AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1996
REGISTRATION NO. 333-1926
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DOCTORS HEALTH SYSTEM, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
MARYLAND 8090 52-1907421
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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) 654-5801
(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.
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
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE PRICE PER AGGREGATE OFFERING
REGISTERED REGISTERED UNIT PRICE
<S> <C> <C> <C>
Class B Common Stock,
$0.01 par value $3,100,000 $ 20.00 $62,000,000.00
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 $ 21,379.31(1)
Options to purchase
Class B Common Stock (2)
</TABLE>
(1) Fees totaling $8,620.70 were previously paid by the Registrant in connection
with the filing of the Registration Statement on March 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.
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CROSS-REFERENCE SHEET TO PROSPECTUS ON FORM S-1
FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K
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<CAPTION>
ITEM FORM S-1 CAPTION LOCATION IN PROSPECTUS
<C> <S> <C>
1. Forepart of the Registration Statement and Outside 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.
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>
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 JUNE 4, 1996
[LOGO HERE]
DOCTORS HEALTH SYSTEM, INC.
3,100,000 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 affiliation of medical practices 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"); and (ii) Options to
purchase Class B Common Stock ("Options," and collectively with the Class B
Common Stock, the "Securities"). Such offers and issuances may be made by the
Company from time to time in the acquisition of physician practices.
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 affiliations of the medical practices will
involve the receipt by the Company primarily of enumerated tangible assets of
such practices and related contracts and leases. The consideration for
acquisitions 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, pursuant to which the Company and its
affiliated medical groups may also issue Securities.
The terms of an affiliation are determined by negotiations between the
Company's representatives and the physicians whose practices are to be acquired.
Factors taken into account in acquisitions include the established size, quality
and reputation of the practice and the market value of the Common Stock when
pertinent. 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 the
terms of an affiliation 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, certain Federal income tax consequences and the agents or
dealers, if any, participating in the offering and sale of the Securities. 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.
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 JUNE , 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.
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'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 affiliated 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.
As of May 1996, approximately 140 PCPs, 93 obstetrician/gynecologists, and
390 specialist physicians had affiliated with the Company by transferring their
practice assets or establishing long term joint venture, IPA or other
contractual relationships with the Company in five regional networks, or had
entered into binding agreements to become so affiliated. The Company also offers
to Affiliated Physicians in Core Medical Groups certain patient care management,
administrative and financial services, including information systems,
contracting for and providing facilities, equipment and other goods. While
primary care-based, the Company encourages its Core Medical Groups' affiliated
physicians to develop into multi-specialty group practices and provides or
arranges financing to allow such Core Medical Groups to develop into diversified
multi-specialty practices. The Company also offers information systems and
related services to certain physicians who are not part of a Core Medical Group
but have become members of the Company's network of health care providers. See
"Business -- Development of Integrated Health Care Delivery System."
The Company offers medical groups and independent physicians a variety of
affiliation models. These affiliations are carried out by the acquisition of
certain medical practice assets, either for cash or through equity, or by
affiliation on a contractual basis. The Company typically enters into Physician
Services Organization Agreements with the Core Medical Groups, pursuant to which
the Company provides care management services, managed care contracting and
related business management. The physicians are allowed to maintain their
clinical independence.
The Company's strategy is to capitalize upon changes in the health care
industry by (i) affiliating with primary care practices and using their related
patient base to attract high quality specialist physicians as partners and to
integrate a full spectrum of health care providers into one or more high
quality, cost effective health care delivery networks, (ii) providing HMOs and
other similar payors with a single source of access to geographically proximate
networks of physicians, and other providers, (iii) focusing on obtaining HMO
contracts and operating profitably under a capitated reimbursement system, (iv)
allowing physicians greater access to managed care, while relieving physicians
of some of the administrative responsibilities and economic risks of providing
managed care services, (v) 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 (vi) expanding
aggressively by recruiting additional physicians to networks that have already
been established, by establishing additional networks, and by transitioning
existing fee-for-service patients in physician practices to the Company's Global
Capitated Contracts. See "Business -- Strategy."
3
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GLOSSARY
Affiliated PCP or Affiliated Physician -- A PCP or other Physician who
affiliates with the Company by entering into a contractual relationship with the
Company through employment in a Core Medical Group, through an Exclusive or Non-
Exclusive IPA, joint contracting venture or other arrangement.
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, eye care, home health, mental health, infusion care,
durable medical equipment, marketing and administration.
Capitated Gatekeeper -- A PCP who is compensated pursuant to a capitation
arrangement.
Capitated Gatekeeper Income -- Income received by PCPs pursuant to capitation
arrangements.
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 that has been formed by Affiliate PCPs to
conduct a medical group practice and that has entered into a PSO Agreement or
similar long-term management agreement with the Company.
Enrollee -- A person who is covered for health benefits under an HMO contract or
other insurance.
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 its affiliates and to take as patients any capitated patients referred by
the Company.
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 pursuant to which a health care provider and/or
management company (such as the Company) assumes all financial risks for
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 medical care services.
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 all services with or without Capitated Contract Carve-Outs
over a specified period, regardless of the cost of the services provided.
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 Practice Association (IPA) -- An organization of independently
practicing physicians which contracts with managed care plans or others for the
provision of professional 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, assume risks and share
rewards, and through which they deliver comprehensive health care services to
the community. The single entity (or group of affiliated entities) performs all
strategic planning and payor contracting for the providers, and allocates
economic rewards and capital among the various interests. The system generally
includes a single legal entity or related affiliated entities, unified
governance and management mechanisms, use of consolidated management and
information systems, and use of consolidated budgets for the entire system.
IPA Participant Physicians -- Primary Care Physicians who enter into Exclusive
or Non-Exclusive IPA agreements with the Company or its affiliates.
Managed Care -- Any payment or delivery arrangement used by a health plan or
provider to control or coordinate use of health services with the goal of
providing quality care at a lower cost.
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
4
<PAGE>
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.
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.
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 or HMO, that
pays or reimburses a health care provider for health care services rendered by
that provider to a patient or health plan.
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 Affiliated Physicians who are members of the Core
Medical Group's group medical practice.
Practice Participation Agreement -- An agreement entered into among the Company,
a Core Medical Group that is affiliating with the Company, 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.
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.
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 taking the
financial risk of providing the subcapitated 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
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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 in
February of 1995. Accordingly, the Company has a limited operating history. For
the year ended December 31, 1995, the Company recorded a net loss of $3,180,723.
The Company is likely to record a net loss for the year ending December 31, 1996
and at March 31, 1996 had an accumulated deficit of $5,018,540. There can be no
assurance that the operating losses incurred by the Company will not exceed
those that are presently expected or that the Company will be able fully to
finance working capital and practice acquisition requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
LIQUIDITY; RESTRICTIONS ON FINANCING
Although the Company believes that its available working capital, together
with a banking facility under negotiation, will be sufficient to meet the
Company's anticipated needs for cash to conduct operations through June 30,
1997, there can be no assurance that the terms of the facility being negotiated
will be agreed to and finalized or will be on terms favorable or acceptable to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Further, the holders of the Company's Series A and Series B Preferred Stock
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 impacted by certain rights of consent of the holders of the
Company's Series A and Series B Preferred Stock. See "Description of Capital
Stock." Thus, the Company may be unable to obtain sufficient financing to
continue its operations in the event that its operating losses exceed
expectations by a significant amount. In the event that the Company is able to
obtain additional financing, no assurances can be given that the terms of such
financings, if any, would be favorable to the Company.
UNCERTAINTY OF STRATEGY; ACQUISITION RISKS
While the Company has developed a strategy and has negotiated a number of
commercial relationships with PCPs, IPAs, specialist physicians, hospitals and
Managed Care Payors, the Company's strategy is based upon a number of
assumptions (including, without limitation, assumptions relating to the
Company's likely rate of growth, the rate at which capitated lives can be added
to the Company's network of Affiliated Physicians, the likely referral and other
business practices of physicians and health care institutions in the Maryland
market area and beyond, 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 may materially and adversely affect the Company's business.
Thus, no assurance can be given that the Company's strategy will be successfully
and profitably implemented.
Further, the Company's strategy is premised upon the successful execution
of acquisition transactions of Core Medical Groups and affiliation transactions
with 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 affiliates. The process of identifying suitable acquisition
and affiliation candidates, and proposing, negotiating and implementing an
economically feasible affiliation with a physician group or forming or managing
of a physician network, is lengthy and complex. Further, substantially all of
the Company's net revenues generated by the medical practices acquired by or
affiliating with the Company will be used to pay for costs of providing medical
care. Thus, the Company's ability to generate any profit is dependent upon its
ability to move its Affiliated Physicians and other providers in the Company's
provider networks away from an unmanaged fee-for-service compensation
arrangements and into a profitable managed care, or capitated, environment. In
addition, the Company's financial results are negatively affected to the extent
that the start-up costs associated with developing practices do not immediately
translate into revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
6
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DEPENDENCE ON MANAGED CARE CONTRACTS
The profitability of the Company depends on securing managed care contracts
and successfully managing the expenses involved in the provision of services
under those contracts by its Affiliated Physicians without sacrificing the
quality of medical care. Although the Company attempts to manage expenses
through negotiation of favorable contracts based upon utilization that is driven
by prudent protocols developed by the Company and the Core Medical Groups to
ensure high quality and cost effective care, such expenses are not otherwise
within the Company's or the Core Medical Groups' control, and are subject to
adverse selection and other utilization risks. The inability of the Company and
its Affiliated PCPs to obtain such contracts or successfully to manage such
expenses would materially and adversely affect the Company's earnings and
revenues. In addition, the success of managed care 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 the numbers of managed care contracts presently contemplated
or that, if such contracts are obtained, payments from such managed care payors
will decrease over time, causing an adverse effect on the Company's earnings and
revenues. Finally, the Company's contracts with payors, which contracts
generally are for one to three year terms, may be terminated earlier upon
notice. There can be no assurance that such payor contracts will not be
terminated. The loss of any payors or the failure to regain or retain such
payors' enrollees could have a material adverse effect on 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 results of operations are highly dependent on the
Company's ability to enroll existing patients and new Medicare patients in the
Company's Medicare managed care contracts with licensed HMOs. See
"Business -- Strategy -- Medicare Managed Care." The Company's strategy for
enrolling Medicare patients in managed care plans 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 enroll a sufficient number of Medicare
patients to its Medicare managed care plans or that such patients can be
converted in accordance with the Company's business plan. The failure of the
Company to enroll a sufficient number of Medicare patients to Medicare managed
care plans could have a material adverse effect on the Company's revenues.
The Company's success is also subject to various state and federal
regulations and the continuation of current reimbursement rates by the federal
government under the Medicare program. There can be no assurance that Medicare
reimbursement rates will remain at current levels. Substantial reduction in
Medicare capitation rates could have a material adverse effect on the Company's
financial results and profitability.
DEPENDENCE OF THE COMPANY ON CORE MEDICAL GROUPS AND IPAS
The Company has business relationships with several primary medical care
provider groups referred to herein as Core Medical Groups. The Company does not
engage in the practice of medicine and will be largely dependent upon medical
services provided by or through the Core Medical Groups and affiliated IPAs for
its revenues. The success of the Company initially will be dependent in large
part upon its ability to attract PCPs and specialist physicians to join Core
Medical Groups or to participate in IPA arrangements with the Company, and upon
the Core Medical Groups' and PCPs' and specialist physicians' ability to perform
their obligations and 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.
Typically, a PSO Agreement obligates the Core Medical Groups 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 "Development of Integrated
Health Care Delivery System -- Affiliation of the Core Medical Group and the
Company." 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 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
7
<PAGE>
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
(management service organizations) 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 will 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.
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 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.
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 vendors who will
become stockholders of the Company, and thus the revenues of the Company and the
level of dilution of percentage ownership interests of existing stockholders,
may be more or less than presently anticipated.
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 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. Further, the Company must obtain the consent of the holders of the
Company's Series A and Series B 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 may 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; PENNY STOCK RULES
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. If either of the Common Stock or
the Options are not traded on an exchange or quoted on NASDAQ and its trading
price falls below $5 per share, it could become 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 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
8
<PAGE>
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
The executive officers and directors of the Company beneficially own
significant percentages of the various classes of the Company's equity
Securities. Accordingly, if they were to act in concert, they may be able to
control the Company's Board of Directors, and therefore, the business, policies
and affairs of the Company. See "Principal Stockholders."
POTENTIAL CONFLICTS OF INTEREST
Certain conflicts of interest are inherent in the structure of the Company
and its contractual and organizational relationships. For example, Scott M.
Rifkin, M.D., Alan L. Kimmel, M.D., who are Directors, officers and stockholders
of the Company, and Peter J. LoPresti, D.O. and Robert Ancona, M.D., currently
Directors of the Company, are also members of Baltimore Medical Group, LLC, and
are stockholders, officers and directors of BMGGP, Inc., the general partner of
MHLP. Further, D. Alexander Rocha, M.D., and William D. Lamm, M.D., both
Directors of the Company, are also the respective Chairmen of Carroll Medical
Group and Cumberland Valley Medical Group. From time to time, the interests of
such persons may conflict with those of the Company due to such relationships.
See also the discussion in "Certain Transactions."
DIVIDENDS
Dividends on the Securities are not contemplated in the foreseeable future
because the shares of Common Stock of the Company are subordinated as to
dividends to the Preferred Stock, the Preferred Stock provisions prohibit the
payment of dividends without the consent of the holders of the Preferred Stock,
and because it is expected that the Company's earnings, if any, will be retained
for working capital and expansion.
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 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
transactions described generally herein, including those by or with the Core
Medical Groups and its employee physicians, IPAs and other affiliated physicians
and providers are subject to extensive and pervasive Federal and state
regulation pursuant to currently effective 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. While management of the Company intends to develop its
operations in a manner that does not subject the Company to regulation by the
Maryland Insurance Commission, there can be no assurance that such efforts will
be successful. Regulation which affects the IPAs, Core Medical Groups, hospitals
and other providers of health care may also have a significant effect on 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 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
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<PAGE>
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 upon the Company.
The Company's physician networks contract with physicians and other health
care professionals as independent contractors and, in accordance with federal
and state tax guidelines pertaining to independent contractors, do not withhold
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 Company's operating results.
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
will not be adversely affected by changes in applicable laws, regulations or
interpretations thereof.
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.
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, its affiliated health care providers and other entities with
which it contracts are subject to the United States and State 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 and such
affiliates 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 and business plan
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 and the Federal Trade Commission. There can, however, be
no assurance that the Company will not be challenged on these grounds.
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<PAGE>
USE OF PROCEEDS
Securities may be issued from time to time in connection with the
affiliation of medical practices with the Company. In such event, the Company
expects to receive certain assets of such practices or capital stock of the
relevant medical practice, or as well as certain contractual rights. The Company
will not receive cash proceeds in connection with the issuance of the
Securities.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
Company's year ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company. The selected financial data
with respect to the three months ended March 31, 1996, has been derived from the
unaudited consolidated financial statements included herein which, in the
opinion of the management of the Company, include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
results of operations and the financial position at and for the interim period
presented. Operating results for the three months ended March 31, 1996, are not
necessarily indicative of the results of operations for the year ending December
31, 1996. 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. All amounts are in thousands,
except for per share amounts.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
<S> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS:
Net revenues.............................................................................. $ 4,917 $ 3,109
Expenses:
Contracted physician services........................................................... 2,033 1,097
Global capitated contractual expense.................................................... -- 126
Care center costs:
Salaries and benefits................................................................ 1,315 798
Medical services..................................................................... 267 117
General and administration........................................................... 1,249 548
Corporate:
General and administration........................................................... 1,314 551
Salaries and benefits................................................................ 1,625 1,026
Depreciation and amortization........................................................... 166 82
Interest expense........................................................................ 129 112
8,098 4,460
Net loss before income taxes......................................................... (3,181) (1,351)
Income tax expense...................................................................... -- --
Net loss............................................................................. $(3,181) $ (1,351)
*Pro forma net loss per share........................................................... $(0.92) $ (0.34)
*Pro forma weighted average number of shares outstanding................................ 3,474 3,924
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 2,865 $ 177
Working capital........................................................................... 2,799 1,250
Total assets.............................................................................. 6,277 6,526
Long term obligations, less current portion............................................... 1,452 1,868
Redeemable convertible preferred stock.................................................... 6,808 6,987
Stockholders' equity (deficit)............................................................ (3,336) (4,861)
</TABLE>
* Pro forma per share amounts have been computed assuming the conversion of all
preferred shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in June 1994, but it did not receive initial
funding until February 1995. Prior to that date, the Company was in a formative
stage, acquiring capital, developing its internal systems and recruiting
management personnel. Operations from the Company's inception through December
31, 1994, were insignificant. Accordingly, no results are presented for the
period from the Company's inception in June 1994 through December 31, 1994.
Through March 31, 1996, the Company had acquired certain assets of 43 primary
care physician practices. As a result of the Company's limited period of
affiliation with the practices, the Company does not believe that period to
period comparison and percentage relationships within the periods set forth
below are meaningful.
The Company has acquired, at net book value, the furniture, fixtures and
equipment, and at net realizable value, the accounts receivable, of certain
medical practices. At the time of such acquisition, the physician has entered
into a 10-year employment agreement with a Core Medical Group. Further, each
Core Medical Group has entered into long-term management service agreements with
the Company (PSO Agreements), 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.
The Company's acquisitions of certain assets of physician practices are
subject to reacquisition rights whereby the physicians may rescind the
transaction typically within a nine month period from the date of closing. As of
March 31, 1996, of the 43 primary care physicians that sold certain of their
assets to the Company, 20 physicians had such rights still available. All of the
agreements contain provisions requiring the Affiliated Physicians to repurchase
substantially all of the assets previously acquired at the price paid by the
Company at the closing. To date, one physician has 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
affect on the Company in light of the Company's experience. Management does not
believe that there will be substantial rescissions of physician affiliation
transactions. For the three months ended March 31, 1996, physicians with
reacquisition rights represented approximately $516,983 or 19.8% of the
Company's total net physician billings of $2,611,574 for the period then ended.
In the event some or all of these physicians exercised their rights, the Company
believes that such exercises would not have a material adverse effect on the
Company.
The Company currently derives net revenues primarily from direct patient
and third party billing for medical services provided by affiliated physicians
within the Core Medical Groups. 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, Medicaid) and private insurance carriers. The Company derives
little or no earnings from these revenue sources as the proceeds from such
revenues are paid to the Core Medical Group for the accounts of the Affiliated
Physicians. The Company's profitability depends on securing Global Capitated
Contracts and successfully managing the revenues obtained per capitated patient
so that expenses involved in the delivery of medical services by its Affiliated
Physicians and other providers are less than such revenue. The inability of the
Company to obtain such contracts, to attract patients to participate in such
contracts, or to successfully manage the cost of care would materially and
adversely affect the Company's revenues and primary source of earnings.
The Company's success under these capitation contracts depends upon the
overall health of its Enrollees, its ability to manage appropriate and timely
utilization of medical resources, and its ability to conclude favorable
agreements with payors and other health care providers. To the extent that the
Enrollees covered under a capitated fee contract require more frequent or
extensive care than was anticipated by the Company, the revenue to the Company
under the contract may be insufficient to cover the cost of care provided.
For the year ended December 31, 1995, the Company derived 61% of its net
revenues from direct patient and third party billing (fee-for-service), 30% from
government sponsored healthcare programs (including Medicare) and 9% from
Gatekeeper Capitation Contracts. For the three months ended March 31, 1996, 60%
of revenues were generated from direct patient and third party billing, 30% from
government sponsored healthcare programs, 8% from Gatekeeper Capitation
Contracts, and 1% from Global Capitation Contracts. The Company's consolidated
results of operations reflect revenues generated by the Core Medical Groups and
the costs associated with the delivery of their services, including physician
salaries, benefits, malpractice insurance and corporate expenses. Currently, the
Company is working with payors to enroll fee-for-service commercial and Medicare
patients to the Company's Global Capitated Contracts, but as of March 31, 1996
had not
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enrolled a sufficient number of such patients to cover the Company's operating
costs. To the extent the Company is unable to enroll patients in the Company's
Global Capitated Contracts in adequate numbers to cover operating costs, it will
have a material adverse affect on the Company's ability to generate sufficient
revenues to cover its normal and necessary expenses.
The Company's operating results are significantly impacted by the number of
Affiliated PCPs. From February 24, 1995 to March 31, 1996, the number of PCPs
who sold certain of their assets to the Company and affiliated with a Core
Medical Group increased from 18 to 43. During the same period of time, the
Company entered into three Global Capitated Contracts.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1995 1996
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Founding physicians at February 24, 1995 (Reacquisition)...... 18 -- -- (1) --
Additional founding physicians affiliated during
the three months ended (1).................................. 3 1 1 9 12
Cumulative number of primary care physicians in Core Medical
Groups as of................................................ 21 22 23 31 43
Cumulative number of Core Medical Groups as of................ 1 1 1 2 2
Cumulative number of full risk contracts as of................ 0 0 0 0 3
</TABLE>
(1) Represents physicians who joined Core Medical Groups during each period
presented.
When affiliating with the physician, the Company, through each PSO
Agreement and such physician's employment with the Core Medical Group, acquires
the exclusive right to negotiate Global Capitated Contracts on behalf of the
physician. In addition to the consideration paid in acquiring certain tangible
assets, leaseholds and contract rights, all direct costs associated with the
acquisition are capitalized. The increase in the number of PCP's has contributed
to the increase in revenue growth as well as increase in operating costs to
support the physician growth.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND THREE MONTHS ENDED MARCH 31, 1996
For the year ended December 31, 1995, net revenues were $4.9 million. For
the three months ended March 31, 1996, net revenues were $3.1 million. Net
physician billings (consisting of billings from fee for service arrangements and
ancillary services, less contractual allowances) constituted $4.1 million or
83.5% of net revenues for the year ended December 31, 1995. For the three months
ended March 31, 1996, net physician billings were $2.6 million or 83.9% of net
revenues. Capitated gatekeeper income was $600,000, or 12.2% of net revenues for
the year ended December 31, 1995. For the three months ended March 31, 1996,
capitated gatekeeper income was $340,000 or 10.9% of net revenues. The Company
had no global capitated contractual income for the year ended December 31, 1995.
For the three months ended March 31, 1996, global capitated contractual income
was $106,000 or 3.4% of net revenues. Interest and other income was $211,000, or
4.3% of net revenues for the year ended December 31, 1995. For the three months
ended March 31, 1996, interest and other income was $51,000 or 1.7% of net
revenues. During the year ended December 31, 1995, the Company affiliated with
31 physicians. The Company affiliated with an additional 12 physicians during
the three months ended March 31, 1996. During the three months ended March 31,
1996 the Company began enrolling capitated lives under capitated contracts.
For the year ended December 31, 1995, expenses associated with contracted
physician services (physician compensation) were $2,033,186, or 41.4% of net
revenues. For the three months ended March 31, 1996, expenses associated with
contracted physician services were $1,097,408 or 35.3% of net revenues. Care
center costs for the year ended December 31, 1995, were $2,830,685, or 57.6% of
net revenues. For the three months ended March 31, 1996, care center $1,464,042
or 47.1% of net revenues. General and administrative expenses for the year ended
December 31, 1995, were $1,314,163, or 26.7% of net revenues. For the three
months ended March 31, 1996, general and administrative expenses were $551,501
or 17.7% of net revenues. Corporate salaries and benefits for the year ended
December 31, 1995 were $1,624,436, or 33% of net revenues, while interest
expenses during the period (consisting primarily of interest on notes payable to
physicians) were $129,038, or 2.6% of net revenues. For the three months ended
March 31, 1996, corporate salaries and benefits were $1,026,597 or 33% of net
revenues, while interest expenses were $112,088 or 3.6% of net revenues.
Depreciation and amortization for the year ended December 31, 1995, was $165,926
or 3.4% of net revenues, and for the three months ended March 31, 1996 were
$82,229 or 2.6% of net revenues.
For the year ended December 31, 1995, and the three months ended March 31,
1996, corporate costs (consisting of general administration, salaries and
benefits, depreciation and amortization and interest expense) exceeded revenues
due to
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<PAGE>
the formative nature of the Company. The Company is devoting significant
resources to establishing its infrastructure, investing in contractual
relations, procuring provider risk-sharing arrangements including Global
Capitation Contracts and establishing an integrated health care delivery system.
The Company entered into three Global Capitation Contracts during the three
months ended March 31, 1996. The Company works with payors to enroll a
substantial number of fee-for-service commercial and Medicare patients in global
capitation plans. At March 31, 1996, the Company had approximately 500 covered
lives under management in its Global Capitated Contracts. However, the Company
has not obtained a sufficient number of lives under Global Capitated Contracts
to generate sufficient revenues to cover the Company's operating costs as of
March 31, 1996. The Company did not generate adequate cash to fund operations
for the year ended December 31, 1995, and for the three months ended March 31,
1996. The Company has working capital, a note receivable and an existing bank
credit facility to assist in funding anticipated operations. See "Liquidity and
Capital Resources." Although contracted physician services, care center costs
and corporate costs are expected to increase at a lesser rate than the increase
in net revenues, the Company is likely to report a use of cash from operations
and expects to record a net loss for the year ending December 31, 1996. See
"Risk Factors -- Losses; Restrictions on Financing."
The Company's results of operations for the future are subject to certain
trends and uncertainties that may have an adverse impact on the Company. As
described in "Risk Factors -- Uncertainty of Strategy; Acquisition Risks," while
the Company has developed a strategy and has negotiated a number of commercial
relationships, the Company's strategy is based upon a number of assumptions, and
there can be no assurance that the Company's strategy will be successfully
implemented. As described in "Risk Factors -- Losses, Restrictions on
Financing," substantially all of the Company's net revenues generated by
transactions between the Company and Affiliated PCPs will be used to fund
physician salaries and to pay for other care center costs. As described in
"Business -- Overview of Business Activities," the ability of the Company to
achieve and maintain profitability will depend to a great degree on the
negotiation of compensation arrangements under Global Capitated Contracts that
result in payments to the Company that exceed the payments by the Company to
PCPs and other health care providers in a managed care environment. Accordingly,
there can be no assurance as to when the Company will achieve profitability.
LIQUIDITY AND CAPITAL RESOURCES
On February 24, 1995, the Company issued $5 million of Series A Preferred
Stock in exchange for $2 million in cash and a $3 million subscription
receivable evidenced by a note (the "Series A Note"). The Company used the $2
million at closing to fund the formation of the Company, to acquire certain
assets of the 18 primary care physicians, and to initiate implementation of its
business strategy. During the fourth quarter of 1995, the Company drew down
$500,000 on the Series A Note to fund physician acquisitions, infrastructure
development and corporate costs.
On December 1, 1995, the Company issued Series B Preferred Stock for $4
million and issued warrants for the guarantee of the Company's bank credit
facility by the holder of the Series B Preferred Stock. The funds were used for
the acquisition of physician practices, development of the Company's information
systems and corporate expenses in conjunction with its business strategy.
The Company requires capital to acquire the assets of recruited physician
practices, and to develop and install the information systems necessary for the
management of provider risk-sharing contracts, including global capitation
contracts, and for billing and collection services. Global Capitation Contracts
positively impact the Company's cash flow due to the fact that the Company
receives capitation revenue prior to incurring costs associated with services
provided under such contracts.
The Company's principal uses of cash have been for acquisition of certain
assets of physician practices, and the purchase of property and equipment
including the development of its information systems and operating activities.
For the three months ended March 31, 1996, the Company's operating activities
used cash of $3.2 million. Cash used for operating activities for the year
ending December 31, 1995 was $2.4 million. Net cash used in investing activities
for the three months ended March 31, 1996 was $459,000 and for the year ended
December 31, 1995 was $881,000. The use of cash for investing activities relates
primarily to the acquisition of furniture, fixtures, and equipment, and the
purchase of the physicians' assets and the information systems necessary for the
management of provider risk-sharing contracts and billing and collection
activities. Net cash provided by financing activities for the three months ended
March 31, 1996, was $957,000. For the year ended December 31, 1995, net cash
provided by financing activities was $6.1 million, and consisted primarily of
the cash proceeds from the issuance of the Series A and Series B Preferred
Stock.
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<PAGE>
At March 31, 1996, the Company had working capital and available credit
facilities (including $2.5 million remaining payable on the Series A Note) of
approximately $3.75 million, including cash and cash equivalents of
approximately $177,000. For the year ended December 31, 1995, the Company had
working capital and available credit facilities of $9.2 million. Accounts
receivable were $961,000 at December 31, 1995, and were $2,361,000 at March 31,
1996. This increase of $1.4 million is attributable to the acquisition of
physician receivables and increased net revenues.
On December 1, 1995, the Company entered into an agreement (the "Bank
Credit Facility Agreement") with NationsBank of Maryland, N.A. ("NationsBank")
as agent, which provides for a revolving bank credit facility (the "Bank Credit
Facility"). The maximum availability under the Bank Credit Facility is $4
million, which the Company can use for recruitment of physicians, operating
expenses and anticipated capital acquisitions. At June 1, 1996 there was
approximately $3.0 million outstanding under the Bank Credit Facility. Advances
under the Bank Credit Facility bear interest at the Company's option at either
NationsBank's prime rate or the Eurodollar rate plus .75%. The Bank 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 Bank Credit Facility are guaranteed by the
Company's Series B Preferred Stockholder (Med-Lantic Management Services, Inc.).
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 Physician Services Organization Agreements between the
Company and Core Medical Groups. Upon redemption of the Series B Preferred Stock
in connection with issuance of junior preferred stock to a holder whose
interests are deemed adverse to the guarantor, the Company is required to obtain
a release of the guarantee.
The Company may draw down on the unfunded portion of the Series A Note,
which was $2.5 million as of the date of this Prospectus. The Series A Note
bears interest at 6.5% per annum. Interest is payable only to the extent that
the Company pays dividends on the Series A Preferred Stock.
Scheduled payments on the Series A Note are subject to deferral at the
Company's option until February 24, 1998, although interest continues to accrue
on any unpaid balance. As of March 31, 1996, the Company had elected to defer
$1,250,000 of scheduled draws under the Series A Note compared to deferral of
$750,000 at December 31, 1995. Upon redemption or conversion of the Series A
Preferred Stock, any unpaid principal is to be canceled in an amount equal to
five times the number of shares redeemed or converted. The Company has the
option to require payment of any outstanding principal and interest on February
24, 1998, or the Company may elect to redeem the outstanding Series A Preferred
Stock and cancel the remaining principal and interest.
Until the Company enrolls an adequate number of capitated patients in
Global Capitated Contracts, the Company expects to incur operating losses and
experience negative cash flows through the end of 1996. As a consequence, in
order to meet the Company's working capital requirements to fund operations the
Company will need to conclude an anticipated banking facility. The Company is
currently in negotiations with several commercial lenders for a facility, the
principal amount of which is expected to be not less than $24 million. Although
the Company believes it will be able to obtain such a facility on terms that
will satisfy the Company's requirements, there can be no assurance that the
banking facility will be agreed to and finalized or that it will be on terms
favorable or acceptable to the Company.
The Company's ability to incur indebtedness is subject to the consent of
the holders of the Series A and Series B Preferred Stock under certain
circumstances. See "Description of Capital Stock."
The Company intends to conduct operations in accordance with its business
strategy, including recruitment of primary care practices fund operating
expenses with its existing cash and cash equivalents, and borrowings under the
Bank Credit Facility note receivable, and anticipated banking facility. The
Company believes that these sources of working capital will be sufficient to
meet the Company's anticipated needs through June 30, 1997.
Although the Company does not have material commitments for capital
expenditures, the Company may make additional capital expenditures in connection
with its business strategy and development of its integrated delivery system.
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BUSINESS
INDUSTRY
The Health Care Financing Administration 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 inflation. 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 49.0 million in 1993, a 14.6% compound
annual growth rate. According to industry sources, there are over 600 HMOs
currently operating in the United States, covering approximately 17% 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. The physician practice
management market is estimated at $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 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 most 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 physicians have exceeded significantly 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 and affiliated IPAs and related networks based upon PCPs 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 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 risk contracts with HMOs and other payors that will enable the Company
to derive revenues by encouraging preventive medicine and by the appropriate
utilization of medical resources. The key elements of this strategy are as
follows:
INTEGRATE HEALTH CARE PROVIDERS INTO COMPREHENSIVE NETWORKS. The Company
develops and consolidates individual or groups of PCPs, specialists, hospitals
and other providers into primary care-driven comprehensive health care networks,
permitting it to assume risk capitation contracts for certain health care
services. The Company intends that physicians will
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participate through employment or other contractual relationships with the
Company and its affiliates, while the Company will negotiate favorable rates, to
the extent feasible, from hospitals and other providers. All participants will
agree to follow the Company's PCP-driven clinical protocols and procedures, and
will be closely supervised by the affiliated PCPs. The Company believes that its
health care delivery networks (i) will provide physicians with greater access to
managed care contracts by facilitating contractual relationships with multiple
HMOs or other payors, (ii) can establish a single point of entry into an
integrated health care delivery network for HMOs and other payors, and (iii)
will offer patients a comprehensive range of high quality medical care.
ATTRACTIVE TO PHYSICIANS. A key component of the Company's strategy is to
be attractive to physicians, and particularly to PCPs. The Company is dedicated
to the creation of professionally managed networks that grant physicians broad
clinical autonomy, practice office independence, 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 capitation contracts, with each of
the HMO payors in a region in which affiliated PCPs 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 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. The Health Care
Financing Administration estimates that there are approximately 325,000 Medicare
recipients in the greater Baltimore area and that only approximately 9,000 are
currently enrolled in HMOs. The Company's results of operations are highly
dependent on its ability to enroll its present portion of affiliated physicians'
current Medicare fee-for-service patients to Medicare managed care plans and
attracting new Medicare patients that enroll in Medicare HMOs with whom the
Company contracts.
The Company currently has two Medicare Global Capitated Contracts with CFS
Health Group and 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 an Affiliated PCP. The
Company's strategy depends to a great extent on its success in having its PCP's
current Medicare patients convert from the traditional Medicare fee-for-service
program to one of the Medicare managed care plans that provide for capitation
payments to the Company. For the Medicare patients enrolled in the plans with an
Affiliated PCP, the Company 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 and appropriate specialty care and
closer affiliation with fewer specialists who will benefit from increased
referrals at lower rates, (iii) to reduce 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 and
its Affiliated Physicians believe 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,
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<PAGE>
and excessive utilization of high cost services. The Company believes that lower
cost, more appropriate care is both preferable to the patient and less expensive
to the payor.
EXPANSION STRATEGY. The Company's growth strategy is based upon actively
developing or consolidating 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, (iii) contracting with payors to
expand the number of capitated lives within existing physician practices, and
(iv) expand coverage of existing patients by HMOs.
HISTORY OF THE COMPANY
INITIAL ACQUISITION TRANSACTION. The Company was incorporated in June 1994
and commenced operations in February 1995 when it organized Baltimore Medical
Group, LLC, as its initial Core Medical Group, and acquired certain assets of 18
primary care physician practices. Upon Baltimore Medical Group, LLC's formation
in February 1995, it acquired certain laboratory assets and accounts receivable
from Baltimore Medical Group, P.A., a company which was formed in January 1993
by five of the initial 18 primary care practices, including those of Drs.
Rifkin, Kimmel and Ancona. Subsequently, one of the 18 initial PCPs exercised
his reacquisition rights. Scott Rifkin, M.D., Alan Kimmel, M.D., David Nagel,
M.D., and Robert Ancona, M.D., four of the original members of Baltimore Medical
Group, LLC, are currently directors of the Company.
The Company acquired the PCPs' assets through Medical Holdings Limited
Partnership, a Maryland limited partnership ("MHLP"). In February 1995, at the
time of the establishment of Baltimore Medical Group, LLC, MHLP was formed and
the Baltimore Medical Group physicians transferred certain medical practice
assets, excluding laboratory and other ancillary assets, to MHLP in exchange for
limited partnership interests in MHLP, cash and promissory notes. The laboratory
and other ancillary assets were transferred to Baltimore Medical Group, LLC by
Baltimore Medical Group, P.A. 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. At
the time the Company acquired certain practice assets, the initial physician
owners became members and employees of Baltimore Medical Group, LLC, and have
continued the practice of medicine 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 -- Affiliation of the Core Medical Group
with the Company."
Under the Partnership Agreement of 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, 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 establishment of Baltimore Medical Group, LLC, and MHLP,
additional physicians have sold certain assets of their medical practices and
acquired limited partnership interests in MHLP and membership interests in
Baltimore Medical Group, LLC, Carroll Medical Group, LLC, and Cumberland Valley
Medical Group, LLC. In addition, they have become employees of these Core
Medical Groups. In several instances, physicians who affiliated with the Company
received shares of the Company's Class B Common Stock directly in lieu of
partnership interests in MHLP. Other physicians have become affiliated with the
Company through other Core Medical Groups, such as Carroll Medical Group.
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Set forth below is an organizational chart reflecting the ownership and
relationships among the Company, its stockholders, its Core Medical Groups, and
other participants in the Company's Integrated Health Care Delivery System.
[chart below]
18 PCP
Stockholders
(Original BMG PCPs)
BMGGP, Inc. PCP Limited Partners
General Partner (BMG, CMB & CVMG Members)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Convertible
Class A Stockholders Class B Stockholders Preferred Stockholders
Other Medical Holdings Med-Lantic St. Joseph
Management Gold Rifkin Kimmel PCPS Limited Partnership Mgmt. Services Medical Ctr.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
IPA Agreements Specialist Agreements
IPAS DOCTORS HEALTH SYSTEM, INC. Specialists
PCP PSO PCP PSO PSO PCP
Members/ Agreement Members/ Agreement Agreement Members/
Employees Employees Employees
Baltimore Medical Group, LLC Cumberland Valley Medical Group, LLC Carroll Medical Group, LLC
</TABLE>
PCP PCP
Members\ Members\
Employees Employees
Anne Arundel Medical Group, LLC Montgomery Physicians
Medical Group, LLC
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<PAGE>
The Company is seeking to construct its integrated delivery system by
acquiring the assets of medical practices throughout the Baltimore-Washington
and other regions.
EXPANSION INTO CARROLL COUNTY, MARYLAND. In November 1995, the Company
affiliated with 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.
EXPANSION INTO MONTGOMERY COUNTY, MARYLAND. In February 1996, the Company
entered into letters of intent to acquire the assets of primary care practices
of 22 physicians in Montgomery County, Maryland. The Company expects to
consummate these transactions in June 1996.
EXPANSION INTO ANNE ARUNDEL COUNTY, MARYLAND. In February 1996, the Company
entered into letters of intent to acquire the assets of primary care practices
of nine physicians in Anne Arundel County, Maryland. The Company expects to
consummate these transactions in June 1996.
EXPANSION INTO ALLEGANY COUNTY, MARYLAND. In May 1996, the Company
consummated the acquisition of the assets 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
Baltimore Medical Group, LLC, CVMG entered into a PSO Agreement with the
Company. The Company is establishing an IPA in Allegany County.
EXPANSION INTO WASHINGTON COUNTY, MARYLAND. The Company is establishing an
exclusive Managed Care contracting arrangement with an IPA representing
approximately 25 primary care physicians in Washington County, Maryland.
Pursuant to the Exclusive IPA agreement, the Company will negotiate Managed Care
contracts on behalf of the IPA PCPs.
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.
The Company expects its affiliation activities to continue by increasing
the number of physicians in each Core Medical Group, forming new Core Medical
Groups, and pursuing acquisition and expansion opportunities throughout the
state of Maryland and surrounding regions.
OVERVIEW OF BUSINESS ACTIVITIES
The Company's integrated healthcare delivery system includes PCPs who
affiliate with the Company through the transfer of certain assets of the
physician's practice to the Company and the employment of the physician with a
Core Medical Group such as Baltimore Medical Group. PCPs may also affiliate with
the Company through participation in an Independent Practice Association
("IPA"). A PCP who becomes employed by a Core Medical Group agrees to conduct
his medical practice only through the 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, that 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 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 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 the
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<PAGE>
negotiation of compensation arrangements that result in payments to the Company
that exceed the cost of care by the Company to 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 specialists,
hospitals and other health care providers, creating economic incentives for all
affiliated providers 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.
Under managed care capitated contracts with payors, the Company expects to
derive revenues from the management of patient care costs for specialist and
hospital services. The Company pays its PCPs a primary care capitation amount
based on the geographic market in which the PCP operates from the capitation
payment received from the HMO. The Company also contracts with other providers,
such as specialist and hospital and ancillary services providers.
The Company intends to finance 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 network may derive benefit from
the successful implementation of the Company's strategy in several ways. A
physician to whom equity 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 his affiliation with the Company involves becoming 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 participating PCPs and other physicians. See
" -- Affiliation of the Core Medical Groups and the Company" and "Affiliation
through IPAs."
As of May 1996, there were approximately 140 PCPs, 93
obstetrician-gynecologists and 390 specialty physicians who had transferred
their practice assets or otherwise become affiliated by contract with the
Company and its affiliated Core Medical Groups and IPAs, or who had entered into
binding letters of intent agreeing to become so affiliated. Approximately 80 of
such PCPs had transferred, or entered into binding letters of intent to convey
certain assets of their practices to DHS affiliates and become employees of Core
Medical Groups. As of such time, the 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
physician affiliation 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 practices, negotiating and implementing 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 affiliated PCP practices. Beginning in February 1995
with respect to Baltimore Medical Group, December 1995 with respect to Carroll
Medical, and May 1995 with respect to Cumberland Valley Medical Group, 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 maintains contracts on the physicians' behalf when they
affiliate with the Company under the same 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 and USA Health
Network.
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 Maryland. 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, 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").
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<PAGE>
In February 1996, the Company entered into a 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. These rates are derived from historical
fee-for-service unmanaged Medicare expenses and are adjusted (and paid to the
Company) for each county.
In May 1996, the Company entered into a Medicare Risk Service Agreement
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 age, sex and Medicare eligibility of
the subscribers enrolled with an Affiliated 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 June 1, 1996, the Company had approximately 500 Medicare and
commercial capitated lives. See "Risk Factors -- Enrollment in Medicare Managed
Care Plans." As of June 1, 1996, the Company's Affiliated PCPs provided medical
care for approximately 30,000 commercially managed care plan enrollees on a
primary care only basis. Management believes that approximately 30,000 to 40,000
additional patients of Affiliated PCPs are currently Medicare subscribers, and
the Company has developed 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
larger Core Medical Groups and/or developing a network of preferred provider
specialists who are paid on a discounted fee-for-service or capitated basis. As
of June 1, 1996, the Company had access to approximately 390 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 a capitated payment arrangement with Womancare IPA, a
Company-developed network of 93 physicians providing OB/GYN services, Advanced
Medical Imaging for radiology services, and Corning Metpath for laboratory
services. Under the Company's Network Participation Agreement with the
respective specialty network, the participating specialist providers provide
services to the Company's members referred by a Company PCP, 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. In addition, the
Company has installed 28 computer systems in 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. Through April 30, 1996, the Company had assumed
responsibility for the billing operations of 29 PCP practices, representing 45
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
AFFILIATION WITH PHYSICIANS
The Company typically affiliates with PCPs and other physicians in one of
several ways: (1) through the transfer of certain of the medical practice assets
and contracts to the Company or to a Company affiliate, as a result of which the
physician may obtain, directly or indirectly, cash and/or an equity interest in
the Company ("Investor Physicians"); (2) through an exclusive IPA arrangement,
pursuant to which such physician agrees to conduct all managed care contracting
activity exclusively through the Company and its affiliates and to take as
patients any capitated patient referred by the Company up to a certain level (an
"Exclusive IPA"), or (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 (a "Non-Exclusive
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IPA"), 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. Prior to the filing of the Registration Statement, of
which this Prospectus is a part, PCPs transferred their assets to MHLP, which
then transferred the assets to the Company. Currently, the Company and/or a Core
Medical Group will acquire the assets of the medical practice directly.
The Company also affiliates 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 with which the
Company is affiliating, the type of practice in which such physicians are
engaged, the geographic location of the practice, financial considerations,
regulatory concerns, and pre-existing contracts.
AFFILIATED PHYSICIANS
Consistent with the Company's primary care-driven strategy, the primary
focus of the Company's affiliations with physicians has been on direct or
indirect affiliation by PCPs with the Company. Since the Company's inception and
in connection with the affiliation of the physicians' medical practices with the
Company, entities (referred to herein as "Core Medical Groups") have been formed
or consolidated to conduct group medical practices. Each Core Medical Group is
comprised of a group of physicians under common management and with a common
information system and provider number, and are 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 Maryland using a limited liability
company organizational structure.
In February of 1995, the Company acquired certain assets of the 18 PCP
practices of Baltimore Medical Group, LLC. From February of 1995 to December 31,
1995, the Company assumed exclusive management responsibility for and became the
sole contracting entity for an additional 14 PCP practices through Baltimore
Medical Group, LLC, and Carroll Medical Group for a total of 31 PCP practices.
From December 31, 1995 through February 29, 1996, the Company assumed, or
entered into letters of intent to acquire certain assets and became the sole
contracting entity for an additional 49 PCP practices. Thus, as of February of
1996, a total of approximately 80 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 practice assets 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 Affiliated
Physicians who is a member of such Core Medical Group, pursuant to which the
following transactions occur:
TRANSFER BY AFFILIATED PHYSICIANS OF THE MEDICAL PRACTICE ASSETS. Under the
Transfer Agreement, each Affiliated 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 Affiliated 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." Although the amount and type of consideration payable to each Affiliated
Physician is determined by negotiations between such physician and the Company,
typically such transactions consist of an acquisition by the Company of certain
tangible and certain intangible assets of the medical practice, including
contract rights, and the collection by the Company of the accounts receivable of
the Affiliated Physician.
EMPLOYMENT OF AFFILIATED PHYSICIANS BY THE CORE MEDICAL GROUP. Each
Investor 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 Investor 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 of Class B Common Stock. The Employment Agreement
provides for the payment of base salary and benefits and for the eligibility of
the Investor 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. An Investor 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".
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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. In some Core
Medical Groups the Company and the Core Medical Group may agree to guarantee all
or a portion of a base salary in return for a management or similar fee based
upon practice growth.
AFFILIATION OF THE CORE MEDICAL GROUP WITH THE COMPANY. The Company
provides managed care contracting and practice management services to the Core
Medical Groups (and indirectly to the Affiliated Physicians) through 30 year PSO
Agreements (with 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 typical 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 Affiliated 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 broad 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. In addition, the Company may,
under the PSO Agreement, 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 obligate both the Core Medical
Group and its Affiliated Physicians to provide medical services at the levels of
compensation negotiated solely by the Company. The Company may also negotiate
for, and enter 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 Investor Physicians, all on terms
and for the compensation determined solely by the Company. The Company is
delegated 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 or which the Company otherwise cannot provide.
A typical PSO Agreement provides that the Company will earn an amount equal
to the difference between the cash it collects on behalf of the Core Medical
Group and each of its physicians 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
Investor Physicians of the Core Medical Groups 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.
It is the Company's intent to earn such amounts from Company revenues other
than PCP revenues, 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.
A typical PSO Agreement provides 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 profits managed care-related attributable to the provision of health
care to the Core Medical Group's 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
profits 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
Investor Physicians." 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, and that the Core Medical Groups will therefore have
little or no net income.
PSO Agreements typically have a term 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 or malfeasance, the
PSO Agreement can not be terminated by the Company or the Core Medical Group
absent a material uncured breach.
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OPERATION OF THE CORE MEDICAL GROUP. Each Affiliated Physician enters into
an Operating Agreement with each of the other Affiliated 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 Investor Physicians of the Core Medical Group. The Bonus
Committee also establishes, in consultation with the Company and the bonus
committees of other Core Medical Groups, practice protocols.
AFFILIATION THROUGH INDEPENDENT PRACTICE ASSOCIATIONS
The Company has affiliated with physicians in a variety of ways through
"Independent Practice Associations" (or "IPAs") in which physicians ("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 affiliation 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 referred by the Company. In some cases, the
Company may grant options to acquire Securities or issue Securities as
incentives for physicians to enter into Exclusive IPA Agreements. The Company
may also issue such options or Securities as compensation for the recruitment of
physicians to affiliate with the Company through Core Medical Groups or
Exclusive IPA Participation Agreements.
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 collection.
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 Company often provides an information system,
including all related hardware, software and documentation to such physician.
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, which may include Securities or
options to purchase Securities, may also be payable by the Company pursuant to
the 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 or one
of its affiliates.
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.
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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 affiliates 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 affiliates 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, or contractual arrangements involving reduced fee-for-fee service
or sub-capitated arrangements. Other than employment in a 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 affiliates with
hospitals ("Participant Hospitals") and other health care providers to
participate in its managed care networks. The Company envisions that most of its
arrangements with Participant Hospitals will involve "hub 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 Healthcare Delivery System
HMOs and
other Payors
Risk Capitation
Contract Payment
Doctors PSO Agreement Core
Health Medical Patients
System Primary Care Group Medical
Capitation Payment Services
Capitation
or
Other Specialists
Payment
Hospitals
Medical Services
IPAs and
Other Service
Providers
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PHYSICIAN RECRUITMENT
The Company recruits physicians through direct marketing efforts and
through Core Medical Groups and through IPAs. The Company has a physician
recruitment staff led by one of the Company's founding physicians, a Director of
physician recruitment, recruiting assistants and other staff who participate in
physician recruiting. The Company also recruits PCPs through relationships with
current Investor Physicians, IPA Participant Physicians and other contacts. The
Company also seeks assistance from recruiting consulting arrangements. Such
recruiting consultants provide the Company with access to potential Investor
Physicians in Core Medical Groups and to potential IPA Participant Physicians in
IPAs.
MANAGED CARE CONTRACTING
CONTRACTS WITH PHYSICIANS, HOSPITALS AND OTHER PROVIDERS OF HEALTH CARE
As discussed above in " -- Affiliation of the Core Medical Group and the
Company" and " -- Affiliation Through 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 affiliated 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
technology 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 Investor 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 " -- Affiliation of the Core Medical Group and the
Company" and " -- Affiliation Through Independent Practice Association."
CONTRACTS WITH PAYORS
The Company enters into contracts with payors on behalf of physicians who
have affiliated with the Company through Core Medical Groups or IPAs. Global
Capitated Contracts typically obligate the Company to provide and pay for all
physician services (except for negotiated carve-outs) and, in many 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 according to Company care
protocols when applicable. The payment from a payor to the Company is typically
calculated based on the number of Members or 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 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 PCPs in its networks and will
make such systems available on a uniform basis when such providers 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 Core Medical Group 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 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 affiliated 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 large number of regional primary care
physicians that have affiliated with the Company, thereby providing payors with
an extensive network of physicians to offer its enrollees. The Company also has
an increasing geographic coverage of physicians in its network with extensive
coverage in the Baltimore metropolitan area and affiliated groups (either
existing or with letters of intent) in Allegany, Carroll, Anne Arundel, Harford,
and Montgomery Counties. However, a large number of unaffiliated 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 the first established physician owned network in
Maryland and is currently the largest provider owned network 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 affiliated
physician, terms of employment arrangements, the level and extent of care
management imposed on the affiliated 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 primary care physicians and primary care strategies.
Although other entities may offer cash consideration for
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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 provides its
affiliated 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 providers, including
administrative, legal and accounting services, billing and collection services,
referral management, utilization review, and computer systems and training,
thereby providing Affiliated PCPs more time to devote to the practice of
medicine. See "Risk Factors -- Competition."
EMPLOYEES
As of the date of this Prospectus, the Company had 75 full-time employees
in its headquarters in Owings Mills, Maryland. The Company also employs
additional full-time and part-time office personnel in each of the Core Medical
Group physician's medical offices.
PROPERTIES AND ASSETS
The Company leases approximately 24,000 square feet in Owings Mills,
Maryland for its corporate headquarters. The term of the lease continues until
2001. 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 the Investor Physicians, computer
hardware and software, the rights granted to it pursuant to the PSO Agreements,
contractual relations with providers and payors and cash.
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, 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
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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)7neither the patient nor the payor may be billed; (ii)7payors can recover all
amounts previously billed and paid in respect of non-excepted self-referrals;
and (iii)7the 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
Investor Physicians, as well as similar entities affiliated 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 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
31
<PAGE>
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 affiliated 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 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.
32
<PAGE>
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. ................. 36 Chairman, Director, Executive Vice President and Director of Development
Stewart B. Gold........................ 54 President and Chief Executive Officer and Director
John R. Dwyer, Jr. .................... 39 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......................... 37 Executive Vice President of Strategic Operations and Administration, Director
of Legal Affairs, Secretary and Director
Beth A. Beale.......................... 41 Vice President of Managed Care Operations
Allan C. Sanders, CPA.................. 33 Vice President of Financial Affairs
Theresa A. Spoleti..................... 37 Vice President of Managed Care Products and Services
Mark H. Eig, M.D. ..................... 46 Assistant Medical Director and 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
Robert Ancona, M.D..................... 48 Director
Linda A. Dembiec....................... 42 Director
John W. Ellis, CPA..................... 43 Director
William D. Lamm, M.D. ................. 43 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 regulatory 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., Mr. Dwyer was the President of
Dimetrics, Inc., a wholly-owned subsidiary of Talley Industries (TAL-NYSE) in
California. Before joining Dimetrics, Mr. Dwyer practiced law with Arent, Fox,
Kinter, Plotkin and Kahn in Washington, D.C. Mr. Dwyer is a graduate of the
Cornell University School of Law and the College of Business Administration at
Marquette University.
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,
33
<PAGE>
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.
Allan C. Sanders, CPA, the Company's Vice President of Financial Affairs,
joined the Company in 1995. From 1985 until he joined the Company, Mr. Sanders
was employed by Kamanitz, Uhlfelder & Permison, CPAs where he headed the firm's
health care division. Mr. Sanders is a member of the American Institute of
Certified Public Accountants (AICPA) where he currently serves on the steering
committee of the National Health Care Conference. Mr. Sanders has given notice
of his intention to resign from the Company effective July 23, 1996.
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.
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.
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 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.
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.
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 SJMC, Mr. Ellis served as Vice President, Finance of Maryland General
Hospital from June 1989 to June 1992.
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.
34
<PAGE>
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 currently Vice President of Diversified Insurance
Industries, Inc. ("Diversified"), a position he has held since 1993. He is a
licensed property and casualty insurance advisor in Maryland. Prior to joining
Diversified, Mr. Zetzer served as President of Stanley-Schuchardt, Inc./Zetzer
Insurance in Baltimore, from 1948 to 1993 and as President of the Grant Central
Insurance Company in Maryland from 1963 to 1968. 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.
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 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.
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 two
most highly compensated executive officers during 1995 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL SECURITIES
COMPENSATION(2) UNDERLYING
SALARY OPTION/SARS
($) BONUS ($) (#)(3)
<S> <C> <C> <C>
Stewart B. Gold, Chief Executive Officer........................... $ 175,393 $ 0 0
Paul A. Serini, Executive Vice President........................... 112,537 28,500 50,080
Allan C. Sanders, CPA(4)
V.P. of Financial Affairs........................................ 90,910 22,500 22,550
</TABLE>
(1) No other executive officer earned more than $100,000 in
1995.
(2) In accordance with SEC rules, perquisites constituting less
than the lesser of $50,000 or 10% of the total salary and
bonuses are not reported.
(3) See "Option Grants," "Option Exercises and Year-End Values"
and "Omnibus Stock Option Plan" for disclosure regarding
outstanding stock options.
(4) Mr. Sanders has given notice of his intention to resign from
the Company effective July 23, 1996.
35
<PAGE>
OPTION GRANTS
Options granted to the Named Executive Officers during 1995 are set forth
in the following table. For disclosure regarding the terms of stock options, see
"Stock Option Plans." No stock appreciation rights ("SARs") were granted during
1995.
<TABLE>
<CAPTION>
POTENTIAL
OPTIONS GRANTS IN LAST FISCAL YEAR REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION
OPTIONS EMPLOYEES PRICE EXPIRATION FOR OPTION TERM(3)
NAME GRANTED(#)(1) IN 1995 ($/SHARE)(2) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Stewart B. Gold........................ 0 0 N/A N/A N/A N/A
Paul A. Serini......................... 50,080 36.9% .01 08/09/05 356 928
Allan C. Sanders, CPA.................. 22,550 16.6% .01 08/09/05 160 417
</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.
OPTION EXERCISES AND YEAR-END VALUES
No stock options were exercised by the Named Executive Officers during
1995. There were no SARs outstanding during 1995. The following table sets forth
certain information regarding unexercised options held by each of the Named
Executive Officers as of December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
<S> <C> <C> <C> <C>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
<CAPTION>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Stewart B. Gold.......................................... 0 0 N/A N/A
Paul A. Serini........................................... 0 50,080 0 $ 563,400
Allan C. Sanders, CPA.................................... 0 22,550 0 253,688
</TABLE>
(1) Value determined by the Board of Directors of the Company.
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. 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 all 200,880 options granted is $.01 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, and 198,380 options were issued
and outstanding.
36
<PAGE>
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 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 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.
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 will be fully vested by May of 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 receives
a base salary of $112,500 per annum. Mr. Sanders will be entitled to participate
in the Bonus Pool to the extent determined by the Chief Executive Officer based
upon agreed upon performance standards or otherwise exemplary performance.
Pursuant to the employment agreement, Mr. Sanders received an option to purchase
22,550 shares of Class A Common Stock. Mr. Sanders may exercise such option
beginning in April 1, 1996, and will become fully vested in such options in
April of 2000, or earlier under certain circumstances. The employment agreement
with Mr. Sanders 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. Sanders 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. Mr. Sanders has given notice of his
intention to resign from the Company effective July 23, 1996.
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."
37
<PAGE>
STOCKHOLDERS AGREEMENT
In December of 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") and Med-Lantic Management Services, Inc. (collectively,
the "Stockholders") entered into a Stockholders Agreement (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 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.
38
<PAGE>
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 $302,700 payable to the Company in
connection with certain professional management services rendered in 1995 and
the first three 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 Affiliated Physicians of the Core Medical Groups affiliated with the Company.
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.
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 $400,000 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 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 May 31, 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 May 31, 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 SHARES
<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(1)............................................................. 50,080 5.9
Allan C. Sanders, CPA(1)...................................................... 22,550 2.9
Directors and executive officers as a group (13) (2).......................... 900,130 100
</TABLE>
(1) Consists of shares in respect of Current Options.
(2) Includes 160,130 shares in respect of Current Options and
warrants to purchase 8,000 shares.
39
<PAGE>
CLASS B COMMON SHARES
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
<S> <C> <C>
Medical Holdings Limited Partnership(1)................................. 2,200,000 93.0%
Directors and executive officers as a group (13)........................ 0 0
</TABLE>
(1) Drs. Rifkin, Kimmel, Nagel, LoPresti and Ancona, Directors
of the Company, are officers or directors of the managing
general partner of MHLP. Does not include options for
100,000 shares of Class B Common Stock which would be
granted by MHLP to Dr. Rifkin under his employment
agreement.
SERIES A 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 (13)........................ 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,
which assuming conversion of all Preferred Stock, will equal
73.8% of the maximum outstanding Class C Common Stock.
SERIES B 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 (13).......................... 0 0
</TABLE>
(1) Mr. Zetzer, 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, 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 26.2% of the maximum outstanding Class C Common 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
Preferred Stock and Series B 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 2.15
Scott Rifkin, M.D........................................................... 200,000(1) 4.3
Stewart B. Gold............................................................. 600,000 12.9
CLASS B STOCKHOLDERS
Medical Holdings Limited Partnership 2,200,000 47.3
Other Primary Care Physicians............................................... 198,000 4.25
CLASS C STOCKHOLDERS
St. Joseph Medical Center................................................... 1,000,000 21.5
Med-Lantic Management Services, Inc......................................... 355,556 7.6
Total................................................................ 4,653,556 100%
</TABLE>
(1) Includes an agreement to issue an option to purchase 100,000
shares of the Company's Common Stock pursuant to Dr.
Rifkin's employment agreement.
40
<PAGE>
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)............................... 2,698,000(1) 58%
Management Stockholders (Stewart B. Gold)................................... 600,000 13%
Investor Stockholders (St. Joseph Medical Center and Med-Lantic Management
Services, Inc.)........................................................... 1,355,556 29%
Total................................................................ 4,653,556 100%
</TABLE>
(1) Includes an agreement to issue an option to purchase 100,000
shares of the Company's Common Stock pursuant to Dr.
Rifkin's employment agreement.
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") (the Series A Preferred Stock and the Series B 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 June 1, 1996, 800,000 shares of Class A Common Stock are issued and
outstanding and held by three holders of record, 2,398,000 shares of Class B
Common Stock are issued and outstanding and held by seven holders of record,
1,000,000 shares of Series A Preferred Stock are issued and outstanding and held
by one holder of record and 355,556 shares of Series B 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.
41
<PAGE>
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 six 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 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"). 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 or Series B Subclass, as the case may be,
shall be sufficient to elect a Converted Series A Class C or Converted Series B
Class C Director, respectively. The Series A Subclass or the Series B 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 or Converted Series B 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 Preferred Stock and Series B
Preferred Stock shall cease and terminate.
SERIES A AND SERIES B PREFERRED STOCK
VOTING RIGHTS. Except with respect to the election and removal of
directors, every holder of Series A Preferred Stock and every holder of Series B
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.
42
<PAGE>
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 Preferred Director by the affirmative vote of at least 80% of all of
the votes entitled to be cast for such Series A Preferred Director.
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 A Preferred Director by the affirmative vote of at least 80% of all of
the votes entitled to be cast for such Series B Preferred 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 and each of the Series B
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 or Series B Preferred Stock, as the case may be, or Class C
Common Stock, or (iii) amendments to any of the employment agreements between
the Company and a Management Stockholder.
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 the Company's
business plan, (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 and the Series B Preferred Stock
must be redeemed by the Company (unless such right is waived in writing by the
holder of Preferred Stock), and 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; and (vii) certain other events,
including changes of control of various types.
CONVERSION. All, but not less than all, of the shares of the 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 Preferred Stock at any time prior to 5:00 p.m.
(EST) on February 24, 2000. However, holders of the Preferred Stock who have not
made full payment in cash to the Company for the shares of Preferred Stock may
not convert their shares. Shares of Preferred Stock will automatically be
converted (unless redeemed), one share for one share (subject to
43
<PAGE>
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 into shares of common
stock on 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. 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 a the rate of 9.75% per annum. 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.
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
the preferential liquidation amounts to the holders of Series A Preferred Stock
and the Series B 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 holders of Series A
Preferred Stock and the holders of Series B Preferred Stock:
(i) upon the payment in full of all accumulated and unpaid accrued
dividends on all outstanding shares of Series A Preferred Stock and
Series B 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;
44
<PAGE>
(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.
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.
45
<PAGE>
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.
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.
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 financial statements as of December 31, 1995 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.
46
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DOCTORS HEALTH SYSTEM, INC.
DECEMBER 31, 1995
AND
MARCH 31, 1996
(UNAUDITED)
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Certified Public Accountants..................................................................... F-3
Consolidated Financial Statements
Balance Sheet........................................................................................................ F-5
Statement of Operations.............................................................................................. F-6
Statement of Stockholders' Equity.................................................................................... F-7
Statement of Cash Flows.............................................................................................. F-8
Notes to Consolidated Financial Statements............................................................................. F-9
Schedule II Valuation and Qualifying Accounts.......................................................................... F-23
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
DOCTORS HEALTH SYSTEM, INC.
We have audited the accompanying consolidated balance sheet of Doctors
Health System, Inc. (a Maryland corporation) and Affiliates as of December 31,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period February 24, 1995 to December 31, 1995.
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 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 audit provides 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., and Affiliates as of December 31, 1995, and the consolidated
results of their operations and their consolidated cash flows for the period
February 24, 1995 to December 31, 1995, in conformity with generally accepted
accounting principles.
We have also audited Schedule II -- Valuation and Qualifying Accounts for
the period February 24, 1995 to December 31, 1995. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
/s/ Grant Thornton LLP
Baltimore, Maryland
February 26, 1996
F-3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, PRO FORMA
1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes 1, 3 and 7)............................... $ 2,864,553 $ 177,237 $ 177,237
Accounts receivable (net of allowance of $108,885 for doubtful accounts
(notes 1, 3 and 4)...................................................... 961,479 2,361,395 2,361,395
Note receivable............................................................ -- 300,000 300,000
Other receivables.......................................................... 218,170 795,206 795,206
Prepaid expenses........................................................... 107,004 148,495 148,495
Total current assets.................................................. 4,151,206 3,782,333 3,782,333
PROPERTY AND EQUIPMENT, at cost (notes 1, 2, 4 and 6)
Furniture and fixtures..................................................... 486,929 696,300 696,300
Computer equipment......................................................... 667,454 888,116 888,116
Computer software.......................................................... 236,268 266,783 266,783
Laboratory equipment....................................................... 24,763 37,380 37,380
Leasehold improvements..................................................... 76,015 86,674 86,674
1,491,429 1,975,253 1,975,253
Less accumulated depreciation and amortization............................. 123,521 191,753 191,753
1,367,908 1,783,500 1,783,500
OTHER ASSETS (notes 1 and 2)
Deferred charges (net of accumulated amortization of $40,218).............. 515,322 673,926 673,926
Accrued interest receivable................................................ 159,317 203,256 3,314
Intangibles (net of accumulated amortization of $2,187).................... 63,421 60,226 60,226
Deposits................................................................... 19,866 22,912 22,912
757,926 960,320 760,378
$ 6,277,040 $ 6,526,153 $ 6,326,211
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, PRO FORMA
1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (note 4)..................................................... $ 117,856 $ 1,106,577 $ 1,404,528
Current maturities of long-term obligations (note 5)....................... 101,275 106,361 106,361
Accounts payable........................................................... 304,526 212,397 212,397
Accrued liabilities
Compensation............................................................ 402,879 471,568 471,568
Malpractice............................................................. 244,890 156,506 156,506
Medical claims.......................................................... -- 113,941 113,941
Other................................................................... 180,920 364,485 353,662
Total current liabilities.......................................... 1,352,346 2,531,835 2,818,963
LONG-TERM OBLIGATIONS
Notes payable -- related parties (notes 5 and 12).......................... 1,002,108 1,185,270 1,185,270
Long-term obligations, less current maturities (note 5).................... 386,361 393,992 393,992
1,388,469 1,579,262 1,579,262
OTHER LIABILITIES
Deferred provider payments................................................. -- 191,983 191,983
Rent abatement............................................................. 64,000 97,195 97,195
64,000 289,178 289,178
COMMITMENTS AND CONTINGENCIES (note 7)....................................... -- -- --
REDEEMABLE CONVERTIBLE PREFERRED STOCK
(notes 3, 7, 8 and 12)
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000)................................. 5,275,800 5,357,055 --
Less subscription receivable............................................ (2,500,000) (2,500,000) --
2,775,800 2,857,055 --
9.75% cumulative, Series B, $11.25 par value, authorized and issued
355,556 shares (liquidation value $4,000,000)......................... 4,032,500 4,130,015 --
6,808,300 6,987,070 --
STOCKHOLDERS' EQUITY (notes 9, 10 and 11)
Common Stock
Class A, $.01 par value, authorized 20,700,000 shares, issued and
outstanding 800,000 shares............................................ 8,000 8,000 8,000
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares...................................................... 22,000 23,650 23,650
Class C, $.01 par value; authorized 29,050,000; issued and outstanding
855,556 shares (pro forma)............................................ -- -- 8,556
Additional paid in capital................................................. 122,948 125,698 6,617,142
Accumulated deficit........................................................ (3,489,023) (5,018,540) (5,018,540)
(3,336,075) (4,861,192) 1,638,808
$ 6,277,040 $ 6,526,153 $ 6,326,211
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS FEBRUARY 24, 1995
FEBRUARY 24, 1995 ENDED TO
TO MARCH 31, 1996 MARCH 31, 1995
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES
Net physician billings (note 13)..................................... $ 4,104,524 $ 2,611,574 $ 445,108
Global capitated contractual income.................................. -- 106,349 --
Capitated gatekeeper income.......................................... 600,760 339,619 29,268
Interest and other income............................................ 211,427 51,925 20,824
4,916,711 3,109,467 495,200
EXPENSES
Contracted physician services........................................ 2,033,186 1,097,408 179,154
Global capitated contractual expense................................. -- 126,349 --
Care center costs
Salaries and benefits............................................. 1,315,185 798,353 34,700
Medical services.................................................. 266,859 117,644 4,437
Administration.................................................... 1,248,641 548,045 40,516
Corporate costs
General and administrative........................................ 1,314,163 551,501 271,726
Salaries and benefits............................................. 1,624,436 1,026,597 125,816
Depreciation and amortization..................................... 165,926 82,229 4,391
Interest expense..................................................... 129,038 112,088 7,690
8,097,434 4,460,214 668,430
Net loss before income taxes.................................... (3,180,723) (1,350,747) (173,230)
Income tax expense (note 14) -- -- --
NET LOSS........................................................ $(3,180,723) $ (1,350,747) $(173,230)
Pro forma net loss per share........................................... $ (.92) $ (.34) $ (.07)
Pro forma weighted average number of shares outstanding, assuming
conversion of preferred shares to common............................. 3,474,232 3,924,457 2,500,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK -- COMMON STOCK -- ADDITIONAL
CLASS A CLASS B PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 24, 1995.......... 800,000 $ 8,000 -- $ -- $ 198 $ -- $ 8,198
Net loss for the period............. -- -- -- -- -- (3,180,723) (3,180,723)
Issuance of common stock purchase
warrants for services (note
11).............................. -- -- -- -- 370,000 -- 370,000
Issuance of Class B common stock.... -- -- 2,200,000 22,000 -- -- 22,000
Issuance costs, Series A Preferred
Stock............................ -- -- -- -- (165,000) -- (165,000)
Issuance costs, Series B Preferred
Stock............................ -- -- -- -- (90,000) -- (90,000)
Series A Preferred Stock dividend
accretion........................ -- -- -- -- -- (275,800) (275,800)
Series B Preferred Stock dividend
accretion........................ -- -- -- -- -- (32,500) (32,500)
Members' capital contributions...... -- -- -- -- 7,750 -- 7,750
Balance at December 31, 1995.......... 800,000 8,000 2,200,000 22,000 122,948 (3,489,023) (3,336,075)
Net loss for the period............. -- -- -- -- -- (1,350,757) (1,350,757)
Issuance of Class B Common Stock.... -- -- 165,000 1,650 -- -- 1,650
Members' capital contributions...... -- -- -- -- 2,750 -- 2,750
Series A Preferred Stock dividend
accretion........................ -- -- -- -- -- (81,255) (81,255)
Series B Preferred Stock dividend
accretion........................ -- -- -- -- -- (97,515) (97,515)
BALANCE AT MARCH 31, 1996 (unaudited). 800,000 $ 8,000 2,365,000 $ 23,650 $ 125,698 $(5,018,540) $(4,861,192)
</TABLE>
* All 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-7
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS FEBRUARY 24, 1995
FEBRUARY 24, 1995 ENDED TO
TO MARCH 31, 1996 MARCH 31, 1995
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $(3,180,723) $ (1,350,747) $ (173,230)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization................................... 165,926 82,229 4,391
Provision for uncollectible accounts receivables................ 108,885 127,915 --
Changes in assets and liabilities, net of effects of medical
practice receivables acquired
Accounts receivable.......................................... (32,246) (1,109,426) (169,672)
Prepaid expenses and other receivables....................... (484,491) (957,966) (178,218)
Accounts payable............................................. 278,139 (106,374) 103,830
Accrued and other liabilities................................ 978,652 298,529 74,362
Organizational costs and deferred charges.................... (185,540) (169,405) (125,000)
Net cash used in operating activities...................... (2,351,398) (3,185,245) (463,537)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................... (861,375) (458,136) (59,671)
Deposits............................................................. (19,866) (654) (30,825)
Net cash used for investing activities..................... (881,241) (458,790) (90,496)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock........................ 6,245,000 -- 1,835,000
Borrowings under line-of-credit agreement............................ -- 1,000,000 --
Principal payments on long- term obligations......................... (143,297) (24,125) (4,343)
Payment on notes payable............................................. (12,461) (21,906) --
Members' capital contributions....................................... 7,750 2,750 4,500
Net cash provided by financing activities.................. 6,096,992 956,719 1,835,157
Net increase (decrease) in cash and cash equivalents................... 2,864,353 (2,687,316) 1,281,124
Cash and cash equivalents at beginning of period....................... 200 2,864,553 200
Cash and cash equivalents at end of period............................. $ 2,864,553 $ 177,237 $ 1,281,324
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Doctors Health System, Inc. (DHS) was incorporated in June, 1994 under the
laws of the State of Maryland, and its activities were formative and
insignificant until it commenced operations in February 1995. The Company's
business is to provide health care services, obtain managed care contracts,
manage physician practices, and operate as a third party administrator. DHS is
developing a regional integrated health care delivery system through contracts
with primary care physicians ("PCPs"), specialist physicians, hospitals and
other health care providers. DHS and its affiliates currently provide services
throughout several regions in Maryland.
DHS conducts its operations through the following wholly owned and majority
owned subsidiaries and affiliated medical groups under long-term physician
service organization (PSO) agreements:
<TABLE>
<S> <C>
Subsidiaries
Doctors Health System Primary Care IPA, Inc.
(inactive during 1995)............................................................... 100.0% owned
Doctors Health System-Medalie Equipment
Corporation (inactive during 1995)................................................... 100.0% owned
WomanCare IPA, LLC (inactive during 1995)............................................... 87.5% owned
Affiliates
Baltimore Medical Group, LLC (Baltimore Medical)
Carroll Medical Group, LLC (Carroll Medical)
</TABLE>
Baltimore Medical and Carroll Medical are engaged in the practice of
medicine and the state in which DHS operates prohibits it from owning an
organization which engages in the practice of medicine. Both of these entities
are parties to PSO and Practice Participation Agreements with grant DHS
unilateral and perpetual control over their operations, personnel, facilities
and business activities. DHS has agreed to assume the responsibility for all
operating expenses, to provide financial management, information systems,
marketing, advertising, risk management and administrative support for
utilization review and quality care, among other services. Revenue for medical
care services provided is billed and collected by DHS on behalf of the
affiliates. The amounts collected by DHS, less the allocated costs attributable
to the medical practice and provision of related health care services by the
physician, are remitted to the respective affiliates , from which they are
obligated to pay base employee physician salaries. An incentive bonus, if any,
to be paid to employee physicians shall be determined by the Management
Committee of each core medical group. DHS receives fees, for services provided
to the CMG's laboratory facilities, which fees amounted to $222,300 in 1995 and
have been eliminated in consolidation.
The PSO agreements, as amended to reflect the intent of the parties,
generally have terms of 30 years, renew automatically for successive 10 year
periods, and may only be terminated for cause by the Affiliate. The Company may
unilaterally terminate the agreement with cause. The agreements (i) require the
Company to continue to invest capital for facilities, equipment and fixtures for
use in the medical practices (ii) employ the majority of non-physician
professional and administrative personnel (iii) recruit new PCPs and other
medical personal and (iv) negotiate, enter into, administer and terminate
contractual arrangements on behalf of the Affiliates.
As indicated above, DHS has unilateral control over the assets and
non-medical operations of its affiliates through various contractual
arrangements, notwithstanding the lack of majority of ownership of such
entities. As a result of this control, a parent-subsidiary relationship under
generally accepted accounting principles exists; therefore, DHS has consolidated
the financial statements of the affiliates from the inception of their
operations. It is the Company's belief that consolidation is necessary to
present fairly the financial position and results of operations of the Company.
Baltimore Medical and Carroll Medical, which were formed in February, 1995
and November, 1995 are owned by the Employee Member Physicians who are general
and/or limited partners in Maryland Holdings Limited Partnership (MHLP). At
December 31, 1995, MHLP owned approximately 47.8% of the outstanding shares of
DHS on a fully diluted basis. The shares owned by MHLP in DHS were issued in
contemplation of having approximately 66 full-time equivalent physicians being
admitted as limited partners. Accordingly, the group of 66 physicians are
considered to be founders. Two of these founders, Drs. Rifkin and Kimmel,
collectively own 4.4% of DHS directly, are part owners of the 1% general partner
of
F-9
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
MHLP, limited partners in MHLP and Member Physicians of Baltimore Medical. As of
December 31, 1995, there were 31 founding physicians who were member, general
and/or limited partners in MHLP. Subsequent to December 31, 1995, either through
acquisition or by letters of intent, the Company has reached the scheduled
number of limited partner physicians set forth in the MHLP partnership
agreement. The 1% general partner of MHLP is BMGGP, Inc., which is owned equally
by 17 of the MHLP limited partner physicians. The 99% limited partners of MHLP
are currently Member Physicians employed by of either Baltimore Medical or
Carroll Medical.
ACQUISITION OF ASSETS OF AND EMPLOYMENT OF FOUNDING PCPS
In connection with its formation strategy, each founding PCP who was
employed by DHS (generally by either Baltimore Medical or Carroll Medical)
agreed to transfer certain of their medical practice fixed assets at their
historical depreciated book value in exchange for cash, their patient
receivables for a promissory note and/or cash and certain intangible assets in
exchange for a 1.5% fully diluted limited partnership interest in MHLP.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
BASIS OF PRESENTATION
The consolidated financial statements of Doctors Health System, Inc. ("DHS"
or the "Company") include its wholly-owned and majority-owned subsidiaries,
Doctors Health System Primary Care IPA, Inc., Doctors Health System -- Medalie
Equipment Corporation, and WomanCare IPA, LLC, and its commonly owned or
controlled affiliates, Baltimore Medical and Carroll Medical from the date of
their affiliation. All significant inter-entity and intercompany balances and
transactions are eliminated.
REVENUE RECOGNITION
Revenues for physician services are generated from direct patient 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.
During 1995, approximately 12.9% of the Company's net revenues came from
gatekeeper capitated contracts on which the Company received a fixed, prepaid
monthly fee for each enrolled life in exchange for providing primary care
medical services. The balance of the Company's revenues were derived from
medical care delivered on a fee for services basis. In the future, the Company
expects to derive a significant portion of its revenues from global capitated
contracts.
MEDICAL SUPPLIES
The Company expenses the cost of routine medical and laboratory supplies
when purchased.
INCOME TAXES
DHS is a corporation subject to federal and state income taxes. 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 affiliates 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.
F-10
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
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.
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. Routine maintenance and repairs are charged to expense as incurred.
DEFERRED CHARGES AND INTANGIBLE ASSETS
Deferred charges are comprised of deferred loan acquisition costs, deferred
physician employment contract costs and organization costs. These costs are
being amortized to operations on the straight-line basis over the term of the
loan (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 market value of net assets acquired (goodwill) from a retiring physician.
Intangible assets are being charged to income over 10 years, or the period of
the initial employment agreement with the physician whose practice has been
acquired, whichever is shorter. Management does not believe that any current
factors indicate an impairment of goodwill acquired. Management will review the
carrying value at each future reporting period to determine if any impairment
has occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, notes payable, accounts
payable, and accrued liabilities are reflected in the financial statements at
fair value because of the short maturity of those instruments. The fair values
of the Company's other financial instruments are disclosed in note 12.
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
Management does not anticipate that the provisions of Statement of
Financial Accounting Standard No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is
effective for years beginning after December 15, 1995, will have a material
impact on the Company's financial statements.
In October 1995, Statement of Financial Accounting Standards (SFAS) No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, was issued. As permitted by SFAS
No. 123, the Company will continue to follow the accounting provisions of
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, for applicable transactions with
F-11
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
employees. The Company will adopt the accounting provisions of SFAS No. 123 for
transactions entered into after December 15, 1995 with individuals or
organizations other than employees. The Company plans to adopt the disclosure
requirements of SFAS No. 123 in 1996. Management believes that adoption of SFAS
No. 123 will not have a material effect on the Company's financial statements.
NOTE 2 -- RISKS AND UNCERTAINTIES
It is reasonably possible that future near term events may result in
changes in estimates that would be material to the financial statements.
Significant estimates are as follows:
LIQUIDITY
The foregoing business description discusses the current nature of the
Company's operations. The Company has not yet obtained the desired number of
contracts for prepaid (capitated) medical services. Many of these contracts are
currently being negotiated. Management plans to enter into contracts during 1996
on a schedule that integrates the Company's physician recruiting effort with the
obligation to provide health care services. At December 31, 1995, management
believes that the consolidated financial position, equity and results of
operations of the Company are consistent with its business plan. Management
intends to conduct operations in 1996 in accordance with that plan and expects
to have adequate capital to conduct its operations. There is no assurance that
the company will meet its plan, attain the necessary contracts required or
implement its plan profitably.
ACQUISITION OF MEDICAL PRACTICE ASSETS
The Company has acquired certain tangible assets, patient receivables and
contract rights of 31 practices as of December 31, 1995. These have been
accounted for as asset purchases at the founders' cost. 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. In the acquisition process, the Company uses the services of
outside professionals. The expenses and fees incurred for these professional
services are considered part of the acquisition cost and are capitalized in the
financial statements as deferred acquisition costs. In the event that a
physician exercises his option to leave, the Company charges any unamortized
deferred costs associated with the acquisition to operations in the period when
notice of withdrawal is received. At May 1, 1996, 9 of these physicians
(unaudited) have remaining reacquisition options for periods expiring through
August 1996. There has been one cancellation by a physician. This cancellation
did not require the disbursement of cash or other assets since the transaction
was never funded.
INVESTMENT IN TANGIBLE ASSETS AND INFRASTRUCTURE
For the year ended December 31, 1995, the majority of the Company's revenue
resulted from the delivery of health care services on a fee for service basis.
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 obtain long-term
contracts for global capitated care with a number of payors. In the event these
contracts are not obtained, the Company would most likely be unable to generate
sufficient revenues to cover its ordinary and necessary expenses. Many of the
contracts are in negotiation at December 31, 1995 and management expects that
they will come to fruition within the next operating cycle. If that level of
operations is not achieved these assets may be impaired since the Company would
not require all of the assets owned or leased.
NOTE 3 -- LOAN AGREEMENT AND GUARANTEE
In December 1995 DHS entered into a loan agreement with its commercial
bank, under which DHS 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 DHS designates a portion of the advances to be subject to the
Eurodollar rate plus .75%. All advances are due at December 31, 1997. No
advances under the agreement were outstanding at December 31, 1995; however,
during 1995
F-12
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- LOAN AGREEMENT AND GUARANTEE -- Continued
advances were outstanding under a similar prior agreement. The bank has the
right to offset DHS demand deposit accounts with the bank against any past due
amounts.
The loan agreement is guaranteed by the holder of DHS Series B Preferred
Stock. The guarantee is collateralized by a security interest in all receivables
and the PSO between DHS and Baltimore Medical. The guarantee agreement also
provides for certain restrictions on DHS, including limitations on incurrence of
additional debt and reduction of amounts due from the Series A Preferred
Stockholder. Upon redemption of the Series B Preferred Stock in connection with
issuance of "junior stock" to a holder whose interests are deemed adverse to the
guarantor, then DHS is required to obtain a release of the guarantee. As
consideration for the guarantee, DHS issued a warrant valued at $370,000 for the
purchase of its common stock (see note 11).
NOTE 4 -- NOTES PAYABLE
Baltimore Medical has an agreement with its commercial bank that provides
for a line of credit for $150,000 that matures on February 29, 1996. Interest
accrues on advances at the bank's prime rate plus 1 1/2% per annum (10%
effective rate at December 31, 1995) and is payable monthly. The line is
collateralized by accounts receivable and certain equipment. Advances under the
line were $57,000 at December 31, 1995. The Company is required to be out of the
line for 90 days annually. In February 1996, the Company and the bank agreed to
revised 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 plus 1/2%.
In connection with the acquisitions of individual medical practice assets,
the Company is obligated on short-term notes payable to two member physicians
aggregating approximately $23,400 at December 31, 1995.
The Company is also obligated on a note payable to an employee physician in
the amount of $37,500. The note bears interest at 10%. Approximately one-half of
the balance was paid in January 1996, and the remainder is due in June 1996.
NOTE 5 -- LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1995 are comprised as follows:
<TABLE>
<S> <C>
Notes payable -- related parties........................................................ $1,002,108
Capital lease obligations............................................................... 487,636
----------
1,489,744
Less current maturities of lease obligations............................................ 101,275
----------
$1,388,469
==========
</TABLE>
The Company is obligated on notes payable to various physicians, who are
partners in MHLP and members of either Baltimore Medical or Carroll Medical, in
connection with the original contribution of the accounts receivable from the
physicians' former practices to MHLP. The notes bear interest at rates ranging
from 9.75% to 10% and the notes mature in the event of: (i) termination of the
respective Professional Services Employment Agreements, (ii) a liquidating
distribution to the stockholders of DHS, (iii) combination, consolidation or
merger where DHS is not the survivor, (iv) disposal of substantially all of DHS'
assets, or (v) a public offering with a certain issuance amount to DHS. The
notes may be reduced or adjusted based on receivable collections and may be
prepaid without penalty. These notes have been classified as long-term since
repayment is not expected in the next operating cycle.
NOTE 6 -- CAPITAL LEASE OBLIGATIONS
The Company has entered into a capital lease for computer equipment and
software. Also, in connection with the acquisition of a medical practice, the
Company assumed a capital lease for certain laboratory equipment. These leases
are noncancelable and have terms that expire at various dates through 1999.
Assets under capital leases as of December 31, 1995 approximated:
F-13
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- CAPITAL LEASE OBLIGATIONS -- Continued
<TABLE>
<S> <C>
Software.................................................................................. $220,000
Computer equipment........................................................................ 380,300
Laboratory equipment...................................................................... 24,800
625,100
Less accumulated depreciation............................................................. 46,800
$578,300
</TABLE>
Following is a schedule by year of future minimum lease payments under
capital leases, together with the present value of the minimum payments at
December 31, 1995:
<TABLE>
<S> <C>
1996...................................................................................... $162,634
1997...................................................................................... 162,634
1998...................................................................................... 156,451
1999...................................................................................... 153,835
635,554
Less amount representing interest......................................................... 147,918
Present value of future minimum lease
payments................................................................................ $487,636
Current maturities........................................................................ $101,275
Long-term obligations..................................................................... 386,361
$487,636
</TABLE>
NOTE 7 -- 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. The Company has obtained retroactive coverage for
physicians that were not previously covered by the current carrier (prior to the
physician's affiliation with DHS). The 1995 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, for example, selection of the
underwriter, form of the insurance policy and 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 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 any 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.
HEALTH CARE DELIVERY COSTS
The Company has contracts with physician groups to provide health care
services to participants enrolled in certain health maintenance plans. The
expenses associated with these contracts are recorded as incurred over the
contract term. The Company's responsibility for the cost of continued care is
limited to amounts paid to its primary care physicians. Apart from primary care,
the Company's responsibility is to refer enrolled members to the appropriate
specialist and/or care facility, as provided in the contract.
F-14
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- Continued
The Company is negotiating future global capitated contracts with various
payors of health care services that contain provisions, including performance
criteria, that may increase the Company's risk.
The Company competes for physicians with other managed health care
providers in the geographic area in which it does business. The Company's
ability to obtain managed care contracts is dependent upon the development of a
sufficient number of physicians.
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 1997.
Effective February 1, 1996, the Company adopted a Flexible Benefits Plan
covering all full-time employees. Subject to certain limitations, the Company
may make "nonelective 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 $418,000 ($30,300 for
leased property owned by member physicians) in 1995. In 1996, the Company
entered into an operating lease for additional office space for its corporate
headquarters. Minimum rental commitments, excluding sublease income, under
operating leases as of December 31, 1995, with existing or renewable terms
greater than one year are as follows:
<TABLE>
<CAPTION>
RELATED UNRELATED
<S> <C> <C>
1996......................................................................... $23,600 $ 725,700
1997......................................................................... -- 763,900
1998......................................................................... -- 790,200
1999......................................................................... -- 765,700
2000......................................................................... -- 797,000
Thereafter................................................................... -- 1,205,700
</TABLE>
CASH AND CASH EQUIVALENTS
The Company maintains its cash balances in one financial institution 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.
F-15
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue the following shares of redeemable
convertible preferred stock at December 31, 1995:
<TABLE>
<CAPTION>
SHARES SHARES AGGREGATE
AUTHORIZED ISSUED VALUE
<S> <C> <C> <C>
6.5% cumulative Series A shares, $5.00 par value...................................... 1,000,000 1,000,000 $5,000,000
9.75% cumulative Series B shares, $11.25 par value.................................... 355,556 355,556 4,000,000
</TABLE>
PREFERRED STOCK CONVERSION AND REDEMPTION RIGHTS
Both Series A Convertible Preferred Stock and Series B 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 DHS stock. Only the fully-paid shares are subject to conversion. The
effects on the Company's capital accounts, assuming conversion is reflected in
the March 31, 1996 unaudited pro forma balance sheet.
Between March 1 and June 1, 2000, the Series A and Series B Convertible
Preferred Stockholders have the right to require DHS to redeem all of their
shares at the greater of fair market 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, DHS has the right to
redeem the outstanding shares at the issuance price plus unpaid dividends and
interest thereon for Series A Preferred Stock. It may also redeem the Series B
Preferred Stock on the same terms that the holders could require DHS to pay on a
requested redemption by the holders.
In addition, upon the occurrence of certain events, Series A and Series B
Convertible Preferred Stockholders have the right to require DHS, and DHS 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 DHS decides to take certain actions without the approval of the
Series A and Series B Convertible Preferred Stockholders then the Preferred
Stockholders have the right to require DHS to redeem all of their outstanding
shares. In the foregoing instances the redemption price is the greater of fair
market value or the issuance price plus unpaid dividends and interest thereon.
If DHS elects to enforce certain non-competition covenants with the Series B
Preferred Stockholder, then the holder may require DHS to redeem the shares held
for the greater of $4.8 million or par value plus unpaid dividends and interest
thereon. If DHS 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 DHS to redeem their shares at the greater of: (1) the
purchase price of the adverse junior stock on a fully diluted basis, (2) fair
market value, or (3) 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, DHS
received a note in the original amount of $3 million ($2.5 million balance at
December 31, 1995). The note bears interest at 6.5% per annum, compounded
quarterly, and interest is payable only to the extent that DHS 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 DHS until
February 14, 1998, but interest continues to accrue on any unpaid balance. As of
December 31, 1995, DHS had elected to defer $750,000 of scheduled 1995 payments.
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. DHS has the option to require payment of
any outstanding principal and interest on February 14, 1998, or DHS may elect to
redeem the outstanding Series A Preferred Stock and cancel the remaining
principal and interest.
F-16
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK -- Continued
PREFERRED STOCK DIVIDENDS
Series A 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 Convertible Preferred Stock
under the related note receivable.
Series B 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
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 Preferred Stock accrued and undeclared
dividends at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Series A................................................................ $275,800
Series B................................................................ 32,500
$308,300
</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 DHS, 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 market 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
distribution amount due to each preferred stockholder is limited to the amount
of cash paid to DHS 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 9 -- STOCKHOLDERS' EQUITY
Doctors Health System, Inc. was capitalized and received its initial
funding on February 24, 1995. On December 1, 1995 the Company amended and
restated its corporate charter. This amendment authorized issuance of the
following shares of capital stock by DHS:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND PAR
AUTHORIZED OUTSTANDING VALUE
<S> <C> <C> <C>
Preferred Common Stock........................................................ 1,000,000 -- $0.01
Class A..................................................................... 20,700,000 800,000 0.01
Class B..................................................................... 10,000,000 2,200,000 0.01
Class C..................................................................... 29,050,000 -- 0.01
60,750,000 3,000,000
</TABLE>
All DHS stockholders are parties to an agreement dated December 1, 1995,
that restricts transfer of DHS stock. The agreement terminates upon occurrence
of certain specified events, including a public offering of DHS stock. Under the
terms
F-17
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- STOCKHOLDERS' EQUITY -- Continued
of the stockholders' agreement, the Company may be required to purchase shares
of the Company's capital stock in certain circumstances, such as: (a) 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 DHS is required to purchase all of the
offered shares at fair market value (as agreed to by the parties or as
determined by an independent appraisal); (b) Class A Common Stock purchased by
Dr. Rifkin or Dr. Kimmel after December 1, 1995, if their employment is
terminated, in which case DHS is required to purchase these shares at fair
market value (as agreed to by the parties or as determined by an independent
appraisal); (c) 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 DHS is required to
purchase all of the shares offered. If termination is without cause, the
purchase price is based on fair market value (as agreed to by the parties 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 December 31, 1995, 600,000 shares of Class A Common Stock were
subject to such repurchase requirement. If DHS 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,(d) All classes of capital stock -- upon the occurrence of an involuntary
transfer involving any of its outstanding capital stock, DHS has the right of
first refusal to purchase the offered shares at fair market 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. During 1994, the Company issued Class
A Common Stock to the originating stockholders.
OTHER OWNERS' EQUITY
The consolidated financial statements include the consolidated accounts of
DHS consolidated with commonly owned or controlled Affiliates.
Baltimore Medical and Carroll Medical are limited liability companies
(LLCs) organized under the laws of the State of Maryland in February 1995 and
November 1995, respectively. Each LLC will continue in existence until December
31, 2025, unless terminated sooner in accordance with their respective operating
agreements. All of the Member Physicians of the LLCs are active physicians who
are limited partners in MHLP. At December 31, 1995, the LLCs were the primary
contracting entities the Company contracts with for the delivery of health care
services. The contracts of the LLCs provide for exclusivity with DHS, and the
LLCs are precluded from contracting with any other party. At December 31, 1995,
the contributions to members' capital were as follows:
<TABLE>
<S> <C>
Baltimore Medical Group, LLC................................................................. $6,500
Carroll Medical Group, LLC................................................................... 1,250
</TABLE>
Doctors Health System Primary Care IPA, Inc., (DHS Primary Care) a
wholly-owned subsidiary of DHS, 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 December
31, 1995.
Doctors Health System-Medalie Equipment Corporation (Medalie), a
wholly-owned subsidiary of DHS, was organized in December 1995 to acquire and
hold equipment to be used in the practice of medicine. Medalie had not commenced
operations at December 31, 1995.
DHS has an 87.5% interest in WomanCare IPA, LLC (WomanCare), which was
organized May 1995. The remaining interest in WomanCare is owned by a physician.
WomanCare had not commenced operations at December 31, 1995.
NOTE 10 -- STOCK OPTIONS
DHS has an Omnibus Stock Plan (the Plan) accounted for under APB Opinion 25
and related Interpretations with respect to employee transactions and SFAS No.
123 with respect to transactions with others. The Plan permits DHS to grant
F-18
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- STOCK OPTIONS -- Continued
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 DHS. SARs entitle the optionee to surrender
unexercised stock options for cash or stock equal to the excess of the fair
market 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 DHS 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 market value of the shares on the date the option is
granted. INCENTIVE stock options are granted only to employees of DHS.
On August 10, 1995 and October 18, 1995 DHS granted INCENTIVE stock options
to ten employees for a total of 123,380 shares at the exercise price of $0.01
per share, the estimated fair value of the shares at the date of grant. The
options become exercisable on various dates ranging from April 1, 1996 through
April 1, 2000. Upon exercise, 57,302 shares issued are 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
DHS or the employee's death, disability, retirement, or termination without
cause.
On December 21, 1995, DHS granted NON-QUALIFIED stock options 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 are 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 DHS or the employee's death, disability, retirement, or
termination without cause. The Company will recognize compensation expense as
the options are exercised and the shares vest in future periods, based upon the
option price and fair market value at the date of grant.
NOTE 11 -- COMMON STOCK PURCHASE WARRANTS
In consideration for the guarantee of a loan agreement, DHS issued a
warrant to its Series B Preferred Stockholder for the purchase of 88,889 shares
of DHS 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 (i.e., 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 December 31, 1995, 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.
In consideration for certain consulting services, the Company has issued
warrants for the purchase of 24,000 shares of DHS common stock at $11.25 per
share (a price greater than management's estimate of fair value at the date of
grant). These warrants expire December 1, 2005, and are exercisable if there is
a change in control of DHS.
NOTE 12 -- FAIR VALUE OF FINANCIAL 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:
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A PREFERRED STOCK
SUBSCRIPTION RECEIVABLE
The Company believes that it is not practical to estimate a fair market
value different from the carrying values of these financial instruments. The
Series A and Series B Preferred Stock are carried at issue price plus accrued
dividends, and have
F-19
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
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 13 -- PHYSICIAN BILLINGS
Physician billings consist of:
<TABLE>
<CAPTION>
THREE MONTHS
FEBRUARY 24, 1995 ENDED FEBRUARY 24, 1995
TO MARCH 31, 1996 TO MARCH 31, 1995
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Gross physician billings............................................. $ 6,434,765 $ 3,883,492 $ 599,876
Less: Provision for contractual and other adjustments.............. (2,330,241) (1,271,918) (154,768)
Net physician billings............................................. $ 4,104,524 $ 2,611,574 $ 445,108
</TABLE>
NOTE 14 -- INCOME TAXES
The Company has incurred a net loss from operations of $3,180,723.
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. This loss may be
carried forward for 15 years expiring in 2010. Under federal tax law, certain
potential 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 December 31, 1995. Deferred tax
assets (liabilities) at December 31, 1995, consist of the following:
<TABLE>
<S> <C>
Tax benefit of NOL carryforward....... $1,225,000
Depreciation.......................... (58,000)
Allowance for doubtful receivables.... 42,000
Accrued liabilities................... 57,000
Other (net)........................... 5,000
1,271,000
Less valuation allowance.............. (1,271,000)
Net deferred tax asset.............. $ --
</TABLE>
F-20
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- EARNINGS PER SHARE
Pro forma loss per common share is based on the weighted average number of
shares outstanding, after giving effect to conversion of Series A and Series B
Preferred Stock. The weighted average common shares outstanding were 3,474,232
at December 31, 1995, which includes shares related to stock options and
warrants from the beginning of the period.
NOTE 16 -- SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
FEBRUARY 24, 1995 ENDED FEBRUARY 24, 1995
TO MARCH 31, 1996 TO MARCH 31, 1995
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash paid for interest............................................... $ 120,800 $ 83,670 $ 3,042
SUPPLEMENTARY NONCASH INVESTING AND FINANCING INFORMATION
Liabilities assumed in connection with purchase of medical practice
assets.......................................................... $ 1,333,491 $ 449,336 $587,380
Assets acquired under capital leases............................... 625,023 -- --
Issuance of common stock purchase warrants for services............ 370,000 -- --
Common stock issued in connection with purchase of medical practice
assets.......................................................... -- 1,650 --
</TABLE>
NOTE 17 -- SUBSEQUENT EVENTS
INTEGRATED HEALTH CARE DELIVERY SYSTEM
The Company and MCNET, Inc. (MCNET), located in Chevy Chase, Maryland, have
entered into a letter of intent for the formation of a physician led integrated
health care delivery system (IDS). The resulting affiliate intends to provide
health care services to residents of Maryland and people who work in Maryland
and surrounding areas. There are approximately 446 physicians associated with
MCNET, of which 153 are primary care physicians. This transaction also
contemplates participation by the individual physicians who are currently
members of MCNET. Negotiations with the individual physicians may not proceed
until DHS has filed a registration statement with the Securities and Exchange
Commission. Negotiations with MCNET have not proceeded as planned and therefore,
management does not believe the transaction contemplated by the letter of intent
will occur, however discussions are ongoing.
GLOBAL CAPITATED CONTRACTS
The Company has entered into a contract and a letter of intent in lieu of a
contract to provide health care services under capitated plans with HMOs that
are consistent with those described in note 1. Delivery of care and monthly
receipt of capitated income will begin in early 1996. These arrangements are
global capitated contracts whereby the Company is responsible for the management
of specialty and facilities care, in addition to the primary care component.
Capitated premiums are due monthly and will be recognized as revenue during the
period the Company is required to provide services under the respective
contract. A provision for additional risk-sharing revenue (or loss) will be
reported in the period in which services are rendered. Differences between
original estimates and subsequent revisions will be reported in the period the
revisions are made. The cost of providing services under the contracts will be
recorded as services are rendered, including an estimate for services rendered
but not yet reported. An estimated loss will be recognized when it is probable
that expected future health care costs will exceed anticipated capitated
receipts and stop-loss insurance recoveries.
NOTE 18 -- NOTE TO UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial information for the three month period ended March
31, 1996 and the period February 24, 1995 to March 31, 1995 has been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments considered necessary
for a fair presentation, which consist solely of normal recurring adjustments,
have been included. The interim information should be read in conjunction with
the financial
F-21
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18 -- NOTE TO UNAUDITED INTERIM FINANCIAL STATEMENTS -- Continued
statements for the period February 24, 1995 to December 31, 1995. Operating
results for interim periods are not necessarily indicative of the results that
may be expected for the entire year.
NOTE 19 -- PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma balance sheet as of March 31, 1996, reflects the conversion
of preferred stock into common as though conversion had occurred as of March 31,
1996. The pro forma adjustments are as follows:
(1) At the time of conversion, the Company is required to pay all accrued
preferred stock dividends plus any interest thereon, less accrued
interest due DHS on the note receivable balance due of $2,500,000. The
net balance due as of March 31, 1996 is reflected as an increase in the
Company's line-of-credit in the pro forma balance sheet.
<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
<S> <C> <C> <C>
Dividends due........................................................................... $ 357,055 $130,015 $ 487,070
Less: accrued interest receivable....................................................... (199,942) -- (199,942)
Add: accrued interest payable........................................................... 10,033 790 10,823
Net balance due Preferred Stockholders................................................ $ 167,146 $130,805 $ 297,951
</TABLE>
(2) Only fully paid Series A and B preferred shares are convertible into
common stock on a share per share basis. The Series A subscription
receivable and the related shares are required to be canceled in
accordance with the applicable agreements. The number of fully paid
shares of preferred stock that are assumed converted to common stock is
computed as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B TOTAL
<S> <C> <C> <C>
Number of Preferred shares issued....................................................... 1,000,000 355,556 1,355,556
Less: shares attributable to subscription receivable.................................... (500,000) -- (500,000)
Total number of Class C common stock issued........................................... 500,000 355,556 855,556
Par value of Class C common stock issued.............................................. $ 5,000 $ 3,556 $ 8,556
</TABLE>
F-22
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FEBRUARY 24, 1995
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
<S> <C> <C> <C> <C> <C>
February 24, 1995 to December 31, 1995
Allowance for doubtful receivables............ $ -- $ 108,885 $ -- $ -- $ 108,885
Valuation allowances on deferred tax assets... $ -- $1,271,000 $ -- $ -- $1,271,000
F-23
<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>
<TABLE>
<S> <C>
SEC Registration Fee............................................................................................ $ 21,379.31
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
II-1
<PAGE>
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. 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 nominal cash consideration 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.
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
Convertible 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 Convertible 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.
In December 1995, the Company issued warrants to purchase a total of 24,000
shares of Class A Common Stock to Stephen Graham, Andrew Hamilton and John Dwyer
as compensation for investment advice.
In January 1996, the Company issued 33,000 shares of its Class B Common
Stock to Harvey Mishner, M.D., and in February 1996, issued 33,000 shares of its
Class B Common Stock to each of Paul Miller, M.D., James Quinlan, M.D., David
Otto, M.D., and Anne Lane, M.D., in connection with the mergers of their medical
practices into wholly-owned subsidiaries of the Company.
In May 1996, the Company issued 33,000 shares of Class B Common Stock to
Terry Williams, M.D., in connection with the merger of his medical practice into
a wholly-owned subsidiary of the Company.
II-2
<PAGE>
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 Articles of Amendment and Restatement of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 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.*
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 Form of Amended and Restated Physician Services Organization Agreement.*
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 Stewart7B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott7M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul7A. 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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
10.26 [Intentionally omitted]
10.27 Form of Employment Agreement (filed herewith).
10.28 Form of Practice Transfer Agreement (filed herewith).
10.29 Form of Offer Letter (filed herewith).
10.30 Free State Health Plan, Inc., IPA Service Agreement (filed herewith).
10.31 Binding Letter of Intent with CFS Health Group, Inc. (Health Care Corporation of the Mid-Atlantic) for Medicare Risk
Service Agreement (filed herewith).
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (filed herewith).
10.33 Form of Reacquisition Agreement.
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. (filed herewith).
24.3 Power of Attorney of Robert G. Graw, Jr., M.D. (filed herewith).
24.4 Power of Attorney of William Lamm, M.D. (filed herewith).
24.5 Power of Attorney of Alexander Rocha, M.D. (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(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
II-4
<PAGE>
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 June 4, 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>
<C> <S> <C>
SIGNATURES TITLE DATE
/s/ STEWART B. GOLD Chief Executive Officer; President; Director June 4, 1996
(Principal Executive Officer)
STEWART B. GOLD
* Chairman June 4, 1996
SCOTT M. RIFKIN, M.D.
/s/ JOHN R. DWYER, JR. Chief Financial Officer; Treasurer and June 4, 1996
Director (Principal Financial and Accounting
JOHN R. DWYER, JR. Officer)
/s/ PAUL A. SERINI Director; Executive Vice President of June 4, 1996
Strategic Operations and Director of Legal
PAUL A. SERINI Affairs
* Executive Vice President for Medical Policy June 4, 1996
and Practice; Director
ALAN L. KIMMEL, M.D.
* Director June 4, 1996
JOHN S. PROUT
* Director June 4, 1996
JOHN W. ELLIS
* Director June 4, 1996
J. DAVID NAGEL, M.D.
* Director June 4, 1996
PETER J. LOPRESTI, D.O.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
* Director June 4, 1996
HOWARD I. GOLDMAN, M.D.
* Director June 4, 1996
ROBERT I. ANCONA, M.D.
* Director June 4, 1996
LINDA A. DEMBIEC
* Director June 4, 1996
ROBERT S. ZETZER
* Director June 4, 1996
WILLIAM D. LAMM, M.D.
* Director June 4, 1996
D. ALEXANDER ROCHA, M.D.
* Director June 4, 1996
MARK H. EIG, M.D.
* Director June 4, 1996
ROBERT G. GRAW, JR., M.D.
BY: /s/ Stewart B. Gold June 4, 1996
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
<S> <C> <C>
3.1 Articles of Amendment and Restatement of the Registrant.*
3.2 Amended Bylaws of the Registrant.*
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 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.*
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 Form of Amended and Restated Physician Services Organization Agreement (filed herewith).
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 Stewart7B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott7M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul7A. Serini and amendment
thereto dated January 1, 1996.*
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
<S> <C> <C>
10.25 Employment Agreement dated as of March 20, 1995 by and between the Registrant and Allan C. Sanders, CPA.*
10.26 [Intentionally omitted]
10.27 Form of Employment Agreement (filed herewith).
10.28 Form of Practice Transfer Agreement (filed herewith).
10.29 Form of Offer Letter (filed herewith).
10.30 Free State Health Plan, Inc., IPA Service Agreement (filed herewith).
10.31 Binding Letter of Intent with CFS Health Group, Inc. (Health Care Corporation of the Mid-Atlantic) for
Medicare Risk Service Agreement.
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (filed herewith).
10.33 Form of Reacquisition Agreement.
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. (filed herewith).
24.3 Power of Attorney of Robert G. Graw, Jr., M.D. (filed herewith).
24.4 Power of Attorney of William Lamm, M.D. (filed herewith).
24.5 Power of Attorney of Alexander Rocha, M.D. (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
* Previously filed.
** To be filed by amendment.
II-9
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 BALTIMORE 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
7
<PAGE>
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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<PAGE>
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.
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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
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
Baltimore Medical Group, LLC
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
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: BALTIMORE MEDICAL GROUP, LLC
__________________________ By:______________________(SEAL)
Alan Kimmel, 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")
BALTIMORE 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: Baltimore Medical Group, LLC
21 Crossroads Drive, Suite 330
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.
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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.
39
<PAGE>
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:______________
BALTIMORE 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:_______________]
40
<PAGE>
EXHIBIT A
True Copy of Lease
SCHEDULE 2b
Building Office Space
41
<PAGE>
EQUIPMENT ADDENDUM
TO
SCHEDULE 2b
Building:
Equipment:
42
[FORM]
DRAFT
5/10/96
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is executed this ___ day of ___________, 19__
("Effective Date"), by and between _____________________MEDICAL GROUP, LLC, a
Maryland limited liability company (the "Medical Group"), and
[M_2_Name_of_New_Doctor] (the "Physician").
The parties to this Agreement, intending to be legally bound, agree as
follows:
1. Purpose. The Medical Group desires to employ the
Physician to engage in the practice of medicine through the Medical Group
(the "Medical Practice") and the Physician desires to be employed by the
Medical Group on the terms and conditions set forth in this Agreement.
2. Scope of Employment; Physician Covenants.
2.1 Employment. The Physician agrees to devote his or her best
efforts and full professional time to the practice of medicine exclusively on
behalf of the Medical Group. The Physician agrees that, except for those
activities described on Schedule 2.1, he or she will not engage in any other
employment or professional activity during the Term of this Agreement without
the prior written consent of the management committee of the Medical Group (the
"Management Committee").
2.2 Law and policies. The Physician agrees to comply with all
of (i) the terms and provisions of applicable law and professional ethical
standards relating to the practice of medicine in Maryland, (ii) the policies
and procedures established by the Management Committee, and (iii) the rules and
regulations at any hospital at which the Physician agrees to practice medicine
on behalf of the Medical Group. The Physician agrees to notify the Medical Group
as soon as possible of any personal illness and/or other inability to work.
2.3 Relocation. The Medical Group anticipates that the
Physician will conduct his or her Medical Practice from his or her current
location during the Term. However, after consultation with the Physician it may
be advisable to relocate the Medical Practice to provide appropriate office
space
<PAGE>
and optimal geographic coverage within the Medical Group's patient service area.
If the Physician is moved without his or her consent, he will be
reimbursed for any lost income and "made whole" by the Medical Group.
2.4 Administrative and other duties. Physician agrees to
accept assignments to perform such duties related to the Practice of Medicine,
including administrative and medical director duties, as may reasonably be
assigned by the Medical Group from time to time after consultation with the
Physician in accordance with applicable Medical Group policies. In the event the
Physician is required to perform administrative duties beyond those performed by
other physicians with employment agreements with the Medical Group similar to
this employment agreement, he or she shall be compensated on terms determined by
mutual agreement of the parties.
2.5 Reimbursement Agreements. The Physician agrees to execute
any agreements necessary for the Medical Group and Physician's participation in
and reimbursement from medical programs administered by public or private third
party payors and other private managed care programs approved by the Medical
Group or with whom the Medical Group otherwise contracts (directly or indirectly
through one or more agents) as a participant or a provider. Physician agrees to
maintain such practice patterns, including abiding by specialty consultation and
other referral restrictions, as may be required by the Medical Group, whether as
a result of such public or private managed care programs, or otherwise.
3. Term. The "Initial Term" of this Agreement shall begin on the
date first above written and shall end on _______________. This Agreement
shall automatically be renewed thereafter for additional terms (each an
"Additional Term") of three (3) years each unless written notice of the
intention not to renew at the end of the Initial Term or any Additional
Term is given by the Physician to the LLC at least one hundred twenty (120)
days prior to the end of such term. (The Initial Term and all Additional Terms
are herein referred to as the "Term.")
4. Termination.
4.1 Termination upon Death. If the Physician dies
during the Term, the Physician's employment shall terminate as of the date
of death of the Physician.
4.2 Termination upon Disability. Notwithstanding any
other provision of this Agreement, if during the Term the Physician
becomes physically, mentally or emotionally disabled, as determined by an
independent qualified physician, so that the Physician is, in the good faith
determination of
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<PAGE>
the Management Committee, substantially unable to perform his or her services
hereunder for (i) a period of 6 consecutive months, or (ii) shorter periods
aggregating 180 days during any twelve month period, then the Physician's
employment hereunder shall terminate as of the date of such determination.
However, in the event the Physician has within his or her employ during the
period of total disability, a physician duly licensed to practice medicine in
the state of Maryland, who is approved in advance by the Medical Group, and who
continues to generate sufficient revenues to permit the Medical Group to pay all
direct and indirect costs associated with Physician's Medical Practice during
any period of disability, then the Physician's employment shall not terminate as
provided above.
4.3 Termination by the Medical Group.
(a) The Medical Group may terminate this
Agreement for "Good Cause" immediately upon written notice to the Physician if
the Management Committee, after delivery of reasonable prior notice to the
Physician and a fair hearing on the merits attended by the Physician and his or
her attorney, determines that:
(i) the Physician is no longer
authorized to practice medicine in
the State of Maryland or has had his
or her license to practice medicine
in any state, including Maryland,
limited or suspended by action of
any regulatory body;
(ii) the Physician ceases to have
admitting privileges at the
hospitals and other institutions
scheduled on Schedule 4.3(a)(ii), or
his or her privileges at any such
hospital or other institution are
suspended or limited in any material
way, for reasons other than
temporary suspensions for record
keeping or a voluntary
relinquishment of such privileges
which has been approved by the
Management Committee;
(iii) the Physician fails to perform his
or her duties in a manner consistent
with the professional and ethical
standards of the medical profession
and as established by the Management
Committee;
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<PAGE>
(iv) the Medical Group is dissolved;
(v) all of the Physician's interest
in the Medical Group is redeemed,
purchased or otherwise transferred
or attempted to be transferred;
(vi) in the good faith determination of
the Management Committee, the
Physician engages in illegal or
other wrongful conduct or is guilty
of dishonesty or chronic absenteeism
substantially detrimental to the
Medical Group or reputation of the
Medical Group or its affiliates,
including other Medical Group
physicians;
(vii) the Physician becomes insolvent or
is unable to pay his or her debts as
they come due and these
circumstances negatively affect the
Physician's ability to practice
medicine in an efficient and
professional manner;
(viii) the Physician fails to cooperate
with the Medical Group in arranging
professional liability insurance
coverage, or becomes ineligible in
the State of Maryland for
professional liability insurance
coverage at commercially reasonable
rates;
(ix) the Physician, as a Member of
the Medical Group, violates any
material provision of the operating
agreement of the Medical Group;
(x) the Physician is found to have
knowingly violated any material
rule, regulation or policy imposed
with regard to the Medicare program,
or becomes ineligible to participate
or is barred from participation in,
or otherwise sanctioned by, the
Medicare program;
(xi) in the good faith determination
of the Management Committee, the
Physician fails for any six
month period to generate
sufficient revenues to permit the
Medical Group to pay
4
<PAGE>
all direct and indirect costs
associated with his or her
employment or the operation of the
Physician's medical facility;
provided, however, that the
Management Committee in the exercise
of its discretion hereunder shall
take into account any extraordinary
circumstances that prevent the
Physician from rendering such
services (other than those
circumstances otherwise set forth in
this Section 4.3(a)); or
(xii) the Physician fails to observe or
perform any material obligation set
forth in this Agreement, which
failure is not cured to the
reasonable satisfaction of the
Management Committee within thirty
(30) days after receipt of notice
from the Management Committee.
(b) In addition to the Medical Group's
right to terminate the Physician's employment pursuant to Section 4.3(a),
and notwithstanding any other provision of this Agreement, the Medical Group
may, for any or for no reason, and without "Good Cause", terminate the
Physician's employment upon 60 days prior written notice to the Physician
only upon the payment of all amounts described in Section 4.5(b).
4.4 Termination by the Physician.
(a) Notwithstanding any other provision of this
Agreement, the Physician shall be entitled to terminate his or her employment,
effective on the sixtieth (60th) day following written notice of
termination delivered to the Management Committee, if the Medical Group
commits a material breach of this Agreement or otherwise engages in acts or
omissions that would constitute a "Constructive Termination" (defined
below) of the Physician's employment with the Medical Group and such material
breach or Constructive Termination remains uncured by the Medical Group after
reasonable prior written notice of termination from the Physician; provided,
however, that if such Constructive Termination is caused by the Physician's
incapacity or inability to serve due to a disability of the type described in
Section 4.2 above and the Medical Group elects to terminate the Physician
pursuant to the provisions of Section 4.2, the Physician 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.
5
<PAGE>
(b) For purposes of this Section 4.4,
"Constructive Termination" shall be limited to only those circumstances
where (i) the Medical Group creates working conditions that a reasonable
physician in the Physician's position would consider unreasonable and
intolerable or (ii) the Medical Group fails to pay the Physician his or her
Base Salary when there are adequate funds in the Physician's Care Center
account to pay such Base Salary.
4.5 Compensation and Benefits Following Termination of
Employment.
(a) In the event of termination of the
Physician's employment for any reason other than a termination pursuant to
Section 4.3(b) (without cause) or Section 4.4(a) (constructive termination):
(i) all compensation and other
benefits payable or provided
hereunder shall cease as of the date
of termination; and
(ii) Base Salary (if any) and any Bonus
then payable or accrued through the
date of termination and all accrued
benefits (if any) then payable to
the Physician pursuant to this
Agreement shall be paid to the
Physician (or to his or her heirs,
legatees and/or legal
representatives) through the date of
termination.
(b) In the event of termination of the
Physician's employment pursuant to Section 4.3(b) (without cause) or
Section 4.4(a) (constructive termination), the Physician (or, in the event
of the Physician's subsequent death or disability, his or her heirs, legatees
and/or legal representatives) shall receive each of the following payments and
benefits:
(i) Base Salary (if any) and any Bonus
then payable or accrued through the
date of termination and all accrued
benefits (if any) then payable to
the Physician pursuant to this
Agreement shall be paid to the
Physician (or to his or her heirs,
legatees and/or legal
representatives) through the date of
termination; and
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<PAGE>
(ii) when and as the same would have
been payable hereunder if the
Physician's employment had not so
terminated, for a period equal to
the shorter of (A) three (3) years,
(B) the balance of the Term then in
effect or (C) such time as the
Physician engages in the Practice
of Medicine (and not in violation
of any of the provisions of Section
11), payments of the full Base
Salary which would have been due
to the Physician at a rate based
upon the average of the last six
(6) payments (or all payments if the
Physician's employment is terminated
prior to receiving six payments)
of Base Salary received by the
Physician immediately prior to
termination as if this Agreement
were still in effect, together
with Bonus payments at a rate based
upon the average of the Bonus
payments received by the Physician
in the three (3) year period (or
during the Physician's employment
if sooner terminated) immediately
preceding termination; provided,
however, that the amounts otherwise
payable under this subsection (ii)
shall cease to be payable upon any
breach by the Physician of any of
the provisions of Section 11 hereof.
(c) In the event of termination under Section
4.2 (disability), the Physician or his or her legal representative, as the
case may be, shall, in addition to such other payments as may be due under
Section 4.5(a) above, be entitled to receive the proceeds of any disability
policies maintained by or for the Medical Group and payable to the Physician.
(d) In the event of termination as a result of
Retirement under Section 4.6, the Physician or his or her legal
representatives, as the case may be, shall, in addition to such other
payment as may be due under Section 4.5(a) above, be entitled to receive the
benefits of any retirement, pension or similar plans maintained by or for the
Medical Group for the benefit of the Physician.
4.6 Retirement. The Physician shall be entitled to retire at
any time after the Physician (a) has completed five (5) years of service with
the Medical Group (measured from the date first above written); and (b) has
attained
7
<PAGE>
the age of sixty (60). For purposes of this Agreement, "retirement" shall
mean retirement from the full time practice of medicine (either in private
practice or in a hospital based practice), excluding teaching. In addition to
the foregoing, the Medical Group will negotiate with any Physician otherwise
entitled to retire, if he desires to retire, terms and conditions of a
"phase-out" of the performance of services by the Physician (at his or her
request), which phase-out results in a full retirement upon the conclusion
thereof.
4.7 Termination Upon Insolvency of the Medical Group. The
Medical Group may terminate this Agreement upon the Insolvency (as defined
below) of the Medical Group. For purposes of this Section 4.7, "Insolvency"
shall mean one or more of the following events: (a) an assignment by the Medical
Group for the benefit of creditors; (b) filing by the Medical Group of a case
under any provision of the federal bankruptcy law or any other law relating to
the insolvency or relief of debtors; (c) a case or proceeding against the
Medical Group by any other Person 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; (d) a receiver,
liquidator, assignee, custodian, trustee or similar official is appointed for
the Medical Group or the property of the Medical Group; (e) the Medical Group
becomes generally unable to pay its debts or other financial obligations
(including without limitation the salary, bonus and other benefits pursuant to
this Agreement) as they mature.
5. Fees for Services; Recordkeeeping.
5.1 Except for fees, monies and other compensation paid
or payable to the Physician (i) by an Affiliate of the Medical Group as the
result of an employment arrangement approved by the Management Committee, and
(ii) as a result of the activities described in Schedule 5.1, all fees and
monies or other compensation of any kind earned, paid or given to the
Physician or to the Medical Group with respect to the Physician's practice of
medicine, shall be the property of the Medical Group, and all such work shall
be performed and such goods or professional services provided by the
Physician on behalf of the Medical Group and subject to the direction,
supervision and control of the Medical Group, and not on the Physician's own
behalf.
5.2 The Physician agrees promptly to furnish to the
Medical Group complete and accurate information sufficient to permit
billing and collecting fees for professional services rendered by the
Physician. The Physician agrees to cooperate with the Medical Group to
maintain all books, records, documents and other evidence necessary to certify
the nature and extent of the services provided by the Physician pursuant
to this Agreement in
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<PAGE>
accordance with accepted professional and business and accounting practices and
any applicable regulations promulgated by any governmental entity or officer.
5.3 The Physician hereby reassigns to the Medical Group
the exclusive right to bill and receive payment of all fees for services
provided by the Physician pursuant to this Agreement. Any fees or other
compensation received by the Physician or the Medical Group for services
performed pursuant to this Agreement shall, as a condition of this Agreement,
be the property of the Medical Group and shall be paid over to the Medical Group
immediately. This reassignment is intended to comply with the requirements the
Medicare Carrier's Manual, as well as the technical requirements of all other
relevant third party payors.
6. Compensation.
6.1 Base Salary.
(a) During the Initial Term of this Agreement,
the Medical Group shall pay to the Physician a base salary computed pursuant
to the provisions of Section 6.1(b) hereof ("Base Salary"). The Base Salary
shall be payable in arrears in equal bi-weekly installments, less such
amounts as are required to be deducted or withheld under the provisions of
applicable law.
(b) The Base Salary shall be equal to the sum
of (i) Medical Service Fees, (ii) the Primary Care Capitation Component,
(iii) all Medical Consulting Fees and (iv) all Incidental Services Fees, less
Direct Medical Facility Costs.
(c) For purposes of this Section 6.1, the
following terms shall have the following meanings:
(i) "Medical Service Fees" means all
fees actually collected by the Medical Group or Doctors Health System, Inc.
("Doctors Health") in the immediately preceding calendar month with respect to
the performance of primary care medical services by the Physician on a fee for
services basis.
(ii) "Primary Care Capitation
Component" means, with respect to the performance of medical services by
the Physician on a capitation basis, all capitation actually collected by
the Medical Group or Doctors Health in the immediately preceding calendar
month as the primary care component of any capitation payment. If the
primary care capitation amount has
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<PAGE>
not been separately allocated, Doctors Health shall make such allocation on
the basis of the best available information and shall use its good faith in
determining, with the Medical Group, a commercially reasonable allocation.
(iii) "Medical Consulting Fees" means
the fees actually collected by the Medical Group or Doctors Health in the
immediately preceding calendar month with respect to professional services
rendered by the Physician in connection with primary care consultations,
examinations, reports, testimony, treatment and surgery; salaries for
teaching medicine; fees or royalties received from speaking engagements
relating to medical subjects or writing medical related books, pamphlets and
articles; fees or salaries for medical directorships; and any other form of
compensation or remuneration for professional services, or goods or other
services provided by, through or for the Physician in connection with
professional services.
(iv) "Incidental Services Fees" means the
quotient obtained by dividing
(A) all fees (other than amounts
collected or billed as referral fees derived from, or
otherwise with respect to, the provision of ancillary
services) actually collected by the Medical Group or by
Doctors Health in the immediately preceding calendar
month with respect to the performance of services by
nurses, physician-extenders and others that are incidental
to the provision of medical services by the Physician
and all of the other Member Physicians practicing
with the Physician at a single office or medical
care facility (the "Medical Facility") (the
Physician and such Member Physicians being collectively
referred to as the "Associated Medical Facility
Physicians") and provided under the supervision of such
Associated Medical Facility Physicians during the
immediately preceding calendar month by
(B) the number of Associated
Medical Facility Physicians during the immediately
preceding calendar month.
(v) "Direct Medical Facility Costs"
means the quotient obtained by dividing
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(A) all expenses, which shall not
include the Management Fee, paid or accrued by the
Medical Group, or Doctors Health during the immediately
preceding calendar month that have been generated
directly by, or with respect to the operation of, the
Medical Facility where the Associated Medical
Facility Physicians regularly provide their medical
services, including but not limited to malpractice
and other insurance, rent, and salary of Medical
Facility Staff and employed physicians, by:
(B) the number of Associated
Medical Facility Physicians during the immediately
preceding calendar month.
(d) For purposes of paragraphs (iv) and (v) of
Section 6.1(c) of this Agreement, if the Physician provides medical
services for the Medical Group at more than one office or Medical Facility
of the Medical Group, the calculation of Incidental Services Fees and
Direct Facility Costs, respectively, shall take into consideration all such
offices or Medical Facilities and the data relating to each of them utilized in
such calculations shall be weighted based upon the aggregate of all Medical
Service Fees, Primary Care Capitation Components and Medical Consulting
Fees generated by the Physician at each such office or Medical Facility.
(e) The calculation of the Physician's Base
Salary shall not include, and the Physician shall not be compensated by the
Medical Group for or in respect of, fees collected by the Medical Group or
Doctors Health for or in respect of laboratory services, radiology services,
or any other ancillary services identified as designated health services
under federal physician self-referral prohibitions. All such revenues shall
be considered to be revenues of the Medical Group. The Medical Group
agrees to distribute such net revenues among the Physicians in accordance with
a plan of distribution that does not take into account the volume or value of
any referrals for such services by any Physician.
6.2 Deferral. If the Physician is, or during the Term of
this Agreement becomes, a Member of the Medical Group, the Physician
acknowledges and agrees that (i) payments of his or her Base Salary and Bonus
are conditioned upon, subordinated to and shall be made only after all of the
operating expenses of the Medical Group have been made or, in the discretion
of the Management Committee, reasonably reserved or otherwise provided
for, and (ii) the Management Committee may, in its discretion, defer
payments of
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<PAGE>
Base Salary and Bonus to Member Physicians of the Medical Group until such time
as the foregoing condition has, in the discretion of the Management Committee,
been satisfied.
6.3 Bonus. For each calendar year or portion thereof
during the Term of this Agreement (each a "Bonus Year"), the Physician
shall be eligible to participate in distributions from a Bonus Pool
established by the Management Committee (or any duly constituted subcommittee
thereof) for each Bonus Year occurring during the Term only in such years in
which the Physician meets or exceeds such standards as may reasonably be
required by the Management Committee.
7. Vacation and Sick Leave. The Physician will be entitled to
such time off for vacation, professional meetings, medical education,
sick/personal leave as determined by the Physician, provided that the
Physician arranges for adequate coverage by other physician employees of the
Medical Group to provide necessary services during his or her absence, all
subject to and in accordance with the policies established from time to time by
the Management Committee.
8. Medical Malpractice Insurance.
8.1 The Physician shall cooperate with the Medical Group in
maintaining, at all times during the term of this Agreement, professional
liability insurance coverage in form and with an insurer acceptable to the
Medical Group for professional services rendered pursuant to this Agreement
in the minimum amount of One Million Dollars ($1,000,000) per occurrence, per
person; Three Million Dollars ($3,000,000) total limit excess coverage, which
policy shall, unless expressly waived by the Medical Group and Doctors Health
name the Medical Group and Doctors Health as additional named insureds. All
such premiums shall constitute a Direct Medical Facility Cost and be charged
to the Physician.
8.2 The Physician shall furnish to the Medical Group a written
notice of each malpractice claim threatened or filed against him within five
(5) business days of receipt of the claim or threat which notice shall
describe the claim in reasonable detail.
8.3 Unless expressly waived by the Medical Group and Doctors
Health, the Physician agrees to and does hereby indemnify and hold the
Medical Group and its Affiliates harmless from any liability, claim, demand,
judgment or costs relating to or arising out of any acts or occurrences of or
relating to the Physician which either arose prior to the execution of this
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<PAGE>
Agreement or which are outside the scope of the Physician's employment and
duties hereunder.
8.4 If the Physician carried a policy of "claims
made" insurance prior to his or her employment with the Medical Group,
then the Physician shall cooperate with the Medical Group in
purchasing, at the expense of the Physician, coverage that will prevent
a lapse of insurance coverage of the Physician ("tail coverage") and shall
keep such coverage in effect as long as the Management Committee determines
is necessary to protect the Medical Group against claims arising against the
Physician.
9. Other Benefits.
9.1 The Medical Group shall provide the Physician with
additional benefits as the Management Committee may in its discretion establish,
based upon the same eligibility criteria and on the same basis as such benefits
are available to similarly situated physician employees of the Medical Group,
and using the Effective Date as the Physician's anniversary date to determine
eligibility.
10. Patient Records.
10.1 All patient records, files, charts, x-ray films and
other written or recorded material pertaining to patients of the Medical Group
shall, as between the Physician and the Medical Group, be and remain the
sole and exclusive property of the Medical Group during the Term of this
Agreement and thereafter, provided, however, that nothing contained herein
shall be construed as preventing or impairing the right of any patient to
select the physician of his or her choice to render services to that patient,
and the Medical Group shall comply with all reasonable requests of any
patient following the termination of the Physician's employment regarding the
disposition of copies of said patient's records, including but not limited to,
x-ray films, subject to the Medical Group right to preserve the original
records for its files.
10.2 If following the termination of the Physician's
employment, any patient should request the transfer of copies of his or her
records (including x-ray films) (the "Records") to the Physician, the Medical
Group shall immediately transfer duplicate copies of the Records to the
Physician and the Physician shall reimburse the Medical Group promptly for all
reasonable out-of-pocket costs incurred by the Medical Group in connection with
the duplication of the Records and/or transmission of copies of the Records to
the Physician. The Medical Group shall pay duplication costs referred to herein
when the Physician's employment has been terminated under the circumstances
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described in Section 4.3(b) or 4.4 of this Agreement. The Medical Group shall
have the full right to set-off all costs and expenses reimbursable to it under
the terms of this Section 10.2 from any amounts payable to the Physician by the
Medical Group after the termination of the Physician's employment, whether such
amount is payable under this Agreement or otherwise.
11. Non-Competition.
11.1 General. The parties acknowledge that the Medical
Group is engaged in the business of providing health care services as part
of an integrated health care delivery system, including providing these services
under Managed Care contracts with HMOs and other payors (the "Managed Care
Business"). In connection with Physician's employment, the Physician will gain
access to new patients, payors, providers and confidential information
concerning the Managed Care Business. The provisions of this Section 11 are
necessary to protect the business and goodwill of the Medical Group and its
affiliates.
11.2. Non-competition. During the Term and for a period of
one year following termination of this Agreement by the Medical Group for
"Good Cause" pursuant to Section 4.3(a) and termination of this Agreement
by the Physician pursuant to Section 4.4(a) (collectively, the "Termination
Events"), the Physician shall not:
(i) engage in the practice of medicine,
within five miles of his or her current location when a Termination Event
occurs, as an employee or otherwise by or through a person or entity which
derives more than $1,000,000 in actual collections from managed care
contracts or similar arrangements in any twelve month period;
(ii) become within five miles of his or her
current location when a Termination Event occurs, an employee of any HMO,
managed health care provider, managed care delivery system or any other Person,
firm or corporation or entity engaged in the Managed Care Business;
(iii) except for persons who were patients of the
Physician immediately prior to the date of this Agreement, and except by way of
general advertisement in the public media, solicit patients of the Medical
Group or patients of its Affiliates in writing or otherwise persuade or
attempt to persuade any such person, to associate with the Physician
with respect to any of the foregoing or to otherwise discontinue an
existing relationship with the Medical Group, its affiliates or any Payor
which has entered into a managed care contract with Doctors Health; and
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<PAGE>
(iv) send any notice or participate in any
direct mailing or otherwise communicate with any patient of the Medical Group
or any affiliate of the Medical Group (whether or not such patient was an
active patient of the Physician at the time of termination of employment),
even if such communication is limited to stating that the Physician is no longer
a participating provider in any Doctors Health managed care contracts or
similar arrangements.
11.3 Enforcement.
11.3.1. If the Physician breaches or threatens
to commit a breach of any of the provisions of this Section 11, the
Medical Group and each of its Affiliates shall have the right and remedy (in
addition to any other rights and remedies that may be available) to have the
provisions of this Section 11 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 Doctors Health, the
Medical Group or their Affiliates and that money damages may not provide an
adequate remedy to the Medical Group and its Affiliates.
11.3.2. If any court determines that any portion
of this Section 11 is invalid or unenforceable, (i) the remainder of this
Section 11 shall not thereby be affected and shall be given full effect
without regard to the invalid portions and (ii) 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.
11.3.3. In the event the Physician breaches the
provisions of Section 11, the Medical Group agrees that the damages
recoverable by the Medical Group from the Physician shall be limited to
(a) money damages equal to the cash Purchase Price; (b) delivery of the
stock certificate representing the stock Purchase Price from the physician to
Doctors Health; and (c) reasonable attorneys' fees.
11.4 The provisions of this Section 11 shall not apply to
the Physician in the event the physician exercises the walk away rights
described in Section 7 of the Practice Transfer Agreement among the Physician,
the Medical Group and Doctors Health dated __________.
12. Dispute Resolution.
12.1. Arbitration. Any dispute between parties to this
Agreement arising under or with respect to this Agreement shall be submitted to
binding
15
<PAGE>
arbitration according to procedures described on Schedule 12 and any arbitral
award may be enforced by a court of competent jurisdiction.
12.2. Litigation. The parties hereby submit to the
jurisdiction and venue of the courts of the State of Maryland. No 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. The parties submit
to the jurisdiction and venue of the courts of the State of Maryland.
13. Miscellaneous Provisions.
13.1. Notices. Any notices given with respect to this
Agreement shall be effective when received and 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 Medical Group:
Baltimore Medical Group, LLC
10451 Mill Run Circle
10th Floor
Owings Mills, MD 21117
If to the Physician:
[Copy to Physician's Attorney]
13.2. Entire Agreement. This Agreement and the other
Closing Documents contain the entire understanding between the parties and
supersede any prior understanding and agreements between them respecting
such subject matters.
13.3. Severability. If any provision of this Agreement, or the
application thereof to any person or circumstances shall, for any reason and to
any extent, be invalid or unenforceable, the remainder of this Agreement and the
application of such provision to other persons or circumstances shall not be
affected thereby, but rather shall be enforced to the greatest extent permitted
by such Laws.
16
<PAGE>
13.4. Assignment. No party to this Agreement shall have any
right to transfer, convey or assign its rights or obligations under this
Agreement to any Person. Each party to this 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.
13.5. Interpretation. This 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.
13.6. Amendment. This 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.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as an instrument under seal as of the day and year first above
written.
WITNESS/ATTEST: ____________MEDICAL GROUP, LLC
_______________________ By: _____________________(SEAL)
WITNESS:
_______________________ __________________________(SEAL)
[M_2_Name_of_New_Doctor]
17
<PAGE>
SCHEDULE 12
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 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 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 attorney who is a member of the National Health Lawyers Association
and who is knowledgeable in the subject matter of the Dispute.
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.
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<PAGE>
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.
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.
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<PAGE>
8. Court Proceedings.
8.1. Any party may seek temporary or preliminary injunctive relief
or actions in summary proceedings from any court of competent jurisdiction prior
to the time the Neutral Arbitrator is appointed. Any temporary or
preliminary injunctive relief granted by a court shall continue during the
pendency of the Proceeding unless the Panel shall, after hearing, direct
otherwise.
9. Costs.
9.1. 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.
9.2. 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.
10. Miscellaneous.
10.1. 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.
10.2. 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 then applicable 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.
10.3. 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. The parties agree that, in determining any remedy or relief
that the Panel deems appropriate, including, without limitation, any remedy
contemplated under Section 2.4 of the Employment Agreement whereunder the
Physician is to be "made whole" as a result of his or her relocation, the Panel
shall not be bound by judicial decisions as to any limitations due to the
speculative nature of damages.
10.4. 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.
10.5. The Panel may, in its discretion, convene and act by
conference call for all purposes other than taking oral testimony.
20
<PAGE>
SCHEDULE 2.1
PERMITTED PROFESSIONAL ACTIVITIES
None
<PAGE>
SCHEDULE 4.3(a)(ii)
HOSPITAL PRIVILEGES
[FORM]
DRAFT
5/9/96
PRACTICE TRANSFER AGREEMENT
By and Among
_________________ Medical Group, LLC,
Doctors Health System, Inc. and
-------------------------------
[Date]
<PAGE>
Practice Transfer Agreement
Table of Contents
Page
Section 1 INTRODUCTION
Section 2 TRANSFER OF MEDICAL PRACTICE;
PURCHASE PRICE
Section 3 REPRESENTATIONS, WARRANTIES AND
COVENANTS OF DOCTORS HEALTH
Section 4 REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE PHYSICIAN
Section 5 ADDITIONAL COVENANTS AND
AGREEMENTS OF THE PHYSICIAN
Section 6 ADDITION AND WITHDRAWAL OF
PHYSICIANS
Section 7 WALK-AWAY RIGHTS
Section 8 DISPUTE RESOLUTION
Section 9 MISCELLANEOUS
2
<PAGE>
This Practice Transfer Agreement, dated as of the ____ day of
______________, (the "Closing Date") by and among ____________ Medical Group,
LLC, a Maryland limited liability company (the "Medical Group"); Doctors Health
System, Inc., a Maryland corporation ("Doctors Health"); and
__________________________ (the "Physician").
The parties to this Agreement, intending to be legally bound,
agree as follows:
1. Purpose. The Physician has decided to transfer certain assets and
liabilities of his medical practice (the "Medical Practice") to Doctors Health
and the Medical Group and to engage in the practice of medicine exclusively
through and with the Medical Group and as an employee of the Medical Group.
Doctors Health and the Medical Group desire to acquire certain assets and
liabilities of the Medical Practice, and the Medical Group wishes to admit the
Physician as a member and to employ the Physician.
2. Transfer of the Medical Practice.
2.1. Transfer of Assets. The Physician transfers to Doctors
Health all of his or her right, title and interest in and to the Medical
Practice, including all assets relating thereto (excluding assets used by the
Physician to provide laboratory services and other services ancillary to his or
her Medical Practice and the accounts receivable of the Medical Practice
outstanding on the Closing Date) as listed on Schedule 2.1(a). The Physician
transfers to the Medical Group all of his or her right, title and interest in
and to any assets as used by the Physician to provide laboratory services and
other services ancillary to his or her Medical Practice as set forth on Schedule
2.1(b). The assets listed on Schedules 2.1(a) and 2.1(b) are referred to in this
Agreement as the "Assets."
2.2. Assumption of Liabilities. Doctors Health assumes the
liabilities and obligations of the Physician listed on Schedule 2.2(a). The
Medical Group assumes the liabilities and obligations of the Physician listed on
Schedule 2.2(b). Doctors Health and the Medical Group assume no other
liabilities or obligations of the Physician except as listed on Schedules 2.2(a)
and 2.2(b), respectively. The liabilities listed on Schedules 2.2(a) and 2.2(b)
are referred to in this Agreement as the "Liabilities."
2.3. Purchase Price. As payment for the transfer of the
Assets of the Medical Practice to Doctors Health and the Medical Group,
Doctors Health has delivered to the Physician the following (which shall
constitute the "Purchase Price"):
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<PAGE>
(a) Check in the amount of $__________ ;
(b) __________ shares of Class B Common Stock
of Doctors Health (the "Shares"); and a promissory note substantially in the
form attached hereto as Exhibit 2.3(c) representing the amount of collectable
accounts receivable of the Medical Practice (the "Note").
2.4. Closing Documents. The parties shall execute and deliver
the following closing documents which shall be effective as of ________________:
(i) Employment Agreement between the Physician and the Medical Group (the
"Employment Agreement"); (ii) Stockholders Agreement and Proxy; (iii) Amendment
to the Operating Agreement of the Medical Group admitting the physician as a
member of the Medical Group; (iv) the Note; and (v) any other documents executed
in connection with this Agreement (the "Closing Documents").
2.5. Employees. Effective on the date hereof, the
Physician's non-physician employees shall become employees of Doctors
Health.
3. Representations, Warranties and Covenants of Doctors Health.
Doctors Health represents, warrants and covenants to the Physician as of the
Closing Date as follows:
3.1. Organization and Power. Doctors Health is a corporation
duly incorporated and organized, validly existing and in good standing under
the laws of the State of Maryland. Doctors Health has full power and authority
(corporate and other) to own and hold its properties and to conduct its
business as currently conducted.
3.2. Authorization of Agreement. The execution, delivery
and performance of this Agreement and the other closing documents to which it
is a party have been duly and validly authorized by Doctors Health and
executed on behalf of Doctors Health, and no other proceedings are necessary
to authorize this Agreement.
3.3. Class B Common Stock. Upon issuance to the Physician of
shares of the Class B Common Stock of Doctors Health, such shares shall
constitute fully paid and nonassessable shares of the Class B Common Stock of
Doctors Health.
4. Representations, Warranties and Covenants of The Physician.
The Physician hereby represents, warrants and covenants to the other parties
hereto as of the Closing Date as follows:
4
<PAGE>
4.1. Ownership of Practice; Title to and Condition of Assets.
Except as listed on Schedule 4.1, the Physician owns and has good and marketable
title to all of the assets, rights, franchises and privileges used or usable in
his or her Medical Practice, free and clear of all liens or encumbrances of any
kind. The Assets are in good operating condition and repair, ordinary wear and
tear excepted. The Physician does not hold fee title to any real property
related to the Medical Practice.
4.2. No Conflicts. The execution, delivery and
performance by the Physician of this Agreement and the other closing documents
to which he is a party do not conflict with or violate any contract or agreement
to which the Physician is subject.
4.3. Compliance With Laws. The Physician is not in violation
of any order, writ, decree, or judgment of any court, arbitrator, or
governmental or regulatory body which violation would (i) affect the legality,
validity or enforceability of this Agreement or any other Closing Documents or
(ii) have a material adverse effect on the Assets or the Physician's Medical
Practice.
4.4. Litigation. There are no lawsuits, proceedings or
investigations pending or threatened against the Physician or the
Physician's Medical Practice.
4.5. Contracts. Schedule 4.5 is a true and complete list of
all material contracts or agreements of the Physician related to the Medical
Practice (the "Contracts"). All of the Contracts are in full force and effect,
and there exists no default under any such Contract. There are no written or
oral binding "side agreements" with any Person whereby the Physician has agreed
to do any material act or thing beyond the requirements of the Contracts.
4.6. Taxes. The Physician has duly filed all Medical
Practice and personal federal, state and local tax returns, declarations
or statements which are required to be filed for all periods up to and
through the Closing Date and paid all taxes due.
4.7. Financial Statements; Accounts Receivable. Attached as
Schedule 4.7(a) is a true and complete copy of an internally prepared or audited
financial statement of the Medical Practice dated as of _______________. Such
financial statements fairly and accurately present the assets, liabilities and
results of operations of the Medical Practice and there are no undisclosed
liabilities or obligations (contingent or accrued) that are not reflected on
such financial statements or set forth on Schedule 4.7(a). Attached as Schedule
4.7(b) is a true and complete list of the accounts receivable as the Medical
5
<PAGE>
Practice dated as of _________________. The Physician knows of no accounts
receivable that are uncollectable.
5. Additional Covenants and Agreements of the Physician.
5.1. Information. The Physician agrees provide to the Medical
Group or to Doctors Health promptly upon request all information necessary to
allow the Medical Group or Doctors Health to comply with applicable law,
including, without limitation, information relating to employees of the
Physicians and employee benefits provided by the Physician to such employees. On
the Closing Date, the Physician has provided Doctors Health an ASCII-formatted
file with patient demographics and an ASCII-formatted file with demographics and
accounts receivable. If the Physician does not have the capability of providing
this information, Doctors Health will assist the Physician in converting such
information to a format acceptable to Doctor Health.
5.2. Reformation of Group Practice. If the Employment
Agreement between the Physician and the Medical Group is terminated on the basis
of Section 4.8 of the Employment Agreement or otherwise as a result of the
Insolvency (as that term is defined in Section 4.8 of the Employment Agreement)
of the Medical Group, the Physician agrees to (a) cooperate with Doctors Health,
the Medical Group and each other Member of the Medical Group to organize a new
corporation, partnership or limited liability company to provide primary medical
care and related services and (b) to engage in the practice of medicine
exclusively through such new primary care entity. The Physician will enter into
an employment agreement with such new entity on terms substantially similar to
the terms of the Employment Agreement and will use his or her best efforts to
cause such new entity to enter into an agreement with Doctors Health for the
provision of assets, facilities and non-professional services, including
management services, on terms, including provisions for Management Fees,
substantially similar to the terms of the Physician Services Organization
Agreement between Doctors Health and the Medical Group.
6. Addition and Withdrawal of Physicians. Doctors Health, shall have
exclusive the authority to (a) negotiate the price and terms with respect to the
acquisition from time to time of the medical practices of such additional
physicians and such physicians' employment by the Medical Group or additional
Medical Groups organized by Doctors Health, and (b) negotiate the withdrawal of
physicians from the Medical Group. Each party agrees to use its best efforts to
permit the addition and withdrawal of physicians as members of the Medical
Group.
6.1. Appointment as Agent; Specific Performance; Release. The
Physician irrevocably appoints Doctors Health and the Chairman of the
6
<PAGE>
Medical Group (or their designee) as his attorney in fact and agent to carry
out the provisions of this Section 6, to execute any document required to
provide for the admission or withdrawal of physicians as members of the Medical
Group, and any other transaction related to acquisition of medical practices.
The parties agree that such appointment is coupled with an interest. The
Physician releases and agrees to indemnify and hold harmless Doctors Health and
the Chairman of the Medical Group and their directors, officers, employees or
shareholders from any claims arising in connection with the performance of
their duties under this Section 6.
6.2. Acquisitions and Withdrawals Other Than Through The
Medical Group. If Doctors Health decides to acquire physician practices or
services through one or more additional medical groups or other entities and not
through the Medical Group, the foregoing provisions of this Section 6 shall
apply with appropriate modifications to reflect the substitution of such
additional medical groups.
7. Walk-Away Rights.
7.1. General. Doctors Health agrees that the Physician may
reacquire his or her Medical Practice from Doctors Health or its assignee and to
resume the practice of medicine independent of the Medical Group at any time
within two hundred and seventy (270) days from the Closing Date. So long as the
Physician has complied with all of the terms and conditions of the Employment
Agreement and has satisfied all of the Physician's financial and other
obligations to Doctors Health and the Medical Group, Doctors Health shall
transfer to the Physician his Medical Practice and all of the Assets and
Liabilities related to Medical Practice, excluding accounts receivable accrued
after the Closing Date.
7.2. Exercise of Walk-Away Rights. The Physician agrees to
provide Doctors Health with written notice of his or her desire to reacquire the
Medical Practice prior to the expiration of 270 days from the Closing Date. As
soon as practicable following receipt of the Physician's reacquisition notice,
(i) Doctors Health and the Medical Group agrees to transfer to the Physician the
Assets; (ii) the Medical Group agrees to pay to the Physician the Physician's
capital contribution to the Medical Group without interest, (iii) the Physician
agrees to assume the Liabilities outstanding on exercise of the walk-away
rights, and withdraw from the Medical Group, (iv) the Medical Group and the
Physician agree to terminate the Employment Agreement, (v) the Physician shall
deliver to Doctors Health the Shares and all cash received by the Physician at
the Closing, (vi) the Physician shall cancel the Note; and (vii) the parties
agree to execute a mutual release and waiver and such other documents as may be
necessary to permit the Physician to reacquire the Medical Practice.
7
<PAGE>
8. Dispute Resolution.
8.1. Arbitration. Any dispute between parties to this
Agreement arising under or with respect to this Agreement shall be submitted to
binding arbitration according to procedures described on Schedule 8 hereof and
any arbitral award may be enforced by a court of competent jurisdiction.
8.2. Litigation. The parties hereby submit to the
jurisdiction and venue of the courts of the State of Maryland. No 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.
9. Miscellaneous.
9.1. Notices. Any notices given with respect to this
Agreement shall be deemed given on the date of delivery 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 DHS: If to the Medical Group:
Doctors Health System, Inc. ______________Medical Group
10451 Mill Run Circle 10451 Mill Run Circle
10th Floor 10th Floor
Owings Mills, Maryland 21117 Owings Mills, MD 21117
Attention: Corporate Counsel
If to the Physician:
[Copy to Physician's Attorney]
9.2 Entire Agreement. This Agreement and the other
closing documents contain the entire understanding among the parties with
respect to the subject matters contained in this Agreement and
supersede any prior understanding and agreements between or among them
respecting such subject matters.
9.3 Severability. If any provision of this Agreement, or
the application thereof to any person or circumstances shall, for any reason
and to any extent, be invalid or unenforceable, the remainder of this Agreement
and the application of such provision to other persons or circumstances
shall not be
8
<PAGE>
affected thereby, but rather shall be enforced to the greatest extent permitted
by such Laws.
9.4 Assignment. No party to this Agreement shall have any
right to transfer, convey or assign its rights or obligations under this
Agreement to any person or entity, except that Doctors Health may make such
transfer conveyances or assignments to any of its affiliates. Each party to this
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.
9.5 Additional Documents And Acts. Each party agrees to
execute and deliver such additional documents and instruments (including a
stockholders agreement with each other Doctors Health stockholder) 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
this Agreement, and the transactions contemplated by this Agreement.
9.6 Interpretation. This Agreement shall be governed by
the laws of the State of Maryland, without regard to principles of conflicts of
laws.
9.7 Amendment. This 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.
9.8 Survival. All warranties, representations, covenants,
undertakings and indemnifications of each party contained herein shall
survive closing and the execution and delivery of this Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as an instrument under seal as of the day and year first above written.
ATTEST/WITNESS: ____________MEDICAL GROUP, LLC
__________________________________ By:________________________________(SEAL)
ATTEST: DOCTORS HEALTH SYSTEM, INC.
__________________________________ By:________________________________(SEAL)
Stewart B. Gold, President
WITNESS: PHYSICIAN
__________________________________ ___________________________________(SEAL)
10
<PAGE>
SCHEDULE 2.1(a)
ASSETS
11
<PAGE>
SCHEDULE 2.1(b)
ASSETS USED TO PROVIDE LABORATORY
AND OTHER ANCILLARY SERVICES
12
<PAGE>
SCHEDULE 2.2(a)
LIABILITIES
13
<PAGE>
SCHEDULE 2.2(b)
LIABILITIES ASSOCIATED WITH ASSETS USED TO PROVIDE
LABORATORY AND OTHER ANCILLARY SERVICES
14
[FORM OFFER LETTER]
Dear Prospective Investor:
We appreciate your interest in becoming affiliated with
Doctors Health System, Inc. and are prepared to make you the following offer
based upon our determination that the value of your practice is $__________:
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.
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
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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.
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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:
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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.
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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
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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
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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.
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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
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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;
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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-
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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
[OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
<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
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) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(bullet) [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
(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
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: [OMITTED AND FILED SEPARATELY WITH THE COMMISSION]
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 11
COMPUTATION OF PRO FORMA EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE, ASSUMING
CONVERSION OF PREFERRED SHARES TO COMMON
<TABLE>
<CAPTION>
February 24, 1995 Three February 24, 1995
to months ended to
December 31, 1995 March 31, 1996 March 31, 1995
<S> <C> <C> <C>
Weighted average of common shares outstanding during the period
(adjusted to reflect two-for-one stock split) 2,816,667 3,068,901 2,340,000
Stock options outstanding 135,880 135,880 --
Common stock purchase warrants outstanding 112,889 248,769 --
Weighted average of common shares for conversion of Series A and
Series B Preferred Stock 408,796 855,556 160,000
Shares used in computing earnings per common share 3,474,232 3,924,457 2,500,000
Net loss $(3,180,723) $(1,350,747) $(173,230)
Net loss per share $(0.92) $(0.34) $(0.07)
</TABLE>
EXHIBIT 23.1
CONSENT
We have issued our report dated February 26, 1996 accompanying the
financial statements and schedule of Doctors Health System, Inc. contained in
Amendment No.1 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
June 4, 1996
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
Doctors Health System, Inc. (the "Corporation"), hereby constitutes and
appoints, jointly and severally, Stewart B. Gold and John Dwyer as his
attorney-in-fact with the power of substitution for the undersigned in any and
all capacities, to sign any and all amendments to the Corporation's Registration
Statement on Form S-1 (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Date: May 31, 1996 /s/ Mark H. Eig, M.D.
Mark H. Eig, M.D.
Exhibit 24.3
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
Doctors Health System, Inc. (the "Corporation"), hereby constitutes and
appoints, jointly and severally, Stewart B. Gold and John Dwyer as his
attorney-in-fact with the power of substitution for the undersigned in any and
all capacities, to sign any and all amendments to the Corporation's Registration
Statement on Form S-1 (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Date: May 31, 1996 /s/ Robert G. Graw, Jr., M.D.
Robert G. Graw, Jr., M.D.
Exhibit 24.4
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
Doctors Health System, Inc. (the "Corporation"), hereby constitutes and
appoints, jointly and severally, Stewart B. Gold and John Dwyer as his
attorney-in-fact with the power of substitution for the undersigned in any and
all capacities, to sign any and all amendments to the Corporation's Registration
Statement on Form S-1 (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Date: May 30, 1996 /s/ William Lamm, M.D.
William Lamm, M.D.
Exhibit 24.5
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Director of
Doctors Health System, Inc. (the "Corporation"), hereby constitutes and
appoints, jointly and severally, Stewart B. Gold and John Dwyer as his
attorney-in-fact with the power of substitution for the undersigned in any and
all capacities, to sign any and all amendments to the Corporation's Registration
Statement on Form S-1 (including post-effective amendments), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Date: May 29, 1996 /s/ Alexander Rocha
Alexander Rocha
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010005
<NAME> FDS-1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,864,553
<SECURITIES> 0
<RECEIVABLES> 1,288,534
<ALLOWANCES> 108,885
<INVENTORY> 0
<CURRENT-ASSETS> 4,151,206
<PP&E> 1,491,429
<DEPRECIATION> 123,521
<TOTAL-ASSETS> 6,277,040
<CURRENT-LIABILITIES> 1,352,346
<BONDS> 0
6,808,300
0
<COMMON> 30,000
<OTHER-SE> (3,366,075)
<TOTAL-LIABILITY-AND-EQUITY> 6,277,040
<SALES> 4,705,284
<TOTAL-REVENUES> 4,916,711
<CGS> 0
<TOTAL-COSTS> 4,863,871
<OTHER-EXPENSES> 3,104,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,035
<INCOME-PRETAX> (3,180,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,180,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,180,723)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010005
<NAME> FDS-2
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 177,237
<SECURITIES> 0
<RECEIVABLES> 3,693,401
<ALLOWANCES> 236,800
<INVENTORY> 0
<CURRENT-ASSETS> 3,782,333
<PP&E> 1,975,253
<DEPRECIATION> 191,753
<TOTAL-ASSETS> 6,526,153
<CURRENT-LIABILITIES> 2,531,835
<BONDS> 0
6,987,070
0
<COMMON> 31,650
<OTHER-SE> (4,892,842)
<TOTAL-LIABILITY-AND-EQUITY> 6,526,153
<SALES> 3,057,542
<TOTAL-REVENUES> 3,109,467
<CGS> 0
<TOTAL-COSTS> 2,687,799
<OTHER-EXPENSES> 1,660,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,088
<INCOME-PRETAX> (1,350,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,350,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,350,747)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
