services. When IPA authorizes a service
for which it is financially responsible and the provider of said services
invokes its statutory right to recover directly from HMO of said services, and
IPA fails to make payment therefor within a reasonable time, HMO may pay for
said services and deduct the amount paid from future payments to IPA under the
following circumstances:
1. After HMO has ascertained that the service was
authorized;
2. The person or entity rendering said service is
attempting to collect payment directly from the IPA and has provided IPA with
proof of past due status of the debt; and
3. The service was provided at least sixty (60)
days prior to any such attempt at collection.
HMO shall apprise IPA in writing at least fifteen (15) days
prior to exercising this right.
BB. Compliance with Annotated Code of Maryland, Health General Article,
Section 19-713.2. IPA agrees to establish an Escrow Fund, obtain a Letter of
Credit, or otherwise insure funds availability sufficient to satisfy IPA's
obligations to external providers as defined in the Annotated Code of Maryland,
Health General Sec. 19-713.2 effective July 1, 1991. IPA also agrees to provide
HMO with a paid claims analysis which defines those external obligations, and
will provide, on a monthly basis, throughout the term of this Agreement, a paid
claims report which will enable HMO to monitor IPA's compliance with the
Annotated Code of Maryland, Health General Sec. 19-713.2. IPA further agrees to
comply with all terms and conditions of the Annotated Code of Maryland, Health
General Sec. 19-713.2, and any regulations promulgated pursuant thereto.
CC. HMO-USA. The HMO is affiliated with a collaboration of Blue Cross
Blue Shield HMO Plans, herein referred to as HMO-USA. These Plans have
established arrangements to provide certain medical services for Members
traveling into another Plan's service area. The IPA agrees to participate in the
HMO-USA network and provide the same level and type of care for HMO-USA members
as that required by this Agreement for the HMO's Members. This includes
arranging for all specialty care when necessary. The HMO will reimburse the IPA
or their contractual specialty or consultant physicians using the HMO's
<PAGE>
fee schedule. Under this program, the IPA shall not seek compensation from
HMO-USA members for such services, including copays.
Article V - JOINT OBLIGATIONS OF IPA AND HMO
A. Cooperation and Liaison. IPA and HMO shall maintain
effective liaison and close cooperation with each other to provide maximum
benefits to each Member at the most reasonable cost consistent with quality
standards of medical practice. IPA and HMO shall cooperate to control
enrollment in HMO in order to avoid exceeding the reasonable capacity of
personnel and facilities.
Article VI - FINANCIAL ARRANGEMENTS AND RISK SHARING
A. Maintenance of Records. The HMO and IPA will maintain
records of account for all financial transactions pertaining to the
HMO. Billing, collection, receipt and reconciliation of all revenues
and appropriate disbursement of required monies will be recorded and
maintained in accordance with accepted accounting practices. The IPA will
also provide the HMO with Audited Financial Statements including all
notes, schedules, and auditor opinions on an annual basis within fifteen
(15) days of receipt from the audit firm or 180 days from the end of the fiscal
period, which ever occurs sooner. If the IPA fails to submit the Audited
Financial Statements by the scheduled due date, the HMO shall have the right
to apply the sanctions described in Article IV, Section X, unless IPA requests
an extension of such due date which shall not be unreasonably withheld or
delayed.
B. Risk Sharing. As an incentive to control the cost to
HMO of providing non-capitated (underwritten) services under this
Agreement, the IPA and HMO shall share risk for the cost of these services in
the manner set out in Attachment B.
C. State of Maryland Performance Standards Penalties. The
State of Maryland employer group contract contains specific performance
standards that carry financial penalties for noncompliance. It is agreed that
should the HMO be assessed penalties by the State of Maryland due to the IPA's
failure to meet any or all of the aforementioned standards then IPA will be
charged an amount equal to those penalties associated with their HMO
Members via a reduction in capitation payments. See Attachment K for a
listing of these performance and noncompliance penalties.
Article VII - TERM OF AGREEMENT, TERMINATION AND RENEWAL
A. Term. The [initial] term of this Agreement shall be November
1, 1995 through December 31, 1996. Both parties commit to initiate negotiating
in good faith to produce a new Agreement not less than ninety (90) days
prior to termination of this current Agreement. If, at the termination of this
Agreement, a new Agreement has not been signed, both parties agree to abide by
the terms of this Agreement until the new Agreement is consummated or for a
period not to exceed three (3) months after termination, whichever is less. The
parties agree that if it is the intention of either not to renew this
Agreement or to seek renewal on terms significantly different from those
specified herein, then said party shall give the other party a minimum of
ninety (90) days prior written notice of same before the end of this Term.
B. Termination. This Agreement may be terminated by either HMO
or IPA at any time, if written notice is given at least ninety (90) days in
advance of such termination. [, except during an initial term when termination
may only be for cause, which is defined as the breach of a term, condition or
provision of this Agreement.] Upon such termination, the rights of each party
hereunder shall terminate, provided however, that such action shall not
release either HMO or IPA of obligations imposed with respect to: (i) third
party payors; (ii)
<PAGE>
incentive payments accrued to IPA or penalty payments due HMO (see Risk Sharing
Article VI. B.) in connection with existing contracts under the HMO program;
(iii) the obligation of IPA to persons then receiving treatment; or (iv) the
obligation of IPA to look solely to HMO for payment and not to attempt to
collect payment from any Members. The parties agree that in the event of
voluntary termination, as provided herein, the obligations of HMO and IPA shall
continue in full force and effect at the capitation rate in force at the time of
termination for the period remaining on group and individual Member contracts
existing on the date notice of termination is given to IPA or received by HMO.
HMO and IPA agree that such extension of IPA obligations hereunder shall not
include obligations arising out of the renewal of existing Member contracts
which become effective after the date notice of termination under this Agreement
is given or the execution of new Member contracts which become effective after
the date written notice of termination is sent to IPA or received by HMO.
This Agreement may be terminated upon the filing by HMO or IPA
of a voluntary petition in bankruptcy or a voluntary petition or an answer
seeking reorganization, arrangement, readjustment of its debts or for any other
relief under any bankruptcy or insolvency act or law of any jurisdiction, now or
hereafter existing, or any action by either party indicating its consent to,
approval of, or acquiescence in, any such petition or proceeding; the
application by either party for, or the appointment by consent to acquiescence
of, a receiver or trustee of either party for all or a substantial part of its
property; the making by either party of an assignment for the benefit of
creditors; the inability of either party or the admission by either in writing
of its inability to pay its debts as they mature; the voluntary suspension of
business by either party.
This Agreement may be terminated upon the filing of an
involuntary petition against either party in bankruptcy or seeking
reorganization, arrangement, readjustment of its debts or for any other relief
under any bankruptcy or insolvency act or law of any jurisdiction, now or
hereafter existing; or the involuntary appointment of a receiver or trustee of
either party for all or a substantial part of its property, or the issuance of a
warrant of attachment, execution or similar process against any substantial part
of the property of either party and the continuance of the same undismissed,
undischarged, or unbonded for a period of sixty days; then, and in any such
event, the other party may declare, by written notice, that this Agreement is
automatically terminated.
Article VIII - MISCELLANEOUS
A. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their respective heirs, successors
and assigns, and it may not be assigned, subcontracted, or otherwise delegated
in a manner inconsistent with this Agreement by either party without the
prior written consent of the other party except as otherwise provided herein.
B. Headings. The headings of the various sections of the
Agreement are inserted merely for the purpose of convenience and do not,
expressly or by implication, limit or define or extend the specific terms of
the section so designated.
C. Maryland Law To Govern. The validity, enforceability and
interpretation of any of the clauses of this Agreement shall be determined and
governed by the laws of the State of Maryland.
D. Independent Contractor Status. None of the provisions of
this Agreement is intended to create nor shall be designed or construed to
create any relationship between IPA and HMO other than that of
independent entities contracting with each hereunder solely for effecting
the provisions of the Agreement. Neither of the parties hereto nor any
of their
<PAGE>
respective representatives shall be construed to be the agent, the
employer, or representative of the other.
E. Costs. In the event of a dispute between HMO and IPA
regarding the interpretation of the contractual provisions contained in
this by one party against the other then and in that event the party against
whom judgment is rendered agrees to pay the reasonable legal expenses and
reasonable court costs of the other.
F. Agreement Complete. This Agreement contains all the
terms and conditions agreed on by the parties hereto, and supersedes all
other agreements, oral or otherwise, regarding the subject matter or parties
hereto.
G. Amendments. This Agreement may be amended at any time by
mutual agreement of the parties, provided that before any amendment shall be
operative and valid, it shall be reduced in writing and signed by the HMO and
IPA. Said amendments may be added in the form of additional attachments,
signed by both parties, when other specific provisions are added or modified.
H. Notice. Any notice required to be given pursuant to the
terms and provisions hereof shall be in writing and shall be sent by certified
mail, return receipt requested, prepaid, to HMO at:
Free State Health Plan, Inc.
c/o CFS Health Group, Inc.
100 S. Charles Street, Tower II, Sixth Floor
Baltimore, Maryland 21201
and to IPA at: Doctors Health System
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
I. Confidentiality of Agreement. The parties acknowledge that the
terms and conditions of this agreement are of a most sensitive nature
and, if disclosed, could be very damaging with respect to their competitive
position. Therefore, the parties agree that neither shall disclose the
terms of this Agreement (including attachments) without the prior written
consent of the other. Any such disclosure shall be deemed a material breach of
this Agreement and shall be cause for immediate termination of this Agreement
at the option of the non-breaching party.
J. Recoupment for Incorrect Payments. If, at any time during
the term of this Agreement, HMO determines that it has made an incorrect
overpayment to IPA or on IPA's behalf, HMO shall have the right, after giving
the IPA thirty (30) days prior written notice, to recover from IPA the full
amount incorrectly overpaid. Such recovery may be in the form of set off,
withholding of future payments, or demand for repayment. HMO's right or resort
to these remedies shall not act as a limitation on any other right of HMO to
recover overpayments from IPA by any other means, all such means being
cumulative.
If during the term of this Agreement IPA determines and
demonstrates to HMO's satisfaction that it has received an underpayment pursuant
to the terms of this Agreement, then HMO shall remit to IPA said underpayment
within thirty (30) days of said demonstration.
K. Effect on Affiliates. The terms of this Agreement shall
apply, at HMO's sole election, to any health maintenance organization or
other entity related to or affiliated with
<PAGE>
HMO, including but not limited to Blue Cross and Blue Shield of Maryland,
Inc., its subsidiaries, affiliates, and related entities.
L. HMO as Licensed Controlled Affiliate. IPA hereby
expressly acknowledges its understanding that this Agreement constitutes a
contract between IPA and HMO that HMO is an independent corporation operating
under a license from the Blue Cross and Blue Shield Association, an
association of independent Blue Cross and Blue Shield Plans (the
"Association"), permitting HMO to use the Blue Cross and Blue Shield Service
Mark in a portion of the State of Maryland, and that the HMO is not contracting
as the agent of the Association. IPA further acknowledges and agrees that it
has not entered into this Agreement based upon representations by any person
other than HMO and that no person, entity, or organization other than HMO
shall be held accountable or liable to IPA for any of HMO's obligations to IPA
created under this
<PAGE>
Agreement. This paragraph shall not create any additional obligations whatsoever
on the part of HMO other than those obligations created under other provisions
of this Agreement.
IN WITNESS WHEREOF, the parties, by their duly authorized
representatives, have executed this Agreement the day and year set forth below
their signature to be effective as stated in Article VII hereof.
ATTEST: FREE STATE HEALTH PLAN, INC.
By:
(Signature)
(Print Name)
Title:
Date:
ATTEST: DOCTORS HEALTH SYSTEM
By:
(Signature)
(Print Name)
Title:
Date:
<PAGE>
ATTACHMENT A
IPA SERVICE AREA
For purposes of this Agreement, the service area for use by the HMO as
guidelines in enrolling Members and to define in-area and out-of-area emergency
room visits shall be as follows:
<PAGE>
ATTACHMENT B
CAPITATION/FINANCIAL ARRANGEMENTS
1. Capitation will be paid on or near the 15th day of each month according to
the schedule in this Attachment for Members who are enrolled in the HMO for
such month, and who have affirmatively selected the entity identified as IPA
in this contract as their selected Primary Provider. A summary listing
showing enrolled Members by the categories relevant to level of reimbursement
will be provided with the payment check. Also on the listing will be a
calculation of any retroactive adjustments either adding or deleting Members
enrolled in the IPA. IPA shall be liable for the cost of any care required to
be provided to any Member who selects IPA as his/her Primary Provider. This
liability includes the cost of any specialty care given after a Member's
effective date with IPA in accordance with a referral made by a Member's
previous Primary Provider. Liability for the cost of care shall continue
until receipt of notice from HMO of the Member's ineligibility for coverage.
2. The period covered by this Attachment B will be from November 1, 1995 through
December 31, 1996. During this period, in consideration of said capitation
amounts, the IPA shall provide or arrange for all those health care services
set forth in Attachment C, and shall assume the responsibility for the cost
of said services (as defined in the HMO Member contracts attached to this
Agreement). Regardless of the number of IPA Physicians rendering services, if
any, to a Member during any month, only one capitation payment will be made
to IPA each month for each Member. The capitation payment shall be made
regardless of the type or amount of service rendered to the Member during a
given month.
3. CAPITATION SCHEDULE (Per Member Per Month)
------------------------------------------
Contract Type/Description
-------------------------
Most Prevalent Coverages Copay Capitation PMPM
------------------------ ----- ---------------
Advantage I, II, III $0 [Confidential Treatment Requested]
and Blue Plus
Direct Pay 20% [Confidential Treatment Requested]
Medicare Supplemental $0 [Confidential Treatment Requested]
* The zero copay capitation rates PMPM for all coverages are reduced
[Confidential Treatment Requested] for each dollar of office copay,
respectively.
Capitation amounts (present and future) shall be adjusted (increased or
decreased) to reflect future copayment and benefit changes depending on
whether such changes result in increased or decreased liability or revenues
to IPA. See item 5 for discussion of "Opt-Out" products.
4. Underwritten and Institutional Services (UIS) Pool
--------------------------------------------------
The following services are considered included in the Underwritten and
Institutional Services Pool:
a. Inpatient Hospital
b. Other Underwritten Services
Out of Area Emergency, including Facility, Physician and Related
Services
Skilled Nursing Facility
Hospice
Ambulance
Shock Trauma (Institutional only)
Extracorporeal Lithotripsy
Outpatient Surgery Facility Fees at Licensed Facilities
Abortions
Funding of the UIS Pool beginning November 1, 1995 through December 31, 1996
will be [Confidential Treatment Requested] per member per month to cover the
benefits discussed above. It is agreed that due to the nature of the product
Members enrolled in self-funded Opt-Out products will be excluded from any
UIS Pool Settlement.
At the end of the contract term, after allowing a 120-day grace period for
late submission of charges, a settlement relating to cost sharing will be
calculated. The total dollars paid into the UIS Pool during the applicable
period (including recoveries from Subrogation and COB related to UIS
services) will be added and then all monies expended during the period for
services covered under the Pool will be deducted leaving a net amount
[Confidential Treatment Requested]. If there is a surplus (positive balance)
in the Pool, then that amount will be allocated [Confidential Treatment
Requested] between HMO and IPA. If a deficit (negative balance) exists, then
IPA will be given notice of the projected amount due from it. IPA will be
liable for [Confidential Treatment Requested] of the deficit up to a maximum
amount equal to [Confidential Treatment Requested] of the capitation
received. Payment of amounts resulting from the cost sharing of the UIS Pool
will be made within 30 days from delivery of settlement from HMO to IPA. It
is understood that for products that are self-funding for the services
detailed, above, there will be no UIS Pool or settlement. See Attachment H
for an example of the risk sharing calculation.
5. Participation in HMO's Opt-Out Products
---------------------------------------
As a means of inducing persons to transition from indemnity type insurance to
the HMO managed-care-type health plan, HMO has several opt-out products;
e.g., New Choice, Blue Plus. These products allow Members to "opt out" of the
HMO's provider network at the time service is rendered or selected. Such an
election is discouraged by the imposition of substantial copays.
IPA agrees to participate in these programs on the following bases:
IPA shall provide the same level of services to Members electing HMO's
opt-out products as with traditional HMO Members with the understanding that
although such Members are required to select a Primary Care Physician and
site at the time of enrollment they, nonetheless, may choose to obtain
services from Physicians other than those to whom they may be referred by
IPA's providers.
In return for IPA's rendering of said services, HMO shall compensate IPA
[Confidential Treatment Requested] of the capitated amounts previously
specified in Section 3 of this Attachment.
A separate non-UIS opt-out cost pool (referred herein as "Pool") will be
established relative to the opt-out Members. The Pool shall be funded by the
remaining [Confidential Treatment Requested] capitation and an additional
amount matching the [Confidential Treatment Requested] capitation.
Amounts expended by HMO for capitated services (Not UIS services; all UIS
costs for these Members except self-funded products are included in the UIS
Pool described on Page 2 of this Attachment) rendered by providers to whom
Member has not been referred by IPA (i.e., non-capitated professional
services) shall be separately identified and applied against the amounts
funded in the Pool.
Any cost or savings, i.e., any difference in the Pool, shall be shared
between HMO and IPA [Confidential Treatment Requested].
There will be no UIS Pool for Members enrolled in self-funded opt-out
products.
6. HMO agrees to compensate Doctors Health System on a fee-for-service basis
based on HMO's fee schedule for deliveries in excess of 25 per thousand
Members. In addition, for deliveries in excess of 22 per thousand Members,
HMO agrees to exclude the hospital facility costs from the UIS Pool.
<PAGE>
ATTACHMENT C
CAPITATION HEALTH CARE SERVICES
The IPA agrees to provide the following medical services (to the extent
specified in the benefit summaries provided by HMO) to each HMO Member selecting
assignment to the IPA for the capitation payment as set forth in Attachment B
and to collect applicable copayment amounts from the HMO Member depending on the
contract in effect between HMO and its Members. The IPA is responsible for the
services contained within this Attachment C resulting from any precertified
hospital admissions regardless of whether they occur inside or outside of the
IPA or HMO Service areas and for any in area emergency admissions. Out-of-area
emergency admissions are paid by the HMO and included in the UIS pool. The IPA
is also responsible to notify the site where a newborn is being enrolled (if
different from the mother's) during the mother's stay in order to transfer
financial responsibility for any neonatal care, otherwise the IPA will be
responsible for any costs during the baby's stay including UIS charges. It is
agreed that services required by government regulatory bodies such as OSHA are
the financial responsibility of the regulated employers and not the HMO.
I. Professional Services (Including Any Non-Surgical Outpatient Facility
Costs Associated With These Services)
A. Surgical services in the hospital, in the office or in a
licensed outpatient surgical facility, including surgical
assistance where medically required and anesthesiologist
services performed in connection with surgical services.
B. Physician services for visits and examinations, including
consultation time and time for personal attendance with the
patient, during a confinement in a hospital or skilled nursing
facility.
C. Physician services received in a Physician's office.
D. Physician services in the Member's home, including time for
personal attendance with the patient when determined necessary
by the IPA Physician, if the Member is too ill or disabled to
be seen during regular working hours at the Physician's
office.
E. Diagnostic radiological (including MRIs and CAT Scans),
laboratory and other services, such as electrocardiography,
electroencephalography and the use of radioactive isotope
therapy. This includes pathology services related to dental
cyst removal. It is agreed that preadmission testing,
regardless of the billing source, is the financial
responsibility of the IPA.
F. Therapeutic radiological services, including radiation therapy
and radioactive isotopes.
G. Physician services, materials and drugs for chemotherapy.
H. Short-term rehabilitation services and short-term physical
therapy, the provision of which the IPA Physician determines
can be expected to result in the significant improvement of a
Member's condition within time frame designated in Member's
Health Benefit Certificate.
<PAGE>
I. All physician services, supplies, equipment, non-physician
personnel (inpatient or outpatient) and outpatient facility
charges for renal dialysis treatment provided before a Member
is eligible for Title XVIII benefits and any of these services
not reimbursed after the Member is eligible for Title XVIII
benefits.
J. Oral surgical services for the following limited procedures
whether provided in an inpatient or outpatient setting:
traumatic injury to sound natural teeth, the jaw bone or
surrounding tissue; and treatment for tumors and cysts
requiring pathological examination of specimens removed from
the jaws, cheeks, lips, tongue, roof and floor of the mouth.
K. Shock Trauma professional services.
II. Preventive Care Benefits (Including Any Non-Surgical Outpatient
Facility Costs Associated With These Services)
A. Prenatal care in conjunction with the benefit and services for
pregnancy as described in Section V.
B. Well-baby care visits in a Physician's office.
C. Periodic health appraisal examination including all tests
routinely made in connection with such examinations which
shall include all ancillary services authorized by the
Physician in performance of this examination. Health appraisal
examinations which are not medically necessary are not
covered, such as for the purposes of continuing or obtaining
employment, insurance, governmental licensure, school
admissions, or for participation in sports activities.
D. Pediatric and adult immunizations in accordance with the
recommendations of the American Academy of Pediatrics, the
United States Public Health Service, or as required by HMO
policy (injectable materials and professional service).
E. All injectable drugs normally administered in a Physician's
office, including but not limited to Immunizations,
Biological Sera and Chemotherapeutics.
F. Ear examinations for determining the need for hearing
correction for a Member.
G. Infertility services (including artificial insemination)
including testing, appropriate medical advice, instruction and
treatment to correct any physical abnormality or illness
discovered as a result of investigation into the cause of
infertility in accordance with accepted medical practice.
H. Voluntary family planning services, including counseling,
examinations, and implantation of birth control devices
including the cost of those devices.
I. Sterilization by bilateral vasectomy and tubal ligation.
III. Outpatient Services
A. The following outpatient services when provided in connection
with ambulatory surgery.
<PAGE>
1. Intensive care services and special duty nursing when
prescribed and medically necessary.
2. Surgical and anesthetic supplies furnished by the
facility as a regular service.
3. Ancillary services when medically necessary,
including laboratory, pathology, radiology, physical
therapy, radiation therapy, inhalation and
respiratory therapy.
4. Oxygen, drugs, medications and biologicals as
prescribed.
5. Short-term rehabilitation and physical therapy
services as described in I.H., above.
6. Coordinated discharge planning services.
7. Administration of blood and blood plasma.
B. Other Services
1. Professional fees for abortions performed in a
hospital outpatient facility. The HMO is
responsible for the total costs of abortions
performed in a free-standing facility.
IV. Patient Care Education Services
Upon request of the Member, the following educational and referral
services:
A. Referral to adoption agencies.
B. Family planning information.
C. Information on personal health behavior.
D. Information to assist Members to make appropriate use of
health care services.
E. Referral to other appropriate medical social services.
F. Referral to appropriate ancillary services for the abuse of or
addiction to alcohol and drugs.
V. Pregnancy and Maternity Care (Including Any Non-Surgical Outpatient
Facility Costs Associated With These Services)
Services and benefits including prenatal care for any condition arising
from pregnancy or resulting childbirth and any complications thereof,
including therapeutic abortion, miscarriage, delivery, antepartum and
postpartum care, and pediatric care of the newborn infant and such
other newborn care as medically necessary. This includes the services
provided by a nurse midwife.
<PAGE>
VI. Emergency In-Area
Emergency Services means those health care services that are provided
in a hospital emergency facility after the sudden onset of a medical
condition that manifests itself by symptoms of sufficient severity,
including severe pain, that the absence of immediate medical attention
could reasonably be expected by a prudent layperson, who possesses an
average knowledge of health and medicine, to result in:
1. Placing the patient's health in serious jeopardy;
2. Serious impairment to bodily functions; or
3. Serious dysfunction of any bodily organ or part.
In consideration of the capitation payments set forth in Attachment B,
IPA shall provide or make available Health Care Services for the
treatment of emergency conditions on a 24-hours-a-day, 7-days-a-week
basis. The IPA will be financially responsible for those emergency
services that are provided in the Service Area (See Attachment A) and
the IPA has preauthorized, authorized at the time of Member's access to
care or would have authorized the service in the normal course of
events based upon a retrospective review in accordance with HMO
procedures. The IPA is financially responsible for the facility and
professional charges except when a Member is directly and immediately
admitted to the hospital following an emergency department visit, in
which case the emergency room facility charge shall be deemed to be
inpatient charges and shall not be the financial responsibility of the
IPA. The IPA is financially responsible for any differential between a
Member's office and emergency copay when the emergency room encounter
results from a lack of coverage on the IPA's part as required by this
Agreement.
VII. Optional Benefits and Services
Certain optional health services may be purchased from HMO for an
increased premium. If agreed to by IPA, such optional services will be
rendered without charge except for applicable copayments. If IPA agrees
to provide one or more optional services, HMO will pay IPA an
agreed-upon capitation rate for each Member entitled to receive such
optional service(s). In the event IPA and HMO agree upon one or more
optional services, such agreement shall be in writing signed on behalf
of the parties hereto and shall be attached hereto and incorporated
herein.
VIII. Referrals for Psychiatric Care and Care for Alcohol and Drug Addiction
IPA shall provide appropriate referrals for specialty psychiatric care
and treatment for Alcohol and Drug Addiction.
IX. Braces and Splints
Braces, defined as a device to support a body part through a range of
normal motion. A brace is provided only under the Prosthetic
Devices/Durable Medical Equipment Rider.
Splints, defined as fitted devices which restrict normal motion.
Covered splints include:
<PAGE>
A. Splints necessary for post-operative healing which are
applied by a physician during the immediate post-operative
period.
B. Splints that are molded, fitted and supplied by a physician in
his or her office.
See Paragraph XI of this Attachment C for a copy of the responsibility
matrix detailing examples of these items.
X. Cardiac Surgery
The following services are to be provided exclusively by University of
Maryland Medicine:
Cardiac Catheterization (CATH)
Percutaneous Transluminal Coronary Angioplasty (PTCA)
Coronary Artery Bypass Graft (CABG)
The HMO will adjudicate these claims and charge the IPA for the
physician component via capitation reduction. The costs remaining which
the HMO pays will be included in the UIS Pool. The amounts associated
with these services will be provided by the HMO separate from this
document.
Note: This Section X will be amended to reflect the impact fo the
new University of Maryland Cardiac Services arrangement.
<PAGE>
ATTACHMENT D
IPA REPORTING REQUIREMENTS
IPA agrees to provide the following information and reports to the HMO within
the indicated time frames.
1. Quarterly internally prepared Income Statement and Balance Sheet within
thirty (30) days of the close of the fiscal period, except for the
second quarter which will be within sixty (60) days.
2. Year End internally prepared Financial Statements and Balance Sheet
within sixty (60) days of the close of the fiscal year.
3. Audited Financial Statements, notes and opinions within fifteen (15)
days of receipt of the statements from the audit firm.
4. Quarterly updates of Physician Listings must be provided to HMO
within fourteen (14) days of the quarter's end.
5. Peer Review Committee minutes must be forwarded to HMO within thirty
(30) days of the date of the meeting.
6. Reports containing ambulatory encounter data shall be provided to HMO
in a mutually acceptable format and within established time frames. IPA
agrees to make original ambulatory encounter forms available for
inspection by HMO during normal business hours upon reasonable request.
7. Reports required to comply with Section 19-713.2 of the Maryland Health
Maintenance Organization Act.
<PAGE>
ATTACHMENT E
GRIEVANCE PROCEDURE
(To be Inserted)
<PAGE>
ATTACHMENT F
ROSTER OF PHYSICIANS
(To be Supplied by IPA)
<PAGE>
ATTACHMENT G
FACILITIES AND HOURS OF OPERATION
(To be Supplied by IPA)
<PAGE>
ATTACHMENT H
[INTENTIONALLY OMITTED - NOT PART OF AGREEMENT]
<PAGE>
ATTACHMENT I
LIST OF CONSULTANT/SPECIALTY REFERRAL PHYSICIANS
(To be Provided by IPA)
<PAGE>
ATTACHMENT J
QUALITY ASSURANCE PLAN AND
QUALITY ASSURANCE SERVICE STANDARDS
<PAGE>
ATTACHMENT K
PERFORMANCE STANDARDS AND NON-COMPLIANCE PENALTIES
PERFORMANCE STANDARD PENALTY
Emergency Care -- 100% access at all
times of day or night, seven (7) days
a week, including holidays $100/occurrence
Claims Payments -- 90% of all claims
shall be adjudicated and paid within $1500/day in excess
fourteen (14) days of receipt of 14 days per claim
Claims Payments -- 99% of all claims
shall be adjudicated and paid within $2000/day in excess
thirty (30) days of receipt of 30 days per claim
Reports -- all encounter reports shall
be furnished in their entirety, on
time, and in format acceptable to
the HMO $2000/day/report
<PAGE>
ATTACHMENT L
LIST OF HMO CONTRACTED PROVIDERS AND FACILITIES
Exhibit 10.31
Certain confidential portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment.
CFS Health Group, Inc.
Care First - FreeState - Potomac Health
February 13, 1996
Ms. Terry Spoleti, Vice President
Managed Care Products and Services
Doctors Health System
10th Floor
10451 Mill Run Circle
Owings Mills, Maryland 21117
Dear Terry:
The purpose of this Letter of Intent is to describe the terms of the contracting
agreements to which we have agreed, each of which will be included in a Medicare
Risk Service Agreement between Doctors Health System (DHS) and Health Care
Corporation of the Mid-Atlantic ("HCCMA"). The following terms will be
incorporated (and changes made) in the Medicare Risk Service Agreement (a copy
attached) which is used as the basic contract form by HCCMA; the resulting
document to be the Medicare Risk Service Agreement between HCCMA and DHS, (the
"Agreement"). Until the basic contract revisions are finalized, this Letter of
Intent will serve as the written contract between HCCMA and DHS.
(bullet) Term
(bullet) February 1, 1996 - June 30, 1997. Otherwise, termination will
only occur for cause. Should the Agreement not be renewed,
obligations under the Agreement shall continue beyond the
termination date for an additional period not to exceed six
(6) months.
(bullet) Financial Terms
(bullet) HCCMA to retain [Confidential Treatment Requested] of AAPCC
received from the Federal Government for administration.
(bullet) HCCMA to retain [Confidential Treatment Requested] of AAPCC
received from the Federal Government for "carve out" services
as follows:
<TABLE>
<S> <C>
Health/DME Infusion [Confidential Treatment Requested]
Mental Health [Confidential Treatment Requested] Eye Care [ZW]
Pro Fees [Confidential Treatment Requested]
Dental [Confidential Treatment Requested]
(bullet) [Confidential Treatment Requested] of the net (i.e., net after
the [Confidential Treatment Requested] retention described
above) AAPCC payment received from the Federal Government will
be paid monthly to DHS as capitation. The remaining
[Confidential Treatment Requested] of the net AAPCC payment
will be used to fund the UIS Pool.
(bullet) DHS will be financially responsible for 100% of a UIS Pool
deficit produced by the settlement calculations performed upon
termination of the Agreement or on June 30, 1997, if a
termination does not occur prior thereto.(1) HCCMA will not
(1) Provision subject to revision awaiting receipt of further information
to determine whether DHS constitutes a "physician group" subject to
HCFA requirements governing "physician incentive plans."
<PAGE>
provide stop loss protection in connection with UIS Pool
funding.
(bullet) HCCMA will inform DHS at such time as contracts with vendors
for "carve out" services are being renegotiated and will allow
DHS to submit proposals to provide such services to HCCMA
Medicare Members enrolled with DHS. However, such proposals
will not be considered if the enrollment of HCCMA Medicare
Members with DHS is less than 5,000.
(bullet) HCCMA will process all UIS claims applying those (payor)
discounts for HCCMA is eligible. HCCMA and DHS will mutually
agree upon a cash flow process regarding UIS Pool funding, the
objective of which will be to limit the UIS Pool fund amount
held by HCCMA to no more than the projected cost of ninety
(90) days expected claims.
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) HCCMA agrees that, in the event a Member is retroactively
added more than 90 days to DHS's panel, DHS will not be
financially responsible for the cost of any care which that
Member received for the period prior to the 90 days
retroactive limit and HCCMA will retain the full AAPCC payment
from the Federal Government for such a Member for the period
prior to the 90 day retroactive limit. DHS providers will be
paid by HCCMA at HCCMA fee schedule rates for the cost of
covered services that they directly provide.
(bullet) Other Terms
(bullet) Material/substantive changes to the Medi-CareFirst product
design involving provision of medical care under the Agreement
will be communicated to DHS in advance of marketing. DHS will
have the option to consider this as cause for termination and,
as such may opt to terminate the Agreement as a result of such
material/substantive product design changes with ninety (90)
days notice, in writing, to HCCMA and in accordance with the
other terminating provisions of the Agreement.
(bullet) HCCMA agrees to work with DHS to allow greater participation
by DHS in decisions or oversight regarding matters involving
pre-certification, utilization management and case management
of institutional services.
(bullet) DHS agrees to support to the maximum extent possible the
marketing efforts of HCCMA for their Medicare products.
(bullet) DHS acknowledges that the Agreement between the parties
creates a singular relationship which has been engendered by a
reliance of HCCMA on the good faith of DHS to respect the
integrity of HCCMA, its parents, subsidiaries and affiliates,
<PAGE>
as to operational and organizational needs. In order to
secure, fortify and maintain the said relationship hereby
acknowledged, DHS will (1) keep HCCMA fully apprised of DHS
corporate structure and ownership and give HCCMA timely notice
of any changes thereto; (2) not use this Agreement and the
terms thereof in a way that causes an improper advantage to
the benefit of DHS and harm to HCCMA, its parents,
subsidiaries or affiliates; and (3) keep strictly confidential
and not disclose the terms of the Agreement. Failure to abide
by either the intent of this provision or its terms will
accord the right to HCCMA to terminate the Agreement for
cause.
(bullet) Medicare Risk Service Agreement Language Changes
The following changes or additions are also to be made or
provided in the attached form Medicare Risk Service Agreement:
1. Article I, Item D., does not contain a hold harmless
provision. No change required.
2. Article II, Item A., the reference to " . . . paragraphs B, C
and D" will be changed to ". . . paragraphs B, C and E."
3. Article II, Item B., the term "usually" will be deleted. We
will discuss the concept of " . . directly or through one or
more IPAs, group practices or other entities with a
contractual agreement with DHS or its affiliates" to develop
contract language to correctly reflect the manner in which
DHS's networks are structured.
4. Article III, Item D., language will be added to reflect that
persons who fail to make required payments (deductible and
copayment amounts under a Member's plan) will be terminated
upon the request of DHS within HCCMA and HCFA disenrollment
policies once unpaid copayments or deductibles reach a
specific dollar amount and efforts to collect are unsuccessful
over a stated period of time. Language will also be added to
provide that DHS will use its best efforts to collect such
payments at the time of service.
5. Article III, Item G., will provide that a copy of the
documents governing the Medical Advisory Committee will be
supplied to DHS.
6. Article III, Item J. 2., refers solely to HCCMA by
implication. No change necessary.
7. Article III, Item J. 3., will be changed to provide that a
party against whom involuntary bankruptcy proceedings have
been commenced may obtain a sufficient bond or have such
proceedings dismissed within ten (10) days before such an
event would permit termination of the Agreement.
<PAGE>
8. Article IV, Item Q.3., will be modified to properly reflect
the relationship of the parties with respect to the use of
such contracted providers.
9. Article IV, Item R., will be revised to provide that any site
additions, deletions or address changes in facilities or hours
of operation by DHS will be communicated to HCCMA, in writing,
60 days prior to becoming effective.
10. Attachment H will be completely revised.
In order to bind BMA to these terms, please have this document endorsed in the
space provided and return the original to my attention.
If you have any questions please give me a call.
Sincerely,
/s/ ERNEST A. VISCUSO
Ernest A. Viscuso
Director
Provider Contracting and
Network Development
EAV:jw
Agreed to:
DOCTORS HEALTH SYSTEM HEALTH CARE CORPORATION
OF THE MID-ATLANTIC
BY: /s/ TERRY SPOLETTI BY: /s/ G MARK CHANEY
------------------ -----------------
Signature Signature
Terry Spoletti G. Mark Chaney
- ------------------------------------ ----------------------
Name (Print) Name (Print)
V.P. Mgd. Care Products and Services Chief Financial Officer
- ------------------------------------ -----------------------
Title Title
2/13/96 2/14/96
- ------------------------------------ -----------------------
Date Date
</TABLE>
Exhibit 10.32
Certain confidential portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment.
D O C T O R S
HEALTH SYSTEM
Managing Quality Healthcare May 8, 1996
Ms. Shirley Dail
Chesapeake Health Plan
814 Light Street
Baltimore, Maryland 21230
Dear Shirley:
The purpose of this Letter of Intent is to describe the terms of the contracting
agreements to which we have agreed, each of which will be included in a Medicare
Risk Service Agreement between Doctors Health System (DHS) and Chesapeake Health
Plan (CHP). The following terms will be incorporated (and changes made) in the
Medicare Risk Service Agreement by June 1, 1996. Until the contract revisions
are finalized and said contract is signed, no later than June 1, 1996, this
Letter of Intent will serve as the written contract between CHP and DHS.
TERM:
June 1, 1996 to May 31, 1997. Contract will be a term of one year, automatically
renewable for one year increments unless 90 days advance notice of termination
is provided by either party. Early termination may only be for cause upon 90
days prior written notice after an opportunity to cure. Termination without
cause may occur at any time after the initial term with 120 days notice by
either party.
FINANCIAL TERMS:
(bullet) Chesapeake Health Plan (CHP) will pay a capitation rate to DHS on a
per member per month basis based on the age, sex and Medicare
eligibility of the subscribers enrolled with a DHS primary care
physician in Chesapeake's Advantage 65 Medicare HMO program. The DHS
capitation schedule is defined in Attachment A. This schedule
represents the amount of capitation DHS will receive after carve out
dollars have been deducted.
(bullet) The payment rates defined in Attachment A have been derived
from a mutually agreed upon formula which is based on HCFA's
AAPCC payment methodology. In the event that AAPCC methodology is
changed or discontinued by HCFA, CHP may propose alternative pricing to
DHS during the term of this agreement. In the event that DHS does not
accept revised payment rates or terms, it may be considered cause for
early termination of this agreement.
<PAGE>
(bullet) The capitation rates to DHS will increase, as defined in Attachment
A, when DHS enrollment reaches thresholds of [OMITTED AND FILED
SEPARATELY WITH THE COMMISSION] members, and again at [OMITTED AND
FILED SEPARATELY WITH THE COMMISSION] members.
(bullet) DHS capitation rates in Attachment A reflect a deduction by CHP to pay
for "carve-outs." The carved-out dollars will cover all costs
related to the following services and DHS will have no further
responsibility. Changes to carve-outs costs may be made annually, on
the anniversary of the contract term, and with the mutual consent of
both parties. The following is the list of carved out services:
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) Capitation Payment is paid on a monthly basis to DHS by the Plan based
on covered lives assigned to DHS PCPs. DHS will assume full risk
for all "non-carved out" services and will purchase sufficient
specific and aggregate stoploss insurance to adequately reinsure
DHS financial risk. Capitation Payment is paid to DHS by the 15th of
the month with an itemized enrollment for that month, sorted by PCP.
(bullet) To accommodate financial reserve requirements, DHS will provide CHP
with reasonably acceptable collateral to secure an amount of not
less than 90 days of DHS Capitation. CHP agrees that a Standby Letter
of Credit from a commercial bank shall be deemed reasonably acceptable
collateral for such purposes, or an alternative method will be mutually
agreed upon for same.
OTHER TERMS:
(bullet) DHS will assume responsibility for adjudication of all claims for
services for which DHS is liable, including institutional claims.
(bullet) DHS agrees to provide detailed utilization reports to CHP for
all professional and institutional services. CHP agrees to provide
DHS with detailed utilization reports on carved out services.
Specifications for utilization reporting will be defined and
mutually agreed to prior to finalizing contract. CHP will provide
technical specifications for DHS reporting requirements in advance
of finalizing contract. The cost of any subsequent changes or
deletions to this reporting requirement which
<PAGE>
requires customization to DHS systems will be paid for by CHP.
(bullet) There will be a 90 day limit on retroactive additions or deletions to
DHS capitated enrollment.
(bullet) Since DHS is accepting full risk for all medical services, DHS
reserves the right to pre-certify and manage the utilization of
these services, provided that DHS policies for same are approved
by CHP's Utilization Management Department. DHS certification,
utilization management and case management standards and processes
will be defined and mutually agreed to before contract is finalized.
(bullet) CHP's Advantage 65 Medicare HMO product design and marketing plan will
be defined and agreed upon before contract is finalized.
Material/substantive changes to the product design, including level
of benefits, deductibles, co-pays, etc., will be communicated to
DHS in advance of marketing. DHS will have the option to consider this
as cause for termination, and as such may opt to terminate the
Agreement as a result of such changes with 90 days written notice.
(bullet) DHS agrees to support the marketing effort of CHP for their
Medicare products. CHP will also provide advertising and marketing
resources and initiatives to DHS as a premier medical group within
the CHP network. A Medicare Marketing Addendum will be documented
and attached to this contract outlining the CHP Marketing Plan
and resource commitment to achieve DHS enrollment targets.
(bullet) DHS reserves the right to subcontract with any provider which
meets mutually agreed upon credentialing criteria. CHP reserves
the right to disallow a DHS provider to treat CHP members if that
provider has been sanctioned by CHP, the State or HCFA.
(bullet) Plan will delegate credentialing of primary care and specialist
providers to DHS. DHS will provide all necessary documentation of
credentialing policies and procedures. DHS will make credentialing
files accessible to CHP for audit purposes.
(bullet) When primary care physician (PCP) elects to participate in DHS
contract with CHP, CHP agrees to facilitate the transition of that
physician's participation agreement and member panel, if any, to
the DHS contract within 90 days of PCP notifying CHP of intention to
terminate individual contract and transition to DHS contract; unless
member is an inpatient in a hospital or subacute facility or in the
process of an episode of specialty care, in which case member will
not transition to DHS panel until discharged from the facility
or until episode of specialty care is completed. It is noted that
the member will at all times have the option to disenroll from the
PCPs panel if that transition to the new panel is not their
preference.
All other terms will be addressed in the formal contract between DHS and CHP as
they relate to members services and HMO policy and procedure requirements as
mutually agreed upon by both parties.
<PAGE>
Agreed To: Agreed To:
DOCTORS HEALTH SYSTEM CHESAPEAKE HEALTH PLAN
By: /s/ TERRY SPOLETTI By: /s/ SHIRLEY DAIL
------------------------ ------------------------
Signature Signature
Terry Spoletti Shirley Dail
- ---------------------------- ----------------------------
Name (Print) Name (Print)
V.P. Managed Care Pros.&Svcs Director Network Development
- ---------------------------- ----------------------------
Title Title
5/8/96 5/9/96
- ---------------------------- ----------------------------
Date Date
<PAGE>
Attachment A: DHS Capitation Rates for Chesapeake Advantage 65 Medicare
HMO
Table A 0-1,999 members
------- ---------------
<TABLE>
<CAPTION>
Male Female
Non-Medicaid
<S> <C>
85+
80-84
75-79 [Confidential Treatment Requested]
70-74
65-69
</TABLE>
Table B 2,000-2,999 members
------- -------------------
<TABLE>
<CAPTION>
Male Female
Non-Medicaid
<S> <C>
85+
80-84
75-79 [Confidential Treatment Requested]
70-74
65-69
</TABLE>
Table C 3,000 or more members
------- ---------------------
<TABLE>
<CAPTION>
Male Female
Non-Medicaid
<S> <C>
85+
80-84
75-79 [Confidential Treatment Requested]
70-74
65-69
</TABLE>
Exhibit 10.33
REACQUISITION AGREEMENT
This REACQUISITION AGREEMENT dated as of the _____ day of ________,
1996, is by and among BALTIMORE MEDICAL GROUP, LLC, a Maryland limited liability
company (the "LLC"); MEDICAL HOLDINGS LIMITED PARTNERSHIP, a Maryland limited
partnership (the "LP"); DOCTORS HEALTH SYSTEM, INC., a Maryland corporation
("DHS"); and __________________________ (the "Physician").
WHEREAS, each of the parties has, simultaneously with the execution of
its Agreement, executed and delivered a Practice Participation Agreement which
affords to the Physician the right, in its discretion, to reacquire and resume
its Medical Practice,
WHEREAS, each of the LLC, the LP and DHS, in order to induce the
Physician to execute and deliver the Practice Participation Agreement and the
other Admission Closing Documents, to contribute the assets of its Medical
Practice to the LP and to engage in the Practice of Medicine exclusively with,
through and as an employee of the LLC, wish to grant to the Physician the
Reacquisition Rights contained in its Agreement and the Physician wishes to
obtain the Reacquisition Rights contained in its Agreement in order to preserve
and memorialize its right to reacquire and resume its Medical Practice
independent of any affiliation with the LLC, the LP and DHS; and
WHEREAS, the parties wish to set forth their mutual understandings and
agreements with respect to the Physician's Reacquisition Rights.
NOW, THEREFORE, in consideration of the foregoing, the mutual
undertakings of the parties contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to its Agreement, intending to be legally bound, agree as follows:
ARTICLE I
RECITALS, DEFINITIONS, ETC.
1.1. RECITALS.
The above recitals are true and correct and are incorporated herein.
1.2. DEFINITION APPENDIX.
When used in its Agreement with its initial letter capitalized, a word
shall have the meaning set forth in the Definition Appendix attached as APPENDIX
B to the Practice Participation Agreement except that the term "Practice Closing
Documents," for purposes of its Agreement (and the other documents described in
Article II hereof and executed simultaneously herewith pursuant to which the
Physician shall become a Member and an employee of the LLC and a Limited Partner
in the LP) (the "Admission Closing Documents") shall include the Admission
Closing Documents.
1.3. CERTAIN OTHER DEFINITIONS.
When used in its Agreement with its initial letter capitalized, a word
that is not defined in APPENDIX B to the Practice Participation Agreement shall
have the meaning assigned to it elsewhere in its Agreement. All references
herein or in any agreement or instrument executed in connection herewith to
entities shall include successor entities, and all references to entities by
name shall include such entities following any change of entity name. All
references to gender shall include each gender and all singular pronoun or other
references shall, where appropriate, include the plural.
1.4. APPENDICES, EXHIBITS AND SCHEDULES.
Attached hereto and forming an integral part of its Agreement are
various Appendices, Exhibits and Schedules, all of which are incorporated into
its Agreement as fully as if the contents hereof were set out in full herein at
each point of reference hereto.
1.5. REFERENCES.
All references herein or in any agreement or instrument entered into in
connection herewith to any agreement, instrument or other document shall include
any and all amendments, modifications, extensions, renewals, substitutions,
supplements, Exhibits and Schedules to, of and for such agreement, contract,
instrument or document, and all references to entities shall include successor
entities and entities following a name change.
ARTICLE II
PRACTICE REACQUISITION RIGHTS
2.1. The Physician may, in its sole discretion, and DHS, the LP and the
LLC hereby grant to the Physician the option to, reacquire its Medical Practice
from DHS, the LP, the LLC or any of them pursuant to the terms of its Agreement
and subject to the Physician's satisfaction of and compliance with all terms,
agreements, warranties, representations, covenants and conditions set forth
herein and in ARTICLE XV of the Practice Participation Agreement relating to the
Physician's Reacquisition Rights. The parties acknowledge and agree that the
intent of its Reacquisition Agreement is (a) to afford to the Physician the
opportunity to terminate all professional and business relationships with the
LP, the LLC and DHS if, in the Physician's sole discretion, the Physician does
not wish to continue to engage in the Practice of Medicine with and through the
LLC and in affiliation with DHS; and (b) to facilitate the withdrawal of the
Physician from all professional relationships with the LLC, the resumption of
the Physician's Practice of Medicine and the continuation of the LLC's Practice
of Medicine without the Physician, all with as little disruption as possible to
any party hereto.
2.2 EXERCISE OF REACQUISITION RIGHT. The Physician must exercise the
Reacquisition Rights afforded him by its Agreement and by ARTICLE XV of the
Practice Participation Agreement by giving written notice within 270 days from
the date hereof (the "Reacquisition Notice") of such exercise in the manner set
forth in SECTION 4.2 hereof to each of the LLP, the LLC and DHS, time being of
the essence.
2.3 REACQUIRED ASSETS AND LIABILITIES. Upon the effective
exercise by the Physician of its Reacquisition Rights through a
timely Reacquisition Notice:
(a) The Physician shall be obligated, and agrees, to reacquire
from DHS and the LP, and each of DHS and the LP shall be obligated, and agrees,
to convey to the Physician, all of the Assets described on SCHEDULE A to the
Sixth Amendment to the Limited Partnership Agreement executed and delivered by
the Physician on the Admission Closing Date as being contributed by the
Physician to the LP that are, on the Reacquisition Closing Date, in the
possession of or under control of the LP, DHS or the Physician and such
replacement assets as shall, as of the Reacquisition Closing Date, have been
provided to the Physician for use in its Practice of Medicine pursuant to the
PSO Agreement or shall hereafter have been acquired by or provided for the
Physician with respect to its Medical Practice (the "Reacquired Assets").
(b) The Physician shall be obligated, and agrees, to assume and
hereafter to pay, perform and discharge, and each of the LP and DHS shall be
obligated, and agrees, to assign and convey to the Physician, all of the assumed
liabilities with respect to the Physician's Medical Practice identified in
SECTION 2 of EXHIBIT 1 of the LP Assignment and Bill of Sale executed and
delivered by the Physician simultaneously herewith (the "Reacquired
Liabilities") as remain outstanding, unpaid or unsatisfied as of the
Reacquisition Closing Date and any other additional liabilities or obligations
of the LP or DHS or any Affiliate of either of them with respect to the Medical
Practice reacquired by the Physician pursuant to its Agreement as may exist on
the Reacquisition Closing Date.
2.4 REACQUISITION PRICE; PAYMENT. The Physician shall purchase and DHS
and the LP shall convey to the Physician the Reacquired Assets, and the
Physician shall assume and DHS and the LP shall convey to the Physician the
Reacquired Liabilities, for the following consideration (the "Reacquisition
Price"):
(a) Payment by the Physician to DHS of the amount of cash, if any,
received by the Physician for the contribution of its Medical Practice to the LP
at the Admission Closing,
(b) Cancellation as paid in full of the Receivables Note of the LP
or DHS in favor of the Physician which the Physician received in respect of
contribution of its Medical Practice to the LP at the Admission Closing;
(c) Withdrawal of the Physician as a Member of the LLC pursuant to
the provisions of SECTION 6.3 of the Operating Agreement and, consistent
herewith, surrender by the Physician to the LLC of its Interest in the LLC; and
(d) Withdrawal by the Physician as a Limited Partner of the LP
pursuant to the provisions of SECTION 7.2 of the Limited Partnership Agreement,
and, consistent herewith, surrender by the Physician to the LP of its Interest
in the LP; provided, however, that upon such withdrawal and surrender the
Physician shall not be entitled to receive any distribution of assets of the LP
or any other distribution or consideration from the LP.
(e) Resignation by the Physician as an employee of the
LLC.
2.5 REACQUISITION CLOSING. The Reacquisition Closing shall occur on a
date (the "Reacquisition Closing Date") mutually agreed upon by the parties but
in no event later than fifteen (15) days from the date DHS receives the
Reacquisition Notice.
2.6 DELIVERIES OF DHS, THE LLC AND THE LP AT REACQUISITION CLOSING. At
the Reacquisition Closing, DHS and the LP shall effectively and legally assign,
transfer, convey and deliver to the Physician all of their rights, title and
interest in and to the Physician's Medical Practice, including, without
limitation, the Reacquired Assets. In furtherance of the foregoing and, unless
the parties mutually agree otherwise, DHS, the LP and with respect to Subsection
(c) hereof, the LLC shall deliver or cause to be delivered to the Physician at
the Reacquisition Closing:
(a) A fully executed, limited warranty bill of sale and assignment
and assumption agreement in form substantially similar to EXHIBIT 2.8 attached
to the Practice Participation Agreement in respect of the sale, transfer and
assignment of the Physician's Medical Practice and the Reacquired Assets to the
Physician and the assumption by the Physician of the Reacquired Liabilities;
(b) All necessary consents to assignments of those of the
Contracts and any other document, act or thing that does not permit assignment,
such consents to assignment to be in form substantially similar to the consents
delivered by the Physician at the Admission Closing or reasonably satisfactory
to the Physician;
(c) A certified check or wire transfer of immediately available
funds in the amount of the Physician's Net Equity in the LLC, if any; and
(d) A written confirmation stating that the Physician's Practice
Participation Agreement and the Physician's Professional Services Employment
Agreement have been terminated reasonably acceptable to the Physician, together
with such other assignments, certificates and supporting documents as are
contemplated hereby or reasonably required on any of them.
2.7 THE PHYSICIAN'S DELIVERIES AT REACQUISITION CLOSING. At the
Reacquisition Closing, the Physician shall effectively and legally assume or
reassume, as the case may be, and hereafter pay, perform and discharge all of
the Reacquired Liabilities and shall also effectively and legally withdraw as a
Member of the LLC and a Limited Partner of the LP and, in furtherance of the
foregoing, and unless the parties mutually agree otherwise, at the Acquisition
Closing, shall:
(a) Pay or deliver, as the case may be, the
Reacquisition Price as set forth in SECTION 2.4 hereof;
(b) Execute and deliver to the LLC an irrevocable
election withdrawing as a Member of the LLC and surrendering its
Interest in the LLC to the LLC;
(c) Execute and deliver to the LP an irrevocable
election withdrawing as a Limited Partner of the LP and surrendering
its Interest in the LP to the LP; and
(d) Execute and deliver to the LLC, the LP and DHS (i) a release
and waiver and acknowledgment of assumption of the Reacquired Liabilities, and
(ii) a written confirmation stating that the Physician's Practice Participation
Agreement and the Physician's Professional Services Employment Agreement have
been terminated, reasonably acceptable to DHS, together with such other
assignments, certificates and supporting documents as are contemplated hereby or
reasonably required by any of them.
ARTICLE III
DISPUTE RESOLUTION
3.1 GENERAL. Any dispute between parties to its Agreement arising under
or with respect to its Agreement (a "Dispute", hereinafter and for purposes of
SCHEDULE 13.1 to the Practice Participation Agreement), shall be submitted to
binding arbitration according to procedures described on SCHEDULE 13.1 to the
Practice Participation Agreement. Each party hereto agrees to abide by the time
periods stated in such SCHEDULE 13.1. The resolution of any such Dispute stated
in such procedures, including without limitation through arbitral award, shall
be binding upon the parties for all purposes and may be enforced in any court of
competent jurisdiction.
3.2 COSTS OF LITIGATION. If a party or parties files suit or brings an
arbitration proceeding to enforce its rights under its Agreement, against
another party or parties, the prevailing party or parties shall be entitled to
recover from the other party all expenses incurred by it or them in preparing
for and in trying the case, including, but not limited to, investigative costs,
court costs and reasonable attorney's fees.
3.3 CONSENT TO JURISDICTION. The parties submit to the
jurisdiction and venue of the courts of the State of Maryland.
3.4 NO JURY TRIAL. NO PARTY SHALL ELECT A TRIAL BY JURY
IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN
ANY WAY CONNECTED WITH ITS AGREEMENT.
ARTICLE IV
MISCELLANEOUS
4.1 TAXES. Except as may be otherwise agreed by DHS and the Physician,
to the extent that any taxes other than income taxes may be owing to any
governmental authority with respect to any transfer or other disposition of
property or rights pursuant to its Agreement, the parties agree that such Taxes
shall be paid by the Physician. The Physician agrees that he will be solely
responsible for paying any Taxes assessed (including Taxes owing with respect to
gain recognized in accordance with Section 311(b) of the Code) relating to any
property or rights transferred to or by him and occurring, or relating to, any
period prior to the Closing Date.
4.2 NOTICES. Any notices given with respect to its Agreement shall be
deemed given if in writing and delivered or mailed by registered or certified
mail, postage prepaid, return receipt requested, reliable overnight courier
service, hand delivery or other delivery service providing written evidence of
delivery. When giving any notices hereunder, the addresses shall be as follows:
If to The LLC:
Baltimore Medical Group, LLC
10451 Mill Run Circle
Tenth Floor
Owings Mills, Maryland 21117
If to DHS:
Doctors Health System, Inc.
10451 Mill Run Circle
Tenth Floor
Owings Mills, Maryland 21117
Attention: Director of Legal Affairs
If to the LP:
Medical Holdings Limited Partnership
10451 Mill Run Circle
Tenth Floor
Owings Mills, Maryland 21117
If to the Physician:
_________________________
_________________________
_________________________
With a required copy to:
_________________________
_________________________
_________________________
Each notice given by registered or certified mail or courier or
other delivery service shall be deemed given and received on the date of receipt
stated in the return receipt or similar evidence of delivery. Failure of or
delay in delivery of any copy of a notice shall not impair the effectiveness of
any original notice properly given to any party in accordance with the terms of
its Section. Each party may change its address or addressee for notice by giving
notice hereof in the manner herein above provided.
4.3 ENTIRE AGREEMENT. Its Agreement and the other Practice Closing
Documents contain the entire understanding between the parties and supersede any
prior understanding and agreements between them respecting such subject matters.
There are no representations, warranties, agreements, arrangements or
understandings, oral or written, between the parties relating to the subject of
the Practice Closing Documents which are not fully expressed herein.
4.4 SEVERABILITY. If any provision of its Agreement, or the application
hereof to any person or circumstances shall, for any reason and to any extent,
be invalid or unenforceable, the remainder of its Agreement and the application
of such provision to other persons or circumstances shall not be affected
hereby, but rather shall be enforced to the greatest extent permitted by such
Laws.
4.5 ASSIGNMENT. No party to its Agreement shall have any right to
transfer, convey or assign its rights or obligations under its Agreement to any
Person. Each party to its Agreement reserves the right to change its name to any
other name that it believes desirable or appropriate to the operation of its
business or otherwise.
4.6 COUNTERPARTS. Its Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same agreement.
4.7 ADDITIONAL DOCUMENTS AND ACTS. In connection with its Agreement, as
well as all transactions contemplated by the Practice Closing Documents, each
party agrees to execute and deliver such additional documents and instruments
and to perform such additional acts as may be reasonably necessary or
appropriate to effectuate, carry out and perform all of the terms, provisions
and conditions of its Agreement, and all such transactions.
4.8 INTERPRETATION. ITS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
RESPECTIVE PARTIES HEREUNDER SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
4.9 AMENDMENT. Its Agreement, including the Exhibits, Appendices and
Schedules hereto, may not be amended, altered or modified except by instrument
in writing executed by each party hereto, including through its duly authorized
attorney-in-fact.
4.10 SURVIVAL. All warranties, representations, covenants, undertakings
and indemnifications of each party contained herein shall survive closing and
the execution and delivery of its Agreement.
4.11 PUBLIC ANNOUNCEMENTS. No party other than DHS shall make any press
release or public announcement concerning the transactions contemplated by its
Agreement and the other Practice Closing Documents without the prior written
approval of DHS, except to the extent legally required. If any such announcement
or other disclosure is required by law, the disclosing party agrees to give DHS
prior notice and an opportunity to comment on the proposed disclosure.
IN WITNESS WHEREOF, the parties hereto have executed or caused their
duly authorized representatives to execute its Agreement as of the day and year
first above written.
ATTEST/WITNESS BALTIMORE MEDICAL GROUP, LLC
_________________________ By: (SEAL)
Scott Rifkin, M.D., President
ATTEST/WITNESS MEDICAL HOLDINGS
LIMITED PARTNERSHIP
By: BMGGP, Inc., General Partner
_________________________ By: (SEAL)
Scott Rifkin, M.D., President
ATTEST: DOCTORS HEALTH SYSTEM, INC.
_________________________ By: (SEAL)
Stewart B. Gold, President
WITNESS
_____________________________ (SEAL)
Exhibit 10.34
AMENDED AND RESTATED
PHYSICIAN SERVICES ORGANIZATION AGREEMENT
This Amended and Restated Physician Services Organization
Agreement ("AGREEMENT") is made and entered into as of the 1st day of May, 1996,
by and between CARROLL MEDICAL GROUP, LLC, a Maryland limited liability company
(hereinafter referred to as the "LLC") and DOCTORS HEALTH SYSTEM, INC., a
Maryland corporation (hereinafter referred to as "DOCTORS HEALTH").
WHEREAS, the LLC is owned exclusively by and employs only
physicians licensed to practice medicine in Maryland and is organized and
dedicated solely to engage in the Practice of Medicine. Doctors Health is a
medical services organization organized and dedicated to hold title to various
assets related to the Practice of Medicine and to perform various management,
administrative and support services for physician groups and to develop and
administer an integrated healthcare network with an emphasis on managed care;
and
WHEREAS, Doctors Health wishes to contract with the LLC to
provide to the LLC certain assets, including leased office space, fixtures and
equipment, and certain management and support services, including financial,
managerial, administrative and employment services, in support of and with
respect to the LLC's Practice of Medicine, and the LLC wishes to secure such
assets and such services from Doctors Health and to appoint Doctors Health as
its exclusive agent and attorney-in-fact of and for the LLC, to enable Doctors
Health to act on behalf of the LLC in the provision of certain of such services,
all upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto, intending to be legally bound,
hereby covenant and agree as follows:
1. RECITALS; DEFINITIONS; ETC.
a. RECITALS. The above recitals are incorporated herein.
b. DEFINITION APPENDIX. When used in this Agreement with its initial
letter capitalized, a word shall have the meaning set forth in the Definition
Appendix attached as APPENDIX A hereto.
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c. CERTAIN OTHER DEFINITIONS. When used in this Agreement with its
initial letter capitalized, a word that is not defined in APPENDIX A shall have
the meaning assigned to it elsewhere in this Agreement.
d. APPENDICES, EXHIBITS AND SCHEDULES. Attached hereto and forming an
integral part of this Agreement are various Appendices, Exhibits and Schedules,
all of which are incorporated into this Agreement as fully as if the contents
thereof were set out in full herein at each point of reference thereto.
e. REFERENCES. All references herein to any agreement, instrument or
other document shall include any and all amendments, modifications, extensions,
renewals, substitutions, supplements, Exhibits and Schedules to, of and for such
agreement, contract, instrument or document.
2. OFFICE SPACE AND EQUIPMENT.
a. PROVISION OF OFFICE SPACE AND EQUIPMENT. Doctors Health agrees
during the term of this Agreement to supply and provide, or to engage others to
supply, the commercially reasonable needs of the LLC for office space and
equipment, including all related materials and supplies, to enable the LLC to
engage in the Practice of Medicine, including, without limitation, the provision
of laboratory, testing and other ancillary services. Doctors Health will assist
the LLC in developing its Budgets and Business Plans and in assessing and
determining its needs for office space and equipment. The LLC agrees to keep
Doctors Health and the Quality Committee currently advised concerning its needs
for office space and equipment and shall promptly advise Doctors Health and the
Quality Committee of any changes in such needs.
b. SUBLEASE OF OFFICE SPACE. Doctors Health, as sublessor, and the LLC,
as sublessee, shall, simultaneously with the execution of this Agreement (or as
soon after Closing as is reasonably practicable), enter into a Sublease in form
substantially similar to EXHIBIT 2b attached hereto as a part hereof (each a
"SUBLEASE") for and in respect of each location where the LLC intends to
establish an office from which to engage in the Practice of Medicine as of the
Closing Date. Specifically, Doctors Health and the LLC will enter into a
Sublease for those portions of each of the buildings shown on SCHEDULE 2b
attached hereto as a part hereof (collectively, the "UNITS") consisting of the
medical office space designated in such Schedule (collectively, the "OFFICE
SPACE").
c. PROVISION OF EQUIPMENT. Doctors Health shall initially provide to
the LLC for use in its Practice of Medicine all fixtures, furnishings and
equipment existing in the Office Space at Closing, as shown on SCHEDULE 2c,
attached hereto as a part hereof (collectively, the "EQUIPMENT"). (The Office
Space and
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the Equipment, as repaired, replaced or maintained, shall be sometimes referred
to collectively as the "DEMISED PREMISES".)
d. USE OF DEMISED PREMISES. The LLC acknowledges and agrees that the
Demised Premises meet and fulfill its commercially reasonable needs for office
space and equipment as of the Closing Date. The LLC shall use the Demised
Premises solely for purposes related to the Practice of Medicine. The LLC shall
use and occupy the Office Space in a safe and reasonable manner, in accordance
with applicable governmental laws, regulations and/or orders. The LLC shall use
the Equipment in a safe and reasonable manner and in accordance with reasonable
operating standards.
e. REPAIR, REPLACEMENT AND RETURN OF EQUIPMENT. During the term of this
Agreement, Doctors Health agrees to install, repair, maintain and replace, or
cause to be installed, repaired, maintained and/or replaced, the Equipment,
including securing such improved or enhanced equipment for the LLC as Doctors
Health deems commercially reasonable. The LLC shall promptly notify Doctors
Health if any item of Equipment requires repair or replacement. The LLC shall,
upon the reasonable request of Doctors Health, return all Equipment to Doctors
Health in the same condition as of the Effective Date of this Agreement (or such
later date as of which any item of Equipment was provided to the LLC), ordinary
wear and tear, and obsolescence, excepted.
f. MAINTENANCE AND REPAIR OF OFFICE SPACE. Doctors Health shall
provide, or cause to be provided, maintenance, repair and replacement of the
systems and related equipment to the extent necessary for the proper operation
of the Office Space and for the Practice of Medicine, including, but not limited
to, mechanical, heat, ventilation, air conditioning, lighting, electrical and
plumbing systems. Doctors Health shall also provide, or cause to be provided,
appropriate janitorial services consisting of daily trash removal and light
dusting and vacuuming of the Office Space, provided that the LLC shall leave the
Office Space in a reasonably tidy and clean condition at the end of each day,
and such other more substantial janitorial services the LLC may reasonably
request. Doctors Health shall also provide for the removal of hazardous medical
waste generated by the LLC at the Office Space, provided that the LLC shall
comply with applicable regulatory waste handling, disposal and packaging
standards.
g. REASONABLE ACCESS. The LLC agrees to allow Doctors Health reasonable
access to the Demised Premises, where such entry will not unreasonably interfere
with the LLC's use or occupancy, or with the provision of medical care or the
rights of any patient, in order to provide any of the services or fulfill any of
the duties of Doctors Health set forth in this Agreement, and/or to take steps
Doctors Health deems necessary for the safety, improvement or preservation of
the Demised Premises.
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h. CHANGES, ADDITIONS OR IMPROVEMENTS TO OFFICE SPACE. The LLC may from
time to time request that Doctors Health make reasonable changes, additions or
improvements to the Office Space in order to permit the LLC to engage more
efficiently in the Practice of Medicine or to enhance its profitability and,
subject to the limitations upon its leasehold or fee interest, Doctors Health
will endeavor to comply with such of the LLC's requests as it deems commercially
reasonable, provided that such changes shall comply with the applicable local,
state or Federal laws or regulations. The LLC shall not cause or permit
materialmen's, mechanics or other liens to be filed against the Office Space or
the Units or the interest of Doctors Health or any mortgagee in contravention of
any lease or mortgage, by whatever name, on the Office Space or the Units.
i. TAXES. Doctors Health shall pay before delinquency all real estate
and property taxes imposed upon the Office Space or the Units for which it is
responsible. The LLC shall pay before delinquency (and hereby authorizes Doctors
Health to pay on its behalf) all taxes, assessments, and other charges imposed
upon the LLC's operations or business conducted upon the Demised Premises,
and/or upon any property of the LLC located in the Demised Premises.
j. INSURANCE. The LLC shall maintain (and hereby authorizes Doctors
Health to acquire and maintain on its behalf) fire insurance with extended
coverage on the Demised Premises, business interruption insurance, general
liability insurance and professional liability insurance on any incidents
occurring in connection with the LLC's occupancy and use of the Demised
Premises, all of which policies shall be in amounts deemed reasonable by Doctors
Health and shall name Doctors Health as loss payee and as an additional insured.
k. INDEMNIFICATION. The LLC shall indemnify and hold Doctors Health,
its employees, agents, officers, and partners or stockholders, as the case may
be, harmless from and against any and all demands, claims, judgments, losses and
damages, and any related costs or expenses (including reasonable attorneys'
fees) arising from any injury or damage to person or property caused by the
negligence or the misconduct of the LLC, its agents, servants or employees, or
of any other person entering upon or using the Demised Premises under the
express or implied invitation of the LLC, or resulting from the violation of
laws or regulations, or violation of the terms of this Agreement by any of the
foregoing.
l. ASSIGNMENT/PLEDGE/ENCUMBRANCE. The LLC may not, without Doctors
Health's prior written consent, assign, sell, pledge, mortgage, encumber or in
any manner transfer any interest in nor sublet the Demised Premises or any part
or item thereof, nor permit occupancy or use of the Demised Premises or
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any item thereof by any other Person other than in the ordinary course of the
LLC's business.
m. DAMAGE/DESTRUCTION/CASUALTY OF DEMISED PREMISES. In the event all or
any portion of the Demised Premises is damaged or destroyed by fire or other
casualty, Doctors Health shall use commercially reasonable efforts to restore
the damaged, or replace the destroyed, Demised Premises as soon as reasonably
possible and to make provision for temporary or interim use of such assets or
facilities in lieu of damaged or destroyed Demised Premises as may be reasonably
required to permit the LLC to continue its Practice of Medicine with minimal
disruption. Doctors Health shall have one hundred eighty (180) days to make
replacements, repairs and restorations, using insurance proceeds and such other
monies as Doctors Health may elect to contribute. In the event the Demised
Premises cannot be repaired, restored or replaced within such time period, or in
the event Doctors Health determines in its sole judgment that such repair,
restoration or replacement is not cost effective, Doctors Health shall have the
right to elect to terminate the LLC's lease or use of such portion of the
Demised Premises and to provide, pursuant to the terms hereof, such other
facilities, assets, equipment or office space as is reasonably appropriate to
permit the LLC and its physicians to resume its practice of medicine.
n. SUBORDINATION. The LLC agrees that this Agreement shall be and is
subordinate to the lien of any and all conditional sale agreements, financing
arrangements, mortgages, deeds of trust, and ground leases that may now or
hereafter be placed upon the Demised Premises, and to any and all advances to be
made thereunder, and to the interests thereon and all renewals, consolidations,
modifications, replacements and extensions thereof.
o. SUBLEASE RENEWALS. Doctors Health will provide to the LLC reasonable
notice of the expiration of the Sublease pursuant to which any Office Space is
occupied by the LLC or the termination of the LLC's right to occupy any Office
Space under any other circumstances and will confer with the LLC concerning the
renegotiation, or renewal of such lease or other occupancy right and the removal
of the LLC to other premises.
3. OPERATIONAL DUTIES OF DOCTORS HEALTH.
a. GENERAL MANAGERIAL DUTIES. The LLC hereby appoints Doctors Health as
its sole and exclusive manager, agent and administrator for, and Doctors Health,
for the benefit and on behalf of the LLC, agrees to use its commercially
reasonable efforts to perform, each of the following management and support
functions:
i. provide all general management services of and for the LLC,
including the establishment of operating and administrative policies and
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procedures, general oversight of the operation of the LLC, strategic planning,
including specifically with respect to financing, market development,
advertising and marketing (including one or more public relations programs that
seeks to enhance each physician's medical practice and extend the LLC's ability
to provide services by creating public awareness of the LLC and its Affiliates),
operation and overall management and control, financial reporting, insurance,
tax matters (other than for individual physicians) and personnel management;
ii. negotiate and implement such acquisitions, by purchase,
lease, or other contractual arrangements, of equipment, goods or services for
the LLC as Doctors Health shall deem commercially reasonable;
iii. provide a competent administrative staff for supervision
and performance of the business and administrative functions of the LLC. Each of
the administrative staff shall be employees of and responsible to Doctors
Health, but all salaries, benefits and other expenses related to the employment
of the administrative staff by Doctors Health shall be deemed Business Costs of
the LLC and paid by Doctors Health as such;
iv. assist the LLC in identifying and consummating the
acquisition of the medical practices of additional primary care physicians
and/or physician groups to become Members and employees of the LLC (provided,
however, that Doctors Health shall have no obligation to provide funding for any
such acquisition except to the extent that the Manger, in its sole discretion,
determines to do so), and recruit, employ, train, supervise and provide to the
LLC such services of non-physician professional staff personnel as may
reasonably be required to permit the LLC to engage in the Practice of Medicine,
including specifically but without limitation allied health professionals.
Except in the case of non-physician professionals who may be required to be LLC
employees for billing purposes ("Incident To Employees"), Doctors Health shall
have the authority to hire, discipline and terminate non-physician staff. In
hiring, Doctors Health shall comply in all material respects with requirements
of Federal, state and local law with respect to both the business and
professional obligations of the LLC and employment, generally. Each of the
non-physician professional staff except Incident To Employees shall be employees
of and responsible to Doctors Health, but all salaries, benefits and other
expenses related to the employment of the non-physician professional staff by
Doctors Health shall be deemed Business Costs of the LLC and paid by Doctors
Health as such;
v. furnish and install operating procedures, information and
other systems and controls as Doctors Health deems reasonable for the purpose of
providing effective management techniques and functions for the benefit of the
LLC;
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vi. prepare annual budgets (including operating and capital
budgets), business plans, financial forecasts and operating plans for the LLC;
vii. prepare and distribute internally prepared monthly
statements of revenue and expense, and such other reports as Doctors Health may
deem appropriate, to the Management Committee;
viii. consistent with the reasonable policies established by
the Management Committee and the Quality Committee and the general parameters
established by any LLC budget and business plan then in effect, seek to manage
the non-professional aspects of the LLC's business efficiently and economically;
ix. keep the Demised Premises and all other assets utilized by
the LLC, including improvements, furniture, furnishings, fixtures and other
equipment therein and appurtenant thereto, in reasonably good order and repair,
subject to ordinary wear and tear, and fully insured;
x. arrange for all commercially reasonable replacements,
improvements, supplies and changes in and to the Demised Premises and all other
assets utilized by the LLC, and in the furniture, furnishings, fixtures and
other Equipment;
xi. provide for and keep accessible to the LLC proper
financial and business books of account and other records, all of which shall be
open to inspection and examination and copying at the expense of the LLC at any
reasonable time during normal business hours;
xii. pay in a timely manner through disbursements of funds
from the LLC Accounts all of the direct and indirect costs and expenses
reasonably incurred (whether directly or indirectly) in connection with the
operation and administration of the LLC's Practice of Medicine (including in
such Practice of Medicine all laboratory, testing and other ancillary services),
whether incurred directly by the LLC or by Doctors Health on behalf of the LLC
("Business Costs"), including without limitation, the following charges (or,
where applicable and consistent with Section 4.c hereof, a reasonable allocative
share of such charges): (a) all personnel costs attributable to the LLC and its
Practice of Medicine, including (1) all salaries and benefits (but not bonus
payments, it being the express intent of the parties that the LLC will fund any
bonus payments to employee physicians from Managed Care Incentive Payments) for
physicians employed by the LLC, (2) salaries, wages, bonuses and all benefits of
professional and administrative staff employed by Doctors Health to provide
services directly to the LLC or its employee physicians in their practice of
medicine, but excluding employees whose services are provided directly to
Doctors Health (and only indirectly to the LLC) to enable Doctors Health to
provide managerial and other administrative services generally to the LLC and to
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any Additional Primary Care Entities or other healthcare providers with which
Doctors Health contracts, (3) salaries, professional fees or other compensation,
including bonuses and all benefits, of all physicians and non-physician
professionals and all other persons employed, contracted or otherwise retained
by Doctors Health to provide professional health care services or other services
or goods to the LLC or to the LLC's patients or customers, and (4) all employee
or personnel benefits, employee insurance costs, payroll taxes and all premiums
and charges for workmen's compensation; (b) maintenance, replacement and repair
charges and costs; (c) expenses for supplies for the Office Space and Equipment;
(d) all office and other administrative expenses, including office and medical
supplies, of the LLC; (e) dues and license fees and other professional expenses
for LLC employees and Manager employees providing services to the LLC; (f) water
and sewer, gas, electricity, telephone and other utility charges; (g) premiums
for insurance or bonds reasonably related to the LLC and amounts deducted from
insurance proceeds pursuant to policy terms; (h) all taxes, assessments, fees,
charges and similar expenses relating to the LLC or the operation thereof;
(i) charges for other equipment, goods, services (including professional and
consulting services) and utilities supplied to or for the benefit of the LLC;
(j) all acquisition, lease and financing expenses and payments, including all
leasehold expenses relating to office space, for the benefit of or relating to
the LLC; (k) costs of billing and collection of the LLC's fees and charges,
including contractors; and (l) such other expenses and charges as would normally
be considered as capital, operating or other expenses of the LLC under
recognized and customary accounting principles and practices, including expenses
incurred by Doctors Health on behalf of the LLC.
Doctors Health shall be obligated to, and shall, pay the LLC's Business
Costs only out of and from the cash that Doctors Health ACTUALLY collects in
respect of and from those LLC's receivables with respect to which it is
appointed as the LLC's agent as provided in Section 3.b hereof, and with respect
to those receivables assigned, transferred and conveyed to Doctors Health
pursuant to such provision, and with respect to any other amounts which Doctors
Health collects or receives on behalf of the LLC (collectively, the "Collected
LLC Cash"). If, in Doctors Health's sole discretion, the Collected LLC Cash is
or will be insufficient to permit Doctors Health to pay all of the LLC's
Business Costs in the ordinary course of business as such Business Costs accrue,
Doctors Health shall give preference in payment to, and shall pay first, those
of the LLC's Business Costs NOT attributable to the salaries or benefits of
physicians employed by the LLC who are also Members of the LLC ("Member
Physicians") ("Non-Member Business Costs") and only after all such Non-Member
Business Costs are satisfied (or reasonable provision therefor in the sole
discretion of Doctors Health has been made) shall Doctors Health pay to the LLC
the funds to enable the Member Physicians to be paid any salary or benefits to
which they may be entitled pursuant to their Professional Service Employment
Agreements with the LLC. To the extent Doctors Health does not have sufficient
Collected
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LLC Cash to pay to or for the benefit of the Member Physicians the aggregate of
all salary and benefits due to them (each such deficiency a "Member Physician
Salary Cost Deficiency") with respect to any month, (a) DHS shall pay to the
Member Physicians such amounts of the salary and benefits due to them in any
such month determined by multiplying the amount of Collected LLC Cash, if any,
Doctors Health deems available for such payments by a fraction, the numerator of
which is the amount of salary and benefits due in such month to such Member
Physician and the denominator of which is the aggregate of all salary and
benefits due in such month to all Member Physicians, and (b) Doctors Health
shall not be entitled to, and shall not receive, any Management Fee with respect
to such month. In addition, the amount of any Member Physician Salary Cost
Deficiency for such month shall, when added to all or any portion of any Member
Physician Salary Cost Deficiencies from prior months with respect to which
payment has not been made by Doctors Health, be deemed for purposes of the
calculation of the Management Fee pursuant to SECTION 4 hereof to be a "Business
Cost" with respect to each succeeding month through and including the month in
which such Member Physician Salary Deficiency has been paid in full, and Doctors
Health shall not be entitled to a Management Fee in any month during which there
are any Member Physician Salary Cost Deficiencies outstanding. In each month in
which there are no Member Physician Salary Cost Deficiencies outstanding, and in
each month where there exists sufficient LLC Collected Cash to pay all the LLC's
Business Costs and all outstanding Member Physician Salary Cost Deficiencies,
Doctors Health may pay to itself, from the LLC Accounts and after payment of all
of the LLC's Business Costs and outstanding Member Physician Salary Cost
Deficiencies, the Compensation to which it is otherwise entitled according to
the terms of SECTION 4 hereof.
Notwithstanding the foregoing, the LLC's Business Costs shall
NOT include, and Doctors Health shall have no obligation either to pay from the
LLC Collected Cash or otherwise, any costs, expenses or other charges incurred
by the LLC or presented to Doctors Health as a result of: (a) any action taken
by the LLC with respect to the employment terms and conditions, including
termination of employment, of any of its employee physicians to which Doctors
Health has not consented in writing; (b) any breach or deficiency in performance
by the LLC or any of its employee physicians of or under any contract to which
the LLC is a party or which was negotiated by Doctors Health on behalf of the
LLC; (c) violation of or failure to comply with any statute, law, regulation,
ordinance, interpretation, decision or other similar requirement of any federal,
state, or local political jurisdiction, or of any agency, commission, board or
other similar entity of any of the foregoing jurisdictions or any professional
organization with jurisdiction or authority over the ability of the LLC or any
of its employee physicians to engage in the practice of medicine; (d) any
willful or negligent act or omission of the LLC or any of its employee
physicians that results or may result in an award of damages against the LLC or
such employee physician whether in tort, contract or otherwise; or (e) any act
or omission on the
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part of the LLC or any of its employee physicians constituting fraud, willful
misrepresentation or other similar conduct.
xiii. pay in a timely manner any Managed Care Incentive
Payment to which the LLC is entitled pursuant to the provisions of SECTION 5
hereof with respect to any MCIP Year to permit the LLC to reward and provide
appropriate incentives to its physician employees, all pursuant to the terms of
SECTION 5 hereof; and
xiv. perform all other acts reasonably necessary or desirable
in the operation and maintenance of the LLC in accordance with the terms and
conditions of this Agreement, except that Doctors Health shall not provide
medical or related professional services or engage in the Practice of Medicine.
b. BILLING AND COLLECTION. The LLC hereby assigns, transfers and
conveys to Doctors Health all of its currently existing and future accounts
receivable with respect to all medical services previously provided or in the
future to be provided by the LLC (but not including any Medicare or Medicaid
payments currently owing, or which in the future become owing, to the LLC)
(collectively, the "Non-Medicare Receivables"). Doctors Health shall be entitled
to take any such action with respect to the Non-Medicare Receivables as it deems
appropriate in the exercise of its sole discretion. The LLC shall execute such
other documents and agreements as may be necessary to more fully and effectively
transfer the Non-Medicare Receivables to Doctors Health.
Doctors Health shall serve as billing and collection agent for
the LLC with respect to any Medicare and/or Medicaid payments currently owing,
or which in the future become owing, to the LLC (the "Medicare Receivables") and
shall bill for and endeavor to collect all such Medicare Receivables owed to the
LLC (reserving the right to send, with simultaneous notice to the LLC, selected
past-due accounts to a collection agency) and issue receipts therefor, if
required. The LLC hereby appoints Doctors Health as its agent and
attorney-in-fact for the collection of the Medicare Receivables. The LLC further
appoints Doctors Health as its attorney in fact and agent, to collect such
Medicare Receivables that Doctors Health deems uncollectible. Doctors Health
shall deposit all the Medicare Receivables in the bank accounts described in
SECTION 4.c. hereof.
Doctors Health will use its commercially reasonable efforts
to:
i. provide to the LLC, upon reasonable prior notice, such
reasonably detailed reports with respect to the LLC's accounts receivable,
billing and collection status, including charges, receipts, and insurance
classifications of patients as the LLC may from time to time reasonably request;
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ii. should this Agreement be terminated, upon request
therefor, provide the LLC with a complete listing and print out of all active
patient accounts, all Medicare and third party insurer active billing records,
all demographic and charge data, and a final report detailing all data and
information pertinent to the LLC's accounts, in accordance with the normal
reporting capability of the billing system or contractor, if any, utilized for
the LLC's billing by Doctors Health; and
iii. use reasonable care in processing and storing the LLC's
data and records.
c. BANK ACCOUNTS.
i. Doctors Health has opened the bank accounts described in
this SECTION 3.c.i for the purpose of depositing, disbursing and otherwise
administering the Collected LLC Cash. Doctors Health shall establish policies
and procedures reasonably satisfactory for managing and administering such
accounts, including designation and authorization of persons authorized to sign
checks. Doctors Health may, upon reasonable notice to the LLC, open in its name
such other bank accounts, including without limitation interest bearing accounts
and reserve accounts, as it may deem appropriate. Doctors Health may also
transfer Collected LLC Cash between any or all such accounts as it may establish
hereunder. Until disbursed by Doctors Health in payment of the LLC's Business
Costs or Doctors Health's Management Fee from such accounts, the Collected LLC
cash (other than such portion attributable to the Non-Medicare Receivables)
shall be and remain the property of the LLC. Doctors Health shall deposit,
disburse and administer the Collected LLC Cash as follows:
A. Doctors Health, as the agent of the LLC, will from time to time
maintain accounts with one or more financially secure banking
institutions, into which it shall deposit promptly upon receipt all
Collected LLC Cash which it receives as the agent of the LLC and on the
LLC's behalf from Medicare and Medicaid and in respect of goods and
services provided pursuant to the Medicare and Medicaid programs
(collectively, the "LLC Medicare Account").
B. Doctors Health will from time to time maintain accounts with one or
more financially secure banking institutions, into which it shall deposit
promptly upon receipt all of the Collected LLC Cash it receives from any
sources other than those described in SECTION 3.c.i.A, above
(collectively, the "LLC Cash Account") (the LLC Medicare Account, the LLC
Cash Account and any other bank accounts established by Doctors Health
hereunder are hereinafter collectively referred to as the "LLC Accounts").
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ii. Doctors Health shall utilize the cash deposited in the LLC
Accounts for the purposes of paying the LLC Business Costs and Doctors Health's
Management Fee according to the following terms and conditions. Consistent with
the requirements of SECTION 3.a.xii hereof, Doctors Health shall give first
priority in the disbursement of funds from the LLC Accounts to the payment of
the Non-Member Business Costs. Doctors Health shall give second priority in the
disbursement of funds from the LLC Accounts to the payment of the salary and
benefits of the LLC's Member Physicians and to any Member Physician Salary Cost
Deficiencies. After all of the LLC's Business Costs (which, where appropriate,
shall include any Member Physician Salary Cost Deficiencies) have been paid,
Doctors Health may disburse and pay over to itself from the LLC Accounts Doctors
Health's Compensation calculated according to the provisions of SECTION 4.a
hereof. Subject to the requirements of applicable law, Manager may transfer
funds from the LLC Medicare Account to the LLC Cash Account in its discretion.
d. CONSULTANTS. Doctors Health may engage on behalf of the LLC
consultants to provide specialized services outside the normal scope of
management services, including, but not limited to, legal representation, public
accounting and labor relations. All reasonable charges for outside consultants
will be LLC Business Costs.
e. PERSONNEL. Doctors Health shall maintain supervisory control over
its personnel involved in providing to the LLC the assets, facilities and
services contemplated hereunder. Doctors Health will consult with the Quality
Committee if the LLC informs Doctors Health of any dissatisfaction with the
performance or staffing level of Doctors Health personnel without, however,
surrendering any of Doctors Health's discretion over the employment, discipline
and other conditions of employment related to Doctors Health employees.
f. CONSENT. In any instance in which Doctors Health is required under
the terms of this Agreement to obtain the LLC's or the Management Committee's
consent or approval in connection with any proposed action, expenditure or
decision of any type, if Doctors Health's recommendations are not approved and
consent or approval is not received, Doctors Health shall have no responsibility
to the LLC with respect to the subject matter of the proposed action,
expenditure, or decision other than to act as directed by the Management
Committee or to maintain the status quo if no direction is received. Doctors
Health shall not be considered to be in violation of this Agreement or any part
thereof as a result of, or in connection with, any matter in which the LLC or
the Management Committee did not consent to or approve any action proposed by
Doctors Health; unless and to the extent Doctors Health shall fail to act as
directed by the LLC or the Management Committee or to maintain the status quo.
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g. CONTRACTING. The LLC hereby authorizes Doctors Health to negotiate
and enter into, administer and terminate all contractual arrangements between
the LLC and Persons to whom the LLC provides goods or services or from whom the
LLC receives goods or services or with whom the LLC contracts to provide medical
professional or other services to the LLC's patients or customers. The LLC
hereby constitutes Doctors Health as the LLC's agent and attorney-in-fact for
the purpose of executing the authority granted Doctors Health pursuant to this
PARAGRAPH 3.G. The contracting authority afforded Doctors Health hereunder
includes, without limitation, the authority to contract with hospitals, other
physicians (including specialists), hospices, nursing homes, pharmacies,
laboratories, providers of transportation, home health care providers, nurses,
and other non-physician health care providers, medical equipment providers and
other providers of medical professional services and other health care services,
patients, customers, insurance companies, health maintenance organizations and
other managed care entities, employers, administrators and other third-party
payors of patient care services or goods provided by the LLC.
h. PATIENT RECORDS. Doctors Health shall provide to the LLC all patient
records of the LLC's physician employees and shall maintain and retain records
of all professional services provided by the LLC to its patients directly or
through contracts with other providers of medical professional services or other
health care services. Doctors Health shall maintain a complete file within the
LLC's offices of all such medical records and supporting documents.
i. MARKETING. Doctors Health shall provide to the LLC, directly or
through consultants, practice development assistance, including but not limited
to advertising, promotional and media materials and one or more public relations
programs designed to enhance each physician's medical practice and extend the
LLC's ability to provide services through increased public awareness of the LLC
and its Affiliates.
j. UTILIZATION MANAGEMENT; QUALITY ASSESSMENT AND IMPROVEMENT. Doctors
Health shall provide ongoing reviews of the LLC's utilization management, and
shall conduct quality assessment and improvement activities for the LLC,
including monitoring of patient satisfaction.
k. REGULATORY COMPLIANCE. Doctors Health shall advise the LLC regarding
compliance with all applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
Notwithstanding the above, it shall be the LLC's sole responsibility to comply
with all such applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
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l. COMMERCIAL REASONABLENESS. Notwithstanding any other provision of
this Agreement, all obligations of Doctors Health hereunder, including, without
limitation, the obligations of Doctors Health to provide assets, facilities, and
services to the LLC in connection with the LLC's Practice of Medicine, shall be
limited, and shall be interpreted according to, a standard of commercial
reasonableness appropriate for application to primary care Medical Practices in
the Baltimore, Maryland SMA as determined by Doctors Health. Doctors Health, in
the performance of its obligations hereunder, including without limitation the
provision of assets, facilities and services to the LLC, shall in no event be
required to do anything or to make available to the LLC any asset, facility or
service, that Doctors Health in good faith believes is not commercially
reasonable and, subject to review under the provisions of SECTIONS 7.b and 7.c
hereof, Doctors Health shall have no duty to do, or omit to do, anything that
is, in the discretion of Doctors Health, commercially unreasonable.
4. COMPENSATION OF DOCTORS HEALTH; OBLIGATIONS OF THE LLC.
a. COMPENSATION. In consideration of the assets, facilities and
services provided by Doctors Health to the LLC pursuant to this Agreement, the
LLC hereby authorizes Doctors Health to pay to itself on behalf of the LLC from
the LLC Accounts, and Doctors Health shall be entitled to receive from the LLC,
Compensation (the "Compensation") calculated and paid monthly according to the
terms of this SECTION 4.a. The amount of Doctors Health's Compensation shall be
the amount determined by (i) subtracting the total amount of (A) all LLC
Business Costs (which, with respect to any month in which there are Member
Physician Salary Cost Deficiencies outstanding, shall include the aggregate of
all such deficiency amounts) that Doctors Health pays or is obligated to pay
through disbursements from the LLC Accounts or provides for by transfers to
reasonable reserves established by Doctors Health, and (B) all bank fees,
charges and other deductions from the LLC Accounts made by the depository bank,
during a calendar month from (ii) the amount of (A) all Collected LLC Cash
deposited by Doctors Health in the LLC Accounts, and (B) all interest earned on
or other amounts credited to the LLC Accounts by the depository bank, during
such calendar month. Doctors Health's Compensation shall be calculated and paid
on or before the tenth day of the month following the month for which payment is
being made. Doctors Health's Compensation shall be paid only out of Collected
LLC Cash remaining in the LLC Accounts after all LLC Business Costs (which, with
respect to any month in which there are Member Physician Salary Cost
Deficiencies outstanding, shall include the aggregate of all such deficiency
amounts) have been paid or provided for. Adjustments in the amount of the
Compensation for any month, if any, may be made after review of settled bank
statements by the independent certified public accountants retained by Doctors
Health to review the financial records of LLC (which may be Doctors
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Health's accountants). Doctors Health shall permit the LLC's accountants to
review Doctors Health's calculation of its Compensation at least quarterly and
any disagreement or dispute between the LLC and Doctors Health relating to the
amount of the Compensation resulting from such review shall be subject to the
dispute resolution procedures of SECTIONS 7.b and 7.c hereof. Doctors Health
shall, if necessary, increase or decrease, as the case may be, the Compensation
next payable after its receipt of the results of such review (including dispute
resolution, if any) to reflect such results.
b. GENERAL COVENANTS OF THE LLC. The LLC acknowledges that Doctors
Health has undertaken to provide significant assets, facilities and services to
the LLC pursuant to this Agreement in reliance upon the LLC's undertaking
diligently to engage, and to use its best efforts to cause its physician
employees diligently to engage, in the Practice of Medicine. The LLC therefore
covenants and agrees that it will diligently engage in the Practice of Medicine
in the Baltimore SMA and will use its best efforts to cause its physician
employees diligently to engage in, and to devote their full-time professional
efforts to, the Practice of Medicine in the Baltimore SMA. The LLC further
covenants and agrees that it will use its best efforts to meet or exceed the
financial, professional service and other standards established for the LLC in
the business plans and budgets prepared for the LLC by Doctors Health and
approved by the Management Committee and, in furtherance thereof, will engage,
and use its best efforts to cause its physician employees to engage, in the
Practice of Medicine in the most efficient and economical manner possible,
consistent with all applicable professional and ethical standards and a standard
of commercial reasonableness appropriate for application to Medical Practices in
the Baltimore SMA, including, specifically, those matters set forth in SECTION
4.d below.
c. AUTHORIZATION OF PAYMENTS. The LLC acknowledges and agrees that its
intent in entering into this Agreement with Doctors Health is to secure from
Doctors Health all of the assets, facilities and non-physician services required
by the LLC to permit it to engage in the Practice of Medicine and, in
furtherance thereof, to enable and permit Doctors Health to pay, from the
Collected LLC Cash in the LLC Accounts, all of the reasonable costs and expenses
of providing such assets, facilities, and services, however and by whomever
incurred, by making disbursements of such Collected LLC Cash directly to
providers of assets, facilities or services or to the LLC or to Doctors Health
itself in reimbursement of costs or expenses incurred by either of them. The LLC
thus covenants and agrees that Doctors Health shall be entitled, and is hereby
authorized, to disburse from the Collected LLC Cash in the LLC Accounts such
funds as are required to pay all of the reasonable costs and expenses of
providing assets, facilities and services directly to the LLC pursuant to this
Agreement, it being the express understanding of the LLC that Doctors Health may
provide assets, facilities and services directly to Additional Primary Care
Entities and other medical service providers, and that such allocations of
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costs incurred for the direct benefit of both the LLC and one or more Additional
Primary Care Entities or other medical service providers will be necessary.
Doctors Health shall, in its discretion, establish the basis for allocating each
category of direct cost and Doctors Health agrees to exercise such discretion in
a manner that results in the establishment of a basis for allocation of direct
costs that is reasonable and fair to the LLC and to each Additional Primary Care
Entity and any other provider entity to which such costs are allocated.
Disputes, if any, regarding such allocations shall be resolved first through the
Quality Committee and thereafter through the other procedures established in
SECTIONS 7.b and 7.c hereof. Doctors Health may, in its discretion, involve or
join as parties to such procedures any other medical service provider involved
directly or indirectly in a dispute between Doctors Health and the LLC or join
the LLC as a party in any dispute between Doctors Health and any other service
provider that relates to the LLC.
d. COVENANTS OF THE LLC AND EACH PHYSICIAN. Without limiting the
foregoing provisions of SECTION 4.a above, or the duties of any physician set
forth in any employment agreement with the LLC, the LLC agrees to provide, and
to use its best efforts to ensure that each of its physician employees and
contractors provides, at least the following services to DHS and to DHS/LLC
patients and otherwise complies with the following provisions:
(i) MEDICAL SERVICES. With respect to any managed care contract,
provide health care services, as an independent contractor to Doctors Health,
including Medicare services, and charity care in accordance with the policies,
procedures, guidelines, and requirements of Doctors Health and the Quality
Committee as are now in place or may hereafter be established. Emergency and
immediate health care services shall be provided by the LLC without regard to
ability to pay.
(ii) ON-CALL COVERAGE. Provide such night and weekend on-call coverage
as from time to time is determined by Doctors Health and the Quality Committee
to be necessary to make services as readily accessible to the community as
possible.
(iii) SUPERVISION. Monitor and review the clinical performance of all
staff, allied health professionals, and the LLC's physicians, in cooperation
with Doctors Health and the Quality Committee.
(iv) QUALITY ASSURANCE AND PEER REVIEW. Establish, with the cooperation
and involvement of Doctors Health and the Quality Committee, policies,
procedures and committees for quality assurance and peer review of all
physicians providing services to Doctors Health, cooperate fully with the
policies, procedures and activities of such committees, and conduct peer review
disciplinary activities in accordance with Maryland law.
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(v) RECOMMENDATIONS. Conduct periodic reviews of medical and related
staffing to consider the needs of the LLC and/or Doctors Health for additional
primary care physicians, staff, allied health professionals and other
non-primary care physicians, and report the results of such reviews to the
management of Doctors Health and the Quality Committee; and provide such other
review and reports to Doctors Health and the Quality Committee as reasonably
requested by Doctors Health's management.
(vi) SURVEYS. Assist the management of Doctors Health with all
preparation for any inspections and on-site surveys of Doctors Health conducted
by governmental agencies and accrediting organizations.
(vii) MANAGED CARE CONTRACTS. Assist and cooperate with Doctors Health
in negotiating and developing managed care contracts, participate in any
preferred provider network established by or through Doctors Health or its
Affiliates, and provide services to all Managed Care Members covered by a
managed care plan that is entered into by Doctors Health, comply with the terms
of managed care contracts that are negotiated by Doctors Health for the benefit
of the LLC, and comply with all applicable Federal and state laws and managed
care plan terms affecting Doctors Health and the LLC.
(viii) RECORDS. Maintain all necessary and appropriate medical records
reflecting health care service provided to patients seen by LLC physicians in a
manner that is consistent with applicable law and that ensures that Doctors
Health has satisfied all applicable requirements for Payor contracts and
participation in public and private payment programs.
(ix) ADMINISTRATIVE DUTIES AND MARKETING. Cooperate with Doctors
Health's policies, procedures and activities pertinent to marketing, patient
relations, scheduling, billing, collections and other administrative matters,
and cooperate with Doctors Health's efforts to bill and collect fees for
services rendered to patients.
(x) LITIGATION. Cooperate in all litigation matters affecting the LLC
and/or Doctors Health.
(xi) EDUCATION. Cooperate with Doctors Health and the Quality Committee
in the development and provision of all educational programs offered by Doctors
Health, and devote reasonable time and effort to such programs.
(xii) UTILIZATION REVIEW. Cooperate fully with the utilization review
policies, procedures and activities of Doctors Health, the Quality Committee and
third party payors. The LLC shall assist Doctors Health and the Quality
Committee in conducting utilization reviews all of the LLC's physicians.
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(xiii) LICENSE. Ensure that the LLC's physicians at all times are
licensed to practice medicine in the State of Maryland or other jurisdictions
approved by Doctors Health;
(xiv) POLICIES. Ensure that the LLC's physicians comply with all
applicable laws, rules and regulations of any and all governmental authorities
and the policies and procedures of Doctors Health and third party payors;
(xv) HOSPITAL PRIVILEGES. Ensure that each of the LLC's physicians
possesses and maintains staff privileges on the medical staff of those hospitals
and institutions set forth on Exhibit 4.3(a)(ii) of each such physician's
Professional Services Employment Agreement, and such other hospitals and
institutions as Doctors Health and the LLC shall agree upon.
(xvi) PATIENT CARE. Ensure that the LLC's physicians providing
professional services to the LLC and Doctors Health shall at all times provide
only those medical services that he or she is qualified to deliver, and shall
provide such services in a manner that is consistent with the patient's best
interests.
(xvii) CREDENTIALLING. Cooperate with Doctors Health and the Quality
Committee in establishing, criteria, policies and procedures for purposes of
credentialling all of the LLC's physicians. Such credentialling criteria,
policies and procedures shall be established in accordance with all community
medical practice standards, all applicable laws, and the minimum participation
criteria developed by Doctors Health and the Quality Committee. All of the LLC's
physicians shall be required to comply with such credentialling criteria. All
decisions with respect to credentialling shall be reached as follows:
(A) LLC MEMBER PHYSICIANS. Doctors Health and the LLC shall
consult with each other regarding the selection of, and negotiations with, LLC
Member Physicians, and
(B) OTHER PHYSICIANS. Doctors Health and the LLC shall consult
with each other regarding the selection of and negotiations with non-Member
Physicians, but the LLC may, subject to minimum participation criteria approved
by Doctors Health, make decisions regarding the selection of non-Member
Physicians.
(xviii) PHYSICIAN AGREEMENTS. The LLC shall enter into and maintain
Professional Services Employment Agreements or other employment agreements
reasonably acceptable to Doctors Health with all the physicians employed by the
LLC. The LLC shall consult with Doctors Health and the Quality Committee
regarding the final terms of all such employment agreements
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prior to the execution thereof and any amendments, or terminations, of such
agreements. It is understood and agreed that Doctors Health is not and shall not
become a party to any Professional Services Employment Agreements or other
employment agreements between the LLC and its physicians.
(xix) PHYSICIAN OBLIGATIONS. The LLC shall be responsible for ensuring
that each of its physicians comply with the following requirements, all of which
have been incorporated by reference into the Professional Services Employment
Agreements with each physician. The LLC shall confer with Doctors Health
concerning the performance of its employee physicians of and under their
employment contracts generally and prior to taking any action to terminate any
such employment agreement. The LLC, at Doctors Health's request agrees to take
any reasonable action requested to enforce compliance, including, but not
limited to terminating such Physician's employment with the LLC and/or seeking
sanctions against such Physician:
(A) Each LLC physician shall abide by the terms and conditions
of the applicable provisions of this Agreement.
(B) Each LLC physician shall be bound to all components of all
agreements executed between Doctors Health and third party payors. Furthermore,
each physician shall abide by all operating rules and regulations of any managed
care plan for elements pertaining, but not limited to the maintenance of medical
records, the confidentiality of records, the filing of claims, and the
non-discrimination in treatment of its members.
(C) Each LLC physician shall be free to exercise absolute
discretion in the conduct of any and all activities which may reasonably be
considered as constituting the Practice of Medicine. The professional
responsibility to patients for the delivery of health care services under this
Agreement shall at all times remain with each LLC physician. Doctors Health
shall not interfere with the professional judgment of any of the LLC's
physicians in the provision of professional health care services.
(D) Each LLC physician shall be required to participate in and
cooperate with the utilization review programs of third party payors and of
Doctors Health. Any determination under a utilization review program that
services provided or proposed to be provided are not medically necessary or not
otherwise appropriate shall in no case be construed as a substitute for the
professional judgment of each LLC physician; rather, such findings are intended
to be and shall be limited to the determination of reimbursement for services
only, it being understood that all decisions regarding the nature and extent of
services to be provided, as well as the choice of provider, are and will be made
exclusively by each LLC physician and his or her patient.
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(E) Each LLC physician agrees that his or her practice
patterns will be profiled and will be reviewed by his or her peers, and that
participation in any of Doctors Health's preferred provider networks will be
dependent upon maintaining satisfactory profiles which are within Doctors
Health's and the Quality Committee's standards of acceptable medical practice.
(F) Each LLC physician shall refer patients to other
physicians only when it is deemed to be medically necessary and in the best
interest of such patients. When referrals are required, each LLC physician shall
use his or her best efforts to refer to other physicians who are participating
in any of the Manager's preferred provider networks then in effect, and to
utilize hospitals and other health care providers that are participating in any
such preferred provider network; provided, however, that no LLC physician shall
be required to refer a particular patient to any specific physician or to admit
such patient requiring hospitalization to any specific hospital if such LLC
Physician, in the good faith exercise of his or her professional judgment,
believes that the medical needs of such patient would be better served
elsewhere.
(G) Each LLC physician shall accept Managed Care Members as
new patients and treat current patients should they become Managed Care Members,
provided that no LLC physician shall be required to accept additional patients
if he is already working at full capacity, as determined by such physician and
the LLC jointly in the reasonable exercise of their discretion.
(H) Each LLC physician shall abide by decisions resulting from
utilization review programs of Doctors Health, the Quality Committee and/or
third party payors, subject to any applicable rights of reconsideration or
review. Each LLC physician shall pursue all appropriate opportunities for
reconsideration and appeal of denials of payment by third party payors.
(I) Each LLC physician shall provide to any designated
utilization review programs(s) any medical or other information necessary to
conduct preadmission certification and continued stay review for all covered
services to be rendered to Managed Care Members.
(J) Each LLC physician shall allow each third party payor or
its designee to review and duplicate any data or other records maintained
regarding services provided under this Agreement as may be necessary to conduct
the utilization review program. Such review and duplication shall be allowed
upon reasonable notice during regular business hours and shall be subject to all
applicable laws, regulations and Doctors Health's policies concerning the
confidentiality of such data or records.
(K) Each LLC physician shall use his or her best efforts to
obtain precertification for those services designated by any utilization review
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program(s) as requiring precertification, and shall use his or her best efforts
to notify the designated utilization review program of emergency or urgent
inpatient admissions within forty-eight (48) hours after admission.
(L) Each LLC physician shall cooperate as reasonably required
to verify that Managed Care Members are eligible for covered services.
(M) Each LLC physician shall prepare and maintain appropriate
records concerning health care services provided under this Agreement. All such
records shall be maintained in accordance with prudent record keeping
procedures, and as otherwise required by law.
(N) Notwithstanding anything provided herein to the contrary,
ownership of and access to all patient records shall be controlled by the
applicable state and federal law. All medical, financial, and personal
information about patients reviewed and collected in connection with this
Agreement shall be held in confidence and shall not be released, disclosed, or
published by the parties, their agents or employees without the written consent
of the patient, unless otherwise permitted by law. Each LLC physician shall be
responsible for supplying any consent necessary to the release of medical
records of patients for purposes of claims management, including specific
consent to the release of any records pertaining to any patient's alcohol or
drug addiction or treatment, or mental health commitment or treatment.
(xx) FULL TIME. Except in cases of emergency, or as otherwise expressly
waived by Doctors Health, the LLC shall ensure that each LLC physician devotes
his or her full-time practice of medicine to the LLC's group practice, and shall
not provide professional services to persons other than Doctors Health and the
patients treated by LLC Physicians. For purposes of this Agreement, "full-time"
shall mean at a minimum the target number of Encounters per year per physician
agreed to by the LLC and each physician but shall also include any time devoted
to the charity care and education activities of Doctors Health and the Quality
Committee, and all time directly or indirectly pertaining to medical treatment
and care of patients, such as working on patient medical charts, making patient
rounds, and assisting with Doctors Health's or the LLC's administrative duties.
All patients treated by an LLC physician shall be deemed to be Doctors Health's
patients and Doctors Health shall be the owner of the medical records for all of
Doctors Health's patients.
(xxi) NON-CONTRACT SPECIALISTS. When referrals to a specialist or other
physician is required, each LLC physician shall use his or her best efforts to
refer to physicians with whom Doctors Health has a provider contract in effect,
and, where applicable, to other physicians who are participating in any of the
Manager's preferred provider networks then in effect. In all other cases, each
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LLC physician may select non-contract specialists to whom patients are referred,
based upon the such physician's best professional judgment of patient needs.
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5. MANAGED CARE INCENTIVE PAYMENT.
a. CREATION OF MANAGED CARE INCENTIVE PAYMENT. The parties acknowledge
that both the Manager's Business Plan and the business plan developed by the
Manager for the LLC contemplate that the LLC and its physician employees will
shift the emphasis of their Practice of Medicine from a traditional
fee-for-service model to a managed care model, and that the Manager must
successfully manage the migration of the LLC's practice to a capitated model if
it is to meet its business goals and objectives. To provide an incentive for the
LLC and the physician employees of the LLC to engage in a managed care
environment in the most efficient and profitable manner possible, beginning with
the calendar year 1995, the Manager shall pay to the LLC, an amount, if any,
calculated as described herein (the "Managed Care Incentive Payment" or "MCIP")
with respect to each calendar year, or portion thereof, that occurs during the
term of this Agreement (each an "MCIP Year"). The Manager and the LLC shall
consult with each other as to the amount of the MCIP for each MCIP Year, subject
to the limitations established in Section 5.b hereof, and the Manager will
negotiate in good faith with the LLC in order to assure that all physician
employees are adequately compensated in light of the market in existence from
time to time.
b. CALCULATION OF MANAGED CARE INCENTIVE PAYMENT. The Manager and the
LLC shall by December 15th of each year agree upon an MCIP payment to be made
out of the Manager's income before provision for income taxes or bonus (as
reflected on the Manager's financial statements) for the following year. There
shall be no MCIP payment in any year in which the Manager does not have income
before provision for income taxes or bonus reflected on its financial
statements. The Manager and the LLC shall agree upon an MCIP payment for each
year that is fair to the Manager and the LLC. If the Manager and the LLC are
unable to agree upon an MCIP, then the MCIP, if any, with respect to such MCIP
Year shall be equal to the lesser of either (i) twenty-five percent (25%) of the
amount of the excess, if any, of (A) those operating revenues of the Manager for
the MCIP Year that are properly attributable to the provision of medical care to
patients of the LLC, over (B) expenses of the Manager and the LLC for the MCIP
Year that are properly attributable or otherwise allocable to the LLC for the
MCIP year, or (ii) twenty-five percent (25%) of the Aggregate Base Salaries of
all primary care physicians employed by the LLC during such MCIP year. The
Manager shall have no obligation to negotiate for an MCIP in excess of either of
such amounts. The Manager shall have the right in its discretion to make
appropriate year to year and period adjustments to accurately reflect income and
expenses, and to allocate expenses among the LLC and any other Additional
Primary Care Entities, independent practice association or other person or
entity for which it serves as manager, and to set off against the amount of any
MCIP payment all or any portion of the amount of its costs and expenses
resulting from a breach by any
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Physician or any Physician's PC of any representation, warranty or covenant made
by such Physician or PC in the Practice Participation Agreement."
c. PAYMENT OF MANAGED CARE INCENTIVE PAYMENT. The Manager shall pay the
MCIP, if any, with respect to each MCIP Year to the LLC on or before February 15
of the calendar year following each such MCIP Year, beginning on February 15,
1996. If, pursuant to SECTION 4.a hereof, an adjustment is made in a succeeding
calendar year with respect to any Management Fee paid to the Manager in a prior
MCIP Year, no adjustment shall be made in the MCIP for the MCIP Year in which
the Management Fee which was subsequently adjusted was actually paid and such
adjustments shall be given effect in the MCIP for the MCIP Year in which they
were actually made.
6. TERM AND TERMINATION.
a. TERM. This agreement shall commence as of the date first above
written, and shall continue in force until December 31, 2025, unless sooner
modified or terminated as provided herein. This Agreement shall automatically be
renewed thereafter for additional terms (each an "Additional Term") for ten
years each in the sole discretion of Doctors Health so long as there is no event
of default with respect to Doctors Health performance of its duties hereunder as
set forth in SECTION 6.b of this Agreement.
b. TERMINATION. This Agreement may be terminated by the non-defaulting
party upon the occurrence of any of the following events of default:
i. The commencement of any voluntary or involuntary case under
the Federal bankruptcy laws or any state insolvency or similar laws seeking the
liquidation or reorganization either party hereto, or the appointment of a
receiver, liquidator, assignee, custodian, trustee or similar official for
either party or the property of either party or the making by either party of an
assignment for the benefit of its creditors (except that in the case of any
involuntary action against either party, such party shall have sixty (60) days
to have such case dismissed), or the failure by either party generally to pay
its debts as they mature.
ii. Either party hereto is indicted upon a charge of
committing any felony or committing a misdemeanor which involves allegations of
fraud, embezzlement, conversion or other similar act or admits engaging in, or
is found in a duly convened arbitral proceeding or a court of competent
jurisdiction to have engaged in, illegal or other wrongful conduct substantially
detrimental to the business or reputation of the other party.
iii. The continued refusal by, or manifest inability of,
either party to perform any of the material duties, or to discharge any of the
material
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obligations, of such party pursuant to this Agreement in a professional and
reasonably competent manner (consistent with applicable professional or business
standards) for a period of at least ninety (90) days after receipt of written
notice from the other party to such party providing reasonable detail as to the
specific material duties or obligations that are not being, or have not been,
performed or discharged by such party in a professional and reasonably competent
manner and providing a reasonable opportunity to such party to address such
failures or omissions and in good faith to attempt to cure or otherwise begin to
effect a remedy of such failures or omissions within such ninety (90) day
period; PROVIDED, HOWEVER, that the LLC may not terminate this Agreement so long
as Doctors Health is in good faith attempting to address any such failure or
omission and it appears reasonably possible that such failure or omission may
(or will) be cured before irreparable material harm or other significant injury
occurs to the LLC and, provided further, that the LLC may not terminate this
Agreement if any lender to, or holder of a senior security of, Doctors Health
arranges, or is arranging for, an assignment or transfer of such of Doctors
Health's duties hereunder as to which Doctors Health is in actual or potential
default to another management entity with experience in managing health care
providers that is reasonably acceptable to the LLC.
c. EFFECT OF TERMINATION.
i. Upon the occurrence of an event of default by the LLC,
Doctors Health shall have the right without further notice to reenter and take
possession of the Demised Premises, or any part thereof, and to repossess the
same as Doctors Health's former estate, and expel the LLC and those claiming
through or under the LLC, and remove the effects of either or both without being
deemed guilty of any manner of trespass and without prejudice to any remedies
for arrears of fees due or preceding breaches of this Agreement.
ii. Upon the occurrence of an event of default by Doctors
Health, the LLC shall have the right to continue in full possession and use of
all of the assets, facilities and goods provided to it by Doctors Health,
including without limitation the Office Space and the Equipment, and to purchase
from Doctors Health for their appraised fair market value all of the assets of
Doctors Health constituting the Demised Premises and any other of Doctors
Health's assets which the LLC, in its sole discretion, deems necessary or
desirable to permit the LLC to continue its Practice of Medicine without
interruption, it being the intent of the parties to permit the LLC in such event
to continue its Practice of Medicine with as little disruption as possible. The
LLC shall be entitled to set off against the purchase price it pays for Doctors
Health's assets the amount of any damages incurred by the LLC as a result of
Doctors Health's breach of this Agreement.
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7. MODIFICATIONS; QUALITY COMMITTEE; ARBITRATION.
a. MODIFICATION FOR PROSPECTIVE LEGAL EVENTS. If, in the good faith
opinion of either party, as supported by the written opinion of counsel to such
party, any Federal or state laws or regulations now existing or hereafter
promulgated or enacted, including specifically without limitation Medicare, are
interpreted by judicial decision, a regulatory agency or legal counsel in any
manner as to indicate that the structure of this Agreement, or any portion
thereof, may be in violation of such laws or regulations, such party may require
the parties hereto to use their respective best efforts to amend this Agreement,
or such portions hereof, to the extent necessary to avoid further violation. To
the maximum extent possible, any such amendment shall preserve the underlying
economic and financial risks, rewards and other arrangements set forth herein. A
party requesting such an amendment shall give written notice thereof to the
other party which shall set out in sufficient detail the basis for the amendment
request and specifically identify the specific provisions of this Agreement for
which renegotiation is sought. Within thirty (30) days of its receipt of the
requesting party's notice, the other party shall give notice to the requesting
party of any additional provisions of this Agreement as to which the other party
requests renegotiation and the reasons therefor. No provisions of this Agreement
other than those specifically designated by the parties for renegotiation shall
be affected by the renegotiations. Should the parties be unable to agree upon
mutually acceptable revisions to this Agreement within ninety (90) days after
receipt by the other party of the initial request for renegotiation, then the
matters that remain unresolved through renegotiation pursuant to this SECTION
7.a shall be submitted to binding arbitration pursuant to the provisions of
SECTION 7.c hereof. Each of the foregoing time periods shall be shortened if and
to the extent necessary to avoid a violation of applicable law in a timely
manner.
b. QUALITY COMMITTEE. Doctors Health and the LLC hereby create the
Quality Committee referred to in this SECTION 7.b for the purpose of
(i) developing cooperative developmental, management and administrative policies
to guide each of the LLC and Doctors Health in fulfilling its obligations
hereunder, (ii) providing to Doctors Health and the LLC a forum in which policy
and implementation matters affecting the LLC and its physicians may be discussed
on a regular basis, and (iii) establishing an expedited process through which
any disagreement or dispute between the parties to this Agreement relating to or
concerning (A) the quality, adequacy or appropriateness of the assets,
facilities or services provided by Doctors Health to the LLC, (B) the quality
and timeliness of the services provided by the LLC and its physicians to
patients pursuant to this Agreement, (C) the appropriateness of any expense
which Doctors Health treats as a Business Cost of the LLC, may be submitted for
review and resolution prior to any informal or formal adjudication. The Quality
Committee shall consist of six members, three appointed by the LLC and three
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appointed by Doctors Health. Of the three members appointed by Doctors Health,
one shall be the Chief Executive Officer of DHS and one shall be the Executive
Vice President and Director of Medical Services of DHS. Of the three members
appointed by the LLC, one shall be the President of the LLC or his designee.
Either party may change the designation of any of its Quality Committee members
who is not serving EX-OFFICIO by written notice delivered to the other party
pursuant to the provisions of SECTION 10.p of this Agreement.
Doctors Health and the LLC agree to cause the Quality
Committee to meet regularly, but not less often than monthly. Where possible,
such meetings shall be scheduled to coincide with the dates of the regularly
scheduled meetings of DHS' Board of Directors. The Quality Committee shall adopt
such rules and regulations regarding the conduct of its business as it deems
appropriate.
If the LLC believes that any asset, facility or service
provided by Doctors Health to the LLC pursuant to this Agreement, including any
item of Equipment, any aspect of the Office Space, any goods, materials or
supplies or any administrative or other service, including any aspect of any
budget, business plan, policy or procedure, or any of the professional or
non-professional personnel provided to the LLC, is inadequate, inappropriate or
otherwise insufficient, then the LLC shall give written notice thereof to
Doctors Health, setting out in sufficient detail the basis for the LLC's
position. If Doctors Health believes that the quality or timeliness of the care
provided to any patient does not meet the standards established herein and in
each physician's Professional Services Employment Agreement, or that the LLC is
not cooperating in such reasonable efforts of Doctors Health to create a fully
integrated efficient health care delivery system as herein contemplated, then
Doctors Health shall give written notice thereof to the LLC which shall set
forth in sufficient detail the basis for Doctors Health's position. The Quality
Committee shall, within ten (10) days of the date of any such notice, convene a
special meeting and shall, in good faith endeavor to resolve the issues raised
in such notice by agreeing upon a unanimous recommendation with respect to such
issues, which shall be reported back to Doctors Health and the LLC. If within
thirty (30) days of the date of such notice there has been no joint
recommendation, or both parties have not accepted in writing a joint
recommendation of the Quality Committee as a basis for resolving all such
issues, the unresolved issues may be referred by either party to arbitration
pursuant to the provisions of SECTION 7.c hereof. Any joint recommendation of
the Quality Committee members which is accepted by both the LLC and Doctors
Health shall be promptly implemented.
c. ARBITRATION. Any dispute between the parties of this Agreement
arising under or with respect to this Agreement, or any matters referred to
arbitration pursuant to the terms of SECTIONS 7.a OR 7.b hereof, shall be
submitted to binding arbitration according to the procedures set out on
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SCHEDULE 13.1 of the Practice Participation Agreement of even date herewith,
among the LLC, Doctors Health and other Parties, the provisions of the said
SCHEDULE 13.1 being hereby incorporated into and as a part of this Agreement by
express reference. Each Party agrees to abide by the time periods and other
rules said forth in the said SCHEDULE 13.1. The resolution of any disputes
through such procedures, including without limitation through arbitral award,
shall be binding upon the Parties for all purposes and may be enforced in any
court of competent jurisdiction.
8. CONFIDENTIALITY AND EXCLUSIVITY.
a. DOCTORS HEALTH'S OBLIGATIONS.
i. Doctors Health shall, and shall use its best efforts to
cause its employees and Affiliates to, maintain all patient records and
financial information concerning the LLC in confidence, and shall not disclose
such information to any third party without the LLC's prior written consent or
as it may be required by law.
ii. Doctors Health may contract with other providers of
medical services to provide, and may provide, to such other providers of medical
services the kinds of assets, facilities and services Doctors Health provides to
the LLC hereunder, provided, however, that Doctors Health shall not, without the
prior written consent of the Management Committee, contract for the provision of
such services or provide such services to any provider of medical services that
is a competitor of or with the LLC in the provision of such medical services in
the Service Area (as defined in SECTION 9.2(d) of the Practice Participation
Agreement) and, provided further, that Doctors Health shall at all times
preserve the confidentiality of the LLC's financial, professional and other
information.
b. THE LLC'S OBLIGATIONS.
i. The LLC shall, and shall use its best efforts to cause its
employees and Affiliates to, maintain all management memoranda, handbooks,
manuals, trade secrets, know-how, techniques and procedures used by Doctors
Health in the provision of assets, facilities and services to the LLC hereunder
in confidence, and shall not disclose such information to any third party
without Doctors Health's prior written consent or as it may be required by law.
ii. The LLC agrees that Doctors Health shall be its sole and
exclusive contractor, provider, agent and attorney-in-fact for the provision of
the assets, facilities and services contemplated in this Agreement to the LLC
and that during the term of this Agreement the LLC will not, directly or
indirectly, seek or enter into any agreement with another Person for the
provision of, or receive from another Person, assets, facilities or services
that are the same as or
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substantially similar to any of those provided by Doctors Health to the LLC
hereunder. In addition, the LLC will keep in full force and effect the
non-competition (and other) provisions of each Professional Services Employment
Agreement, will not, without the prior written consent of Doctors Health, enter
into employment agreements or other contracts with primary care physicians that
do not contain substantially similar provisions, and will take any and all steps
requested or required by Doctors Health to enforce any and all such provisions
as drafted. To this end, the LLC hereby appoints Doctors Health as its
attorney-in-fact for purposes of enforcing, on behalf of the LLC, all such
provisions as drafted.
c. EFFECT OF TERMINATION. Upon expiration or termination of this
Agreement for any reason whatsoever, each party shall immediately turn over all
confidential information of the other party in its possession and control to the
other party, and shall refrain from thereafter using, appropriating or
reproducing such information in any form whatsoever.
d. ENFORCEMENT. Each party agrees that the other party shall be
entitled to seek equitable relief to enjoin the actual or threatened breach of
the confidentiality and exclusivity obligations of this ARTICLE 8 including,
without limitation, temporary or preliminary injunctive relief either from or
pursuant to the arbitration provisions of SECTION 7.c hereof or pre-arbitral
injunctive relief from a court of competent jurisdiction prior to the selection
of an arbitral panel.
9. SOLICITATION OF PERSONNEL. The LLC agrees that during the term of this
Agreement, and for a period of three (3) years following its expiration or
termination, the LLC shall neither interfere with, solicit the services or
employment of, nor hire any of Doctors Health's employees, either on behalf of
the LLC or in connection with any partnership, corporation, joint venture or
other Person, without the prior written consent of Doctors Health.
10. MISCELLANEOUS.
a. AUTHORIZING ACTIONS. Each party agrees promptly to do all things and
take all actions necessary to authorize and facilitate the performance of this
Agreement and the other Practice Closing Documents, and all obligations
hereunder and thereunder, including, but not limited to, the execution of any
necessary documents, and the filing of any forms, deeds or memoranda of leases
with applicable governmental agencies or offices.
b. NO PERFORMANCE GUARANTEES. The LLC acknowledges that Doctors Health
has made no warranties or representations other than those contained herein and
that no financial projection shall be construed as a guarantee of the
profitability or success of the LLC's operations.
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c. RECORDS.
i. The LLC shall keep all records relating to this Agreement
and its Medical Practice open and available for inspection by Doctors Health or
other authorized Person in connection with any audit related to patient
services, and shall maintain all books, records, documents and other evidence
necessary to certify the nature and extent of the services provided under this
Agreement and pursuant to its Medical Practice in accordance with accepted
business practice, appropriate accounting procedures and applicable Federal,
State or local law and regulations.
ii. The LLC agrees to maintain books, records, documents, and
other evidence as necessary to certify the nature and extent of the services
provided under this Agreement and as part of the LLC's Medical Practice in
accordance with accepted business and professional practices, appropriate
accounting procedures and practices, and Federal, State and local laws and
regulations. The LLC agrees to maintain the data described above during the term
of this Agreement and for a period of four (4) years after its expiration or
termination. Doctors Health or any other duly authorized Person shall have
reasonable access during normal business hours to such books, records,
documents, and other evidence for the purpose of inspection, audit, and copying.
If the LLC carries out any of the duties required under this Agreement through a
subcontract with a value or cost of Ten Thousand Dollars ($10,000) or more, over
a twelve (12) month period, the LLC shall incorporate in any such subcontract
the provisions regarding access to books and records as set forth herein.
iii. Each party hereto agrees to cooperate with the other
party in the event it is the subject of a tax audit or inquiry and to make
available to such other party or other authorized Person in connection with any
such inquiry or audit all of the business, financial and other records
reasonably relating thereto on reasonable terms during normal business hours for
the purpose of inspection, audit and, subject to payment of reasonable fees,
copying.
d. GOVERNING LAW. The validity of this Agreement, its interpretation
and construction shall be governed by the laws of the State of Maryland, without
regard to principles of conflict of laws.
e. EQUAL EMPLOYMENT OPPORTUNITY. Each party expressly agrees to abide
by any and all applicable Federal and/or state equal employment opportunity
statutes, rules and regulations including, without limitation, Title VII of the
Civil Rights Act of 1964, the Equal Employment Opportunity Act of 1972, the Age
Discrimination in Employment Act of 1967, the Equal Pay Act of 1963, the
National Labor Relations Act, the Fair Labor Standards Act, the Rehabilitation
Act of 1973, the Occupational Safety and Health Act of 1970, and
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the Americans with Disabilities Act of 1990, as all may be from time to time
modified or amended.
f. FORCE MAJEURE. Neither party shall be liable nor deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service resulting, directly or indirectly, from Acts of God,
civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by either party's service providers, employees or agents, or
any similar or dissimilar cause beyond the reasonable control of either party.
g. WAIVER. A waiver by either party of a breach or failure to perform
any provision of this Agreement shall not constitute a waiver of any subsequent
breach of the same or a different provision hereof.
h. SEVERABILITY. If any provision of this Agreement is found to be void
or unenforceable, then such provision shall be treated as severable, leaving
valid and enforceable the remainder of this Agreement.
i. BINDING EFFECT AND ASSIGNMENT. This Agreement may not be assigned by
the LLC without the prior written consent of Doctors Health. BMG Limited
Partnership, as the initial Manager hereunder, may, for purposes of planning and
achieving internal management and staffing efficiencies, assign all of its
rights, title and interests in and to, and rights and obligations under, this
Agreement to any Subsidiary or Affiliate of BMG Limited Partnership, (as those
terms are defined in SECTION 9.2(e) AND (f) of the Practice Participation
Agreement), including, without limitation, DHS in its discretion and without the
prior written consent of the LLC and, upon such assignment by BMG Limited
Partnership, its assignee Subsidiary or Affiliate shall be and become Doctors
Health hereunder entitled to all of the rights and subject to all of the duties
and obligations of Doctors Health hereunder, without any other or further act by
any Person. Upon assignment by BMG Limited Partnership to a Subsidiary or
Affiliate pursuant to the preceding sentence, this Agreement shall not be
further assignable by any Manager without the prior written consent of the LLC.
j. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which together shall constitute one Agreement.
k. TAX LIABILITIES. The LLC shall have the sole responsibility for
paying any and all applicable Federal, state and local income taxes, gross
receipt taxes, FICA taxes, and all other withholding taxes, unemployment and
disability benefits, and workers' compensation obligations, and any and all
license and permit fees of whatever nature which may be applicable to it and for
filing all information and other tax returns and other returns or reports as may
be required of it. Doctors Health may act as payment agent for some or all of
these
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taxes, without assuming responsibility for such payment. The LLC shall indemnify
and hold Doctors Health harmless against any and all claims against the LLC, any
physician employed by the LLC or Doctors Health, and related attorneys' fees,
for the failure to pay or file any of the foregoing payments, withholding,
contributions, taxes, fees, and documents, reports and returns, including but
not limited to, Federal, state, and local taxes, FICA taxes, gross receipt
taxes, unemployment and disability benefits, and workers' compensation
obligations, and any and all license and permit fees.
l. INDEPENDENT RELATIONSHIP. The LLC and Doctors Health intend to act
and perform as independent contractors. Only the LLC shall practice medicine and
shall do so utilizing licensed physicians with no employment relationship to the
Manager. Notwithstanding the authority granted to Doctors Health herein, Doctors
Health and the LLC agree that the LLC shall retain the authority to direct the
medical, professional, and ethical aspects of its medical practice. Each party
shall be solely responsible for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party. As
more specifically set forth herein, Doctors Health shall provide the LLC with
offices and facilities, equipment, supplies, support personnel, and management
and financial advisory services. As more specifically set forth in, and subject
to the provisions of, this Agreement and the LLC Operating Agreement, the LLC
shall be responsible for the recruitment and hiring of physicians and all issues
related to medical practice patterns and documentation thereof. Doctors Health
shall neither exercise control over nor interfere with the physician-patient
relationship, which shall be maintained strictly between the physicians of the
LLC and their patients. Matters involving the internal agreements and finances
of the LLC, including the distribution of professional fee income or
distributions of Managed Care Incentive Payments, if any, among the individual
Members and other physicians of the LLC, tax planning, and pension and
investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of the LLC and/or the individual
physicians. The parties agree that the benefits to the LLC hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by Doctors Health or any of its Affiliates to any of the LLC's
patients in any facility or laboratory controlled, managed or operated by
Doctors Health.
m. EXCHANGE OF INFORMATION. Each party shall cooperate in sharing with
and providing to the other party all information reasonably required or
desirable pursuant to the terms of this Agreement.
n. FURTHER COOPERATION. The LLC shall cooperate and execute such
agreements and cause such of its physician employees as may be necessary to
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become participating providers in such third-party reimbursement programs as
Doctors Health may from time to time direct. As used in this Agreement, the term
"third-party reimbursement program" shall include, but not be limited to, health
maintenance organizations, preferred provider organizations, private health
insurance companies, Blue Cross/Blue Shield, the Federal and State Medicare
and/or Medicaid programs, and any other managed care plan. The LLC shall also
cooperate with Doctors Health in promotional programs developed or selected by
Doctors Health.
o. ENTIRE AGREEMENT. This Agreement and the other Practice Purchase
Closing Documents constitute the complete understanding of the parties and
supersede any and all other agreements, written or oral, between the parties
with respect to the subject matter hereof and thereon. No other agreement,
statement or promise not contained herein or therein shall be valid or binding.
p. NOTICES. All notices required hereunder shall be in writing,
delivered personally, by overnight delivery service or by registered or
certified mail, postage prepaid and return receipt requested, and shall be
deemed made when delivered and shall be properly addressed to the parties as
follows or as otherwise designated from time to time:
To Doctors Health:
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
with a required copy to:
Corporate Counsel
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
To the LLC:
Chairman
Carroll Medical Group, LLC
721 Hanover Pike
Hampstead, Maryland 21074
q. AMENDMENT. This Agreement may be modified or amended at any time by
a written amendment, signed by both parties hereto.
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r. APPOINTMENTS. By its execution of this Agreement, the LLC hereby
constitutes and appoints Doctors Health, acting in its corporate capacity or
through any of its duly authorized officers or employees, the LLC's true and
lawful attorney-in-fact and also constitutes and appoints Doctors Health as the
LLC's agent, and hereby empowers and authorizes Doctors Health, as its attorney
and agent, for the LLC and in its name, place and stead, and on its behalf, from
time to time, to do and to execute any and all acts, deeds, instruments and
things, which are necessary or desirable to enable Doctors Health to do any
and all things relating to the organization, management, business, or non-
professional activities of the LLC, as fully and completely as the LLC might
or could do if it, itself, undertook to do or execute any or all of such acts,
deeds, instruments or things. The appointment of Doctors Health as the LLC's
agent and attorney-in-fact hereunder is and shall be irrevocable during the term
of this Agreement and is expressly agreed and acknowledged by both parties to be
coupled with an interest.
IN WITNESS WHEREOF, the parties hereto have caused their
authorized representatives to execute this Amended and Restated Physician
Services Organization Agreement as an instrument under seal effective as of the
day and date first above written.
WITNESS/ATTEST: CARROLL MEDICAL GROUP, LLC
__________________________ By:______________________(SEAL)
D. Alexander Rocha, M.D.,
Chairman
WITNESS/ATTEST: DOCTORS HEALTH SYSTEM, INC.
__________________________ By:______________________(SEAL)
Stewart B. Gold, President
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EXHIBIT 2b
FORM OF SUBLEASE
THIS SUBLEASE ("THIS SUBLEASE"), ____day of___________, 199_, by and
between DOCTORS HEALTH SYSTEM, Inc., a Maryland Corporation, ("TENANT") CARROLL
MEDICAL GROUP, LLC, a Maryland limited liability company ("SUBTENANT").
EXPLANATORY STATEMENT
A. By Lease Agreement dated_______________, 19___, a copy of which is
attached hereto as Exhibit A (the "LEASE"), [Add appropriate recitals regarding
leases from Physicians and/or PCs, to the LP, to DHS] ___________, Maryland
known as ___________________ (the "PREMISES").
B. Subtenant desires to sublease the Premises from Tenant and Tenant
desires to sublease the Premises to Subtenant, on the terms and subject to the
conditions which are hereinafter set forth.
[C. Landlord joins in the execution of this Sublease to evidence its
consent to the within Sublease, as required by Section ______ of the Lease.
Where appropriate.]
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual entry into this
Sublease by the parties hereto and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by each party
hereto, Tenant hereby subleases to Subtenant and Subtenant hereby subleases from
Tenant all of the Premises in its "as is" physical condition (Subtenant having
heretofore examined and being familiar in all respects with the Premises), on
the terms and subject to the conditions which are hereinafter set forth:
1. Term; Extension and Expiration of Term. The term of this Sublease
(the "INITIAL TERM") shall be for a period of ______ (___) months [which period
shall be equal to the term of the Lease less one (1) day], beginning on
________, 19___ and expiring on ___________, 19____ (the "EXPIRATION DATE"). If
the term of the Lease is renewed, Subtenant may extend the Initial Term for a
period coterminous with the extended period less one (1) day on the same terms
and conditions as set forth in this Sublease by providing Tenant with at least
_________ (___) days' notice in advance of the Expiration Date. If
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Subtenant provides such notice, this Sublease shall continue and extend until
the expiration date of the renewal term less one (1) day (the "EXTENDED TERM")
(both the Initial Term and the Extended Term shall be collectively referred to
as the "TERM"). Tenant shall use reasonable efforts to notify Subtenant of the
Expiration Date of this Sublease at least thirty (30) days before the Expiration
Date.
2. Rental. Subtenant shall pay to Tenant, without prior notice or
demand and without set-off or reduction, as rental for the Premises (the
"RENT"), the amount of ________ Dollars ($__________) per month during the
Term. Rent shall be prorated on a daily basis for any partial calendar month
during the Term. This Sublease is on an absolute gross lease basis and Landlord
shall maintain the Premises (including repair or replacement of any part
thereof, unless such replacement is due to Subtenant's negligence or willful
misconduct), pay taxes, insurance, and operating expenses, and any and all other
charges due and payable in connection with the occupancy and use of the
Premises, including, but not limited to, those payable to Landlord under the
Lease. Tenant and subtenant agree (A) that no actual payments are required to be
made by Subtenant to Tenant of Rent hereunder, all such Rent due herewith being
part of the Tenants Management Fee charged to Subtenant under that Certain
Professional Services Organization Agreement between Tenant and Subtenant dated
____________, 1996 (the "PSO Agreement"); (B) Tenants' payment of rent to the
landlord from time to time shall be deemed the payment of an "LLC Business Cost"
under the PSO Agreement, and a "Direct Medical Facilities Cost" under the
Professional Services Employment Agreement for each of the Subtenant's physician
employees.
3. Obligations of Tenant and Subtenant Under the Lease.
3.1. In addition to any other obligations that are imposed
upon Subtenant under the provisions of this Sublease, Subtenant shall abide by
any restriction placed on Tenant pursuant to the terms of the Lease.
3.2. In addition to any other rights that are held by
Subtenant under the provisions of this Sublease, Subtenant shall have all of the
same rights hereunder against Tenant as Tenant has against Landlord under the
provisions of the Lease, and, except for the services to be provided by Landlord
to Tenant under the Lease, Tenant shall have all of the same obligations
hereunder to Subtenant as Landlord to Tenant under the Lease, all as if
provisions identical to such provisions were set forth at length in this
Sublease.
3.3. Without limiting the generality of the foregoing
provisions of this Section, 3.3.1. Subtenant covenants and agrees not to commit
any act that shall cause Tenant to be in breach of any term, covenant, or
condition under the
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Lease or interfere with Tenant's performance of its obligations or duties under
the Lease;
3.3.2. in any instance in which Tenant has any right under the
provisions of the Lease to give or withhold its approval of any action,
omission, or other matter, or has any other discretionary right under the
provisions of the Lease, Tenant shall exercise such right in each instance in a
manner that is consistent with Subtenant's rights and Tenant's obligations
hereunder, and
3.3.3. in any such instance in which Tenant may exercise any
such right in two (2) or more ways, neither or none of which would be
inconsistent with Subtenant's rights and Tenant's obligations, Tenant shall
notify Subtenant thereof in writing, and shall exercise any right in accordance
with Subtenant's written instructions to Tenant; provided, however, that Tenant
must receive such instructions within such period, if any, during which Tenant
may be required by the provisions of the Lease to exercise or waive such right.
4. Amendment and Termination of Lease.
4.1. Tenant shall not amend, or consent to any amendment of,
the Lease in any respect that materially and adversely affects Subtenant's right
to use and enjoy the Premises on the terms and subject to the conditions that
are contained in this Sublease. No amendment of the Lease shall operate to alter
or impair Subtenant's rights hereunder.
4.2. If the Lease terminates for any reason this Sublease
shall thereupon automatically terminate simultaneously with such termination of
the Lease, and no party hereto shall have any right hereunder against any other
party hereto on account thereof; provided, however, that nothing in the
foregoing provisions of this sentence shall be deemed in any way to alter or
impair any liability that any party hereto may have to any other accruing before
such termination.
4.3. If the Lease terminates as a result of a default by
Tenant in performing its obligations thereunder, the parties hereto shall have
such rights and liabilities to each other hereunder on account of such default
as exist under applicable law.
4.4. On the expiration or earlier termination of this
Sublease, the rights and obligations of Landlord and Tenant shall be governed by
the Termination of Lease Agreement by and between Landlord and Tenant of even
date herewith.
5. Notices. Any notice, demand, consent, approval, request, or other
communication or document to be provided hereunder to a party hereto shall be
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(a) in writing, and (b) deemed to have been provided (i) twenty-four (24) hours
after being sent as certified or registered mail in the United States mails,
postage prepaid, return receipt requested, to the address of such party set
forth below or to such other address in the United States of America as such
party may designate from time to time by notice to each other party hereto, or
(ii) (if such party's receipt thereof is acknowledged in writing) upon being
given by hand or other actual delivery to such party. The addresses for the
parties are as follows:
If to Tenant: Doctors Health System, Inc.
21 Crossroads Drive, Suite 330
Owings Mills, MD 21117
If to Subtenant: Carroll Medical Group, LLC
721 Hanover Pike
Hampstead, MD 21074
6. General.
6.1. Effectiveness. This Sublease shall become effective on
and only on its execution and delivery by the parties hereto.
6.2. Complete Understanding. This Sublease, together with the
Physician Services Organization Agreement and other documents executed between
Tenant and Subtenant in connection therewith, represent the complete
understanding among the parties hereto as to the subject matter hereof, and
supersedes all prior negotiations, representations, guaranties, warranties,
promises, statements, or agreements, either written or oral, among the parties
hereto as to the same.
6.3. Amendment. This Sublease may be amended by and only by an
instrument executed and delivered by the parties hereto.
6.4. Waiver. No party hereto shall be deemed to have waived
the exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and, without limiting the generality of the foregoing,
no delay or omission by any party hereto in exercising any such right shall be
deemed a waiver of its future exercise). No such waiver made in any instance
involving the exercise of any such right shall be deemed a waiver as to any
other such instance or right.
6.5. Applicable Law. This Sublease shall be given effect and
construed by application of the law of Maryland, and any action or proceeding
arising hereunder shall be brought in the courts of Maryland.
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6.6. Time of Essence. Time shall be of the essence of this
Sublease.
6.7. Headings. The headings of the Sections, subsections,
paragraphs, and subparagraphs hereof are provided herein for and only for
convenience of reference, and shall not be considered in construing their
contents.
6.8. Construction. As used herein, all references made (a) in
the neuter, masculine, or feminine gender shall be deemed to have been made in
all such genders, (b) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well, and (c) to
any Section, subsection, paragraph, or subparagraph shall, unless therein
expressly indicated to the contrary, be deemed to have been made to such
Section, subsection, paragraph, or subparagraph of this Sublease.
6.9. Exhibits. Each writing or plat referred to herein as
being attached hereto as an exhibit or otherwise designated herein as an exhibit
hereto is hereby made a part hereof.
6.10. Assignment. This Sublease shall be binding on and shall
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors, and assigns hereunder.
6.11. Severability. No determination by any court,
governmental body, or otherwise that any provision of this Sublease or any
amendment hereof is invalid or unenforceable in any instance shall affect the
validity or enforceability of (a) any other provision thereof, or (b) such
provision in any circumstance not controlled by such determination. Each such
provision shall be valid and enforceable to the fullest extent allowed by, and
shall be construed wherever possible as being consistent with, applicable law.
6.12. Disclaimer of Partnership Status. Nothing in the
provisions of this Sublease shall be deemed in any way to create among the
parties hereto any relationship of partnership, joint venture, or association,
and the parties hereto hereby disclaim the existence of any such relationship.
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IN WITNESS WHEREOF, the parties hereto have executed and ensealed this
Sublease or caused it to be executed and ensealed on its behalf by their duly
authorized representatives, the day and year first above written.
WITNESS or ATTEST: [TENANT]
___________________________ By:___________________
(SEAL)
___________________________ Name:_____________
___________________________ Title:______________
CARROLL MEDICAL GROUP, LLC:
___________________________ By:___________________
(SEAL)
___________________________ Name:_____________
___________________________ Title:______________
[JOINDER] (where applicable)
In accordance with Section ____ of the Lease, Landlord joins in the execution of
this Sublease for the purpose of evidencing its consent to the sublease herein.
WITNESS OR ATTEST: LANDLORD:
_________________________ By:____________________
(SEAL)
_________________________ Name:______________
_________________________ Title:_______________
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EXHIBIT A
True Copy of Lease
SCHEDULE 2b
BUILDING OFFICE SPACE
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EQUIPMENT ADDENDUM
TO
SCHEDULE 2b
BUILDING:
EQUIPMENT:
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Exhibit 10.35
AMENDED AND RESTATED
PHYSICIAN SERVICES ORGANIZATION AGREEMENT
This Amended and Restated Physician Services Organization
Agreement ("AGREEMENT") is made and entered into as of the 1st day of May, 1996,
by and between CUMBERLAND VALLEY MEDICAL GROUP, LLC, a Maryland limited
liability company (hereinafter referred to as the "LLC") and DOCTORS HEALTH
SYSTEM, INC., a Maryland corporation (hereinafter referred to as "DOCTORS
HEALTH").
WHEREAS, the LLC is owned exclusively by and employs only
physicians licensed to practice medicine in Maryland and is organized and
dedicated solely to engage in the Practice of Medicine. Doctors Health is a
medical services organization organized and dedicated to hold title to various
assets related to the Practice of Medicine and to perform various management,
administrative and support services for physician groups and to develop and
administer an integrated healthcare network with an emphasis on managed care;
and
WHEREAS, Doctors Health wishes to contract with the LLC to
provide to the LLC certain assets, including leased office space, fixtures and
equipment, and certain management and support services, including financial,
managerial, administrative and employment services, in support of and with
respect to the LLC's Practice of Medicine, and the LLC wishes to secure such
assets and such services from Doctors Health and to appoint Doctors Health as
its exclusive agent and attorney-in-fact of and for the LLC, to enable Doctors
Health to act on behalf of the LLC in the provision of certain of such services,
all upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto, intending to be legally bound,
hereby covenant and agree as follows:
1. RECITALS; DEFINITIONS; ETC.
a.RECITALS.The above recitals are incorporated herein.
b.DEFINITION APPENDIX.When used in this Agreement with its initial
letter capitalized, a word shall have the meaning set forth in the Definition
Appendix attached as APPENDIX A hereto.
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c.CERTAIN OTHER DEFINITIONS.When used in this Agreement with its
initial letter capitalized, a word that is not defined in APPENDIX A shall
have the meaning assigned to it elsewhere in this Agreement.
d. APPENDICES, EXHIBITS AND SCHEDULES. Attached hereto and forming an
integral part of this Agreement are various Appendices, Exhibits and Schedules,
all of which are incorporated into this Agreement as fully as if the contents
thereof were set out in full herein at each point of reference thereto.
e.REFERENCES. All references herein to any agreement, instrument or
other document shall include any and all amendments, modifications,
extensions, renewals, substitutions, supplements, Exhibits and Schedules to,
of and for such agreement, contract, instrument or document.
2. OFFICE SPACE AND EQUIPMENT.
a. PROVISION OF OFFICE SPACE AND EQUIPMENT. Doctors Health agrees
during the term of this Agreement to supply and provide, or to engage others to
supply, the commercially reasonable needs of the LLC for office space and
equipment, including all related materials and supplies, to enable the LLC to
engage in the Practice of Medicine, including, without limitation, the provision
of laboratory, testing and other ancillary services. Doctors Health will assist
the LLC in developing its Budgets and Business Plans and in assessing and
determining its needs for office space and equipment. The LLC agrees to keep
Doctors Health and the Quality Committee currently advised concerning its needs
for office space and equipment and shall promptly advise Doctors Health and the
Quality Committee of any changes in such needs.
b. SUBLEASE OF OFFICE SPACE. Doctors Health, as sublessor, and the LLC,
as sublessee, shall, simultaneously with the execution of this Agreement (or as
soon after Closing as is reasonably practicable), enter into a Sublease in form
substantially similar to EXHIBIT 2B attached hereto as a part hereof (each a
"SUBLEASE") for and in respect of each location where the LLC intends to
establish an office from which to engage in the Practice of Medicine as of the
Closing Date. Specifically, Doctors Health and the LLC will enter into a
Sublease for those portions of each of the buildings shown on SCHEDULE 2B
attached hereto as a part hereof (collectively, the "UNITS") consisting of the
medical office space designated in such Schedule (collectively, the "OFFICE
SPACE").
c. PROVISION OF EQUIPMENT. Doctors Health shall initially provide to
the LLC for use in its Practice of Medicine all fixtures, furnishings and
equipment existing in the Office Space at Closing, as shown on SCHEDULE 2C,
attached hereto as a part hereof (collectively, the "EQUIPMENT"). (The Office
Space and
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the Equipment, as repaired, replaced or maintained, shall be sometimes
referred to collectively as the "DEMISED PREMISES".)
d. USE OF DEMISED PREMISES. The LLC acknowledges and agrees that the
Demised Premises meet and fulfill its commercially reasonable needs for office
space and equipment as of the Closing Date. The LLC shall use the Demised
Premises solely for purposes related to the Practice of Medicine. The LLC shall
use and occupy the Office Space in a safe and reasonable manner, in accordance
with applicable governmental laws, regulations and/or orders. The LLC shall use
the Equipment in a safe and reasonable manner and in accordance with reasonable
operating standards.
e. REPAIR, REPLACEMENT AND RETURN OF EQUIPMENT. During the term of this
Agreement, Doctors Health agrees to install, repair, maintain and replace, or
cause to be installed, repaired, maintained and/or replaced, the Equipment,
including securing such improved or enhanced equipment for the LLC as Doctors
Health deems commercially reasonable. The LLC shall promptly notify Doctors
Health if any item of Equipment requires repair or replacement. The LLC shall,
upon the reasonable request of Doctors Health, return all Equipment to Doctors
Health in the same condition as of the Effective Date of this Agreement (or such
later date as of which any item of Equipment was provided to the LLC), ordinary
wear and tear, and obsolescence, excepted.
f. MAINTENANCE AND REPAIR OF OFFICE SPACE. Doctors Health shall
provide, or cause to be provided, maintenance, repair and replacement of the
systems and related equipment to the extent necessary for the proper operation
of the Office Space and for the Practice of Medicine, including, but not limited
to, mechanical, heat, ventilation, air conditioning, lighting, electrical and
plumbing systems. Doctors Health shall also provide, or cause to be provided,
appropriate janitorial services consisting of daily trash removal and light
dusting and vacuuming of the Office Space, provided that the LLC shall leave the
Office Space in a reasonably tidy and clean condition at the end of each day,
and such other more substantial janitorial services the LLC may reasonably
request. Doctors Health shall also provide for the removal of hazardous medical
waste generated by the LLC at the Office Space, provided that the LLC shall
comply with applicable regulatory waste handling, disposal and packaging
standards.
g. REASONABLE ACCESS. The LLC agrees to allow Doctors Health reasonable
access to the Demised Premises, where such entry will not unreasonably interfere
with the LLC's use or occupancy, or with the provision of medical care or the
rights of any patient, in order to provide any of the services or fulfill any of
the duties of Doctors Health set forth in this Agreement, and/or to take steps
Doctors Health deems necessary for the safety, improvement or preservation of
the Demised Premises.
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h. CHANGES, ADDITIONS OR IMPROVEMENTS TO OFFICE SPACE. The LLC may from
time to time request that Doctors Health make reasonable changes, additions or
improvements to the Office Space in order to permit the LLC to engage more
efficiently in the Practice of medicine or to enhance its profitability and,
subject to the limitations upon its leasehold or fee interest, Doctors Health
will endeavor to comply with such of the LLC's requests as it deems commercially
reasonable, provided that such changes shall comply with the applicable local,
state or Federal laws or regulations. The LLC shall not cause or permit
materialmen's, mechanics or other liens to be filed against the Office Space or
the Units or the interest of Doctors Health or any mortgagee in contravention of
any lease or mortgage, by whatever name, on the Office Space or the Units.
i. TAXES. Doctors Health shall pay before delinquency all real estate
and property taxes imposed upon the Office Space or the Units for which it is
responsible. The LLC shall pay before delinquency (and hereby authorizes Doctors
Health to pay on its behalf) all taxes, assessments, and other charges imposed
upon the LLC's operations or business conducted upon the Demised Premises,
and/or upon any property of the LLC located in the Demised Premises.
j. INSURANCE. The LLC shall maintain (and hereby authorizes Doctors
Health to acquire and maintain on its behalf) fire insurance with extended
coverage on the Demised Premises, business interruption insurance, general
liability insurance and professional liability insurance on any incidents
occurring in connection with the LLC's occupancy and use of the Demised
Premises, all of which policies shall be in amounts deemed reasonable by
Doctors Health and shall name Doctors Health as loss payee and as an
additional insured.
k.INDEMNIFICATION. The LLC shall indemnify and hold Doctors Health, its
employees, agents, officers, and partners or stockholders, as the case may be,
harmless from and against any and all demands, claims, judgments, losses and
damages, and any related costs or expenses (including reasonable attorneys'
fees) arising from any injury or damage to person or property caused by
the negligence or the misconduct of the LLC, its agents, servants or
employees, or of any other person entering upon or using the Demised Premises
under the express or implied invitation of the LLC, or resulting from the
violation of laws or regulations, or violation of the terms of this Agreement
by any of the foregoing.
L. ASSIGNMENT/PLEDGE/ENCUMBRANCE. The LLC may not, without Doctors
Health's prior written consent, assign, sell, pledge, mortgage, encumber or in
any manner transfer any interest in nor sublet the Demised Premises or any part
or item thereof, nor permit occupancy or use of the Demised Premises or
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any item thereof by any other Person other than in the ordinary course of the
LLC's business.
m. DAMAGE/DESTRUCTION/CASUALTY OF DEMISED PREMISES. In the event all or
any portion of the Demised Premises is damaged or destroyed by fire or other
casualty, Doctors Health shall use commercially reasonable efforts to restore
the damaged, or replace the destroyed, Demised Premises as soon as reasonably
possible and to make provision for temporary or interim use of such assets or
facilities in lieu of damaged or destroyed Demised Premises as may be reasonably
required to permit the LLC to continue its Practice of Medicine with minimal
disruption. Doctors Health shall have one hundred eighty (180) days to make
replacements, repairs and restorations, using insurance proceeds and such other
monies as Doctors Health may elect to contribute. In the event the Demised
Premises cannot be repaired, restored or replaced within such time period, or in
the event Doctors Health determines in its sole judgment that such repair,
restoration or replacement is not cost effective, Doctors Health shall have the
right to elect to terminate the LLC's lease or use of such portion of the
Demised Premises and to provide, pursuant to the terms hereof, such other
facilities, assets, equipment or office space as is reasonably appropriate to
permit the LLC and its physicians to resume its practice of medicine.
n.SUBORDINATION. The LLC agrees that this Agreement shall be and is
subordinate to the lien of any and all conditional sale agreements,
financing arrangements, mortgages, deeds of trust, and ground leases that may
now or hereafter be placed upon the Demised Premises, and to any and all
advances to be made thereunder, and to the interests thereon and all
renewals, consolidations, modifications, replacements and extensions thereof.
o. SUBLEASE RENEWALS. Doctors Health will provide to the LLC reasonable
notice of the expiration of the Sublease pursuant to which any Office Space is
occupied by the LLC or the termination of the LLC's right to occupy any Office
Space under any other circumstances and will confer with the LLC concerning the
renegotiation, or renewal of such lease or other occupancy right and the removal
of the LLC to other premises.
3. OPERATIONAL DUTIES OF DOCTORS HEALTH.
a. GENERAL MANAGERIAL DUTIES. The LLC hereby appoints Doctors
Health as its sole and exclusive manager, agent and administrator for, and
Doctors Health, for the benefit and on behalf of the LLC, agrees to use its
commercially reasonable efforts to perform, each of the following management
and support functions:
i.provide all general management services of and for the LLC,
including the establishment of operating and administrative policies and
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procedures, general oversight of the operation of the LLC, strategic planning,
including specifically with respect to financing, market development,
advertising and marketing (including one or more public relations programs that
seeks to enhance each physician's medical practice and extend the LLC's ability
to provide services by creating public awareness of the LLC and its Affiliates),
operation and overall management and control, financial reporting, insurance,
tax matters (other than for individual physicians) and personnel management;
ii. negotiate and implement such acquisitions, by purchase,
lease, or other contractual arrangements, of equipment, goods or services
for the LLC as Doctors Health shall deem commercially reasonable;
iii. provide a competent administrative staff for supervision
and performance of the business and administrative functions of the LLC. Each of
the administrative staff shall be employees of and responsible to Doctors
Health, but all salaries, benefits and other expenses related to the employment
of the administrative staff by Doctors Health shall be deemed Business Costs of
the LLC and paid by Doctors Health as such;
iv. assist the LLC in identifying and consummating the
acquisition of the medical practices of additional primary care physicians
and/or physician groups to become Members and employees of the LLC (provided,
however, that Doctors Health shall have no obligation to provide funding for any
such acquisition except to the extent that the Manger, in its sole discretion,
determines to do so), and recruit, employ, train, supervise and provide to the
LLC such services of non-physician professional staff personnel as may
reasonably be required to permit the LLC to engage in the Practice of Medicine,
including specifically but without limitation allied health professionals.
Except in the case of non-physician professionals who may be required to be LLC
employees for billing purposes ("Incident To Employees"), Doctors Health shall
have the authority to hire, discipline and terminate non-physician staff. In
hiring, Doctors Health shall comply in all material respects with requirements
of Federal, state and local law with respect to both the business and
professional obligations of the LLC and employment, generally. Each of the
non-physician professional staff except Incident To Employees shall be employees
of and responsible to Doctors Health, but all salaries, benefits and other
expenses related to the employment of the non-physician professional staff by
Doctors Health shall be deemed Business Costs of the LLC and paid by Doctors
Health as such;
v. furnish and install operating procedures, information and
other systems and controls as Doctors Health deems reasonable for the purpose
of providing effective management techniques and functions for the benefit of
the LLC;
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vi. prepare annual budgets (including operating and capital
budgets), business plans, financial forecasts and operating plans for the LLC;
vii. prepare and distribute internally prepared monthly
statements of revenue and expense, and such other reports as Doctors Health
may deem appropriate, to the Management Committee;
viii. consistent with the reasonable policies established by
the Management Committee and the Quality Committee and the general parameters
established by any LLC budget and business plan then in effect, seek to manage
the non-professional aspects of the LLC's business efficiently and economically;
ix. keep the Demised Premises and all other assets utilized by
the LLC, including improvements, furniture, furnishings, fixtures and other
equipment therein and appurtenant thereto, in reasonably good order and repair,
subject to ordinary wear and tear, and fully insured;
x. arrange for all commercially reasonable replacements,
improvements, supplies and changes in and to the Demised Premises and all
other assets utilized by the LLC, and in the furniture, furnishings, fixtures
and other Equipment;
xi. provide for and keep accessible to the LLC proper
financial and business books of account and other records, all of which
shall be open to inspection and examination and copying at the expense of the
LLC at any reasonable time during normal business hours;
xii. pay in a timely manner through disbursements of funds
from the LLC Accounts all of the direct and indirect costs and expenses
reasonably incurred (whether directly or indirectly) in connection with the
operation and administration of the LLC's Practice of Medicine (including in
such Practice of Medicine all laboratory, testing and other ancillary services),
whether incurred directly by the LLC or by Doctors Health on behalf of the LLC
("Business Costs"), including without limitation, the following charges (or,
where applicable and consistent with Section 4.c hereof, a reasonable allocative
share of such charges): (a) all personnel costs attributable to the LLC and its
Practice of Medicine, including (1) all salaries and benefits (but not bonus
payments, it being the express intent of the parties that the LLC will fund any
bonus payments to employee physicians from Managed Care Incentive Payments) for
physicians employed by the LLC, (2) salaries, wages, bonuses and all benefits of
professional and administrative staff employed by Doctors Health to provide
services directly to the LLC or its employee physicians in their practice of
medicine, but excluding employees whose services are provided directly to
Doctors Health (and only indirectly to the LLC) to enable Doctors Health to
provide managerial and other administrative services generally to the LLC and to
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any Additional Primary Care Entities or other healthcare providers with which
Doctors Health contracts, (3) salaries, professional fees or other compensation,
including bonuses and all benefits, of all physicians and non-physician
professionals and all other persons employed, contracted or otherwise retained
by Doctors Health to provide professional health care services or other services
or goods to the LLC or to the LLC's patients or customers, and (4) all employee
or personnel benefits, employee insurance costs, payroll taxes and all premiums
and charges for workmen's compensation; (b) maintenance, replacement and repair
charges and costs; (c) expenses for supplies for the Office Space and Equipment;
(d) all office and other administrative expenses, including office and medical
supplies, of the LLC; (e) dues and license fees and other professional expenses
for LLC employees and Manager employees providing services to the LLC; (f) water
and sewer, gas, electricity, telephone and other utility charges; (g) premiums
for insurance or bonds reasonably related to the LLC and amounts deducted from
insurance proceeds pursuant to policy terms; (h) all taxes, assessments, fees,
charges and similar expenses relating to the LLC or the operation thereof; (i)
charges for other equipment, goods, services (including professional and
consulting services) and utilities supplied to or for the benefit of the LLC;
(j) all acquisition, lease and financing expenses and payments, including all
leasehold expenses relating to office space, for the benefit of or relating to
the LLC; (k) costs of billing and collection of the LLC's fees and charges,
including contractors; and (l) such other expenses and charges as would normally
be considered as capital, operating or other expenses of the LLC under
recognized and customary accounting principles and practices, including expenses
incurred by Doctors Health on behalf of the LLC.
Doctors Health shall be obligated to, and shall, pay the LLC's Business
Costs only out of and from the cash that Doctors Health ACTUALLY collects in
respect of and from those LLC's receivables with respect to which it is
appointed as the LLC's agent as provided in Section 3.b hereof, and with respect
to those receivables assigned, transferred and conveyed to Doctors Health
pursuant to such provision, and with respect to any other amounts which Doctors
Health collects or receives on behalf of the LLC (collectively, the "Collected
LLC Cash"). If, in Doctors Health's sole discretion, the Collected LLC Cash is
or will be insufficient to permit Doctors Health to pay all of the LLC's
Business Costs in the ordinary course of business as such Business Costs accrue,
Doctors Health shall give preference in payment to, and shall pay first, those
of the LLC's Business Costs NOT attributable to the salaries or benefits of
physicians employed by the LLC who are also Members of the LLC ("Member
Physicians") ("Non-Member Business Costs") and only after all such Non-Member
Business Costs are satisfied (or reasonable provision therefor in the sole
discretion of Doctors Health has been made) shall Doctors Health pay to the LLC
the funds to enable the Member Physicians to be paid any salary or benefits to
which they may be entitled pursuant to their Professional Service Employment
Agreements with the LLC. To the extent Doctors Health does not have sufficient
Collected
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LLC Cash to pay to or for the benefit of the Member Physicians the
aggregate of all salary and benefits due to them (each such deficiency a "Member
Physician Salary Cost Deficiency") with respect to any month, (a) DHS shall pay
to the Member Physicians such amounts of the salary and benefits due to them in
any such month determined by multiplying the amount of Collected LLC Cash, if
any, Doctors Health deems available for such payments by a fraction, the
numerator of which is the amount of salary and benefits due in such month to
such Member Physician and the denominator of which is the aggregate of all
salary and benefits due in such month to all Member Physicians, and (b) Doctors
Health shall not be entitled to, and shall not receive, any Management Fee with
respect to such month. In addition, the amount of any Member Physician Salary
Cost Deficiency for such month shall, when added to all or any portion of any
Member Physician Salary Cost Deficiencies from prior months with respect to
which payment has not been made by Doctors Health, be deemed for purposes of the
calculation of the Management Fee pursuant to SECTION 4 hereof to be a "Business
Cost" with respect to each succeeding month through and including the month in
which such Member Physician Salary Deficiency has been paid in full, and Doctors
Health shall not be entitled to a Management Fee in any month during which there
are any Member Physician Salary Cost Deficiencies outstanding. In each month in
which there are no Member Physician Salary Cost Deficiencies outstanding, and in
each month where there exists sufficient LLC Collected Cash to pay all the LLC's
Business Costs and all outstanding Member Physician Salary Cost Deficiencies,
Doctors Health may pay to itself, from the LLC Accounts and after payment of all
of the LLC's Business Costs and outstanding Member Physician Salary Cost
Deficiencies, the Compensation to which it is otherwise entitled according to
the terms of SECTION 4 hereof.
Notwithstanding the foregoing, the LLC's Business Costs shall
NOT include, and Doctors Health shall have no
obligation either to pay from the LLC Collected Cash or otherwise, any costs,
expenses or other charges incurred by the LLC or presented to Doctors Health as
a result of: (a) any action taken by the LLC with respect to the employment
terms and conditions, including termination of employment, of any of its
employee physicians to which Doctors Health has not consented in writing; (b)
any breach or deficiency in performance by the LLC or any of its employee
physicians of or under any contract to which the LLC is a party or which was
negotiated by Doctors Health on behalf of the LLC; (c) violation of or failure
to comply with any statute, law, regulation, ordinance, interpretation, decision
or other similar requirement of any federal, state, or local political
jurisdiction, or of any agency, commission, board or other similar entity of any
of the foregoing jurisdictions or any professional organization with
jurisdiction or authority over the ability of the LLC or any of its employee
physicians to engage in the practice of medicine; (d) any willful or negligent
act or omission of the LLC or any of its employee physicians that results or may
result in an award of damages against the LLC or such employee physician whether
in tort, contract or otherwise; or (e) any act or omission on the
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part of the LLC or any of its employee physicians constituting fraud, willful
misrepresentation or other similar conduct.
xiii. pay in a timely manner any Managed Care Incentive
Payment to which the LLC is entitled pursuant to the provisions of SECTION 5
hereof with respect to any MCIP Year to permit the LLC to reward and provide
appropriate incentives to its physician employees, all pursuant to the terms of
SECTION 5 hereof; and
xiv. perform all other acts reasonably necessary or desirable
in the operation and maintenance of the LLC in accordance with the terms and
conditions of this Agreement, except that Doctors Health shall not provide
medical or related professional services or engage in the Practice of Medicine.
b. BILLING AND COLLECTION. The LLC hereby assigns, transfers and
conveys to Doctors Health all of its currently existing and future accounts
receivable with respect to all medical services previously provided or in the
future to be provided by the LLC (but not including any Medicare or Medicaid
payments currently owing, or which in the future become owing, to the LLC)
(collectively, the "Non-Medicare Receivables"). Doctors Health shall be entitled
to take any such action with respect to the Non-Medicare Receivables as it deems
appropriate in the exercise of its sole discretion. The LLC shall execute such
other documents and agreements as may be necessary to more fully and effectively
transfer the Non-Medicare Receivables to Doctors Health.
Doctors Health shall serve as billing and collection agent for
the LLC with respect to any Medicare and/or Medicaid payments currently owing,
or which in the future become owing, to the LLC (the "Medicare Receivables") and
shall bill for and endeavor to collect all such Medicare Receivables owed to the
LLC (reserving the right to send, with simultaneous notice to the LLC, selected
past-due accounts to a collection agency) and issue receipts therefor, if
required. The LLC hereby appoints Doctors Health as its agent and
attorney-in-fact for the collection of the Medicare Receivables. The LLC further
appoints Doctors Health as its attorney in fact and agent, to collect such
Medicare Receivables that Doctors Health deems uncollectible. Doctors Health
shall deposit all the Medicare Receivables in the bank accounts described in
SECTION 4.C. hereof.
Doctors Health will use its commercially reasonable efforts to:
i. provide to the LLC, upon reasonable prior notice, such
reasonably detailed reports with respect to the LLC's accounts receivable,
billing and collection status, including charges, receipts, and insurance
classifications of patients as the LLC may from time to time reasonably request;
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ii. should this Agreement be terminated, upon request
therefor, provide the LLC with a complete listing and print out of all active
patient accounts, all Medicare and third party insurer active billing records,
all demographic and charge data, and a final report detailing all data and
information pertinent to the LLC's accounts, in accordance with the normal
reporting capability of the billing system or contractor, if any, utilized for
the LLC's billing by Doctors Health; and
iii. use reasonable care in processing and storing the LLC's
data and records.
c. BANK ACCOUNTS.
i. Doctors Health has opened the bank accounts described in
this SECTION 3.C.I for the purpose of depositing, disbursing and otherwise
administering the Collected LLC Cash. Doctors Health shall establish policies
and procedures reasonably satisfactory for managing and administering such
accounts, including designation and authorization of persons authorized to sign
checks. Doctors Health may, upon reasonable notice to the LLC, open in its name
such other bank accounts, including without limitation interest bearing accounts
and reserve accounts, as it may deem appropriate. Doctors Health may also
transfer Collected LLC Cash between any or all such accounts as it may establish
hereunder. Until disbursed by Doctors Health in payment of the LLC's Business
Costs or Doctors Health's Management Fee from such accounts, the Collected LLC
cash (other than such portion attributable to the Non-Medicare Receivables)
shall be and remain the property of the LLC. Doctors Health shall deposit,
disburse and administer the Collected LLC Cash as follows:
A. Doctors Health, as the agent of the LLC, will from time to time
maintain accounts with one or more financially secure banking
institutions, into which it shall deposit promptly upon receipt all
Collected LLC Cash which it receives as the agent of the LLC and on the
LLC's behalf from Medicare and Medicaid and in respect of goods and
services provided pursuant to the Medicare and Medicaid programs
(collectively, the "LLC Medicare Account").
B. Doctors Health will from time to time maintain accounts with one or
more financially secure banking institutions, into which it shall deposit
promptly upon receipt all of the Collected LLC Cash it receives from any
sources other than those described in SECTION 3.C.I.A, above
(collectively, the "LLC Cash Account") (the LLC Medicare Account, the LLC
Cash Account and any other bank accounts established by Doctors Health
hereunder are hereinafter collectively referred to as the "LLC Accounts").
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ii. Doctors Health shall utilize the cash deposited in the LLC
Accounts for the purposes of paying the LLC Business Costs and Doctors Health's
Management Fee according to the following terms and conditions. Consistent with
the requirements of SECTION 3.A.XII hereof, Doctors Health shall give first
priority in the disbursement of funds from the LLC Accounts to the payment of
the Non-Member Business Costs. Doctors Health shall give second priority in the
disbursement of funds from the LLC Accounts to the payment of the salary and
benefits of the LLC's Member Physicians and to any Member Physician Salary Cost
Deficiencies. After all of the LLC's Business Costs (which, where appropriate,
shall include any Member Physician Salary Cost Deficiencies) have been paid,
Doctors Health may disburse and pay over to itself from the LLC Accounts Doctors
Health's Compensation calculated according to the provisions of SECTION 4.A
hereof. Subject to the requirements of applicable law, Manager may transfer
funds from the LLC Medicare Account to the LLC Cash Account in its discretion.
d. CONSULTANTS. Doctors Health may engage on behalf of the LLC
consultants to provide specialized services outside the normal scope of
management services, including, but not limited to, legal representation,
public accounting and labor relations. All reasonable charges for outside
consultants will be LLC Business Costs.
e. PERSONNEL. Doctors Health shall maintain supervisory control over
its personnel involved in providing to the LLC the assets, facilities and
services contemplated hereunder. Doctors Health will consult with the Quality
Committee if the LLC informs Doctors Health of any dissatisfaction with the
performance or staffing level of Doctors Health personnel without, however,
surrendering any of Doctors Health's discretion over the employment, discipline
and other conditions of employment related to Doctors Health employees.
f. CONSENT. In any instance in which Doctors Health is required under
the terms of this Agreement to obtain the LLC's or the Management Committee's
consent or approval in connection with any proposed action, expenditure or
decision of any type, if Doctors Health's recommendations are not approved and
consent or approval is not received, Doctors Health shall have no responsibility
to the LLC with respect to the subject matter of the proposed action,
expenditure, or decision other than to act as directed by the Management
Committee or to maintain the status quo if no direction is received. Doctors
Health shall not be considered to be in violation of this Agreement or any part
thereof as a result of, or in connection with, any matter in which the LLC or
the Management Committee did not consent to or approve any action proposed by
Doctors Health; unless and to the extent Doctors Health shall fail to act as
directed by the LLC or the Management Committee or to maintain the status quo.
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g. CONTRACTING. The LLC hereby authorizes Doctors Health to negotiate
and enter into, administer and terminate all contractual arrangements between
the LLC and Persons to whom the LLC provides goods or services or from whom the
LLC receives goods or services or with whom the LLC contracts to provide medical
professional or other services to the LLC's patients or customers. The LLC
hereby constitutes Doctors Health as the LLC's agent and attorney-in-fact for
the purpose of executing the authority granted Doctors Health pursuant to this
PARAGRAPH 3.G. The contracting authority afforded Doctors Health hereunder
includes, without limitation, the authority to contract with hospitals, other
physicians (including specialists), hospices, nursing homes, pharmacies,
laboratories, providers of transportation, home health care providers, nurses,
and other non-physician health care providers, medical equipment providers and
other providers of medical professional services and other health care services,
patients, customers, insurance companies, health maintenance organizations and
other managed care entities, employers, administrators and other third-party
payors of patient care services or goods provided by the LLC.
h. PATIENT RECORDS. Doctors Health shall provide to the LLC all patient
records of the LLC's physician employees and shall maintain and retain records
of all professional services provided by the LLC to its patients directly or
through contracts with other providers of medical professional services or other
health care services. Doctors Health shall maintain a complete file within the
LLC's offices of all such medical records and supporting documents.
i. MARKETING. Doctors Health shall provide to the LLC, directly or
through consultants, practice development assistance, including but not
limited to advertising, promotional and media materials and one or more
public relations programs designed to enhance each physician's medical
practice and extend the LLC's ability to provide services through increased
public awareness of the LLC and its Affiliates.
j. UTILIZATION MANAGEMENT; QUALITY ASSESSMENT AND IMPROVEMENT. Doctors
Health shall provide ongoing reviews of the LLC's utilization management, and
shall conduct quality assessment and improvement activities for the LLC,
including monitoring of patient satisfaction.
k. REGULATORY COMPLIANCE. Doctors Health shall advise the LLC regarding
compliance with all applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
Notwithstanding the above, it shall be the LLC's sole responsibility to comply
with all such applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
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l. COMMERCIAL REASONABLENESS. Notwithstanding any other provision of
this Agreement, all obligations of Doctors Health hereunder, including, without
limitation, the obligations of Doctors Health to provide assets, facilities, and
services to the LLC in connection with the LLC's Practice of Medicine, shall be
limited, and shall be interpreted according to, a standard of commercial
reasonableness appropriate for application to primary care Medical Practices in
the Baltimore, Maryland SMA as determined by Doctors Health. Doctors Health, in
the performance of its obligations hereunder, including without limitation the
provision of assets, facilities and services to the LLC, shall in no event be
required to do anything or to make available to the LLC any asset, facility or
service, that Doctors Health in good faith believes is not commercially
reasonable and, subject to review under the provisions of SECTIONS 7.B and 7.C
hereof, Doctors Health shall have no duty to do, or omit to do, anything that
is, in the discretion of Doctors Health, commercially unreasonable.
4. COMPENSATION OF DOCTORS HEALTH; OBLIGATIONS OF THE LLC.
a. COMPENSATION. In consideration of the assets, facilities and
services provided by Doctors Health to the LLC pursuant to this Agreement, the
LLC hereby authorizes Doctors Health to pay to itself on behalf of the LLC from
the LLC Accounts, and Doctors Health shall be entitled to receive from the LLC,
Compensation (the "Compensation") calculated and paid monthly according to the
terms of this SECTION 4.A. The amount of Doctors Health's Compensation shall be
the amount determined by (i) subtracting the total amount of (A) all LLC
Business Costs (which, with respect to any month in which there are Member
Physician Salary Cost Deficiencies outstanding, shall include the aggregate of
all such deficiency amounts) that Doctors Health pays or is obligated to pay
through disbursements from the LLC Accounts or provides for by transfers to
reasonable reserves established by Doctors Health, and (B) all bank fees,
charges and other deductions from the LLC Accounts made by the depository bank,
during a calendar month from (ii) the amount of (A) all Collected LLC Cash
deposited by Doctors Health in the LLC Accounts, and (B) all interest earned on
or other amounts credited to the LLC Accounts by the depository bank, during
such calendar month. Doctors Health's Compensation shall be calculated and paid
on or before the tenth day of the month following the month for which payment is
being made. Doctors Health's Compensation shall be paid only out of Collected
LLC Cash remaining in the LLC Accounts after all LLC Business Costs (which, with
respect to any month in which there are Member Physician Salary Cost
Deficiencies outstanding, shall include the aggregate of all such deficiency
amounts) have been paid or provided for. Adjustments in the amount of the
Compensation for any month, if any, may be made after review of settled bank
statements by the independent certified public accountants retained by Doctors
Health to review the financial records of LLC (which may be Doctors
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Health's accountants). Doctors Health shall permit the LLC's accountants to
review Doctors Health's calculation of its Compensation at least quarterly and
any disagreement or dispute between the LLC and Doctors Health relating to the
amount of the Compensation resulting from such review shall be subject to the
dispute resolution procedures of SECTIONS 7.B and 7.C hereof. Doctors Health
shall, if necessary, increase or decrease, as the case may be, the Compensation
next payable after its receipt of the results of such review (including dispute
resolution, if any) to reflect such results.
b. GENERAL COVENANTS OF THE LLC. The LLC acknowledges that Doctors
Health has undertaken to provide significant assets, facilities and services to
the LLC pursuant to this Agreement in reliance upon the LLC's undertaking
diligently to engage, and to use its best efforts to cause its physician
employees diligently to engage, in the Practice of Medicine. The LLC therefore
covenants and agrees that it will diligently engage in the Practice of Medicine
in the Baltimore SMA and will use its best efforts to cause its physician
employees diligently to engage in, and to devote their full-time professional
efforts to, the Practice of Medicine in the Baltimore SMA. The LLC further
covenants and agrees that it will use its best efforts to meet or exceed the
financial, professional service and other standards established for the LLC in
the business plans and budgets prepared for the LLC by Doctors Health and
approved by the Management Committee and, in furtherance thereof, will engage,
and use its best efforts to cause its physician employees to engage, in the
Practice of Medicine in the most efficient and economical manner possible,
consistent with all applicable professional and ethical standards and a standard
of commercial reasonableness appropriate for application to Medical Practices in
the Baltimore SMA, including, specifically, those matters set forth in SECTION
4.D below.
c. AUTHORIZATION OF PAYMENTS. The LLC acknowledges and agrees that its
intent in entering into this Agreement with Doctors Health is to secure from
Doctors Health all of the assets, facilities and non-physician services required
by the LLC to permit it to engage in the Practice of Medicine and, in
furtherance thereof, to enable and permit Doctors Health to pay, from the
Collected LLC Cash in the LLC Accounts, all of the reasonable costs and expenses
of providing such assets, facilities, and services, however and by whomever
incurred, by making disbursements of such Collected LLC Cash directly to
providers of assets, facilities or services or to the LLC or to Doctors Health
itself in reimbursement of costs or expenses incurred by either of them. The LLC
thus covenants and agrees that Doctors Health shall be entitled, and is hereby
authorized, to disburse from the Collected LLC Cash in the LLC Accounts such
funds as are required to pay all of the reasonable costs and expenses of
providing assets, facilities and services directly to the LLC pursuant to this
Agreement, it being the express understanding of the LLC that Doctors Health may
provide assets, facilities and services directly to Additional Primary Care
Entities and other medical service providers, and that such allocations of
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costs incurred for the direct benefit of both the LLC and one or more Additional
Primary Care Entities or other medical service providers will be necessary.
Doctors Health shall, in its discretion, establish the basis for allocating each
category of direct cost and Doctors Health agrees to exercise such discretion in
a manner that results in the establishment of a basis for allocation of direct
costs that is reasonable and fair to the LLC and to each Additional Primary Care
Entity and any other provider entity to which such costs are allocated.
Disputes, if any, regarding such allocations shall be resolved first through the
Quality Committee and thereafter through the other procedures established in
SECTIONS 7.B and 7.C hereof. Doctors Health may, in its discretion, involve or
join as parties to such procedures any other medical service provider involved
directly or indirectly in a dispute between Doctors Health and the LLC or join
the LLC as a party in any dispute between Doctors Health and any other service
provider that relates to the LLC.
d. COVENANTS OF THE LLC AND EACH PHYSICIAN. Without limiting the
foregoing provisions of SECTION 4.A above, or the duties of any physician set
forth in any employment agreement with the LLC, the LLC agrees to provide, and
to use its best efforts to ensure that each of its physician employees and
contractors provides, at least the following services to DHS and to DHS/LLC
patients and otherwise complies with the following provisions:
(i) MEDICAL SERVICES. With respect to any managed care contract,
provide health care services, as an independent contractor to Doctors Health,
including Medicare services, and charity care in accordance with the policies,
procedures, guidelines, and requirements of Doctors Health and the Quality
Committee as are now in place or may hereafter be established. Emergency and
immediate health care services shall be provided by the LLC without regard to
ability to pay.
(ii) ON-CALL COVERAGE. Provide such night and weekend on-call coverage
as from time to time is determined by Doctors Health and the Quality Committee
to be necessary to make services as readily accessible to the community as
possible.
(iii) SUPERVISION. Monitor and review the clinical performance of all
staff, allied health professionals, and the LLC's physicians, in cooperation
with Doctors Health and the Quality Committee.
(iv) QUALITY ASSURANCE AND PEER REVIEW. Establish, with the cooperation
and involvement of Doctors Health and the Quality Committee, policies,
procedures and committees for quality assurance and peer review of all
physicians providing services to Doctors Health, cooperate fully with the
policies, procedures and activities of such committees, and conduct peer review
disciplinary activities in accordance with Maryland law.
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(v) RECOMMENDATIONS. Conduct periodic reviews of medical and related
staffing to consider the needs of the LLC and/or Doctors Health for additional
primary care physicians, staff, allied health professionals and other
non-primary care physicians, and report the results of such reviews to the
management of Doctors Health and the Quality Committee; and provide such other
review and reports to Doctors Health and the Quality Committee as reasonably
requested by Doctors Health's management.
(vi) SURVEYS. Assist the management of Doctors Health with all
preparation for any inspections and on-site surveys of Doctors Health conducted
by governmental agencies and accrediting organizations.
(vii) MANAGED CARE CONTRACTS. Assist and cooperate with Doctors Health
in negotiating and developing managed care contracts, participate in any
preferred provider network established by or through Doctors Health or its
Affiliates, and provide services to all Managed Care Members covered by a
managed care plan that is entered into by Doctors Health, comply with the terms
of managed care contracts that are negotiated by Doctors Health for the benefit
of the LLC, and comply with all applicable Federal and state laws and managed
care plan terms affecting Doctors Health and the LLC.
(viii) RECORDS. Maintain all necessary and appropriate medical records
reflecting health care service provided to patients seen by LLC physicians in a
manner that is consistent with applicable law and that ensures that Doctors
Health has satisfied all applicable requirements for Payor contracts and
participation in public and private payment programs.
(ix) ADMINISTRATIVE DUTIES AND MARKETING. Cooperate with Doctors
Health's policies, procedures and activities pertinent to marketing, patient
relations, scheduling, billing, collections and other administrative matters,
and cooperate with Doctors Health`s efforts to bill and collect fees for
services rendered to patients.
(x) LITIGATION. Cooperate in all litigation matters affecting the LLC
and/or Doctors Health.
(xi) EDUCATION. Cooperate with Doctors Health and the Quality Committee
in the development and provision of all educational programs offered by Doctors
Health, and devote reasonable time and effort to such programs.
(xii) UTILIZATION REVIEW. Cooperate fully with the utilization review
policies, procedures and activities of Doctors Health, the Quality Committee and
third party payors. The LLC shall assist Doctors Health and the Quality
Committee in conducting utilization reviews all of the LLC's physicians.
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(xiii) LICENSE. Ensure that the LLC's physicians at all times are
licensed to practice medicine in the State of Maryland or other jurisdictions
approved by Doctors Health;
(xiv) POLICIES. Ensure that the LLC's physicians comply with all
applicable laws, rules and regulations of any and all governmental authorities
and the policies and procedures of Doctors Health and third party payors;
(xv) HOSPITAL PRIVILEGES. Ensure that each of the LLC's physicians
possesses and maintains staff privileges on the medical staff of those hospitals
and institutions set forth on Exhibit 4.3(a)(ii) of each such physician's
Professional Services Employment Agreement, and such other hospitals and
institutions as Doctors Health and the LLC shall agree upon.
(xvi) PATIENT CARE. Ensure that the LLC's physicians providing
professional services to the LLC and Doctors Health shall at all times provide
only those medical services that he or she is qualified to deliver, and shall
provide such services in a manner that is consistent with the patient's best
interests.
(xvii) CREDENTIALLING. Cooperate with Doctors Health and the Quality
Committee in establishing, criteria, policies and procedures for purposes of
credentialling all of the LLC's physicians. Such credentialling criteria,
policies and procedures shall be established in accordance with all community
medical practice standards, all applicable laws, and the minimum participation
criteria developed by Doctors Health and the Quality Committee. All of the LLC's
physicians shall be required to comply with such credentialling criteria. All
decisions with respect to credentialling shall be reached as follows:
(A) LLC MEMBER PHYSICIANS. Doctors Health and the LLC shall
consult with each other regarding the selection of, and negotiations with, LLC
Member Physicians, and
(B) OTHER PHYSICIANS. Doctors Health and the LLC shall consult
with each other regarding the selection of and negotiations with non-Member
Physicians, but the LLC may, subject to minimum participation criteria approved
by Doctors Health, make decisions regarding the selection of non-Member
Physicians.
(xviii) PHYSICIAN AGREEMENTS. The LLC shall enter into and maintain
Professional Services Employment Agreements or other employment agreements
reasonably acceptable to Doctors Health with all the physicians employed by the
LLC. The LLC shall consult with Doctors Health and the Quality Committee
regarding the final terms of all such employment agreements
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prior to the execution thereof and any amendments, or terminations, of such
agreements. It is understood and agreed that Doctors Health is not and shall not
become a party to any Professional Services Employment Agreements or other
employment agreements between the LLC and its physicians.
(xix) PHYSICIAN OBLIGATIONS. The LLC shall be responsible for ensuring
that each of its physicians comply with the following requirements, all of which
have been incorporated by reference into the Professional Services Employment
Agreements with each physician. The LLC shall confer with Doctors Health
concerning the performance of its employee physicians of and under their
employment contracts generally and prior to taking any action to terminate any
such employment agreement. The LLC, at Doctors Health's request agrees to take
any reasonable action requested to enforce compliance, including, but not
limited to terminating such Physician's employment with the LLC and/or seeking
sanctions against such Physician:
(A) Each LLC physician shall abide by the terms and conditions
of the applicable provisions of this Agreement.
(B) Each LLC physician shall be bound to all components of all
agreements executed between Doctors Health and third party payors. Furthermore,
each physician shall abide by all operating rules and regulations of any managed
care plan for elements pertaining, but not limited to the maintenance of medical
records, the confidentiality of records, the filing of claims, and the
non-discrimination in treatment of its members.
(C) Each LLC physician shall be free to exercise absolute
discretion in the conduct of any and all activities which may reasonably be
considered as constituting the Practice of Medicine. The professional
responsibility to patients for the delivery of health care services under this
Agreement shall at all times remain with each LLC physician. Doctors Health
shall not interfere with the professional judgment of any of the LLC's
physicians in the provision of professional health care services.
(D) Each LLC physician shall be required to participate in and
cooperate with the utilization review programs of third party payors and of
Doctors Health. Any determination under a utilization review program that
services provided or proposed to be provided are not medically necessary or not
otherwise appropriate shall in no case be construed as a substitute for the
professional judgment of each LLC physician; rather, such findings are intended
to be and shall be limited to the determination of reimbursement for services
only, it being understood that all decisions regarding the nature and extent of
services to be provided, as well as the choice of provider, are and will be made
exclusively by each LLC physician and his or her patient.
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(E) Each LLC physician agrees that his or her practice
patterns will be profiled and will be reviewed by his or her peers, and that
participation in any of Doctors Health`s preferred provider networks will be
dependent upon maintaining satisfactory profiles which are within Doctors
Health's and the Quality Committee's standards of acceptable medical practice.
(F) Each LLC physician shall refer patients to other
physicians only when it is deemed to be medically necessary and in the best
interest of such patients. When referrals are required, each LLC physician shall
use his or her best efforts to refer to other physicians who are participating
in any of the Manager's preferred provider networks then in effect, and to
utilize hospitals and other health care providers that are participating in any
such preferred provider network; provided, however, that no LLC physician shall
be required to refer a particular patient to any specific physician or to admit
such patient requiring hospitalization to any specific hospital if such LLC
Physician, in the good faith exercise of his or her professional judgment,
believes that the medical needs of such patient would be better served
elsewhere.
(G) Each LLC physician shall accept Managed Care Members as
new patients and treat current patients should they become Managed Care Members,
provided that no LLC physician shall be required to accept additional patients
if he is already working at full capacity, as determined by such physician and
the LLC jointly in the reasonable exercise of their discretion.
(H) Each LLC physician shall abide by decisions resulting from
utilization review programs of Doctors Health, the Quality Committee and/or
third party payors, subject to any applicable rights of reconsideration or
review. Each LLC physician shall pursue all appropriate opportunities for
reconsideration and appeal of denials of payment by third party payors.
(I) Each LLC physician shall provide to any designated
utilization review programs(s) any medical or other information necessary to
conduct preadmission certification and continued stay review for all covered
services to be rendered to Managed Care Members.
(J) Each LLC physician shall allow each third party payor or
its designee to review and duplicate any data or other records maintained
regarding services provided under this Agreement as may be necessary to conduct
the utilization review program. Such review and duplication shall be allowed
upon reasonable notice during regular business hours and shall be subject to all
applicable laws, regulations and Doctors Health's policies concerning the
confidentiality of such data or records.
(K) Each LLC physician shall use his or her best efforts to
obtain precertification for those services designated by any utilization review
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program(s) as requiring precertification, and shall use his or her best efforts
to notify the designated utilization review program of emergency or urgent
inpatient admissions within forty-eight (48) hours after admission.
(L) Each LLC physician shall cooperate as reasonably required
to verify that Managed Care Members are eligible for covered services.
(M) Each LLC physician shall prepare and maintain appropriate
records concerning health care services provided under this Agreement. All such
records shall be maintained in accordance with prudent record keeping
procedures, and as otherwise required by law.
(N) Notwithstanding anything provided herein to the contrary,
ownership of and access to all patient records shall be controlled by the
applicable state and federal law. All medical, financial, and personal
information about patients reviewed and collected in connection with this
Agreement shall be held in confidence and shall not be released, disclosed, or
published by the parties, their agents or employees without the written consent
of the patient, unless otherwise permitted by law. Each LLC physician shall be
responsible for supplying any consent necessary to the release of medical
records of patients for purposes of claims management, including specific
consent to the release of any records pertaining to any patient's alcohol or
drug addiction or treatment, or mental health commitment or treatment.
(xx) FULL TIME. Except in cases of emergency, or as otherwise expressly
waived by Doctors Health, the LLC shall ensure that each LLC physician devotes
his or her full-time practice of medicine to the LLC's group practice, and shall
not provide professional services to persons other than Doctors Health and the
patients treated by LLC Physicians. For purposes of this Agreement, "full-time"
shall mean at a minimum the target number of Encounters per year per physician
agreed to by the LLC and each physician but shall also include any time devoted
to the charity care and education activities of Doctors Health and the Quality
Committee, and all time directly or indirectly pertaining to medical treatment
and care of patients, such as working on patient medical charts, making patient
rounds, and assisting with Doctors Health's or the LLC's administrative duties.
All patients treated by an LLC physician shall be deemed to be Doctors Health's
patients and Doctors Health shall be the owner of the medical records for all of
Doctors Health's patients.
(xxi) NON-CONTRACT SPECIALISTS. When referrals to a specialist or other
physician is required, each LLC physician shall use his or her best efforts to
refer to physicians with whom Doctors Health has a provider contract in effect,
and, where applicable, to other physicians who are participating in any of the
Manager's preferred provider networks then in effect. In all other cases, each
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LLC physician may select non-contract specialists to whom patients are referred,
based upon the such physician's best professional judgment of patient needs.
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5. MANAGED CARE INCENTIVE PAYMENT.
a. CREATION OF MANAGED CARE INCENTIVE PAYMENT. The parties acknowledge
that both the Manager's Business Plan and the business plan developed by the
Manager for the LLC contemplate that the LLC and its physician employees will
shift the emphasis of their Practice of Medicine from a traditional
fee-for-service model to a managed care model, and that the Manager must
successfully manage the migration of the LLC's practice to a capitated model if
it is to meet its business goals and objectives. To provide an incentive for the
LLC and the physician employees of the LLC to engage in a managed care
environment in the most efficient and profitable manner possible, beginning with
the calendar year 1995, the Manager shall pay to the LLC, an amount, if any,
calculated as described herein (the "Managed Care Incentive Payment" or "MCIP")
with respect to each calendar year, or portion thereof, that occurs during the
term of this Agreement (each an "MCIP Year"). The Manager and the LLC shall
consult with each other as to the amount of the MCIP for each MCIP Year, subject
to the limitations established in Section 5.b hereof, and the Manager will
negotiate in good faith with the LLC in order to assure that all physician
employees are adequately compensated in light of the market in existence from
time to time.
b. CALCULATION OF MANAGED CARE INCENTIVE PAYMENT. The Manager and the
LLC shall by December 15th of each year agree upon an MCIP payment to be made
out of the Manager's income before provision for income taxes or bonus (as
reflected on the Manager's financial statements) for the following year. There
shall be no MCIP payment in any year in which the Manager does not have income
before provision for income taxes or bonus reflected on its financial
statements. The Manager and the LLC shall agree upon an MCIP payment for each
year that is fair to the Manager and the LLC. If the Manager and the LLC are
unable to agree upon an MCIP, then the MCIP, if any, with respect to such MCIP
Year shall be equal to the lesser of either (i) twenty-five percent (25%) of the
amount of the excess, if any, of (A) those operating revenues of the Manager for
the MCIP Year that are properly attributable to the provision of medical care to
patients of the LLC, over (B) expenses of the Manager and the LLC for the MCIP
Year that are properly attributable or otherwise allocable to the LLC for the
MCIP year, or (ii) twenty-five percent (25%) of the Aggregate Base Salaries of
all primary care physicians employed by the LLC during such MCIP year. The
Manager shall have no obligation to negotiate for an MCIP in excess of either of
such amounts. The Manager shall have the right in its discretion to make
appropriate year to year and period adjustments to accurately reflect income and
expenses, and to allocate expenses among the LLC and any other Additional
Primary Care Entities, independent practice association or other person or
entity for which it serves as manager, and to set off against the amount of any
MCIP payment all or any portion of the amount of its costs and expenses
resulting from a breach by any
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Physician or any Physician's PC of any representation, warranty or covenant made
by such Physician or PC in the Practice Participation Agreement."
c. PAYMENT OF MANAGED CARE INCENTIVE PAYMENT. The Manager shall pay the
MCIP, if any, with respect to each MCIP Year to the LLC on or before February 15
of the calendar year following each such MCIP Year, beginning on February 15,
1996. If, pursuant to SECTION 4.A hereof, an adjustment is made in a succeeding
calendar year with respect to any Management Fee paid to the Manager in a prior
MCIP Year, no adjustment shall be made in the MCIP for the MCIP Year in which
the Management Fee which was subsequently adjusted was actually paid and such
adjustments shall be given effect in the MCIP for the MCIP Year in which they
were actually made.
6. TERM AND TERMINATION.
a. TERM. This agreement shall commence as of the date first above
written, and shall continue in force until December 31, 2025, unless sooner
modified or terminated as provided herein. This Agreement shall automatically be
renewed thereafter for additional terms (each an "Additional Term") for ten
years each in the sole discretion of Doctors Health so long as there is no event
of default with respect to Doctors Health performance of its duties hereunder as
set forth in SECTION 6.B of this Agreement.
b. TERMINATION. This Agreement may be terminated by the non-defaulting
party upon the occurrence of any of the following events of default:
i. The commencement of any voluntary or involuntary case under
the Federal bankruptcy laws or any state insolvency or similar laws seeking the
liquidation or reorganization either party hereto, or the appointment of a
receiver, liquidator, assignee, custodian, trustee or similar official for
either party or the property of either party or the making by either party of an
assignment for the benefit of its creditors (except that in the case of any
involuntary action against either party, such party shall have sixty (60) days
to have such case dismissed), or the failure by either party generally to pay
its debts as they mature.
ii. Either party hereto is indicted upon a charge of
committing any felony or committing a misdemeanor which involves allegations of
fraud, embezzlement, conversion or other similar act or admits engaging in, or
is found in a duly convened arbitral proceeding or a court of competent
jurisdiction to have engaged in, illegal or other wrongful conduct substantially
detrimental to the business or reputation of the other party.
iii. The continued refusal by, or manifest inability of,
either party to perform any of the material duties, or to discharge any of the
material
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obligations, of such party pursuant to this Agreement in a professional
and reasonably competent manner (consistent with applicable professional or
business standards) for a period of at least ninety (90) days after receipt of
written notice from the other party to such party providing reasonable detail as
to the specific material duties or obligations that are not being, or have not
been, performed or discharged by such party in a professional and reasonably
competent manner and providing a reasonable opportunity to such party to address
such failures or omissions and in good faith to attempt to cure or otherwise
begin to effect a remedy of such failures or omissions within such ninety (90)
day period; PROVIDED, HOWEVER, that the LLC may not terminate this Agreement so
long as Doctors Health is in good faith attempting to address any such failure
or omission and it appears reasonably possible that such failure or omission may
(or will) be cured before irreparable material harm or other significant injury
occurs to the LLC and, provided further, that the LLC may not terminate this
Agreement if any lender to, or holder of a senior security of, Doctors Health
arranges, or is arranging for, an assignment or transfer of such of Doctors
Health's duties hereunder as to which Doctors Health is in actual or potential
default to another management entity with experience in managing health care
providers that is reasonably acceptable to the LLC.
c. EFFECT OF TERMINATION.
i. Upon the occurrence of an event of default by the LLC,
Doctors Health shall have the right without further notice to reenter and take
possession of the Demised Premises, or any part thereof, and to repossess the
same as Doctors Health's former estate, and expel the LLC and those claiming
through or under the LLC, and remove the effects of either or both without being
deemed guilty of any manner of trespass and without prejudice to any remedies
for arrears of fees due or preceding breaches of this Agreement.
ii. Upon the occurrence of an event of default by Doctors
Health, the LLC shall have the right to continue in full possession and use of
all of the assets, facilities and goods provided to it by Doctors Health,
including without limitation the Office Space and the Equipment, and to purchase
from Doctors Health for their appraised fair market value all of the assets of
Doctors Health constituting the Demised Premises and any other of Doctors
Health's assets which the LLC, in its sole discretion, deems necessary or
desirable to permit the LLC to continue its Practice of Medicine without
interruption, it being the intent of the parties to permit the LLC in such event
to continue its Practice of Medicine with as little disruption as possible. The
LLC shall be entitled to set off against the purchase price it pays for Doctors
Health's assets the amount of any damages incurred by the LLC as a result of
Doctors Health's breach of this Agreement.
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7. MODIFICATIONS; QUALITY COMMITTEE; ARBITRATION.
a. MODIFICATION FOR PROSPECTIVE LEGAL EVENTS. If, in the good faith
opinion of either party, as supported by the written opinion of counsel to such
party, any Federal or state laws or regulations now existing or hereafter
promulgated or enacted, including specifically without limitation Medicare, are
interpreted by judicial decision, a regulatory agency or legal counsel in any
manner as to indicate that the structure of this Agreement, or any portion
thereof, may be in violation of such laws or regulations, such party may require
the parties hereto to use their respective best efforts to amend this Agreement,
or such portions hereof, to the extent necessary to avoid further violation. To
the maximum extent possible, any such amendment shall preserve the underlying
economic and financial risks, rewards and other arrangements set forth herein. A
party requesting such an amendment shall give written notice thereof to the
other party which shall set out in sufficient detail the basis for the amendment
request and specifically identify the specific provisions of this Agreement for
which renegotiation is sought. Within thirty (30) days of its receipt of the
requesting party's notice, the other party shall give notice to the requesting
party of any additional provisions of this Agreement as to which the other party
requests renegotiation and the reasons therefor. No provisions of this Agreement
other than those specifically designated by the parties for renegotiation shall
be affected by the renegotiations. Should the parties be unable to agree upon
mutually acceptable revisions to this Agreement within ninety (90) days after
receipt by the other party of the initial request for renegotiation, then the
matters that remain unresolved through renegotiation pursuant to this SECTION
7.A shall be submitted to binding arbitration pursuant to the provisions of
SECTION 7.C hereof. Each of the foregoing time periods shall be shortened if and
to the extent necessary to avoid a violation of applicable law in a timely
manner.
B. QUALITY COMMITTEE. Doctors Health and the LLC hereby create the
Quality Committee referred to in this SECTION 7.B for the purpose of (i)
developing cooperative developmental, management and administrative policies to
guide each of the LLC and Doctors Health in fulfilling its obligations
hereunder, (ii) providing to Doctors Health and the LLC a forum in which policy
and implementation matters affecting the LLC and its physicians may be discussed
on a regular basis, and (iii) establishing an expedited process through which
any disagreement or dispute between the parties to this Agreement relating to or
concerning (A) the quality, adequacy or appropriateness of the assets,
facilities or services provided by Doctors Health to the LLC, (B) the quality
and timeliness of the services provided by the LLC and its physicians to
patients pursuant to this Agreement, (C) the appropriateness of any expense
which Doctors Health treats as a Business Cost of the LLC, may be submitted for
review and resolution prior to any informal or formal adjudication. The Quality
Committee shall consist of six members, three appointed by the LLC and three
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appointed by Doctors Health. Of the three members appointed by Doctors Health,
one shall be the Chief Executive Officer of DHS and one shall be the Executive
Vice President and Director of Medical Services if DHS. Of the three members
appointed by the LLC, one shall be the President of the LLC or his designee.
Either party may change the designation of any of its Quality Committee members
who is not serving EX-OFFICIO by written notice delivered to the other party
pursuant to the provisions of SECTION 10.P of this Agreement.
Doctors Health and the LLC agree to cause the Quality
Committee to meet regularly, but not less often than monthly. Where possible,
such meetings shall be scheduled to coincide with the dates of the regularly
scheduled meetings of DHS' Board of Directors. The Quality Committee shall adopt
such rules and regulations regarding the conduct of its business as it deems
appropriate.
If the LLC believes that any asset, facility or service
provided by Doctors Health to the LLC pursuant to this Agreement, including any
item of Equipment, any aspect of the Office Space, any goods, materials or
supplies or any administrative or other service, including any aspect of any
budget, business plan, policy or procedure, or any of the professional or
non-professional personnel provided to the LLC, is inadequate, inappropriate or
otherwise insufficient, then the LLC shall give written notice thereof to
Doctors Health, setting out in sufficient detail the basis for the LLC's
position. If Doctors Health believes that the quality or timeliness of the care
provided to any patient does not meet the standards established herein and in
each physician's Professional Services Employment Agreement, or that the LLC is
not cooperating in such reasonable efforts of Doctors Health to create a fully
integrated efficient health care delivery system as herein contemplated, then
Doctors Health shall give written notice thereof to the LLC which shall set
forth in sufficient detail the basis for Doctors Health's position. The Quality
Committee shall, within ten (10) days of the date of any such notice, convene a
special meeting and shall, in good faith endeavor to resolve the issues raised
in such notice by agreeing upon a unanimous recommendation with respect to such
issues, which shall be reported back to Doctors Health and the LLC. If within
thirty (30) days of the date of such notice there has been no joint
recommendation, or both parties have not accepted in writing a joint
recommendation of the Quality Committee as a basis for resolving all such
issues, the unresolved issues may be referred by either party to arbitration
pursuant to the provisions of SECTION 7.C hereof. Any joint recommendation of
the Quality Committee members which is accepted by both the LLC and Doctors
Health shall be promptly implemented.
c. ARBITRATION. Any dispute between the parties of this Agreement
arising under or with respect to this Agreement, or any matters referred to
arbitration pursuant to the terms of SECTIONS 7.A OR 7.B hereof, shall be
submitted to binding arbitration according to the procedures set out on
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SCHEDULE 13.1 of the Practice Participation Agreement of even date herewith,
among the LLC, Doctors Health and other Parties, the provisions of the said
SCHEDULE 13.1 being hereby incorporated into and as a part of this Agreement by
express reference. Each Party agrees to abide by the time periods and other
rules said forth in the said SCHEDULE 13.1. The resolution of any disputes
through such procedures, including without limitation through arbitral award,
shall be binding upon the Parties for all purposes and may be enforced in any
court of competent jurisdiction.
8. CONFIDENTIALITY AND EXCLUSIVITY.
a. DOCTORS HEALTH'S OBLIGATIONS.
i. Doctors Health shall, and shall use its best efforts to
cause its employees and Affiliates to, maintain all patient records and
financial information concerning the LLC in confidence, and shall not disclose
such information to any third party without the LLC's prior written consent or
as it may be required by law.
ii. Doctors Health may contract with other providers of
medical services to provide, and may provide, to such other providers of medical
services the kinds of assets, facilities and services Doctors Health provides to
the LLC hereunder, provided, however, that Doctors Health shall not, without the
prior written consent of the Management Committee, contract for the provision of
such services or provide such services to any provider of medical services that
is a competitor of or with the LLC in the provision of such medical services in
the Service Area (as defined in SECTION 9.2(D) of the Practice Participation
Agreement) and, provided further, that Doctors Health shall at all times
preserve the confidentiality of the LLC's financial, professional and other
information.
b. THE LLC'S OBLIGATIONS.
i. The LLC shall, and shall use its best efforts to cause its
employees and Affiliates to, maintain all management memoranda, handbooks,
manuals, trade secrets, know-how, techniques and procedures used by Doctors
Health in the provision of assets, facilities and services to the LLC hereunder
in confidence, and shall not disclose such information to any third party
without Doctors Health's prior written consent or as it may be required by law.
ii. The LLC agrees that Doctors Health shall be its sole and
exclusive contractor, provider, agent and attorney-in-fact for the provision of
the assets, facilities and services contemplated in this Agreement to the LLC
and that during the term of this Agreement the LLC will not, directly or
indirectly, seek or enter into any agreement with another Person for the
provision of, or receive from another Person, assets, facilities or services
that are the same as or
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substantially similar to any of those provided by
Doctors Health to the LLC hereunder. In addition, the LLC will keep in full
force and effect the non-competition (and other) provisions of each Professional
Services Employment Agreement, will not, without the prior written consent of
Doctors Health, enter into employment agreements or other contracts with primary
care physicians that do not contain substantially similar provisions, and will
take any and all steps requested or required by Doctors Health to enforce any
and all such provisions as drafted. To this end. the LLC hereby appoints Doctors
Health as its attorney-in-fact for purposes of enforcing, on behalf of the LLC,
all such provisions as drafted.
c. EFFECT OF TERMINATION. Upon expiration or termination of this
Agreement for any reason whatsoever, each party shall immediately turn over all
confidential information of the other party in its possession and control to the
other party, and shall refrain from thereafter using, appropriating or
reproducing such information in any form whatsoever.
d. ENFORCEMENT. Each party agrees that the other party shall be
entitled to seek equitable relief to enjoin the actual or threatened breach of
the confidentiality and exclusivity obligations of this ARTICLE 8 including,
without limitation, temporary or preliminary injunctive relief either from or
pursuant to the arbitration provisions of SECTION 7.C hereof or pre-arbitral
injunctive relief from a court of competent jurisdiction prior to the selection
of an arbitral panel.
9. SOLICITATION OF PERSONNEL. The LLC agrees that during the term of this
Agreement, and for a period of three (3) years following its expiration or
termination, the LLC shall neither interfere with, solicit the services or
employment of, nor hire any of Doctors Health's employees, either on behalf of
the LLC or in connection with any partnership, corporation, joint venture or
other Person, without the prior written consent of Doctors Health.
10. MISCELLANEOUS.
a. AUTHORIZING ACTIONS. Each party agrees promptly to do all things and
take all actions necessary to authorize and facilitate the performance of this
Agreement and the other Practice Closing Documents, and all obligations
hereunder and thereunder, including, but not limited to, the execution of any
necessary documents, and the filing of any forms, deeds or memoranda of leases
with applicable governmental agencies or offices.
b. NO PERFORMANCE GUARANTEES. The LLC acknowledges that Doctors Health
has made no warranties or representations other than those contained herein and
that no financial projection shall be construed as a guarantee of the
profitability or success of the LLC's operations.
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c. RECORDS.
i. The LLC shall keep all records relating to this Agreement
and its Medical Practice open and available for inspection by Doctors Health or
other authorized Person in connection with any audit related to patient
services, and shall maintain all books, records, documents and other evidence
necessary to certify the nature and extent of the services provided under this
Agreement and pursuant to its Medical Practice in accordance with accepted
business practice, appropriate accounting procedures and applicable Federal,
State or local law and regulations.
ii. The LLC agrees to maintain books, records, documents, and
other evidence as necessary to certify the nature and extent of the services
provided under this Agreement and as part of the LLC's Medical Practice in
accordance with accepted business and professional practices, appropriate
accounting procedures and practices, and Federal, State and local laws and
regulations. The LLC agrees to maintain the data described above during the term
of this Agreement and for a period of four (4) years after its expiration or
termination. Doctors Health or any other duly authorized Person shall have
reasonable access during normal business hours to such books, records,
documents, and other evidence for the purpose of inspection, audit, and copying.
If the LLC carries out any of the duties required under this Agreement through a
subcontract with a value or cost of Ten Thousand Dollars ($10,000) or more, over
a twelve (12) month period, the LLC shall incorporate in any such subcontract
the provisions regarding access to books and records as set forth herein.
iii. Each party hereto agrees to cooperate with the other
party in the event it is the subject of a tax audit or inquiry and to make
available to such other party or other authorized Person in connection with any
such inquiry or audit all of the business, financial and other records
reasonably relating thereto on reasonable terms during normal business hours for
the purpose of inspection, audit and, subject to payment of reasonable fees,
copying.
d. GOVERNING LAW.The validity of this Agreement, its interpretation and
construction shall be governed by the laws of the State of Maryland, without
regard to principles of conflict of laws.
e. EQUAL EMPLOYMENT OPPORTUNITY. Each party expressly agrees to abide
by any and all applicable Federal and/or state equal employment opportunity
statutes, rules and regulations including, without limitation, Title VII of the
Civil Rights Act of 1964, the Equal Employment Opportunity Act of 1972, the Age
Discrimination in Employment Act of 1967, the Equal Pay Act of 1963, the
National Labor Relations Act, the Fair Labor Standards Act, the Rehabilitation
Act of 1973, the Occupational Safety and Health Act of 1970, and
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the Americans with Disabilities Act of 1990, as all may be from time to time
modified or amended.
f. FORCE MAJEURE. Neither party shall be liable nor deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service resulting, directly or indirectly, from Acts of God,
civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by either party's service providers, employees or agents, or
any similar or dissimilar cause beyond the reasonable control of either party.
g. WAIVER. A waiver by either party of a breach or failure to perfor
any provision of this Agreement shall not constitute a waiver of any
subsequent breach of the same or a different provision hereof.
h. SEVERABILITY. If any provision of this Agreement is found to be
void or unenforceable, then such provision shall be treated as severable,
leaving valid and enforceable the remainder of this Agreement.
i. BINDING EFFECT AND ASSIGNMENT. This Agreement may not be assigned by
the LLC without the prior written consent of Doctors Health. BMG Limited
Partnership, as the initial Manager hereunder, may, for purposes of planning and
achieving internal management and staffing efficiencies, assign all of its
rights, title and interests in and to, and rights and obligations under, this
Agreement to any Subsidiary or Affiliate of BMG Limited Partnership, (as those
terms are defined in SECTION 9.2(E) AND (F) of the Practice Participation
Agreement), including, without limitation, DHS in its discretion and without the
prior written consent of the LLC and, upon such assignment by BMG Limited
Partnership, its assignee Subsidiary or Affiliate shall be and become Doctors
Health hereunder entitled to all of the rights and subject to all of the duties
and obligations of Doctors Health hereunder, without any other or further act by
any Person. Upon assignment by BMG Limited Partnership to a Subsidiary or
Affiliate pursuant to the preceding sentence, this Agreement shall not be
further assignable by any Manager without the prior written consent of the LLC.
j. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which together shall constitute one Agreement.
k. TAX LIABILITIES. The LLC shall have the sole responsibility for
paying any and all applicable Federal, state and local income taxes, gross
receipt taxes, FICA taxes, and all other withholding taxes, unemployment and
disability benefits, and workers' compensation obligations, and any and all
license and permit fees of whatever nature which may be applicable to it and for
filing all information and other tax returns and other returns or reports as may
be required of it. Doctors Health may act as payment agent for some or all of
these
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taxes, without assuming responsibility for such payment. The LLC shall
indemnify and hold Doctors Health harmless against any and all claims against
the LLC, any physician employed by the LLC or Doctors Health, and related
attorneys' fees, for the failure to pay or file any of the foregoing payments,
withholding, contributions, taxes, fees, and documents, reports and returns,
including but not limited to, Federal, state, and local taxes, FICA taxes, gross
receipt taxes, unemployment and disability benefits, and workers' compensation
obligations, and any and all license and permit fees.
l. INDEPENDENT RELATIONSHIP. The LLC and Doctors Health intend to act
and perform as independent contractors. Only the LLC shall practice medicine and
shall do so utilizing licensed physicians with no employment relationship to the
Manager. Notwithstanding the authority granted to Doctors Health herein, Doctors
Health and the LLC agree that the LLC shall retain the authority to direct the
medical, professional, and ethical aspects of its medical practice. Each party
shall be solely responsible for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party. As
more specifically set forth herein, Doctors Health shall provide the LLC with
offices and facilities, equipment, supplies, support personnel, and management
and financial advisory services. As more specifically set forth in, and subject
to the provisions of, this Agreement and the LLC Operating Agreement, the LLC
shall be responsible for the recruitment and hiring of physicians and all issues
related to medical practice patterns and documentation thereof. Doctors Health
shall neither exercise control over nor interfere with the physician-patient
relationship, which shall be maintained strictly between the physicians of the
LLC and their patients. Matters involving the internal agreements and finances
of the LLC, including the distribution of professional fee income or
distributions of Managed Care Incentive Payments, if any, among the individual
Members and other physicians of the LLC, tax planning, and pension and
investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of the LLC and/or the individual
physicians. The parties agree that the benefits to the LLC hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by Doctors Health or any of its Affiliates to any of the LLC's
patients in any facility or laboratory controlled, managed or operated by
Doctors Health.
m. EXCHANGE OF INFORMATION. Each party shall cooperate in sharing
with and providing to the other party all information reasonably required or
desirable pursuant to the terms of this Agreement.
n. FURTHER COOPERATION. The LLC shall cooperate and execute such
agreements and cause such of its physician employees as may be necessary to
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become participating providers in such third-party reimbursement programs as
Doctors Health may from time to time direct. As used in this Agreement, the term
"third-party reimbursement program" shall include, but not be limited to, health
maintenance organizations, preferred provider organizations, private health
insurance companies, Blue Cross/Blue Shield, the Federal and State Medicare
and/or Medicaid programs, and any other managed care plan. The LLC shall also
cooperate with Doctors Health in promotional programs developed or selected by
Doctors Health.
o. ENTIRE AGREEMENT. This Agreement and the other Practice Purchase
Closing Documents constitute the complete understanding of the parties and
supersede any and all other agreements, written or oral, between the parties
with respect to the subject matter hereof and thereon. No other agreement,
statement or promise not contained herein or therein shall be valid or binding.
p. NOTICES. All notices required hereunder shall be in writing,
delivered personally, by overnight delivery service or by registered or
certified mail, postage prepaid and return receipt requested, and shall be
deemed made when delivered and shall be properly addressed to the parties as
follows or as otherwise designated from time to time:
To Doctors Health:
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
with a required copy to:
Corporate Counsel
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
To the LLC:
Chairman
Cumberland Valley Medical Group, LLC
47 Virginia Avenue
Cumberland, Maryland 21502
q. AMENDMENT. This Agreement may be modified or amended at any time by
a written amendment, signed by both parties hereto.
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r. APPOINTMENTS. By its execution of this Agreement, the LLC hereby
constitutes and appoints Doctors Health, acting in its corporate capacity or
through any of its duly authorized officers or employees, the LLC's true and
lawful attorney-in-fact and also constitutes and appoints Doctors Health as the
LLC's agent, and hereby empowers and authorizes Doctors Health, as its attorney
and agent, for the LLC and in its name, place and stead, and on its behalf, from
time to time, to do and to execute any and all acts, deeds, instruments and
things, which are necessary or desirable to enable Doctors Health to do any and
all things relating to the organization, management, business, or
non-professional activities of the LLC, as fully and completely as the LLC might
or could do if it, itself, undertook to do or execute any or all of such acts,
deeds, instruments or things. The appointment of Doctors Health as the LLC's
agent and attorney-in-fact hereunder is and shall be irrevocable during the term
of this Agreement and is expressly agreed and acknowledged by both parties to be
coupled with an interest.
IN WITNESS WHEREOF, the parties hereto have caused their
authorized representatives to execute this Amended and Restated Physician
Services Organization Agreement as an instrument under seal effective as of the
day and date first above written.
WITNESS/ATTEST: CUMBERLAND VALLEY MEDICAL
GROUP, LLC
__________________________ By:______________________(SEAL)
William Lamm, M.D.,
Chairman
WITNESS/ATTEST: DOCTORS HEALTH SYSTEM, INC.
__________________________ By:______________________(SEAL)
Stewart B. Gold, President
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EXHIBIT 2B
FORM OF SUBLEASE
THIS SUBLEASE ("THIS SUBLEASE"), ____day of___________, 199_, by and
between DOCTORS HEALTH SYSTEM, INC., a Maryland Corporation, ("TENANT")
CUMBERLAND VALLEY MEDICAL GROUP, LLC, a Maryland limited liability company
("SUBTENANT").
EXPLANATORY STATEMENT
A. By Lease Agreement dated_______________, 19___, a copy of which is
attached hereto as Exhibit A (the "LEASE"), [Add appropriate recitals regarding
leases from Physicians and/or PCs, to the LP, to DHS] ___________, Maryland
known as ___________________ (the "PREMISES").
B. Subtenant desires to sublease the Premises from Tenant and Tenant
desires to sublease the Premises to Subtenant, on the terms and subject to the
conditions which are hereinafter set forth.
[C. Landlord joins in the execution of this Sublease to evidence its
consent to the within Sublease, as required by Section ______ of the Lease.
Where appropriate.]
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual entry into this
Sublease by the parties hereto and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by each party
hereto, Tenant hereby subleases to Subtenant and Subtenant hereby subleases from
Tenant all of the Premises in its "as is" physical condition (Subtenant having
heretofore examined and being familiar in all respects with the Premises), on
the terms and subject to the conditions which are hereinafter set forth:
1. Term; Extension and Expiration of Term. The term of this Sublease
(the "INITIAL TERM") shall be for a period of ______ (___) months [WHICH PERIOD
SHALL BE EQUAL TO THE TERM OF THE LEASE LESS ONE (1) DAY], beginning on
________, 19___ and expiring on ___________, 19____ (the "EXPIRATION DATE"). If
the term of the Lease is renewed, Subtenant may extend the Initial Term for a
period coterminous with the extended period less one (1) day on the same terms
and conditions as set forth in this Sublease by providing Tenant with at least
_________ (___) days' notice in advance of the Expiration Date. If
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Subtenant provides such notice, this Sublease shall continue and extend until
the expiration date of the renewal term less one (1) day (the "EXTENDED TERM")
(both the Initial Term and the Extended Term shall be collectively referred to
as the "TERM"). Tenant shall use reasonable efforts to notify Subtenant of the
Expiration Date of this Sublease at least thirty (30) days before the Expiration
Date.
2. Rental. Subtenant shall pay to Tenant, without prior notice or
demand and without set-off or reduction, as rental for the Premises (the
"RENT"), the amount of ________ Dollars ($__________) per month during the
Term.. Rent shall be prorated on a daily basis for any partial calendar month
during the Term. This Sublease is on an absolute gross lease basis and Landlord
shall maintain the Premises (including repair or replacement of any part
thereof, unless such replacement is due to Subtenant's negligence or willful
misconduct), pay taxes, insurance, and operating expenses, and any and all other
charges due and payable in connection with the occupancy and use of the
Premises, including, but not limited to, those payable to Landlord under the
Lease. Tenant and subtenant agree (A) that no actual payments are required to be
made by Subtenant to Tenant of Rent hereunder, all such Rent due herewith being
part of the Tenants Management Fee charged to Subtenant under that Certain
Professional Services Organization Agreement between Tenant and Subtenant dated
___________, 199_ (the "PSO Agreement"); (B) Tenants' payment of rent to the
landlord from time to time shall be deemed the payment of an "LLC Business Cost"
under the PSO Agreement, and a "Direct Medical Facilities Cost" under the
Professional Services Employment Agreement for each of the Subtenant's physician
employees.
3. Obligations of Tenant and Subtenant Under the Lease.
3.1. In addition to any other obligations that are imposed
upon Subtenant under the provisions of this Sublease, Subtenant shall abide by
any restriction placed on Tenant pursuant to the terms of the Lease.
3.2. In addition to any other rights that are held by
Subtenant under the provisions of this Sublease, Subtenant shall have all of the
same rights hereunder against Tenant as Tenant has against Landlord under the
provisions of the Lease, and, except for the services to be provided by Landlord
to Tenant under the Lease, Tenant shall have all of the same obligations
hereunder to Subtenant as Landlord to Tenant under the Lease, all as if
provisions identical to such provisions were set forth at length in this
Sublease.
3.3. Without limiting the generality of the foregoing
provisions of this Section, 3.3.1. Subtenant covenants and agrees not to commit
any act that shall cause Tenant to be in breach of any term, covenant, or
condition under the
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Lease or interfere with Tenant's performance of its obligations or duties under
the Lease;
3.3.2. in any instance in which Tenant has any right under the
provisions of the Lease to give or withhold its approval of any action,
omission, or other matter, or has any other discretionary right under the
provisions of the Lease, Tenant shall exercise such right in each instance in a
manner that is consistent with Subtenant's rights and Tenant's obligations
hereunder, and
3.3.3. in any such instance in which Tenant may exercise any
such right in two (2) or more ways, neither or none of which would be
inconsistent with Subtenant's rights and Tenant's obligations, Tenant shall
notify Subtenant thereof in writing, and shall exercise any right in accordance
with Subtenant's written instructions to Tenant; provided, however, that Tenant
must receive such instructions within such period, if any, during which Tenant
may be required by the provisions of the Lease to exercise or waive such right.
4. Amendment and Termination of Lease.
4.1. Tenant shall not amend, or consent to any amendment of,
the Lease in any respect that materially and adversely affects Subtenant's right
to use and enjoy the Premises on the terms and subject to the conditions that
are contained in this Sublease. No amendment of the Lease shall operate to alter
or impair Subtenant's rights hereunder.
4.2. If the Lease terminates for any reason this Sublease
shall thereupon automatically terminate simultaneously with such termination of
the Lease, and no party hereto shall have any right hereunder against any other
party hereto on account thereof; provided, however, that nothing in the
foregoing provisions of this sentence shall be deemed in any way to alter or
impair any liability that any party hereto may have to any other accruing before
such termination.
4.3. If the Lease terminates as a result of a default by
Tenant in performing its obligations thereunder, the parties hereto shall have
such rights and liabilities to each other hereunder on account of such default
as exist under applicable law.
4.4. On the expiration or earlier termination of this
Sublease, the rights and obligations of Landlord and Tenant shall be governed by
the Termination of Lease Agreement by and between Landlord and Tenant of even
date herewith.
5. Notices. Any notice, demand, consent, approval, request, or other
communication or document to be provided hereunder to a party hereto shall be
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(a) in writing, and (b) deemed to have been provided (i) twenty-four (24) hours
after being sent as certified or registered mail in the United States mails,
postage prepaid, return receipt requested, to the address of such party set
forth below or to such other address in the United States of America as such
party may designate from time to time by notice to each other party hereto, or
(ii) (if such party's receipt thereof is acknowledged in writing) upon being
given by hand or other actual delivery to such party. The addresses for the
parties are as follows:
If to Tenant: Doctors Health System, Inc.
21 Crossroads Drive, Suite 330
Owings Mills, MD 21117
If to Subtenant: Cumberland Valley Medical Group, LLC
47 Virginia Avenue
Cumberland, MD 21502
6. General.
6.1. Effectiveness. This Sublease shall become effective on
and only on its execution and delivery by the parties hereto.
6.2. Complete Understanding. This Sublease, together with the
Physician Services Organization Agreement and other documents executed between
Tenant and Subtenant in connection therewith, represent the complete
understanding among the parties hereto as to the subject matter hereof, and
supersedes all prior negotiations, representations, guaranties, warranties,
promises, statements, or agreements, either written or oral, among the parties
hereto as to the same.
6.3. Amendment. This Sublease may be amended by and only by an
instrument executed and delivered by the parties hereto.
6.4. Waiver. No party hereto shall be deemed to have waived
the exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and, without limiting the generality of the foregoing,
no delay or omission by any party hereto in exercising any such right shall be
deemed a waiver of its future exercise). No such waiver made in any instance
involving the exercise of any such right shall be deemed a waiver as to any
other such instance or right.
6.5. Applicable Law. This Sublease shall be given effect and
construed by application of the law of Maryland, and any action or proceeding
arising hereunder shall be brought in the courts of Maryland.
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6.6. Time of Essence. Time shall be of the essence of this
Sublease.
6.7. Headings. The headings of the Sections, subsections,
paragraphs, and subparagraphs hereof are provided herein for and only for
convenience of reference, and shall not be considered in construing their
contents.
6.8. Construction. As used herein, all references made (a) in
the neuter, masculine, or feminine gender shall be deemed to have been made in
all such genders, (b) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well, and (c) to
any Section, subsection, paragraph, or subparagraph shall, unless therein
expressly indicated to the contrary, be deemed to have been made to such
Section, subsection, paragraph, or subparagraph of this Sublease.
6.9. Exhibits. Each writing or plat referred to herein as
being attached hereto as an exhibit or otherwise designated herein as an
exhibit hereto is hereby made a part hereof.
6.10. Assignment. This Sublease shall be binding on and shall
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors, and assigns hereunder.
6.11. Severability. No determination by any court,
governmental body, or otherwise that any provision of this Sublease or any
amendment hereof is invalid or unenforceable in any instance shall affect the
validity or enforceability of (a) any other provision thereof, or (b) such
provision in any circumstance not controlled by such determination. Each such
provision shall be valid and enforceable to the fullest extent allowed by, and
shall be construed wherever possible as being consistent with, applicable law.
6.12. Disclaimer of Partnership Status. Nothing in the
provisions of this Sublease shall be deemed in any way to create among the
parties hereto any relationship of partnership, joint venture, or association,
and the parties hereto hereby disclaim the existence of any such relationship.
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IN WITNESS WHEREOF, the parties hereto have executed and ensealed this
Sublease or caused it to be executed and ensealed on its behalf by their duly
authorized representatives, the day and year first above written.
WITNESS or ATTEST: [TENANT]
___________________________ By:___________________
(SEAL)
___________________________ Name:_____________
___________________________ Title:______________
CUMBERLAND VALLEY MEDICAL GROUP, LLC:
___________________________ By:___________________
(SEAL)
___________________________ Name:_____________
___________________________ Title:______________
[JOINDER] (WHERE APPLICABLE)
In accordance with Section ____ of the Lease, Landlord joins in the execution of
this Sublease for the purpose of evidencing its consent to the sublease herein.
WITNESS OR ATTEST: LANDLORD:
_________________________ By:____________________
(SEAL)
_________________________ Name:______________
_________________________ Title:_______________]
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EXHIBIT A
True Copy of Lease
SCHEDULE 2B
BUILDING OFFICE SPACE
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EQUIPMENT ADDENDUM
TO
SCHEDULE 2B
BUILDING:
EQUIPMENT:
42
Exhibit 10.36
PHYSICIAN SERVICES ORGANIZATION AGREEMENT
This Physician Services Organization Agreement ("Agreement")
is made and entered into as of the 12th day of September, 1996, by and
between DOCTORS HEALTH MONTGOMERY, LLC, a Maryland limited liability company
(hereinafter referred to as the "LLC") and DOCTORS HEALTH SYSTEM, INC., a
Maryland corporation (hereinafter referred to as the "Manager").
WHEREAS, the LLC is owned exclusively by and employs only
physicians licensed to practice medicine in Maryland and is organized and
dedicated solely to engage in the Practice of Medicine. The Manager is a medical
services organization organized and dedicated to hold title to various assets
related to the Practice of Medicine, to perform various management,
administrative and support services for physician groups and to develop and
administer an integrated healthcare network with an emphasis on managed care;
and
WHEREAS, the Manager wishes to contract with the LLC to
provide to the LLC certain assets, including leased office space, fixtures and
equipment, and certain management and support services, including financial,
managerial, administrative and employment services, in support of and with
respect to the LLC's Practice of Medicine, and the LLC wishes to secure such
assets and such services from the Manager and to appoint the Manager as its
exclusive agent and attorney-in-fact of and for the LLC, to enable the Manager
to act on behalf of the LLC in the provision of certain of such services, all
upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto, intending to be legally bound,
hereby covenant and agree as follows:
1. RECITALS; DEFINITIONS; ETC.
a. Recitals. The above recitals are incorporated herein.
b. Definition Appendix. When used in this Agreement with its
initial letter capitalized, a word shall have the meaning set forth in the
Definition Appendix attached as Appendix A hereto.
c. Certain Other Definitions. When used in this Agreement with
its initial letter capitalized, a word that is not defined in Appendix A shall
have the meaning assigned to it elsewhere in this Agreement.
d. Appendices, Exhibits and Schedules. Attached hereto and forming an
integral part of this Agreement are various Appendices, Exhibits and Schedules,
all of which are incorporated into this Agreement as fully as if the contents
thereof were set out in full herein at each point of reference thereto.
<PAGE>
e. References. All references herein to any agreement,
instrument or other document shall include any and all amendments,
modifications, extensions, renewals, substitutions, supplements, Exhibits and
Schedules to, of and for such agreement, contract, instrument or document.
2. OFFICE SPACE AND EQUIPMENT.
a. Provision of Office Space and Equipment. The Manager agrees during
the term of this Agreement to supply and provide, or to engage others to supply,
the commercially reasonable needs of the LLC for office space and equipment,
including all related materials and supplies, to enable the LLC to engage in the
Practice of Medicine, including, without limitation, the provision of
laboratory, testing and other ancillary services. The Manager will assist the
LLC in developing its Budgets and Business Plans and in assessing and
determining its needs for office space and equipment. The LLC agrees to keep the
Manager and the Quality Committee currently advised concerning its needs for
office space and equipment and shall promptly advise the Manager and the Quality
Committee of any changes in such needs.
b. Sublease of Office Space. The Manager, as sublessor, and the LLC, as
sublessee, shall, simultaneously with the execution of this Agreement (or as
soon after Closing as is reasonably practicable), enter into a Sublease in form
substantially similar to Exhibit 2b attached hereto as a part hereof (each a
"Sublease") for and in respect of each location where the LLC intends to
establish an office from which to engage in the Practice of Medicine as of the
Closing Date. Specifically, the Manager and the LLC will enter into a Sublease
for those portions of each of the buildings shown on Schedule 2b attached hereto
as a part hereof (collectively, the "Units") consisting of the medical office
space designated in such Schedule (collectively, the "Office Space").
c. Provision of Equipment. The Manager shall provide to the
LLC for use in its Practice of Medicine all fixtures, furnishings and equipment
existing in the Office Space (collectively, the "Equipment"). (The Office
Space and the Equipment, as repaired, replaced or maintained, shall be
sometimes referred to collectively as the "Demised Premises".)
d. Use of Demised Premises. The LLC acknowledges and agrees that the
Demised Premises meet and fulfill its commercially reasonable needs for office
space and equipment as of the Closing Date. The LLC shall use the Demised
Premises solely for purposes related to the Practice of Medicine. The LLC shall
use and occupy the Office Space in a safe and reasonable manner, in accordance
with applicable governmental laws, regulations and/or orders. The LLC shall use
the Equipment in a safe and reasonable manner and in accordance with reasonable
operating standards.
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e. Repair, Replacement and Return of Equipment. During the term of this
Agreement, the Manager, at the LLC's request and subject to the LLC's approval,
agrees to install, repair, maintain and replace, or cause to be installed,
repaired, maintained and/or replaced, the Equipment, including securing such
improved or enhanced equipment for the LLC as the Manager deems commercially
reasonable. The LLC shall promptly notify the Manager if any item of Equipment
requires repair or replacement. The LLC shall, upon the reasonable request of
the Manager, return all Equipment to the Manager in the same condition as of the
Effective Date of this Agreement (or such later date as of which any item of
Equipment was provided to the LLC), ordinary wear and tear, and obsolescence,
excepted.
f. Maintenance and Repair of Office Space. The Manager shall provide,
or cause to be provided, maintenance, repair and replacement of the systems and
related equipment to the extent necessary for the proper operation of the Office
Space and for the Practice of Medicine, including, but not limited to,
mechanical, heat, ventilation, air conditioning, lighting, electrical and
plumbing systems. The Manager shall also provide, or cause to be provided,
appropriate janitorial services consisting of daily trash removal and light
dusting and vacuuming of the Office Space, provided that the LLC shall leave the
Office Space in a reasonably tidy and clean condition at the end of each day,
and such other more substantial janitorial services the LLC may reasonably
request. The Manager shall also provide for the removal of hazardous medical
waste generated by the LLC at the Office Space, provided that the LLC shall
comply with applicable regulatory waste handling, disposal and packaging
standards.
g. Reasonable Access. The LLC agrees to allow the Manager reasonable
access to the Demised Premises, where such entry will not unreasonably interfere
with the LLC's use or occupancy, or with the provision of medical care or the
rights of any patient, in order to provide any of the services or fulfill any of
the duties of the Manager set forth in this Agreement, and/or to take steps the
Manager deems necessary for the safety, improvement or preservation of the
Demised Premises.
h. Changes, Additions or Improvements to Office Space. The LLC may from
time to time request that the Manager make reasonable changes, additions or
improvements to the Office Space in order to permit the LLC to engage more
efficiently in the Practice of Medicine or to enhance its profitability and,
subject to the limitations upon its leasehold or fee interest, the Manager will
endeavor to comply with such of the LLC's requests as it deems commercially
reasonable, provided that such changes shall comply with the applicable local,
state or Federal laws or regulations. The LLC shall not cause or permit
materialmen's, mechanics or other liens to be filed against the Office Space or
the Units or the interest of the Manager or any mortgagee in contravention of
any lease or mortgage, by whatever name, on the Office Space or the Units.
i. Taxes. The Manager shall pay before delinquency all real estate and
property taxes imposed upon the Office Space or the Units for which it is
responsible.
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The LLC shall pay before delinquency (and hereby authorizes the Manager to
pay on its behalf) all taxes, assessments, and other charges imposed upon the
LLC's operations or business conducted upon the Demised Premises, and/or
upon any property of the LLC located in the Demised Premises.
j. Insurance. The LLC shall maintain (and hereby authorizes
the Manager to acquire and maintain on its behalf) fire insurance with extended
coverage on the Demised Premises, business interruption insurance, general
liability insurance and professional liability insurance on any incidents
occurring in connection with the LLC' s occupancy and use of the Demised
Premises, all of which policies shall be in amounts deemed reasonable by the
Manager and shall name the Manager as loss payee and as an additional insured.
k. Indemnification. The LLC shall indemnify and hold the
Manager, its employees, agents, officers, and partners or stockholders, as
the case may be, harmless from and against any and all demands, claims,
judgments, losses and damages, and any related costs or expenses (including
reasonable attorneys' fees) arising from any injury or damage to person or
property caused by the negligence or the misconduct of the LLC, its agents,
servants or employees, or of any other person entering upon or using the
Demised Premises under the express or implied invitation of the LLC, or
resulting from the violation of laws or regulations, or violation of the terms
of this Agreement by any of the foregoing to the extent such injury or
damage is not covered by insurance or does not arise as a result of the
Manager's breach of its obligations to the LLC under this Agreement.
l. Assignment/Pledge/Encumbrance. The LLC may not, without the
Manager's prior written consent, assign, sell, pledge, mortgage, encumber or in
any manner transfer any interest in nor sublet the Demised Premises or any part
or item thereof, nor permit occupancy or use of the Demised Premises or any item
thereof by any other Person other than in the ordinary course of the LLC's
business.
m. Damage/Destruction/Casualty of Demised Premises. In the event all or
any portion of the Demised Premises is damaged or destroyed by fire or other
casualty, the Manager shall use commercially reasonable efforts to restore the
damaged, or replace the destroyed, Demised Premises as soon as reasonably
possible and to make provision for temporary or interim use of such assets or
facilities in lieu of damaged or destroyed Demised Premises as may be reasonably
required to permit the LLC to continue its Practice of Medicine with minimal
disruption. The Manager shall have one hundred eighty (180) days to make
replacements, repairs and restorations, using insurance proceeds and such other
monies as the Manager may elect to contribute. In the event the Demised Premises
cannot be repaired, restored or replaced within such time period, or in the
event the Manager determines in its sole judgment that such repair, restoration
or replacement is not cost effective, the Manager shall have the right to elect
to terminate the LLC's lease or use of such portion of the
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Demised Premises and to provide, pursuant to the terms hereof, such other
facilities, assets, equipment or office space as is reasonably appropriate to
permit the LLC and its physicians to resume its Practice of Medicine.
n. Subordination. The LLC agrees that this Agreement shall be
and is subordinate to the lien of any and all conditional sale agreements,
financing arrangements, mortgages, deeds of trust, and ground leases that may
now or hereafter be placed upon the Demised Premises, and to any and all
advances to be made thereunder, and to the interests thereon and all renewals,
consolidations, modifications, replacements and extensions thereof.
o. Sublease Renewals. The Manager will provide to the LLC reasonable
notice of the expiration of the Sublease pursuant to which any Office Space is
occupied by the LLC or the termination of the LLC's right to occupy any Office
Space under any other circumstances and will confer with the LLC concerning the
renegotiation, or renewal of such lease or other occupancy right and the removal
of the LLC to other premises.
3. OPERATIONAL DUTIES OF THE MANAGER.
a. General Managerial Duties. The LLC hereby appoints the Manager,
acting directly or through one or more wholly-owned subsidiaries, as its sole
and exclusive manager, agent and administrator for, and the Manager, for the
benefit and on behalf of the LLC, agrees to use its commercially reasonable
efforts to perform, each of the following management and support functions:
i. provide all general management services of and for the LLC,
including the establishment of operating and administrative policies and
procedures, general oversight of the operation of the LLC, strategic planning,
including specifically with respect to financing, market development,
advertising and marketing (including one or more public relations programs that
seeks to enhance each physician's medical practice and extend the LLC's ability
to provide services by creating public awareness of the LLC and its Affiliates),
operation and overall management and control, financial reporting, insurance,
tax matters (other than for individual physicians) and personnel management, and
the establishment of an integrated healthcare delivery system for the benefit of
the LLC, and the negotiation and administration of managed care agreements in
which the LLC and its Physicians will participate;
ii. negotiate and implement such acquisitions, by purchase,
lease, or other contractual arrangements, of equipment, goods or services for
the LLC as the Manager shall deem commercially reasonable;
iii. provide a competent administrative staff for supervision
and performance of the business and administrative functions of the LLC. Each of
the
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administrative staff shall be employees of and responsible to the Manager, but
all salaries, benefits and other expenses related to the employment of the
administrative staff by the Manager shall be deemed Business Costs of the LLC
and paid by the Manager as such;
iv. assist the LLC in identifying and consummating the
acquisition of the medical practices of additional primary care physicians
and/or physician groups to become Members and employees of the LLC and selling
their medical practices to DHS (provided, however, that the Manager shall have
no obligation to provide funding for any such acquisition except to the extent
that the Manger, in its sole discretion, determines to do so), and recruit,
employ, train, supervise and provide to the LLC such services of non-physician
professional staff personnel as may reasonably be required to permit the LLC to
engage in the Practice of Medicine, including specifically but without
limitation allied health professionals. Except in the case of non-physician
professionals who may be required to be LLC employees for billing purposes
("Incident To Employees"), the Manager shall have the authority to hire,
discipline and terminate non-physician staff after consultation with the
Physicians. In hiring, the Manager shall comply in all material respects with
requirements of Federal, state and local law with respect to both the business
and professional obligations of the LLC and employment, generally. Each of the
non-physician professionals except Incident To Employees shall be employees of
and responsible to the Manager, but all salaries, benefits and other expenses
related to the employment of the non-physician professional staff by the Manager
shall be deemed Business Costs of the LLC and paid by the Manager as such;
v. subject to consultation with and approval by the
LLC, furnish and install operating procedures, information and other systems
and controls as the Manager deems reasonable for the purpose of providing
effective management techniques and functions for the benefit of the LLC;
vi. upon consultation with the LLC and subject to the
LLC's approval, prepare annual budgets (including operating and capital
budgets), business plans, financial forecasts and operating plans for the LLC;
vii. prepare and distribute internally prepared monthly
statements of revenue and expense (including such statements regarding the
LLC and each Medical Faclity), and such other reports as the Manager may deem
appropriate, to the Management Committee;
viii. consistent with the reasonable policies established by
the Management Committee and the Quality Committee and the general parameters
established by any LLC budget and business plan then in effect, seek to manage
the non-professional aspects of the LLC's business efficiently and economically;
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ix. keep the Demised Premises and all other assets utilized by
the LLC, including improvements, furniture, furnishings, fixtures and other
equipment therein and appurtenant thereto, in reasonably good order and repair,
subject to ordinary wear and tear, and fully insured;
x. arrange for all commercially reasonable replacements,
improvements, supplies and changes in and to the Demised Premises and all
other assets utilized by the LLC, and in the furniture, furnishings, fixtures
and other Equipment;
xi. provide for and keep accessible to the LLC proper
financial and business books of account and other records, all of which
shall be open to inspection and examination and copying at the expense of the
LLC at any reasonable time during normal business hours;
xii. subject to the provisions of Section 3.m below, pay in a
timely manner through disbursements of funds from the LLC Accounts all of the
direct and indirect costs and expenses reasonably incurred (whether directly or
indirectly) in connection with the operation and administration of the LLC's
Practice of Medicine (including in such Practice of Medicine all laboratory,
testing and other ancillary services), whether incurred directly by the LLC or
by the Manager on behalf of the LLC ("Business Costs"), including without
limitation, the following charges (or, where applicable and consistent with
Section 3.m hereof, a reasonable allocative share of such charges): (a) all
personnel costs attributable to the LLC and its Practice of Medicine, including
(1) all Base Salaries and Base Bonus (as those terms are defined in the LLC's
Professional Services Employment Agreement (the "Employment Agreement"), a copy
of which is attached hereto as Exhibit 3.a(xii)) and benefits (but not
additional bonus payments, it being the express intent of the parties that the
LLC will fund any additional bonus payments to employee physicians from Managed
Care Incentive Payments and other sources) for physicians employed by the LLC,
(2) salaries, wages, bonuses and all benefits of professional and administrative
staff employed by the Manager to provide services directly to the LLC or its
employee physicians in their Practice of Medicine, but excluding employees whose
services are provided directly to the Manager (and only indirectly to the LLC)
to enable the Manager to provide managerial and other administrative services
generally to the LLC and to any Additional Primary Care Entities or other
healthcare providers with which the Manager contracts, (3) salaries,
professional fees or other compensation, including bonuses and all benefits, of
all physicians and non-physician professionals and all other persons employed,
contracted or otherwise retained by the Manager to provide professional health
care services or other services or goods to the LLC or to the LLC's patients or
customers, and (4) all employee or personnel benefits, employee insurance costs,
payroll taxes and all premiums and charges for workmen's compensation; (b)
maintenance, replacement and repair charges and costs; (c) expenses for supplies
for the Office Space and Equipment; (d) all office and other administrative
expenses,
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including office and medical supplies, of the LLC; (e) dues and license
fees and other professional expenses for LLC employees and Manager
employees providing services to the LLC; (f) water and sewer, gas, electricity,
telephone and other utility charges; (g) premiums for insurance or bonds
reasonably related to the LLC and amounts deducted from insurance proceeds
pursuant to policy terms; (h) all taxes, assessments, fees, charges and similar
expenses relating to the LLC or the operation thereof; (i) charges for other
equipment, goods, services (including professional and consulting services) and
utilities supplied to or for the benefit of the LLC; (j) all acquisition, lease
and financing expenses and payments, including all leasehold expenses relating
to Office Space, for the benefit of or relating to the LLC; and (k) such other
expenses and charges as would normally be considered as capital, operating or
other expenses of the LLC under recognized and customary accounting principles
and practices, including expenses incurred by the Manager on behalf of the LLC.
The order of disbursement is as set forth in Section 3.m below.
Notwithstanding the foregoing, the LLC's Business Costs shall not
include, and the Manager shall have no obligation either to pay from the LLC
Collected Cash or otherwise, any costs, expenses or other charges incurred by
the LLC or presented to the Manager as a result of: (a) any action taken by the
LLC with respect to the employment terms and conditions, including termination
of employment, of any of its employee physicians to which the Manager has not
consented in writing; (b) any breach or deficiency in performance by the LLC or
any of its employee physicians of or under any contract to which the LLC is a
party or which was negotiated by the Manager on behalf of the LLC unless such
breach or deficiency occurs or arises as a result of the Manager's breach of its
obligations to the LLC; (c) violation of or failure to comply with any statute,
law, regulation, ordinance, interpretation, decision or other similar
requirement of any federal, state, or local political jurisdiction, or of any
agency, commission, board or other similar entity of any of the foregoing
jurisdictions or any professional organization with jurisdiction or authority
over the ability of the LLC or any of its employee physicians to engage in the
Practice of Medicine unless such violation or failure to comply arises as a
result of actions or conduct on the part of DHS; (d) any willful or negligent
act or omission of the LLC or any of its employee physicians that results or may
result in an award of damages against the LLC or such employee physician whether
in tort, contract or otherwise; or (e) any act or omission on the part of the
LLC or any of its employee physicians constituting fraud, willful
misrepresentation or other similar conduct.
xiii. pay in a timely manner any Managed Care Incentive
Payment to which the LLC is entitled pursuant to the provisions of Section 5
hereof with respect to any MCIP Year to permit the LLC to reward and provide
appropriate incentives to its physician employees, all pursuant to the terms of
Section 5 hereof; and
xiv. perform all other acts reasonably necessary or desirable
in the operation and maintenance of the LLC in accordance with the terms and
conditions of
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this Agreement, except that the Manager shall not provide medical or related
professional services or engage in the Practice of Medicine.
b. Billing and Collection.
(i) During the term of this Agreement, the LLC hereby assigns,
transfers and conveys to the Manager all of the LLC's currently existing and
future accounts receivable with respect to all medical services previously
provided or in the future to be provided by the LLC (but not including any
Medicare or Medicaid payments currently owing, or which in the future become
owing, to the LLC) (collectively, the "Non-Medicare Receivables"). The Manager
shall bill for and endeavor to collect all such Non-Medicare Receivables
(reserving the right to send, with simultaneous notice to the LLC, selected
past-due accounts to a collection agency) and issue receipts therefor, if
required. Furthermore, subject to the Manager's obligations under Section 3.c
hereof with respect to the establishment of the bank accounts described therein,
the Manager shall be entitled to take any such action consistent with the
provisions of this Agreement with respect to the Non-Medicare Receivables as it
deems appropriate in the exercise of its discretion in order to fulfill its
obligations to the LLC under this Agreement. The LLC shall execute such other
documents and agreements as may be necessary to more fully and effectively
transfer the Non-Medicare Receivables to the Manager. The Manager shall serve as
billing and collection agent for the LLC with respect to any Medicare and/or
Medicaid payments currently owing, or which in the future become owing, to the
LLC (the "Medicare Receivables") and shall bill for and endeavor to collect all
such Medicare Receivables owed to the LLC (reserving the right to send, with
simultaneous notice to the LLC, selected past-due accounts to a collection
agency) and issue receipts therefor, if required. The LLC hereby appoints the
Manager as its agent and attorney-in-fact for the collection of the Medicare
Receivables. The Manager shall deposit all the Medicare Receivables and all of
the other monies collected by it as the LLC's billing agent and attorney-in-fact
in the bank accounts described in Section 3.c hereof.
(ii) As part of its billing responsibility, the Manager
will use its commercially reasonable efforts to:
(A) provide to the LLC, monthly, such reasonably
detailed reports with respect to the LLC's accounts receivable, billing and
collection status, including charges, receipts, and insurance classifications
of patients as the LLC may from time to time reasonably request;
(B) should this Agreement be terminated, upon
request therefor, provide the LLC with a complete listing and print out of
all active patient accounts, all Medicare and third party insurer active
billing records, all demographic and charge data, and a final report
detailing all data and information pertinent to the LLC's accounts, in
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accordance with the normal reporting capability of the billing system or
contractor, if any, utilized for the LLC's billing by the Manager; and
(C) use reasonable care in processing and storing the
LLC's data and records.
(iii) The parties recognize that the Manager cannot bill or
collect for services provided by and through the LLC unless and to the extent
that the LLC Physicians perform in a timely manner certain administrative duties
related to billing, including but not limited to the completion of medical
records and the submission of billing information in the form and format
reasonably requested by the Manager.
(A) The LLC warrants that it will require
that each LLC Physician will be required, as part of his or her Employment
Agreement, to agree to grant to the LLC the right to withhold payment of any
amount due Physician under his or her Employment Agreement during any period
when such Physician has failed to comply with commercially reasonable written
standards communicated to the Physicians ("Standards") for timeliness and
diligence to be adopted by the LLC with respect to each of the following: (i)
Completion of appropriate medical records for patients of the Physician;
(ii) Maintaining the office hours agreed upon by Physician and the LLC; (iii)
Completion of all information reasonably requested by the LLC or its billing
agent in connection with billing and collecting for services provided by or
ordered by the Physician; or (iv) Compliance with the requirements of managed
care programs with respect to utilization review, prior approval or review, or
referral protocols.
(B) The LLC agrees that it shall adopt and set
such Standards in consultation with the Manager. The Manager has proposed
interim Standards set forth in Exhibit 3.b(iii)(B) which shall be applicable
during the Initial Base Salary Period until the Standards described in
Section 3.b(iii)(A) have been established by the LLC. The LLC expressly
grants to the Manager the right to require enforcement by the LLC of each
of the covenants and rights to adjust or withhold payments to LLC Physicians,
including the right to withhold for failure to comply with the Standards
contained in Section 6.4(c) of the Employment Agreement. In the event that
the LLC fails to enforce such Standards at the Manager's request, the
Manager's obligations to advance any Physician Compensation Deficiency (as
defined in Section 3.m(iv)) shall be suspended during the period of any such
non-compliance.
c. Bank Accounts.
i. The Manager has opened the bank accounts described in this
Section 3.c.i for the purpose of depositing, disbursing and otherwise
administering the Collected LLC Cash (as defined in Section 3.m). The Manager
shall establish policies and procedures reasonably satisfactory for managing and
administering such accounts, including designation and authorization of persons
authorized to sign checks. The
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Manager may, upon reasonable notice to the LLC, open in the Manager's name
such other bank accounts, including without limitation interest bearing
accounts and reserve accounts, as it may deem appropriate. The Manager may
also transfer Collected LLC Cash between any or all such accounts as it may
establish hereunder. Until disbursed by the Manager in payment of the LLC's
Business Costs or the Manager's Compensation from such accounts, the
Collected LLC Cash (other than such portion attributable to the Non-Medicare
Receivables) shall be and remain the property of the LLC. The Manager
shall deposit, disburse and administer the Collected LLC Cash as follows:
A. The Manager, as the agent of the LLC, will from time to time
maintain accounts with one or more financially secure banking
institutions, into which it shall deposit promptly upon receipt
all Collected LLC Cash which it receives as the agent of the LLC
and on the LLC's behalf from Medicare and Medicaid and in respect
of goods and services provided pursuant to the Medicare and
Medicaid programs (collectively, the "LLC Medicare Account").
B. The Manager will from time to time maintain accounts with one
or more financially secure banking institutions, into which it
shall deposit promptly upon receipt all of the Collected LLC Cash
it receives from any sources other than those described in Section
3.c.i.A above (collectively, the "LLC Cash Account") (the LLC
Medicare Account, the LLC Cash Account and any other bank accounts
established by the Manager hereunder are hereinafter collectively
referred to as the "LLC Accounts").
ii. The Manager shall utilize the cash deposited in the LLC
Accounts for the purposes of paying the LLC Business Costs and the Manager's
Compensation according to the terms and conditions set forth in Section 3.m.
Subject to the requirements of applicable law, the Manager may transfer funds
from the LLC Medicare Account to the LLC Cash Account in its discretion.
d. Consultants. Subject to the approval of the LLC, the Manager
may engage on behalf of the LLC consultants to provide specialized services
outside the normal scope of management services, including, but not limited
to, legal representation, public accounting and labor relations. All
reasonable charges for outside consultants will be LLC Business Costs.
e. Personnel. The Manager shall maintain supervisory control over its
personnel involved in providing to the LLC the assets, facilities and services
contemplated hereunder. The Manager will consult with the Quality Committee if
the LLC informs the Manager of any dissatisfaction with the performance or
staffing level of the Manager personnel without, however, surrendering any of
the Manager's discretion over the employment, discipline and other conditions of
employment related to the Manager employees.
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f. Consent. In any instance in which the Manager is required under the
terms of this Agreement to obtain the LLC's or the Management Committee's
consent or approval in connection with any proposed action, expenditure or
decision of any type, if the Manager's recommendations are not approved and
consent or approval is not received, the Manager shall have no responsibility to
the LLC with respect to the subject matter of the proposed action, expenditure,
or decision other than to act as directed by the Management Committee or to
maintain the status quo if no direction is received. The Manager shall not be
considered to be in violation of this Agreement or any part thereof as a result
of, or in connection with, any matter in which the LLC or the Management
Committee did not consent to or approve any action proposed by the Manager;
unless and to the extent the Manager shall fail to act as directed by the LLC or
the Management Committee or to maintain the status quo.
g. Contracting. The LLC hereby authorizes the Manager as its sole and
exclusive agent to negotiate and enter into, administer and terminate all
contractual arrangements between the LLC and Persons to whom the LLC provides
goods or services or from whom the LLC receives goods or services or with whom
the LLC contracts to provide medical professional or other services to the LLC's
patients or customers. The LLC hereby constitutes the Manager as the LLC's sole
and exclusive agent and attorney-in-fact for the purpose of executing the
authority granted the Manager pursuant to this Paragraph 3.g. The contracting
authority afforded the Manager hereunder includes, without limitation, the
authority to contract with hospitals, other physicians (including specialists),
hospices, nursing homes, pharmacies, laboratories, providers of transportation,
home health care providers, nurses, and other non-physician health care
providers, medical equipment providers and other providers of medical
professional services and other health care services, patients, customers,
insurance companies, health maintenance organizations and other managed care
entities, employers, administrators and other third-party payors of patient care
services or goods provided by the LLC. The Manager shall secure the LLC's prior
consent to enter into any contract on behalf of the LLC for goods or services
for which the LLC will be responsible, but which will not be directly provided
by the LLC through its employees.
h. Patient Records. The Manager shall provide to the LLC all patient
records of the LLC's physician employees and shall maintain and retain records
of all professional services provided by the LLC to its patients directly or
through contracts with other providers of medical professional services or other
health care services. The Manager shall maintain a complete file within the
LLC's offices of all such medical records and supporting documents.
i. Marketing. The Manager shall provide to the LLC, directly
or through consultants, practice development assistance, including but not
limited to advertising, promotional and media materials and one or more public
relations programs designed
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to enhance each physician's medical practice and extend the LLC's ability to
provide services through increased public awareness of the LLC and its
Affiliates.
j. Utilization Management; Quality Assessment and Improvement.
The Manager shall provide ongoing reviews of the LLC's utilization management,
and shall conduct quality assessment and improvement activities for the LLC,
including monitoring of patient satisfaction.
k. Regulatory Compliance. The Manager shall advise the LLC regarding
compliance with all applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
Notwithstanding the above, it shall be the LLC's sole responsibility to comply
with all such applicable state and Federal laws and regulations, including
Medicare regulations and policies concerning primary care physician services.
l. Commercial Reasonableness. Notwithstanding any other provision of
this Agreement, all obligations of the Manager hereunder, including, without
limitation, the obligations of the Manager to provide assets, facilities, and
services to the LLC in connection with the LLC's Practice of Medicine, shall be
limited, and shall be interpreted according to, a standard of commercial
reasonableness appropriate for application to primary care Medical Practices in
the Montgomery County, Maryland, as determined by the Manager. The Manager, in
the performance of its obligations hereunder, including without limitation the
provision of assets, facilities and services to the LLC, shall in no event be
required to do anything or to make available to the LLC any asset, facility or
service, that the Manager in good faith believes is not commercially reasonable
and, subject to review under the provisions of Sections 7.b and 7.c hereof, the
Manager shall have no duty to do, or omit to do, anything that is, in the
discretion of the Manager, commercially unreasonable.
m. Disbursement of LLC Collected Cash. The Manager shall be obligated
to, and shall, pay the LLC's Business Costs only out of and from the cash that
the Manager actually collects in respect of and from the LLC's Non-Medicare
Receivables, with respect to which the Manager is appointed as the LLC's agent
as provided in Section 3.b hereof, and with respect to the LLC's Non-Medicare
Receivables assigned, transferred and conveyed to the Manager pursuant to such
provision, and with respect to any other amounts which the Manager collects or
receives on behalf of the LLC (collectively, the "Collected LLC Cash"). The
order of priority for the use of the Collected LLC Cash is as set forth in this
Section.
(i) If the Collected LLC Cash is or will be insufficient to
permit the Manager to pay all of the LLC's Business Costs in the ordinary course
of business as such Business Costs accrue, the Manager shall pay or provide for
such LLC Business Costs in the following order of priority: first, the Manager
will pay or provide for the payment of all LLC Business Costs ("Base Business
Costs") other than the Base
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Salaries, Base Bonuses and Additional Bonuses of all physicians employed by
the LLC who are also members of the LLC ("Member Physicians"); Second,
the Manager will pay or provide for the payment of all the Base Salary and
benefits of all Member Physicians ("Base Salaries"); and third, the Manager
will pay or provide for the payment of all the Base Bonuses and Additional
Bonuses ("Bonuses"), as those terms are defined in each Member Physician's
Employment Agreement. The provisions of subsections (ii) and (iii) shall
govern in the event that the Manger determines that there is or will be
insufficient Collected LLC Cash to pay Base Salaries or Bonuses.
(ii) During the term of this Agreement, to the extent there is
insufficient Collected LLC Cash to pay to or for the benefit of the Member
Physicians the aggregate of all Base Salaries (each such deficiency a "Base
Salary Deficiency") with respect to any time period, available funds shall be
applied by the Manager on behalf of the LLC to reduce the Base Salary Deficiency
in the following order, with each funding source being depleted before
proceeding to the next funding source: (1) All available Net Ancillary Service
Collections received by the LLC; (2) The LLC's portion of the aggregate of the
Practice Growth Amounts, as defined in each Employment Agreement; (3) Any or all
of the MCIP payment undistributed to the LLC; (4) Any management fees earned by
the Manager with respect to Ancillary Services under Section 4.b of this
Agreement; and (5) the Manager's portion of the aggregate of the Practice Growth
Amount, discussed in Section 4.c of this Agreement. If a Base Salary Deficiency
exists after the exhaustion of all of the above listed funding sources, the
Manager shall nonetheless fund the amount of the Base Salary Deficiency to the
LLC to enable the LLC to make such payments.
(iii) To the extent there is insufficient Collected LLC Cash
to pay to or for the benefit of the Member Physicians the aggregate of all
Bonuses when due them with respect to any year (each such deficiency a "Bonus
Deficiency"), funding shall be applied to reduce the Bonus Deficiency in the
following order, and only to the extent that Base Business Costs and Base
Salaries have been funded, with each funding source being depleted before
proceeding to the next funding source: (1) All available Net Ancillary Service
Collections received by the LLC; (2) The LLC's portion of the aggregate of the
Practice Growth Amounts, as defined in each Employment Agreement; (3) Any or all
of the MCIP payment undistributed to the LLC; (4) Any management fees earned by
the Manager with respect to Ancillary Services under Section 4.b of this
Agreement; and (5) the Manager `s portion of the aggregate of the Practice
Growth Amount, discussed in Section 4.c of this Agreement. If a Bonus Deficiency
remains after the application of the funding sources as specified above, then
the Manager may, but shall not be required to, elect to advance funding to the
LLC to pay all or a portion of the remainder of the Bonus Deficiency, in which
case the Manager shall have the right to offset the amount of the advance, plus
the carrying cost of the funds, against the amounts then or thereafter owing or
accruing to the LLC. The amount of any Bonus Deficiency shall, for purposes of
the calculation of the Compensation pursuant to Section 4 hereof, be deemed a
"Base Business Cost" until
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any funds advanced to cover any Bonus Deficiency have been paid in full. In the
event the Manger does not elect to advance all or any portion of the Bonus
Deficiency to the LLC, then, unless the Manager consents in writing, the LLC
shall accrue and defer any unpaid Bonus Deficiency otherwise due to Physicians
as contemplated by Section 6.3 of each Employment Agreement.
(iv) "Base Salary Deficiency" and "Bonus Deficiency" shall
be referred to collectively as "Physician Compensation Deficiency."
4. COMPENSATION OF THE MANAGER; OBLIGATIONS OF THE LLC.
a. Compensation. In consideration of the assets, facilities
and services provided by the Manger to the LLC pursuant to this Agreement,
the LLC hereby authorizes the Manager to pay to itself on behalf of the LLC
from the LLC Accounts, and the Manager shall be entitled to receive from
the LLC, Compensation (the "Compensation") calculated and paid according to
the terms of this Section 4.
b. Net Ancillary Services Collections. All amounts collected, billed or
derived from, or otherwise with respect to, the provision of ancillary services
in the LLC, including but not limited to, laboratory services, radiology
services, or any other service classified as a designated health service for the
purpose of the prohibition on physician self-referral contained in the Social
Security Act ("Ancillary Services") shall be considered Ancillary Services
Revenue. The Manager shall calculate all direct expense of providing Ancillary
Services (excluding any physician expense), and subtract the direct expense from
all revenue collected with respect to Ancillary Services to identify "Net
Ancillary Services Cash Collections". The Manager shall retain, and pay to
itself on a monthly basis, an amount equal to forty percent (40%) of the Net
Ancillary Services Cash Collections as part of its Compensation, with the
remaining sixty percent (60%) being the "Net Ancillary Services Collections"
which shall be credited to the account of the LLC and made available to pay LLC
Business Costs. To the extent that the Net Ancillary Services Collections are
not required to pay LLC Business Costs due or accrued with respect to any year,
or used to pay all or a portion of any Physician Compensation Deficiency under
Section 3.m, the Manager shall pay over to the LLC the remainder of the Net
Ancillary Services Collections to the LLC for distribution to the physicians
following the end of any applicable year as part of the Additional Bonus Pool.
The LLC warrants that it shall distribute Net Ancillary Services Collections
among the physician members of the LLC in accordance with a plan of distribution
that has been previously adopted by the LLC and approved by the Manager and
which does not, directly or indirectly, take into account the volume or value of
any referrals for such services by any physician in the LLC.
c. Practice Growth Bonus. "Practice Growth Amount" has the meaning
attributed to it in Section 6.3 of each Employment Agreement. At the end of
every year, the Manager shall calculate the Practice Growth Amount for each
Member
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Physician in the LLC, and shall retain and pay to itself thirty-eight percent
(38%) of each Member Physician's Practice Growth Amount, as part of its
Compensation (the "Practice Growth Bonus Amount").
d. Base Compensation. The amount of the Manager's Base Compensation in
each year shall be the amount determined by (i) subtracting the total amount of
(A) all LLC Business Costs (which, with respect to any month in which there are
Physician Deficiencies outstanding, shall include the aggregate of all such
deficiency amounts) that the Manager pays or is obligated to pay through
disbursements from the LLC Accounts or provides for by transfers to reasonable
reserves established by the Manager, and (B) all bank fees, charges and other
deductions from the LLC Accounts made by the depository bank, during a calendar
month from (ii) the amount of (A) all Collected LLC Cash deposited by the
Manager in the LLC Accounts, and (B) all interest earned on or other amounts
credited to the LLC Accounts by the depository bank, during such calendar month;
and (iii) subtracting from the resulting number any amounts paid to or retained
by the Manager under the provisions of Section 4.b and 4.c above for the year in
question. The Manager's Compensation shall be calculated and paid on or before
the tenth day of the month following the month for which payment is being made.
The Manager's Compensation shall be paid only out of Collected LLC Cash
remaining in the LLC Accounts after all LLC Business Costs (which, with respect
to any month in which there are Base Salary Deficiencies outstanding, shall
include the aggregate of all such deficiency amounts) have been paid or provided
for, including the accruing of any reserves for the Net Ancillary Services
Collections and the Practice Growth Bonus Amounts as the Manager shall consider
appropriate. Adjustments in the amount of the Compensation for any year, if any,
may be made after review of settled bank statements by the independent certified
public accountants retained by the Manager to review the financial records of
LLC (which may be the Manager's accountants). The Manager shall permit the LLC's
accountants to review the Manager's calculation of its Compensation annually and
any disagreement or dispute between the LLC and the Manager relating to the
amount of the Compensation resulting from such review shall be subject to the
dispute resolution procedures of Section 7.b and 7.c hereof. The Manager shall,
if necessary, increase or decrease, as the case may be, the Compensation next
payable after its receipt of the results of such review (including dispute
resolution, if any) to reflect such results.
e. General Covenants of the LLC. The LLC acknowledges that the Manager
has undertaken to provide significant assets, facilities and services to the LLC
pursuant to this Agreement in reliance upon the LLC's undertaking diligently to
engage, and to use its best efforts to cause its physician employees diligently
to engage, in the Practice of Medicine. The LLC therefore covenants and agrees
that it will diligently engage in the Practice of Medicine in Montgomery County
and will use its best efforts to cause its physician employees diligently to
engage in, and to devote their full-time professional efforts to, the Practice
of Medicine in Montgomery County. The LLC further covenants and agrees that it
will use its best efforts to meet or exceed the
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financial, professional service and other standards established for the LLC
in the business plans and budgets prepared for the LLC by the Manager and
approved by the Management Committee and, in furtherance thereof, will
engage, and use its best efforts to cause its physician employees to engage, in
the Practice of Medicine in the most efficient and economical manner possible,
consistent with all applicable professional and ethical standards and a
standard of commercial reasonableness appropriate for application to Medical
Practices in Montgomery County and any other areas in which the LLC may have
physician practices, including, specifically, those matters set forth in
Section 4.g below.
f. Authorization of Payments. The LLC acknowledges and agrees that its
intent in entering into this Agreement with the Manager is to secure from the
Manager all of the assets, facilities and non-physician services required by the
LLC to permit it to engage in the Practice of Medicine and, in furtherance
thereof, to enable and permit the Manager to pay, from the Collected LLC Cash in
the LLC Accounts, all of the reasonable costs and expenses of providing such
assets, facilities, and services, however and by whomever incurred, by making
disbursements of such Collected LLC Cash directly to providers of assets,
facilities or services or to the LLC or to the Manager itself in reimbursement
of costs or expenses incurred by either of them. The LLC thus covenants and
agrees that the Manager shall be entitled, and is hereby authorized, to disburse
from the Collected LLC Cash in the LLC Accounts such funds as are required to
pay all of the reasonable costs and expenses of providing assets, facilities and
services directly to the LLC pursuant to this Agreement, it being the express
understanding of the LLC that the Manager may provide assets, facilities and
services directly to Additional Primary Care Entities and other medical service
providers, and that such allocations of costs incurred for the direct benefit of
both the LLC and one or more Additional Primary Care Entities or other medical
service providers will be necessary. The Manager shall, in its discretion,
establish the basis for allocating each category of direct cost and the Manager
agrees to exercise such discretion in a manner that results in the establishment
of a basis for allocation of direct costs that is reasonable and fair to the LLC
and to each Additional Primary Care Entity and any other provider entity to
which such costs are allocated. Disputes, if any, regarding such allocations
shall be resolved first through the Quality Committee and thereafter through the
other procedures established in Sections 7.b and 7.c hereof. The Manager may, in
its discretion, involve or join as parties to such procedures any other medical
service provider involved directly or indirectly in a dispute between the
Manager and the LLC or join the LLC as a party in any dispute between the
Manager and any other service provider that relates to the LLC.
g. Covenants of the LLC and each Physician. Without limiting the
foregoing provisions of Section 4.e above, or the duties of any physician set
forth in any Employment Agreement with the LLC, the LLC agrees to provide, and
to use its best efforts to ensure that each of its physician employees and
contractors provides, at
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least the following services to DHS and to DHS/LLC patients and otherwise
complies with the following provisions:
(i) Medical Services. With respect to any managed care
contract, provide health care services, as an independent contractor to the
Manager, including Medicare services, and charity care in accordance with the
policies, procedures, guidelines, and requirements of the Manager and the
Quality Committee as are now in place or may hereafter be established. Emergency
and immediate health care services shall be provided by the LLC without regard
to ability to pay.
(ii) On-Call Coverage. Provide such night and weekend
on-call coverage as from time to time is determined by the Manager and the
Quality Committee to be necessary to make services as readily accessible
to the community as possible.
(iii) Supervision. Monitor and review the clinical performance
of all staff, allied health professionals, and the LLC's physicians, in
cooperation with the Manager and the Quality Committee.
(iv) Quality Assurance and Peer Review. Establish, with the
cooperation and involvement of the Manager and the Quality Committee, policies,
procedures and committees for quality assurance and peer review of all
physicians providing services to the Manager, cooperate fully with the policies,
procedures and activities of such committees, and conduct peer review
disciplinary activities in accordance with Maryland law.
(v) Recommendations. Conduct periodic reviews of medical and
related staffing to consider the needs of the LLC and/or the Manager for
additional primary care physicians, staff, allied health professionals and other
non-primary care physicians, and report the results of such reviews to the
management of the Manager and the Quality Committee; and provide such other
review and reports to the Manager and the Quality Committee as reasonably
requested by the Manager's management.
(vi) Surveys. Assist the management of the Manager with
all preparation for any inspections and on-site surveys of the Manager conducted
by governmental agencies and accrediting organizations.
(vii) Managed Care Contracts. Assist and cooperate with the
Manager in negotiating and developing managed care contracts, participate in any
preferred provider network established by or through the Manager or its
Affiliates, and provide services to all Managed Care Members covered by a
managed care plan that is entered into by the Manager, comply with the terms of
managed care contracts that are negotiated by the Manager for the benefit of the
LLC, and comply with all applicable Federal and state laws and managed care plan
terms affecting the Manager and the LLC.
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(viii) Records. Maintain all necessary and appropriate medical
records reflecting health care service provided to patients seen by LLC
physicians in a manner that is consistent with applicable law and that ensures
that the Manager has satisfied all applicable requirements for Payor contracts
and participation in public and private payment programs.
(ix) Administrative Duties and Marketing. Cooperate with the
Manager's policies, procedures and activities pertinent to marketing, patient
relations, scheduling, billing, collections and other administrative matters,
and cooperate with the Manager`s efforts to bill and collect fees for services
rendered to patients.
(x) Litigation. Cooperate in all litigation matters affecting
the LLC and/or the Manager.
(xi) Education. Cooperate with the Manager and the Quality
Committee in the development and provision of all educational programs offered
by the Manager, and devote reasonable time and effort to such programs.
(xii) Utilization Review. Cooperate fully with the utilization
review policies, procedures and activities of the Manager, the Quality Committee
and third party payors. The LLC shall assist the Manager and the Quality
Committee in conducting utilization reviews all of the LLC's physicians.
(xiii) License. Ensure that the LLC's physicians at all
times are licensed to practice medicine in the State of Maryland or other
jurisdictions approved by the Manager;
(xiv) Policies. Ensure that the LLC's physicians comply
with all applicable laws, rules and regulations of any and all governmental
authorities and the policies and procedures of the Manager and third party
payors;
(xv) Hospital Privileges. Ensure that each of the LLC's
physicians possesses and maintains staff privileges on the medical staff of
those hospitals and institutions set forth on Exhibit 4.3(a)(ii) of each such
physician's Employment Agreement, and such other hospitals and institutions as
the Manager and the LLC shall agree upon.
(xvi) Patient Care. Ensure that the LLC's physicians providing
professional services to the LLC and the Manager shall at all times provide only
those medical services that he or she is qualified to deliver, and shall provide
such services in a manner that is consistent with the patient's best interests.
(xvii) Credentialling. Cooperate with the Manager and the
Quality Committee in establishing, criteria, policies and procedures for
purposes of credentialling all of the LLC's physicians. Such credentialling
criteria, policies and
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procedures shall be established in accordance with all community medical
practice standards, all applicable laws, and the minimum participation
criteria developed by the Manager and the Quality Committee. All of the LLC's
physicians shall be required to comply with such credentialling criteria. All
decisions with respect to credentialling shall be reached as follows:
(A) LLC Member Physicians. The Manager and the LLC
shall consult with each other regarding the selection of, and negotiations
with, LLC Member Physicians, and
(B) Other Physicians. The Manager and the LLC
shall consult with each other regarding the selection of and negotiations with
non-Member Physicians, but the LLC may, subject to minimum participation
criteria approved by the Manager, make decisions regarding the selection of
non-Member Physicians.
(xviii) Physician Agreements. The LLC shall enter into and
maintain Professional Services Employment Agreements or other employment
agreements reasonably acceptable to the Manager with all the physicians employed
by the LLC. The LLC shall consult with the Manager and the Quality Committee
regarding the final terms of all such employment agreements prior to the
execution thereof and any amendments, or terminations, of such agreements. It is
understood and agreed that the Manager is not and shall not become a party to
any Professional Services Employment Agreements or other employment agreements
between the LLC and its physicians.
(xix) Physician Obligations. The LLC shall be responsible for
ensuring that each of its physicians comply with the following requirements, all
of which have been incorporated by reference into the Professional Services
Employment Agreements with each physician. The LLC shall confer with the Manager
concerning the performance of its employee physicians of and under their
employment contracts generally and prior to taking any action to terminate any
such employment agreement. The LLC, at the Manager's request agrees to take any
reasonable action requested to enforce compliance, including, but not limited to
terminating such Physician's employment with the LLC and/or seeking sanctions
against such Physician:
(A) Each LLC physician shall abide by the terms and
conditions of the applicable provisions of this Agreement.
(B) Each LLC physician shall be bound to all
components of all agreements executed between the Manager and third party
payors. Furthermore, each physician shall abide by all operating rules and
regulations of any managed care plan for elements pertaining, but not limited
to the maintenance of medical records, the confidentiality of records, the
filing of claims, and the non-discrimination in treatment of its members.
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(C) Each LLC physician shall be free to exercise
absolute discretion in the conduct of any and all activities which may
reasonably be considered as constituting the practice of medicine. The
professional responsibility to patients for the delivery of health care
services under this Agreement shall at all times remain with each LLC physician.
The Manager shall not interfere with the professional judgment of any of the
LLC's physicians in the provision of professional health care services.
(D) Each LLC physician shall be required to
participate in and cooperate with the utilization review programs of third
party payors and of the Manager. Any determination under a utilization
review program that services provided or proposed to be provided are not
medically necessary or not otherwise appropriate shall in no case be construed
as a substitute for the professional judgment of each LLC physician; rather,
such findings are intended to be and shall be limited to the determination
of reimbursement for services only, it being understood that all decisions
regarding the nature and extent of services to be provided, as well as the
choice of provider, are and will be made exclusively by each LLC physician and
his or her patient.
(E) Each LLC physician agrees that his or her
practice patterns will be profiled and will be reviewed by his or her peers,
and that participation in any of the Manager`s preferred provider networks
will be dependent upon maintaining satisfactory profiles which are within
the Manager's and the Quality Committee's standards of acceptable medical
practice.
(F) Each LLC physician shall refer patients to
other physicians only when it is deemed to be medically necessary and in the
best interest of such patients. When referrals are required, each LLC physician
shall use his or her best efforts to refer to other physicians who are
participating in any of the Manager's preferred provider networks then in
effect, and to utilize hospitals and other health care providers that are
participating in any such preferred provider network; provided, however,
that no LLC physician shall be required to refer a particular patient to any
specific physician or to admit such patient requiring hospitalization to any
specific hospital if such LLC Physician, in the good faith exercise of his or
her professional judgment, believes that the medical needs of such patient
would be better served elsewhere.
(G) Each LLC physician shall accept Managed Care
Members as new patients and treat current patients should they become Managed
Care Members, provided that no LLC physician shall be required to accept
additional patients if he is already working at full capacity, as determined
by such physician and the LLC jointly in the reasonable exercise of their
discretion.
(H) Each LLC physician shall abide by decisions
resulting from utilization review programs of the Manager, the Quality Committee
and/or third party payors, subject to any applicable rights of reconsideration
or review. Each LLC
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physician shall pursue all appropriate opportunities for reconsideration and
appeal of denials of payment by third party payors.
(I) Each LLC physician shall provide to any
designated utilization review programs(s) any medical or other information
necessary to conduct preadmission certification and continued stay review for
all covered services to be rendered to Managed Care Members.
(J) Each LLC physician shall allow each third party
payor or its designee to review and duplicate any data or other records
maintained regarding services provided under this Agreement as may be
necessary to conduct the utilization review program. Such review and
duplication shall be allowed upon reasonable notice during regular business
hours and shall be subject to all applicable laws, regulations and the
Manager's policies concerning the confidentiality of such data or records.
(K) Each LLC physician shall use his or her best
efforts to obtain precertification for those services designated by any
utilization review program(s) as requiring precertification, and shall use his
or her best efforts to notify the designated utilization review program of
emergency or urgent inpatient admissions within forty-eight (48) hours after
admission.
(L) Each LLC physician shall cooperate as reasonably
required to verify that Managed Care Members are eligible for covered services.
(M) Each LLC physician shall prepare and maintain
appropriate records concerning health care services provided under this
Agreement. All such records shall be maintained in accordance with prudent
record keeping procedures, and as otherwise required by law.
(N) Notwithstanding anything provided herein to the
contrary, ownership of and access to all patient records shall be controlled
by the applicable state and federal law. All medical, financial, and personal
information about patients reviewed and collected in connection with this
Agreement shall be held in confidence and shall not be released, disclosed, or
published by the parties, their agents or employees without the written consent
of the patient, unless otherwise permitted by law. Each LLC physician shall
be responsible for supplying any consent necessary to the release of
medical records of patients for purposes of claims management, including
specific consent to the release of any records pertaining to any patient's
alcohol or drug addiction or treatment, or mental health commitment or
treatment.
(xx) Full Time. Except in cases of emergency, or as otherwise
expressly waived by the Manager or by the LLC, the LLC shall ensure that each
LLC physician devotes his or her full-time practice of medicine to the LLC's
group practice, and shall not provide professional services to persons other
than the Manager and the
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patients treated by LLC Physicians. Except as otherwise waived, all patients
treated by an LLC physician shall be deemed to be the Manager's patients and
the Manager shall be the owner of the medical records for all of the Manager's
patients.
(xxi) Non-Contract Specialists. When referrals to a specialist
or other physician is required, each LLC physician shall use his or her best
efforts to refer to physicians who are employees of the LLC or with whom the LLC
and/or the Manager has a provider contract in effect, and, where applicable, to
other physicians who are participating in any of the Manager's preferred
provider networks then in effect. In all other cases, each LLC physician may
select non-contract specialists to whom patients are referred, based upon the
such physician's best professional judgment of patient needs.
5. MANAGED CARE INCENTIVE PAYMENT.
a. Creation of Managed Care Incentive Payment. The parties acknowledge
that both the Manager's Business Plan and the business plan developed by the
Manager for the LLC contemplate that the LLC and its physician employees will
shift the emphasis of their Practice of Medicine from a traditional
fee-for-service model to a managed care model, and that the Manager must
successfully manage the migration of the LLC's practice to a capitated model if
it is to meet its business goals and objectives. To provide an incentive for the
LLC and the physician employees of the LLC to engage in a managed care
environment in the most efficient and profitable manner possible, beginning with
the calendar year 1996, the Manager shall pay to the LLC, an amount, if any,
calculated as described herein (the "Managed Care Incentive Payment" or "MCIP")
with respect to each calendar year, or portion thereof, that occurs during the
term of this Agreement (each an "MCIP Year"). The Manager and the LLC shall
consult with each other as to the amount of the MCIP for each MCIP Year, subject
to the limitations established in Section 5.b hereof, and the Manager will
negotiate in good faith with the LLC in order to assure that all physician
employees are adequately compensated in light of the market in existence from
time to time.
b. Calculation of Managed Care Incentive Payment. The Manager and the
LLC shall by December 15th of each year agree upon an MCIP payment to be made
out of the Manager's income before provision for income taxes or bonus (as
reflected on the Manager's financial statements) for the following year. There
shall be no MCIP payment in any year in which the Manager does not have income
before provision for income taxes or bonus reflected on its financial
statements. The Manager and the LLC shall agree upon an MCIP payment for each
year that is fair to the Manager and the LLC. If the Manager and the LLC are
unable to agree upon an MCIP, then the MCIP, if any, with respect to such MCIP
Year shall be equal to the lesser of either (i) twenty-five percent (25%) of the
amount of the excess, if any, of (A) those operating revenues of the Manager for
the MCIP Year that are properly attributable to the provision of medical care to
patients of the LLC, over (B) expenses of the Manager
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and the LLC for the MCIP Year that are properly attributable or otherwise
allocable to the LLC for the MCIP year, or (ii) twenty-five percent (25%) of
the Aggregate Base Salaries of all primary care physicians employed by the
LLC during such MCIP year. The Manager shall have no obligation to negotiate
for an MCIP in excess of either of such amounts. The Manager shall have the
right in its discretion to make appropriate year to year and period adjustments
to accurately reflect income and expenses, and to allocate expenses among the
LLC and any other Additional Primary Care Entities, independent practice
association or other person or entity for which it serves as manager, and to
set off against the amount of any MCIP payment all or any portion of the
amount of its costs and expenses resulting from a breach by any Physician
or any Physician's PC of any representation, warranty or covenant made by
such Physician or PC in the Practice Participation Agreement."
c. Payment of Managed Care Incentive Payment. The Manager shall pay the
MCIP, if any, with respect to each MCIP Year to the LLC on or before February 15
of the calendar year following each such MCIP Year, beginning on February 15,
1997. If, pursuant to Section 4.d hereof, an adjustment is made in a succeeding
calendar year with respect to any Management Fee paid to the Manager in a prior
MCIP Year, no adjustment shall be made in the MCIP for the MCIP Year in which
the Management Fee which was subsequently adjusted was actually paid and such
adjustments shall be given effect in the MCIP for the MCIP Year in which they
were actually made.
6. TERM AND TERMINATION.
a. Term. This Agreement shall commence as of the date first above
written, and shall continue in force until December 31, 2025, unless sooner
modified or terminated as provided herein. This Agreement shall automatically be
renewed thereafter for additional terms (each an "Additional Term") for ten
years each in the sole discretion of the Manager, so long as there is no event
of default with respect to the Manager's performance of its duties hereunder as
set forth in Section 6.b of this Agreement.
b. Termination. This Agreement may be terminated by the
non-defaulting party upon the occurrence of any of the following events of
default:
i. The commencement of any voluntary or involuntary case under
the Federal bankruptcy laws or any state insolvency or similar laws seeking the
liquidation or reorganization of either party hereto, or the appointment of a
receiver, liquidator, assignee, custodian, trustee or similar official for
either party or the property of either party or the making by either party of an
assignment for the benefit of its creditors (except that in the case of any
involuntary action against either party, such party shall have sixty (60) days
to have such case dismissed), or the failure by either party generally to pay
its debts as they mature.
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ii. Either party hereto is indicted upon a charge of
committing any felony or committing a misdemeanor which involves allegations of
fraud, embezzlement, conversion or other similar act or admits engaging in, or
is found in a duly convened arbitral proceeding or a court of competent
jurisdiction to have engaged in, illegal or other wrongful conduct substantially
detrimental to the business or reputation of the other party.
iii. The continued refusal by, or manifest inability of,
either party to perform any of the material duties, or to discharge any of the
material obligations, of such party pursuant to this Agreement in a professional
and reasonably competent manner (consistent with applicable professional or
business standards) for a period of at least ninety (90) days after receipt of
written notice from the other party to such party providing reasonable detail as
to the specific material duties or obligations that are not being, or have not
been, performed or discharged by such party in a professional and reasonably
competent manner and providing a reasonable opportunity to such party to address
such failures or omissions and in good faith to attempt to cure or otherwise
begin to effect a remedy of such failures or omissions within such ninety (90)
day period; provided, however, that the LLC may not terminate this Agreement so
long as the Manager is in good faith attempting to address any such failure or
omission and it appears reasonably possible that such failure or omission may
(or will) be cured before irreparable material harm or other significant injury
occurs to the LLC and, provided further, that the LLC may not terminate this
Agreement if any lender to, or holder of a senior security of, the Manager
arranges, or is arranging for, an assignment or transfer of such of the
Manager's duties hereunder as to which the Manager is in actual or potential
default to another management entity with experience in managing health care
providers that is reasonably acceptable to the LLC.
c. Effect of Termination.
i. Upon the occurrence of an event of default by the LLC, the
Manager shall have the right without further notice to reenter and take
possession of the Demised Premises, or any part thereof, and to repossess the
same as the Manager's former estate, and expel the LLC and those claiming
through or under the LLC, and remove the effects of either or both without being
deemed guilty of any manner of trespass and without prejudice to any remedies
for arrears of fees due or preceding breaches of this Agreement.
ii. Upon the occurrence of an event of default by the Manager,
the LLC shall have the right to continue in full possession and use of all of
the assets, facilities and goods provided to it by the Manager, including
without limitation the Office Space and the Equipment, and to purchase from the
Manager for their appraised fair market value all of the assets of the Manager
constituting the Demised Premises and any other of the Manager's assets which
the LLC, in its sole discretion, deems necessary or desirable to permit the LLC
to continue its Practice of Medicine without
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interruption, it being the intent of the parties to permit the LLC in such
event to continue its Practice of Medicine with as little disruption as
possible. The LLC shall be entitled to set off against the purchase price it
pays for the Manager's assets the amount of any damages incurred by the LLC
as a result of the Manager's breach of this Agreement.
7. MODIFICATIONS; QUALITY COMMITTEE; ARBITRATION.
a. Modification for Prospective Legal Events. If, in the good faith
opinion of either party, as supported by the written opinion of counsel to such
party, any Federal or state laws or regulations now existing or hereafter
promulgated or enacted, including specifically without limitation Medicare, are
interpreted by judicial decision, a regulatory agency or legal counsel in any
manner as to indicate that the structure of this Agreement, or any portion
thereof, may be in violation of such laws or regulations, such party may require
the parties hereto to use their respective best efforts to amend this Agreement,
or such portions hereof, to the extent necessary to avoid further violation. To
the maximum extent possible, any such amendment shall preserve the underlying
economic and financial risks, rewards and other arrangements set forth herein. A
party requesting such an amendment shall give written notice thereof to the
other party which shall set out in sufficient detail the basis for the amendment
request and specifically identify the specific provisions of this Agreement for
which renegotiation is sought. Within thirty (30) days of its receipt of the
requesting party's notice, the other party shall give notice to the requesting
party of any additional provisions of this Agreement as to which the other party
requests renegotiation and the reasons therefor. No provisions of this Agreement
other than those specifically designated by the parties for renegotiation shall
be affected by the renegotiations. Should the parties be unable to agree upon
mutually acceptable revisions to this Agreement within ninety (90) days after
receipt by the other party of the initial request for renegotiation, then the
matters that remain unresolved through renegotiation pursuant to this Section
7.a shall be submitted to binding arbitration pursuant to the provisions of
Section 7.c hereof. Each of the foregoing time periods shall be shortened if and
to the extent necessary to avoid a violation of applicable law in a timely
manner.
b. Quality Committee. The Manager and the LLC hereby create the Quality
Committee referred to in this Section 7.b for the purpose of (i) developing
cooperative developmental, management and administrative policies to guide each
of the LLC and the Manager in fulfilling its obligations hereunder, (ii)
providing to the Manager and the LLC a forum in which policy and implementation
matters affecting the LLC and its physicians may be discussed on a regular
basis, and (iii) establishing an expedited process through which any
disagreement or dispute between the parties to this Agreement relating to or
concerning (A) the quality, adequacy or appropriateness of the assets,
facilities or services provided by the Manager to the LLC, (B) the quality and
timeliness of the services provided by the LLC and its physicians to patients
pursuant to this Agreement, (C) the appropriateness of any expense which the
Manager treats as a Business Cost of the LLC, may be submitted for review and
resolution prior to any
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informal or formal adjudication. The Quality Committee shall consist of six
members, three appointed by the LLC and three appointed by the Manager. The
three members appointed by the Manager shall be the Chief Executive Officer
of the Manager, the Executive Vice President and Director of Medical Services
of the Manager and the Executive Vice President and Director of Legal Services
of the Manager. Of the three members appointed by the LLC, one shall be the
President of the LLC or his designee. Either party may change the designation
of any of its Quality Committee members who is not serving ex-officio
by written notice delivered to the other party pursuant to the provisions
of Section 10.p of this Agreement.
The Manager and the LLC agree to cause the Quality Committee
to meet regularly, but not less often than monthly. Where possible, such
meetings shall be scheduled to coincide with the dates of the regularly
scheduled meetings of the Manager's Board of Directors. The Quality Committee
shall adopt such rules and regulations regarding the conduct of its business as
it deems appropriate.
If the LLC believes that any asset, facility or service
provided by the Manager to the LLC pursuant to this Agreement, including any
item of Equipment, any aspect of the Office Space, any goods, materials or
supplies or any administrative or other service, including any aspect of any
budget, business plan, policy or procedure, or any of the professional or
non-professional personnel provided to the LLC, is inadequate, inappropriate or
otherwise insufficient, then the LLC shall give written notice thereof to the
Manager, setting out in sufficient detail the basis for the LLC's position. If
the Manager believes that the quality or timeliness of the care provided to any
patient does not meet the standards established herein and in each physician's
Professional Services Employment Agreement, or that the LLC is not cooperating
in such reasonable efforts of the Manager to create a fully integrated efficient
health care delivery system as herein contemplated, then the Manager shall give
written notice thereof to the LLC which shall set forth in sufficient detail the
basis for the Manager's position. The Quality Committee shall, within ten (10)
days of the date of any such notice, convene a special meeting and shall, in
good faith endeavor to resolve the issues raised in such notice by agreeing upon
a unanimous recommendation with respect to such issues, which shall be reported
back to the Manager and the LLC. If within thirty (30) days of the date of such
notice there has been no joint recommendation, or both parties have not accepted
in writing a joint recommendation of the Quality Committee as a basis for
resolving all such issues, the unresolved issues may be referred by either party
to arbitration pursuant to the provisions of Section 7.c hereof. Any joint
recommendation of the Quality Committee members which is accepted by both the
LLC and the Manager shall be promptly implemented.
c. Arbitration. Any dispute between the parties of this Agreement
arising under or with respect to this Agreement, or any matters referred to
arbitration pursuant to the terms of Sections 7.a or 7.b hereof, shall be
submitted to binding arbitration according to the procedures set out on Schedule
13.1 of the Practice Participation
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Agreement of even date herewith, among the LLC, the Manager and other Parties,
the provisions of the said Schedule 13.1 being hereby incorporated into
and as a part of this Agreement by express reference. Each Party agrees to
abide by the time periods and other rules said forth in the said Schedule 13.1.
The resolution of any disputes through such procedures, including without
limitation through arbitral award, shall be binding upon the Parties for
all purposes and may be enforced in any court of competent jurisdiction.
8. CONFIDENTIALITY AND EXCLUSIVITY.
a. The Manager's Obligations.
i. The Manager shall, and shall use its best efforts to cause
its employees and Affiliates to, maintain all patient records and financial
information concerning the LLC in confidence, and shall not disclose such
information to any third party without the LLC's prior written consent or as it
may be required by law.
ii. The Manager may contract with other providers of medical
services to provide, and may provide, to such other providers of medical
services the kinds of assets, facilities and services the Manager provides to
the LLC hereunder, provided, however, that the Manager shall not, without the
prior written consent of the Management Committee, contract for the provision of
such services or provide such services to any provider of medical services that
is a competitor of or with the LLC in the provision of such medical services in
the LLC's service area as determined by the Manager from time to time in
consultation with the LLC and, provided further, that the Manager shall at all
times preserve the confidentiality of the LLC's financial, professional and
other information.
b. The LLC's Obligations.
i. The LLC shall, and shall use its best efforts to cause its
employees and Affiliates to, maintain all management memoranda, handbooks,
manuals, trade secrets, know-how, techniques and procedures used by the Manager
in the provision of assets, facilities and services to the LLC hereunder in
confidence, and shall not disclose such information to any third party without
the Manager's prior written consent or as it may be required by law.
ii. The LLC agrees that the Manager shall be its sole and
exclusive contractor, provider, agent and attorney-in-fact for the provision of
the assets, facilities and services contemplated in this Agreement to the LLC
and that during the term of this Agreement the LLC will not, directly or
indirectly, seek or enter into any agreement with another Person for the
provision of, or receive from another Person, assets, facilities or services
that are the same as or substantially similar to any of those provided by the
Manager to the LLC hereunder, or perform any managed care contracting or similar
act
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directly on its own behalf. In addition, the LLC will keep in full force and
effect the non-competition (and other) provisions of each Professional Services
Employment Agreement, will not, without the prior written consent of the
Manager, enter into employment agreements or other contracts with primary care
physicians that do not contain substantially similar provisions, and will take
any and all steps requested or required by the Manager to enforce any and all
such provisions as drafted. To this end. the LLC hereby appoints the Manager as
its attorney-in-fact for purposes of enforcing, on behalf of the LLC, all such
provisions as drafted.
c. Effect of Termination. Upon expiration or termination of this
Agreement for any reason whatsoever, each party shall immediately turn over all
confidential information of the other party in its possession and control to the
other party, and shall refrain from thereafter using, appropriating or
reproducing such information in any form whatsoever.
d. Enforcement. Each party agrees that the other party shall be
entitled to seek equitable relief to enjoin the actual or threatened breach
of the confidentiality and exclusivity obligations of this Article 8
including, without limitation, temporary or preliminary injunctive relief
either from or pursuant to the arbitration provisions of Section 7.c hereof or
pre-arbitral injunctive relief from a court of competent jurisdiction prior
to the selection of an arbitral panel.
9. SOLICITATION OF PERSONNEL. The LLC agrees that during the term of this
Agreement, and for a period of three (3) years following its expiration or
termination, the LLC shall neither interfere with, solicit the services or
employment of, nor hire any of the Manager's then current employees, either on
behalf of the LLC or in connection with any partnership, corporation, joint
venture or other Person, without the prior written consent of the Manager.
10. MISCELLANEOUS.
a. Authorizing Actions. Each party agrees promptly to do all things and
take all actions necessary to authorize and facilitate the performance of this
Agreement and the other Practice Closing Documents, and all obligations
hereunder and thereunder, including, but not limited to, the execution of any
necessary documents, and the filing of any forms, deeds or memoranda of leases
with applicable governmental agencies or offices.
b. No Performance Guarantees. The LLC acknowledges that the
Manager has made no warranties or representations other than those contained
herein and that no financial projection shall be construed as a guarantee
of the profitability or success of the LLC's operations.
c. Records.
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i. The LLC shall keep all records relating to this Agreement
and its Medical Practice open and available for inspection by the Manager or
other authorized Person in connection with any audit related to patient
services, and shall maintain all books, records, documents and other evidence
necessary to certify the nature and extent of the services provided under this
Agreement and pursuant to its Medical Practice in accordance with accepted
business practice, appropriate accounting procedures and applicable Federal,
State or local law and regulations.
ii. The LLC agrees to maintain books, records, documents, and
other evidence as necessary to certify the nature and extent of the services
provided under this Agreement and as part of the LLC's Medical Practice in
accordance with accepted business and professional practices, appropriate
accounting procedures and practices, and Federal, State and local laws and
regulations. The LLC agrees to maintain the data described above during the term
of this Agreement and for a period of four (4) years after its expiration or
termination. The Manager or any other duly authorized Person shall have
reasonable access during normal business hours to such books, records,
documents, and other evidence for the purpose of inspection, audit, and copying.
If the LLC carries out any of the duties required under this Agreement through a
subcontract with a value or cost of Ten Thousand Dollars ($10,000) or more, over
a twelve (12) month period, the LLC shall incorporate in any such subcontract
the provisions regarding access to books and records as set forth herein.
iii. Each party hereto agrees to cooperate with the other
party in the event it is the subject of a tax audit or inquiry and to make
available to such other party or other authorized Person in connection with any
such inquiry or audit all of the business, financial and other records
reasonably relating thereto on reasonable terms during normal business hours for
the purpose of inspection, audit and, subject to payment of reasonable fees,
copying.
d. Governing Law. The validity of this Agreement, its interpretation
and construction shall be governed by the laws of the State of Maryland, without
regard to principles of conflict of laws.
e. Equal Employment Opportunity. Each party expressly agrees to abide
by any and all applicable Federal and/or state equal employment opportunity
statutes, rules and regulations including, without limitation, Title VII of the
Civil Rights Act of 1964, the Equal Employment Opportunity Act of 1972, the Age
Discrimination in Employment Act of 1967, the Equal Pay Act of 1963, the
National Labor Relations Act, the Fair Labor Standards Act, the Rehabilitation
Act of 1973, the Occupational Safety and Health Act of 1970, and the Americans
with Disabilities Act of 1990, as all may be from time to time modified or
amended.
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f. Force Majeure. Neither party shall be liable nor deemed to be in
default for any delay or failure in performance under this Agreement or other
interruption of service resulting, directly or indirectly, from Acts of God,
civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by either party's service providers, employees or agents, or
any similar or dissimilar cause beyond the reasonable control of either party.
g. Waiver. A waiver by either party of a breach or failure to
perform any provision of this Agreement shall not constitute a waiver of any
subsequent breach of the same or a different provision hereof.
h. Severability. If any provision of this Agreement is found to be
void or unenforceable, then such provision shall be treated as severable,
leaving valid and enforceable the remainder of this Agreement.
i. Binding Effect and Assignment. This Agreement may not be assigned
by the LLC without the prior written consent of the Manager.
j. Counterparts. This Agreement may be executed in one or more
counterparts, all of which together shall constitute one Agreement.
k. Tax Liabilities. The LLC shall have the sole responsibility for
paying any and all applicable Federal, state and local income taxes, gross
receipt taxes, FICA taxes, and all other withholding taxes, unemployment and
disability benefits, and, although the Manager will act as payment agents,
workers' compensation obligations, and any and all license and permit fees of
whatever nature which may be applicable to it and for filing all information and
other tax returns and other returns or reports as may be required of it. The
Manager shall act as payment agent for all of these taxes, and shall have
responsibility for making such payments when due on behalf of the LLC from
Collected LLC Cash. The LLC shall indemnify and hold the Manager harmless
against any and all claims against the LLC, any physician employed by the LLC or
the Manager, and related attorneys' fees, for the failure to pay or file any of
the foregoing payments, withholding, contributions, taxes, fees, and documents,
reports and returns, including but not limited to, Federal, state, and local
taxes, FICA taxes, gross receipt taxes, unemployment and disability benefits,
and workers' compensation obligations, and any and all license and permit fees.
l. Independent Relationship. The LLC and The Manager intend to act and
perform as independent contractors. Only the LLC shall practice medicine and
shall do so utilizing licensed physicians with no employment relationship to the
Manager. Notwithstanding the authority granted to the Manager herein, the
Manager and the LLC agree that the LLC shall retain the authority to direct the
medical, professional, and ethical aspects of its medical practice. Each party
shall be solely responsible for and
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shall comply with all state and federal laws pertaining to employment taxes,
income withholding, unemployment compensation contributions and other
employment related statutes applicable to that party. As more specifically set
forth herein, the Manager shall provide the LLC with offices and facilities,
equipment, supplies, support personnel, and management and financial advisory
services. As more specifically set forth in, and subject to the provisions of,
this Agreement and the LLC Operating Agreement, the LLC shall be responsible
for the recruitment and hiring of physicians and all issues related to medical
practice patterns and documentation thereof. The Manager shall neither
exercise control over nor interfere with the physician-patient relationship,
which shall be maintained strictly between the physicians of the LLC and their
patients. Matters involving the internal agreements and finances of the LLC,
including the distribution of professional fee income or distributions
of Managed Care Incentive Payments, if any, among the individual Members and
other physicians of the LLC, tax planning, and pension and investment
planning (and expenses relating solely to these internal business matters)
shall remain the sole responsibility of the LLC and/or the individual
physicians. The parties agree that the benefits to the LLC hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by the Manager or any of its Affiliates to any of the LLC's
patients in any facility or laboratory controlled, managed or operated by the
Manager.
m. Exchange of Information. Each party shall cooperate in sharing
with and providing to the other party all information reasonably required or
desirable pursuant to the terms of this Agreement.
n. Further Cooperation. The LLC shall cooperate and execute such
agreements and cause such of its physician employees as may be necessary to
become participating providers in such third-party reimbursement programs as the
Manager may from time to time direct. As used in this Agreement, the term
"third-party reimbursement program" shall include, but not be limited to, health
maintenance organizations, preferred provider organizations, private health
insurance companies, Blue Cross/Blue Shield, the Federal and State Medicare
and/or Medicaid programs, and any other managed care plan. The LLC shall also
cooperate with the Manager in promotional programs developed or selected by the
Manager.
o. Entire Agreement. This Agreement and the other Practice Purchase
Closing Documents constitute the complete understanding of the parties and
supersede any and all other agreements, written or oral, between the parties
with respect to the subject matter hereof and thereon. No other agreement,
statement or promise not contained herein or therein shall be valid or binding.
p. Notices. All notices required hereunder shall be in writing,
delivered personally, by overnight delivery service or by registered or
certified mail, postage prepaid and return receipt requested, and shall be
deemed made when delivered and
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shall be properly addressed to the parties as follows or as otherwise
designated from time to time:
To the Manager:
Montgomery Newco, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
with a required copy to:
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
Attention: Corporate Counsel
To the LLC:
Doctors Health Montgomery, LLC
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
With a required copy to:
Ober, Kaler, Grimes & Shriver
A Professional Corporation
Attn: Melinda B. Antalek, Esquire
120 East Baltimore Street
Baltimore, Maryland 21202-1643
q. Amendment. This Agreement may be modified or amended at any
time by a written amendment, signed by both parties hereto.
r. Appointments. By its execution of this Agreement, the LLC hereby
constitutes and appoints the Manager, acting in its corporate capacity or
through any of its duly authorized officers or employees, the LLC's true and
lawful attorney-in-fact and also constitutes and appoints the Manager as the
LLC's agent, and hereby empowers and authorizes the Manager, as its attorney and
agent, for the LLC and in its name, place and stead, and on its behalf, from
time to time, to do and to execute any and all acts, deeds, instruments and
things, which are necessary or desirable to enable the Manager to do any and all
things relating to the organization, management, business, or non-professional
activities of the LLC, as fully and completely as the LLC might or could do if
it, itself, undertook to do or execute any or all of such acts, deeds,
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instruments or things. The appointment of the Manager as the LLC's agent and
attorney-in-fact hereunder is and shall be irrevocable during the term of this
Agreement and is expressly agreed and acknowledged by both parties to be coupled
with an interest.
IN WITNESS WHEREOF, the parties hereto have caused their
authorized representatives to execute this Agreement effective as of the day and
date first above written.
WITNESS/ATTEST: DOCTORS HEALTH MONTGOMERY, LLC
By: /s/ Jeffrey P. Indrisano
- --------------------------- _______________________(SEAL)
Jeffrey P. Indrisano, Chairman
WITNESS/ATTEST: DOCTORS HEALTH SYSTEM, INC.
By: /s/ Paul A. Serini
- --------------------------- ________________________(SEAL)
Paul A. Serini,
Executive Vice President
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EXHIBIT 2b
SUBLEASE
THIS SUBLEASE ("this Sublease"), ____day of___________, 199_, by and
between Doctors Health System, Inc., a Maryland Corporation, ("Tenant") DOCTORS
HEALTH MONTGOMERY, LLC, a Maryland limited liability company ("Subtenant").
EXPLANATORY STATEMENT
A. By Lease Agreement dated_______________, 19___, a copy of which is
attached hereto as Exhibit A (the "Lease"), [Add appropriate recitals regarding
leases from Physicians and/or PCs, to the LP, to DHS] ___________, Maryland
known as ___________________ (the "Premises").
B. Subtenant desires to sublease the Premises from Tenant and
Tenant desires to sublease the Premises to Subtenant, on the terms and subject
to the conditions which are hereinafter set forth.
[C. Landlord joins in the execution of this Sublease to evidence
its consent to the within Sublease, as required by Section ______ of the Lease.
Where appropriate.]
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual entry into this
Sublease by the parties hereto and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by each party
hereto, Tenant hereby subleases to Subtenant and Subtenant hereby subleases from
Tenant all of the Premises in its "as is" physical condition (Subtenant having
heretofore examined and being familiar in all respects with the Premises), on
the terms and subject to the conditions which are hereinafter set forth:
1. Term; Extension and Expiration of Term. The term of this Sublease
(the "Initial Term") shall be for a period of ______ (___) months [which period
shall be equal to the term of the Lease less one (1) day], beginning on
________, 19___ and expiring on ___________, 19____ (the "Expiration Date"). If
the term of the Lease is renewed, Subtenant may extend the Initial Term for a
period coterminous with the extended period less one (1) day on the same terms
and conditions as set forth in this Sublease by providing Tenant with at least
_________ (___) days' notice in advance of the Expiration Date. If Subtenant
provides such notice, this Sublease shall continue and extend until the
expiration date of the renewal term less one (1) day (the "Extended Term") (both
the Initial Term and the Extended Term shall be collectively
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referred to as the "Term"). Tenant shall use reasonable efforts to notify
Subtenant of the Expiration Date of this Sublease at least thirty (30) days
before the Expiration Date.
2. Rental. Subtenant shall pay to Tenant, without prior notice or
demand and without set-off or reduction, as rental for the Premises (the
"Rent"), the amount of ________ Dollars ($__________) per month during the
Term.. Rent shall be prorated on a daily basis for any partial calendar month
during the Term. This Sublease is on an absolute gross lease basis and Landlord
shall maintain the Premises (including repair or replacement of any part
thereof, unless such replacement is due to Subtenant's negligence or willful
misconduct), pay taxes, insurance, and operating expenses, and any and all other
charges due and payable in connection with the occupancy and use of the
Premises, including, but not limited to, those payable to Landlord under the
Lease. Tenant and subtenant agree (A) that no actual payments are required to be
made by Subtenant to Tenant of Rent hereunder, all such Rent due herewith being
part of the Tenants Management Fee charged to Subtenant under that Certain
Professional Services Organization Agreement between Tenant and Subtenant dated
________ __, 1996 (the "PSO Agreement"); (B) Tenants' payment of rent to the
landlord from time to time shall be deemed the payment of an "LLC Business Cost"
under the PSO Agreement, and a "Direct Medical Facilities Cost" under the
Professional Services Employment Agreement for each of the Subtenant's physician
employees.
3. Obligations of Tenant and Subtenant Under the Lease.
3.1. In addition to any other obligations that are imposed
upon Subtenant under the provisions of this Sublease, Subtenant shall abide by
any restriction placed on Tenant pursuant to the terms of the Lease.
3.2. In addition to any other rights that are held by
Subtenant under the provisions of this Sublease, Subtenant shall have all of the
same rights hereunder against Tenant as Tenant has against Landlord under the
provisions of the Lease, and, except for the services to be provided by Landlord
to Tenant under the Lease, Tenant shall have all of the same obligations
hereunder to Subtenant as Landlord to Tenant under the Lease, all as if
provisions identical to such provisions were set forth at length in this
Sublease.
3.3. Without limiting the generality of the foregoing
provisions of this Section, 3.3.1. Subtenant covenants and agrees not to commit
any act that shall cause Tenant to be in breach of any term, covenant, or
condition under the Lease or interfere with Tenant's performance of its
obligations or duties under the Lease;
3.3.2. in any instance in which Tenant has any right under the
provisions of the Lease to give or withhold its approval of any action,
omission, or other matter, or has any other discretionary right under the
provisions of the Lease, Tenant shall
36
<PAGE>
exercise such right in each instance in a manner that is consistent with
Subtenant's rights and Tenant's obligations hereunder, and
3.3.3. in any such instance in which Tenant may exercise any
such right in two (2) or more ways, neither or none of which would be
inconsistent with Subtenant's rights and Tenant's obligations, Tenant shall
notify Subtenant thereof in writing, and shall exercise any right in accordance
with Subtenant's written instructions to Tenant; provided, however, that Tenant
must receive such instructions within such period, if any, during which Tenant
may be required by the provisions of the Lease to exercise or waive such right.
4. Amendment and Termination of Lease.
4.1. Tenant shall not amend, or consent to any amendment of,
the Lease in any respect that materially and adversely affects Subtenant's right
to use and enjoy the Premises on the terms and subject to the conditions that
are contained in this Sublease. No amendment of the Lease shall operate to alter
or impair Subtenant's rights hereunder.
4.2. If the Lease terminates for any reason this Sublease
shall thereupon automatically terminate simultaneously with such termination of
the Lease, and no party hereto shall have any right hereunder against any other
party hereto on account thereof; provided, however, that nothing in the
foregoing provisions of this sentence shall be deemed in any way to alter or
impair any liability that any party hereto may have to any other accruing before
such termination.
4.3. If the Lease terminates as a result of a default by
Tenant in performing its obligations thereunder, the parties hereto shall have
such rights and liabilities to each other hereunder on account of such default
as exist under applicable law.
4.4. On the expiration or earlier termination of this
Sublease, the rights and obligations of Landlord and Tenant shall be governed by
the Termination of Lease Agreement by and between Landlord and Tenant of even
date herewith.
5. Notices. Any notice, demand, consent, approval, request, or other
communication or document to be provided hereunder to a party hereto shall be
(a) in writing, and (b) deemed to have been provided (i) twenty-four (24) hours
after being sent as certified or registered mail in the United States mails,
postage prepaid, return receipt requested, to the address of such party set
forth below or to such other address in the United States of America as such
party may designate from time to time by notice to each other party hereto, or
(ii) (if such party's receipt thereof is acknowledged in writing) upon being
given by hand or other actual delivery to such party. The addresses for the
parties are as follows:
37
<PAGE>
If to Tenant: Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, MD 21117
38
<PAGE>
If to Subtenant: Doctors Health Montgomery, LLC
10451 Mill Run Circle, 10th Floor
Owings Mills, MD 21117
6. General.
6.1. Effectiveness. This Sublease shall become effective
on and only on its execution and delivery by the parties hereto.
6.2. Complete Understanding. This Sublease, together with the
Physician Services Organization Agreement and other documents executed between
Tenant and Subtenant in connection therewith, represent the complete
understanding among the parties hereto as to the subject matter hereof, and
supersedes all prior negotiations, representations, guaranties, warranties,
promises, statements, or agreements, either written or oral, among the parties
hereto as to the same.
6.3. Amendment. This Sublease may be amended by and only
by an instrument executed and delivered by the parties hereto.
6.4. Waiver. No party hereto shall be deemed to have waived
the exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and, without limiting the generality of the foregoing,
no delay or omission by any party hereto in exercising any such right shall be
deemed a waiver of its future exercise). No such waiver made in any instance
involving the exercise of any such right shall be deemed a waiver as to any
other such instance or right.
6.5. Applicable Law. This Sublease shall be given effect and
construed by application of the law of Maryland, and any action or proceeding
arising hereunder shall be brought in the courts of Maryland.
6.6. Time of Essence. Time shall be of the essence of this
Sublease.
6.7. Headings. The headings of the Sections, subsections,
paragraphs, and subparagraphs hereof are provided herein for and only for
convenience of reference, and shall not be considered in construing their
contents.
6.8. Construction. As used herein, all references made (a) in
the neuter, masculine, or feminine gender shall be deemed to have been made in
all such genders, (b) in the singular or plural number shall be deemed to have
been made, respectively, in the plural or singular number as well, and (c) to
any Section, subsection, paragraph, or subparagraph shall, unless therein
expressly indicated to the contrary, be deemed to have been made to such
Section, subsection, paragraph, or subparagraph of this Sublease.
39
<PAGE>
6.9. Exhibits. Each writing or plat referred to herein as
being attached hereto as an exhibit or otherwise designated herein as an exhibit
hereto is hereby made a part hereof.
6.10. Assignment. This Sublease shall be binding on and shall
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors, and assigns hereunder.
6.11. Severability. No determination by any court,
governmental body, or otherwise that any provision of this Sublease or any
amendment hereof is invalid or unenforceable in any instance shall affect the
validity or enforceability of (a) any other provision thereof, or (b) such
provision in any circumstance not controlled by such determination. Each such
provision shall be valid and enforceable to the fullest extent allowed by, and
shall be construed wherever possible as being consistent with, applicable law.
6.12. Disclaimer of Partnership Status. Nothing in the
provisions of this Sublease shall be deemed in any way to create among the
parties hereto any relationship of partnership, joint venture, or association,
and the parties hereto hereby disclaim the existence of any such relationship.
IN WITNESS WHEREOF, the parties hereto have executed and ensealed this
Sublease or caused it to be executed and ensealed on its behalf by their duly
authorized representatives, the day and year first above written.
WITNESS or ATTEST: [TENANT]
By: _________________________(SEAL)
Name: _________________________
Title: _________________________
DOCTORS HEALTH MONTGOMERY, LLC:
By: _________________________(SEAL)
Name: _________________________
Title: _________________________
40
<PAGE>
[JOINDER (where applicable)
In accordance with Section ____ of the Lease, Landlord joins in the execution of
this Sublease for the purpose of evidencing its consent to the sublease herein.
WITNESS OR ATTEST: LANDLORD:
By: __________________________(SEAL)
Name: __________________________
Title: __________________________]
41
<PAGE>
EXHIBIT A
True Copy of Lease
42
<PAGE>
SCHEDULE 2b
Building Office Space
43
<PAGE>
EQUIPMENT ADDENDUM
TO
SCHEDULE 2b
Building:
Equipment:
44
<PAGE>
Exhibit 10.37
STOCK PURCHASE AGREEMENT
between
DOCTORS HEALTH SYSTEM, INC.
and
GENESIS HEALTH VENTURES, INC.
dated as of September 4, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS............................................................1
2. SALE AND PURCHASE OF SHARES............................................1
2.1. Sale and Purchase of Shares....................................1
2.2. Sale and Purchase of Option for Additional Shares..............1
2.3. Purchase Price.................................................2
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................2
3.1. Organization and Standing......................................2
3.2. Subsidiaries...................................................2
3.3. Articles of Incorporation and Bylaws...........................3
3.4. Capitalization.................................................3
3.5. Directors, Officers and Employees..............................4
3.6. Financial Statements...........................................4
3.7. No Liabilities.................................................5
3.8. Accounts Receivable............................................5
3.9. Taxes..........................................................5
3.10. Conduct of Business; Absence of Material Adverse Change.......7
3.11. Title to Property and Assets..................................8
3.12. Insurance.....................................................8
3.13. Intellectual Property.........................................9
3.14. Debt Instruments..............................................9
3.15. Leases........................................................10
3.16. Other Agreements..............................................10
3.17. Books and Records.............................................11
3.18. Litigation; Disputes..........................................12
3.19. Labor Relations...............................................12
3.20. Pension and Benefit Plans.....................................13
3.20.1. Disclosure Schedule................................13
3.20.2. Copies of Documents................................13
3.20.3. General............................................13
3.20.4. Unpaid Contributions...............................13
3.20.5. Contributions and Other Obligations................14
3.20.6. Qualified Plans....................................14
3.20.7. Compliance with Law................................14
3.20.8. ERISA; Prohibited Transactions.....................14
3.20.9. Health Care Continuation Coverage Requirements.....14
3.20.10. Filed Returns and Reports.........................15
3.21. Environmental.................................................15
3.22. Transactions with Related Parties.............................16
3.23. Restrictions and Consents.....................................16
3.24. Authorization.................................................16
3.25. Absence of Violations.........................................17
3.26. Regulatory Matters............................................17
<PAGE>
3.26.1. General Compliance with Law........................17
3.26.2. Licenses and Permits...............................17
3.26.3. Fraud and Abuse Matters............................18
3.26.4. Health Care Entity.................................19
3.26.5. Hart-Scott-Rodino..................................19
3.27. Certain Future Relationships..................................19
3.28. SEC Registration..............................................20
3.29. Binding Obligation............................................20
3.30. Status of Shares..............................................20
3.31. Offering of Shares............................................20
3.32. Disclosure....................................................21
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.........................21
4.1. Organization and Standing......................................21
4.2. Authorization..................................................21
4.3. Binding Obligation.............................................22
4.4. Hart-Scott-Rodino..............................................22
4.5. Certain Future Relationships...................................22
5. RESTRICTED SECURITIES..................................................22
5.1. No Registration Under the Securities Act.......................22
5.2. Acquisition for Investment.....................................22
5.3. Evaluation of Merits and Risks of Investment...................23
6. ADDITIONAL COVENANTS OF THE COMPANY....................................23
6.1. Reports........................................................23
6.2. Investor Representatives on Board of Directors.................23
6.3. Certain Future Relationships...................................24
6.4. Actions Prompting Redemptions..................................25
6.5. Use of Proceeds................................................27
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT ANY CLOSINGS......27
7.1. Representations and Warranties.................................27
7.2. Performance....................................................27
7.3. Legal Proceedings..............................................27
7.4. Investor's Certificate.........................................28
7.5. Option Agreement...............................................28
7.6. Amended and Restated Stockholders Agreement....................28
7.7. Registration Rights Agreement..................................28
7.8. Documents at Closing...........................................28
8. CONDITIONS PRECEDENT TO THE INVESTOR'S
OBLIGATIONS AT THE INITIAL CLOSING....................................28
8.1. Representations and Warranties.................................28
8.2. Performance....................................................29
8.3. Absence of Adverse Changes.....................................29
8.4. Legal Proceedings..............................................29
8.5. Officer's Certificate..........................................29
8.6. Opinion of Counsel.............................................29
<PAGE>
8.7. Restated Articles..............................................30
8.8. Option Agreement...............................................30
8.9. Amended and Restated Stockholders Agreement....................30
8.10. Registration Rights Agreement.................................30
8.11. Documents at Closing..........................................30
8.12. Appointment of Director.......................................30
8.13. Consents......................................................31
9. CONDITIONS PRECEDENT TO THE INVESTOR'S
OBLIGATIONS AT THE SECOND CLOSING.....................................31
9.1. Absence of Violations..........................................31
9.2. Performance....................................................31
9.3. Legal Proceedings..............................................32
9.4. Officer's Certificate..........................................32
9.5. Opinion of Counsel.............................................32
9.6. Documents at Closing...........................................32
10. THE CLOSINGS..........................................................32
10.1. Closings of Sale and Purchase.................................32
10.2. Deliveries by the Company to the Investor.....................33
10.2.1. Initial Closing Deliveries.........................33
10.2.2. Second Closing Deliveries..........................34
10.3. Deliveries by the Investor to the Company.....................34
11. SURVIVAL OF REPRESENTATIONS AND COVENANTS; INDEMNIFICATION;
REMEDIES; TAX MATTERS...............................................34
11.1. Survival of Representations and Covenants.....................34
11.2. Agreement of the Company to Indemnify.........................35
11.3. Conditions of Indemnification.................................36
11.4. Specific Performance..........................................37
12. TERMINATION...........................................................37
12.1. Termination...................................................37
12.2. Effect of Termination.........................................37
13. MISCELLANEOUS.........................................................38
13.1. Additional Actions and Documents..............................38
13.2. No Brokers....................................................38
13.3. Expenses......................................................38
13.4. Assignment....................................................38
13.5. Entire Agreement; Amendment...................................39
13.6. Waiver........................................................39
13.7. Consent to Jurisdiction.......................................39
13.8. Severability..................................................40
13.9. Governing Law.................................................40
13.10. Notices......................................................40
13.11. Headings.....................................................41
13.12. Execution in Counterparts....................................41
13.13. Limitation on Benefits.......................................41
<PAGE>
13.14. Binding Effect...............................................41
<PAGE>
Exhibit A Definitions
Exhibit B Option Agreement
Exhibit C Stockholders Agreement
Exhibit D Registration Rights Agreement
Exhibit E Form of Opinion of Company
Exhibit F Restated Articles
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is entered into as of September
4, 1996 between Doctors Health System, Inc., a Maryland corporation (the
"COMPANY"), and Genesis Health Ventures, Inc., a Pennsylvania corporation (the
"INVESTOR").
WHEREAS, the Company desires to issue to the Investor, and the
Investor desires to subscribe for and acquire from the Company, a substantial
equity interest in the Company, upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
1. DEFINITIONS
For all purposes of this Purchase Agreement, certain
capitalized terms specified in Exhibit A shall have the meanings set forth in
that Exhibit A, except as otherwise expressly provided.
2. SALE AND PURCHASE OF SHARES
2.1. SALE AND PURCHASE OF SHARES
On the basis of the representations, warranties and agreements
contained herein, and subject to the terms and conditions hereof, the Company
agrees to issue to the Investor, and the Investor agrees to purchase from the
Company, 571,428 shares (the "SHARES") of the Company's Series C Preferred
Stock, par value $17.50 per share (the "SERIES C PREFERRED"), at a price of
$17.50 per share, for an aggregate purchase price of $10 million in cash. The
Investor shall purchase 428,571 shares of Series C Preferred at the Initial
Closing and 142,857 shares of Series C Preferred at the Second Closing.
2.2. SALE AND PURCHASE OF OPTION FOR ADDITIONAL SHARES
On the basis of the representations, warranties and agreements
contained herein, and subject to the terms and conditions hereof, the Company
agrees to issue to the Investor, and the Investor agrees to purchase from the
Company, an option to purchase up to 500,000 shares of the Series C Preferred at
a price of $20 per share, for an aggregate purchase price of $10 million in
cash, on the
<PAGE>
terms and conditions set forth in the Option Agreement attached as
Exhibit B hereto (the "OPTION").
2.3. PURCHASE PRICE
(a) At the Initial Closing, the Investor shall pay to the
Company by wire transfer of immediately available funds the amount of $7,500,000
dollars (the "INITIAL PURCHASE PRICE").
(b) At the Second Closing, the Investor shall pay to the
Company by wire transfer of immediately available funds the amount of $2,500,000
dollars (the "SECOND PURCHASE PRICE").
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the Disclosure Schedule,
the Company represents and warrants (which representations and warranties shall
be deemed to include the disclosure with respect thereto so specified in the
Disclosure Schedule) to the Investor as follows:
3.1. ORGANIZATION AND STANDING
The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland, and has the full
and unrestricted corporate power and authority to own, operate and lease its
Assets, to carry on its business as currently conducted, to execute and deliver
this Purchase Agreement and to carry out the transactions contemplated hereby.
There is no state, country or territory wherein the absence of licensing or
qualification as a foreign corporation would have a material adverse effect upon
the business of the Company as currently conducted.
3.2. SUBSIDIARIES
The Company has no Subsidiaries and no equity investment or
other interest in, nor has the Company made advances or loans to, any
corporation, association, partnership, joint venture or other entity, except as
set forth in the Disclosure Schedule. Section 3.2 of the Disclosure Schedule
sets forth (a) the authorized capital of each direct and indirect Subsidiary of
the Company and the percentage of the outstanding capital of each Subsidiary
directly or indirectly owned by the Company, and (b) the nature and amount of
any such equity investment or other equity interest. All equity capital of
Subsidiaries directly or indirectly held by the Company has been duly authorized
and validly issued and is outstanding, fully paid and nonassessable. Except as
set forth in the Disclosure Schedule, the Company directly, or indirectly
through wholly owned Subsidiaries,
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<PAGE>
owns all such equity capital of the direct or indirect Subsidiaries free
and clear of all Encumbrances. Each Subsidiary is duly organized, validly
existing and in good standing (or its local equivalent) under the laws of its
state or jurisdiction of organization (as listed in the Disclosure Schedule),
and has the full and unrestricted corporate power and authority to own, operate
and lease its Assets and to carry on its business as currently conducted. Each
Subsidiary is registered to conduct business and is in good standing in the
states, countries and territories listed in the Disclosure Schedule. There is no
state, country or territory wherein the absence of registration as a foreign
corporation would have a material adverse effect upon the business of the
Subsidiaries as currently conducted.
3.3. ARTICLES OF INCORPORATION AND BYLAWS
The Company has delivered to the Investor (i) a true and
complete copy of the Restated Articles and the bylaws, as currently in effect
and certified by the secretary of the Company, and (ii) a true and complete copy
of the organizational documents of each Subsidiary, as currently in effect. Such
copies are attached as exhibits to, and part of, Section 3.3 of the Disclosure
Schedule.
3.4. CAPITALIZATION
Upon the filing of the Restated Articles, the authorized
capital stock of the Company and the outstanding shares of capital stock of the
Company as of the date hereof will be as set forth in Section 3.4 of the
Disclosure Schedule. All of such outstanding shares have been validly issued and
are fully paid and nonassessable. No shares of capital stock of the Company or
any Subsidiary have been reserved for any purpose, other than issuance of
capital stock in amounts set forth in Section 3.4 of the Disclosure Schedule (i)
pursuant to the Company's Omnibus Stock Option Plan , (ii) upon the conversion
of Series A Preferred Stock and the Series B Preferred Stock, (iii) upon the
exercise of the Common Stock Warrants (as defined in Section 3.4 of the
Disclosure Schedule) and (iv) pursuant to the Option Agreement. Except as set
forth in Section 3.4 of the Disclosure Schedule, there are no outstanding
securities convertible into or exchangeable for the capital stock of the Company
or any of the Subsidiaries and no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of the Company or any of the Subsidiaries. There are no
outstanding Agreements affecting or relating to the voting, issuance, purchase,
redemption, repurchase, transfer or registration for sale under the Securities
Act of the Company's common stock, any other securities of the Company, or any
securities of any Subsidiary, except as contemplated hereunder.
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<PAGE>
3.5. DIRECTORS, OFFICERS AND EMPLOYEES
Section 3.5 of the Disclosure Schedule lists all current
directors and officers of the Company and all managers, employees and
consultants of the Company who, individually, have received or are scheduled to
receive compensation from the Company for the year ending December 31, 1996 in
excess of $100,000, showing each such person's name, positions, and annual
remuneration and material bonuses for the current fiscal year.
3.6. FINANCIAL STATEMENTS
(a) The Company has prepared and delivered to the Investor and
there are included as exhibits that are part of Section 3.6(a) of the Disclosure
Schedule, the Consolidated balance sheets of the Company, the Subsidiaries and
the Medical Groups as of the end of the year ended December 31, 1995, and the
Consolidated statements of income, stockholders' equity and changes in financial
position for such year, accompanied by the unqualified opinion of Grant Thornton
L.L.P. The Company also has prepared and delivered to the Investor, and there
are included as exhibits that are part of Section 3.6(a) of the Disclosure
Schedule, an internal financial reporting package, which includes the unaudited
Consolidated balance sheet of the Company as of June 30, 1996, and the unaudited
Consolidated statements of income, stockholders' equity and changes in financial
position for the six months ended June 30, 1996. All of the financial
statements, including, without limitation, the notes thereto, referred to in
this Section 3.6 or delivered to the Investor after the date hereof pursuant to
this Purchase Agreement: (a) are in accordance with the books and records of the
Company, the Subsidiaries and the Medical Groups, (b) present fairly the
Consolidated financial position of the Company, the Subsidiaries and the Medical
Groups as of the respective dates and the results of operations and changes in
financial position for the respective periods indicated (subject, in the case of
the June 30, 1996 statements, to the absence of footnotes and normal
adjustments), and (c) have been prepared in accordance with generally accepted
accounting principles (subject, in the case of the June 30, 1996 statements, to
the absence of footnotes and to normal adjustments) applied on a basis
consistent with prior accounting periods.
(b) The Company has prepared and delivered to the Investor and
has included as an exhibit to Section 3.6(b) of the Disclosure Schedule the
Company's operating plan for the period ending December 31, 1997 (the "OPERATING
PLAN"), which (i) has been prepared in good faith on a basis consistent with the
historical Consolidated financial statements furnished pursuant to this Purchase
Agreement and, to the Company's knowledge, consistent with the payment
arrangements contemplated in the Company's agreements with health maintenance
organizations and other payors which have been entered into prior to the date
hereof and (ii) represents the Company's good faith best judgment as to the
expected financial condition and results of operations of the Company at and for
the
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<PAGE>
period ending December 31, 1997. To the Company's knowledge, the attainment
by the Company of the results forecasted in the Operating Plan will not violate
any Laws currently in effect and applicable to the Company, the Subsidiaries,
the Medical Groups or their operations. The results forecasted in the Operating
Plan are management's estimates and do not constitute a warranty as to the
future performance of the Company.
3.7. NO LIABILITIES
Except as reflected in the June 30, 1996 balance sheet
attached as part of Section 3.6 of the Disclosure Schedule or incurred in the
Ordinary Course of Business (in amounts not material to the Company, its
Subsidiaries and the Medical Groups, taken as a whole), as of June 30, 1996,
there were no liabilities (whether contingent or absolute, matured or unmatured,
known or unknown) of the Company, any Subsidiary or any Medical Group that would
be required by GAAP to be disclosed therein. Except as described in the
Disclosure Schedule, since June 30, 1996, the Company has not incurred any
liabilities (whether contingent or absolute, matured or unmatured, known or
unknown) other than in the Ordinary Course of Business and in amounts that are
not material to the Company, its Subsidiaries and the Medical Groups, taken as a
whole.
3.8. ACCOUNTS RECEIVABLE
The accounts receivable of the Company, the Subsidiaries and
the Medical Groups shown on the balance sheets delivered pursuant to SECTION
3.6, or thereafter acquired by any of them, have been collected or, to the
knowledge of the Company, are collectible in amounts not less than the amounts
thereof carried on the books of the Company, the Subsidiaries and the Medical
Groups, except to the extent of the allowance for doubtful accounts shown on
such balance sheets and the additional write-off of certain accounts receivable
set forth on the Disclosure Schedule.
3.9. TAXES
(a) All Company Tax Returns due on or before the date hereof,
or which become due after the date hereof and on or before the Closing Date,
have been, or will be, duly filed. No penalties or other charges are or will
become due with respect to any of the Company Tax Returns so filed as the result
of the late filing thereof. All of the Company Tax Returns so filed are (or, in
the case of returns becoming due after the date hereof and on or before the
Closing Date, will be) true and complete in all respects. The Company, its
Subsidiaries or the Medical Groups: (i) have paid all Taxes due or claimed to be
due by any taxing authority in connection with any of the Company Tax Returns
(without regard to whether or not such Taxes are shown as due on such Company
Tax Returns); or (ii) have
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<PAGE>
established (or, in the case of amounts becoming due after the date hereof,
prior to the Closing Date will have paid or established) in financial statements
provided to the Investor pursuant to SECTION 3.6 adequate reserves (in
conformity with generally accepted accounting principles consistently applied)
for the payment of such Taxes. The amounts set up as reserves for Taxes on the
Consolidated financial statements of the Company delivered pursuant to SECTION
3.6 are sufficient for the payment of all unpaid Taxes, whether or not such
Taxes are disputed or are yet due and payable, for or with respect to the
period, and for which the Company may be liable in its own right (including,
without limitation, by reason of being a member of the same affiliated group) or
as a transferee of the Assets of, or successor to, any corporation, person,
association, partnership, joint venture or other entity.
(b) Neither the Company, any Subsidiary nor any Medical Group,
either in its own right (including, without limitation, by reason of being a
member of the same affiliated group) or as a transferee, has or on the Closing
Date will have any liability for Taxes payable for or with respect to any
periods prior to and including the Closing Date in excess of the amounts
actually paid prior to the Closing Date or reserved for in financial statements
delivered to the Investor pursuant to SECTION 3.6.
(c) All Company Tax Returns have been filed with the relevant
taxing authorities, and all deficiencies related to such Company Tax Returns
proposed as a result of such examinations have been paid or settled. Except as
set forth in Section 3.9(c) of the Disclosure Schedule, there is no action,
suit, proceeding, audit, investigation or claim pending or, to the knowledge of
the Company, threatened in respect of any Taxes for which the Company is or may
become liable, nor has any deficiency or claim for any such Taxes been proposed,
asserted or, to the knowledge of the Company, its Subsidiaries or the Medical
Groups, threatened. Except as set forth in Section 3.9(c) of the Disclosure
Schedule (i) no agreement, waiver or consent providing for an extension of time
with respect to the assessment or collection of any Taxes against the Company is
outstanding, and (ii) no power of attorney granted by the Company with respect
to any tax matters is currently in force.
(d) The Company has delivered or otherwise made available to
the Investor true and complete copies of all Company Tax Returns and all written
communications relating to any such Company Tax Returns or to any deficiency or
claim proposed and/or asserted, irrespective of the outcome of such matter, but
only to the extent such items relate to tax years (i) which are subject to an
audit, investigation, examination or other proceeding, or (ii) with respect to
which the statute of limitations has not expired.
(e) Section 3.9(e) of the Disclosure Schedule sets forth (i)
all federal tax elections previously filed and currently in effect with respect
to the Company or
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<PAGE>
any of the Subsidiaries or the Medical Groups, and (ii) all elections and
consents previously filed and currently in effect for purposes of state or local
Taxes, in each case that reasonably could be expected to affect or be binding
upon the Company or any of the Subsidiaries or the Medical Groups or their
respective Assets or operations after the Closing. Section 3.9(e) of the
Disclosure Schedule sets forth all federal Forms 3115 filed with respect to the
Company or any of the Subsidiaries.
(f) Neither the Company nor any of the Subsidiaries or the
Medical Groups is a party to an Agreement relating to the sharing, allocation or
payment of, or indemnity for, Taxes (other than an Agreement the only parties to
which are the Company, the Subsidiaries and/or the Medical Groups).
3.10. CONDUCT OF BUSINESS; ABSENCE OF MATERIAL ADVERSE CHANGE
Other than as set forth in Section 3.10 of the Disclosure
Schedule, since June 30, 1996, there has been no material adverse change, and no
change except in the Ordinary Course of Business, in the business, operations,
condition (financial or otherwise), Assets, liabilities or prospects of the
Company. Except as set forth in Section 3.10 of the Disclosure Schedule, since
June 30, 1996, the Company has conducted its business diligently and
substantially in the manner heretofore conducted and only in the Ordinary Course
of Business, and the Company has not, except as contemplated by this Purchase
Agreement, (a) incurred loss of, or significant injury to, any Material Assets
of the Company as the result of any fire, explosion, flood, windstorm,
earthquake, labor trouble, riot, accident, act of God or public enemy or armed
forces, or other casualty; (b) issued any capital stock, bonds or other
corporate securities or debt instruments, granted any options, warrants or other
rights calling for the issuance thereof, or borrowed any funds; (c) incurred, or
become subject to, any obligation or liability (absolute or contingent, matured
or unmatured, known or unknown), except current liabilities incurred in the
Ordinary Course of Business; (d) discharged or satisfied any Encumbrance or paid
any obligation or liability (absolute or contingent, matured or unmatured, known
or unknown) other than current liabilities shown in the balance sheets delivered
pursuant to SECTION 3.6, and current liabilities incurred since June 30, 1996 in
the Ordinary Course of Business; (e) declared or made payment of, or set aside
for payment, any dividends or distributions of any Assets, or purchased,
redeemed or otherwise acquired any of its capital stock, any securities
convertible into capital stock, or any other securities; (f) mortgaged, pledged
or subjected to any Encumbrance any of its Material Assets; (g) sold, exchanged,
transferred or otherwise disposed of any of its Material Assets, or canceled any
debts or claims, except in each case in the Ordinary Course of Business; (h)
written down the value of any Material Assets or written off as uncollectible
any notes or accounts receivable, except write-downs and write-offs in the
Ordinary Course of Business, none of which, individually or in the aggregate,
are material to the Company, the Subsidiaries and the Medical Groups, taken as a
whole; (i) entered into any transactions other than in the Ordinary Course of
Business; (j) increased the rate of
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compensation payable, or to become payable, by it to any of its officers,
employees, agents or independent contractors over the rate being paid to them on
June 30, 1996, other than in the Ordinary Course of Business; (k) made or
permitted any amendment or termination of any material Agreement to which it is
a party or which it owns; (l) through negotiation or otherwise made any
commitment or incurred any liability to any labor organization; (m) made any
accrual or arrangement for or payment of bonuses or special compensation of any
kind to any director, officer or employee, other than in the Ordinary Course of
Business; (n) directly or indirectly paid any severance or termination pay to
any officer or employee in excess of two months' salary; (o) made capital
expenditures, or entered into commitments therefor, aggregating more than
$100,000; (p) made any change in any method of accounting or accounting
practice; (q) entered into any transaction of the type described in SECTION
3.22; or (r) made an Agreement to do any of the foregoing.
3.11. TITLE TO PROPERTY AND ASSETS
Except as set forth in Section 3.11 of the Disclosure
Schedule, the Company and the Subsidiaries have good, valid and marketable title
to all Assets respectively owned by them, free and clear of all Encumbrances
other than those referred to in the balance sheets delivered pursuant to SECTION
3.6 (or the notes thereto). The Company and the Subsidiaries do not own any real
estate, and the Company is not now and has never been a "United States real
property holding corporation" as defined in ss.897(c)(2) of the Code and ss.
1.897-2(b) of the regulations promulgated thereunder. All material items of
personal property of the Company and the Subsidiaries is in good operating
condition and repair and is suitable and adequate for the uses for which it is
intended or is being used.
3.12. INSURANCE
Other than as set forth in Section 3.12 of the Disclosure
Schedule, the Company has insurance coverage under policies maintained by the
Company (including stop loss and reinsurance policies) that (a) are with
insurance companies reasonably believed by the Company to be financially sound
and reputable; (b) are in full force and effect; (c) are sufficient for
compliance by the Company and by each Subsidiary and Medical Group with all
requirements of Law and of all Agreements to which the Company, any Subsidiary
or any Medical Group is a party; (d) are valid and outstanding policies
enforceable against the insurer; and (e) insure against risks of the kind
customarily insured against and in amounts customarily carried by companies
similarly situated and by companies engaged in similar businesses and owning
similar properties.
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3.13. INTELLECTUAL PROPERTY
(a) Section 3.13(a) of the Disclosure Schedule lists all
trademarks, trademark applications and registrations, registered copyrights,
patents and patent applications owned or licensed by or registered in the name
of the Company, any Subsidiary or any Medical Group or used or to be used by the
Company, any Subsidiary or any Medical Group in its business as presently
conducted or contemplated, and all other items of Intellectual Property that are
material to the business or operations of the Company, any Subsidiary or any
Medical Group. Section 3.13(a) of the Disclosure Schedule lists those
trademarks, trademark applications and registrations, registered copyrights,
patents and patent applications which have been duly registered in, filed in or
issued by the United States Patent and Trademark Office, the United States
Register of Copyrights, or the corresponding offices of other jurisdictions as
identified in Section 3.13(a) of the Disclosure Schedule, and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations in the United States and each such jurisdiction.
(b) All licenses or other Agreements material to the business
of the Company, the Subsidiaries and the Medical Groups, taken as a whole, under
which the Company, any Subsidiary or any Medical Group is granted rights in
Intellectual Property are listed on the Disclosure Schedule. Except as set forth
in Section 3.13(b) of the Disclosure Schedule, all such licenses or other
Agreements are in full force and effect, there is no material default by any
party thereto. To the knowledge of the Company, the licensors under such
licenses and other Agreements have and had all requisite power and authority to
grant the rights purported to be conferred thereby.
3.14. DEBT INSTRUMENTS
Section 3.14 of the Disclosure Schedule lists all mortgages,
indentures, notes, guarantees and other Agreements for or relating to borrowed
money (including, without limitation, capital leases) to which the Company, any
Subsidiary or any Medical Group is a party or which have been assumed by the
Company, any Subsidiary or any Medical Group or to which any Assets of the
Company, any Subsidiary or any Medical Group are subject. The Company, the
Subsidiaries and the Medical Groups have performed all the obligations required
to be performed by any of them to date and are not in default in any respect
under any of the foregoing, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default.
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3.15. LEASES
Section 3.15 of the Disclosure Schedule lists all leases and
other Agreements under which the Company, any Subsidiary or any Medical Group is
lessee or lessor of any Material Asset, or holds, manages or operates any
Material Asset owned by any third party, or under which any Material Asset owned
by the Company or by any Subsidiary or Medical Group is held, operated or
managed by a third party. The Company, the Subsidiaries and the Medical Group
are the owners and holders of all the leasehold estates purported to be granted
by the Documents described in Section 3.15 of the Disclosure Schedule to them.
Each such lease and other Agreement is in full force and effect and constitutes
a legal, valid and binding obligation of, and is legally enforceable against,
the respective parties thereto and grants the leasehold estate it purports to
grant free and clear of all Encumbrances. All necessary governmental approvals
with respect thereto have been obtained, all necessary filings or registrations
therefor have been made, and there have been no threatened cancellations thereof
and are no outstanding disputes thereunder. The Company, the Subsidiaries and
the Medical Groups have in all respects performed all material obligations
thereunder required to be performed by any of them to date. No party is in
default in any respect under any of the foregoing, and there has not occurred
any event which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute such a default. To the
knowledge of the Company, all of the Assets subject to such leases are in good
operating condition and repair.
3.16. OTHER AGREEMENTS
(a) Section 3.16(a) of the Disclosure Schedule lists all
material Agreements to which the Company, any Subsidiary or any Medical Group is
a party or by which the Company, any Subsidiary or any Medical Group is bound at
the date hereof. True and correct copies of such Agreements have been made
available to the Investor. Each such Agreement is in full force and effect and
constitutes a legal, valid and binding obligation of, and is legally enforceable
against, the respective parties thereto. All necessary governmental approvals
with respect thereto have been obtained, all necessary filings or registrations
therefor have been made, and there have been no threatened cancellations thereof
and are no outstanding disputes thereunder. The Company, the Subsidiaries and
the Medical Groups have in all respects performed all material obligations
thereunder required to be performed by any of them to date. No party is in
default in any respect under any of the Agreements described in Section 3.16(a)
of the Disclosure Schedule, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a default.
(b) Except as specified in Section 3.16(b) of the Disclosure
Schedule (and without limiting the foregoing), neither the Company nor any
Subsidiary or
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Medical Group is a party to any written (i) Agreement for the employment of any
officer, employee, consultant or independent contractor involving payments of
more than $100,000 per year over its remaining term other than officers,
employees, consultants or contractors set forth in Section 3.5 of the Disclosure
Schedule; (ii) Agreement with any labor organization or other collective
bargaining unit except as may be imposed by law; (iii) Agreement for the future
purchase of materials, supplies, services, merchandise or equipment involving
payments of more than $100,000 over its remaining term (including, without
limitation, periods covered by any option to renew by either party); (iv)
Agreement for the purchase, sale or lease of any real estate or other Material
Assets; (v) profit-sharing, bonus, incentive compensation, deferred
compensation, stock option, severance pay, stock purchase, employee benefit,
insurance, hospitalization, pension, retirement or other similar plan or
Agreement; (vi) Agreement for the sale of any of its Material Assets or the
grant of any preferential rights to purchase any of its Material Assets or
rights, other than in the Ordinary Course of Business; (vii) Agreement which
contains any provisions requiring the Company, any Subsidiary or any Medical
Group to indemnify any other party thereto other than in the Ordinary Course of
Business; (viii) joint venture agreement or other Agreement involving the
sharing of profits; (ix) outstanding loan to any person or entity or receivable
due from any stockholder of the Company or persons or entities controlling,
controlled by or under common control with the Company; or (x) any Agreement
(including, without limitation, Agreements not to compete and exclusivity
Agreements) that reasonably could be interpreted to impose any material
restriction on the Company's ability to conduct its business operations in the
Ordinary Course of Business.
(c) Section 3.16(c) of the Disclosure Schedule lists all
physicians who, as of the date hereof, have entered into (i) participation
agreements with a Medical Group or other medical practice affiliated with the
Company, (ii) binding letters of intent to become affiliated with the Company, a
Medical Group or a medical practice affiliated with the Company, and (iii)
non-binding letters of intent to become affiliated with the Company, a Medical
Group or a medical practice affiliated with the Company.
3.17. BOOKS AND RECORDS
The books of account, stock records, minute books and other
records of the Company and the Subsidiaries are true and complete in all
material respects and have been maintained in accordance with good business
practices, and the matters contained therein are appropriately and accurately
reflected in the financial statements of the Company delivered pursuant to
SECTION 4.6.
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3.18. LITIGATION; DISPUTES
(a) Except as set forth in Section 3.18(a) of the Disclosure
Schedule, there are no actions, suits, claims, arbitrations, proceedings or
investigations pending, or, to the Company's knowledge, threatened or reasonably
anticipated against, affecting or involving the Company, any Subsidiary or any
Medical Group or their respective businesses or Assets, or the transactions
contemplated by this Purchase Agreement, at law or in equity or admiralty, or
before or by any court, arbitrator or governmental authority, domestic or
foreign. Neither the Company nor any Subsidiary or Medical Group is operating
under, subject to or in default with respect to any order, award, writ,
injunction, decree or judgment of any court, arbitrator or governmental
authority.
(b) Neither the Company nor any Subsidiary or Medical Group is
currently involved in or, to the knowledge of the Company, the Subsidiaries or
the Medical Groups, reasonably anticipates any dispute with any of its current
or former employees, agents, brokers, distributors, vendors, customers, business
consultants, franchisees, franchisors, representatives or independent
contractors (or any current or former employees of any of the foregoing persons
or entities) affecting the businesses or Assets of the Company, any Subsidiary
or any Medical Group.
3.19. LABOR RELATIONS
There are no strikes, work stoppages, grievance proceedings,
union organization efforts or other controversies pending or, to the Company's
knowledge, threatened or reasonably anticipated between the Company, any
Subsidiary or any Medical Group and (i) any current or former employees of the
Company or of any Subsidiary or Medical Group or (ii) any union or other
collective bargaining unit representing such employees. The Company, the
Subsidiaries and the Medical Groups have complied and are in compliance with all
Laws relating to employment or the workplace, including, without limitation,
provisions relating to wages, hours, collective bargaining, safety and health,
work authorization, equal employment opportunity, immigration, withholding,
unemployment compensation, worker's compensation, employee privacy and right to
know, except where a failure to comply, singly or in the aggregate, would not
have a material adverse effect to the Company, the Subsidiaries and the Medical
Groups, taken as a whole. There are no collective bargaining agreements or
employment agreements (other than agreements as may be imposed by applicable
law) between the Company, any Subsidiary or any Medical Group and any of their
respective employees, or professional service agreements not terminable at will
relating to the businesses and Assets of the Company or of any Subsidiary or
Medical Group, other than as set forth on the Disclosure Schedule. The
consummation of the transactions contemplated hereby will not cause the Company,
any of the Subsidiaries or the
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Medical Group or the Investor to incur or suffer any liability relating to, or
obligation to pay, severance, termination or other payments to any person or
entity.
3.20. PENSION AND BENEFIT PLANS
3.20.1. DISCLOSURE SCHEDULE
Except as set forth in Section 3.20.1 of the Disclosure
Schedule, neither the Company nor any Subsidiary or Medical Group (i) maintains
any Plan or material Other Arrangement, (ii) is a party to any Plan or material
Other Arrangement or (iii) has obligations under any Plan or material Other
Arrangement.
3.20.2. COPIES OF DOCUMENTS
The Company has delivered to the Investor true and complete
copies of each of the following Documents: (i) the Documents setting forth the
terms of each Plan; (ii) for the most recent plan year, all annual reports (Form
5500 series) on each Plan that have been filed with any governmental agency;
(iii) the current summary plan description and subsequent summaries of material
modifications for each Title I Plan; (iv) all DOL opinions on any Plan and all
correspondence relating to the request for and receipt of each opinion; (v) all
IRS rulings, opinions or technical advice relating to any Plan; and (vi) all
Agreements with service providers or fiduciaries for providing services on
behalf of any Plan. For each material Other Arrangement, the Company has
delivered to the Investor true and complete copies of each policy, Agreement or
other Document setting forth or explaining the terms of the Other Arrangement.
3.20.3. GENERAL
Except as provided in Section 3.20.1 of the Disclosure
Schedule, no Plan is (i) a Multiemployer Plan, (ii) an ESOP, (iii) subject to
Title IV of ERISA, (iv) funded through a trust or similar arrangement, or (v)
provides post-retirement medical, life insurance or other benefits promised
(except for health care continuation coverage) provided or otherwise due now or
in the future to current, former or retired employees of the Company or any
Subsidiary.
3.20.4. UNPAID CONTRIBUTIONS
The Disclosure Schedule sets forth the contributions that (i)
the Company or any Subsidiary has promised or is otherwise obligated to make
under any Plan and (ii) are unpaid as of the date of this Purchase Agreement.
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3.20.5. CONTRIBUTIONS AND OTHER OBLIGATIONS
The Company and the Subsidiaries have made all contributions
required by and due under the terms of its Plans.
3.20.6. QUALIFIED PLANS
The Company's 401(k) Plan is the Company's only Qualified
Plan. Except as described in Section 3.20.6 of the Disclosure Schedule, the
401(k) Plan complies and has complied in all material respects with ERISA, the
Code (including, without limitation, the requirements for Tax qualification
described in Section 401 thereof), and all other Laws. The Company intends to
receive a determination letter from the IRS with respect to the 401(k) Plan. The
remedial amendment period for the adoption of the 401(k) Plan has not lapsed.
3.20.7. COMPLIANCE WITH LAW
The Company has complied in all material respects with all
applicable provisions of the Code, ERISA, the National Labor Relations Act,
Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment
Act, the Fair Labor Standards Act, the Securities Act, the Securities Exchange
Act of 1934, and all other Laws pertaining to the Plans, Other Arrangements and
other employee or employment related benefits, and all premiums and assessments
relating to all Plans or Other Arrangements. The Company has no pending unfair
labor practice charges, contract grievances under any collective bargaining
agreement, other administrative charges, claims, grievances or lawsuits before
any court, governmental agency, regulatory body, or arbiter arising under any
Law governing any Plan, and there exist no facts that could give rise to such a
claim.
3.20.8. ERISA; PROHIBITED TRANSACTIONS
Neither the Company nor any Subsidiary nor any of the Plans
has engaged in a violation of Section 406(a) or 406(b) of ERISA for which no
exemption exists under Section 408 of ERISA or a "prohibited transaction" (as
such term is defined in Section 4975(c)(1) of the Code), for which no exemption
exists under Section 4975(c)(2) or 4975(d) of the Code.
3.20.9. HEALTH CARE CONTINUATION COVERAGE REQUIREMENTS
All Welfare Plans of the Company that are subject to Section
4980B(f) of the Code and Sections 601 through 607 of ERISA comply with and have
been administered in compliance with the health care continuation-coverage
requirements for tax-favored status under Section 4980B(f) of the Code (formerly
Section 162(k) of the Code), Sections 601 through 607 of ERISA, except where a
failure to comply, singly or in the aggregate, would not have a material adverse
effect on the Company or its Subsidiaries.
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3.20.10. FILED RETURNS AND REPORTS
The Company and the Subsidiaries have (i) filed or caused to
be filed all returns and reports on Plans in which employees of the Company or
Subsidiaries participate that they are required to file and (ii) paid or made
adequate provision for all fees, interest, penalties, assessments or
deficiencies that have become due pursuant to those returns or reports or
pursuant to any assessment or adjustment that has been made relating to those
returns or reports. All other fees, interest, penalties and assessments that are
payable by or for the Company or any Subsidiary have been timely reported, fully
paid and discharged. There are no unpaid fees, penalties, interest or
assessments due from the Company or any subsidiary or from any other person that
are or could become a lien on any Asset of the Company or any Subsidiary or
could otherwise adversely affect the businesses or Assets of the Company or any
Subsidiary.
3.21. ENVIRONMENTAL
(a) To the Company's knowledge, the Company and each
Subsidiary and Medical Group are in compliance with, have been in compliance
with, and have no material liability under, the Environmental Laws.
(b) To the Company's knowledge, the Real Property currently
operated by the Company and each Subsidiary and Medical Group does not contain,
and during the period of any ownership, tenancy or operation, no Real Property
formerly owned or operated contained, any underground improvements used
currently or in the past for the management of Hazardous Materials, and no
portion of any currently leased or operated property is or has been used as a
dump or landfill or consists of filled in land, except where the existence
thereof could not have a material adverse effect on the Company, its
Subsidiaries and the Medical Groups, taken as a whole. Except as disclosed in
Section 3.21(b) of the Disclosure Schedule, neither PCBs nor asbestos-containing
materials (that would be material to the Company) are present on or in any Real
Property currently operated by the Company, its Subsidiaries or the Medical
Groups.
(c) Neither the Company, its Subsidiaries nor the Medical
Groups, nor any officer, director or stockholder thereof has directly or
indirectly received any Claim or knows or suspects any fact(s) which might
reasonably form the basis for any Claim arising out of or attributable to: (i)
the current or past presence, release, or threatened release of Hazardous
Materials at or from any part of the Real Property; (ii) the off-site disposal
or treatment of Hazardous Materials originating on or from the Real Property or
the businesses or Assets of the Company or any Subsidiary; or (iii) any
violation of Environmental Laws at any part of the Real Property or otherwise
arising from the Company's, any Subsidiary's or any
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Medical Group's activities (or the activities of the Company's, any Subsidiary's
or any Medical Group's predecessors in title) involving Hazardous Materials.
3.22. TRANSACTIONS WITH RELATED PARTIES
Except as contemplated by this Purchase Agreement or set forth
in Section 3.22 of the Disclosure Schedule, neither any present or former
officer, director or stockholder of the Company or any Subsidiary, nor any
Affiliate of such officer, director or stockholder, is currently a party to any
transaction with the Company or any Subsidiary, including, without limitation,
any Agreement providing for the employment of, Furnishing of Services by, rental
of Assets from or to, or otherwise requiring payments to, any such officer,
director, stockholder or Affiliate, other than transactions in the Ordinary
Course of Business with the Company.
3.23. RESTRICTIONS AND CONSENTS
There are no Agreements, Laws or other restrictions of any
kind to which the Company, any Subsidiary or any Medical Group (or any asset
thereof) is party or subject that would prevent or restrict the execution,
delivery or performance of this Purchase Agreement or result in any penalty,
forfeiture, Agreement termination, or restriction on business operations of the
Investor, the Company, any Subsidiary or any Medical Group as a result of the
execution, delivery or performance of this Purchase Agreement. Section 3.23 of
the Disclosure Schedule lists all such Agreements and Laws that reasonably could
be interpreted or expected to require the consent or acquiescence of any person
or entity not party to this Purchase Agreement with respect to any aspect of the
execution, delivery or performance of this Purchase Agreement by the Company,
any Subsidiary or any Medical Group.
3.24. AUTHORIZATION
The execution, delivery and performance by the Company of this
Purchase Agreement and all other Documents contemplated hereby, the fulfillment
of and compliance with the respective terms and provisions hereof and thereof,
and the consummation by the Company of the transactions contemplated hereby and
thereby, do not and will not: (a) require any consent or approval of the
stockholders of the Company that has not been obtained; (b) conflict with, or
violate any provision of, any Law having applicability to the Company, any
Subsidiary or any Medical Group or any of their respective Assets, or any
provision of the certificate or articles of organization or bylaws or equivalent
constituent document of the Company, any Subsidiary or any Medical Group; (c)
conflict with, or result in any breach of, or constitute a default under any
Agreement to which the Company, any Subsidiary or any Medical Group is a party
or by which it or any of its Assets may be bound; or (d) result in or require
the creation or imposition of or result in the
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acceleration of any indebtedness, or of a material Encumbrance, or with respect
to, the Company, any Subsidiary or any Medical Group or any of the Assets now
owned or hereafter acquired by the Company, any Subsidiary or any Medical Group.
3.25. ABSENCE OF VIOLATIONS
Neither the Company, any Subsidiary nor any Medical Group is
in violation of or default under, nor has it breached, any term or provision of
its certificate or articles of organization or bylaws or any material Agreement
or restriction to which the Company, any Subsidiary or any Medical Group is a
party or by which the Company or any Subsidiary or any Material Asset thereof is
bound or affected.
3.26. REGULATORY MATTERS
The Company and the Subsidiaries and, to the Company's
knowledge, the Medical Groups and the physicians employed by the Medical Groups
have not knowingly or willfully failed to comply with the regulatory matters
described in this Section 3.26.
3.26.1. GENERAL COMPLIANCE WITH LAW
The Company, the Subsidiaries and, to the Company's knowledge,
the Medical Groups have complied and are in full compliance with all Laws except
where a failure to comply, singly or in the aggregate, would not have a material
adverse effect on the Company, the Subsidiaries and the Medical Groups, taken as
a whole.
3.26.2. LICENSES AND PERMITS
The Company, the Subsidiaries, the Medical Groups and each of
the physicians employed by such Persons have all licenses, permits, certificates
of authority, franchises, approvals, authorizations, consents or orders of, or
filings with ("PERMITS") any federal, state, local, foreign or other
governmental agency, instrumentality, commission, authority, board or any other
Person, necessary to conduct their business as now being conducted except where
the failure to have any such Permit does not have a material adverse effect on
the Company, the Subsidiaries and the Medical Groups, taken as a whole. All
Permits of the Company and the Subsidiaries and, to the Company's knowledge, the
Medical Groups and each of the physicians employed by such Medical Groups are
valid and in full force and effect except where the failure to have any such
Permit does not have a material adverse effect on the Company, the Subsidiaries
and the Medical Groups, taken as a whole. No notice to, declaration, filing or
registration with, or Permit or consent from, any governmental or regulatory
body or authority, or any other Person or entity, is required to be made or
obtained by the Company or any of
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the Subsidiaries or Medical Groups in connection with the execution, delivery or
performance of this Purchase Agreement and the consummation of the transactions
contemplated hereby. Notwithstanding the foregoing, the Company is not required
to obtain any Permit to do business as a health maintenance organization,
insurance company, or other risk-bearing health care entity under the Laws and
regulations of Maryland or the Laws and regulations of any other jurisdiction in
which the Company, the Subsidiaries or the Medical Groups do business.
3.26.3. FRAUD AND ABUSE MATTERS
To the Company's knowledge, the Company, the Medical Groups,
and all persons and entities providing services for the Company or the Medical
Groups, have not engaged in any activities which are prohibited or could form
the basis for criminal penalties, civil monetary penalties or a mandatory or
permissive exclusion from the Medicare, Medicaid or other federal and state
health care programs under ss. ss. 1320a-7, 1320a-7a, 1320a-7b, or 1395nn of
Title 42 of the United States Code, the federal CHAMPUS statute, or any
regulations promulgated thereunder, or similar or related federal, state and
local statutes, common law or regulations. Without in any way limiting the
foregoing, the Company, the Medical Groups, and, to the knowledge of the
Company, all persons and entities providing services for the Company or the
Medical Groups have not engaged in any of the following activities:
(i) knowingly and willingly made or caused to be made any
false statement or representation of a material fact in any
application for any benefit or payment;
(ii) knowingly and willingly made or caused to be made any
false statement or representation of a material fact for use
in determining rights to any benefit or payment;
(iii) presenting or causing to be presented a claim for
reimbursement under CHAMPUS, Medicare, Medicaid, or other
state healthcare program that is for an item or service that
the person presenting or causing to be presented knows or
should know was not provided as claimed, or presenting a claim
that the person presenting knows or should know is false or
fraudulent;
(iv) having knowledge of the occurrence of any event affecting
(a) his/her initial or continued right to any benefit or
payment or (b) the initial or continued right to any benefit
or payment of any other individual in whose behalf he/she has
applied for or is receiving such benefit or payment, conceals
or fails to disclose such event with an intent fraudulently to
secure such benefit or payment either in a greater amount or
quantity that is due or when no such benefit or payment is
authorized;
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(v) offering, paying, soliciting or receiving any remuneration
(including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (a) in
return for referring, or to induce the referral of, an
individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be
made in whole or in part by CHAMPUS, Medicare or Medicaid, or
other state health care program, or (b) in return for, or to
induce, the purchase, lease, or order of, or arranging for or
recommending the purchase, lease, or order of, any good,
facility, service, or item for which payment may be made in
whole or in part by CHAMPUS, Medicare or Medicaid, or other
state health care program;
(vi) making or causing to be made or inducing or seeking to
induce the making of any false statement or representation (or
omitting to state a fact required to be stated therein or
necessary to make the statements contained therein not
misleading) of a material fact with respect to (a) the
conditions or operations of a facility in order that the
facility may qualify for CHAMPUS, Medicare, Medicaid or other
state health care program certification, or (b) information
required to be provided under ss. 1124A of the Social Security
Act (42 U.S.C. ss. 1320a-3);
(vii) submitting or causing to be submitted bills or requests
for payment under Medicare, Medicaid or other state health
care program containing charges substantially in excess of
usual charges; or
(viii) furnishing or causing to be furnished items or services
to patients substantially in excess of the needs of such
patients.
3.26.4. HEALTH CARE ENTITY
The Company is not a "health care entity" which provides
"designated health services" for purposes of federal Medicare/Medicaid physician
self-referral and anti-kickback laws and regulations and similar Maryland Laws
and regulations.
3.26.5. HART-SCOTT-RODINO
No filings under Hart-Scott-Rodino are required in connection
with the Initial Closing and the Second Closing.
3.27. CERTAIN FUTURE RELATIONSHIPS
Subject to compliance with applicable Law, neither the Company
nor any Medical Group is subject to or bound by any agreement, commitment or
obligation that would prohibit, or be violated by, any agreement or arrangement
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with the Investor or its Affiliates on commercially reasonable terms for the
provision of health care services and supplies of the type provided by the
Investor and its Affiliates, including, without limitation, long-term care,
pharmacy services, durable medical equipment and home health care ("INVESTOR
SERVICES").
3.28. SEC REGISTRATION
The Company has filed with the Securities and Exchange
Commission a registration statement on Form S-1 with respect to the Class B
Common Stock and options to purchase Class B Common Stock (the "REGISTRATION
STATEMENT"). A copy of Registration Statement and all amendments thereto has
been delivered to the Investor.
3.29. BINDING OBLIGATION
This Purchase Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms; and each
Document to be executed by the Company pursuant hereto, when executed and
delivered in accordance with the provisions hereof, shall be a valid and binding
obligation of the Company, enforceable in accordance with its terms.
3.30. STATUS OF SHARES
The shares of Series C Preferred being issued to the Investor
on the Initial Closing Date have been, and the shares of Series C Preferred to
be issued to the Investor on the Second Closing Date will be, duly authorized by
all necessary corporate action on the part of the Company, and such shares, upon
the Initial Closing and the Second Closing, as the case may be, will be validly
issued, fully paid and nonassessable. The shares of Class C Common Stock
issuable upon conversion of the Series C Preferred have been duly authorized by
all necessary corporate action on the part of the Company and such shares of
Class C Common Stock have been validly reserved for issuance, and upon issuance
upon such conversion will be validly issued and outstanding, fully paid and
nonassessable.
3.31. OFFERING OF SHARES
Neither the Company nor any Person acting on its behalf has
offered the Series C Preferred or any similar securities of the Company for sale
to, solicited any offers to buy the Series C Preferred or any similar securities
of the Company from or otherwise approached or negotiated with respect to the
Company with any Person other than the Investor and a limited number of other
"Accredited Investors" (as defined in Rule 501(a) under the Securities Act).
Neither the Company nor any other Person acting on its behalf has taken or will
take any action prior to a Closing (including, without limitation, any offering
of any securities of the Company under
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circumstances which would require the integration of such offering with the
offering of the Series C Preferred under the Securities Act and the rules and
regulations of the Commission thereunder) which might subject the offering,
issuance and sale of the Series C Preferred to the registration requirements of
Section 5 of the Securities Act.
3.32. DISCLOSURE
No representation or warranty by the Company in this Purchase
Agreement, and no Document delivered or to be delivered to, or made available
for inspection by, the Investor pursuant to this Purchase Agreement, or in
connection herewith or with the transactions contemplated hereby, contains or
will contain any untrue or misleading statement of material fact or omits or
will omit any fact necessary to make the statements of material fact contained
herein or therein, in light of the circumstances under which made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor hereby represents and warrants to the Company as
follows:
4.1. ORGANIZATION AND STANDING
The Investor is a corporation duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania and has
the full and unrestricted corporate power and authority to carry on its business
as currently conducted, to enter into this Purchase Agreement and to carry out
the transactions contemplated hereby.
4.2. AUTHORIZATION
The execution, delivery and performance by the Investor of
this Purchase Agreement and all other Documents contemplated hereby, the
fulfillment of and the compliance with the respective terms and provisions
hereof and thereof, and the consummation by the Investor of the transactions
contemplated hereby and thereby have been duly authorized, (which authorization
has not been modified or rescinded and is in full force and effect), and will
not: (a) conflict with, or violate any provision of, any term or provision of
the certificate of incorporation or bylaws of the Investor or (b) conflict with,
or result in any breach of, or constitute a default under, any Agreement to
which the Investor is a party or by which the Investor is bound. No other
corporate action is necessary for the Investor to enter into this Purchase
Agreement and all other Documents contemplated hereby and to consummate the
transactions contemplated hereby and thereby.
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4.3. BINDING OBLIGATION
This Purchase Agreement constitutes a valid and binding
obligation of the Investor, enforceable in accordance with its terms. Each
Document to be executed by the Investor pursuant hereto, when executed and
delivered in accordance with the provisions hereof, shall be a valid and binding
obligation of the Investor, enforceable in accordance with its terms.
4.4. HART-SCOTT-RODINO
No filings under Hart-Scott-Rodino are required in connection
with the Initial Closing and the Second Closing.
4.5. CERTAIN FUTURE RELATIONSHIPS
Subject to compliance with applicable Law, the Investor is
neither subject to nor bound by any agreement, commitment or obligation that
would prohibit, or be violated by, any agreement or arrangement with the Company
or any of the Subsidiaries or the Medical Groups on commercially reasonable
terms for the provision of Investor Services.
5. RESTRICTED SECURITIES
The Investor hereby represents, warrants and covenants as
follows:
5.1. NO REGISTRATION UNDER THE SECURITIES ACT
The Investor understands that the Shares and the Option to be
purchased by it under this Purchase Agreement have not been registered under the
Securities Act, are issued in reliance upon exemptions contained in the
Securities Act or interpretations thereof (including Section 4(2) of the
Securities Act) and the securities laws of the Commonwealth of Pennsylvania, and
cannot be offered for sale, sold or otherwise transferred unless such Shares or
such Option being acquired hereunder, as the case may be, subsequently are so
registered or qualify for exemption from registration under the Securities Act.
5.2. ACQUISITION FOR INVESTMENT
The Shares and the Option are being acquired under this
Purchase Agreement by the Investor in good faith solely for its own account, for
investment and not with a view toward resale or other distribution within the
meaning of the Securities Act. The Shares or the Option will not be offered for
sale, sold or otherwise transferred by the Investor without either registration
or exemption from registration under the Securities Act.
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5.3. EVALUATION OF MERITS AND RISKS OF INVESTMENT
The Investor has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
its investment in the Shares and the Option being acquired hereunder. The
Investor is an "accredited investor" within the meaning of one or more
paragraphs (1), (2), (3) or (8) of Rule 501(a) under the Securities Act. The
Investor understands and is able to bear any economic risks associated with such
investment (including, without limitation, the necessity of holding such Shares
or such Option for an indefinite period of time, inasmuch as such Shares and
such Option have not been registered under the Securities Act).
6. ADDITIONAL COVENANTS OF THE COMPANY
Without limiting any other covenants and agreements contained
herein, during the term of this Purchase Agreement and for so long as the
Investor or any of its Affiliates holds or beneficially owns any Series C
Preferred, the Company covenants and agrees as follows:
6.1. REPORTS
Prior to the effective date of the Registration Statement, the
Company shall provide to the Investor reports regarding the Company's financial
performance and condition and operations in such form as the Company provides to
the Board of Directors and the holders of the Company's Series A Preferred Stock
and Series B Preferred Stock. After the effective date of the Registration
Statement, the Company shall, in addition to reports customarily prepared for
the Board of Directors, deliver to the Investor copies of all reports required
to be filed pursuant to the federal securities laws.
6.2. INVESTOR REPRESENTATIVES ON BOARD OF DIRECTORS
The Company agrees to cause the election of a designated
representative of the Investor as a member of the Company's Board of Directors
and its Executive Committee with full rights to attend, participate in, and vote
on all matters coming before all meetings (including executive sessions) of such
Board of Directors and the Executive Committee. The Company agrees to cause the
election at the Company's 1998 annual stockholders meeting of a second
designated representative of the Investor as a member of the Company's Board of
Directors with full rights to attend, participate in, and vote on all matters
coming before all meetings (including executive sessions) of such Board of
Directors.
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6.3. CERTAIN FUTURE RELATIONSHIPS
(a) Each of the Company, the Subsidiaries and the Medical
Groups shall:
(i) use its good faith best efforts to notify the
Investor reasonably in advance of any agreement or arrangement
that it has decided to enter into for the provision of
Investor Services;
(ii) use all good faith best efforts to keep the
Investor informed of all material discussions of a substantive
nature that it may have regarding the provision of Investor
Services;
(iii) provide the Investor and its Affiliates with
all information that may reasonably be required to enable the
Investor and its Affiliates an opportunity to make a proposal
to provide Investor Services to the Company, the Subsidiaries
or the Medical Groups on commercially reasonable terms;
(iv) provide the Investor with an opportunity to
secure contracts for the provision of Investor Services that
were previously granted to others, all on commercially
reasonable terms; and
(v) cooperate in any creative proposals that the Investor or
its Affiliates may make regarding pricing or service
alternatives.
(b) To better implement and effectuate the foregoing, the
Investor and the Company each agree to designate one or more persons to serve as
part of a joint working group, which group will be charged with investigating,
on an ongoing and regular basis, innovative and cost-effective contracting
opportunities between and among the Company, the Investor and their respective
Affiliates, and reporting the results of such activities to the senior
management of the Investor and the Company.
(c) Nothing contained in this Section 6.3 shall obligate the
Company or the Investor to utilize or purchase the products or services of each
other and should not be interpreted as an agreement that such purchases will not
from time to time be made from third parties.
(d) The Company will not after the Initial Closing enter into
any exclusive arrangements with third parties that preclude Genesis and its
Affiliates from providing goods or services to the Company and its Affiliates,
unless (1) such arrangements are at such time or times also offered to, or
otherwise made available to, Genesis, and (2) the price and other terms of such
arrangements constitute arms-length fair market terms that do not take into
account other arrangements
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that may have been offered or promised by such third party in order to obtain
such commitments, including, but not limited to, investments in the Company.
(e) The Company and Genesis agree that the provisions of this
SECTION 6.3 have been developed in order to assist the parties in providing
efficient and cost-effective medical care, across the entire continuum of care,
to patients served by the Company's integrated health care delivery system.
6.4. ACTIONS PROMPTING REDEMPTIONS
(a) Prior to September 1, 1998, without the approval of the
Investor, the Company shall not:
(i) redeem any shares of the Company's Series A
Preferred Stock or Series B Preferred Stock pursuant to
Sections B.3(c) or C.3(c) of the Restated Charter;
(ii) take any of the actions set forth in Section
B.1.(e)(i) of the Restated Charter without the requisite
approval of the holders of the Series A Preferred Stock
pursuant to the Restated Charter, unless the Company
determines in good faith that such action is in the best
interests of the Company and all of its stockholders and is
not designed to primarily benefit holders of the Series A
Preferred Stock;
(iii) take any of the actions set forth in Section
C.1.(e)(i) of the Restated Charter without the requisite
approval of the holders of the Series B Preferred Stock
pursuant to the Restated Charter, unless the Company
determines in good faith that such action is in the best
interests of the Company and all of its stockholders and is
not designed to primarily benefit holders of the Series B
Preferred Stock; or
(iv) engage in practices that violate the Ethical and
Religious Directives for Catholic Health Care Services, unless
the Company determines in good faith that such action is in
the best interests of the Company and all of its stockholders
and is not designed to primarily benefit holders of the Series
A Preferred Stock.
(b) If the Company elects to take any of the actions set forth
in Section 6.4(a)(ii) or 6.4(a)(iii) (other than an issuance of Series A Adverse
Junior Stock or Series B Adverse Junior Stock (as such terms are defined in the
Restated Charter)), the Company shall provide to the Investor no later than
sixty (60) days prior to the date such action is to be effective (1) written
notice to that effect and
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(2) a certificate from the Company's president and chief executive officer
certifying that the Company has determined in good faith that such action is in
the best interests of the Company and all of its stockholders and is not
designed to primarily benefit holders of Series A Preferred Stock or Series B
Preferred Stock, as the case may be.
(c) If the Company elects to issue Series A Adverse Junior
Stock or Series B Adverse Junior Stock, the Company shall provide to the
Investor no later than thirty (30) days prior to the date such issuance is to be
consummated (1) written notice to that effect, and (2) a certificate from the
Company's president and chief executive officer certifying that the Company has
determined in good faith that such issuance is in the best interests of the
Company and all of its stockholders and is not designed to primarily benefit
holders of Series A Preferred Stock or Series B Preferred Stock, as the case may
be.
(d) If the Company engages in practices that violate the
Ethical and Religious Directives for Catholic Health Care Services, the Company
shall provide to the Investor no later than thirty (30) days prior to the date
of the consummation of a redemption resulting from such practices (1) written
notice that the Company has engaged in such practices and, consequently, shares
of Series A Preferred Stock are being redeemed, and (2) a certificate from the
Company's president and chief executive officer certifying that the Company has
determined in good faith that such action is in the best interests of the
Company and all of its stockholders and is not designed to primarily benefit
holders of Series A Preferred Stock.
(e) Within ten (10) days after the Investor receives a written
notice pursuant to Section 6.4(b), (c) or (d), the Investor may require
arbitration under the expedited procedures set forth herein of whether the
action described in the notice is in the best interests of the Company and all
of its stockholders and whether such action is designed to primarily benefit
holders of Series A Preferred Stock or Series B Preferred Stock, as the case may
be. Such arbitration shall be conducted by three arbitrators, two of whom shall
be selected by the parties (the "Party Designated Arbitrators") and the third of
whom shall be a "Neutral Arbitrator" selected the Party Designated Arbitrators.
The Party Designated Arbitrators shall agree upon and appoint a Neutral
Arbitrator, who shall be an attorney experienced in the commercial financing
transactions. The arbitration shall be concluded within thirty (30) days of the
date of the Company's notice. The determination of the arbitrators so appointed
shall be final and conclusive upon the parties and the Company hereby agrees not
to take the action which is the subject of the arbitration if it is determined
that such action is not in the best interests of the Company and all of its
stockholders or such action is designed to primarily benefit holders of Series A
Preferred Stock or Series B Preferred Stock, as the case may be.
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6.5. USE OF PROCEEDS
Without the approval of the Investor, the Company shall not
use the Initial Purchase Price, the Second Purchase Price or any consideration
that the Investor pays to the Company in connection with the purchase of Series
C Preferred Stock pursuant to the Option Agreement (i) to redeem the Company's
Series A Preferred Stock, Series B Preferred Stock or any securities of the
Company with dividend, redemption or liquidation rights senior to the dividend,
redemption or liquidation rights of the Series C Preferred Stock or (ii) to pay
any dividends or interest thereon.
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS AT ANY CLOSINGS
The obligations of the Company under this Purchase Agreement
are subject to the fulfillment, at or prior to any Closing Date, of each of the
following conditions, and failure to satisfy any such condition shall excuse and
discharge all obligations of the Company to carry out the provisions of this
Purchase Agreement, unless such failure is agreed to in writing by the Company:
7.1. REPRESENTATIONS AND WARRANTIES
The representations and warranties made by the Investor in
this Purchase Agreement or in any Document delivered by the Investor pursuant to
this Purchase Agreement shall be true and complete in all material respects when
made and on and as of such Closing Date as though such representations and
warranties were made on and as of such date, except for any changes expressly
permitted by this Purchase Agreement.
7.2. PERFORMANCE
The Investor shall have performed and complied with all
Agreements and conditions required by this Purchase Agreement to be performed or
complied with by them prior to such Closing Date.
7.3. LEGAL PROCEEDINGS
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
dismissed, settled or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement, other than an action or proceeding instituted or threatened by the
Company.
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7.4. INVESTOR'S CERTIFICATE
The Investor shall have delivered to the Company a
certificate, dated as of such Closing Date and executed by a senior officer of
the Investor, certifying to the fulfillment of the conditions set forth in
SECTIONS 7.1 through 7.3.
7.5. OPTION AGREEMENT
The Option Agreement substantially in the form of Exhibit B
attached hereto shall have been executed and delivered by the Investor.
7.6. AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
The Amended and Restated Stockholders Agreement substantially
in the form of Exhibit C attached hereto shall have been executed and delivered
by the parties (other than the Company and the Company's executive officers who
are stockholders of the Company) thereto.
7.7. REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement substantially in the form of
Exhibit D attached hereto shall have been executed and delivered by the
Investor.
7.8. DOCUMENTS AT CLOSING
All documents required to be furnished by the Investor to the
Company prior to or at such Closing Date shall have been so furnished.
8. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS AT THE INITIAL CLOSING
The obligations of the Investor to purchase Series C Preferred
and the Option at the Initial Closing under this Purchase Agreement are subject
to the fulfillment, at or prior to the Initial Closing, of each of the following
conditions, and failure to satisfy any such condition shall excuse and discharge
all obligations of the Investor to carry out the provisions of this Purchase
Agreement related to the Initial Closing, unless such failure is agreed to in
writing by the Investor:
8.1. REPRESENTATIONS AND WARRANTIES
The representations and warranties made by the Company in this
Purchase Agreement and the statements contained in the Disclosure Schedule and
Exhibits attached hereto or in any Document delivered by the Company pursuant to
this Purchase Agreement (the "DISCLOSURE MATERIALS") shall be true and
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complete in all material respects when made, and on and as of the Initial
Closing Date as though such representations and warranties were made on and as
of such date, except for any changes occurring in the Ordinary Course of
Business disclosed to and approved by the Investor and as otherwise expressly
permitted by this Purchase Agreement.
8.2. PERFORMANCE
The Company shall have performed and complied with all
Agreements and conditions required by this Purchase Agreement to be performed or
complied with prior to the Initial Closing Date.
8.3. ABSENCE OF ADVERSE CHANGES
There shall have been no adverse changes since the date of
this Purchase Agreement material to the Company, its Subsidiaries and the
Medical Groups, taken as a whole, in the business, operations, condition
(financial or otherwise), Assets, liabilities or prospects of the Company
(regardless of whether or not such events or changes are inconsistent with the
representations and warranties given herein by the Company).
8.4. LEGAL PROCEEDINGS
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
settled, dismissed or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement other than an action or proceeding instituted or threatened by the
Investor.
8.5. OFFICER'S CERTIFICATE
The Company shall have delivered to the Investor a
certificate, dated as of the Initial Closing Date, and executed by the Company's
President, in his capacity as such, certifying to the fulfillment of the
conditions specified in SECTIONS 8.1 through 8.4.
8.6. OPINION OF COUNSEL
The Investor shall have received an opinion of the director of
legal affairs of the Company, dated as of the Initial Closing Date, to the
effect and substantially in the form of Exhibit E.
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8.7. RESTATED ARTICLES
The articles of amendment and restatement of the Company's
articles of incorporation in the form attached hereto as Exhibit F (the
"RESTATED ARTICLES") shall have received all necessary corporate authorizations,
shall have been filed as necessary under the laws of the State of Maryland, and
shall be effective. The Investor shall have received (a) a certified copy of
resolutions of the Board of Directors of the Company duly authorizing and
adopting the Restated Articles, and (b) a copy of the Restated Articles,
certified by the State Department of Assessments and Taxation of the State of
Maryland.
8.8. OPTION AGREEMENT
The Option Agreement substantially in the form of Exhibit B
attached hereto shall have been executed and delivered by the Company.
8.9. AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
The Amended and Restated Stockholders Agreement substantially
in the form of Exhibit C attached hereto shall have been executed and delivered
by the parties (other than the Investor) thereto.
8.10. REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement substantially in the form of
Exhibit D attached hereto shall have been executed and delivered by the Company.
8.11. DOCUMENTS AT CLOSING
All documents required to be delivered by the Company to the
Investor prior to or at the Initial Closing shall have been so delivered.
8.12. APPOINTMENT OF DIRECTOR
The Investor shall have received a copy of a resolution of the
Board of Directors of the Company, certified by the Secretary of the Company, or
a copy of a written consent of the Board of Directors of the Company appointing
Richard R. Howard as the Investor's designated representative to the Board of
Directors and its Executive Committee effective as of the Initial Closing Date.
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8.13. CONSENTS
(a) The Investor shall have received all consents,
authorizations and approvals of governmental and supragovernmental parties which
are required to be obtained in order to consummate the transactions contemplated
hereby.
(b) The Company shall have received on or prior to the Initial
Closing Date all consents, authorizations and approvals of governmental,
supragovernmental and private parties which are required to be obtained in order
to consummate the transactions contemplated hereby, including, without
limitation, the consents of all parties to Agreements listed on Sections 3.16(a)
and 3.16(b) of the Disclosure Schedule, and which terminate under their
respective terms as a result of the transactions contemplated hereby, and the
Company shall have delivered to the Investor a certificate, dated as of the
Initial Closing Date and executed by the Company's President, in his capacity as
such, certifying to the fulfillment of the conditions specified in this SECTION
8.13(B).
9. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS AT
THE SECOND CLOSING
The obligations of the Investor to purchase Series C Preferred
at the Second Closing under this Purchase Agreement are subject to the
fulfillment, at or prior to the Second Closing Date, of each of the following
conditions, and failure to satisfy any such condition shall excuse and discharge
all obligations of the Investor to carry out the provisions of this Purchase
Agreement related to the Second Closing, unless such failure is agreed to in
writing by the Investor:
9.1. ABSENCE OF VIOLATIONS
The Company is not in violation of or default under, and it
has not breached, any term or provision of its articles of incorporation or
bylaws, and the Company is not in material violation of or default under and has
not materially breached any term or provision of the Loan Agreement dated as of
December 1, 1995 between the Company and NationsBank, N.A., the Promissory Note
dated as of August 15, 1996 between the Company and First National Bank of
Maryland, N.A. or under any successor credit facility, including, without
limitation, the facility currently being negotiated with First National Bank of
Maryland, N.A.
9.2. PERFORMANCE
The Company shall have performed and complied with those
material provisions of SECTIONS 6 AND 11 of this Purchase Agreement required to
be performed or complied with prior to the Second Closing Date.
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9.3. LEGAL PROCEEDINGS
No action or proceeding by or before any governmental
authority shall have been instituted or threatened (and not subsequently
settled, dismissed or otherwise terminated) which is reasonably expected to
restrain, prohibit or invalidate the transactions contemplated by this Purchase
Agreement other than an action or proceeding instituted or threatened by the
Investor.
9.4. OFFICER'S CERTIFICATE
The Company shall have delivered to the Investor a
certificate, dated as of the Second Closing Date and executed by the Company's
President, in his capacity as such, certifying to the fulfillment of the
conditions specified in SECTIONS 9.1 through 9.3.
9.5. OPINION OF COUNSEL
The Investor shall have received an opinion of the director of
legal affairs of the Company, dated as of the Second Closing Date, that is
reasonably acceptable to the Investor.
9.6. DOCUMENTS AT CLOSING
All documents required to be delivered by the Company to the
Investor prior to or at the Second Closing shall have been so delivered.
10. THE CLOSINGS
10.1. CLOSINGS OF SALE AND PURCHASE
(a) Subject to the terms and conditions of this Purchase
Agreement, the Closing shall take place at the offices of Doctors Health System,
Inc., 10451 Mill Run Circle, 10th Floor, Owings Mills, Maryland 21117.
(b) The Initial Closing shall take place at 10:00 a.m.
Baltimore, Maryland time on September 4, 1996 or at such other time as the
parties may agree to in writing (the "INITIAL CLOSING DATE").
(c) The Second Closing shall take place at 10:00 a.m.
Baltimore, Maryland time on December 27, 1996 or at such other time as the
parties may agree to in writing (the "SECOND CLOSING DATE")
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10.2. DELIVERIES BY THE COMPANY TO THE INVESTOR
10.2.1. INITIAL CLOSING DELIVERIES
At the Initial Closing, the Company shall deliver to the
Investor the following:
(a) a stock certificate in definitive form registered in the
name of the Investor, representing the shares of Series C Preferred being
purchased by it pursuant hereto;
(b) an executed copy of the Option Agreement;
(c) a copy of the Restated Articles, as certified by the
Maryland State Department of Assessments and Taxation;
(d) a certified copy of the resolutions adopted by the Board
of Directors of the Company authorizing the transactions contemplated by this
Purchase Agreement or any written consent of all of the current members of the
Board of Directors of the Company (effective as of the Initial Closing Date)
required for the consummation of the transactions contemplated herein;
(e) the certificates required by SECTION 8.5 and 8.13(B);
(f) a copy of a resolution of the Board of Directors of the
Company, certified by the Secretary of the Company, or a copy of a written
consent of the Board of Directors of the Company appointing the Investor's
representative to the Board of Directors and its Executive Committee effective
as of the Closing;
(g) the opinion required by SECTION 8.6;
(h) certificates of incumbency and specimen signatures of the
signatory officers of the Company;
(i) good standing certificates as of a date not more than five
days prior to the Initial Closing Date issued by the Secretary of State of the
respective states of incorporation of the Company and of each Subsidiary
incorporated in the United States, and of each state in which the Company is
qualified to do business;
(j) the articles of incorporation and bylaws (or equivalent
constituent documents), minute books and stock books of the Company and the
Subsidiaries and all other books and records reasonably requested by the
Investor; and
(k) such other Documents as the Investor may reasonably
request.
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10.2.2. SECOND CLOSING DELIVERIES
At the Second Closing, the Company shall deliver to the
Investor the following:
(a) a stock certificate in definitive form registered in the
name of the Investor, representing the shares of Series C Preferred being
purchased by it pursuant hereto;
(b) the certificate required by SECTION 9.4;
(c) the opinion required by SECTION 9.5; and
(d) good standing certificates as of a date not more than five
days prior to the Second Closing Date issued by the Secretary of State of the
respective states of incorporation of the Company and of each Subsidiary
incorporated in the United States, and of each state in which the Company is
qualified to do business.
10.3. DELIVERIES BY THE INVESTOR TO THE COMPANY
At the Initial Closing and the Second Closing, the Investor
shall deliver the following:
(a) a wire transfer to the Company in the amount of the
respective Purchase Price;
(b) the certificate required by SECTION 7.4;
(c) a certified copy of the resolutions adopted by the Board
of Directors of the Investor authorizing the transactions contemplated by this
Purchase Agreement; and
(d) such other Documents as the Company may reasonably
request.
11. SURVIVAL OF REPRESENTATIONS AND COVENANTS; INDEMNIFICATION; REMEDIES; TAX
MATTERS
11.1. SURVIVAL OF REPRESENTATIONS AND COVENANTS
All representations, warranties, covenants, indemnities and
other Agreements made by any party to this Purchase Agreement herein or pursuant
hereto shall also be deemed made on and as of the Initial Closing Date as though
such representations, warranties, covenants, indemnities and other Agreements
were made on and as of such date. All representations and warranties of the
Company contained in SECTION 3 and of the Investor contained in SECTIONS 4
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AND 5 shall survive the Closing Dates until 5 p.m. Baltimore, Maryland time on
September 1, 1999. Except as otherwise set forth herein, the covenants,
indemnities and other agreements contained herein shall survive the Closings and
any investigation, audit or inspection at any time made by or on behalf of any
party hereto.
11.2. AGREEMENT OF THE COMPANY TO INDEMNIFY
(a) Subject to the conditions and provisions of this SECTION
11, the Company hereby agrees to indemnify, defend and hold harmless the
Investor Indemnified Persons from and against and in respect of all Claims
asserted against, imposed upon or incurred by the Investor Indemnified Persons
(whether such Claims are by, against or relate to the Company, or any other
party, including, without limitation, a governmental entity), directly or
indirectly, by reason of or resulting from any misrepresentation or breach of
any representation or warranty, or noncompliance with conditions or other
Agreements, given or made by the Company in this Purchase Agreement or in the
Disclosure Schedule or Exhibits attached hereto or in any Document delivered by
or on behalf of any the Company pursuant to this Purchase Agreement.
(b) Except with respect to Claims based upon fraud by the
Company in connection with the representations, warranties or covenants of the
Company contained in this Purchase Agreement or any of the transactions
contemplated by this Purchase Agreement, or as otherwise provided in this
Purchase Agreement, the Company shall not be required to provide any
indemnification under the provisions of this SECTION 11.2 unless and until the
aggregate losses of the Investor Indemnified Persons exceed $100,000, whereupon
the Investor Indemnified Persons shall be entitled to indemnification for the
aggregate cumulative amount of losses in excess of such $100,000. In addition,
except with respect to Claims based upon fraud by the Company in connection with
the representations, warranties or covenants of the Company contained in this
Purchase Agreement or any of the transactions contemplated by this Purchase
Agreement, or as otherwise provided in this Purchase Agreement, the maximum
aggregate amount of indemnification which the Investor Indemnified Parties shall
be entitled to from the Company under this SECTION 11.2 shall be an amount equal
to the Purchase Price.
(c) Except for Claims of, or based upon, fraud by the Company
in connection with the representations, warranties or covenants of the Company
contained in this Purchase Agreement or any of the transactions contemplated by
this Purchase Agreement, this SECTION 11.2 and the related procedures contained
in SECTION 11.3 hereof shall provide the sole and exclusive remedy for any and
all losses with respect to any inaccuracy in or breach of the representations or
warranties or breach or nonperformance of any of the covenants or agreements
made by any party in or pursuant to this Purchase Agreement.
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11.3. CONDITIONS OF INDEMNIFICATION
The obligations and liabilities of the Company and the
Investor hereunder with respect to their respective indemnities pursuant to this
SECTION 11, resulting from any Claim shall be subject to the following terms and
conditions:
(a) The indemnified party shall give prompt written notice to
the indemnifying party of any Claim which is asserted against, resulting to,
imposed upon or incurred by such indemnified party and which may give rise to
liability of the indemnifying party pursuant to this SECTION 11, stating (to the
extent known or reasonably anticipated) the nature and basis of such Claim and
the amount thereof.
(b) The indemnifying party shall engage counsel with respect
to any such Claim, such representation (including the compromise or settlement
of any Claim) to be undertaken on behalf of the indemnified party, and the
indemnified party shall have right to approve such counsel (such approval not to
be unreasonably withheld). In the event the indemnifying party elects not to
undertake such defense by its own counsel, the indemnifying party shall give
prompt written notice of such election to the indemnified party, and the
indemnified party will undertake the defense thereof by counsel or other
representatives designated by it, at the cost and expense of the indemnifying
party (such costs and expenses of such defense to be advanced by the
indemnifying party as incurred by the indemnified party).
(c) In the event that any Claim shall arise out of a
transaction or cover any period or periods wherein the Company, on the one hand,
and the Investor, on the other hand, shall each be liable hereunder for part of
the liability or obligation arising therefrom, then the parties shall, each
choosing its or his own counsel and bearing its or his own expense, defend such
Claim, and no settlement or compromise of such Claim may be made without the
joint consent or approval of each party (which consent shall not be unreasonably
withheld), except where the respective liabilities and obligations of the
parties are clearly allocable or attributable on the basis of objective facts.
(d) The amount which any indemnifying party is or may be
required to pay any indemnified party pursuant to this SECTION 11 shall be
measured taking into account (i) any income tax savings (and income tax cost
attributable to the indemnity payment) actually realized (or occurred) that
affect the overall economic impact of the losses to the indemnified party, and
(ii) any insurance proceeds actually realized and adverse insurance consequences
incurred (such as premium adjustments and other detriments) that affect the
overall economic impact of the losses to the indemnified party.
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11.4. SPECIFIC PERFORMANCE
In addition to any other remedies which the Investor may have
at law or in equity, the Company hereby acknowledge that the Shares, the Option
and the Company and the Subsidiaries are unique, and that the harm to the
Investor resulting from a failure to close the transaction due to breaches by
the Company of its obligations cannot be adequately compensated by damages.
Accordingly, the Company agree that in the event of a failure to close the
transaction as a result of breaches by the Company, the Investor shall have the
right to have all obligations, undertakings, Agreements, covenants and other
provisions of this Purchase Agreement specifically performed by the Company, and
that the Investor shall have the right to obtain an order or decree of such
specific performance in any of the courts of the United States of America or of
any state or other political subdivision thereof.
12. TERMINATION
12.1. TERMINATION
This Purchase Agreement may be terminated at any time before
the Second Closing Date under any one or more of the following circumstances:
(a) by the mutual consent of the parties hereto; or
(b) by the Company or the Investor, by written notice of
termination to the other parties hereto, if the Initial Closing has not occurred
by September 15, 1996.
Notwithstanding this SECTION 12.1, a party who is in breach of
any of its obligations or representations and warranties set forth in this
Purchase Agreement shall not have the right to terminate this Purchase
Agreement.
12.2. EFFECT OF TERMINATION
In the event of termination of this Purchase Agreement as
provided in SECTION 12.1, this Purchase Agreement shall forthwith become void
and have no effect, except that notwithstanding anything to the contrary
contained in this Purchase Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Purchase Agreement or any intentional misrepresentation or
breach of warranty hereunder.
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13. MISCELLANEOUS
13.1. ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to take or cause to
be taken such further actions, to execute, deliver and file or cause to be
executed, delivered and filed such further Documents, and will obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Purchase Agreement.
13.2. NO BROKERS
Each of the parties hereto represents and warrants to the
other parties (and to each of them) that such party has not engaged any broker,
finder or agent in connection with the transactions contemplated by this
Purchase Agreement and has not incurred (and will not incur) any unpaid
liability to any broker, finder or agent for any brokerage fees, finders' fees
or commissions, with respect to the transactions contemplated by this Purchase
Agreement. Each party agrees to indemnify, defend and hold harmless each of the
other parties from and against any and all claims asserted against such parties
for any such fees or commissions by any persons purporting to act or to have
acted for or on behalf of the indemnifying party.
13.3. EXPENSES
Each of the parties hereto shall pay all expenses incurred by
such party incident to this Purchase Agreement and the transactions contemplated
hereunder, including all legal and accounting fees.
13.4. ASSIGNMENT
The Investor shall have the right to assign its rights and
obligations under this Purchase Agreement, in whole or in part, to an Affiliate
wholly owned by the Investor or to designate any of its Affiliates (to the
extent permitted by Law) to receive directly the Shares and the Option to be
purchased hereunder or to exercise any of the rights of such Investor, or to
perform any of its obligations. The Company shall not assign its rights and
obligations under this Purchase Agreement, in whole or in part, whether by
operation of law or otherwise, without the prior written consent of the other
parties hereto, and any such assignment contrary to the terms hereof shall be
null and void and of no force and effect. In no event shall the assignment by
the Company or the Investor of its respective rights or obligations under this
Purchase Agreement, whether before or after a Closing, release the Company or
the Investor from its respective liabilities and obligations hereunder.
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13.5. ENTIRE AGREEMENT; AMENDMENT
This Purchase Agreement, including the Disclosure Schedule,
the Exhibits and other Documents referred to herein or delivered pursuant
hereto, constitutes the entire Agreement among the parties hereto with respect
to the transactions contemplated herein, and it supersedes all prior oral or
written Agreements, commitments or understandings with respect to the matters
provided for herein. No amendment, modification or discharge of this Purchase
Agreement shall be valid or binding unless set forth in writing and duly
executed and delivered by the party against whom enforcement of the amendment,
modification, or discharge is sought.
13.6. WAIVER
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Purchase Agreement or under
any other Documents delivered in connection with or pursuant to this Purchase
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial exercise
of any such right, power or privilege shall preclude the further exercise of
such right, power or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
13.7. CONSENT TO JURISDICTION
(a) This Purchase Agreement and the duties and obligations of
the Company and the Investor hereunder and under each of the Documents referred
to herein shall be enforceable against any of the Company or the Investor in the
courts of the United States of America and of the State of Maryland. For such
purpose, the Company and the Investor hereby irrevocably submit to the
non-exclusive jurisdiction of such courts, and agrees that all claims in respect
of this Purchase Agreement and such other Documents may be heard and determined
in any of such courts.
(b) The Company and the Investor hereby irrevocably agree that
a final judgment of any of the courts specified above in any action or
proceeding relating to this Purchase Agreement or to any of the other Documents
referred to herein or therein shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
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13.8. SEVERABILITY
If any part of any provision of this Purchase Agreement or any
other Agreement or document given pursuant to or in connection with this
Purchase Agreement shall be invalid or unenforceable in any respect, such part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of such provision or the
remaining provisions of this Purchase Agreement.
13.9. GOVERNING LAW
This Purchase Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of the State of Maryland (excluding
the choice of law rules thereof).
13.10. NOTICES
All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Purchase Agreement shall be in writing and shall be hand
delivered, sent by overnight courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
telegram, telecopy or telex, addressed as follows:
(i) If to the Investor:
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
Attention: John F. DePodesta
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Michael C. Williams
(ii) If to the Company:
Doctors Health System, Inc.
10451 Mill Run Road
Owings Mills, Maryland 21117
Attention: Paul A. Serini
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Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be hand delivered,
sent, mailed, telecopied or telexed in the manner described above, or which
shall be delivered to a telegraph company, shall be deemed sufficiently given,
served, sent, received or delivered for all purposes at such time as it is
delivered to the addressee (with the return receipt, the delivery receipt, or
(with respect to a telecopy or telex) the answerback being deemed conclusive,
but not exclusive, evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
13.11. HEADINGS
Section headings contained in this Purchase Agreement are
inserted for convenience of reference only, shall not be deemed to be a part of
this Purchase Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
13.12. EXECUTION IN COUNTERPARTS
To facilitate execution, this Purchase Agreement may be
executed in as many counterparts as may be required. It shall not be necessary
that the signatures of, or on behalf of, each party, or that the signatures of
all persons required to bind any party, appear on each counterpart; but it shall
be sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
Agreement. It shall not be necessary in making proof of this Purchase Agreement
to produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
13.13. LIMITATION ON BENEFITS
The covenants, undertakings and agreements set forth in this
Purchase Agreement shall be solely for the benefit of, and shall be enforceable
only by, the parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and permitted assigns, except that the
agreements set forth in SECTION 11 also shall be for the benefit of, and
enforceable by, Investor Indemnified Persons and their respective successors,
heirs, executors, administrators, legal representatives or permitted assigns.
13.14. BINDING EFFECT
Subject to any provisions hereof restricting assignment, this
Purchase Agreement shall be binding upon and shall inure to the benefit of the
parties hereto
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and their respective successors, heirs, executors, administrators, legal
representatives and assigns.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Purchase Agreement, or have caused this Purchase Agreement to be duly executed
on their behalf, as of the day and year first above written.
DOCTORS HEALTH SYSTEM, INC.
By:
Name:
Title:
GENESIS HEALTH VENTURES, INC.
By:
Name:
Title:
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EXHIBIT A
TO STOCK PURCHASE AGREEMENT
Dated as of September 4, 1996
DEFINITIONS
"AFFILIATE" means: (a) with respect to a person, any member of
such person's family; (b) with respect to an entity, any officer, director,
stockholder, partner or investor of or in such entity or of or in any Affiliate
of such entity; and (c) with respect to a person or entity, any person or entity
which directly or indirectly, through one or more intermediaries, Controls, is
Controlled by, or is under common Control with such person or entity.
"AGREEMENT" means any concurrence of understanding and
intention between two or more persons (or entities) with respect to their
relative rights and/or obligations or with respect to a thing done or to be done
(whether or not conditional, executory, express, implied, in writing or meeting
the requirements of contract), including, without limitation, contracts, leases,
promissory notes, covenants, easements, rights of way, covenants, commitments,
arrangements and understandings.
"ASSETS" means assets of every kind and everything that is or
may be available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"CLAIMS" means all demands, claims, pending or threatened
actions or causes of action, suits, orders, legal proceedings, formal or
informal notice of any complaint, directive, citation, notice of responsibility
or potential responsibility, information request, assessments, losses, damages
(including, without limitation, diminution in value), liabilities, costs and
expenses, including, without limitation, interest, penalties and attorneys' fees
and disbursements.
"CLASS B COMMON STOCK" means the shares of Class B common
stock, $.01 par value per share, of the Company.
"CLASS C COMMON STOCK" means the shares of Class C common
stock, $.01 par value per share, of the Company.
"CLOSINGS" means the Initial Closing and the Second Closing.
"CLOSING DATE" means the Initial Closing Date or the Second
Closing Date, as the context may require.
"CODE" means the Internal Revenue Code of 1986, as amended,
and all Laws promulgated pursuant thereto or in connection therewith.
<PAGE>
"COMMON CONTROL ENTITY" means any trade or business under
common control (as such term is defined in Section 414(b) or 414(c) of the Code)
with the Company or any Subsidiary.
"COMPANY" means Doctors Health System, Inc., a Maryland
corporation.
"COMPANY TAX RETURNS" means all federal, state, local and
other applicable tax returns, declarations of estimated tax reports required to
be filed by, or which include, the Company or any of the Subsidiaries or the
Medical Groups (without regard to extensions of time permitted by law or
otherwise).
"CONSOLIDATED" means, with respect to financial statements, a
consolidation with respect to the reporting of assets, liabilities and operating
accounts of the Company and its international operations.
"CONTROL" means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
ownership of voting securities, by Agreement or otherwise).
"DOL" means the Department of Labor or its successors.
"DISCLOSURE SCHEDULE" means the disclosure schedule identified
as the Disclosure Schedule to the Purchase Agreement.
"DOCUMENTS" means any paper or other material (including,
without limitation, computer storage media) on which is recorded (by letters,
numbers or other marks) information that may be evidentially used, including,
without limitation, legal opinions, mortgages, indentures, notes, instruments,
leases, Agreements, insurance policies, reports, studies, financial statements
(including, without limitation, the notes thereto), other written financial
information, schedules, certificates, charts, maps, plans, photographs, letters,
memoranda and all similar materials.
"ENCUMBRANCE" means, with respect to any Asset, any mortgage,
lien, pledge, encumbrance, security interest, deed of trust, order, decree,
judgment, charge, or any other type of arrangement that has the effect of
creating a security interest in respect of such Asset.
"ENVIRONMENTAL LAWS" means any Laws (including without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act), now or hereafter in effect relating to the generation,
production, installation, use, storage, treatment, transportation, release,
threatened release, or disposal of Hazardous Materials, noise control, or the
protection of human health, safety, natural resources, animal health or welfare,
or the environment.
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"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and all Laws promulgated pursuant thereto or in connection
therewith.
"ESOP" means an "EMPLOYEE STOCK OWNERSHIP PLAN" as such term
is defined in Section 407(d)(6) of ERISA or Section 4975(e)(7) of the Code.
"EXHIBIT" means an exhibit attached to the Purchase Agreement.
"401(K) PLAN" means the 401(k) employee benefit plan adopted
by the Company effective January 1, 1996.
"INVESTOR SERVICES" has the meaning set forth in SECTION 3.27
hereof.
"HART-SCOTT-RODINO" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and all Laws promulgated pursuant thereto
or in connection therewith.
"HAZARDOUS MATERIALS" means any wastes, substances, radiation,
or materials (whether solids, liquids or gases) which are subject to regulation
under any Environmental Laws; (iii) the presence of which on the Real Property
cause or threaten to cause a nuisance pursuant to applicable statutory or common
law upon the Real Property or to adjacent properties; (iv) without limitation,
which contain polychlorinated biphenyls (PCBs), asbestos, lead-based paints,
urea-formaldehyde foam insulation, and petroleum or petroleum products
(including, without limitation, crude oil or any fraction thereof) or (iv) which
pose a hazard to human health, safety, natural resources, industrial hygiene, or
the environment, or an impediment to working conditions.
"INDIVIDUAL ACCOUNT PLAN" means a Plan that is or was an
"INDIVIDUAL ACCOUNT PLAN" as such term is defined in Section 3(34) of ERISA.
"INITIAL CLOSING" means the closing of the sale and purchase
of 428,571 shares of Series C Preferred pursuant to the Purchase Agreement.
"INITIAL CLOSING DATE" has the meaning set forth in SECTION
10.1(B) hereof.
"INITIAL PURCHASE PRICE" means the purchase price for the
shares to be sold and purchased in the Initial Closing.
"INTELLECTUAL PROPERTY" means all franchises, patents, patent
qualifications, trademarks, service marks, trade names, trade styles, brands,
private labels, copyrights, know-how, computer software, industrial designs and
drawings and general intangibles of a like nature, trade secrets, licenses, and
rights
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and filings with respect to the foregoing, and all reissues, extensions
and renewals thereof.
"INVESTOR" means Genesis Health Ventures, Inc., a Pennsylvania
corporation.
"INVESTOR INDEMNIFIED PERSONS" means the Investor and their
respective Affiliates, employees, representatives, agents, officers and
directors.
"LAWS" means all federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, determinations, writs,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified persons or entities and to the
businesses and Assets thereof (including, without limitation, Laws relating to
securities registration and regulation; the performance of professional medical
services; the provision and administration of insured and self-funded healthcare
benefits; the sale, leasing, ownership or management of real property;
employment practices, terms and conditions, and wages and hours; building
standards, land use and zoning; safety, health and fire prevention; and
environmental protection, including Environmental Laws).
"MATERIAL ASSETS" means Assets having an aggregate value in
excess of $250,000.
"MEDICAL GROUPS" means Baltimore Medical Group, LLC, Carroll
Medical Group, LLC, and Cumberland Valley Medical Group, LLC.
"MULTIEMPLOYER PLAN" means a "MULTIEMPLOYER PLAN" as such term
is defined in Section 3(37) of ERISA.
"OPERATING PLAN" has the meaning set forth in SECTION 3.6(B)
hereof.
"OPTION" has the meaning set forth in SECTION 2.2 hereof.
"OPTION AGREEMENT" means the Option Agreement dated as of
September 4, 1996 substantially in the form attached hereto as Exhibit B.
"ORDINARY COURSE OF BUSINESS" means ordinary course of
business consistent with past practices and prudent business operations.
"OTHER ARRANGEMENT" means a benefit program or practice
providing for bonuses, incentive compensation, vacation pay, severance pay,
insurance, restricted stock, stock options, employee discounts, company cars,
tuition reimbursement or any other perquisite or benefit (including, without
limitation, any fringe benefit under Section 132 of the Code) to employees,
officers or independent contractors that is not a Plan.
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"PENSION PLAN" means an "EMPLOYEE PENSION BENEFIT PLAN" as
such term is defined in Section 3(2) of ERISA.
"PERMITS" has the meaning set forth in SECTION 3.26.2 hereof.
"PERSON" means any individual, partnership, joint venture,
corporation, trust, unincorporated organization, government or department or
agency of a government.
"PLAN" means any plan, program or arrangement, whether or not
written, that is or was an "EMPLOYEE BENEFIT PLAN" as such term is defined in
Section 3(3) of ERISA and (a) which is maintained by the Company or any
Subsidiary or Medical Group; (b) to which the Company or any Subsidiary or
Medical Group contributed or was obligated to contribute or to fund or provide
benefits; or (c) which provides or promises benefits to any person who performs
or who has performed services for the Company or any Subsidiary or Medical Group
and because of those services is or has been (i) a participant therein or (ii)
entitled to benefits thereunder. The term "Plan" shall not include any plan
maintainted by any Person prior to such Person's affiliation with a Subsidiary
or a Medical Group.
"PROPOSAL" means any proposal, offer or indication of interest
from any Person, entity or group relating to any acquisition or purchase of all
or (other than in the Ordinary Course of Business) any portion of the assets of,
or any equity in, the Company or any business combination with the Company,
other than the transactions contemplated by the Purchase Agreement.
"PURCHASE AGREEMENT" means this Stock Purchase Agreement,
including the Disclosure Schedule and all Exhibits hereto.
"INITIAL PURCHASE PRICE" means the purchase price for the
shares to be sold and purchased in the Initial Closing.
"QUALIFIED PLAN" means a Pension Plan that satisfies, or is
intended by the Company to satisfy, the requirements for tax qualification
described in Section 401 of the Code.
"REAL PROPERTY" means any real property currently operated or
leased, or formerly owned, operated, or leased, by the Company, its Subsidiaries
or any Medical Group.
"REGISTRATION STATEMENT" has the meaning set forth in SECTION
3.28 hereof.
"RESTATED ARTICLES" means the articles of amendment and
restatement of the Company in the form attached hereto as Exhibit F.
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"SECOND CLOSING" means the closing of the sale and purchase of
the additional 142,857 shares of Series C Preferred pursuant to the Purchase
Agreement.
"SECOND CLOSING DATE" has the meaning set forth in SECTION
10.1(C) of the Purchase Agreement.
"SECOND PURCHASE PRICE" means the purchase price for the
shares to be sold and purchased in the Second Closing.
"SECTION" means a Section (or a subsection) of the Purchase
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and all laws promulgated pursuant thereto or in connection therewith.
"SHARES" has the meaning set forth in SECTION 2.1 hereof.
"SUBSIDIARY" means a corporation or other entity of which at
least 80% of the outstanding securities or other interests having rights to vote
or otherwise exercise Control are held, directly or indirectly, by the Company.
"TAXES" means all federal, state and local taxes (including,
without limitation, income, profit, franchise, sales, use, real property,
personal property, ad valorem, excise, employment, social security and wage
withholding taxes) and installments of estimated taxes, assessments,
deficiencies, levies, imports, duties, license fees, registration fees,
withholdings, or other similar charges of every kind, character or description
imposed by any governmental or quasi-governmental authorities, and any interest,
penalties or additions to tax imposed thereon or in connection therewith.
"TITLE I PLAN" means a Plan that is subject to Title I of
ERISA.
"WELFARE PLAN" means an "EMPLOYEE WELFARE BENEFIT PLAN" as
such term is defined in Section 3(1) of ERISA.
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Exhibit 10.38
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of
September 4, 1996, by and between DOCTORS HEALTH SYSTEM, INC., a Maryland
corporation (the "COMPANY"), and GENESIS HEALTH VENTURES, INC., a Delaware
corporation ("GENESIS"). This Agreement is delivered in connection with that
certain Stock Purchase Agreement dated as of even date herewith between the
Company and Genesis (the "STOCK PURCHASE AGREEMENT"), pursuant to which the
Company has agreed to issue and sell, and Genesis has agreed to purchase,
(i) 571,428 shares of the Company's Series C Convertible Preferred Stock,
par value $17.50 per share (the "SERIES C PREFERRED STOCK"), and (ii) an
option to purchase up to 500,000 additional shares of Series C Preferred
Stock (the "OPTION") pursuant to that certain Option Agreement dated as of
even date herewith between the Company and Genesis (the "OPTION AGREEMENT").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereby agree
as follows:
1. Definitions. As used in this Agreement the following terms
have the meanings indicated:
"Affiliate" shall mean any Person who is an "affiliate" as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
"Approved Underwriter" has the meaning set forth in Section
3(f) of this Agreement.
"Business Day" means any day that is not a Saturday or Sunday
or a day on which banks located in the City of Baltimore are authorized or
required to be closed.
"Common Stock" means the Class C Common Stock, par value $0.01
per share, of the Company or any other equity securities of the Company into
which such securities are converted, reclassified, reconstituted or exchanged.
"Company Underwriter" has the meaning set forth in Section
4(a) of this Agreement.
"Demand Registration" has the meaning set forth in Section
3(a) of this Agreement.
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"Fair Market Value" means the average of the closing price per
share for the Registrable Securities as to which a registration is being
effected as reported on the NYSE Composite Transactions Tape for the 20
consecutive trading days immediately prior to the applicable date of
determination, or, if such securities are not then listed and traded on the
NYSE, the closing price for such securities for such period on the principal
national securities exchange (or market) on which they are then traded as
reported in the principal consolidated transaction reporting system with respect
to securities listed on such exchange (or market) or, if such securities are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use, or, if on any such date, such securities are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market marker making a market in such securities
selected by the Board of Directors of the Company. The term "trading day" shall
mean a day on which the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock are not listed or
admitted to trading on any national securities exchange, a Business Day.
"Holder" means Genesis and any transferee or transferees of
Genesis to whom Registrable Securities have been transferred in accordance with
the provisions of Section 9(f) of this Agreement, other than a transferee to
whom such securities have been transferred pursuant to a registration statement
under the Securities Act or Rule 144 or Regulation S under the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Holders' Counsel" has the meaning set forth in Section
6(a)(i) of this Agreement.
"Incidental Registration" has the meaning set forth in Section
4(a) of this Agreement.
"Indemnified Party" has the meaning set forth in Section 7(c)
of this Agreement.
"Indemnifying Party" has the meaning set forth in Section 7(c)
of this Agreement.
"Inspector" has the meaning set forth in Section 6(a)(viii) of
this Agreement.
"NASD" has the meaning set forth in Section 6(a)(xiv) of this
Agreement.
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"Option Agreement" has the meaning assigned to such term in
the first paragraph of this Agreement.
"Person" means any individual, firm, corporation, partnership,
limited liability company, trust, incorporated or unincorporated association,
joint venture, joint stock company, limited liability company, government (or an
agency or political subdivision thereof) or other entity of any kind, and shall
include any successor (by merger or otherwise) of such entity.
"Public Offering" means any underwritten offering of shares of
Common Stock pursuant to an effective registration statement filed under the
Securities Act.
"Records" has the meaning set forth in Section 6(a)(viii) of
this Agreement.
"Registrable Securities" means (a) any shares of Common Stock
issued to Holder, or to its successors or assigns, as appropriate, as a result
of the conversion of the shares of Series C Preferred Stock acquired pursuant to
the Stock Purchase Agreement or the Option Agreement, or upon exercise by Holder
of any warrants or other rights to purchase or to acquire Common Stock, and (b)
any additional shares of Common Stock or other equity securities of the Company
that may be issued to Holder in respect of or exchange for any shares of Common
Stock referred to in clause (a) by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization or otherwise and shares of Common Stock issuable upon
conversion, exercise or exchange thereof.
"Registration Expenses" has the meaning set forth in Section
6(d) of this Agreement.
"Registration Statement" means a registration statement filed
by the Company pursuant to the Securities Act which covers all or a portion of
the Registrable Securities, and all amendments and supplements to such
registration statement.
"SEC" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Stock Purchase Agreement" has the meaning assigned to such
term in the first paragraph of this Agreement.
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"Underwriter" means an underwriter, placement or selling agent
and any "underwriter" within the meaning of Section 2(11) of the Securities Act.
2. General: Securities Subject to this Agreement.
(a) Grant of Rights. The Company hereby grants
registration rights to the Holder upon the terms and conditions set forth in
this Agreement.
(b) Registrable Securities. For the purposes of this
Agreement, Registrable Securities will cease to be Registrable Securities when
(i) a registration statement covering such Registrable Securities has been
declared effective under the Securities Act by the SEC and such Registrable
Securities have been disposed of pursuant to such effective registration
statement, (ii) the entire amount of Registrable Securities proposed to be sold
in a single sale, in the opinion of counsel satisfactory to the Company and the
Holder, each in their reasonable judgment, may be distributed to the public
without any limitation as to volume pursuant to Rule 144 (or any successor
provision then in effect) under the Securities Act or (iii) the Registrable
Securities are proposed to be sold or distributed by a Person not entitled to
the registration rights granted by this Agreement.
(c) Holders of Registrable Securities. A Person is
deemed to be a holder of Registrable Securities whenever such Person owns of
record Registrable Securities, or holds an option to purchase, or a security
convertible into or exercisable or exchangeable for, Registrable Securities
whether or not such acquisition or conversion has actually been effected and
disregarding any legal restrictions upon the exercise of such rights. If the
Company receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company may act
upon the basis of the instructions, notice or election received from the
registered owner of such Registrable Securities. Registrable Securities issuable
upon exercise of an option or upon conversion of another security shall be
deemed outstanding for the purposes of this Agreement.
3. Demand Registration.
(a) Request for Demand Registration. At any time
beginning 180 days after the conversion of the Series C Preferred Stock in
connection with a Public Offering, the Holder may make a written request to the
Company to register, under the Securities Act (other than pursuant to a
registration statement on Form S-4 or S-8 or any successor thereto) and under
the securities or "blue sky" laws of any jurisdiction designated by such Holder
(a "DEMAND REGISTRATION"), the number of Registrable Securities stated in such
request. The Company shall not be obligated to effect more than one (1) Demand
Registration pursuant to this Section 3 on Form S-1 under the Securities Act or
any successor form or similar
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long-form registration or, if available, on Form S-2 or S-3 or any similar
short-form registration. If at the time of any request to register Registrable
Securities pursuant to this Section 3(a), the Company is engaged in, or has
fixed plans to engage in within sixty (60) days of the time of such request, a
Public Offering or is engaged in any other activity which, in the good faith
determination of the Board of Directors of the Company, would be materially
adversely affected by the requested registration to the material detriment of
the Company, then the Company may at its option direct that such request be
delayed for a reasonable period not in excess of ninety (90) days from the
effective date of such offering or the date of completion of such other material
activity, as the case may be. In addition, the Company shall not be required to
effect more than one registration on behalf of all persons who have been granted
registration rights by the Company in any 12 month period or any registration
within one hundred twenty (120) days after the effective date of any other
Registration Statement of the Company. A request for a Demand Registration shall
state the amount of the Registrable Securities proposed to be sold and the
intended method of disposition thereof. Upon a request for a Demand
Registration, the Company shall promptly take such steps as are necessary or
appropriate to prepare for the registration of the Registrable Securities to be
registered.
(b) Incidental or "Piggy-Back" Rights with Respect to
a Demand Registration. The Holder may offer its Registrable Securities under any
demand registration pursuant to any other registration rights agreement or other
similar agreement between the Company and any other holder of the Company's
securities. Within ten (10) days after the receipt of a request for such demand
registration, the Company shall (i) give written notice thereof to the Holder
and (ii) subject to Section 3(e), include in such registration all of the
Registrable Securities held by the Holder from whom the Company has received a
written request for inclusion therein within ten (10) days of the receipt by the
Holder of such written notice referred to clause (i) above. Each such request by
the Holder shall specify the number of Registrable Securities proposed to be
registered and the intended method of disposition thereof.
(c) Effective Demand Registration. A registration
shall not constitute a Demand Registration until it has become effective and
remains continuously effective for the lesser of (i) the period during which all
Registrable Securities registered in the Demand Registration are sold and
(ii) 120 days; provided, however, that a registration shall not constitute a
Demand Registration if (x) after such Demand Registration has become effective,
such registration or the related offer, sale or distribution of Registrable
Securities thereunder is interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental agency or court for any
reason not attributable to the Holder and such interference is not thereafter
eliminated or (y) the conditions to closing specified in the underwriting
agreement, if any, entered into in connection with such Demand Registration are
not satisfied or waived other than by reason of a
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failure by the Holder or (z) the Company sells for its account at least one-half
of the shares included in the registration.
(d) Expenses. In any registration initiated as a
Demand Registration, the Company shall pay all Registration Expenses (other than
underwriting discounts and commissions) in connection therewith, whether or not
such Demand Registration becomes effective.
(e) Underwriting Procedures. If the holders of a
majority in aggregate amount of the Registrable Securities to be included in the
Demand Registration so elects, the offering of Registrable Securities pursuant
to such registration shall be in the form of a firm commitment Public Offering
and the managing underwriter or underwriters selected for such offering shall be
the Approved Underwriter (as hereinafter defined) selected in accordance with
Section 3(f). In connection with any Demand Registration under this Section 3
involving an underwriting, none of the Registrable Securities held by any Holder
shall be included in such underwriting unless such Holder accepts the terms of
the underwriting as agreed upon by the Company, Genesis and the Approved
Underwriter, and then only in such quantity as will not, in the opinion of the
Approved Underwriter, jeopardize the success of such Public Offering by the
Holder. If the Approved Underwriter advises the Company in writing that in its
opinion the aggregate amount of such Registrable Securities requested to be
included in such Public Offering is sufficiently large to have a material
adverse effect on the success of such Public Offering, then the Company shall
include in such registration only the aggregate amount of Registrable Securities
that in the opinion of the Approved Underwriter may be sold without any such
material adverse effect and the amount of such shares that may be included in
such registration shall be reduced first by any shares proposed to be sold in
such Public Offering by the Company's executive officers (the "MANAGEMENT
STOCKHOLDERS"), second by any shares proposed to be sold by shareholders other
than the Holder and the Management Stockholders, third by any shares proposed to
be sold by the Company and fourth by a further amount to the Holder.
(f) Selection of Underwriters. If any Demand
Registration of Registrable Securities is in the form of an underwritten
offering, the managing underwriter for such Public Offering (the "APPROVED
UNDERWRITER") shall be chosen by the holders of a majority of the aggregate
Registrable Securities being registered; provided, however, that the Approved
Underwriter shall be acceptable to the Company in its reasonable judgment.
4. Incidental or "Piggy-Back" Registration.
(a) Request for Incidental Registration. At any time
the Company proposes to file a Registration Statement under the Securities Act
with respect to an offering by the Company for its own account (other than a
registration
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statement on Form S-4 or S-8 or any successor thereto), then the Company shall
give written notice of such proposed filing to the Holder at least thirty (30)
days before the anticipated filing date, and such notice shall describe the
proposed registration and distribution and offer the Holder the opportunity to
register the number of Registrable Securities as the Holder may request (an
"INCIDENTAL REGISTRATION") in writing. The Company shall, and shall use its best
efforts (within ten (10) days of the notice provided for in the preceding
sentence) to cause the managing underwriter or underwriters of a proposed Public
Offering (the "COMPANY UNDERWRITER") to permit the Holder to include its
Registrable Securities in such Public Offering on the same terms and conditions
as the securities of the Company included therein; provided, however, that the
Company shall not be obligated to effect more than three (3) Incidental
Registrations pursuant to this Section 4, not including any Incidental
Registration in which the Company, based on the opinion of the Company
Underwriter, does not include any Registrable Securities which the Holder has
requested to be included. In connection with any Incidental Registration under
this Section 4(a) involving an underwriting, the Company shall not be required
to include any Registrable Securities in such underwriting unless the holders
thereof accept the terms of the underwriting as agreed upon between the Company
and the Company Underwriter, and then only in such quantity as will not, in the
opinion of the Company Underwriter, jeopardize the success of the Public
Offering by the Company. If in the written opinion of the Company Underwriter
the registration of all or part of the Registrable Securities which the Holder
has requested to be included would materially adversely affect such Public
Offering, then the Company shall be required to include in such Incidental
Registration, to the extent of the amount that the Company Underwriter believes
may be sold without causing such adverse effect; first, all of the securities to
be offered for the account of the Company; second, the Registrable Securities to
be offered for the account of the Holder pursuant to this Section 4 and any
other securities requested to be included in such underwriting (other than
securities to be offered for the account of any of the Management Stockholders),
pro rata (in accordance with the proportion that the Fair Market Value of all
securities proposed to be included in such registration by each holder bears to
the Fair Market Value of all securities proposed to be included in such
registration by Holder and all other Persons exercising incidental registration
rights in such registration); and third; all securities to be offered for the
account of the Management Stockholders.
(b) Expenses. The Company shall bear all Registration
Expenses (other than underwriting discounts and commissions) in connection with
any Incidental Registration pursuant to this Section 4, whether or not such
Incidental Registration becomes effective; provided, however, that the Holder
shall bear the costs of its own legal counsel.
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5. Holdback Agreements.
(a) Restrictions on Public Sale by the Holder. In the
event that the Company effects a Public Offering in which shares of the
Company's Common Stock are sold to one or more Underwriters, the Holder agrees,
if requested by the managing underwriters, not to effect any public sale or
distribution, including any sale pursuant to Rule 144 under the Securities Act,
of any equity securities (except as part of such Public Offering) during the
15-day period prior to the requested effective date of the registration
statement for such offering and during the 120-day period commencing with the
actual effective date of the registration statement for such offering.
(b) Restrictions on Public Sale by the Company. The
Company agrees not to effect any public sale or distribution of any of its
securities, or any securities convertible into or exchangeable or exercisable
for such securities (except pursuant to registrations on Form S-4 or S-8 or any
successor thereto), during the 15-day period prior to the requested effective
date of the registration statement for such offering and during the period
beginning on the actual effective date of any Demand Registration and ending on
the earlier of (i) the date on which all Registrable Securities registered on
such registration statement are sold and (ii) 120 days after the effective date
of such registration statement.
6. Registration Procedures.
(a) Obligations of the Company. Whenever registration
of Registrable Securities has been requested pursuant to Section 3 or Section 4
of this Agreement, the Company shall use its best efforts to effect the
registration and sale of such Registrable Securities in accordance with the
intended method of distribution thereof as quickly as practicable, and in
connection with any such request, the Company shall, as expeditiously as
possible:
(i) use its best efforts to prepare and file
with the SEC a registration statement on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate
and which form shall be available for the sale of such Registrable
Securities in accordance with the intended method of distribution
thereof, and use its best efforts to cause such registration statement
to become effective; provided, however, that (x) before filing a
registration statement or prospectus or any amendments or supplements
thereto, the Company shall provide counsel selected by the holders
holding a majority of the Registrable Securities being registered in
such registration ("HOLDERS' COUNSEL") and any other Inspector (as
hereinafter defined) with an adequate and appropriate opportunity to
participate in the preparation of such registration statement and each
prospectus included therein (and each amendment or supplement thereto)
to be filed with the SEC, which documents shall be subject to the
review of
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Holders' Counsel, and (y) the Company shall notify the Holders' Counsel
and each seller of Registrable Securities of any stop order issued or
threatened by the SEC and take all reasonable action required to
prevent the entry of such stop order or to remove it if entered;
(ii) prepare and file with the SEC such
amendments and supplement to such registration statement and the
prospectus used in connection therewith as may be necessary to keep
such registration statement effective for the lesser of (x) twenty-four
(24) months and (y) such shorter period which will terminate when all
Registrable Securities covered by such registration statement have been
sold, and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration
statement;
(iii) as soon as reasonably possible,
furnish to each seller of Registrable Securities, prior to filing a
registration statement, copies of such registration statement as is
proposed to be filed, and thereafter such number of copies of such
registration statement, each amendment and supplement thereto (in each
case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as each such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
seller;
(iv) use its best efforts to register or
qualify such Registrable Securities under such other securities or
"blue sky" laws of such jurisdictions as any seller of Registrable
Securities may request, and to continue such qualification in effect in
such jurisdiction for as long as permissible pursuant to the laws of
such jurisdiction, or for as long as any such seller requests or until
all of such Registrable Securities are sold, whichever is shortest, and
do any and all other acts and things which may be reasonably necessary
or advisable to enable any such seller to consummate the disposition in
such jurisdictions of the Registrable Securities owned by such seller;
provided, however, that the Company shall not be required to
(x) qualify generally to do business in any jurisdiction where it would
not otherwise be required to qualify but for this Section 6(a)(iv),
(y) subject itself to taxation in any such jurisdiction or (z) consent
to general service of process in any such jurisdiction;
(v) use its best efforts to cause the
Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and
operations of the Company to enable
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the seller or sellers of Registrable Securities to consummate the
disposition of such Registrable Securities;
(vi) notify each seller of Registrable
Securities at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus
included in such registration statement contains an untrue statement of
a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made,
and the Company shall promptly prepare a supplement or amendment to
such prospectus and furnish to each seller a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, after delivery to the purchasers of such Registrable
Securities, such prospectus shall not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made;
(vii) enter into and perform customary
agreements (including an underwriting agreement in customary form with
the Approved Underwriter or Company Underwriter, if any, selected as
provided in Section 3 or Section 4, as the case may be) and take such
other actions as are prudent and reasonably required in order to
expedite or facilitate the disposition of such Registrable Securities;
(viii) make available for inspection by any
seller of Registrable Securities, any managing underwriter
participating in any disposition pursuant to such registration
statement, Holders' Counsel and any attorney, accountant or other agent
retained by any such seller or any managing underwriter (each, an
"INSPECTOR" and collectively, the "INSPECTORS"), all financial and
other records, pertinent corporate documents and properties of the
Company and its subsidiaries (collectively, the "RECORDS") as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's and its subsidiaries' officers,
directors and employees, and the independent public accountants of the
Company, to supply all information reasonably requested by any such
Inspector in connection with such registration statement. Records that
the Company determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (x) the disclosure of such Records is necessary to
avoid or correct a misstatement or omission in the registration
statement, (y) the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction or
(z) the information in such Records was known to the Inspectors on a
non-confidential basis prior to its disclosure by the
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Company or has been made generally available to the public. Each seller
of Registrable Securities agrees that it shall, upon learning that
disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(ix) if such sale is pursuant to an
underwritten offering, use its best efforts to obtain a "cold comfort"
letter from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by "cold
comfort" letters as Holders' Counsel or the managing underwriter
reasonably request;
(x) use its best efforts to furnish, at the
request of any seller of Registrable Securities on the date such
securities are delivered to the underwriters for sale pursuant to such
registration or, if such securities are not being sold through
underwriters, on the date the registration statement with respect to
such securities becomes effective, an opinion, dated such date, of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such
request, covering such legal matters with respect to the registration
in respect of which such opinion is being given as such seller may
reasonably request and are customarily included in such opinions;
(xi) otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC, and make
available to its security holders, as soon as reasonably practicable
but no later than fifteen (15) months after the effective date of the
registration statement, an earnings statement covering a period of
twelve (12) months beginning after the effective date of the
registration statement, in a manner which satisfies the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(xii) cause all such Registrable Securities
to be listed on each securities exchange on which similar securities
issued by the Company are then listed, provided that the applicable
listing requirements are satisfied;
(xiii) keep Holders' Counsel advised in
writing as to the initiation and progress of any registration under
Section 3 or Section 4 hereunder;
(xiv) cooperate with each seller of
Registrable Securities and each underwriter participating in the
disposition of such Registrable Securities and their respective counsel
in connection with any filings required to be made with the National
Association of Securities Dealers, Inc. (the "NASD"); and
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(xv) use best efforts to take all other
steps necessary to effect the registration of the Registrable
Securities contemplated hereby.
(b) Seller Information. The Company may require each
seller of Registrable Securities as to which any registration is being effected
to furnish to the Company such information regarding the distribution of such
securities as the Company may from time to time reasonably request in writing.
(c) Notice to Discontinue. Holder agrees that, upon
receipt of any notice from the Company of the happening of any event of the kind
described in Section 6(a)(vi), the Holder shall forthwith discontinue
disposition of Registrable Securities pursuant to the registration statement
covering such Registrable Securities until the Holder's receipt of the copies of
the supplemented or amended prospectus contemplated by Section 6(a)(vi) and, if
so directed by the Company, the Holder shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the prospectus covering such Registrable Securities
which is current at the time of receipt of such notice. If the Company shall
give any such notice, the Company shall extend the period during which such
registration statement shall be maintained effective pursuant to this Agreement
(including, without limitation, the period referred to in Section 6(a)(ii)) by
the number of days during the period from and including the date of the giving
of such notice pursuant to Section 6(a)(vi) to and including the date when the
Holder shall have received the copies of the supplemented or amended prospectus
contemplated by and meeting the requirements of Section 6(a)(vi).
(d) Registration Expenses. The Company shall pay all
expenses (other than as set forth in Sections 3(d) and 4(b)) arising from or
incident to the performance of, or compliance with, this Agreement, including,
without limitation, (i) all SEC, stock exchange and NASD registration and filing
fees, (ii) all fees and expenses incurred in complying with securities or "blue
sky" laws (including reasonable fees, charges and disbursements of counsel in
connection with "blue sky" qualifications of the Registrable Securities),
(iii) all printing, messenger and delivery expenses, (iv) the fees, charges and
disbursements of counsel to the Company and of its independent public
accountants and any other accounting fees, charges and expenses incurred by the
Company (including, without limitation, any expenses arising from any special
audits incident to or required by any registration or qualification) and any
legal fees, charges and expenses incurred by the Company and, in the case of a
Demand Registration, the Holder and (v) any liability insurance or other
premiums for insurance obtained in connection with any Demand Registration or
Incidental Registration pursuant to the terms of this Agreement, regardless of
whether such registration statement is declared effective. All of the
expenses described in this Section 6(d) are referred to herein as "REGISTRATION
EXPENSES."
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(e) Information Blackout.
(i) At any time when a Registration
Statement effected pursuant to Section 3 relating to Registrable
Securities is effective, upon written notice from the Company to Holder
that the Company has determined in good faith that sale of Registrable
Securities pursuant to the Registration Statement would require
disclosure of non-public material information having an adverse effect
on the Company (an "INFORMATION BLACKOUT"), Holder shall immediately
suspend sales of Registrable Securities pursuant to such Registration
Statement until the earlier of:
(A) 60 days after the Company makes
such good faith determination, and
(B) such time as the Company
notifies the Holder that such material information has been
disclosed to the public or has ceased to be material or that
sales pursuant to such Registration Statement may otherwise be
resumed (the number of days from such suspension of sales by
the Holder until the day when such sale may be resumed
hereunder is hereinafter called a "SALES BLACKOUT PERIOD").
(ii) Any delivery by the Company of notice
of an Information Blackout during the forty-five (45) days immediately
following effectiveness of any Registration Statement effected pursuant
to Section 3 above shall give the holders of a majority of the
Registrable Securities being sold the right, by written notice to the
Company within twenty (20) business days after the end of such
Information Blackout, to cancel such registration, in which event
Holder shall have one additional registration right under Section 3
above ("BLACKOUT TERMINATION RIGHT").
(iii) If there is an Information Blackout
and the Blackout Termination Right, if any, pursuant to clause
(ii) above, is not available or exercised, the time period set forth
in Section 6(a)(ii) shall be extended for a number of days equal to the
number of days in the Sales Blackout Period.
7. Indemnification: Contribution.
(a) Indemnification by the Company. The Company
agrees to indemnify and hold harmless, to the fullest extent permitted by law,
each Holder, its officers, directors, trustees, partners, employees, advisors
and agents and each Person who controls (within the meaning of the Securities
Act or the Exchange Act) such Holder from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue, or allegedly untrue,
statement of a material fact contained in any
13
<PAGE>
registration statement, prospectus or preliminary prospectus or notification or
offering circular (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or arising out of or based upon
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
concerning such Holder furnished in writing to the Company by such Holder
expressly for use therein. The Company shall also provide customary indemnities
to any underwriters of the Registrable Securities, their officers, directors and
employees and each Person who controls such underwriters (within the meaning of
the Securities Act and the Exchange Act) to the same extent as provided above
with respect to the indemnification of the Holders of Registrable Securities.
(b) Indemnification by Holders. In connection with
any registration statement in which a Holder is participating pursuant to
Section 3 or Section 4 hereof, each such Holder shall furnish to the Company in
writing such information with respect to such Holder as the Company may
reasonably request or as may be required by law for use in connection with any
such registration statement or prospectus and each Holder agrees to indemnify
and hold harmless, to the fullest extent permitted by law, the Company, any
underwriter retained by the Company and their respective directors, officers,
employees and each Person who controls the Company or such (within the meaning
of the Securities Act and the Exchange Act) to the same extent as the foregoing
indemnity from the Company to the Holders set forth in Section 7(a) hereof, but
only with respect to any such information with respect to such Holder furnished
in writing to the Company by such Holder expressly for use therein; provided,
however, that the total amount to be indemnified by such Holder pursuant to this
Section 7(b) shall be limited to the net proceeds received by such Holder in the
offering to which the registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any
Person entitled to indemnification hereunder (the "INDEMNIFIED PARTY") agrees to
give prompt written notice to the indemnifying party (the "INDEMNIFYING PARTY")
after the receipt by the Indemnified Party of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which the Indemnified Party intends to claim indemnification
or contribution pursuant to this Agreement; provided, however, that the failure
so to notify the Indemnifying Party shall not relieve the Indemnifying Party of
any liability that it may have to the Indemnified Party hereunder. If notice of
commencement of any such action is given to the Indemnifying Party as above
provided, the Indemnifying Party shall be entitled to participate in and, to the
extent it may wish, jointly with any other Indemnifying Party similarly
notified, to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such Indemnified Party. The Indemnified Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and
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<PAGE>
expenses of such counsel (other than reasonable costs of investigation) shall be
paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay
the same, (ii) the Indemnifying Party fails to assume the defense of such action
with counsel satisfactory to the Indemnified Party in its reasonable judgment or
(iii) the named parties to any such action (including any impleaded parties)
have been advised by such counsel that either (x) representation of such
Indemnified Party and the Indemnifying Party by the same counsel would be
inappropriate under applicable standards of professional conduct or (y) there
may be one or more legal defenses available to it which are different from or
additional to those available to the Indemnifying Party. In either of such
cases, the Indemnifying Party shall not have the right to assume the defense of
such action on behalf of such Indemnified Party. No Indemnifying Party shall be
liable for any settlement entered into without its written consent, which
consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for
in this Section 7 from the Indemnifying Party is unavailable to an Indemnified
Party hereunder in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of and benefits to the Indemnifying Party and Indemnified Party
in connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits to such Indemnifying Party and Indemnified Party shall be
deemed to be in the same respective proportions as the total proceeds from the
Public Offering received by such Indemnifying Party and Indemnified Party. The
relative faults of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Sections 7(a), 7(b) and 7(c), any legal or other fees, charges or expenses
reasonably incurred by such party in connection with any investigation or
proceeding, provided that the total amount to be indemnified by such Holder
shall be limited to the net proceeds received by such Holder in the offering.
The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 7(d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. No person
15
<PAGE>
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person.
8. Rule 144. The Company covenants that it shall file (a) any
reports required to be filed by it under the Exchange Act and (b) take such
further action as each Holder of Registrable Securities may reasonably request
(including providing any information necessary to comply with Rules 144 and 144A
under the Securities Act), all to the extent required from time to time to
enable such Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule 144
under the Securities Act, as such rule may be amended from time to time, or
(ii) any similar rules or regulations hereafter adopted by the SEC. The Company
shall, upon the request of any Holder of Registrable Securities, deliver to such
Holder a written statement as to whether it has complied with such requirements.
9. Miscellaneous.
(a) Recapitalizations, Exchanges, etc. The provisions
of this Agreement shall apply, to the full extent set forth herein with respect
to (i) the shares of Common Stock and (ii) any and all equity securities of the
Company or any successor or assign of the Company (whether by merger,
consolidation, sale of assets or otherwise) which may be issued in respect of,
in conversion of, in exchange for or in substitution of, the shares of Common
Stock and shall be appropriately adjusted for any stock dividends, splits,
reverse splits, combinations, recapitalizations and the like occurring after the
date hereof. The Company shall cause any successor or assign (whether by merger,
consolidation or otherwise) to enter into a new registration rights agreement
with the Holder on terms substantially similar to this Agreement as a condition
of any such transaction.
(b) No Inconsistent Agreements. The Company shall not
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Holder in this Agreement or grant any additional
registration rights to any Person or with respect to any securities which are
not Registrable Securities which are prior in right to or inconsistent with the
rights granted in this Agreement.
(c) Remedies. The Holder, in addition to being
entitled to exercise all rights granted by law, including recovery of damages,
shall be entitled to specific performance of their rights under this Agreement.
The Company agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive in any action for specific performance the
defense that a remedy at law would be adequate.
(d) Amendments and Waivers. Except as otherwise
provided herein, the provisions of this Agreement may not be amended, modified
or
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<PAGE>
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless consented to in writing by the parties hereto.
(e) Notices. All notices, demands and other
communications provided for or permitted hereunder shall be made in writing and
shall be made by registered or certified first-class mail, return receipt
requested, telecopier, courier service, overnight mail or personal delivery:
(i) if to the Company:
Doctors Health System, Inc.
10451 Mill Run Circle, Tenth Floor
Owings Mills, Maryland 21117
Attention: Paul A. Serini
(ii) if to the Holder:
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
Attention: John F. DePodesta
with copies (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: Michael C. Williams
All such notices and communications shall be deemed
to have been duly given when delivered by hand, if personally delivered; when
delivered by courier or overnight mail, if delivered by commercial courier
service or overnight mail; five (5) Business Days after being deposited in the
mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged,
if telecopied.
(f) Successors and Assigns: Third Party
Beneficiaries. This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of each of the parties hereto. The Demand
Registration rights of the Holder contained in Section 3 hereof and the other
rights of the Holder with respect thereto shall be, with respect to any
Registrable Securities, (i) automatically transferable to any Affiliate of the
Holder and (ii) in all other cases, transferred only with the consent of the
Company. The incidental or "piggy-back" registration rights of the Holder
contained in Sections 3(b) and 4 hereof and the other rights of the Holder
17
<PAGE>
with respect thereto shall be, with respect to any Registrable Securities,
automatically transferred by the Holder to any Person who is the transferee of
such Registrable Securities. All of the obligations of the Company hereunder
shall survive any such transfer. No Person other than the parties hereto and
their successors and permitted assigns is intended to be a beneficiary of any of
the rights granted hereunder.
(g) Counterparts. This Agreement may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
(j) Severability. If any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired,
it being intended that the parties shall in good faith negotiate a modification
to this Agreement that preserves the essence of the agreement of the parties
contained herein and all of the rights and privileges of the Holder, as so
modified, shall be enforceable to the fullest extent permitted by law.
(k) Entire Agreement. This Agreement is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein and in the Stock Purchase Agreement. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
(l) Further Assurances. Each of the parties shall
execute such documents and perform such further acts as may be reasonably
required or desirable to carry out or to perform the provisions of this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed, or have
caused to be executed, this Agreement on the date first written above.
DOCTORS HEALTH SYSTEM, INC.
By:______________________________
Name:
Title:
GENESIS HEALTH VENTURES, INC.
By:______________________________
Name:
Title:
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<PAGE>
Exhibit 10.39
OPTION AGREEMENT
between
DOCTORS HEALTH SYSTEM, INC.
and
GENESIS HEALTH VENTURES, INC.
dated as of September 4, 1996
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT is entered into as of September 4, 1996, by and
between Doctors Health System, Inc., a Maryland corporation (the "COMPANY"), and
Genesis Health Ventures, Inc., a Pennsylvania corporation ("GENESIS").
WHEREAS, the Company and Genesis have entered into a Stock Purchase
Agreement (the "STOCK PURCHASE AGREEMENT") pursuant to which Genesis has agreed
to purchase 571,428 shares of the Company's Series C Preferred Stock, par value
$17.50 per share (the "SERIES C PREFERRED STOCK"); and
WHEREAS, the Stock Purchase Agreement requires the parties to enter
into an Option Agreement in connection with the purchase by Genesis of
additional shares of Series C Preferred Stock.
NOW, THEREFORE, in consideration of the foregoing, and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. OPTION TO PURCHASE SHARES
Subject to the terms and conditions hereof, the Company hereby grants
to Genesis an option (the "Option") to purchase 500,000 shares (as adjusted
herein, the "SHARES") of the Series C Preferred Stock. The exercise price of the
Option shall be $20.00 per share, payable by wire transfer in United States
Dollars (the "OPTION PRICE"), for a total of $10,000,000. The Option shall be
immediately exercisable by Genesis at any time prior to its expiration. The
Option shall expire upon the earliest date on which one of the following occurs
(the "OPTION TERMINATION DATE"): (i) August 30, 2001; or (ii) the consummation
of (a) a Qualified Public Offering, (b) a merger or similar combination
transaction of which the Company is not the survivor, or (c) a sale or other
disposition of substantially all of the Company's assets (any of (a)-(c)
hereinafter referred to as a "QUALIFIED TRANSACTION"). The Company shall provide
Genesis with a written notice at least 30 days prior to the consummation of any
Qualified Transaction. For purposes of this Agreement, a QUALIFIED PUBLIC
OFFERING shall mean an offering of the Company's Common Stock registered under
the Securities Act with (a) the net proceeds to the Company of the sale of such
Common Stock to equal or exceed $25,000,000, (b) a total market capitalization
of the Company at the time of such offering of at least $100,000,000, (c) the
net price per share to equal or exceed the weighted average price paid by
Genesis for each share of Series C Preferred Stock outstanding immediately prior
to such offering, plus all accrued but unpaid dividends (whether declared or
undeclared) and interest thereon, as adjusted for stock splits,
recapitalizations and similar transactions, and (d) subject to a firm
<PAGE>
commitment underwriting conducted by a nationally recognized underwriter
reasonably acceptable to Genesis.
2. ADJUSTMENT IN NUMBER OF OPTION SHARES AND/OR OPTION PRICE
2.01. If the number of outstanding shares of Series C Preferred Stock
is increased or decreased or changed into or exchanged for a different number or
kind of stock or other securities of the Company by reason of any
recapitalization, reclassification (including any reclassification in connection
with a merger, consolidation or other business combination involving the
Company), stock split, reverse split, combination of shares of Series C
Preferred Stock, stock dividend or other distribution payable in capital stock,
or other increase or decrease in shares of Series C Preferred Stock effected
without receipt of consideration by the Company occurring after the date hereof,
a proportionate and appropriate adjustment shall be made by the Company in the
number and kind of shares subject to the Option, so that the proportionate
interest in the Company of Genesis immediately following such event shall, to
the extent practicable, be the same as immediately prior to such event. Any such
adjustment in the Option shall not change the aggregate Option Price with
respect to shares subject to the unexercised portion of the Option but shall
include a corresponding proportionate adjustment in the Option Price per share.
2.02. If, after the date hereof but prior to the Option Termination
Date (the "ADJUSTMENT PERIOD"), the Company sells Series C Preferred Stock or
securities convertible into or exchangeable for Series C Preferred Stock, for a
price (the "LOWER OFFERING PRICE") less than the weighted average price paid or
to be paid by Genesis for each share of Series C Preferred Stock then
outstanding or subject to the Option, plus all accrued but unpaid dividends and
interest thereon (the "WEIGHTED AVERAGE PRICE"), the Option Price shall be
adjusted to a price equal to the quotient obtained by dividing:
(1) an amount equal to (x) the sum of (A) the total number of
shares of Series C Preferred Stock outstanding immediately prior to
such issuance or sale, plus (B) the total number of shares of Series C
Preferred Stock issuable upon exercise of all options, warrants and
other rights convertible or exchangeable for, or evidencing the right
to purchase shares of Series C Preferred Stock outstanding immediately
prior to such issuance or sale, if any, multiplied by (C) the Weighted
Average Price in effect immediately prior to such issuance or sale,
plus (y) the consideration, if any received or deemed to be received by
the Company upon such issuance or sale; by
(2) the sum of (A) the total number of shares of Series C
Preferred Stock outstanding immediately after such issuance or sale,
plus (B) the total
2
<PAGE>
number of shares of Series C Preferred Stock issuable upon exercise of
all options, warrants and other rights convertible or exchangeable for,
or evidencing the right to purchase shares of Series C Preferred Stock
outstanding immediately after such issuance or sale, if any.
If, subsequent to such an adjustment, the Company issues or sells
additional shares of Series C Preferred Stock during the Adjustment Period, for
a price of less than the then applicable Weighted Average Price (as adjusted for
all prior adjustments), a further adjustment in the Option Price shall be made
in accordance with this Section 2.
3. PARTIAL EXERCISE
The Option shall be exercisable in whole or in part, at any time and
from time to time, after becoming exercisable and prior to termination of the
Option, provided, that no single exercise of the Option shall be for less than
10,000 Shares unless the number of Shares purchased is the total number at the
time available for purchase under this Option. In no event may the Option be
exercised for a fractional Share. The number of shares which may be purchased
upon exercise of the Option shall be reduced by the number of shares previously
purchased upon exercise of the Option.
4. METHOD OF EXERCISE OF OPTION
Subject to the terms and conditions of this Option Agreement, Genesis
may exercise the Option with respect to all or any part of the Shares then
subject to such Option by giving the Company written notice of exercise,
specifying the number of Shares as to which the Option is being exercised. Such
notice shall be addressed to the Secretary of the Company at the Company's
principal office, and shall be effective upon delivery (by personal delivery,
fax or other delivery) to the Secretary of the Company. Such notice shall be
accompanied by cash (in U.S. Dollars) in an amount equal to the Option Price of
such Shares. The Company's obligations to issue Shares pursuant to this
Agreement are subject to the expiration, prior to an exercise of the Option, of
any waiting period applicable to the investment by Genesis in the Company
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
5. MANDATORY EXERCISE
5.01. FIRST MANDATORY EXERCISE. Subject to the conditions set forth in
Sections 5.03 and 5.04, the Company may require Genesis to exercise the Option
with respect to such number of Shares as the Company shall determine in an
amount no greater than one-half the number of Shares for which the Option may be
exercised at the end of any month which is the second consecutive month during
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<PAGE>
which the Company has received payment for a total of at least 20,000 Capitated
Medicare Lives.
5.02. SECOND MANDATORY EXERCISE. Subject to the conditions set forth in
Sections 5.03 and 5.04, Genesis may be required by the Company to exercise the
Option with respect to any Shares for which the Option has not yet been
exercised at the end of any month which is the second consecutive month during
which the Company has received payment for a total of at least 40,000 Capitated
Medicare Lives.
5.03. The obligations of Genesis to exercise the Option pursuant to
this Section 5 are subject to the fulfillment on or before each such exercise of
each of the following conditions:
5.03(A) The Company shall deliver a certificate in the form
attached as Exhibit A hereto dated as of the date of such exercise.
5.03(B) The Company shall have performed and complied with all
material agreements, obligations and conditions contained in the Stock
Purchase Agreement and the Restated Stockholders Agreement dated as of
the date hereof.
5.03(C) All consents, authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United
States or of any state or of any third party that are necessary in
connection with the exercise of the Option and the lawful issuance of
the Shares to Genesis pursuant to this Option Agreement shall have been
duly obtained and shall be effective on and as of such exercise other
than those which are not required to be obtained before such exercise.
5.03(D) There shall not have been any default or breach by the
Company (that has not been cured or waived) with respect to its
obligations (i) to holders of the Company's Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock under the
Company's articles of incorporation, (ii) to NationsBank, N.A. under
the Loan Agreement dated as of December 1, 1995 and (iii) to First
National Bank of Maryland, N.A. under the Promissory Note dated as of
August 15, 1996 or under any successor credit facility, including,
without limitation, the facility currently being negotiated with First
National Bank of Maryland, N.A.
5.03(E) The expiration of any waiting period applicable to the
investment by Genesis in the Company required by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
5.04 The Company shall provide Genesis with a written notice at least
30 days prior to a mandatory exercise pursuant to this Section 5. Such notice
shall set
4
<PAGE>
forth the number of Shares for which Genesis will be required to exercise the
Option, which number will not be less than 10,000 Shares.
5.05. For purposes of this Section 5, the term "CAPITATED MEDICARE
LIVES" shall mean those Medicare-eligible persons living in Maryland, Delaware,
West Virginia and the District of Columbia and in the areas of Northern Virginia
and Southern Pennsylvania who, at the time of any calculation under this Section
5, are enrolled in (a) a "Medicare HMO" or similar Medicare managed care product
offered directly by the Company under contract with the United States Health
Care Financing Administration ("HCFA") and with respect to whom the Company
receives a capitation or other risk-based payment from HCFA, or (b) a "Medicare
HMO" or other similar Medicare managed care product offered by a health
maintenance organization or other payor with respect to which the Company agrees
to provide or arrange to provide all or substantially all of those services now
qualifying as "Medicare Part A" and "Medicare Part B" benefits under
arrangements that permit the Company to realize all or the preponderance of any
savings obtained by managing the provision of such services to enrolled Medicare
members.
6. LIMITATIONS ON TRANSFER
The Option is not transferable by Genesis, other than to a corporation
that, directly or indirectly, is wholly owned by Genesis, and shall not be
pledged or hypothecated (by operation of law or otherwise) or subject to
execution, attachment or similar processes.
7. RESERVATION OF STOCK
The Company shall at all times reserve and keep available, solely for
issuance and delivery upon exercise of the Option, the number of shares of
Series C Preferred Stock from time to time issuable upon exercise of the Option.
All shares of Series C Preferred Stock issuable upon exercise of the Option
shall be duly authorized and, when issued upon exercise and the payment of the
Option Price as provided herein, shall be validly issued, fully paid and
nonassessable with no liability on the part of Genesis.
8. RIGHTS AS SHAREHOLDER
Neither Genesis nor any successor or permitted assign shall be, or have
any of the rights or privileges of, a shareholder of the Company in respect of
any Shares issuable hereunder unless and until such Shares have been fully paid
and certificates representing such Shares have been endorsed, transferred and
delivered, and the name of Genesis (or of such successor or permitted assign)
has been entered as the shareholder of record on the books of the Company.
5
<PAGE>
9. REORGANIZATIONS
9.1 REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING ENTITY.
Subject to Section 9.2, if the Company shall be the surviving entity in any
reorganization, merger or consolidation of the Company with one or more other
entities, the Option shall pertain to and apply to the securities to which a
holder of the number of Shares subject to the Option would have been entitled
immediately following such reorganization, merger or consolidation, with a
corresponding proportionate adjustment of the Option Price per share so that the
aggregate Option Price thereafter shall be the same as the aggregate Option
Price of the Shares remaining subject to the Option immediately prior to such
reorganization, merger or consolidation.
9.2 REORGANIZATION IN WHICH THE COMPANY IS NOT THE SURVIVING
CORPORATION OR SALE OF ASSETS. Upon the dissolution or liquidation of the
Company, or upon a merger, consolidation or reorganization of the Company with
one or more other entities in which the Company is not the surviving entity, or
upon a sale of all or substantially all of the assets of the Company to another
entity, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving entity) approved by the
Board of Directors of the Company which results in any person or entity, or
persons or entities acting as a group or otherwise in concert owning 50 percent
or more of the combined voting power of all classes of stock of the Company, the
Option hereunder shall terminate, except to the extent provision is made in
writing in connection with such transaction for the continuation and/or the
assumption of the Option, or for the substitution for the Option of new options
covering the stock of a successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares of
stock and exercise prices, in which event the Option shall continue in the
manner and under the terms so provided. The Company shall send written notice of
an event that will result in such a termination to Genesis not later than the
time at which the Company gives notice thereof to its shareholders but in no
event less than 30 days prior to such event.
10. ADJUSTMENTS
No fractional shares or units of other securities shall be issued
pursuant to any such adjustment, and any fractions resulting from any such
adjustment shall be eliminated in each case by rounding downward to the nearest
whole share or unit. Any disputes regarding adjustments in the Option Price or
number of Shares issuable upon exercise of the Option (including without
limitation any adjustments pursuant to Section 2 hereof) shall be resolved by an
independent arbitrator selected by the Company and Genesis.
6
<PAGE>
11. MISCELLANEOUS PROVISIONS.
11.1 NOTICES. All notices, demands, requests, or other communications
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be faxed
and mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, overnight or
express mail, addresses as follows:
(i) If to the Company:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attention: Paul A. Serini
Facsimile No.: (410) 654-5806
(ii) If to Genesis:
Genesis Health Ventures, Inc.
148 West State Street
Kennett Square, Pennsylvania 19348
Attention: John F. DePodesta
Facsimile No.: (610) 444-7483
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Michael C. Williams
Facsimile No.: (202) 637-5910
Each party may designate by notice in writing a new address to which
any notice, demand, request or communication may thereafter be so given, served
or sent. Each notice, demand, request or communication which shall be mailed,
delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent or received for all purposes at such time as it
is delivered to the addressee (with the return receipt, the delivery receipt, or
affidavit of messenger being deemed conclusive evidence of such delivery) or at
such time as delivery is refused by the addressee upon presentation.
11.2 ENTIRE AGREEMENT; MODIFICATION; BENEFIT. This Agreement
constitutes the entire agreement of the parties hereto with respect to the
matters contemplated herein, supersede all prior oral and written memoranda and
7
<PAGE>
agreements with respect to the matters contemplated herein, and may not be
modified, deleted or amended except by written instrument executed by the
parties. All provisions of this Agreement shall be binding upon, and shall inure
to the benefit of and be enforceable by, the parties hereto and their respective
successors and permitted assigns.
11.3 GOVERNING LAW. This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating thereto shall be governed by
and construed in accordance with the laws of Maryland (but not including the
choice of law rules thereof).
11.4 EXECUTION. To facilitate execution, this Agreement may be executed
in as many counterparts as may be required; and it shall not be necessary that
the signatures of, or on behalf of, each party, or the signatures of all persons
required to bind any party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each party, or the signatures
of the persons required to bind any party, appear on one or more of the
counterparts. All counterparts shall collectively constitute a single agreement.
[Signatures commence on next page]
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IN WITNESS WHEREOF, the undersigned have duly
executed this Agreement, or have caused this Agreement to be duly executed on
their behalf, as of the date first written above.
DOCTORS HEALTH SYSTEM, INC.
By:
Name:
Title:
GENESIS HEALTH VENTURES, INC.
By:
Name:
Title:
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EXHIBIT A
DOCTORS HEALTH SYSTEM, INC.
CERTIFICATE
Doctors Health System, Inc., a Maryland corporation (the "Company"), in
connection with the Option Agreement (the "Option Agreement") dated as of
September 4, 1996 between the Company and Genesis Health Ventures, Inc., a
Pennsylvania corporation ("Genesis"), hereby represents and warrants as of the
date hereof (which representations and warranties shall be deemed to include the
disclosures with respect thereto so specified in the schedules attached hereto)
to the Investor as follows, with capitalized terms used herein without
definition having the meanings assigned to them in the Stock Purchase Agreement
dated as of September 4, 1996 between the Company and Genesis:
1. ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland, and has the full and unrestricted corporate power and authority to
own, operate and lease its Assets, to carry on its business as currently
conducted, to execute and deliver the Option Agreement and to carry out the
transactions contemplated hereby. There is no state, country or territory
wherein the absence of licensing or qualification as a foreign corporation would
have a material adverse effect upon the business of the Company as currently
conducted.
2. CAPITALIZATION. The authorized capital stock of the Company and the
outstanding shares of capital stock of the Company as of the date hereof will be
as set forth in Schedule 2 hereto. All of such outstanding shares have been
validly issued and are fully paid and nonassessable. No shares of capital stock
of the Company or any Subsidiary have been reserved for any purpose, other than
issuance of capital stock in amounts set forth in Schedule 2 (i) pursuant to the
Company's Omnibus Stock Option Plan , (ii) upon the conversion of Series A
Preferred Stock and the Series B Preferred Stock, (iii) upon the exercise of the
Common Stock Warrants (as defined in Schedule 2) and (iv) pursuant to the Option
Agreement. Except as set forth in Schedule 2, there are no outstanding
securities convertible into or exchangeable for the capital stock of the Company
or any of the Subsidiaries and no outstanding options, rights (preemptive or
otherwise), or warrants to purchase or to subscribe for any shares of such stock
or other securities of the Company or any of the Subsidiaries.
3. RESTRICTIONS AND CONSENTS. There are no Agreements, Laws or other
restrictions of any kind to which the Company, any Subsidiary or any Medical
Group (or any asset thereof) is party or subject that would prevent or restrict
the execution, delivery or performance of the Option Agreement or result in any
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penalty, forfeiture, Agreement termination, or restriction on business
operations of the Investor, the Company, any Subsidiary or any Medical Group as
a result of the execution, delivery or performance of the Option Agreement.
Schedule 3 lists all such Agreements and Laws that reasonably could be
interpreted or expected to require the consent or acquiescence of any person or
entity not party to the Option Agreement with respect to any aspect of the
execution, delivery or performance of the Option Agreement by the Company, any
Subsidiary or any Medical Group.
4. AUTHORIZATION. The execution, delivery and performance by the
Company of the Option Agreement, the fulfillment of and compliance with the
terms and provisions thereof, and the consummation by the Company of the
transactions contemplated thereby, do not and will not: (a) require any consent
or approval of the stockholders of the Company that has not been obtained; (b)
conflict with, or violate any provision of, any Law having applicability to the
Company, any Subsidiary or any Medical Group or any of their respective Assets,
or any provision of the certificate or articles of organization or bylaws or
equivalent constituent document of the Company, any Subsidiary or any Medical
Group; (c) conflict with, or result in any breach of, or constitute a default
under any Agreement to which the Company, any Subsidiary or any Medical Group is
a party or by which it or any of its Assets may be bound; or (d) result in or
require the creation or imposition of or result in the acceleration of any
indebtedness, or of a material Encumbrance, or with respect to, the Company, any
Subsidiary or any Medical Group or any of the Assets now owned or hereafter
acquired by the Company, any Subsidiary or any Medical Group.
5. REGULATORY MATTERS. The Company and the Subsidiaries and, to the
Company's knowledge, the Medical Groups and the physicians employed by the
Medical Groups have not knowingly or willfully failed to comply with the
regulatory matters described in this Section 5. Schedule 5 contains a list of
exceptions and disclosures that qualify the matters set forth in this Section 5,
where applicable.
5.1. GENERAL COMPLIANCE WITH LAW. The Company, the
Subsidiaries and, to the Company's knowledge, the Medical Groups have complied
and are in full compliance with all Laws except where a failure to comply,
singly or in the aggregate, would not have a material adverse effect on the
Company, the Subsidiaries and the Medical Groups, taken as a whole.
5.2. LICENSES AND PERMITS. The Company, the Subsidiaries, the
Medical Groups and each of the physicians employed by such Persons have all
Permits any federal, state, local, foreign or other governmental agency,
instrumentality, commission, authority, board or any other Person, necessary to
conduct their business as now being conducted except where the failure to have
any such Permit does not have a material adverse effect on the Company, the
Subsidiaries and the Medical Groups, taken as a whole. All Permits of the
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Company and the Subsidiaries and, to the Company's knowledge, the Medical Groups
and each of the physicians employed by such Medical Groups are valid and in full
force and effect except where the failure to have any such Permit does not have
a material adverse effect on the Company, the Subsidiaries and the Medical
Groups, taken as a whole. No notice to, declaration, filing or registration
with, or Permit or consent from, any governmental or regulatory body or
authority, or any other Person or entity, is required to be made or obtained by
the Company or any of the Subsidiaries or Medical Groups in connection with the
execution, delivery or performance of this Purchase Agreement and the
consummation of the transactions contemplated hereby. Notwithstanding the
foregoing, the Company is not required to obtain any Permit to do business as a
health maintenance organization, insurance company, or other risk-bearing health
care entity under the Laws and regulations of Maryland or the Laws and
regulations of any other jurisdiction in which the Company, the Subsidiaries or
the Medical Groups do business.
5.3. FRAUD AND ABUSE MATTERS. To the Company's knowledge, the
Company, the Medical Groups, and all persons and entities providing services for
the Company or the Medical Groups, have not engaged in any activities which are
prohibited or could form the basis for criminal penalties, civil monetary
penalties or a mandatory or permissive exclusion from the Medicare, Medicaid or
other federal and state health care programs under ss. ss. 1320a-7, 1320a-7a,
1320a-7b, or 1395nn of Title 42 of the United States Code, the federal CHAMPUS
statute, or any regulations promulgated thereunder, or similar or related
federal, state and local statutes, common law or regulations. Without in any way
limiting the foregoing, the Company, the Medical Groups, and, to the knowledge
of the Company, all persons and entities providing services for the Company or
the Medical Groups have not engaged in any of the following activities:
(i) knowingly and willingly made or caused to be made
any false statement or representation of a material fact in any
application for any benefit or payment;
(ii) knowingly and willingly made or caused to be
made any false statement or representation of a material fact for use
in determining rights to any benefit or payment;
(iii) presenting or causing to be presented a claim
for reimbursement under CHAMPUS, Medicare, Medicaid, or other state
healthcare program that is for an item or service that the person
presenting or causing to be presented knows or should know was not
provided as claimed, or presenting a claim that the person presenting
knows or should know is false or fraudulent;
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(iv) having knowledge of the occurrence of any event
affecting (a) his/her initial or continued right to any benefit or
payment or (b) the initial or continued right to any benefit or payment
of any other individual in whose behalf he/she has applied for or is
receiving such benefit or payment, conceals or fails to disclose such
event with an intent fraudulently to secure such benefit or payment
either in a greater amount or quantity that is due or when no such
benefit or payment is authorized;
(v) offering, paying, soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or
indirectly, overtly or covertly, in cash or in kind (a) in return for
referring, or to induce the referral of, an individual to a person for
the furnishing or arranging for the furnishing of any item or service
for which payment may be made in whole or in part by CHAMPUS, Medicare
or Medicaid, or other state health care program, or (b) in return for,
or to induce, the purchase, lease, or order of, or arranging for or
recommending the purchase, lease, or order of, any good, facility,
service, or item for which payment may be made in whole or in part by
CHAMPUS, Medicare or Medicaid, or other state health care program;
(vi) making or causing to be made or inducing or
seeking to induce the making of any false statement or representation
(or omitting to state a fact required to be stated therein or necessary
to make the statements contained therein not misleading) of a material
fact with respect to (a) the conditions or operations of a facility in
order that the facility may qualify for CHAMPUS, Medicare, Medicaid or
other state health care program certification, or (b) information
required to be provided under ss. 1124A of the Social Security Act (42
U.S.C. ss. 1320a-3);
(vii) submitting or causing to be submitted bills or
requests for payment under Medicare, Medicaid or other state health
care program containing charges substantially in excess of usual
charges; or
(viii) furnishing or causing to be furnished items or
services to patients substantially in excess of the needs of such
patients.
5.4. HEALTH CARE ENTITY. The Company is not a "health care
entity" which provides "designated health services" for purposes of federal
Medicare/Medicaid physician self-referral and anti-kickback laws and regulations
and similar Maryland Laws and regulations.
6. BINDING OBLIGATION. The Option Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms.
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7. OFFERING OF SHARES. Neither the Company nor any Person acting on its
behalf has offered the Series C Preferred or any similar securities of the
Company for sale to, solicited any offers to buy the Series C Preferred or any
similar securities of the Company from or otherwise approached or negotiated
with respect to the Company with any Person other than the Investor and a
limited number of other "Accredited Investors" (as defined in Rule 501(a) under
the Securities Act). Neither the Company nor any other Person acting on its
behalf has taken or will take any action prior to the exercise (including,
without limitation, any offering of any securities of the Company under
circumstances which would require the integration of such offering with the
offering of the Series C Preferred under the Securities Act and the rules and
regulations of the Commission thereunder) which might subject the offering,
issuance and sale of the Series C Preferred to the registration requirements of
Section 5 of the Securities Act.
8. DISCLOSURE. No representation or warranty by the Company herein
contains or will contain any untrue or misleading statement of material fact or
omits or will omit any fact necessary to make the statements of material fact
contained herein or therein, in light of the circumstances under which made, not
misleading.
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IN WITNESS WHEREOF, the undersigned has signed this Certificate on
behalf of Doctors Health System, Inc. this ___ day of _______________.
DOCTORS HEALTH SYSTEM, INC.
By:______________________________
Name:
Title:
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OFFICER'S CERTIFICATE
GENESIS HEALTH VENTURES, INC.
The undersigned, John F. DePodesta, Senior Vice President of Genesis
Health Ventures, Inc., a Pennsylvania corporation (the "Investor"), pursuant to
the Stock Purchase Agreement dated as of September 4, 1996 between the Investor
and Doctors Health System, Inc. (the "Purchase Agreement"), hereby certifies on
behalf of the Investor as follows:
1. The representations and warranties made by the Investor in the
Purchase Agreement are true and correct in all material respects as of the date
hereof.
2. The Investor has performed and complied with all agreements and
conditions required by the Purchase Agreement to be performed or complied with
by it prior to the date hereof.
3. No action or proceeding by or before any governmental authority has
been instituted or threatened (and not subsequently dismissed, settled or
otherwise terminated) which is reasonably expected to restrain, prohibit or
invalidate the transactions contemplated by the Purchase Agreement.
4. Attached as Exhibit I hereto is a true and correct copy fo the
resolutions duly adopted by the Board of Directors of the Investor at a meeting
held on August 21, 1996 and such resolutions are in full force and effect on the
date hereof, have not been amended, altered or repealed, and are the only
resolutions by the Board of Directors of the Investor.
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IN WITNESS WHEREOF, the undersigned has executed this Officer's
Certificate as of September 4, 1996.
________________________________
John F. DePodesta
Senior Vice President
The undersigned, _______________________________ of the Investor,
hereby certifies that John F. DePodesta is, on and as of the date hereof, a duly
elected, qualified and acting Senior Vice President of the Investor and the
signature set forth above is his genuine signature.
Dated: ________________________________
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Exhibit 10.40
Certain confidential portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential treatment.
IPA PERCENTAGE OF PREMIUM SERVICE AGREEMENT
This Agreement is made and entered into as of June 1, 1996 (the
"Effective Date"), by and between CHESAPEAKE HEALTH PLAN, INC., A UNITED
HEALTHCARE COMPANY, a Maryland corporation (hereinafter referred to as "HMO"),
and Doctors Health System, a Maryland corporation (hereinafter referred to as
"IPA").
RECITALS
WHEREAS, HMO is organized and operates in Maryland as a state-licensed
health maintenance organization under the Maryland Health Maintenance
Organization Act.
WHEREAS, the purpose of HMO is to offer prepaid health care benefits
through a coordinated system of arrangements with various health care providers
that will afford a reasonable choice of primary care physicians, assure access
to medical services and health care resources, and monitor the quality of health
care provided to HMO's enrollees, in groups or as individuals.
WHEREAS, IPA has the capacity to provide or arrange for the provision
of health care services to Members as are specified herein.
WHEREAS, IPA desires to enter into an agreement with HMO to provide or
arrange for the provision of health services to the Members of the HMO.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein stated, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by and between the parties hereto as follows:
ARTICLE I - DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated:
1.1 Capitation Fee - means the amount per Covered Member (hereinafter
defined) per month specified in Attachments G, H & I, payable to IPA in
consideration for rendering Medical Services (hereinafter defined) and
Utilization Review Program Services (hereinafter defined) pursuant to this
Agreement.
1.2 Clean Claim - means a form HCFA-1500 which includes the Member Name
and Address, subscriber name (if different than patient), HMO ID Number or Other
Insurance ID Number, Date of Birth, Diagnosis Code/Description, CPT/HCPCS/
Description, Dates of Service, Place of Service, Charges/Quantity, Type of
Service, Authorization Number and copy of Authorization, if applicable, Primary
Care Physician who referred patient, if applicable, Provider's Name, Provider
Number and authorization number or other identifiers.
1.3 Copayment - means a charge or an amount authorized under the
applicable Subscription Agreement (hereinafter defined) which may be collected
directly by IPA or its contracted providers or facilities from a Covered Member
and which amount is the financial responsibility of the Covered Member.
1.4 Covered Member - means any person entitled to Covered Services
(hereinafter defined) under the terms of one or more Subscription Agreements
(hereinafter defined). Covered Member includes, but is not limited to, Medical
Assistance Members and Medicare Members.
1.5 Covered Services - means the medical services, hospital services,
and other health care services to which a Member is entitled under the
Subscription Agreement and any applicable supplemental benefit riders.
1.6 Department - means the Maryland Department of Health and Mental
Hygiene, or its designee.
1.7 Emergency - means those health care services that are provided in a
hospital emergency facility after the sudden onset of a medical condition that
manifests itself by symptoms of sufficient severity, including severe pain, that
the absence of immediate medical attention could reasonably be expected by a
prudent layperson who possesses an average knowledge of health and medicine, to
result in: (1) placing the patient's health in serious jeopardy; (2) serious
impairment to bodily functions; or (3) serious dysfunction of any bodily organ
or part.
1.8 External Providers - means any physician, health professional, or
other health care provider, including IPA Physicians, Health Service
Contractors, and Health Centers contracted with IPA to provide Covered Services
to all Members of the HMO.
1.9 HCFA - means Healthcare Financing Administration.
1.10 Health Center - means the Health Center(s) listed in Attachment A
operated by IPA for the provision of certain outpatient health care services to
Members pursuant to this Agreement.
1.11 IPA Physician - means a duly licensed doctor of medicine or
osteopathy who practices in the Health Center(s) and who has by contract agreed
with IPA to provide certain health care services or is otherwise bound by the
terms of such contracts as IPA may enter into to arrange for the provision of
health care services.
1.12 Medical Assistance Contract ("MA Contract")(if applicable) - means
the agreement then in effect between HMO and the Department pertaining to the
provision of services by HMO and its subcontractors to MA Members (hereinafter
defined) under the Maryland Medical Assistance Program. The terms of the Medical
Assistance Contract are incorporated by reference herein.
1.13 Medical Assistance Member ("MA Member")(if applicable) - means any
Member enrolled in HMO who is entitled to receive benefits and services under
the MA Contract.
1.14 Medical Services - means those professional, emergency, hospital,
and referral services which IPA has agreed to provide to or arrange for Members
and which are set forth in Attachments B, C & D.
1.15 Medicare Member - means any Member enrolled in HMO who is entitled
to benefits under the Medicare Risk Contract (hereinafter defined).
1.16 Medicare Risk Contract - means the agreement between HMO and the
Health Care Financing Administration pertaining to the provision of services by
HMO to Medicare Members under the Medicare Risk Contract.
1.17 Member - means any person voluntarily enrolled in the prepaid
medical care program of the HMO, including Medical Assistance and Medicare
Members or any employee, subscriber, enrollee, beneficiary, insured,
policyholder or any other person including spouse or dependents, who are
eligible to receive benefits under a plan of a purchaser.
1.18 Non-MAMember - means any Member enrolled in HMO who is not
receiving services and benefits under the MA Contract.
1.19 Non-Medicare Member - means any Member enrolled in HMO who is
not receiving services and benefits under the Medicare Risk Contract.
1.20 Out of Area - means that the Member is more than thirty (30) miles
from his place of residence and experiences an "Emergency" as defined above.
1.21 Participating Provider - means any duly licensed hospital, skilled
nursing facility, home health agency, or other health provider entity which has
contracted with, or on whose behalf a contract has been entered into with, IPA
to provide Covered Services to Members. Attachment A provides a current list of
"Participating Providers".
1.22 Primary Care Physician ("PCP") - means a physician in family
practice, general practice, internal medicine or pediatrics who provides initial
and primary care to enrollees; who supervises, coordinates, and maintains
continuity of patient care; and who initiates referrals to specialist care.
1.23 Provider Manual - means the manual of rules and regulations
promulgated by HMO with which IPA is required to comply, as such manual may be
established, enhanced, amended, or modified from time to time. A copy of the
Provider Manual is attached hereto as Attachment F.
1.24 Referral Physician - means a duly licensed doctor of medicine or
osteopathy who is not a member of the IPA medical staff and to whom a Member is
referred by an IPA Physician for Medical Services.
1.25 Service Area - means a particular geographic area in which HMO is
licensed to conduct business. On thirty (30) days advance notice to IPA, the
Service Area may be expanded as deemed necessary by HMO.
1.26 Subscriber - means a Member of the Group who meets all applicable
eligibility requirements and for whom the premium payment required has been
actually received by the Health Plan.
1.27 Subscription Agreement - means the Group Master Contract,
Conversion Contract and any other agreement between the HMO and Member which
constitutes the Agreement regarding benefits, exclusions, and other conditions
between the HMO and Member, which includes the MA and Medicare Contracts.
1.28 Utilization Review Program - means the program established for
daily or frequent review and monitoring of Covered Services being managed and/or
arranged by IPA. This review includes precertification, concurrent and
retrospective review and may include telephonic review as well as on-site
review.
ARTICLE II - GENERAL
2.1 IPA Service Area. The service area of the IPA shall be generally
defined as an area within a radius of thirty (30) minutes travel time from the
location of each IPA Health Center or Primary Care Physician's office. The
purpose of the service area designation will be for the determination of the
appropriateness of each HMO Member's selection of IPA as his/her provider of
Medical Services. IPA acknowledges that the Member shall have the absolute right
to select his/her provider of medical services, and that this service area
designation is for purposes of guidance only and does not entitle IPA to the
assignment of any particular member. The HMO will screen Applications to
determine the ability of the applicant to use the IPA properly and efficiently.
The applicant's place of residence, place of employment, and access to
transportation to a Health Center or Primary Care Physician's office will be
considered in the screening process. For MA Members, the IPA's service area
shall be the service area approved by the Department. For Medicare Members the
IPA's service area shall be the service area approved by HCFA.
2.2 Relationship of IPA and HMO.
2.2.1 Each party to this Agreement retains its own identity
and full autonomy for carrying out its responsibilities hereunder and in the
management of its affairs. Except as specifically provided herein, neither the
IPA nor the HMO is authorized to bind the other with any third party(s). Neither
the IPA nor the HMO shall be liable to any other party for any act, or failure
to act, of the other party to this Agreement except for the liability of both
the HMO and the IPA to the Department and HCFA for the provision of services and
benefits to MA & Medicare Members, as provided for in the MA and Medicare
Contracts.
2.2.2 None of the provisions of this Agreement is intended to
create nor shall be deemed nor construed to create any relationship between IPA
and HMO other than that of independent entities contracting with each other
solely for effecting the provisions of this Agreement. Neither of the parties
hereto nor any of their respective representatives shall be construed to be the
agent, employer, or representatives of the other.
2.3 Indemnification. IPA shall indemnify and hold HMO, its employees
and agents, harmless from any and all claims, lawsuits, settlements, and
liabilities incurred as a result of the services provided or not provided by IPA
or IPA's employees, agents or subcontractors pursuant to this Agreement. HMO
shall indemnify and hold IPA harmless from any and all claims, lawsuits,
settlements, and liabilities incurred as a result of actions taken or not taken
by HMO in the administration of the Covered Services under this Agreement.
2.4 Cooperation. IPA and HMO shall maintain effective liaison and close
cooperation with each other in order to provide medical and health maintenance
services compatible with community standards of medical care and medical ethics.
Each party shall cooperate to freely and fully exchange information necessary to
the other party's performance of this Agreement.
2.5 Maintenance of Records. The HMO and IPA will maintain records of
account for all financial transactions pertaining to the HMO. Billing,
collection, receipt and reconciliation of all revenues, and appropriate
disbursement of required moneys will be recorded and maintained in accordance
with generally accepted accounting principles, consistently applied.
2.6 Proprietary Information. IPA and HMO each recognize that all
material provided to each by the other party is the proprietary property of the
party providing the information and neither party shall disclose or release such
material to any third party without the prior written consent of the party
providing the information, except as otherwise required by law or regulation.
Upon termination or expiration of this Agreement, each party shall promptly
return all such proprietary information to the party who provided the
information.
2.7 Confidential. IPA and HMO shall use their best efforts to preserve
the confidentiality of the pricing terms contained in this Agreement. Both
parties acknowledge that all information obtained from the other in negotiating
and completing the transaction contemplated therein is strictly confidential.
Both parties agree not to use any information obtained from the other in any
manner whatsoever which does not directly relate to the transaction contemplated
herein. Where IPA is required to disclose any of the above information to
stockholders or potential investors, IPA will seek HMO's approval and not
disclose the above information without obtaining a signed confidentiality
agreement.
ARTICLE III - COMPENSATION
3.1 IPA Capitation Payment.
3.1.1 Subject to the provisions of Section 3.2 regarding
withholds, the HMO will pay to the IPA a monthly capitation payment for each
Non-MA Member selecting the IPA as set forth in Attachment G, for each MA Member
as set forth in Attachment H and for each Medicare Member as set forth in
Attachment 1.
3.1.2 The capitation payment shall be made on the tenth (10th)
day of each month, or on the next business day if the tenth (10th) is a weekend
day or legal holiday.
3.1.3 IPA agrees to accept from the HMO the mutually agreed
upon monthly capitation payments set forth in Attachment G (for Commercial
Members), Attachment H (for MA Members) and Attachment I (for Medicare Members)
as payment in full for all Covered Medical Services to be provided by IPA,
except for any authorized copayments. HMO and IPA mutually agree to adjust the
capitations set forth in Attachments G, H, and I, in the event that said
services and/or premiums are materially increased, reduced, or changed. If the
parties are unable to agree on the amount of such adjustments, either party may
terminate this Agreement upon ninety (90) days prior written notice, subject to
provisions contained in Section 6.3.2.
3.1.4 Capitation rates for Members who select IPA for a
fraction of a month will be as follows: for Members enrolling between the first
(1st) and fifteenth (15th) day of the month, IPA will be capitated for the full
month. For Members enrolling between the sixteenth (16th) and the end of the
month, capitation payments and IPA service obligations for said Members shall
begin on the first day of the following month.
3.1.5 Capitation rates for Members who disenroll from IPA
during a month will be as follows: for Members who disenroll between the first
(1st) and fifteenth (15th) day of the month, IPA will not receive any capitation
payments. For Members who disenroll between the sixteenth (16th) day to the end
of the month, IPA will receive a capitation payment on behalf of such Members
for the full month.
3.1.6 The HMO shall produce and/or make available to the IPA
by the fifteenth day of each month a listing of the following:
(a) Members who have chosen the IPA as provider
of care, and whose membership is effective during the month following the month
in which the listing is provided to IPA;
(b) Members whose enrollment was effective prior
to the first day of the following month and whose enrollment was not reported on
previous listings;
(c) Members who are enrolled as of the date of
the listing and whose enrollment is to be terminated; and
(d) Any corrections or adjustments to prior
months listings.
3.1.7 IPA, in consideration of said capitation payments, shall
provide or arrange for all those physician services as required in this
Agreement and shall assume the responsibility for the costs of said services, as
specifically defined in the Subscription Agreement. Regardless of the number of
External Providers rendering service to a Member during any month, only one
capitation payment will be made to IPA each month for each Member. The
capitation payment shall be made regardless of the type or amount of service
rendered to the Member during a given month. Although services not covered by
the Member's agreement with the HMO may be provided by the IPA, the HMO shall
have no responsibility to pay for benefits not included in the Subscription
Agreement and applicable benefit riders.
3.2 Reserve. Pursuant to Maryland Health-General 19-713.2, upon
contract signature IPA shall provide HMO with reasonably acceptable collateral
to secure an amount equal to the immediately preceding sixty (60) days of IPA
capitation. The purpose of such Reserve is to ensure that sufficient funds are
on hand to reimburse HMO for any payment made to External Providers, as required
by law, if IPA fails to make any such payments. HMO agrees that a Standby Letter
of Credit from a commercial bank shall be deemed reasonably acceptable
collateral for such purposes. Such Standby Letter of Credit shall be delivered
upon such standard commercial terms and conditions as the Bank, HMO and IPA may
agree.
3.3 Ineligible for Coverage. In the event an individual ceases to be a
Member or becomes ineligible for HMO coverage while receiving Covered Services,
HMO shall promptly notify IPA of such ineligibility. Neither IPA nor HMO shall
be responsible for the cost of any Covered Services rendered to an individual
after that individual has ceased to be a Member. IPA may bill the individual
directly for any such services provided to a person who is not a Member.
3.4 Retroactive Adjustments. Any errors in the calculation of the
number of Members resulting from termination or miscalculation of membership
will be retroactively adjusted by HMO for a period not to exceed 90 days from
the date the error occurred. Notwithstanding such time period, HMO shall use
best efforts to adjust any miscalculation of the number of Members within thirty
(30) days following the date that a Capitation Fee payment is made. Any mistakes
not adjusted within such thirty (30) day period, however, shall be adjusted when
discovered; provided, however, that no overpayments to IPA shall be adjusted
more than ninety (90) days after such payment is made. In the event that, as a
result of the failure of HMO to use such best efforts, an underpayment to IPA is
not adjusted within the ninety (90) day period, such underpayment shall be
adjusted when discovered.
3.5 Non-Covered Services. In the event a Member desires services which
are beyond the scope or duration of Covered Services under this Agreement, IPA
shall verify with HMO that HMO has no obligation to provide those non-covered
services and, if such verification is obtained, IPA shall inform the Member that
such services are not Covered Services and thereafter may bill the Member for
such Non-Covered Services.
3.6 External Providers.
3.6.1 IPA shall promptly and fully pay all External Providers
who provide Medical Services to Members which were arranged or referred by IPA,
in accordance with the terms of its applicable understandings, contracts and
agreements, and as required by law and which are also Covered Services. IPA
shall pay an External Provider providing services to all Members no later than
thirty (30) days after receipt of a complete and undisputed claim for Medical
Services, unless a longer period of time has been agreed to by HMO.
3.6.2 HMO shall have the right to contact External Providers
directly to verify whether IPA is current in its payment to them. As required by
Section 5.8 below, IPA must certify to HMO on a quarterly basis as to its
payments to External Providers.
ARTICLE IV - HMO RESPONSIBILITIES
4.1 Administration of Agreement. HMO agrees to perform or have
performed all necessary accounting, marketing, enrollment, date base management,
reporting and other functions appropriate to the administration of the HMO and
this Agreement. HMO shall promote the availability of IPA to Members in at least
the same manner that other medical groups and primary care providers who are
under contract with HMO are promoted. HMO agrees to use sound underwriting
criteria in its selection of group accounts. HMO further agrees that such
underwriting requirements shall not differ from those established by HMO for
prospective group accounts that will be offered other physicians or medical
groups with which HMO contracts.
4.2 Eligibility and Benefit Determinations.
4.2.1 HMO is responsible for making eligibility and benefit
determinations regarding Covered Services. HMO will strive to issue HMO
identification cards to each Member within thirty (30) days of enrollment and
HMO shall confirm eligibility of Members by telephone inquiry from IPA. HMO will
provide on-line systems capabilities for eligibility determination within six
(6) months of contract signing, providing both systems are compatible. HMO will
provide a monthly membership list to IPA for Members in accordance with Section
3.1.6. In the event a dispute arises between the parties as to any eligibility
or benefit determination made by HMO, the parties agree to act in good faith to
resolve their dispute and either party may submit the dispute to arbitration in
accordance with Section 7.16 if they are unable to resolve their disagreement to
their mutual satisfaction. All communications to Members regarding final benefit
determinations and eligibility shall be made by HMO.
4.3 Medical Services. HMO acknowledges that IPA and External Providers
shall maintain a professional relationship with Members and shall have the right
and obligation to treat Members in accordance with sound medical practice and
medical ethics. IPA acknowledges, however, that HMO may, pursuant to this
Agreement and the Provider Manual, impose certain restrictions on benefit
coverage and the provision of services including, but not limited to,
determinations made pursuant to the HMO's utilization review or quality
assurance programs.
4.4 Collections of Premiums and Other Income. HMO agrees to collect all
premiums and other items of income to which the HMO is entitled except for any
copayments, coinsurance, or deductibles which may be required of Members at the
time of service. Such copayments, coinsurance or deductibles, if any, will be
collected by IPA's External Providers when Covered Services requiring copayments
are rendered. HMO will develop reasonable policies regarding the termination of
enrollment of Members who fail to make copayments.
4.5 Staff Assistance. HMO shall appoint a Medical Director who will
provide continued staff assistance to IPA. This assistance shall include but not
be limited to advising on the development of: referral protocols for Physician
services; a system for peer and utilization review structure established by the
IPA; a system for the maximum sharing of medical records consistent with
applicable confidentiality requirements to ensure that appropriate information
will travel with the patient throughout the health delivery system; protocols
for referrals to Referral Physicians; and length-of-stay determination,
pre-admission testing, and other criteria necessary to authorize and approve
inpatient admissions prior to hospitalization.
4.6 HMO's Professional Liability Insurance. HMO, at its sole cost
and expense, shall procure and maintain such policies of general liability and
professional liability insurance and other insurance as shall be necessary to
insure HMO and its employees against any claim occasioned directly, or
indirectly, in connection with the performance of any service by HMO, the use of
any property, facilities or equipment provided by HMO, and the activities
performed by HMO in connection with this Agreement. Said insurance limits shall
not be less than ($1,000,000) individual and ($3,000,000) aggregate.
ARTICLE V - IPA RESPONSIBILITIES
5.1 Medical Services. IPA agrees to provide those Covered Services
which are Medical Services and are set forth in Attachments B, C, & D to each
Member who selects IPA as his/her provider of care. For MA and Medicare Members,
IPA also agrees to provide those services required by the current MA and
Medicare Contracts which IPA has the capacity to provide. Any other services
require the prior written consent of IPA. A copy of the current Subscription
Agreements and supplemental benefit riders are provided as Attachment E and may
be revised by HMO from time to time as changes are required. HMO shall provide
IPA with ninety (90) days prior written notice of any modifications to the
Subscription Agreement or the MA and Medicare Contracts provided that no
modification that changes IPA's responsibilities or otherwise increases IPA's
financial risk hereunder shall become effective unless consented to in writing
by IPA.
5.2 Referral Physician Services. In consideration of the capitation
payments set forth in Attachments G, H & I hereto, IPA agrees to arrange and pay
for all those Referral Physician and other health professional services which
HMO is required to provide as Covered Services and which are Medical Services.
IPA agrees to identify and arrange with Referral Physicians and other referral
health professionals who are duly licensed in a manner designed to implement an
efficient system of referrals and consultations, to facilitate the coordination
of medical services, to ensure continuity of care, and to provide accessibility
to the Member. Referral Physicians shall be either Board Certified or determined
by IPA to be Board Eligible for certification and meet other requirements as may
be established by HMO and agreed to by IPA. For usual and frequently used
Medical Services, IPA shall enter into a written agreement with Referral
Physicians or health professionals.
5.3 Participating Providers. Except in cases of Emergency or medical
necessity, External Providers shall agree to use only those inpatient
facilities, skilled nursing facilities, home health agencies, and other
institutional providers which are Participating Providers, or have been approved
by HMO. HMO delegates credentialling of these providers to IPA, but reserves
right to disallow a specific provider due to quality of care criteria. However,
the parties agree that unless services are not available or accessible to
Members, Members will be required to secure Covered Services only from those
Participating Providers to whom a referral is made by the Primary Care
Physician.
5.4 Standard of Medical Care.
5.4.1 IPA agrees to use its best efforts in rendering Medical
Services in order to provide medical care in conformity with accepted medical
and surgical practices prevailing in the community, and to arrange for medical
treatment as promptly as practicable, consistent with sound medical practice.
Further, the IPA agrees to establish mechanisms to: provide for internal peer
review of Members records; evaluate the quality of health care provided to
Members; and evaluate the utilization of Medical Services rendered by IPA to
Members. Such mechanisms shall be in conformance with applicable state and
federal requirements and the requirements set forth in the Provider Manual.
5.4.2 IPA and all of their External Providers shall not
differentiate or discriminate in the treatment of Members as to the quality of
services delivered because of race, sex, age, religion, national origin, or
health status. The rights of Members as patients shall be observed, protected
and promoted. Health care services shall be rendered to Members in the same
manner, in accordance with the same standards, and with the same time
availability as offered to all other patients.
5.4.3 Transportation Expenses. IPA shall be responsible for
the arrangement of and costs associated with: (1) all ambulance transportation
preauthorized by IPA for the provision of Medical Services, (2) transportation
when necessary for all Members to a provider located outside the 30-mile travel
radius from the Member's place of residence, excluding Member's Primary Care
Physician.
5.5 Selection of IPA Primary Care Physician or Health Center. IPA
agrees that each Member seeking care shall be required to select a specific
Primary Care Physician or Health Center as his/her personal physician for
providing and/or arranging for his or her overall health care needs. Except in
cases of Emergency, referrals to referral health professionals and obtaining a
Medical Service from any other provider, shall only be a Covered Service when
authorized by the Member's Primary Care Physician. Except in cases of Emergency,
referrals to Referral Physicians or other referral health professionals and the
obtaining of a Medical Service from any other provider shall only be a Covered
Service when authorized by the Member's Primary Care Physician. Except in an
Emergency, IPA shall not be responsible for any Medical Service that is not
authorized by a Member's Primary Care Physician.
5.6 Designated Physician to Authorize Referral and Hospitalization. IPA
agrees to designate a Physician, who shall be on call 24 hours per day, each and
every day, to authorize appropriate hospital services or other referrals for
Members. IPA agrees to ensure that one or more Health Centers or Primary Care
Physicians within the IPA service area shall be available to Members who may
require emergency care. HMO and IPA shall, from time to time, jointly review
methods and details of coverage and scheduling to ensure adequate emergency
coverage and adequate medical coverage at the Health Centers or Primary
Physician's offices at all times the facilities and/or physician offices are
open.
5.7 Coordination of Benefits and Subrogation. IPA and HMO shall
establish and implement a system for coordination of benefits and subrogation,
in accordance with those rules established under the HMO's policies and
procedures and applicable federal and state laws. If known to IPA, IPA shall
identify and inform HMO of Members for whom coordination of benefits and
subrogation opportunities exist. HMO hereby authorizes IPA to seek payment, on a
fee-for service basis or otherwise, from any insurance carrier, organization, or
government agency which is primarily responsible for the payment or provision of
medical services provided by IPA under this Agreement which can be recovered by
reason of coordination of benefits, motor vehicle injury, worker's compensation,
temporary disability, occupational disease, or similar exclusionary or limiting
provisions, to the extent authorized by the applicable and not otherwise
prohibited by law.
5.8 Reporting Requirements.
1. IPA shall deliver to HMO, on a monthly basis, within 30
days after the end of the month, unless otherwise specified, written reports as
follows:
(a) IPA shall electronically transmit
Member-specific encounter data in the format of Attachment L to HMO on a monthly
basis within ten (10) days after the end of the month for which data was
collected.
(b) IPA shall submit financial data reflecting
total IPA medical loss ratio for arranging for the provision of Medical Services
to HMO on a quarterly basis (every three months) in a format mutually agreed to
by HMO and IPA.
(c) IPA shall submit quarterly reports within 45
days after the quarter identifying payments made or owed to External Providers.
These reports will be in a format satisfactory to HMO. The cost of any
subsequent changes or deletions to this reporting requirement which
requires customization to IPA systems will be paid for by HMO. The reports will
be certified by the Chief Executive Officer and Chief Financial Officer of IPA.
HMO shall have the right to contact IPA's External Providers directly to
verify whether IPA is current in its payment to them.
(d) IPA shall submit a current annual financial
statement to HMO within ninety (90) days following the close of IPA's fiscal
year or an interim financial statement upon request by HMO.
(e) IPA shall submit complaint and grievance
information to HMO, to meet the requirements of HMO and appropriate regulatory
agencies; such information shall include, but not be limited to that which is
required to be included in HMO's annual HEDIS Report on medical service
measures, Quality Improvement and Utilization Management Delegation
Reports. A copy of the complaint and grievance procedure is annexed hereto as
Attachment J, and made a part hereof.
(f) IPA shall submit Member information to HMO
in conformance with Attachment L, as well as additional information as may be
needed and in compliance with relevant state and federal laws which include,
but shall not be limited to, the laws regarding the confidentiality of
medical records.
(g) For MA Members, if applicable, IPA shall
submit outcome data in a form and format mutually acceptable to the parties of
patient and IPA access to include, but not be limited to, (i) the time
within which an initial call to access care is answered, (ii) call
abandonment rate, (iii) call on-hold rate, (iv) number of appointments
scheduled per week and (v) number of kept appointments per week.
5.9 Provider Agreements. IPA shall enter into written service
arrangements with all External Providers providing care under this Agreement.
IPA shall provide HMO with a pro forma copy of such agreements and
changes, amendments, or additions to such agreement. Such agreements, at a
minimum, shall provide for the following:
5.9.1 External Providers shall provide services in
accordance with the compensation arrangement accepted by the IPA.
5.9.2 To the extent feasible, External Providers will share
records, equipment, and the professional, technical and administrative staff.
5.9.3 External Providers shall comply with and maintain
standards under IPA's credentialing standards. HMO retains the right to audit
the IPA's credentialling standards. IPA shall establish and maintain programs
for the continuing education for its External Providers or otherwise require
them to obtain continuing education credits as set forth in IPA's credentialing
standards.
5.9.4 External Providers will look solely to the IPA for
compensation for Covered Services provided to Members, except for any approved
and applicable copayments, coinsurance or deductibles to be collected by the
External Providers.
5.9.5 External Providers shall not, under any circumstances,
including nonpayment of moneys owed to the External Provider by IPA, insolvency
of IPA or HMO, or breach of the Agreement between IPA and the External
Providers, bill, charge, collect a deposit, seek compensation, remuneration or
reimbursement from or have any recourse against any Member, or any person (other
than IPA) acting on the Member's behalf, for Covered Services provided by the
External Providers pursuant to their contracts with IPA; provided, however, that
External Providers may collect from Members any approved and applicable
copayments or supplemental charges or charges for non-Covered Services. Each
such agreement must provide that this provision will survive the termination of
the agreement, regardless of the cause of the termination.
5.9.6 In the event a Member desires services which are beyond
the scope or duration of Covered Services under this Agreement, External
Providers shall verify with HMO that HMO has no obligation to provide those
non-covered services and, if such notice is given, IPA may bill the Member for
such non-covered services. External Provider shall not be prohibited from
collecting from Members any charges for items or services not covered under this
Agreement.
5.9.7 External Providers shall provide Medical Services
consistent with community standards of medical care and medical ethics. Such
medical care shall be accessible and shall at all times be rendered to Members
in a reasonable, dignified and nondiscriminatory manner.
5.9.8 Continuation of Services. In the event of HMO's or IPA's
inability to pay a capitation or fee for services rendered, including, without
limitation, in the event of insolvency, IPA and its External Providers shall
continue to provide Medical Services to Members for the duration of the period
(not to exceed thirty (30) days) for which a Capitation Fee has been paid to
IPA, and shall continue for the same period to provide Medical Services to
Members who are admitted in an inpatient health care facility on the date of
insolvency or inability to pay until the date of discharge from the facility
(but not to exceed one year thereafter). IPA shall cause provisions to this
effect to be included in all agreements with its External Providers. Each such
agreement must provide that this provision shall survive the termination of the
agreement, regardless of the cause of the termination.
5.9.9 External Providers shall make referrals to Referral
Physicians and health care facilities only in accordance with the guidelines set
forth in the Provider Manual.
5.9.10 External Providers shall provide at their sole cost and
expense, such policies of malpractice insurance as shall be necessary to insure
themselves and their employees against any claim or claims for damages arising
by reason of personal injury or death occasioned directly or indirectly in
connection with the performance of any service by the External Providers. The
amounts and extent of such insurance coverage shall be at least one million
dollars ($1,000,000) per year for each occurrence and three million dollars
($3,000,000) in the aggregate per year for each External Provider. Any
reductions or termination of such coverage shall require the approval of the
HMO.
IPA agrees to produce, at HMO's request at any point
in time during this Agreement, a certificate of insurance from an External
Provider's insurance carrier manifesting compliance with all provisions of
this section of this Agreement.
5.9.11 External Providers shall maintain adequate medical
records on Members and make such records available to other providers and HMO in
accordance with Sections 5.19 and 5.21 of this Agreement.
5.10 Compensation from HMO Solely. IPA shall not, under any
circumstances, including non-payment of moneys owed to the IPA by HMO,
insolvency of HMO, or breach of this Agreement, bill, charge, collect a deposit,
seek compensation, remuneration or reimbursement from, or have any recourse
against any Member, or any person (other than HMO) acting on the Member's
behalf, for Covered Services provided by IPA pursuant to this Agreement;
provided, however, that IPA may collect from the Members any applicable
copayments or supplemental charges or charges for non-Covered Services in
accordance with the Subscription Agreement.
IPA agrees to look solely to HMO for compensation for Covered Services
provided to MA and Medicare Members, and not to seek any compensation from the
Department, HCFA, or from the MA or Medicare Members (other than applicable
copayments or deductibles).
5.11 Payment of Claims. Notwithstanding any other provision in this
Agreement to the contrary, in instances where patient care, the reputation of
the HMO, and/or the relationship between HMO and its Members is jeopardized by
the IPA's nonpayment or late payment to subcontractors or providers for services
provided to HMO enrollees, HMO shall have the right to make these payments
directly to the subcontractor provider and to recover from the IPA the full
amount of any such payments as outlined under Section 3.2. In order to exercise
its rights, HMO must give IPA ten (10) days prior notice of HMO's intention to
pay the subcontractor or provider directly.
5.12 Sharing of Facilities. Subject to applicable confidentiality
requirements, IPA shall provide for a system which, to the extent feasible and
to the extent permitted by law, permits maximum sharing of equipment and
professional, technical and administrative staff by IPA's External Providers.
5.13 IPA Medical Director. IPA will designate an IPA Medical
Director who, among other duties will:
5.13.1 Participate as specified in the complaint and
grievance procedure of the HMO.
5.13.2 Monitor the IPA's peer review, quality assurance, and
utilization review processes.
5.13.3 Assist the HMO Medical Director in determining final
rulings regarding medical necessity of referrals to Referral Physicians,
inpatient, hospital outpatient, emergency room, or other treatments or services.
5.14 Malpractice Insurance and Professional Liability. IPA shall
provide and maintain such policies of malpractice insurance as shall be
necessary to insure IPA against any claim or claims for damages arising by
reason of personal injuries or death occasioned directly or indirectly in
connection with the performance of any service by IPA. The amounts and extent of
such insurance shall not be less than [$1,000,000] per claim and [$3,000,000]
per year.
5.15 Review of Staffing & Scheduling. IPA agrees to maintain on record
with the HMO a current schedule of all providers categorized by name, board
status, facility status, hospital affiliation, and relationship to IPA.
HMO and IPA shall, from time to time, jointly review methods and
details of staffing and scheduling to ensure adequate coverage at all times. IPA
shall, from time to time and upon request of HMO at any time, submit medical
policies, procedures, and regulations to HMO for review in order to ensure the
quality and availability of care. The same shall be reviewed and revised
periodically in the light of experience and advances in medical practice.
5.16 IPA/Patient Ratio and Waiting Times. IPA shall at all times
maintain a sufficient number of External Providers to ensure a reasonable
IPA/patient ratio, so that there shall be no unreasonable waiting periods for
appointments or waiting periods for services for Members upon arrival for a
scheduled appointment.
5.17 Credentialling of Providers and Facilities. IPA shall perform
credentialling and selection of its External Providers, and facilities using the
standards developed by the National Committee for Quality Assurance ("NCQA") as
outlined in the letter of Agreement which was previously sent to IPA for
signature. HMO shall have the right to review the credentials of the External
Providers and facilities for compliance with HMO's own credentialling standards.
IPA shall thereafter use its best efforts to ensure that all External Providers
and facilities perform in accordance with the customary rules of ethics,
conduct, and practice of their respective professions.
[Confidential Treatment Requested]
5.18 IPA Physician Requirements and Responsibilities. IPA and IPA
Physicians will adhere to the following requirements:
5.18.1 All IPA providers shall be duly licensed to practice
medicine or osteopathy in the State of Maryland. Evidence of such licensing
shall be submitted to HMO upon request. In addition, IPA providers, where
appropriate, must meet all qualifications and standards for membership on the
medical staff of at least one hospital that is a Participating Provider or to
which Members are admitted.
5.18.2 All physicians and nurse practitioners will have, where
appropriate, a current narcotics number issued by the appropriate authority,
which is currently the United States Drug Enforcement Administration.
5.18.3 All physicians must be Board Eligible or Board
Certified in their areas of specialty, or be able to demonstrate equivalent
training and experience.
5.19 Medical Records. External Providers shall maintain adequate
medical records for Members treated by External Providers. Subject to all
applicable privacy and confidentiality requirements, such medical records shall
be made available to each physician and other External Providers treating the
Member, and upon request, to any proper committee of the IPA or HMO for review,
to determine whether their content and quality are acceptable, as well as for
peer review or grievance review. IPA and HMO agree that medical records of
Members shall be treated as confidential so as to comply with all federal and
state laws and regulations regarding the confidentiality of patient records. IPA
hereby agrees that the HMO has agreed, as part of the MA and Medicare Contracts,
to make medical records of Members available to the Department and HCFA as
appropriate. HMO will secure from Members a release of medical information and
records in accordance with applicable state and federal law. HMO shall indemnify
and hold IPA harmless from any claims by Members relating to IPA's release of
medical information and records to HMO pursuant to this Agreement.
5.20 Advanced Directives. All providers shall discuss with the patient
his/her right under state law to institute or decline Advanced Directives. The
providers shall note in the patient's medical record whether he/she executed or
declined Advanced Directives.
5.21 Inspection of Records and Operations. HMO and IPA shall have the
right to inspect and audit, at all reasonable times, the other party's
accounting, administrative, medical records and operations pertaining to HMO, to
Members, and to its performance under this Agreement. If copies of records are
requested by HMO, HMO agrees to pay IPA a reasonable fee not to exceed the
maximum limits as provided by Maryland law, ss. 4-304(c)(3) of the Health
General Article. IPA further agrees that in the event an examination concerning
the quality of health care services is conducted by appropriate officials, as
required by state law, IPA and External Providers shall submit, in a timely
fashion, any required books and records and shall facilitate such examination.
IPA and HMO agree to facilitate on-site inspection of Health Centers, and
External Providers and their records by representatives of the Department and
HCFA or other authorized agencies.
As required by the MA and Medicare Contracts, the parties agree that
the Department and HCFA may require the HMO to furnish information regarding its
procedure to be followed to monitor or coordinate IPA's activities.
5.22 Duration of Maintenance of Medical Records. IPA shall maintain all
medical and financial records of the Members for the greater of, the time
required under HCFA guidelines or Maryland law, or until all audits in process
hereunder are completed, whichever is longer.
5.23 Utilization Review. If Utilization Review is the responsibility of
the IPA, IPA agrees to provide Utilization Review Services as outlined in the
delegated Utilization Management Agreement. If Utilization Review is not
delegated, IPA agrees to abide by HMO's policies and procedures.
5.24 IPA Quality Management Program. IPA is required to comply
with HMO's Quality Management Program which shall include and not be limited to:
1. Systematic peer review relating to utilization and
quality of care rendered hereunder, including establishment of an appropriate
enforcement mechanism for all final peer review decisions and consultation;
2. Review of the process followed in the provision of
Medical Services;
3. Systematic data collection of performance and patient
results, provides interpretation of such data to the practitioners, and
institutes needed change; and
4. Written procedures for taking appropriate remedial action
whenever it is determined that inappropriate, unnecessary or substandard
services have been provided or that services which should have not been
provided.
5.25 Referral to Social Services Agency (if applicable). (This section
applies to Medical Assistance Members) In the event a Member fails to attend a
scheduled appointment, without giving prior notice, IPA shall send written
notice of the same with a new appointment to the Member or to a responsible
party. If the Member falls to attend the second scheduled appointment, without
giving prior notice, IPA shall send to the Member or responsible party a second
letter instructing the Member or responsible party to contact the IPA
immediately. If the Member or responsible party fails to respond to the second
notice, IPA shall refer the Member, if appropriate, to the appropriate social
services agency (such as Protective Services, Social Services, etc.). A Member
that has demonstrated noncompliance (e.g., has not taken prescribed medication)
shall be referred, as appropriate, to the appropriate social services agency.
5.26 Compliance with HMO Administrative Policies and Procedures. IPA
shall require that all External Providers shall comply with all HMO
administrative policies and procedures relating to the delivery of medical
services and any new policy and procedure which may be enacted by HMO and state
and federal laws and regulations, including cooperation in any external review
conducted by appropriate state and federal agencies, and/or the Joint Commission
on Accreditation of Health Care Organizations. All services shall be rendered
subject to the terms and conditions of this Agreement. In the event that HMO
changes any policies or procedures, whether such change is a result of a change
in state or federal laws or regulations, a change in JCAHO standards, NCQA
standards, or otherwise, and such change materially impacts IPA's cost of
providing services under this Agreement, the IPA and HMO shall negotiate in good
faith a change in the Capitation Fee that fairly and adequately compensates IPA
for such change, or if Agreement cannot be reached, may be cause for termination
after the initial contract term.
5.27 Provider Manual. IPA hereby agrees to comply with all
provisions of the Provider Manual attached hereto as Attachment F.
5.28 MA Contract (if applicable). IPA hereby agrees to comply with
all provisions of the MA Contract.
5.29 Medicare Contract. IPA hereby agrees to comply with all
provisions of the Medicare Contract.
ARTICLE VI - TERM AND TERMINATION
6.1 Term. This Agreement shall commence on the Effective Date noted on
page one (1) and shall remain in effect for an initial term of one (1) Contract
Year. Thereafter, this Agreement will automatically renew for one year
increments unless ninety (90) days advance notice of termination is provided by
either party. Early termination may only be for cause upon ninety (90) days
prior written notice after an opportunity to cure. Termination without cause may
occur at any time after the initial term with one hundred twenty (120) days
notice by either party. Each twelve (12) month period of this Agreement shall be
referred to as a "Contract Year".
6.2 Termination On the Event of Insolvency. Notwithstanding the
foregoing, this Agreement may be terminated effective upon written notice if
either party: (i) is or becomes insolvent (as defined in Section 101(31) of the
United States Bankruptcy Code) or unable to pay its debts as they mature; (ii)
makes a general assignment for the benefit of creditors; (iii) commences a case
under or otherwise seeks to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution, or liquidation law, statute, or
proceeding; (iv) by any act indicates its consent to, approval of, or
acquiescence in any such proceeding or the appointment of a receiver of or
trustee for it for a substantial part of its property, or suffers any such
receivership, trusteeship, or proceeding to continue undismissed for a period of
thirty (30) days; (v) becomes a debtor in any case under any chapter of the
United States Bankruptcy Code; or (vi) is dissolved, or there is entered any
order, judgment or decree for dissolution; or there is entered any judgment,
order, award or decree which would have a material adverse effect on the party
or the prospects of the full and punctual performance by the party of its
obligations, if the same shall not have been discharged or execution thereof
stayed within thirty (30) days after entry or discharged within thirty (30) days
after the expiration of any stay, and if the same is not fully covered by
applicable insurance.
6.3 Effect of Termination.
6.3.1 Any termination of this Agreement shall not release
either HMO or IPA of obligations imposed with respect to: third party payors;
incentive payments accrued to IPA or penalty payments due HMO in connection with
existing contracts to provide services to Members; or the obligation of IPA to
persons then receiving treatment.
6.3.2 Upon termination of this Agreement, the rights of each
party hereunder shall terminate provided, however, that IPA will continue to
provide or arrange for Medical Services to Members until the renewal or
expiration date of any agreement between HMO and an employer or other group that
offers HMO's program or with an individual enrollee and which was entered into
prior to the termination date provided that payments are made by HMO to IPA as
set forth below. If pursuant to this paragraph, IPA's responsibilities under
this Agreement are continued beyond the date of termination, all terms and
conditions contained in this Agreement shall remain in full force and effect
(other than Attachments G, H, & I), provided that IPA shall be compensated for
Medical Services provided during the continuation period on a fee-for-service
basis in accordance with IPA's usual and customary fee schedule. Once notice of
termination has been given, HMO shall not use IPA's or their providers' names in
any HMO marketing materials other than as necessary to fulfill the terms of this
Agreement. In no event shall IPA's obligation under this Section 6.3.2 extend
beyond three (3) months after the termination of this Agreement.
6.3.3 Copies of Members' medical records and other data to be
provided in accordance with this Agreement shall be delivered to the HMO, by the
IPA, upon the effective date of termination and/or in accordance with other
provisions of this Agreement, provided that (a) HMO secures the prior written
consent of the Member to such transfer; (b) any copying of medical records shall
only be performed during IPA's regular business hours; and (c) any copying of
medical records shall be performed in such a manner so as to not disrupt IPA's
operations.
6.3.4 Notwithstanding anything herein to the contrary, the
following provisions of this Agreement shall survive termination for whatever
cause: Section 2.3 (Indemnification), 5.14 (Malpractice Insurance and Liability)
Section 3.6 (External Providers), Section 5.8 (Reporting Requirements) for
reports as to any period prior to termination, Section 5.10 (Compensation from
HMO Solely), Section 5.19 (Medical Records), and Section 5.21 (inspection of
Records and Operations).
6.4 Annual Renegotiation of Capitation Rate. Notwithstanding any other
provision of this Agreement, no later than ninety (90) days prior to the end of
each Contract Year, HMO shall present revised capitation amounts and any other
provision related to compensation to be effective for the succeeding Contract
Year.
6.5 Termination-MA Only (if applicable). If the IPA provides Covered
Services to MA Members, termination, either voluntary or as a result of default,
shall not take effect without prior notification to the Department by the HMO.
6.6 Termination - Medicare Only. If the IPA provides Covered Services
to Medicare Members, termination, either voluntary or as a result of default,
shall not take effect without prior notification to HCFA by the HMO.
6.7 [Confidential Treatment Requested]
ARTICLE VII - MISCELLANEOUS
7.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their respective heirs, successors and
assigns of HMO and IPA.
7.2 Assignment. This Agreement, being intended to secure the personal
services of IPA, shall not be assigned, sublet, delegated or transferred, except
as may be provided herein, without the prior written consent of HMO and any
required regulatory approval; provided, however, that HMO may assign this
Agreement to an affiliate or a successor in interest upon notice to IPA.
If IPA provides services to MA or Medicare Members, no
assignment by IPA shall be effective without prior written notice to the
Department for MA Members, and HCFA for Medicare Members.
7.3 Headings. The headings of the various sections of the Agreement are
inserted merely for the purpose of convenience and do not, expressly or by
implication, limit, define or extend the specific terms of the section so
designated.
7.4 Interpretation. The validity, enforceability and interpretation of
any of the clauses of this Agreement shall be determined and governed by the
applicable laws of the State of Maryland, including those governing health
maintenance organizations.
7.5 Entire Agreement and Modifications. This Agreement together with
any supplements, addenda, amendments or modifications, or attachments,
constitutes the entire Agreement and supersedes all other agreements, oral or
otherwise, regarding the subject matter hereof.
7.6 Amendment. This Agreement may be amended at any time by mutual
agreement of the parties, provided that before any amendment shall be operative
and valid, it shall be reduced to writing and signed by the HMO and IPA. Said
amendments may be added in the form of additional attachments signed by both
parties.
7.7 Medical Ethics. HMO and IPA agree that the administration of the
medical services and this Agreement shall, at all times, be compatible with the
Principles of Ethics and Code of Professional Conduct.
7.8 Relationship of Parties. The relationship between HMO and IPA is
solely that of independent contractors and nothing in this Agreement is intended
to create nor shall be deemed or construed as creating any partnership, joint
venture, master-servant, principal-agent or any other relationship between the
parties hereto other than that of independent entities contracting with each
other hereunder solely for the purpose of effectuating the provisions of this
Agreement. Neither of the parties hereto, nor any of their respective
representatives, shall be construed to be the agent, employer, or representative
of the other and neither party is authorized to or has the power to obligate or
bind the other party by contract, agreement, warranty, representation, or
otherwise in any manner whatsoever.
7.9 Disenrollment. It is understood that Subscription Agreements may be
terminated by HMO in the event that a Member is unable or unwilling to establish
and maintain satisfactory Physician/Patient relationships, including failure to
follow a recommended treatment or procedure. Such termination shall be made in
accordance with the terms and conditions of Subscription Agreements, all
applicable statutory requirements, and the grievance and disenrollment
procedures established by HMO.
7.10 Cooperation. HMO and IPA shall maintain an effective liaison and
close cooperation with each other to provide maximum benefits to each Member at
the most reasonable cost, consistent with high quality standards of medical
practice.
7.11 Severability. The illegality, invalidity or unenforceability of
any provision of this Agreement shall in no way affect the legality, validity or
enforceability of any other provision of this Agreement and its Attachments.
7.12 Notice. Any notice required to be given pursuant to the terms and
provisions hereof shall be in writing and shall be hand delivered, telecopied,
or sent by overnight delivery service or certified mail, return receipt
requested, prepaid to HMO, 814 Light Street, Baltimore, Maryland 21230, Attn:
V.P. General Counsel; and to IPA at 10451 Mill Run Circle, 10th Floor, Owings
Mills, MD 21117, Attn: V.P. Managed Care Products and Services.
A notice delivered personally will be effective only when acknowledged
in writing by the person to whom it is given. Any notice that is mailed shall be
deemed effective 48 hours after it is mailed. Any notice that is delivered by
overnight delivery service shall be deemed effective 24 hours after delivery to
such service. A notice delivered by telecopy shall be deemed effective
immediately.
7.13 Waiver. No failure or delay of any party to exercise any right or
remedy pursuant to this Agreement shall affect such right or remedy or
constitute a waiver by such party of any right or remedy pursuant hereto. Resort
to one form of remedy shall not constitute a waiver of alternative remedies.
Further, no waiver, express or implied, or any breach of this Agreement shall
constitute a waiver of any right under this Agreement or of any subsequent
breach, whether of a similar or dissimilar nature.
7.14 Further Assurances. The parties shall execute and deliver or cause
to be executed and delivered such further instruments and documents and shall
take such other actions as may be reasonably required to more effectively carry
out the terms and provisions of this Agreement.
7.15 No Third Party Rights. No Member or other person shall have any
rights under this agreement as a third party beneficiary or otherwise, except as
specifically provided herein.
7.16 Arbitration of All Controversies. Any controversy which shall
arise between the parties regarding the rights, duties, or liabilities hereunder
of either party shall be submitted first through the HMO's Provider Grievance
Procedure. If unresolved, such dispute shall be submitted to arbitration under
the rules and regulations of the Maryland Uniform Arbitration Act. Both parties
expressly covenant and agree to be bound by the decision of the arbitrators as a
final determination of the matter in dispute. Each party to this Agreement
agrees to pay for half the cost of any arbitration; provided, however, that each
party to this Agreement shall be responsible for its own attorney's fees and
related costs.
7.17 Interpretation and Governing Law. All rights and remedies
hereunder shall be cumulative and not alternative. This Agreement shall be
construed and governed by the laws of the State of Maryland.
7.18 Department of Insurance Approval. This Agreement is subject to
the approval of the Maryland Insurance Administration. Any changes requested by
the Department of Insurance will be incorporated into this Agreement by
Amendment.
7.19 Equal Employment Opportunity. The parties are concerned that they
fulfill their roles as Equal Opportunity Employers. The parties further agree
that they shall not discriminate against any employee or applicant for
employment because of age, race, sex, creed, color, national origin, or physical
or mental handicap. Utilization of each other's services is predicated upon
compliance with Equal Employment Opportunity policy as expressed above.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives to be effective as of the date
set forth above.
HMO IPA
BY: _______________________(SEAL) By: ____________________(SEAL)
Title: ____________________________ Title: _________________________
Date: ____________________________ Date: _________________________
Witness/Attest:____________________ Witness/Attest:_________________
<PAGE>
LIST OF ATTACHMENTS
A Provider Directory of Participating Providers, External Providers, and
Health Service Contractors
B Medical Services for Medical Assistance Members (if applicable)
C Medical Services For Medicare Members
D Medical Services for Commercial Members (if applicable)
E Subscription Agreements
F Provider Manual
G Capitation Rates for Commercial Members
H Capitation Rates for MA Members (if applicable)
I Capitation Rates for Medicare Members (if applicable)
J Complaint, Grievance/Appeals Policy
K Encounter Format
L Member Information Format
M Provider Appeals Policy
<PAGE>
Attachment A
Directory of Participating Providers, External Providers, Health Centers
and Health Service Contractors
IPA's Directory of Participating Providers, External Providers and Health
Service Contractors, Health Centers previously submitted is hereby made a part
of this Agreement. Such Directory shall be updated from time to time without
necessity of an amendment to this Agreement.
<PAGE>
Attachment B
Medical Assistance Members Medical Services
(If Applicable)
The IPA is responsible for directly providing, arranging, or purchasing, or
otherwise making available as medically necessary, the full scope of services to
which persons are entitled under the current State Plan, as may be amended from
time to time, and all applicable State and federal regulations, guidelines,
transmittals, and procedures, except as specified herein.
At such time when Medical Assistance Members are added to this Agreement, the
Agreement will be amended to reflect the appropriate applicable terms and rates.
<PAGE>
Attachment C
Medical Services for Medicare Members
Please refer to the attached documents.
<PAGE>
Attachment D
Medical Services For Commercial Members
(If Applicable)
The IPA agrees to provide the following medical services to each Member
selecting assignment to the IPA for the capitation payment as set forth in
Attachment G and to collect from the Member any applicable copayment amounts, if
indicated in Members Subscription Agreement.
At such time when Commercial Members are added to this Agreement, the Agreement
will be amended to reflect the appropriate terms and rates.
<PAGE>
Attachment E
(If Applicable)
Subscription Agreements
*See attached
* Federal
* State of Maryland
* City of Baltimore
* Commercial P-1
* Commercial P-2/P-3
* First Option
<PAGE>
Attachment F
Provider Manual
The HMO Provider Manual previously provided is hereby made a part of this
Agreement. The manual will be updated from time to time without necessity of a
contract amendment.
<PAGE>
Attachment G
Commercial Member Capitation Rates
(If Applicable)
At such time when Commercial Members are added, this Agreement will be amended
to reflect the rates.
<PAGE>
Attachment H
Capitation Rates for MA Members (if applicable)
At such time when Medical Assistance Members are added to this Agreement, the
Agreement will be amended to reflect the rate.
<PAGE>
Attachment I
Capitation For Medicare Members
At this time, this Agreement applies only to Medicare Members. At such time when
Medical Assistance and/or Commercial Members are added to this Agreement, the
Agreement will be amended to reflect the rates and any additional terms
applicable to this population.
HMO shall pay a capitation amount for Medicare Members who have agreed to have
IPA as their provider of care for such month. In exchange for such capitation,
IPA shall provide, arrange or purchase, or otherwise make available as Medically
Necessary, the full scope of services to which persons are entitled under the
current HMO Medicare Risk Contract, as may be amended from time to time,
including all applicable state and federal regulations, guidelines,
transmittals, and procedures, except those services carved out herein. If a
Member requires a particular type of provider who is not in the IPA network, the
IPA is responsible for securing the provider and is financially liable.
1. On or before the tenth (10th) day of each month, HMO will pay to IPA the
capitation payment set forth in this Attachment for each Member who is enrolled
for that month in the respective benefit plan as set forth in this Attachment.
2. HMO will pay a capitation rate to DHS on a per member per month basis on the
age, sex and Medicaid eligibility of the subscribers enrolled with an IPA
Primary Care Physician in HMO's Advantage 65 Medicare HMO Program. The IPA
capitation schedule is defined in this Attachment. This schedule represents the
amount of capitation IPA will receive AFTER carve out dollars have been
deducted.
3. The payment rates defined in this Attachment have been derived from a
mutually agreed upon formula which is based on HCFA's AAPCC payment methodology.
In the event that AAPCC methodology is changed or discontinued by HCFA, HMO may
propose alternative pricing to IPA during the term of this Agreement. In the
event that IPA does not accept revised payment rates or terms, it may be
considered cause for early termination of this Agreement.
4. The capitation rates to IPA will increase, as defined in this Attachment when
IPA's enrollment of NEW HMO Members reaches enrollment thresholds of
[Confidential Treatment Requested] Members, and again at [Confidential Treatment
Requested] Members.
5. IPA capitation rates in this Attachment reflect a deduction by HMO to pay for
"carve-outs". The carved-out dollars will cover all costs related to the
following services and IPA will have no further responsibility. Changes to
carve-outs costs may be made annually, on the anniversary of the contract term,
and with the mutual consent of both parties. The net premium is total premium
net of the carve outs which are listed below:
<PAGE>
Attachment I
(Continuation)
Capitation For Medicare Members
<TABLE>
<CAPTION>
Carve Outs PMPM
<S> <C>
Eye Care/Vision - global [Confidential Professional & Facility Services
Ear Care (Hearing Screen Tst., Hearing Aid Eval.,
Ear Mold Impression)
Prescription Drug Treatment (Pharmacy)
Mental Health & Substance Abuse
Dental
Transplants Requested]
Open Heart Surgery
Total
</TABLE>
6. Reimbursement rates:
Table A [Confidential Treatment Requested] Members
<TABLE>
<CAPTION>
Male Female
Age Medicaid Non-Medicaid Medicaid Non-Medicaid
<S> <C>
85+
80-84
75-79 [Confidential Treatment Requested] [Confidential Treatment Requested]
70-74
65-69
Table B [Confidential Treatment Requested] Members
<S><C>
85+
80-84
75-79 [Confidential Treatment Requested] [Confidential Treatment Requested]
70-74
65-69
</TABLE>
<PAGE>
Attachment I (continued)
<TABLE>
<CAPTION>
Table C [Confidential Treatment Requested] Members
<S><C>
85+
80-84
75-79 [Confidential Treatment Requested] [Confidential Treatment Requested]
70-74
65-69
</TABLE>
<PAGE>
Attachment J
HMO's Complaint, Grievance/Appeal Policy
Please refer to the attached documents which may be amended from time to time
without the necessity of a formal contract amendment. HMO will strive to provide
IPA with thirty (30) days notice of any changes prior to the effective date of
the change.
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------- --------------------------------------------------
POLICIES & PROCEDURES
SECTION: QUALITY
MANAGEMENT
- ------------------------------------------------------------------------------------------------------------
TITLE: Medicare Grievance Policy
- ------------------------------------------------------------------------------------------------------------
Policy Number: Issued: 05-28-96 Last Revision: 05-28-96
- ---------------------------------------- --------------------------------- ---------------------------------
Committee Review Date: Board Approval Date: N/A
- --------------------------------------------------- ----- --------------------------------------------------
Policy Implementation Date:
- ------------------------------------------------------------------------
</TABLE>
POLICY STATEMENT:
Chesapeake Health Plan ("CHP") receives and resolves Medicare enrollees'
grievances in an effective and timely manner.
PURPOSE:
Chesapeake Health Plan is dedicated to ensuring that all Medicare enrollees
receive timely resolution to their questions and/or complaints regarding Health
Plan services or the payment of services. This policy is designed to provide
Medicare enrollees with a full and fair investigation of complaints and
grievances. All Medicare enrollees are informed, upon enrollment, of their right
and the process for filing a grievance.
GOALS:
To promote member satisfaction by identifying opportunities to meet the needs
and expectations of members, and to comply with the requirement of regulatory,
accreditory and other auditing agencies.
SCOPE:
This policy applies to matters subject to the formal HCFA grievance process. The
grievance procedures apply to Medicare enrollee complaints that do not involve
an initial determination. The procedures outline the steps in the grievance
process and the time limits imposed on each step.
Grievance rights belong to the member or the member's legal guardian. In cases
of temporary need, the member may assign their grievance rights to a family
member or representative by completing a CHP Appointment of Representation Form
and submitting it to the CHP Grievance Coordinator.
<PAGE>
DEFINITION:
Medicare grievances are disputes or complaints that do not involve an initial
determination. Examples include:
(bullet) Complaints about quality of care or service
(bullet) Complaints about accessibility of care or service
(bullet) Complaints about physician demeanor and behavior or adequacy of
facilities
(bullet) Involuntary disenrollment issues
RESPONSIBILITY:
Member Service Department, Quality Management Department, and Chesapeake Health
Plan Grievance Committee
CONTACT PERSON:
Valerie James
- ------------------------------------------------------------------------
PROCEDURE:
1. Member calls with inquiry or informal grievance.
2. CHP responds within three (3) working days.
3. If member is still dissatisfied, member files formal grievance in
writing or by telephone within sixty (60) days.
4. CHP acknowledges formal grievance within ten (10) working days
Send letter 18 - Receipt of Formal Grievance Acknowledgment
5. Grievance Coordinator issues decisions within thirty (30) days.
Send letter 19 - Original Formal Grievance Decision
6. If member still not satisfied with decision of Grievance Coordinator,
member submits written request for review by Grievance Committee within
ten (10) days of receipt of Grievance Coordinators decision. The
committee is comprised of:
Medical Director
Director of Compliance
Vice President of Medical Services
<PAGE>
7. CHP acknowledges request within ten (10) working days. Send letter 20 -
Acknowledgment of Request for Grievance Committee Review
8. Grievance Committee meets and notifies member of decision within thirty
(30) days of receipt of written request. (Period may be extended for an
additional thirty (30) days if there is a delay in obtaining required
records) Send letter 21 - Grievance Committee Decision
9. If member is still dissatisfied, the member may submit a concern to the
Maryland Insurance Administration. A CHP Member Services Represented
will assist the member.
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------ -----------------------------------------------------
POLICIES & PROCEDURES
SECTION: QUALITY
MANAGEMENT
- ------------------------------------------------------------------------------------------------------------
TITLE: Medicare Appeal Policy
- ------------------------------------------------------------------------------------------------------------
Policy Number: Issued: 05-28-96 Last Revision: 05-28-96
- ---------------------------------------------------- -- ----------------------------------------------------
Committee Review Date: Board Approval Date: N/A
- ---------------------------------------------------- -- ----------------------------------------------------
Policy Implementation Date:
- ---------------------------------------------------- -- ----------------------------------------------------
</TABLE>
POLICY STATEMENT:
Chesapeake Health Plan ("CHP") receives and resolves Medicare enrollees' appeals
in an effective and timely manner.
PURPOSE:
Chesapeake Health Plan is dedicated to ensuring that all Medicare enrollees
receive timely resolution to appeals regarding Health Plan services or the
payment of services. This policy is designed to provide Medicare enrollees with
a full and fair investigation of appeals. All Medicare Enrollees are informed,
upon enrollment, of their right and the process for filing an appeal.
GOALS:
To promote member satisfaction by identifying opportunities to meet the needs
and expectations of members, and to comply with the requirement of regulatory,
accreditory and other auditing agencies.
SCOPE:
This policy applies to matters subject to the formal HCFA appeal process. All
disputes by Medicare enrollees about a determination is subject to the appeals
procedure. The procedures outline the steps in the appeal process and the time
limits imposed on each step.
Appeal rights belong to the member or the member's legal guardian. In cases of
temporary need, the member may assign their appeal rights to a family member or
representative by completing a CHP Appointment of Representation form and
submitting it to the CHP Grievance Coordinator.
<PAGE>
DEFINITION:
Medicare appeals are disputes regarding a CHP initial determination or requests
by Medicare enrollees for the Health Plan to reconsider an initial decision.
Examples include:
(bullet) Payment for services received.
(bullet) Reimbursement for emergency or urgently needed services.
(bullet) Services not received but were the responsibility of CHP to pay for
or provide.
(bullet) Claims for services for which no written notice has been issued
sixty (60) days after submission.
RESPONSIBILITY:
Member Service Department, Quality Management Department, and Chesapeake Health
Plan Grievance Committee
CONTACT PERSON:
Valerie James
- ------------------------------------------------------------------------
PROCEDURE:
1. Member requests reconsideration of denied claim or service in writing
within sixty (60) days from date of denial notice.
2. CHP acknowledges receipt of request within five (5) working days. Send
letter 30 - Reconsideration Acknowledgment (If required send Letter 31 -
Request for Release of Additional Information)
3. Medicare Appeals Committee meets. The committee is comprised of:
Medical Director
Vice President, Operations
Vice President, Services
4. Member notified in writing of reconsideration decision within sixty (60)
days from date received.
<PAGE>
Decision in member's favor
Claim paid or service rendered by CHP within sixty (60) days
Send letter 32 - Overturn of Initial Denial of Claims Payment
or Denial of Service
Decision against member
Case file sent to HCFA for their decision within 60 days
Send letter 33 - Upholding Initial Denial
Send letter 34 - Notice of Referral to HCFA for Final Determination
HCFA Follows Up After This Point
HCFA notifies Chesapeake of their decision and Chesapeake notifies the member.
Send letter 35 - Acknowledgment of Receipt of Reconsideration Determinations
from HCFA.
Decision for the member by HCFA
CHP pays claims or provides service within 60 days of receipt of HCFA decision.
Send letter 36 - Notification to HCFA of Claims Payment or Service
Authorization.
Decision against member by HCFA
HCFA advises member of right to hearing before Administrative Law Judge (ALJ).
The member has 60 days to request a hearing.
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------- ---------------------------------------------------
POLICIES & PROCEDURES
SECTION: QUALITY
MANAGEMENT
- -------------------------------------------------------- ---------------------------------------------------
TITLE: Complaint, Grievance/Appeal Policy - For Commercial and Medical Assistance HMO Members
- ------------------------------------------------------------------------------------------------------------
Policy Number: Issued: 05-28-96 Last Revision: 05-28-96
- --------------------------------------- --------------------------------- ----------------------------------
Committee Review Date: Board Approval Date: N/A
- ---------------------------------------------------- --- ---------------------------------------------------
Policy Implementation Date:
- ---------------------------------------------------- --- ---------------------------------------------------
</TABLE>
POLICY STATEMENT:
Chesapeake receives and resolves all member complaints, grievances in an
effective and timely manner.
PURPOSE:
Chesapeake Health Plan ("CHP") is dedicated to ensuring that all CHP members
receive timely resolution to their questions and/or complaints regarding Health
Plan services or the payment of services. This policy is designed to provide CHP
members with a full and fair investigation of complaints and grievances. All CHP
members are informed, upon enrollment, of their right and the process for filing
a complaint.
GOALS:
To promote member satisfaction by identifying opportunities to meet the needs
and expectations of members, and to comply with the requirement of regulatory,
accreditory and other auditing agencies.
SCOPE:
This policy applies to CHP's Commercial and Medical Assistance-HMO members.
Commercial includes members enrolled in a POS option and those with direct pay
coverage.
Grievance/Appeal rights belong to the member or the member's legal guardian. In
cases of temporary need, the member may assign their grievance/appeal rights to
a family
<PAGE>
member or a representative by completing a CHP Appointment of Representative
Form and submitting it to the CHP Grievance Coordinator.
Refer to Medicare Grievance and Medicare Appeals Policies for Advantage 65
Members.
Refer to Provider Appeal Policy for Provider Appeals.
BACKGROUND:
Complaints and Grievances are investigated and trended as required by CHP's
Quality Management program. The results are used to identify components of care
and service that require corrective or improvement intiative.
All Complaint and Grievance activity is documented and maintained in the Member
Services Module (MSM). The Grievance records, which include details of
investigations, are centrally maintained in a secure location by the Grievance
Coordinator.
Refer to Medicare Grievance Policy and Medicare Appeals Policy for members
enrolled in the Advantage 65 product.
DEFINITION:
A. An inquiry is defined as a member's verbal request to the Health Plan
for clarification, additional information or explanation of a plan
service, operations, administration, procedures, or benefits.
Inquiries are processed by the Member Service Department.
B. A complaint is defined as a member's initial request for a
determination or an action. A complaint represents a member's concern
or dissatisfaction with the Health Plan's services, providers of
services, or payment of services. Members may file a complaint if they
perceive that they have been treated unprofessionally or improperly by
CHP staff or a CHP provider. Complaints can be filed verbally or in
writing and are processed by the Member Service Department.
If a Medical Assistance-HMO member disenrolls from the HMO and states
on the disenrollment form that she/he is disenrolling because of
alleged fraudulent marketing conduct, CHP must document this and pursue
it as a complaint.
C. A grievance is defined as a member's complaint regarding a previous
issue that was not resolved to the member's satisfaction. A grievance
is a member's request for reconsideration. Grievances must be
submitted in writing and are processed by the CHP Grievance Coordinator
and Grievance Committee.
<PAGE>
Members have one year from denial of a claim to file written request
for consideration.
RESPONSIBILITY:
Member Service Department, Quality Management Department, and Chesapeake Health
Plan Grievance Committee.
CONTACT PERSON:
Valerie James
- ------------------------------------------------------------------------
PROCEDURE:
To file a complaint, CHP members are instructed to contact the CHP Member
Services Department and speak with a Member Services Representative.
The Member Service Representative is responsible for researching the case and
working with appropriate CHP department(s) to resolve the member's issue. Member
Service Representatives attempt to resolve member issues upon the first contact.
Members must be informed of a resolution to their complaint or provided a status
report regarding their complaint within thirty (30) calendar days.
Medical Assistance-HMO members must be provided with a written copy of their
complaint.
Complaints which pertain to emergency situations and require an expedited
determination are handled accordingly.
The Member Services Representative informs the member of his/her right to file a
grievance if she/he is not satisfied with the resolution. The member is also
informed of his/her right to appear before the Grievance Committee.
The member is instructed to direct his/her grievance to the attention of the CHP
Grievance Coordinator. Grievances must be submitted in writing within sixty (60)
days after the member receives notification of the resolution of his/her
complaint.
The Grievance Coordinator is responsible for acknowledging, in writing, to the
member receipt of his/her grievance within five (5) working days.
The Grievance Coordinator will submit all pertinent documentation to CHP's
Grievance Committee, which consists of the following CHP staff:
<PAGE>
Medical Director
Vice President, Services
Vice President, Medical Services
Vice President, Operations
Director, Compliance
Grievances are resolved and the member is notified of the committee's decision
within thirty (30) days of receipt of the member's complete information.
The Grievance Committee is the final level of review within the Health Plan.
The member is advised of his/her right to contact the appropriate state
government regulatory agency if she/he is dissatisfied with the decision of the
Grievance Committee. The Grievance Coordinator supports the activities of the
agency and the member during this review process.
<PAGE>
Attachment K
Encounter Format
Please refer to the attached document which may be amended from time to time
without the necessity of a formal contract amendment. HMO will strive to provide
IPA with thirty (30) days notice of any changes prior to the effective date of
the change.
<PAGE>
CHESAPEAKE HEALTH PLAN
STANDARD ENCOUNTER LAYOUT
<TABLE>
<CAPTION>
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
FIELD NAME BEGIN LGT NOTES TYPE JUST
<S> <C> H
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Claim Number 1 15 999999999999*99 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Paid Date 16 6 YYMMDD A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Service from Date 22 6 YYMMDD A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Service to date 28 6 YYMMDD A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 34 2 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Source 36 1 (E)ncounter A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Source Fed ID 37 20 Supplier Federal ID A/N L
Number
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 57 3 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Claimant Last Name 60 20 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Claimant First Name 80 20 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 100 49 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Claimant Medical Record No. 149 15 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Claimant Membership No. 164 12 CHP Internal Number A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 176 51 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Provider Name 227 40 Last, First A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Provider Tax ID 267 12 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 279 40 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
1st Diagnosis 319 7 ICD9 Code A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
2nd Diagnosis 326 7 ICD9 Code A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
3rd Diagnosis 333 7 ICD9 Code A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
UB82 Revenue Code 340 4 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Type of Service 344 2 See Value List A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
CPT Procedure Code 346 6 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Procedure Modifier 352 2 A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Place of Service 354 2 See Value List A/N L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 356 6 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Units of Service 362 5 N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Submitted Amount 367 9 N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Ineligible Amount 376 9 * N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Ineligible Reason 385 5 See Value List* A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 390 9 Submitted-UCR Amount A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
UCR Cutback 399 9 N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 408 9 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Deductible 417 9 * N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
COB 426 9 * N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Copayment 435 9 N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
COB Savings 444 9 * N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
<PAGE>
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
COB Status 453 1 M = Medicare A L
R = Regular
W = Workmen's Comp.
A = Accident
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Amount Paid 454 9 N R
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
Filler 463 37 A L
- --------------------------------------- ------------ ----------- -------------------------- ------------ --------
</TABLE>
* Does not apply to Encounters
RECORD LENGTH: 500 TAPE DENSITY: 1600
<PAGE>
Chesapeake Health Plan
Standard Encounter Layout
BLOCK FACTOR: 10 FORMAT: ASCII
BLOCK FACTOR: 5000 UNLABELED:
<PAGE>
Text File Layout
3/2/95
This layout is based on the standard CHP Eligibility Tape layout.
<TABLE>
<CAPTION>
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
Start End Length Just Description Format
<S> <C>
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
1 15 15 Left Subscriber's Member Number NNNNNN*01
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
16 30 15 Left Member Number NNNNNN*NN
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
31 39 9 Left Member's Social Security Number NNNNNNNNN
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
40 59 20 Left Member's Last Name Text
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
60 79 20 Left Member's First Name Text
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
80 80 1 Left Member's Middle Initial X
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
81 83 3 Left Member's Suffix SR, JR, III, etc.
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
84 91 8 Left Member's Date of Birth YYYYMMDD
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
92 92 1 Left Member's Sex M or F
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
93 93 1 Left Relationship Code P, S, or D
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
94 123 30 Left Subscriber's Address, Line 1 Text
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
124 153 30 Left Subscriber's Address, Line 2 Text
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
154 173 20 Left Subscriber's City Text
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
174 175 2 Left Subscriber's State XX
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
176 184 9 Left Subscriber's Zip Code NNNNN
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
185 194 10 Right Subscriber's Home Phone NNNNNNNNNN
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
195 204 10 Right Subscriber's Work Phone NNNNNNNNNN
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
205 212 8 Left Coverage Begin Date YYYYMMDD
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
213 220 8 Left Coverage End Date YYYYMMDD
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
221 223 3 Left Coverage End Reason Code XXX
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
224 253 30 Left Employer Group Number 30X
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
254 263 10 Left Primary Care Physician Code 10X
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
264 273 10 Left Region Code 10X
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
274 300 27 Left Filler Blank
- --------------- ------------- ------------- ---------------- -------------------------------------- -----------------------
</TABLE>
Notes:
(bullet) An entire family (subscriber and all dependents) should be
included in this file if any member of the family is or has been
assigned to a network PCP.
(bullet) If a subscriber (member "01") is included in this file, and the
subscriber is not assigned to a network PCP, then that subscriber
should be considered enrolled, and the PCP code field should be left
blank.
(bullet) If a dependent (not member "01") is included in this file, and
the dependent is not assigned to a network PCP, then that dependent
should be considered disenrolled.
(bullet) Network PCPs can be identified by their PCN code. (Currently, "CMC",
"DH", and "SHMC").
<PAGE>
Attachment L
Member Information Format
Please refer to the attached document which may be amended from time to time
without the necessity of a formal contract amendment. HMO will strive to provide
IPA with thirty (30) days notice of any changes prior to the effective date of
the change.
<PAGE>
Attachment M
Provider Appeals Policy
The IPA's Provider Appeals Policy previously submitted for review is hereby made
a part of this Agreement.
Exhibit 10.41
Instructions to Loan Officer: Use for all loans to corporations, regardless of
amount; and any loan to a noncorporate borrower when the only purpose of
such loan is business and the principal amount exceeds $75,000 if the loan
is secured by residential real property or $15,000 otherwise.
First National Bank
of Maryland TIME/DEMAND
BUSINESS PURPOSE PROMISSORY NOTE
$1,500,000.00 Baltimore City, Maryland August 15, 1996
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the order of
THE FIRST NATIONAL BANK OF MARYLAND, a national banking association ("Bank"), at
Bank's offices at 25 South Charles Street, Baltimore, Maryland 21201 or at such
other place as the holder of this Promissory Note may from time to time
designate, the principal sum of One Million Five Hundred Thousand and no/100
Dollars ($1,500,000.00), or such other amount as may be advanced from time to
time to Borrower, together with interest thereon at the rate or rates hereafter
specified and any and all other sums which may be owing to Bank by Borrower
pursuant to this Promissory Note. The following terms shall apply to this
Promissory Note.
1. INTEREST. From the date hereof until all sums due hereunder, including
principal, interest, charges, fees and expenses are paid in full, the principal
amount outstanding from time to time pursuant to this Promissory Note shall bear
interest as follows (Check One):
[ ] Fluctuating Rate. At a fluctuating rate equal to % per annum above
the greater of: (i) that rate announced from time to time by Bank as its
"prime rate"; or (ii) the average rate, rounded to the nearest 1/10th of
1%, for 3-month maturity dealer placed commercial paper ("Commercial Paper
Rate") for the week most recently reported in the Federal Reserve Statistical
Release No. H. 15(519), entitled "Selected Interest Rates," or any succeeding
publications; provided that the interest rate on this Promissory Note shall
never be less than the rate that is 1% per annum above the Commercial Paper
Rate. Bank at its discretion may charge a lesser rate from time to time.
Interest on the principal amount outstanding shall be adjusted daily with the
rate for each day being the rate in effect at the close of business on that
day. Bank makes loans at interest rates at, above and below its prime rate.
[ ] Fixed Rate. At the fixed per annum rate of %.
[ ] Other (describe): At a fluctuating per annum rate of interest at all
times equal to the Bank's 90 day Libor Rate (as hereinafter defined) in
effect from time to time, plus two percent (2%) per annum; provided that
on and after the Deposit Date (as hereinafter defined) this Promissory
Note shall bear interest at a fluctuating per annum rate of interest at all
times equal to the Bank's 90 day Libor Rate in effect from time to time plus
three-quarters of one percent (.75%) per annum. As used herein, the term (a) "90
Day Libor Rate" means the floating and fluctuating per annum rate of interest
equal at all times to the interest rate which the Bank, in its sole and
absolute discretion, announces and declares from time to time to be the Bank's
ninety (90) day London Interbank Offered Rate as adjusted for any reserve
requirements prescribed by the Board of Governors of the Federal Reserve System
(or any successor), (b) "Deposit Date" means the date (if any) when St. Joseph
Medical Center, Inc., a Maryland non-profit corporation ("SJMC") has made the
Deposit (as hereinafter defined) to a demand deposit account maintained by
SJMC in its name with the Bank (the "Account"), and (c) "Deposit" means a
deposit to the Account by SJMC upon terms and conditions satisfactory to the
Bank of immediately available funds in an amount not less than $1,500,000.
2. CALCULATION OF INTEREST. Interest shall be calculated on the basis of a
three hundred sixty (360) days per year factor applied to the actual days on
which there exists an unpaid balance hereunder.
3. REPAYMENT. Borrower shall make payments of principal and interest in
accordance with the options selected under subsection (a) and subsection (b)
below:
(a) Principal: Borrower shall make payments of principal as follows (Check One):
[ ] Demand. In full on demand by Bank, which may be made at any time, without
notice, and without regard to whether a default has occurred.
[ ] Time. In full on October 14, 1996.
(b) Interest: Borrower shall make payments of accrued interest as follows (Check
One):
[ ] Monthly. Payments of all accrued and unpaid interest shall be made on the
day of each successive month, beginning on , 19 , and
continuing until the maturity of this Promissory Note (whether upon demand,
stated maturity, acceleration or otherwise) at which time all sums due
hereunder. including principal, interest, charges, fees and expenses, shall be
paid in full.
[ ] Quarterly. Payments of all accrued and unpaid interest shall be made
quarterly on the day of each third month, beginning on ,
19 , and continuing until the maturity of this Promissory Note (whether upon
demand, stated maturity, acceleration or otherwise) at which time all sums due
hereunder, including principal, interest, charges, fees and expenses, shall be
paid in full.
[ ] Other (describe): prepay on the date hereof.
All amounts owed to Bank hereunder shall be payable in immediately available
funds (Check One):
[ ] as billed
[ ] by preauthorized debit of Account # .
Borrower agrees to maintain a balance in the above-described account which is at
least equal to the payment amount on each payment due date.
4. LATE PAYMENT CHARGE. If any payment due hereunder (including any payment in
whole or in part of principal) is not received by the holder within fifteen
(15) calendar days after its due date, Burrower shall pay a late payment charge
equal to five percent (5%) of the amount then due.
5. APPLICATION OF PAYMENTS. All payments made pursuant to this Promissory
Note shall be applied first to accrued and unpaid interest, then to unpaid
expenses and charges payable hereunder, and then to principal, or in such other
order or proportion as the holder, in the holder's sole discretion. may elect
from time to time.
6. SECURITY. Sums due under this Promissory Note are secured by, and Borrower
grants to Bank a security interest in, all deposits and property of Borrower
now or at any time hereafter in the possession of or on deposit with Bank
whether as custodian or depository or in any other capacity. In addition,
this Promissory Note is secured by any property described as collateral in any
security agreement, mortgage, deed of trust. pledge agreement or other
document previously, simultaneously, or hereafter entered into by Borrower in
connection with any obligation or liability of Borrower to Bank or any
corporate affiliate of Bank, such other security document(s) including but not
limited to the following:
[ ] Security Agreement(s)
[ ] Real estate mortgage or deed of trust on property known as
in County/City, State of (Real estate in Pennsylvania
constituting the residence of any Borrower may not be security for any loan of
$50,000 or less in principal amount.)
[ ] Other (describe):
This Promissory Note specifically incorporates by reference, as if fully set
forth herein, all of the language and provisions of the security documents
described generally or specifically above.
7. DEFAULT. Any of the following will be a default under this Promissory Note:
(a) failure to pay any principal, expense, fee, charge or interest when due, or
failure to perform any other obligations hereunder; (b) a default by any
Borrower upon any of the existing or future obligations of any Borrower to Bank;
(c) a default by SJMC, any other guarantor or other person that is now or
hereafter liable upon or in connection with any of the obligations of any
Borrower to Bank or that has granted any lien or security interest to or for the
benefit of Bank to secure any of the obligations of any Borrower to Bank ("Other
Obligor"), upon any of the existing or future obligations of any Other Obligor
to Bank; (d) a default in any other agreement, instrument or document between
any Borrower or Other Obligor and Bank or any corporate affiliate of Bank,
including, without limitation, any security document referred to above, whether
previously, simultaneously, or hereafter entered into, (e) a material adverse
change in the financial condition of any Borrower or Other Obligor from that
expressed in the financial statement most recently submitted to Bank prior to
the date of this Promissory Note, as determined in good faith by Bank in its
sole discretion; (f) institution of bankruptcy, insolvency, reorganization or
receivership proceedings by or against any Borrower or Other Obligor in any
state or federal court; (g) the appointment of a receiver, assignee, custodian,
trustee or similar official under any federal or state insolvency or creditors'
rights law for any property of any Borrower or Other Obligor; (h) failure of any
Borrower or Other Obligor to furnish to Bank such collateral or additional
collateral as Bank may in good faith request; (i) any warranty, representation,
or statement to Bank by or on behalf of any Borrower or Other Obligor proving to
have been incorrect in any material respect when made or furnished; (j) the
occurrence of any event which is, or would be with the passage of time or the
giving of notice or both, a default under any indebtedness of any Borrower or
Other Obligor to any person other than Bank; (k) any material loss, theft or
substantial damage, not fully insured for the benefit of Bank, to any of the
assets of any Borrower or Other Obligor, or the sale, transfer, lease,
encumbrance or other disposition of all or any material part of the assets of
any Borrower or Other Obligor other than in the ordinary course of business of
Borrower or Other Obligor; (l) the entry of any final judgment against any
Borrower or Other Obligor for the payment of money in excess of $5,000; (m) the
levy upon or attachment of any assets of any Borrower or Other Obligor; (n) the
recordation of any federal, state or local tax lien against any Borrower or
Other Obligor; (o) a change of ownership or dissolution, merger, consolidation,
liquidation or reorganization of any Borrower or Other Obligor which is a
corporation. partnership or other legal entity; (p) the death of any Borrower or
Other Obligor who is a natural person; (q) the failure of any Borrower or Other
Obligor to furnish to Bank such financial information as Bank may require from
time to time; (r) the determination in good
<PAGE>
faith by Bank, in its sole discretion, that the ability of any Borrower or
Other Obligor to pay or perform any of their respective obligations to Bank is
impaired for any reason, or (s) the failure of SJMC to make the Deposit to the
Account on or before September 1, 1996.
8. REMEDIES. Upon a default, in addition to all other rights and remedies
available to the holder of this Promissory Note under any other document or
agreement between Borrower and Bank or under applicable law, the holder of this
Promissory Note, in the holder's sole discretion and without notice or demand,
may: (a) raise the rate of interest accruing on the unpaid balance due under
this Promissory Note by two (2) percentage points above the rate of interest
otherwise applicable, independent of whether the holder of this Promissory Note
elects to accelerate the unpaid principal balance as a result of such default;
and (b) declare the entire unpaid principal balance plus accrued interest and
all other sums due hereunder immediately due and payable. Borrower agrees that a
default under this Promissory Note is a default by Borrower under all other
liabilities and obligations of Borrower to the holder, and that the holder shall
have the right to declare immediately due and payable all of such other
liabilities and obligations. Upon a default, Borrower authorizes any attorney
admitted to practice before any court of record in the United States to appear
on behalf of Borrower in any court in one or more proceedings, or before any
clerk thereof or prothonotary or other court official, and to confess judgment
against Borrower, without prior notice or opportunity of Borrower for prior
hearing, in favor of the holder of this Promissory Note in the full amount due
on this Promissory Note (including principal, accrued interest and any and all
charges, fees and expenses) plus court costs, plus attorneys' fees equal to
fifteen percent (15%) of the unpaid balance of principal, interest, charges, and
other sums due hereunder. In addition to all other courts in which judgment may
be confessed against Borrower upon this Promissory Note, Borrower agrees that
venue and jurisdiction shall be proper in the Circuit Court of any County of the
State of Maryland or of Baltimore City, Maryland, or in the United States
District Court for the District of Maryland. Borrower waives the benefit of any
and every statute, ordinance, or rule of court which may be lawfully waived
conferring upon Borrower any right or privilege of exemption, homestead rights,
stay of execution, or supplementary proceedings, or other relief from the
enforcement or immediate enforcement of a judgment or related proceedings on a
judgment. (Any judgment obtained by confession shall not constitute a lien on
any real property located in Pennsylvania which is the residence of any Borrower
if this Promissory Note is in the original principal amount of $50,000 or less.)
The authority and power to appear for and enter judgment against Borrower shall
not be exhausted by one or more exercises thereof, or by any imperfect exercise
thereof, and shall not be extinguished by any judgment entered pursuant thereto;
such authority and power may be exercised on one or more occasions from time to
time, in the same or different jurisdictions, as often as the holder shall deem
necessary or advisable.
9. INTEREST RATE AFTER JUDGMENT. If judgment is entered against Borrower on this
Promissory Note, the amount of the judgment entered (which may include
principal, interest, charges, fees, and expenses) shall bear interest at the
higher of the above described default interest rate as determined on the date of
the entry of the judgment, or the legal rate of interest then applicable to
judgments in the jurisdiction in which judgment was entered.
10. EXPENSES OF COLLECTION. Borrower shall pay all costs and expenses incurred
by Bank in collecting sums due under this Promissory Note, including without
limitation the costs of any lien, judgment or other record searches, appraisals,
travel expenses and the like. In addition, if this Promissory Note is referred
to an attorney for collection, whether or not judgment has been confessed or
suit has been filed, Borrower shall pay all of the holder's costs, fees
(including, but not limited to, the holder's attorneys' fees, charges and
expenses) and all other expenses resulting from such referral.
11. NEGOTIABLE INSTRUMENT. Borrower agrees that this Promissory Note shall be
deemed to be a negotiable instrument, even though this Promissory Note may not
qualify under applicable law, absent this paragraph, as a negotiable instrument.
12. WAIVERS. Borrower, and all parties to this Promissory Note, whether maker,
indorser, or guarantor, waive presentment, demand, notice of dishonor and
protest.
13. EXTENSIONS OF MATURITY. All parties to this Promissory Note, whether maker,
indorser, or guarantor, agree that the maturity of this Promissory Note, or any
payment due hereunder, may be extended at any time or from time to time without
releasing, discharging, or affecting the liability of such party.
14. NOTICES. Any notice or demand required or permitted by or in connection with
this Promissory Note, without implying the obligation to provide any notice or
demand, shall be in writing at the address set forth below or to such other
address as may be hereafter specified by written notice to Bank by Borrower. Any
such notice or demand shall be deemed to be effective as of the date of hand
delivery or facsimile transmission, one (1) day after dispatch if sent by
telegram, mailgram. overnight delivery, express mail or federal express, or
three (3) days after mailing if sent by first class mail with postage prepaid.
15. ASSIGNABILITY. This Promissory Note may be assigned by Bank or any holder at
any time.
16. JOINT AND SEVERAL LIABILITY. If more than one person or entity is executing
this Promissory Note as Borrower, all liabilities under this Promissory Note
shall be joint and several with respect to each of such persons or entities.
17. BINDING NATURE. This Promissory Note shall inure to the benefit of and be
enforceable by Bank and Bank's successors and assigns and any other person to
whom Bank may grant an interest in Borrower's obligations to Bank, and shall be
binding and enforceable against Borrower and Borrower's personal
representatives, successors and assigns.
18. VALIDITY OF ANY PART. If any provision or part of any provision of this
Promissory Note shall for any reason be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Promissory Note, and this Promissory Note shall be
construed as if such invalid, illegal or unenforceable provision or part thereof
had never been contained herein, but only to the extent of its invalidity,
illegality or unenforceability.
19. MAXIMUM RATE OF INTEREST; COMMERCIAL LOAN. Notwithstanding any provision of
this Promissory Note to the contrary, Borrower shall not be obligated to pay
interest hereunder in excess of the maximum rate of interest permitted by the
laws of any state determined to govern this Promissory Note or the laws of the
United States applicable to loans in such state. If any provision of this
Promissory Note shall ever be construed to require the payment of any amount of
interest in excess of that permitted by applicable law, then the interest to be
paid hereunder shall be held subject to reduction to the amount allowed under
applicable law, and any sums paid in excess of the interest rate allowed by law
shall be applied in reduction of the principal balance outstanding under this
Promissory Note. Borrower acknowledges that it has been contemplated at all
times by Borrower that the laws of the State of Maryland will govern the maximum
rate of interest that it is permissible for the holder of this Promissory Note
to charge Borrower under this Promissory Note. Borrower warrants that this
Promissory Note evidences a loan made solely to acquire or carry on a business
or commercial enterprise.
20. CHOICE OF LAW; CONSENT TO VENUE AND JURISDICTION. This Promissory Note shall
be governed, construed and interpreted in accordance with the laws of the State
of Maryland, even if the Maryland rules governing conflicts of laws would
otherwise require that the laws of another jurisdiction govern this Promissory
Note. Borrower consents to the jurisdiction and venue of the courts of any
county in the State of Maryland or the courts of Baltimore City, Maryland and to
the jurisdiction and venue of the United States District Court for the District
of Maryland in any action or judicial proceeding brought to enforce, construe or
interpret this Promissory Note.
21. UNCONDITIONAL OBLIGATIONS. Borrower's obligations under this Promissory Note
shall be the absolute and unconditional duties and obligations of Borrower and
shall be independent of any rights of set-off, recoupment or counterclaim which
Borrower might otherwise have against the holder of this Promissory Note, and
Borrower shall pay absolutely the payments of principal, interest, fees, charges
and expenses required hereunder, free of any deductions and without abatement,
diminution or set-off.
22. ACTIONS AGAINST BANK. Any action brought by Borrower against Bank which is
based, directly or indirectly, or in whole or in part, upon this Promissory Note
or any matter related to this Promissory Note shall be brought only in the
courts of the State of Maryland.
23. WAIVER OF JURY TRIAL. Borrower (by execution of this Promissory Note) and
Bank (by acceptance of this Promissory Note) agree that any suit, action, or
proceeding, whether claim or counterclaim, brought or instituted by Borrower or
Bank on or with respect to this Promissory Note or which in any way relates,
directly or indirectly, to the obligations of Borrower to Bank under this
Promissory Note, or the dealings of the parties with respect thereto, shall be
tried only by a court and not by a jury. Borrower and Bank hereby expressly
waive any right to a trial by jury in any such suit, action, or proceeding.
Borrower and Bank acknowledge and agree that this provision is a specific and
material aspect of the agreement between the parties and that Bank would not
enter into the transaction with Borrower if this provision were not a part of
their agreement.
2
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the undersigned
execute this Promissory Note under seal, as Borrower, as of the date first
written above.
WITNESS/ATTEST*:
Doctors Health System, Inc.
(Name of Organization)
10451 Mill Run Circle, 10th Floor
(Street Address)
Owings Mills, Maryland 21117
(City-State-zip)
(410) 654-5800 (410) 654-5806
(Telephone) (Facsimile)
By: (SEAL)
Assistant Secretary (Authorized Signature)
Thomas F. Mapp John R. Dwyer, Chief Financial Officer
(Print Name) (Print Name and Title)
By: (SEAL)
(Authorized Signature)
By: (SEAL)
(Authorized Signature)
* NOTE: Attestation by a corporate officer of another corporate officer's
capacity to sign is required in all corporate transactions.
If Borrower is an individual he or she should sign below:
WITNESS:
(SEAL)
(SEAL)
(Print Name) (Print Name)
(Street Address)
(City-State-zip)
(Telephone) (Facsimile)
(SEAL)
(SEAL)
(Print Name) (Print Name)
(Street Address)
(City-State-zip)
Attach additional signature page if necessary. (Telephone) (Facsimile)
3
Exhibit 10.42
August 15, 1996
DOCTORS HEALTH SYSTEM, INC.
10451 Mill Run Circle, 10th Floor
Owings Mills, MD 21117
Gentlemen:
St. Joseph Medical Center, Inc. ("SJMC") is pleased to confirm its
intention, upon the terms and conditions set forth herein, to provide credit
enhancement in connection with loans in a principal amount not exceeding
$1,500,000 to Doctors' Health System ("DHS") from First National Bank of
Maryland ("Lender"). This letter shall set forth the terms and conditions
thereof and, upon your acceptance of the terms hereof as evidenced by your
execution in the space set forth below, shall constitute a binding agreement
between DHS and SJMC.
1. SJMC agrees to deliver to Lender its written guaranty (the
"Guaranty"), in such form as shall be required by Lender and approved by SJMC.
Pursuant thereto, SJMC shall unconditionally guarantee and be liable for the
payment obligations of DHS in respect of loans advanced by Lender in accordance
with its Business Purpose Promissory Note dated of even date herewith
(collectively, the "Guaranteed Obligations"); provided that the maximum amount
of the Guaranteed Obligations shall not exceed $1,500,000. The Guaranty shall
terminate not earlier than 60 days following the incurrence by DHS of the
Guaranteed Obligations (or, if not advanced in full by Lender, the initial
advance of proceeds thereof by Lender in connection therewith).
2. Any advance made by SJMC to Lender in connection with any claim
under the Guaranty shall be deemed to constitute a loan (each a "Loan") from
SJMC to DHS, which Loan shall be immediately due and payable by DHS to SJMC.
Each Loan shall bear interest at a rate equal to 5% in excess of the rate of
interest charged by Lender to DHS. Interest shall be calculated on the basis of
a 365 or 366 day year (as applicable) and shall accrue for each day such Loan is
not repaid (with a minimum of one day's interest due for any advance made by
DHS). Except as provided in the following paragraph, the obligation of DHS to
repay any amounts due in respect of any Loan shall be absolute, irrevocable and
unconditional and shall be due and payable in all circumstances, without
limitation, notwithstanding any of the following: (a) any lack of validity in
any instrument evidencing any of DHS' obligations to Lender; (b) any amendment,
modification or waiver of any instrument evidencing any obligation of DHS to
Lender (whether or not SJMC shall have knowledge thereof); (c) the existence of
any claim, set-off, defense or other rights which DHS may have against SJMC,
whether in connection with this or any other transaction; (d) the invalidity or
non-conformance of any claim for payment by Lender against DHS; (e) the
bankruptcy or insolvency of DHS or SJMC; or (f) any other circumstance
whatsoever, whether or not similar to any of the foregoing.
3. So long as the Guaranty shall remain outstanding or there shall
remain unpaid any amounts payable by DHS in respect of the principal amount of
any Loans hereunder, any amount paid by
<PAGE>
SJMC in respect of the principal due under the Non-Negotiable, Non-Transferable
Promissory Note of SJMC dated February 24, 1995, shall first be applied by DHS
immediately to reduce the principal amount of the Guaranteed Obligations or to
repay the principal of any Loans hereunder.
4. As security for the repayment of all amounts due in respect of any
Loan, DHS hereby grants to SJMC a continuing lien and security interest in and
to the following property (collectively, the "Collateral"):
(a) Receivables - all accounts, accounts receivable, contract
rights, chattel paper, negotiable and non-negotiable instruments and
agreements, and general intangibles (as such terms are defined by the
Maryland Uniform Commercial Code);
(b) Interest in Agreements - each of the agreements listed on
Exhibit D hereto, including all replacements, renewals, substitutions
and additions thereto; and
(c) Proceeds and Products - all cash and non-cash proceeds and
products of any services, property or goods described in the
subparagraphs (a) and (b) above, including, without limitation, all
cash, moneys, funds, securities or other instruments both now and
hereafter on deposit or held by DHS, Lender or SJMC in any bank or
other account established and maintained by SJMC or by SJMC and DHS or
by DHS in connection with any loans, letter of credit or other
financial accommodation both now and hereafter extended by SJMC to DHS.
SJMC acknowledges and agrees that DHS has granted or will grant in
favor of Medical Mutual a lien and security interest in the Collateral.
For the benefit and security of SJMC, DHS hereby grants to SJMC all of
the rights heretofore granted to Medical Mutual Liability Insurance Society of
Maryland ("Medical Mutual") set forth in Article 6 of the Final Credit
Enhancement Agreement dated as of December 1, 1995 (the "Medical Mutual
Agreement"), between SJMC and Medical Mutual, the terms and provisions of which
Sections are hereby incorporated herein by reference (without regard to any
amendment or modification thereof entered into between DHS and Medical Mutual),
which rights may be exercised by SJMC, Medical Mutual or both, in such manner as
they shall between them agree.
5. As a condition to the effectiveness hereof and to the
execution and delivery by SJMC of the Guaranty, DHS shall deliver, or cause
to be delivered, to SJMC, the following:
(a) a promissory note evidencing its payment obligations
hereunder in substantially the form attached hereto as Exhibit A;
(b) a financing statement evidencing the liens and security
interests granted pursuant to paragraph 4 above, in substantially the
form attached hereto as Exhibit B;
(c) a Collateral Assignment of Contracts in substantially
the form attached hereto as Exhibit C;
(d) the Consent and Agreement of Medical Mutual in the
form attached to this Agreement;
(e) an opinion of Thomas F. Mapp, Corporate Counsel for DHS,
in form and substance reasonably satisfactory to SJMC with respect to
the validity and enforceability of each agreement and instrument
executed and delivered by DHS to SJMC in connection with the
transactions contemplated hereby; and
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(f) such other certificates, agreements and instruments as
shall reasonably be required by SJMC in connection with the
transactions contemplated hereby.
6. So long as any of the Guaranteed Obligations are outstanding, DHS
shall comply with each of its covenants and agreements set forth in Article 7 of
the Medical Mutual Agreement (other than Sections 7.1(c) and 7.1(d) thereof),
each of which covenants and agreements is hereby incorporated herein by
reference. All references in the Medical Mutual Agreement to (i) the "Lender
Documentation" shall mean and include the Lender Documentation as described
therein and each and all agreements and instruments executed and delivered by
DHS in favor of the Lender in respect of the Guaranteed Obligations, and (ii)
"PSO Agreement" shall mean each of the agreements of DHS described in
subparagraph (b) of paragraph 4 above.
7. In order to induce SJMC to enter into this Agreement and to issue
the Guaranty, DHS makes the following representations and warranties to SJMC:
(a) Corporate Existence. DHS is duly organized, validity
existing and in good standing under the laws of the State of Maryland,
has the corporate power to own its assets and to transact the business
in which it is now engaged and is duly qualified as a foreign
corporation and in good standing in each jurisdiction in which such
qualification is required.
(b) Corporate Power; Authorization; Enforceable Obligation.
DHS has the corporate power, authority and legal right to execute,
deliver and perform this Agreement and each agreement or instrument
delivered to lender in connection with the insurance by DHS of the
Guaranteed Obligations (collectively the "Lender Documentation") and
has taken all necessary corporate action to authorize the execution,
delivery and performance thereof. No consent, license, permit, approval
or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority is
required for the execution, delivery and performance by it of this
Agreement or the Lender Documentation which has not been obtained,
made, given or accomplished (other than federal and state securities
laws, as to which no representation is made). This Agreement and the
Lender Documentation have been executed and delivered by its duly
authorized officer, and each of such agreements constitute, a legal,
valid and binding obligation of DHS, enforceable against DHS in
accordance with its terms, except as enforceability may be limited by
bankruptcy insolvency, reorganization, moratorium or similar laws
relating or limiting creditors' rights generally or by equitable
principles relating to enforceability.
(c) No Legal Bar. DHS' execution, delivery and performance of
this Agreement and the Lender Documentation will not violate any
provision of any existing law or regulation applicable to it (other
than federal and state securities laws, as to which no representation
is made), or of any order, judgment, award or decree of any court,
arbitrator or governmental authority applicable to it or its
certificate of incorporation or by-laws or any mortgage, indenture,
lease, contract or other agreement, instrument or undertaking to which
it is a party or by which it or any of its assets may be bound, and
will not, except as otherwise provided herein or under any of the
Lender Documentation, result in, or require, the creation or imposition
of any Lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other
agreement, instrument or undertaking.
(d) No Material Litigation. No litigation, investigation or
administrative proceeding of or before any court, arbitrator or
governmental authority is pending nor, to its knowledge, threatened
against DHS or any of its assets (i) with respect to this Agreement or
the
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Lender Documentation or (ii) that would have a material adverse effect
on its business, operations, assets or financial or other condition.
(e) ERISA. DHS has never established, terminated or
been required to make contributions to any Plan (as defined in the
Medical Mutual Agreement).
(f) Security Interest. (i) No effective financing statement
listing the DHS as debtor (other than any which may be filed on behalf
of SJMC or Medical Mutual (but only to extent described in the Medical
Mutual Agreement) or other lending institution authorized SJMC)
covering any of the Collateral is on file in any public office and (ii)
DHS has not created any security interest which remains in effect in
the Collateral and will keep the Collateral and every part thereof free
and clear of all liens, security interests or other encumbrances except
the liens and security interests granted pursuant to this Agreement or
in favor of Medical Mutual as described in the Medical Mutual Agreement
and any other liens or security interest permitted in writing by SJMC.
(g) Not an Investment Company or Holding Company. DHS is not
an "investment company" or an "affiliated person" of, or "principal
underwriter" or "promoter" for, an "investment company", within the
meaning of or subject to regulation under the Investment Company Act of
1940, as amended. The obtaining of the loans provided by Lender by DHS,
the application of the proceeds thereof by DHS and the consummation of
the transactions contemplated hereby or by Lender Documentation will
not violate any provision of such Act or any rule, regulation or order
issued by the Securities and Exchange Commission thereunder.
(h) Compliance with Laws. DHS is not in violation of any law,
rule or regulation (other than federal and state securities laws, as to
which no representation is made), or in default with respect to any
judgment, writ, injunction or decree of any governmental authority,
where such violation or default could result in a material adverse
effect on its business, operations, assets or financial or other
condition.
(i) Tax Returns. DHS has filed all federal, state and
local tax returns required to have been filed by it and paid all taxes
as shown to be due and payable on such returns or on any assessments
received by it.
(j) Incorporated Representations and Warranties. Each
of the representations and warranties of DHS set forth in this
Agreement or in the Lender Documentation or in connection therewith is
true and correct in all material respects.
(k) Disclosure. To the best of its knowledge, information and
belief, neither this Agreement nor any document, certificate or
financial statement furnished to SJMC or the Lender by DHS or on its
behalf in connection herewith contains any untrue statement of a
material fact or omission of any material fact.
8. If any of the following events shall occur (each an "Event of
Default"), SJMC shall be entitled to exercise the rights and remedies described
in paragraph 9 below:
(a) DHS shall fail to repay any amount due to SJMC
hereunder when due or to Lender under the Lender Documentation;
(b) DHS shall breach or fail to perform any of the covenants
or agreements set forth in this Agreement (other than as provided in
(a) above) or in any of the agreements and
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instruments described to Lender in connection with the Guaranteed
Obligations which breach or failure is not cured within fifteen (15)
calendar days after notice from SJMC to DHS;
(c) Any representation or warranty made by DHS herein or in
the Lender Documentation shall prove to have been incorrect in any
material respect when made;
(d) Any lien or security interest in the Collateral encumbered
hereby shall cease to be a valid and enforceable perfected security
interest in favor of the SJMC, or DHS shall so assert in writing, or
any of the Collateral shall be subject to any lien or security interest
other than as permitted hereunder or authorized by SJMC;
(e) An Insolvency Event (as defined in the Medical Mutual
Agreement) shall have occurred with respect to DHS;
(f) Any event or condition shall occur and be continuing which
permits any lender to DHS to declare any Material Indebtedness (as
defined in the Medical Mutual Agreement) of DHS for money borrowed to
become due and payable prior to its scheduled maturity date, or there
shall occur an acceleration of any of such indebtedness (including,
without limitation, any of the indebtedness of DHS to or guaranteed by
Medical Mutual);
Notwithstanding the foregoing, none of the events described above,
other than an event described in ( e) above, shall constitute an Event of
Default hereunder unless and until DHS shall have notice thereof and shall
have failed to cure such default within 30 days after notice; provided that
(i) DHS shall be deemed to have notice of any event described in (a) above, and
(ii) in the case of an event described in (f) above DHS shall be entitled to
cure such default only so long as the lender shall not have taken any action to
exercise any remedy against DHS other than the giving of a notice of a default
and a demand for payment thereof.
9. (a) In addition to all other rights and remedies provided by
law SJMC, on the occurrence of any Event of Default, may:
(i) Accelerate and call due any amounts due from DHS under
paragraph 2 above and all accrued interest and other sums due as of
the date of default;
(ii) Accelerate and prepay on DHS' behalf, and for the
account of DHS, any of the Guaranteed Obligations;
(iii) Foreclose or enforce all or any security interests,
liens, assignments, or pledges created hereunder;
(iv) Confess judgment or file suit against the Borrower on
the Note;
(v) File suit against the borrower on this Agreement;
(vi) Seek specific performance or injunctive relief to enforce
performance of the undertakings, duties, and agreements provided in
this Agreement, and that the instrument executed and delivered by DHS
in favor of SJMC in connection with the transactions contemplated
hereby, whether or not a remedy at law exists or is adequate; and
(vii) Exercise any rights of a secured creditor under the
Uniform Commercial Code, as adopted and amended in Maryland, including
the right to take possession of the Collateral without the use of
judicial process or hearing of any kind.
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(b) The rights and remedies provided in this Agreement or
otherwise under applicable laws shall be cumulative and the exercise of any
particular right or remedy shall not preclude the exercise of any rights or
remedies in addition to, or an alternative of, such right or remedy.
10. This Agreement shall be terminated, and the Borrower shall be
released from liability hereunder on the date which is the last to occur of: (a)
the full and final payment to SJMC of all amounts owed to SJMC pursuant to this
Agreement or (b) the date of expiration of the Guaranty.
11. No failure or delay on the part of SJMC to exercise any right,
power or privilege under this Agreement and no course of dealing between DHS,
SJMC, the Lender or any of their respective affiliates shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. To the extent
permitted by law, the rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which SJMC would
otherwise have pursuant to law or equity. No notice to or demand on any party in
any case shall entitle such party to any other or further Nortek or demand in
similar or other circumstances, or constitute a waiver of the right of the other
party to any other or further action in any circumstances without notice or
demand. In the event that the consent of SJMC is required under the terms
hereof, it is understood and agreed that except as otherwise provided expressly
herein, the determination whether to grant or withhold such consent shall be
made solely by SJMC in its absolute discretion.
12. This Agreement may not be amended, waived, supplemented, restated,
or otherwise modified except by written agreement signed by SJMC and DHS.
13. (a) DHS agrees to pay, and to hold SJMC harmless from all liability
for, any stamp taxes imposed by future changes in law (including interest and
penalties, and fees) which may be payable in connection with this Agreement or
the issuance of the Guaranty or any modification of any of the foregoing.
(b) DHS shall (i) indemnify and hold harmless SJMC and each
director, officer, employee and affiliate thereof from and against all losses,
claims, damages, expenses or liabilities to which SJMC or such director,
officer, employee or affiliate may become subject insofar as such losses,
claims, damages, expenses or liabilities (or actions, suits or proceedings
including any inquiry or investigation or claims in respect thereof) are caused
by or result from any errors or omissions of DHS hereunder and (ii) reimburse
the SJMC and each director, officer, employer or affiliate thereof upon their
demand, for any reasonable legal or other expense (including the reasonable
allocated costs of staff counsel) incurred in connection with the investigating,
preparing to defend or defending any such loss, claim, damage, liability, action
or claim; provided however, that DHS shall not be required to indemnify SJMC for
any claims, damages, losses, liabilities, costs or expenses to the extent, but
only to the extent, caused by the willful misconduct or gross negligence of such
person or entity. If any action is brought against SJMC or any other person
indemnified or intended to be indemnified pursuant to this paragraph, DHS shall,
if requested by SJMC or any such indemnified person, resist and defend such
action, suit or proceeding or cause the same to be resisted and defended by
counsel reasonably satisfactory to the person or persons indemnified or intended
to be indemnified. Each indemnified person shall, unless SJMC or other
indemnified person has made the request described in the preceding sentence and
such request has been complied with, have the right to employ its own counsel
(or staff counsel) to investigate and control the defense of any other matter
covered by such indemnify and the reasonable fees and expenses of such counsel
shall be at the expense of DHS.
(c) All obligations provided for in this paragraph herein
shall survive any termination of this Agreement and the Guaranty.
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14. This Agreement shall bind, and the benefits hereof shall inure to,
DHS and SJMC and their respective successors and assigns; provided that neither
may transfer or assign any or all of its rights and obligations hereunder
without the prior written consent of the other party.
15. All notices, demands, instructions, requests, consents and other
communications required or permitted to be given to or made upon any party
hereto or other entity or person referred to herein shall be in writing and
shall be personally delivered or sent by registered, certified or express mail,
postage prepaid, return receipt requested, or by facsimile transmission as
follows:
If to DHS:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attn: Paul A. Serini, Executive Vice President
Tel: (410) 654-5800/5801, Ext. 209
Fax: (410) 654-5807
with a copy to:
Venable, Baetjer and Howard, LLP
2 Hopkins Plaza
1800 Mercantile Bank & Trust Building
Baltimore, Maryland 21201
Attn: Bryson L. Cook, Esq.
Tel: (410) 244-7400
Fax: (410) 244-7742
If to SJMC:
St. Joseph Medical Center
7620 York Road
Towson, Maryland 21204
Attn: John W. Ellis, Chief Financial Officer
Tel: (410) 337-1202
Fax: (410) 337-1559
with a copy to:
Drinker Biddle & Reath
1100 PNB Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107
Attn: Charles B. Congdon, Esquire
Tel: (215) 988-2659
Fax: (215) 988-2757
16. All covenants, agreements, representations and warranties made by
DHS herein or other instruments prepared or delivered in connection with or
pursuant to this Agreement shall be considered to have been relied upon by SJMC
and shall survive the execution and delivery of this Agreement and the
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issuance of the Guaranty, regardless of any investigation made by SJMC or on
its behalf and, unless stated herein to survive for a longer period, shall
continue until such time as the Guaranty has been terminated and all
indebtedness hereunder shall have been paid in full and the commitment of SJMC
has been terminated.
17. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT REFERENCE TO ITS CONFLICT OF LAWS
PROVISIONS.
18. IF AN EVENT OF DEFAULT OCCURS HEREUNDER OR UNDER ANY OTHER DOCUMENT
EXECUTED BY DHS IN CONNECTION WITH THIS AGREEMENT, DHS DOES HEREBY AUTHORIZE AND
EMPOWER THE CLERK OR ANY ATTORNEY OF ANY COURT OF RECORD (INCLUDING FEDERAL
COURT, IF APPROPRIATE JURISDICTION EXISTS) AND CONFESS JUDGMENT IN FAVOR OF SJMC
AGAINST DHS FOR THE UNPAID PRINCIPAL BALANCE OF THE REPAYMENT AMOUNT, TOGETHER
WITH ALL ACCRUED AND UNPAID INTEREST THEREON INCLUDING LATE CHARGES, AND
TOGETHER WITH ALL COSTS OF SUIT AND ATTORNEYS' FEES IN AN AMOUNT EQUAL TO TWENTY
PERCENT (20%) OF THE OUTSTANDING AMOUNT DUE.
DHS' agreement to the provisions in this paragraph is evidenced by the
initials of the authorized officer of DHS, executing this Agreement on behalf of
DHS: __________.
19. DHS HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
20. (a) DHS hereby irrevocably and unconditionally submits for itself
and its property, to the non-exclusive jurisdiction of any Maryland State court
and Federal courts of the United States of America sitting in Maryland, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of such parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such State of Maryland or, to the extent permitted by laws, in
such Federal court. Each of such parties hereto agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(b) DHS hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement in any Maryland State or Federal court.
Each of the parties hereto hereby irrevocably waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the maintenance of
such action or proceeding in any such court.
(c) To the extent permitted by law, each party to this
Agreement irrevocably consents to service of process in the manner provided for
notices herein. Nothing in this Agreement will affect the right of any party to
this Agreement to serve process in any other manner permitted by law.
21. In the event any provision of this Agreement shall be held invalid
or unenforceable by any court of competent jurisdiction, the parties hereto
agree that such holding shall not invalidate or render unenforceable any other
provision hereof or thereof. The parties hereto further agree that the holding
by any court of competent jurisdiction that any remedy pursued by SJMC hereunder
is unavailable or unenforceable shall not affect in any way the ability of SJMC
to pursue any other remedy available to it.
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22. This Agreement completely sets forth the agreements between the
parties and fully supersedes all prior agreements, both written and oral,
relating to all matters set forth herein.
23. All references to the Medical Mutual Agreement herein or to any
term defined in the Medical Mutual Agreement shall mean and refer to the Medical
Mutual Agreement and the terms defined therein as originally executed and
delivered, a true and correct copy of which has been provided by DHS to SJMC,
without regard to any amendment, modification, supplement or other charge
thereto as may be agreed between DHS and Medical Mutual.
24. DHS hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement;
(b) SJMC has no fiduciary relationship to DHS and the
relationship between SJMC, on the one hand, and DHS, on the other hand,
is solely that of creditor and debtor.
25. SJMC and DHS shall cooperate and use their best efforts to secure
for DHS loans from the Lender in an aggregate principal amount of at least $10
million (including amounts necessary to refinance the Guaranteed Obligations)
prior to October 1, 1996. It is the intention and expectation of the parties
that SJMC will provide a loan guaranty of up to $10 million and, in connection
therewith, that the management of SJMC will undertake to obtain (to the extent
not already obtained) all required corporate approvals of such guaranty.
Very truly yours,
ST. JOSEPH MEDICAL CENTER, INC.
By: ______________________________
(Vice) President
Accepted and agreed as of
the date set forth above:
DOCTORS HEALTH SYSTEM, INC.
By: _______________________________
Chief Financial Officer
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CONSENT AND AGREEMENT OF MEDICAL MUTUAL
The undersigned, Medical Mutual Liability Insurance Society of
Maryland, hereby joins and consents in the foregoing agreement between Doctors
Health System, Inc. and St. Joseph Medical Center (the "Agreement"), and, in
consideration of, and reliance upon, the undertakings and agreements of the
parties in the Agreement (including the undertakings of SJMC and DHS in
paragraph 25 thereof), agrees as follows:
1. Medical Mutual hereby consents and agrees to the
granting by DHS of the liens and security interests set forth in
paragraph 4 of the Agreement;
2. Medical Mutual agrees and consents that the liens and
security interests of SJMC described in paragraph 4 of the Agreement
shall be of equal rank and priority with the liens and security
interests of Medical Mutual granted pursuant to the Medical Mutual
Agreement, and further agrees that Medical Mutual and SJMC shall
cooperate in the exercise of any remedies with respect to the
Collateral for the purpose of maximizing recovery to each of them. All
amounts recovered by Medical Mutual and SJMC upon the exercise of any
remedies shall be applied to the payment of amounts due to each of them
under the foregoing Agreement and the Medical Mutual Agreement,
respectively, pro rata in proportion to the outstanding principal
balances due to each of them.
3. Medical Mutual consents and agrees to the provisions
of paragraph 25 of the Agreement.
All capitalized terms used but not otherwise defined in this Consent
and Agreement shall have the meanings ascribed thereto in the Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Consent
and Agreement to be signed on its behalf this _______ day of August, 1996.
MEDICAL MUTUAL LIABILITY
INSURANCE OF MARYLAND
By: __________________________________
Acknowledged and agreed:
ST. JOSEPH MEDICAL CENTER, INC.
By: _________________________________
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Exhibit A
[Form of Promissory Note]
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Exhibit B
[Form of Financing Statement]
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Exhibit C
COLLATERAL ASSIGNMENT OF RIGHTS UNDER AGREEMENTS
THIS COLLATERAL ASSIGNMENT OF RIGHTS UNDER AGREEMENTS (this
"Assignment") is entered into as of this ______ day of August, 1996, by DOCTORS
HEALTH SYSTEM, INC., a Maryland corporation (the "Assignor"), for the benefit of
ST. JOSEPH MEDICAL CENTER, INC., a Maryland nonprofit corporation, its
successors and assigns ("SJMC").
Explanatory Statement
WHEREAS, the Assignor and SJMC have entered into an Agreement
of even date herewith (the "Agreement"), whereby the parties have agreed, among
other things, that SJMC will guarantee certain financial obligations of the
Assignor in consideration for which the Assignor will transfer and assign
certain rights and other assets of the Assignor to SJMC in order to secure the
obligations of the Assignor to SJMC that may arise from time to time (the
"Credit Enhancement Arrangement");
WHEREAS, the Assignor desires to assign all of its rights,
title and interest in and to, and remedies under, certain contracts more
particularly described in Schedule I hereto (collectively, the "Assigned
Contracts") rights; and
WHEREAS, the Assignor recognizes that SJMC is unwilling to
enter into the Credit Enhancement Arrangement unless this Assignment is executed
and delivered by the Assignor. The Assignor is willing to enter into this
Assignment so that SJMC will enter into the Credit Enhancement Arrangement.
NOW, THEREFORE, in consideration of the premises, to induce
SJMC to enter into the Credit Enhancement Arrangement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Assignor hereby covenants and agrees with SJMC as follows:
Agreement
1. Recitals. The recitals contained in the Explanatory Statement
are true and accurate in all material respects and are hereby incorporated into
this Assignment.
2. Defined Terms. All terms not defined herein shall have
the meaning ascribed in the Final Credit Enhancement Agreement of even date
herewith.
3. Collateral Assignment. For the purpose of securing all of the
Assignor's obligations to SJMC in connection with the Credit Enhancement
Arrangement, the Assignor hereby collaterally assigns to SJMC and grants to SJMC
a continuing security interest in and to all of the Assignor's rights in, under
and pursuant to the Assigned Contracts, including but not limited to any and all
rights or rights of enforcement, whether pertaining to the Assignor or third
parties and whenever arising or coming into existence, and further including all
of the proceeds thereof.
4. Representation and Warranties of the Assignor. The Assignor
represents and warrants that (a) no financing statement covering any of the
Collateral is or shall be on file in any public office or
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financing records, other than financing statements in favor of SJMC and
existing financing statements in favor of Medical Mutual Liability Insurance
Society of Maryland, and the Assignor is and will be the legal owner of all of
the Collateral, free and clear of all liens, security interests, encumbrances
and claims whatsoever; (b) the Assignor is duly authorized to enter into and
perform this Assignment; (c) the execution and performance by the Assignor of
this Assignment does not violate, breach or constitute a default under any
contract or agreement to which the Assignor is or may become a party or any
federal, state, county, city or municipal statute, rule, regulation, ordinance
or law; (d) this Assignment constitutes the valid and legally binding
obligations of the Assignor and is fully enforceable against the Assignor in
accordance with its terms; and (e) there is no Litigation and there are no
actions, suits, complaints or proceedings of any kind, whether administrative,
regulatory or otherwise, pending or threatened against the Assignor which
could result in any adverse change in its financial condition or which could
affect adversely its business, property, assets or ability to pay its
obligations to SJMC, and (f) none of the Assigned Contracts has been amended or
modified since its original dates of execution and delivery except as described
in Schedule I hereto.
5. Covenants of the Assignor. The Assignor covenants that (a) the
Assignor shall keep and maintain in accordance with generally accepted
accounting principles current, accurate and complete books and records with
respect to the Collateral and all proceeds of the Collateral, and the financial
condition of the Assignor, including such information as SJMC may from time to
time require; (b) the Assignor shall not sell, discount, assign, lease or
otherwise transfer or dispose of any of the Collateral without SJMC's prior
written consent, which consent shall be at the sole and absolute discretion of
SJMC; (c) the Assignor will not make any amendment subsequent to the date hereof
to any of the Assigned Contracts that materially adversely affects the value of
any of the Assigned Contracts or the rights of SJMC as Guarantor pursuant to the
Agreement without SJMC's prior written consent; (d) the Assignor shall permit
SJMC, and any of their agents and designees, at any reasonable time or times
during normal business hours, to enter upon any business premises of the
Assignor, to inspect all of the Assignor's books and records, to inspect the
Collateral and any other assets of the Assignor, to reproduce and copy all or
any part of any books and records of the Assignor or other documents in the
Assignor's possession, and to verify, by such means as SJMC shall determine
(including an audit of the Assignor's books and records), any and all
information relating to the obligations of the Assignor to SJMC and/or the
Collateral; (e) the Assignor shall immediately notify SJMC of the threat or
commencement of any litigation, action, suit or proceeding of any kind against
the Assignor or the occurrence of any event or circumstance which materially
adversely affects, or which could reasonably be deemed to affect materially
adversely, SJMC's security interest or any of the Collateral, including, but not
limited to, any damage to or loss or destruction of any books and records
relating to the Collateral; and (f) the Assignor shall immediately notify SJMC
of any event or circumstance which constitutes a default under this Assignment
or under any of the Assigned Contracts and of any material adverse change in the
Assignor's financial condition or business operations.
6. SJMC Not Obliged Under Assigned Contracts. SJMC shall have no
obligation or duty to perform any of the obligations of the Assignor under the
Assigned Contracts, all of which shall remain the sole and exclusive duty and
obligation of the Assignor. The Assignor agrees to fully and completely perform
all of the terms and provisions of the Assigned Contracts and otherwise satisfy
is obligations thereunder so that the rights hereby assigned to SJMC shall be
and remain fully and completely enforceable at all times.
7. SJMC May Enforce Rights Under Assigned Contracts. In the event of a
default by the Assignor with respect to any of its obligations to SJMC hereunder
or under the Credit Enhancement Arrangement or the occurrence or continuation of
such a default, SJMC may, subject to any period of notice and grace set forth in
the Credit Enhancement Agreement, enforce, either in its own name or in the name
of the Assignor, all rights of the Assignor under the Assigned Contracts and may
(a) bring suit to enforce any rights under the Assigned Contracts, (b)
compromise or settle any disputed claim as to rights under the Assigned
Contracts, (c) give releases or acquaintances of rights under the Assigned
Contracts,
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or (d) do any and all things necessary, convenient or proper to fully and
completely effectuate the collateral assignment of the rights under the
Assigned Contracts pursuant hereto. The Assignor hereby constitutes and appoints
SJMC or SJMC's designee as the Assignor's attorney-in-fact with full power
following an Event of Default in the Assignor's name, place and stead to do or
accomplish any of the aforementioned undertakings and to execute such documents
or instruments in the name or stead of the Assignor as may be necessary,
convenient or proper in SJMC's sole opinion. The aforementioned power of
attorney shall be a power of attorney coupled with an interest and irrevocable.
In the event any action is brought by SJMC to enforce any rights under the
Assigned Contracts, the Assignor agrees to cooperate fully with and assist SJMC
in the prosecution thereof.
8. Further Assurances. The Assignor agrees to execute and deliver to
SJMC at any time or times when requested by SJMC any financing statements,
amendment statements, security agreements, mortgages, assignments, activity
reports and such other documents as SJMC may request, in form satisfactory to
SJMC, in order to preserve, perfect and maintain the perfection of SJMC's
security interest and to consummate all transactions contemplated by this
Assignment.
9. Notices. All notices required hereunder shall be in writing,
delivered personally, by overnight delivery service or by registered or
certified mail, postage prepaid and return receipt requested, and shall be
deemed made when delivered and shall be properly addressed to the parties as
follows or as otherwise designated from time to time:
If to SJMC: St. Joseph Medical Center, Inc.
7620 York Road
Towson, Maryland 21204
Attn: John W. Ellis, CFO
with a copy to: Drinker Biddle & Reath
1100 PNB Building
1345 Chestnut Street
Philadelphia, PA 19107
Attn: Charles B. Congdon, Esquire
If to the Assignor: Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
10. Binding Obligations. This Assignment shall be binding upon
the Assignor and the Assignor's successors and assigns, and shall benefit SJMC
and SJMC's successors and assigns, including any party participating in the
Credit Enhancement Arrangement.
11. Final Agreement. This Assignment constitutes the final and
entire agreement with respect to the collateral assignment of rights under the
Assigned Contracts from the Assignor to SJMC, and any term, covenant or
provision not set forth herein shall not be considered a part of this
Assignment.
12. Amendment. This Assignment may only be amended by a writing
executed by the party to be bound by the amendment.
13. Costs and Expenses. The Assignor agrees that all costs and expenses
paid or incurred by SJMC, including reasonable attorney's fees, court costs and
charges paid to public officials, in connection with perfecting, protecting,
preserving or extending SJMC's security interest, collecting the obligations of
the Assignor to SJMC, or enforcing or exercising any rights or remedies of SJMC
under
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this Assignment or the Credit Enhancement Agreement shall be part of the
Assignor's obligations, secured by SJMC's security interest and payable to SJMC
upon demand.
14. Choice of Law. The laws of the state of Maryland, excluding,
however, conflict of law or principles, shall govern and be applied to determine
all issues relating to this Assignment and the rights and obligations of the
parties hereto, including the validity, construction, interpretation and
enforceability of this Assignment and its various provisions and the
consequences and legal effect of all transactions and events which resulted in
the execution of this Assignment or which occurred or were to occur as a direct
or indirect result of this Assignment having been executed.
15. Consent to Jurisdiction; Assignment as to Venue. The Assignor
irrevocably consents to the non-exclusive jurisdiction of the courts of the
State of Maryland and of the United States District Court for the District of
Maryland, if a basis for federal jurisdiction exists. The Assignor agrees that
venue shall be proper in any circuit court of the State of Maryland selected by
SJMC or in the United States District Court for the District of Maryland if a
basis for federal jurisdiction exists and waives any right to object to the
maintenance of a suit in any of the state or federal courts of the State of
Maryland on the basis of improper venue or of inconvenience of forum.
16. Waiver of Jury Trial. The Assignor (by its execution of this
Assignment) and SJMC (by its acceptance of this Assignment) agree that any suit,
action or proceeding whether claim or counterclaim, brought or instituted by the
Assignor, SJMC or any successor or assign of the Assignor or SJMC, with respect
to this Assignment or which in any way relates, directly or indirectly, to this
Assignment, shall be tried only by a court and not by a jury. THE ASSIGNOR AND
SJMC HEREBY EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY SUCH
SUIT, ACTION OR PROCEEDING.
IN WITNESS WHEREOF, the Assignor executes this Assignment with the
specific intention that this Assignment constitutes a document under seal.
WITNESS/ATTEST: ASSIGNOR:
DOCTORS HEALTH SYSTEM, INC.
__________________________________ By: ___________________________(SEAL)
Name:
Title:
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SCHEDULE I
Schedule of Assigned Contracts
1. Amended and Restated Physician Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Baltimore Medical Group, LLC.
2. Amended and Restated Physician Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Carroll Medical Group, LLC.
3. Amended and Restated Physicians Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Cumberland Valley Medical Group, LLC.
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Exhibit D
Schedule of Assigned Contracts
1. Amended and Restated Physician Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Baltimore Medical Group, LLC.
2. Amended and Restated Physician Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Carroll Medical Group, LLC.
3. Amended and Restated Physicians Services Organization Agreement
dated May 1, 1996, by and between Doctors Health System, Inc. and
Cumberland Valley Medical Group, LLC.
18
Exhibit 10.43
EXECUTION COPY
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, entered into to be effective on May
1, 1996 (the "Effective Date"), between DOCTORS HEALTH SYSTEM, INC., a
Maryland corporation (the "Company"), and JOHN R. DWYER, Jr. (the "Executive").
_____________
Background
_____________
The Company is engaged, directly or through service contracts
with others, in the business of (i) negotiating contracts to provide health
care services and products, (ii) managing health care providers and (iii)
providing health care services and products (the "Business").
The Executive is experienced in administrative, financial and
business matters relating to the Business and in negotiating and implementing
transactions relating to the Business.
The Company desires to hire Executive, and the Executive
desires to work for the Company, on the terms and conditions set forth in this
Agreement.
1. Employment, Duties and Acceptance.
1.1 Employment. (a) Effective upon the Effective
Date, the Company shall employ the Executive as its Executive Vice President,
Treasurer and Chief Financial Officer. In such capacities, the Executive
shall report directly to and be subject to the supervision and direction of
the President and Chief Executive Officer of the Company (the "CEO"). The
Executive shall have overall responsibility and authority for managing all
financial affairs of the Company. The Executive will also, subject to the
supervision and direction of the CEO, assist the CEO and at the CEO's request
other officers of the Company in such aspects of the Company's commercial
relationships with hospitals, insurers, specialists, physicians employed by
affiliates of the Company and others as may be requested by the CEO. Whether
or not the Executive is then serving as a member of the Board of Directors of
the Company, the Executive shall have the right to attend and participate
in the discussions at all of the meetings of the Company's Board of
Directors, including meetings of the Executive Committee. thereof. The
Executive shall perform his duties faithfully and to the best of his abilities.
<PAGE>
(b) The Executive shall, subject to
Section 1.1(c) hereof, devote his full working time and creative energies to
the performance of his duties hereunder and will at all times devote such
additional time and efforts as are reasonably sufficient for fulfilling
the significant responsibilities entrusted to him. So long as such
activities, in the aggregate, do not interfere with the performance by the
Executive of his duties hereunder: (i) the Executive shall be permitted a
reasonable amount of time to supervise his personal, passive, investments;
(ii) the Executive shall be permitted a reasonable amount of time to participate
(as board member, officer or volunteer) in civic, political and charitable
activities; (iii) the Executive shall be permitted to deliver lectures to
and teach at educational institutions and business organizations; and (iv)
subject to the provisions of Section 5 hereof, the Executive may serve as a
director or trustee of one or more corporations not affiliated with the
Company. Until April 30, 1997, the Executive shall be permitted to spend
approximately fifteen (15) hours per month to wind-up the affairs of his
clients from the firm of Graham, Hamilton and Dwyer and active investment
activities.
(c) The Company shall use its commercially
reasonable best efforts to ensure that the Executive is nominated to serve as a
member of the Board of Directors of the Company.
1.2 Place of Employment. The Executive's principal
place of employment shall be in the Baltimore, Maryland metropolitan area,
subject to such travel as may be reasonably required by his employment pursuant
to the terms hereof. The Executive shall not be required to relocate outside
of the Washington, D.C.-Baltimore, Maryland metropolitan area during the Term
unless the Company provides relocation benefits acceptable to the Executive in
his sole discretion.
2. Term of Employment. The term of the Executive's employment
under this Agreement (the "Term") shall commence on the Effective Date and shall
end on April 30, 2000, unless sooner terminated, or later extended, as herein
provided. Not later than February 1, 2000 (and each February 1 of each calendar
year during any Extension Period (defined below)), the Company and the
Executive shall enter into good faith negotiations to determine whether and on
what terms to extend or renew this Agreement beyond April 1 of such calendar
year. If by October 15, 1999 (and October 15 of any calendar year occurring
during an Extension Period) either party gives written notice to the other of
its desire to terminate this Agreement as of April 1, then this Agreement shall
so terminate, and the Executive shall be permitted a reasonable amount of time
during the balance of the Term within which to explore alternative employment
opportunities. If no such written notice to terminate is given by either party
by October 15, 1999 (or by October 15 of any calendar year occurring during an
Extension Period), then the Term shall, without further act or deed,
automatically be extended upon the same terms and conditions as previously
in effect, for an additional 12 month period, commencing on May 1 of the
applicable calendar year and ending on April 30 of the immediately following
calendar year. Each such 12 month extension during the Term is referred to
herein as an "Extension Period", and shall constitute a
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part of the Term of this Agreement for all purposes, including the provisions
regarding extensions contained in this Section 2.
3. Compensation.
3.1 Salary. As compensation for all services to be
rendered pursuant to this Agreement, the Company shall pay to the Executive,
during the Term, a "Base Salary" (as defined in this Section 3.1) less such
deductions as shall be required to be withheld by applicable laws and
regulations. The "Base Salary" shall be a salary of $195,000 per annum. The
Base Salary shall accrue from and after the Effective Time, and shall be payable
during the Term, in arrears in equal bi-weekly installments.
3.2 Bonus Pool. (a) Beginning with the calendar
year 1996, the Company shall establish for the benefit of the Executive and
certain other Company employees a "Bonus Pool" with respect to each calendar
year, or portion thereof, that occurs during the Term (each a "Bonus Year").
(b) During the Term, except as otherwise
provided herein, the Executive shall be entitled to participate in the Bonus
Pool to the extent agreed to between the Executive and the CEO, provided,
however, that for calendar years 1996 and 1997, the Executive's bonus shall be
determined in accordance with Schedule 3.2(b) attached hereto. On or before
the fifteenth day of December in each year during the term beginning with
December 15, 1997, the Executive and the CEO shall agree upon the performance
standards and potential awards for the Executive applicable to the Bonus Year
beginning on the next following January 1. All amounts allocated to the
Executive pursuant to this Section 3.2 shall become payable to the Executive
and are hereinafter collectively referred to as the "Bonus". The amount of the
Executive's Bonus for each Bonus Year, if any, shall be determined by the first
day of March, and paid by the fifteenth day of March, next following the Bonus
Year for which the Bonus is payable.
(c) Upon any Change in Control of the
Company (as herein defined), all accrued Bonus amounts reflected on the
Company's internally prepared financial statements shall become payable to
the Executive.
3.3 Stock Options. As soon practicable after
the date of this Agreement, the Company will grant to the Executive qualified
incentive stock options (the "Options") to purchase 70, 000 shares of the
Company's Class A Common Stock (the "Option Shares") pursuant to the
Company's Omnibus Stock Option Plan or other stock benefit plan (the
"Plan"). The exercise price of such Options shall be 11.00 per share,
representing the fairmarket value of the Option Shares. In addition to
the 70,000 options issued to the Executive on the date hereof, the Company
is contemplating, subject to approval of the appropriate committee of the
Board of Directors, the issuance of an additional 30,000 options to the
Executive, which options will vest over at least a
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four year period and be granted with or without a significant exercise price
and with significant conditions to exercise based upon earnings and other
criteria.
(b) The Executive agrees to and shall execute a
stockholder's agreement restricting his ability to transfer shares of the
Company's Class A Common Stock, or any other shares of the Company's stock
which the Executive may own or in which the Executive may have an interest, in
form substantially similar to the stockholders agreement attached hereto as
Appendix A (the "Stockholder's Agreement").
(c) Nothing in this Section 3.3 shall adversely
effect the Executive's right to participate, together with other key employees
of the Company, in any future grants of options, stock or other equity related
vehicles by the Company pursuant to the Plan as in effect from time to time.
All such future grants shall be subject to the terms of the Plan as in effect at
the time of grant.
3.4. Withholding. The Company is authorized
to withhold from the amount of any Salary, Bonuses, and any other things of
value paid to or for the benefit of the Executive, all sums authorized by the
Executive or required to be withheld by law, court decree, or executive order,
including (but not limited to) such things as income taxes, employment taxes,
and employee contributions to fringe benefit plans sponsored by the Company.
3.5 Participation in Executive Benefit Plans.
The Executive shall be permitted during the Term, if and to the extent legally
eligible, to participate in any group life, health, hospitalization or
disability insurance plan, health program, automobile allowance, pension
plan or similar benefit plan of the Company which may be available to other
comparable executives or professional employees, including physicians, of the
Company generally on the same terms as such other executives. All group life,
health, hospitalization and disability plan or policy premiums applicable to
participation in such plans or policies by the Executive and his wife and
children (subject to reasonable policy and plan limitations) shall be paid by
the Company.
3.6 Vacation. The Executive will receive at
least 4 weeks vacation per year, to be scheduled and taken at the Executive's
option at such times as his duties may permit. Should the Company's policy
provide for more vacation to comparable executives the Executive will be
accorded such higher vacation. Unused vacation time shall not be cumulated or
carried over nor shall the Executive receive any compensation for unused
vacation time.
3.7 Expenses. Subject to such policies as may
from time to time be established by the Board, the Company shall pay or
reimburse the Executive for all ordinary, necessary and reasonable expenses
(including, without limitation, travel, meetings, dues, subscriptions, fees,
educational expenses, computer equipment, mobile telephones, professional
insurance, and the like) actually incurred or paid by the
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Executive during the Term in the performance of the Executive's services
under this Agreement (including, without limitation, expenses incident to
attendance at board or management meetings of the Company, or its Subsidiaries
or Affiliates), upon presentation of expense statements or vouchers or such
other supporting information as the Company may require.
4. Termination.
4.1 Termination upon Death. If the Executive dies
during the Term, the Executive's employment shall terminate as of the date of
death of the Executive.
4.2 Termination upon Disability. Notwithstanding
any other provision of this Agreement, if during the Term the Executive
becomes physically, mentally or emotionally disabled, whether totally or
partially, as determined by an independent qualified physician, so that the
Executive is, in the good faith determination of the Board, substantially
unable to perform his services hereunder for (i) a period of three consecutive
months, or (ii) shorter periods aggregating three months during any twelve month
period, the Company may at any time after the last day of the three consecutive
months of disability or on the last day of the shorter period aggregating three
months of disability, by written notice to the Executive, terminate the
Executive's employment hereunder as of the date such written notice becomes
effective.
4.3 Termination at Election of Company.
(a) Notwithstanding any other provision of
this Agreement, the Company may terminate the Executive's employment hereunder
at any time upon: (i) the continued failure or refusal by, or manifest
inability of, the Executive to perform his duties after reasonable prior notice
to the Executive; (ii) the Executive engaging in any acts or omissions
involving dishonesty or acts or omissions that demonstrate moral turpitude;
(iii) the conviction of the Executive of a felony after all appeals have been
exhausted; and (iv) the Executive engaging in intentional acts or omissions
that demonstrably and materially injure the business and affairs of the Company,
monetarily or otherwise.
(b) In addition to the Company's right
to terminate the Executive's employment pursuant to Section 4.3(a), and
notwithstanding any other provision of this Agreement, the Company may, for
any or for no reason, terminate the Executive's employment upon 60 days prior
written notice to the Executive.
4.4 Termination by the Executive.
(a) Provided that the Executive has
delivered to the Company at least sixty (60) days prior written notice setting
forth in reasonable detail any alleged material breach by the Company of this
Agreement or acts or omissions
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engaged in by the Company constituting "constructive termination" of the
Executive's employment with the Company, which breach, acts or omissions have
not been cured by the Company as of the end of such period to the reasonable
satisfaction of the Executive, then, notwithstanding any other provision of this
Agreement, the Executive shall be entitled to terminate his employment for such
reasons, effective immediately upon the delivery by the Executive to the
Company of a notice to the effect that such breach, acts or omissions have not
been cured to the reasonable satisfaction of the Executive; provided, however,
that if such constructive termination is caused by the Executive's incapacity
or inability to serve due to a disability of the type described in Section
4.2 above and the Company elects to terminate the Executive pursuant to the
provisions of Section 4.2, the Executive shall, for purposes of this Agreement,
be deemed to have been terminated pursuant to the provisions of Section 4.2
and not of this Section 4.4.
(b) For purposes of this Section 4.4,
"constructive termination" shall be limited to (A) Stewart B. Gold's
employment as CEO of the Company terminating or the Executive no longer is
reporting directly to Stewart B. Gold, (B) those circumstances where (i) the
Company creates working conditions that a reasonable person in the Executive's
position would consider unreasonable or intolerable which is not remedied by
the Company within sixty (60) days after notice thereof given by the Executive;
and (ii) such working conditions are not generally applicable to other
executives of the Company; (C) a combination, consolidation or merger where the
Company is not the survivor, any sale or issuance of Company securities that
places a majority of the voting power of shares in the control of persons or
entities not having such control on the date hereof, or any sale, exchange or
other disposition of all or substantially all of the Company's assets (each a
"Change in Control") and (D) the Executive is not elected to the Company's Board
of Directors.
4.5 Compensation and Benefits Following Termination
of Employment.
(a) In the event of termination of the
Executive's employment for any reason other than a termination pursuant to
Section 4.3(b) or Section 4.4 (or a termination caused merely by the
expiration of the Term): (i) all compensation and other benefits payable or
provided hereunder shall cease as of the date of termination; (ii) Base Salary
(if any) then payable or accrued through the date of termination; (iii) all
accrued benefits (if any) then payable to the Executive pursuant to the
terms of any plans or arrangements referred to in Section 3.5 shall be paid
to the Executive (or to his heirs, legatees and/or legal representatives)
through the date of termination; and (iv) except in the event of termination
due to death (Section 4.1) or Disability (Section 4.2), any Options that
remain unexcercised and any shares of stock that remain unvested pursuant to
Section 3.3 shall immediately be forfeited to the Company. In the event
of termination due to death (Section 4.1) or Disability (Section 4.2), any
Options that remain unexcercised and any shares of stock that remain unvested
pursuant to Section 3.3 shall immediately be excercisable by the Executive
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(or his heirs, legatees and/or legal representatives), and fully vested in
the Executive, and upon issuance all such shares shall be subject to the
Company's Stockholders Agreement then in effect.
(b) In the event of termination of the
Executive's employment pursuant to Section 4.3(b) or Section 4.4 (each a
"Wrongful Termination"), the Executive (or, in the event of the Executive's
subsequent death or disability, his heirs, legatees and/or legal
representatives) shall receive, at the times and as the same would have been
payable hereunder if the Executive's employment had not been so terminated,
each of the following payments and benefits:
(i) all accrued benefits (if
any) then payable to the Executive pursuant to the terms of any plans or
arrangements referred to in Section 3.5;
(ii) with respect to any
periods on or prior to April 1, 1997, all payments of the full Base Salary
which would have been due to the Executive through April 1, 1997, at the
times such payments would otherwise be made, all as if this Agreement were still
in effect;
(iii) with respect to any periods
after April 1, 1997, 100% of the Base Salary which would have been due to
the Executive through the remainder of the Term, at the times such payments
would otherwise be made, all as if this Agreement were still in effect;
(iv) with respect to any
periods on or prior to April1, 1997, all payments in respect of all Bonuses
that the Executive would have received (determined by taking the average of
the amounts of the Bonuses actually received by the Executive, if any,
for the Bonus Years immediately preceding the calendar year during which the
Executive's employment is terminated, or such lesser number of Bonus years
during the Term; if the Executive's employment is terminated during 1996 prior
to determination of a Bonus for the 1996 Bonus Year, it shall be assumed
that the Executive would have received a Bonus calculated in accordance
with Schedule 3.2(b) for the 1996 Bonus Year) with respect to each calendar
year, or each portion thereof, through April 1, 1997, subject to the
provisions of Section 3.2(b) hereof, at the times such payments would
otherwise be made, all as if this Agreement were still in effect and subject
to the provisions of Section 3.2(c) hereof;
(v) with respect to any
periods after April 1, 1997, 50% of the payments in respect of all Bonuses
that the Executive would have received (determined by taking the average of
the amounts of the Bonuses actually received by the Executive, if any, for
the three Bonus years immediately preceding the calendar year during which the
Executives employment is terminated, or such lesser number of Bonus years
during the Term) with respect to each calendar year, or each portion thereof,
through the remainder of the Term, subject to the provisions of Section 3.2(b)
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hereof, at the times such payments would otherwise be made, all as if this
Agreement were still in effect and subject to the provisions of Section 3.2(c)
hereof;
(vi) subject to the provisions
of the Company's Amended and Restated Articles (as in effect on the date
hereof), the Company's Bylaws (as in effect on the date hereof), the
Stockholder's Agreement, and, if issued under a Plan, any Plan then in
effect, any Options that remain unexcercised and any shares of stock that
remain unvested pursuant to Section 3.3 shall immediately (and thereafter) be
fully excercisable and vest in the Executive and no longer be subject to
forfeiture.
(c) In the event of termination under
Section 4.2 (disability), the Executive or his legal representative, as the
case may be, shall, in addition to such other payments benefits and rights as
may be due from the Company hereunder, be entitled to receive from insurers
the proceeds of any disability policies maintained by the Company and payable
to the Executive.
5. Certain Covenants of the Executive.
5.1 Necessity for Covenants. The Executive
acknowledges that (i) the Company, its Subsidiaries and its Affiliates (as
defined in Section 5.2) are engaged in the business, directly or through
service contracts with others, of providing primary and specialized medical
and related health care services and related products (the "Company
Business"), and will in the future be engaged in the Company Business;
(ii) his employment pursuant to this Agreement will give him access to
customers and suppliers of, and trade secrets of and confidential information
concerning, the Company, its Subsidiaries and its Affiliates; and (iii) the
agreements and covenants contained in this Section 5 are essential to protect
the business and goodwill of the Company, its Subsidiaries and its Affiliates.
In order to induce the Company to enter into this Agreement and pay the
compensation and other benefits at the levels requested by the Executive, the
Executive enters into the following covenants:
5.2 Definitions.
(a) For purposes of Sections 5.3
through 5.8 only, the term "Company" shall include the Company and all of the
Company's, Subsidiaries and Affiliates.
(b) "Provider" shall mean any health
care service provider or Affiliate thereof to whom the Company provided
management or other services.
(c) "Payor" means any insurer,
employer, health maintenance organization, preferred provider organization,
health benefit plan or other entity or organization to which, or to whose
members, insured's, employees, enrollees,
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beneficiaries or other persons affiliated with it (collectively
"Beneficiaries"), the Company provides services or products.
(d) "Service Area" means the
geographic area in which the Company provides health care services and in
which the Beneficiaries of those services generally reside, which shall
include all areas within a 25 mile radius of the site of any Provider's office.
(e) "Subsidiary" means any person or
entity in which the Company owns, beneficially or otherwise, an equity interest
of more than 50%.
(f) "Affiliate" means a Subsidiary of
the Company; a person or entity which is owned, controlled, or operated by
the Company; any person owning an equity interest in the Company; any person
who has appointed the Company as its exclusive agent for the provision of
professional services and the collection of revenues therefrom; and any
partner, member, employee, owner or agent of any Affiliate and any person or
entity which is under common ownership, control or operation with the specified
person or entity.
5.3 Restrictions. During the Term and, if
the Executive's employment is terminated other than pursuant to Sections
4.3(b) or 4.4 hereof or upon expiration of the Term for any reason other than
Section 4, for a period of twelve (12) months after the Executive's employment
hereunder is terminated (the "Termination Date") (the "Restricted Period"),
the Executive shall not, directly or indirectly, for himself or on behalf of
any other person, firm, corporation or other entity, whether as a principal,
agent, employee, stockholder, partner, officer, member, director, sole
proprietor, or otherwise:
(a) call upon or solicit any Provider
for the purpose of persuading the Provider to engage the Executive or any
other person, firm, corporation or other entity to provide services which are
the same or similar to those the Company provided to the Provider;
(b) call upon or solicit any Payor
for the purpose of persuading the Payor to engage any person or entity
other that the Company to provide health care services to the Payor with
respect to any of its Beneficiaries in the Service Area;
(c) solicit, participate in or promote
the solicitation of any person who was employed by the Company or a Provider
at any time during the twelve (12) months preceding the Termination Date to
leave the employ of the Company, or hire or engage any of those persons;
(d) make any disparaging remarks about
the Company's business, services or personnel;
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(e) interfere in any way with the
Company's business, prospects or personnel; or
(f) become affiliated with or, subject
to Section 5.16 hereof, render services to any person engaged in any
business that competes with the Company Business within the Service Area,
directly or indirectly, in any capacity, including, without limitation, as an
individual, partner, shareholder, officer, director, principal, agent, employee,
trustee or consultant; provided, however, that the Executive may own, directly
or indirectly, solely as an investment, securities which are publicly traded if
the Executive (a) is not a controlling person of, or a member of a group which
controls, the issuer and (b) does not, directly or indirectly, own 5% or more
of any class of securities of the issuer.
5.4 Trade Secrets and Confidential Information
5.4.1 Trade Secrets Defined. The term
"Trade Secrets," as used in this Agreement, includes, without limitation,
(i) all information concerning billing practices and procedures of the Company,
(ii) the rates and amounts that the Company pays to its personnel, (iii)
information about the Company's contracts with insurers, health maintenance
organizations, employers, and other payors, (iv) all formulae, compilations,
programs, devices, lists, methods, techniques or processes of the Company, and
(v) all other information of the Company that would be deemed to be "trade
secrets" within the meaning of the Maryland Uniform Trade Secrets Act (the
"Act").
5.4.2 Confidential Information Defined.
Any other information not qualifying as a Trade Secret, but relating to the
business of the Company which is disclosed by the Company to the Executive, or
is discovered by the Executive in the course of employment, is Confidential
Information.
5.4.3 Duty to Maintain Secrecy and
Confidentiality. During the Period of the Executive's employment with the
Company, the Executive shall maintain the secrecy and confidentiality of the
Trade Secrets and the Confidential Information and shall not (i) divulge,
furnish or make accessible to anyone or in any way or use, for his own benefit
or for the benefit of any other individual firm or entity (other than in the
ordinary course of the Company's business), any Trade Secret or Confidential
Information; (ii) take or permit any action to be taken which would reduce
the value of the Trade Secrets or Confidential information to the Company;
or (iii) otherwise misappropriate or suffer the misappropriation of the
Trade Secrets or the Confidential information, within the meaning of the
Act. After Termination Date, Executive shall continue to maintain the
secrecy and confidentiality of such information, but only to the extent
that the Executive is prohibited from directly or indirectly competing with
Company pursuant to the provisions of Section 5.3.
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5.4.4 Information Which is Publicly
Known. Notwithstanding anything herein to the contrary, the obligations of
secrecy and confidentiality set forth herein shall not apply to any
information which is now generally publicly known or which subsequently
becomes generally publicly known other than as a direct or indirect result of
the breach of this Agreement by the Executive, or which is required by law or
order of any court to be disclosed.
5.5 Property of the Company. All memoranda,
notes, lists, records and other documents or papers (and all copies
thereof), including but not limited to, such items stored in computer
memories, on microfiche or by any other means, made or compiled by or on
behalf of the Executive, or made available to the Executive concerning
the Company Business, are and shall be the property of the Company and shall
be delivered to the Company promptly upon the termination of the Executive's
employment with the Company or at any other time on request; provided however,
that the Executive may inspect during normal business hours such records as
shall be necessary for the purpose of assisting the Executive to file, or
prepare for an audit of, his personal income tax returns.
5.6 Executive's Ideas, Etc. All inventions,
prototypes, discoveries, improvements, innovations and the like ("Inventions")
and all works of original authorship or images that are fixed in any tangible
medium of expression and all copies thereof ("Works") which are designed,
created or developed by Executive, solely or in conjunction with others, in
the course of performance of the Executive's duties which relate to the
Company Business, shall be made or conceived for the exclusive benefit of and
shall be the exclusive property of the Company. The Executive shall
immediately notify the Company upon the design, creation or development of
all Inventions and Works. At any time thereafter, the Executive, at the
request and expense of the Company, shall execute and deliver to the Company
all documents or instruments which may be necessary to secure or perfect the
Company's title to or interest in the Inventions and Works, including but not
limited to applications for letters of patent, and extensions, continuations
or reissues thereof, applications for copyrights and documents or instruments
of assignment or transfer. All Works are agreed and stipulated to be "works
made for hire," as that term is used and understood within the Copyright Act
of 1976, as amended. To the extent any Works are not deemed to be works made
for hire as defined above, and to the extent that title to or ownership of
any Invention or Work and all other rights therein are not otherwise vested
exclusively in the Company, the Executive shall, without further consideration
but at the expense of the Company, assign and transfer to the Company the
Executive's entire right, title and interest (including copyrights and patents)
in or to those Inventions and Works.
5.7 Rights and Remedies Upon Breach. If the
Executive breaches, or threatens to commit a breach of, any of the provisions
of Sections 5.1 through 5.6 (the "Restrictive Covenants"), the Company shall,
in addition to its right immediately to terminate this Agreement, have the
right and remedy (which right and remedy shall be independent of others and
severally enforceable, and which shall be in
11
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addition to, and not in lieu of, any other rights and remedies available
to the Company under law or in equity) to have the Restrictive Covenants
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach could cause
irreparable injury to the Company or its Affiliates and that money damages may
not provide adequate remedy to the Company.
5.8 Covenants Currently Binding Executive. The
Executive warrants that his employment by the Company will not (a) violate any
non-disclosure agreements, covenants against competition, or other restrictive
covenants made by the Executive to or for the benefit of any previous employer
or partner, or (b) violate or constitute a breach or default under, any
statute, law, judgment, order, decree, writ, injunction, deed, instrument,
contract, lease, license or permit to which the Executive is a party or by
which the Executive is bound.
5.9 Litigation. There is no litigation,
proceeding or investigation of any nature (either civil or criminal) which is
pending or, to the best of the Executive's knowledge, threatened against or
affecting the Executive and which would adversely affect his ability to
substantially perform the duties herein.
5.10 Review. The Executive has received or been
given the opportunity to review the provisions of this Agreement, and the
meaning and effect of each provision, with independent legal counsel of the
Executive's choosing.
5.11 Severability of Covenants. The Executive
acknowledges and agrees that the Restrictive Covenants are reasonable and
valid in geographical and temporal scope and in all respects. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall
not thereby be affected and shall be given full effect, without regard to the
invalid portions.
5.12 Blue-Penciling. If any court determines that
any of the Restrictive Covenants, or any part thereof, is unenforceable
because of the duration or geographic scope of such provision, such court shall
have the power to reduce the duration or scope of such provision, as the
case may be, and, in its reduced form, such provision shall then be enforceable
and shall be enforced. If any such court declines to so revise such covenant,
the parties agree to negotiate in good faith a modification that will make such
duration or scope enforceable.
5.13 Enforceability in Jurisdictions. The
parties intend to and hereby confer jurisdiction to enforce the Restrictive
Covenants upon the courts of any jurisdiction within the geographical scope
of such Covenants. If the courts of any one or more of such jurisdictions
hold any Restrictive Covenant unenforceable by reason of the breadth of such
scope or otherwise, it is the intention of the parties that such determination
not bar or in any way affect the Company's right to the relief provided above
in the courts of any other jurisdiction within the geographical scope of such
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Covenants, as to breaches of such Covenants in such other respective
jurisdictions, such Covenants as they relate to each jurisdiction being, for
this purpose, severable into diverse and independent covenants.
5.14 Extension. If the Executive violates any
Restrictive Covenant, the Company shall not be deprived of the full benefit
of the period of the covenant. Accordingly, the duration of that covenant
shall be extended by the period of any violation of that covenant.
5.15 Remedies. The Company shall be entitled
to injunctive or other equitable relief because it will be caused irreparable
injury and damage by a breach of the provisions of any of the Restrictive
Covenants. The right to injunctive relief shall include the right to both
preliminary and permanent injunctions. The Company shall not be required to
post a bond or other similar assurance if it brings an action to enforce the
provisions of any of the Restrictive Covenants. The Company's right to
equitable relief shall not preclude any other rights or remedies which the
Company may have, all of which rights and remedies are cumulative.
5.16 Scope of Restrictions. The parties
expressly acknowledge and agree that nothing contained in this Section 5
shall preclude the Executive from engaging in or limit the Executive's
ability to serve as investment banker, financial consultant, merchant banker or
attorney, as a member of, stockholder or partner in or employee of a
partnership, professional corporation or other entity performing such services
unless such services directly or indirectly or materially are adverse to the
interests of the Company.
6. Dispute Resolution.
6.1 Costs of Litigation. If either party files
suit or brings an arbitration proceeding to enforce its rights under this
Agreement, the prevailing party shall be entitled to recover from the other
party all expenses incurred by it in preparing for and in trying the case,
including, but not limited to, investigative costs, court costs and reasonable
attorney's fees.
6.2 Consent to Jurisdiction. The parties submit
to the jurisdiction and venue of the courts of the State of Maryland.
6.3 No Jury Trial. NEITHER PARTY SHALL ELECT A
TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS AGREEMENT.
6.4 Arbitration. Any dispute between the Company
and the Executive concerning any part of the Executive's compensation arising
under Section 3 or Section 4 hereof (including the amount of the Bonus Pool)
shall be resolved by binding arbitration pursuant to the terms of Schedule
6.4, attached hereto as a part
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hereof. Any other dispute arising hereunder may, if all parties to such
dispute expressly agree in writing, be so resolved.
7. Other Provisions.
7.1 Notices. Any notice or other communication
required or which may be given hereunder shall be in writing and shall be
delivered personally, telegraphed, telexed, sent by facsimile transmission
or sent by certified, registered or express mail, postage paid, and shall be
deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, four days after the date of mailing, as
follows:
(i) if to the Company, to:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attention: President and CEO
(ii) if to the Executive, to:
John R. Dwyer, Jr.
8904 Harness Trail
Potomac, MD 20854
Any party may by notice given in accordance with this
Section to the other party designate another address or person for receipt of
notices hereunder.
7.2 Entire Agreement. This Agreement contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings, written or
oral, with respect thereto, including the Prior Agreement.
7.3 Waivers and Amendments. This Agreement may
be amended, modified, superseded, canceled, renewed or extended, and the
terms and conditions hereof may be waived, only by a written instrument
signed by the Executive and a duly authorized officer of the Company (each,
in such capacity, a party) or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any right, power or privilege
hereunder, nor any single or partial exercise of any right, power or
privilege hereunder, preclude any
14
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other or further exercise thereof or the exercise of any other right, power or
privilege hereunder.
7.4 Governing Law. This Agreement has been
negotiated and is to be performed in the State of Maryland, and shall be
governed and construed in accordance with the laws of the State of Maryland
applicable to agreements made and to be performed entirely within such State.
7.5 Counterparts. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.
7.6 Confidentiality. Neither party shall
disclose the contents of this Agreement or of any other agreement they have
simultaneously entered into to any person, firm or entity, except the agents
or representatives of the parties, or except as required by law.
7.7 Word Forms. Whenever used herein, the
singular shall include the plural and the plural shall include the singular.
The use of any gender, tense or conjugation shall include all genders, tenses
and conjugations.
7.8 Headings. The Section headings have been
included for convenience only, are not part of this Agreement, and are not to
be used to interpret any provision hereof.
7.9 Binding Effect and Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties, their
successors, heirs, personal representatives and other legal representatives.
Neither the Executive nor the Company may assign this Agreement without the
prior written consent of the other.
7.10 Separability. The covenants contained in
this Agreement are separable, and if any court of competent jurisdiction
declares any of them to be invalid or unenforceable, that declaration of
invalidity or unenforceability shall not affect the validity or enforceability
of any of the other covenants, each of which shall remain in full force and
effect.
7.11 Consent or Approval. Whenever under the
terms of this Agreement the approval or consent of the Company is required
or the Company must make any determination, the Company, unless this
Agreement specifically requires otherwise, may not unreasonably withhold or
delay that consent or approval.
7.12 Background. The Background is a part of this
Agreement.
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IN WITNESS WHEREOF, the parties, intending to be legally
bound, have executed this Agreement or caused it to be executed and attested by
their duly authorized officers as a document under seal on the day and year
first above written.
ATTEST/WITNESS: DOCTORS HEALTH SYSTEM, INC.
/s/ Paul Serini /s/ Stewart B. Gold
_____________________________ By:_______________________(SEAL)
Paul Serini, Secretary Stewart B. Gold, President
EXECUTIVE:
/s/ John R. Dwyer, Jr.
_____________________________ _________________________(SEAL)
John R. Dwyer, Jr.
The undersigned, Stewart B. Gold, enters into the Employment Agreement by
and between John R. Dwyer, Jr., and Doctors Health System, Inc. dated
May 1, 1996 solely for the purpose of making the following
representations, warranties and covenants to John R. Dwyer, Jr., that (i) he
is the holder as of the date hereof, of 600,000 shares (the "Shares") of the
Company's Class A Common Stock, including such shares as may be issued as a
result of any recapitalization, stock split, stock dividend or other
change in the corporate structure or shares of the Company and (ii) so long
as he is the holder of such shares of Common Stock, he will vote all of such
shares, and any other equity securities of the Company he may hold from time
to time, for the election of John R. Dwyer, Jr. as a member of the Company's
Board of Directors.
/s/ Stewart B. Gold
___________________________
Stewart B. Gold
16
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SCHEDULE 3.2(b)
1996 Bonus
The Parties have agreed that there shall be no guaranteed 1996 Bonus.
17
<PAGE>
SCHEDULE 3.2(b)
1997 Bonus
The 1997 Bonus shall be determined by reference to the Company's net income
before taxes and bonuses as set forth in the audit of the Company's financial
statements for calendar year 1997 ("Audit Net Income") compared to $3,011,958,
the projected net income set forth in the Company's 1997 Financial Projections
dated April 24, 1996 ("Projection Net Income"), as modified or approved by the
DHS Board of Directors.
The 1997 Bonus shall be determined by multiplying the Executive's Base Salary by
a fraction, the numerator of which shall be the Audit Net Income and the
denominator of which shall be the Projection Net Income. The 1997 Bonus shall
be equal to the product of such multiplication.
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SCHEDULE 6.4
ARBITRATION PROCEDURE
1. Institution of Arbitration Proceeding.
1.1. Any party to this Agreement ( an "Initiating Party") may
initiate an arbitration proceeding (the "Proceeding") to resolve a dispute
subject to resolution under this Schedule (a "Dispute") by giving written
notice (the "Dispute Notice") to the other party (the "Responding Party") to
such Dispute. The Dispute Notice shall describe the substance of the Dispute
with sufficient specificity to give the Responding Party adequate notice
of its nature. Unless otherwise specified, time periods specified in this
Schedule 6.4 shall be calculated from the date of the Dispute Notice (the
"Commencement Date").
2. Selection of Arbitral Panel.
2.1. The Arbitral Panel (the "Panel") shall consist of three
arbitrators, two of whom (the "Party Designated Arbitrators") shall be
selected by the parties pursuant to Section 2.2 hereof. The third arbitrator
shall be a "Neutral Arbitrator" selected by the Party Designated Arbitrators
pursuant to Section 2.3 hereof.
2.2. The Initiating Party shall designate its Party Designated
Arbitrator in the Dispute Notice. Within fifteen days of the Commencement
Date, the Responding Party shall designate its Party Designated Arbitrator.
2.3. Within forty-five days of the Commencement Date, the two
Party Designated Arbitrators shall agree upon and appoint a Neutral Arbitrator
who shall be an accountant and a partner in an international, "Big Six"
accounting firm.
2.4. Each party agrees promptly to disclose to the other party
any circumstances known to it which would cause reasonable doubt regarding
the impartiality of an individual under consideration or appointed as the
Neutral Arbitrator and any such individual shall also promptly disclose to the
parties any such circumstances.
2.5. During the process of selecting the Neutral Arbitrator and
thereafter during the course of this Proceeding, ex parte communications
with the Neutral Arbitrator or any individual under consideration as the
Neutral Arbitrator are prohibited and shall be disclosed by the party
making any ex parte communication, the Neutral Arbitrator or any individual
under consideration as a Neutral Arbitrator immediately upon discovery.
3. Pre-Hearing Procedures.
3.1. Within fifteen days of the appointment of the Neutral
Arbitrator, the Panel may convene a Pre-Hearing Conference to, inter alia,
familiarize the Neutral Arbitrator with the nature of the Dispute between the
Parties, determine the need for and the nature of discovery and establish a
procedural schedule for the further conduct of the Proceeding.
4. Discovery.
4.1. Discovery, appropriately limited by the nature of the Dispute,
is expressly contemplated and permitted. However, the Parties acknowledge
and agree that one of the benefits of resolving Disputes through arbitration
is the opportunity reasonably to limit discovery. The Parties further agree
that they will endeavor to agree upon procedures and a schedule for discovery
that will result in a prompt and fair hearing under these procedures.
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4.2. Discovery requests and responses need not be served upon the
Panel but the Panel shall promptly convene upon motion of either party to
resolve discovery disputes, if any.
4.3. Discovery will be completed within sixty days of
the Pre-Hearing Conference.
5. Submission of Evidence and Hearing.
5.1. The Panel may receive evidence in the form of written
statements filed prior to Hearing for cross-examination on such statements
or may receive oral testimony at Hearing. Each party shall be entitled to
submit rebuttal testimony. The Panel may also permit opening and closing
statements of counsel at Hearing.
5.2. The Panel shall convene for Hearing the evidence and
argument of the parties at a time and place to be established by the Panel.
The Hearing shall be held no later than thirty days after the close of
discovery or thirty days after the Pre-Hearing Conference if there is no
discovery.
5.3. At the Hearing, and for all other purposes related to the
Proceeding, the Initiating Party shall be deemed the party seeking
affirmative relief, shall go first and shall bear the burdens of proof and of
persuasion.
5.4. The Hearing shall be transcribed.
6. Post-Hearing Procedures.
6.1. The Panel may request Post-Hearing briefs and, if it does
so, shall establish a schedule for submission of such briefs at the close of
Hearing.
6.2. Within thirty days of the later of the close of the Hearing
or its receipt of Post-Hearing briefs, the Panel shall issue a written
Decision and Award which shall include findings of fact and explain the
reasons for the Decision.
7. Confidentiality.
7.1. Unless otherwise agreed, the Proceeding and all information
and documents relating to it shall be kept confidential by the Parties, the
Panel, witnesses and all other persons involved with the Proceeding.
Specifically, but without limitation, the Confidential Information of the
parties shall be safeguarded and maintained as confidential by all participants
in the Proceeding.
8. Costs.
8.1. The Neutral Arbitrator's fees and expenses, and all
expenses of the Pre-Hearing Conference, Hearing or any other aspect of the
Proceeding not directly attributable to either party, such as the cost of
transcription of Panel Hearings and rental of Hearing rooms, shall be borne
equally by the parties.
8.2. The Panel shall in its Decision and Award determine whether
and to what extent either party is a prevailing party and entitled to an award
of its costs, including attorneys' fees.
9. Miscellaneous.
9.1. The parties may agree at any time to depart from these
procedures, including the time periods herein established. Although not
favored, the Panel may also permit departures from these procedures and time
periods absent agreement of the parties to prevent a miscarriage of justice.
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<PAGE>
9.2. Until the Neutral Arbitrator is appointed, any issue
relating to the Proceeding that is not provided for in these procedures
shall be governed by the Commercial Arbitration Rules of the American
Arbitration Association. Once the Neutral Arbitrator is appointed, the Panel
is empowered to resolve all issues not contemplated by these procedures and upon
which the parties cannot agree.
9.3. The Panel may grant any remedy or relief that it deems just
and equitable and within the scope of the agreement of the parties, including,
but not limited to, specific performance of a contract, injunctive relief or
other equitable relief.
9.4. These procedures contemplate a two-party Proceeding. If there
are more than two parties to a Proceeding, and they are unable by unanimous
agreement to align themselves as two parties, each party shall be entitled
to all the rights of a party hereunder, including specifically but without
limitation the right to appoint a Party Designated Arbitrator, and the
Neutral Arbitrator shall have a number of votes as to all matters decided by
the Panel equal to the sum of (i) the votes of all Party Designated Arbitrators,
and (ii) one.
9.5. The Panel may, in its discretion, convene and act by
conference call for all purposes other than taking oral testimony.
21
Exhibit 10.44
PRIMARY CARE LIMITED PARTICIPATION AGREEMENT
1. This PARTICIPATION AGREEMENT is entered into on _____, 1996 by DOCTORS
HEALTH SYSTEM, INC. ("DHS") and the
PHYSICIAN whose name appears below.
2. Physician warrants to DHS that he/she is an actively practicing primary
care physician who intends to enter into a cooperative relationship with
other DHS affiliated physicians to manage care provided to DHS HMO Members.
3. Physician agrees to provide to eligible persons who elect to enroll in an
HMO managed care product offered by any Payor who has contracted with DHS
(the "DHS HMO PLANS") those primary care services customarily provided by
primary care physicians to eligible patients, as may be required by the DHS
HMO Plans. These patients are referred to in this Agreement as the "DHS HMO
MEMBERS".
4. DHS will credential Physician. Physician agrees to cooperate with the DHS
credentialing and review process, all at no cost to Physician.
5. Physician agrees to participate in the managed care agreements that DHS
enters into with DHS HMO Plans. Physician agrees to accept a reasonable
number of DHS HMO Members under the DHS HMO Plans.
6. Physician agrees to abide by and comply with the relevant provisions of the
agreements between DHS and the DHS HMO Plans. DHS will provide summaries of
all relevant provisions that may apply to Physician.
7. Physician agrees to work cooperatively and in good faith with DHS and with
the other DHS affiliated physicians providing services to the DHS HMO
Members. To this end, Physician will use all reasonable efforts to:
(bullet) Prepare and maintain customary medical records for services
provided to DHS HMO Members and provide DHS with access to such
records without charge. DHS agrees that all patient records will
be treated as confidential and will comply with laws and
regulations related to confidentiality and all ethical standards
for physicians regarding the confidentiality of patient records.
(bullet) Comply with and accept payment conditions of this Agreement.
(bullet) Comply with managed care medical standards adopted by DHS
affiliated physicians as part of arrangements with the DHS HMO
Plans.
(bullet) Cooperate with DHS' efforts to contact eligible patients in
Physician's practice, including providing mailing lists and use of
Physician's name in correspondence.
(bullet) Sign and submit in a timely manner authorizations, consents,
encounter data and other forms adopted by DHS.
(bullet) Comply with DHS policies and guidelines which DHS provides to
physician.
8. Physician will participate in all utilization review, quality assurance and
credentialing programs operated by DHS to assure or improve the quality and
effective utilization of health care services to the DHS HMO Members
("QA/UR PROGRAMS"). Physician agrees not to hold DHS and other participants
in the QA/UR Programs responsible for any reasonable recommendations made
or actions taken in good faith with respect to Physician. Physician will
participate in all programs developed by DHS that are designed to resolve
DHS HMO Member grievances.
9. Physician agrees not to bill DHS HMO Members unless the service provided
was not a covered service under the DHS HMO Plan and the DHS HMO Member was
given prior written notice that the services would not be covered. However,
Physician may charge, bill, collect and keep from DHS HMO Members any
copayments or coinsurance. Except for copayments or coinsurance, Physician
agrees that, whether or not there is any unresolved dispute for payment,
under no circumstances, including but not limited to nonpayment by DHS or
DHS insolvency, will Physician make any claims, other than for copayments
or coinsurance, against any DHS HMO Member for covered services.
10. Physician agrees not to differentiate or discriminate in the treatment of
patients as to the quality of services delivered to DHS HMO Members because
of race, sex, age, religion, place of residence, health status or source of
payment, and to observe, protect and promote the rights of DHS HMO Members
as patients.
11. Physician will make arrangements for twenty-four hours, seven days a week
coverage to DHS HMO Members through other primary care physicians who
participate in the DHS provider network.
12. Physician agrees to respond within three days of receipt to any written
inquiry from DHS about services provided to DHS HMO Members or any other
matters relating to this Agreement, subject to all laws regarding the
confidentiality of medical records,.
13. DHS will provide to Physician a list of other physicians and other health
care providers who provide medical services in the DHS provider network.
Other than in cases of a bona-fide medical emergency, Physician agrees to
utilize the DHS provider network when arranging for additional medical
services required by DHS HMO Members.
14. DHS' affiliated physicians have developed protocols and practice procedures
applicable to fellow physician participants in the DHS provider network
(the "DHS PROTOCOLS"). Physician agrees to follow the DHS Protocols when
treating DHS HMO Members. If Physician should ever deem any aspect of the
DHS Protocols to be medically inappropriate or otherwise inappropriate for
utilization by Physician, Physician may notify DHS in writing, with
sufficient specificity to enable DHS to respond to Physician's concerns.
15. Physician will own and operate all aspects of his or her medical practice
and will remain responsible for all operations of the medical practice,
including all patient treatment decisions and employee, office, lease and
financial affairs. DHS is not engaged in the practice of medicine and will
not interfere in any patient treatment decisions.
<PAGE>
16. DHS may use Physician's name, specialty, telephone number(s), and business
location(s) in marketing, descriptive, and other information relating to
the DHS HMO Plans, and will include Physician as a member of the DHS
provider network during this Agreement. Physician may nonetheless be
precluded from participating in a DHS HMO Product by one of the DHS HMO
Plans. In such an event, DHS will notify Physician, in writing, within 30
days of learning of such an action, and will assist Physician, if
requested, in seeking to overturn such an action.
17. DHS will finalize, in cooperation with primary care physician
representatives from Doctors Health Montgomery, LLC, the commercial and
Medicare primary care base capitation rates using their good faith best
efforts to reflect the prevailing market rate for Montgomery County
("PRIMARY CARE BASE CAPITATION RATES"). Attached as SCHEDULE A are the
proposed DHS Primary Care Base Capitation Rates that DHS believes
reflect prevailing market rates for Montgomery County. DHS will provide
to Physician the finalized Primary Care Base Capitation Rates agreed
upon with Doctors Health Montgomery, LLC, and Physician will have 3
business days to reject such Primary Care Base Capitation Rates and
terminate this Agreement. Otherwise, DHS will pay to Physician, and
Physician agrees to accept from DHS as compensation for all covered
services provided by Physician to DHS HMO Members the finalized Primary
Care Base Capitation Rates.
18. The Primary Care Base Capitation Rate may be adjusted for age and sex of
the DHS HMO Members. The Medicare Primary Care Base Capitation Rate will be
INCREASED by an amount up to ten percent (10%), based upon the number of
enrolled Medicare DHS HMO Members in Physician's panel, according to a
formula established by DHS in cooperation with primary care physician
representatives from Doctors Health Montgomery.
19. All Payments of the Primary Care Base Capitation Rate will be made by DHS
directly to Physician, by the fifth business day of the month for the prior
month's enrollment. The percentage bonus for capitated panel size will be
calculated at the beginning of each quarter.
20. In order to provide economic incentives for Physicians to provide the
best possible health care to DHS HMO Members while fostering
efficiencies in utilization and quality assurance, DHS' affiliated
physicians have established, and Physician will participate in, a bonus
pool. The amount of bonus awards are determined according to DHS' primary
care bonus system, rewarding high clinical quality, appropriate
utilization, patient satisfaction and retention and the extent of
cooperation with other participating physicians and DHS. Based upon this
system, Physician may receive up to 25% OF THE SURPLUS generated in
Physician's panel of DHS HMO Members after managed care expenses (up to
a maximum of 25% of all Primary Care Base Capitation payments received by
Physician that year or the limits permitted by applicable health care
regulations). Physician will never be responsible for managed care losses.
These are the sole responsibility of DHS. Awards for calendar year
1996 will be paid by DHS in April of 1997. Awards for calendar year 1997
will be made in April of 1998.
21. Physician understands that DHS will be paid by the DHS HMO Plans for all
services provided by Physician to DHS HMO Members. Except for copayments
and coinsurance, Physician will not seek to collect or accept any
reimbursement from DHS HMO Members or the DHS HMO Plans for any covered
services provided to DHS HMO Members.
22. Physician will maintain, at his or her expense, general and professional
liability insurance coverage of not less than $1,000,000 per claim and
$3,000,000 per year. Physician will provide DHS with copies of the
policies or other evidence of compliance with the insurance
requirements. Physician will notify DHS when any patient of Physician
files a claim or any notice of intent to commence legal action alleging
professional negligence against Physician or of the settlement of any
such claim by Physician or if a judgment is rendered against Physician in
any such legal action. Physician will promptly notify DHS in writing of
any changes in or cancellations of any policy of insurance maintained
by Physician. If such policy is written on a claims made basis and such
coverage is discontinued, Physician will purchase an "Extension of
Coverage Endorsement" within ten (10) days of written notice of
discontinuance and shall provide DHS with a copy of this endorsement.
23. This Agreement will expire on DECEMBER 31, 1997 (the "TERM"), unless
extended by mutual agreement or earlier terminated pursuant to the terms
hereof.
24. This Agreement may be terminated by Physician upon 90 days prior written
notice to DHS if DHS fails to perform its obligations to Physician or to
pay any amounts required to be paid by DHS to Physician.
25. DHS may terminate this Agreement by notice in writing to Physician for good
cause, or if Physician materially breaches this Agreement and such breach
continues for a period of thirty (30) days after written notice is given to
Physician by DHS specifying the nature of the breach. Good cause means:
(bullet) Physician's membership in any professional organization is
terminated for cause related to professional conduct, or Physician
resigns from any professional organizations under the threat of
disciplinary action for professional conduct.
(bullet) Physician is indicted upon a charge of committing a felony or any
misdemeanor involving moral turpitude.
(bullet) Physician fails to comply with rules, regulations and policies
imposed with regard to the Medicare programs or to preserve his
or her eligibility to participate in the Medicare programs.
(bullet) Physician fails to comply with any material DHS Protocols.
(bullet) Physician takes any action which puts a DHS HMO Members' health
at risk.
(bullet) Physician loses his/her license or certificate to practice
medicine.
2
<PAGE>
26. To the extent required to enable DHS to comply with Section 952 of the
Medicare and Medicaid Amendments of 1980, or regulations promulgated
pursuant thereto, Physician shall until the expiration of four (4) years
after the furnishing of services under this Agreement, make available, upon
written request, to the Secretary of Health and Human Services or the
Comptroller General of the United States, or to any of their duly
authorized representatives, this Agreement and such of Physician's books,
documents and records as are necessary to certify the nature and extent of
costs under this Agreement.
DOCTORS HEALTH SYSTEM, INC.
By:______________________________(SEAL)
Chairman
PRINTED NAME PHYSICIAN
________________________ _________________________________(SEAL)
Please Attach Business Card , M.D.
3
<PAGE>
Exhibit 10.45
MEDICARE HMO - PRIMARY CARE LIMITED PARTICIPATION AGREEMENT
1. This PARTICIPATION AGREEMENT is entered into on _____, 1996 by DOCTORS
HEALTH SYSTEM, INC. ("DHS") and the PHYSICIAN whose name appears below.
2. Physician has been (or will be) paid a SIGNING BONUS of $5,000 upon
execution of this Agreement and satisfactory credentialing of Physician by
DHS. This payment is in addition to the other payments described in this
Agreement. This payment is made based upon Physician's assurance to DHS
that he/she is an actively practicing primary care physician (adult
medicine) with at least 200 Medicare eligible patients in his/her practice,
and intends to enter into a cooperative relationship with other DHS
affiliated physicians to manage care provided to Medicare HMO Members.
3. Physician agrees to provide to Medicare eligible persons who elect to
enroll in a Medicare HMO product offered by either UNITED/CHESAPEAKE HEALTH
PLAN and/or CFS/BLUE CROSS OF MARYLAND (the "DHS MEDICARE HMO PLANS") those
primary care services customarily provided by primary care physicians to
Medicare eligible patients, as may be required by the DHS Medicare HMO
Plans. These patients are referred to in this Agreement as the "MEDICARE
HMO MEMBERS".
4. DHS will credential Physician. Physician agrees to cooperate with the DHS
credentialing and review process, all at no cost to Physician.
5. Physician agrees to participate in the managed care agreements that DHS has
entered into with the two DHS Medicare HMO Plans. Physician agrees to
cooperate with DHS in accepting Medicare HMO Members under the DHS Medicare
HMO Plans, and agrees not to participate with the two DHS HMO Medicare
Plans directly or through another similar entity or IPA. Physician is free
to contract with any other HMOs offering managed care type plans to
Medicare eligible patients.
6. Physician agrees to abide by the relevant provisions of the agreements
between DHS and the DHS Medicare HMO Plans. DHS will provide summaries of
all relevant provisions that may apply to Physician.
7. Physician agrees to work cooperatively and in good faith with DHS and with
the other DHS affiliated physicians providing services to the Medicare HMO
Members. To this end, Physician will use all reasonable efforts to:
(bullet) Prepare and maintain customary medical records for services
provided to Medicare HMO Members and provide DHS with access to
such records without charge. DHS agrees that all patient records
will be treated as confidential and will comply with laws and
regulations related to confidentiality and all ethical standards
for physicians regarding the confidentiality of patient records.
(bullet) Comply with and accept the billing and payment conditions of this
Agreement.
(bullet) Comply with managed care medical standards adopted by DHS
affiliated physicians as part of arrangements with the DHS
Medicare HMO Plans.
(bullet) Cooperate with DHS' efforts to contact Medicare-eligible patients
in Physician's practice, including providing mailing lists and use
of Physician's name in correspondence.
(bullet) Sign and submit in a timely manner authorizations, consents,
encounter data and other forms adopted by DHS.
(bullet) Comply with DHS policies and guidelines which DHS provides to
physician.
8. Physician will participate in all utilization review, quality assurance and
credentialing programs operated by DHS to assure or improve the quality and
effective utilization of health care services to the Medicare HMO Members
("QA/UR PROGRAMS"). Physician agrees not to hold DHS and other participants
in the QA/UR Programs responsible for any reasonable recommendations made
or actions taken in good faith with respect to Physician. Physician will
participate in all programs developed by DHS that are designed to resolve
HMO Medicare Member grievances.
9. Physician agrees not to bill HMO Medicare Members unless the service
provided was not a covered service under the DHS Medicare HMO Plan and the
Medicare HMO Member was given prior written notice that the services would
not be covered. However, Physician may charge, bill, collect and keep from
HMO Medicare Members any copayments or coinsurance. Except for copayments
or coinsurance, Physician agrees that, whether or not there is any
unresolved dispute for payment, under no circumstances, including but not
limited to nonpayment by DHS or DHS insolvency, will Physician make any
claims, other than for copayments or coinsurance, against any Medicare HMO
Member for covered services.
<PAGE>
10. Physician agrees not to differentiate or discriminate in the treatment of
patients as to the quality of services delivered to Medicare HMO Members
because of race, sex, age, religion, place of residence, health status or
source of payment, and to observe, protect and promote the rights of
Medicare HMO Members as patients.
11. Physician will make arrangements for twenty-four hours, seven days a week
coverage to Medicare HMO Members through other primary care physicians who
participate in the DHS provider network.
12. Physician agrees to respond within three days of receipt to any written
inquiry from DHS about services provided to Medicare HMO Members or any
other matters relating to this Agreement, subject to all laws regarding the
confidentiality of medical records.
13. DHS will provide to Physician a list of other physicians and other health
care providers who provide medical services in the DHS provider network.
Other than in cases of a bona-fide medical emergency, Physician agrees to
utilize the DHS provider network when arranging for additional medical
services required by Medicare HMO Members.
14. DHS' affiliated physicians have developed protocols and practice procedures
applicable to fellow physician participants in the DHS provider network
(the "DHS PROTOCOLS"). Physician agrees to follow the DHS Protocols when
treating Medicare HMO Members. If Physician should ever deem any aspect of
the DHS Protocols to be medically inappropriate or otherwise inappropriate
for utilization by Physician, Physician may notify DHS in writing, with
sufficient specificity to enable DHS to respond to Physician's concerns.
15. Physician will own and operate all aspects of his or her medical practice
and will remain responsible for all operations of the medical practice,
including all patient treatment decisions and employee, office, lease and
financial affairs. DHS is not engaged in the practice of medicine and will
not interfere in any patient treatment decisions.
16. DHS may use Physician's name, specialty, telephone number(s), and business
location(s) in marketing, descriptive, and other information relating to
the DHS Medicare HMO Plans, and will include Physician as a member of the
DHS provider network during this Agreement. Physician may nonetheless be
precluded from participating in a DHS Medicare HMO Product by one of the
two DHS Medicare HMO Plans. In such an event, DHS will notify Physician, in
writing, within 30 days of learning of such an action, and will assist
Physician, if requested, in seeking to overturn such an action.
17. DHS will pay to Physician, and Physician agrees to accept from DHS as
compensation for all covered services provided by Physician to Medicare HMO
Members, the following "MEDICARE PRIMARY CARE BASE CAPITATION RATES":
COUNTY AGED/DISABLED INSTITUTIONALIZED
Allegany $26.70 $52.06
Anne Arundel $30.64 $59.74
Baltimore $30.36 $59.19
Baltimore City $31.23 $60.00
Calvert $26.15 $50.99
Caroline $24.00 $46.80
Carroll $26.97 $52.58
Cecil $24.86 $48.48
Charles $31.16 $60.00
Dorchester $24.00 $46.80
Frederick $24.00 $46.80
Garrett $24.00 $46.80
Harford $29.45 $57.43
Howard $30.68 $59.82
Kent $24.00 $46.80
Montgomery $32.00 $60.00
Prince Georges $34.72 $60.00
Queen Anne $24.00 $46.80
St. Marys $26.34 $51.37
Somerset $24.00 $46.80
Talbot $24.00 $46.80
2
<PAGE>
Washington $24.00 $46.80
Wicomico $24.00 $46.80
Worcester $24.00 $46.80
18. The Medicare Primary Care Base Capitation Rate shown above may be adjusted
for age and sex of the Medicare HMO Members. The Medicare Primary Care Base
Capitation Rate will be INCREASED by an amount up to ten percent (10%),
based upon the number of enrolled Medicare HMO Members in Physician's
panel, as follows:
CAPITATED PANEL SIZE
Greater than 50 Medicare HMO Members/physician or 150 Medicare HMO
Members/practice group 2.5%
Greater than 100 Medicare HMO Members/physician or 350 Medicare HMO
Members/practice group 5.0%
Greater than 250 Medicare HMO Members/physician or 700 Medicare HMO
Members/practice group 7.5%
Greater than 400 Medicare HMO Members/physician or 1200 Medicare HMO
Members/practice group 10.0%
MAXIMUM TOTAL 10.0%
19. All Payments of the Primary Care Base Capitation Rate will be made by DHS
directly to Physician, by the first day of the month for the prior month's
enrollment. The percentage bonus for capitated panel size will be
calculated at the beginning of each quarter.
20. In order to provide economic incentives for Physicians to provide the
best possible health care to Medicare HMO Patients while fostering
efficiencies in utilization and quality assurance, DHS' affiliated
physicians have established, and Physician will participate in, a bonus
pool. The amount of bonus awards are determined according to DHS' primary
care bonus system, rewarding high clinical quality, appropriate
utilization, patient satisfaction and retention and the extent of
cooperation with other participating physicians and DHS. Based upon this
system, Physician may receive up to 25% OF THE SURPLUS generated in
Physician's panel of Medicare HMO Members after managed care expenses
(up to a maximum of 25% of all Medicare Primary Care Base Capitation
payments received by Physician that year or the limits permitted by
applicable Medicare regulations). Physician will never be responsible
for managed care losses. These are the sole responsibility of DHS.
Awards for calendar year 1996 will be paid by DHS in April of 1997.
Awards for calendar year 1997 will be made in April of 1998.
21. Physician understands that DHS will be paid by the Medicare HMO Plans for
all services provided by Physician to Medicare HMO Members. Except for
copayments and coinsurance, Physician will not seek to collect or accept
any reimbursement from Medicare HMO Members or the DHS Medicare HMO Plans
for any covered services provided to Medicare HMO Members.
22. Physician will maintain, at his or her expense, general and professional
liability insurance coverage of not less than $1,000,000 per claim and
$3,000,000 per year. Physician will provide DHS with copies of the
policies or other evidence of compliance with the insurance
requirements. Physician will notify DHS when any patient of Physician
files a claim or any notice of intent to commence legal action
alleging professional negligence against Physician or of the settlement
of any such claim by Physician or if a judgment is rendered against
Physician in any such legal action. Physician will promptly notify
DHS in writing of any changes in or cancellations of any policy of
insurance maintained by Physician. If such policy is written on a
claims made basis and such coverage is discontinued, Physician will
purchase an "Extension of Coverage Endorsement" within ten (10) days
of written notice of discontinuance and shall provide DHS with a copy
of this endorsement.
23. This Agreement will expire on DECEMBER 31, 1997 (the "TERM"), unless
extended by mutual agreement or earlier terminated pursuant to the terms
hereof.
24. This Agreement may be terminated by Physician upon 90 days prior written
notice to DHS if DHS fails to perform its obligations to Physician or to
pay any amounts required to be paid by DHS to Physician.
25. DHS may terminate this Agreement by notice in writing to Physician for good
cause, or if Physician materially breaches this Agreement and such breach
continues for a period of thirty (30) days after written notice is given to
Physician by DHS specifying the nature of the breach. Good cause means:
3
<PAGE>
(bullet) Physician's membership in any professional organization is
terminated for cause related to professional conduct, or Physician
resigns from any professional organizations under the threat of
disciplinary action for professional conduct.
(bullet) Physician is indicted upon a charge of committing a felony or any
misdemeanor involving moral turpitude.
(bullet) Physician fails to comply with rules, regulations and policies
imposed with regard to the Medicare programs or to preserve his or
her eligibility to participate in the Medicare programs.
(bullet) Physician fails to comply with any material DHS Protocols.
(bullet) Physician takes any action which puts an HMO Medicare
Members' health at risk.
(bullet) Physician loses his/her license or certificate to practice
medicine.
26. To the extent required to enable DHS to comply with Section 952 of the
Medicare and Medicaid Amendments of 1980, or regulations promulgated
pursuant thereto, Physician shall until the expiration of four (4) years
after the furnishing of services under this Agreement, make available, upon
written request, to the Secretary of Health and Human Services or the
Comptroller General of the United States, or to any of their duly
authorized representatives, this Agreement and such of Physician's books,
documents and records as are necessary to certify the nature and extent of
costs under this Agreement.
DOCTORS HEALTH SYSTEM, INC. PHYSICIAN
By:_________________________(Seal) ____________(SEAL)
Chairman , M.D.
4
<PAGE>
EXHIBIT 11
COMPUTATION OF (LOSS) EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Weighted average of common shares outstanding during the period
(adjusted to reflect two-for-one stock split) 3,063,205 3,000,000 3,000,000
Net (loss) earnings $(6,646,423) $(2,056,834) $ 171,950
Dividends on Series A and B Redeemable, 552,531 113,300
Convertible Preferred
Net (loss) earnings as adjusted (7,198,954) (2,170,134)
Net (loss) earnings per common share $(2.35) $(.72) $.06
Pro forma income assuming a 40% effective tax rate $ 103,170
Pro forma earnings per common share .03
</TABLE>
All outstanding options and warrants as of June 30, 1996 and 1995 have been
excluded as they are anti-dilutive.
EXHIBIT 23.1
CONSENT
We have issued our report dated October 3, 1996 accompanying the
financial statements and schedule of Doctors Health System, Inc. contained in
Amendment No. 2 to the Registration Statement and Prospectus (Form S-1). We
consent to the use of the aforementioned report in the Amended Registration
Statement and Prospectus, and to the use of our name as it appears under the
caption "Experts."
GRANT THORNTON LLP
Baltimore, Maryland
October 11, 1996
CONSENT
We have issued our reports accompanying the financial statements of Doctors
Health System, Inc. contained in Amendment No.2 to the Registration Statement
and Prospectus (Form S-1) on Practice A, dated September 10, 1996; Practice B,
dated September 17, 1996; Practice C, dated September 17, 1996; Practice D,
dated September 20, 1996; Practice E, dated September 12, 1996; Practice F,
dated September 18, 1996; Practice G, dated September 12, 1996; Practice H,
dated September 12, 1996; Practice I, dated September 25, 1996; and Practice J,
dated September 20, 1996. We consent to the use of the aforementioned reports
in the Amended Registration Statement and Prospectus, and to the use of our
name as it appears under the caption "Experts."
GRANT THORNTON LLP
Baltimore, Maryland
October 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010005
<NAME> FDS-1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,400,837
<SECURITIES> 0
<RECEIVABLES> 3,975,654
<ALLOWANCES> 360,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,149,243
<PP&E> 2,764,782
<DEPRECIATION> 254,481
<TOTAL-ASSETS> 11,323,248
<CURRENT-LIABILITIES> 4,318,039
<BONDS> 0
8,165,881
0
<COMMON> 31,980
<OTHER-SE> (7,000,544)
<TOTAL-LIABILITY-AND-EQUITY> 11,323,248
<SALES> 10,254,590
<TOTAL-REVENUES> 10,576,143
<CGS> 0
<TOTAL-COSTS> 11,199,481
<OTHER-EXPENSES> 5,780,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,513
<INCOME-PRETAX> (6,646,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,646,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,646,423)
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
