AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 333-1926
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DOCTORS HEALTH SYSTEM, INC.
(Exact name of Registrant as specified in its Charter)
------------------------
<TABLE>
<S> <C> <C>
MARYLAND 8099 52-1907421
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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10451 MILL RUN CIRCLE
OWINGS MILLS, MARYLAND 21117
(410) 654-5800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
PAUL A. SERINI, ESQ.
EXECUTIVE VICE PRESIDENT
AND DIRECTOR OF LEGAL AFFAIRS
10451 MILL RUN CIRCLE
OWINGS MILLS, MARYLAND 21117
(410) 654-5800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPY TO:
ELIZABETH R. HUGHES, ESQ.
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK & TRUST BUILDING
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
(410) 244-7608
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box.
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.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
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 NOVEMBER 22, 1996
4,100,000 SHARES OF CLASS B COMMON STOCK
1,000,000 OPTIONS TO PURCHASE CLASS B COMMON STOCK
------------------------
Doctors Health System, Inc., a Maryland corporation (the "Company"), may
offer and issue from time to time in connection with the affiliation of medical
practices with the Company one or more of the following types of its securities:
(i) shares of its Class B common stock, par value $0.01 per share ("Class B
Common Stock"); or (ii) Options to purchase Class B Common Stock ("Options," and
collectively with the Class B Common Stock, the "Securities"). Securities may be
issued by the Company as consideration in one or a combination of the following
types of transactions: (i) as consideration for acquisitions of certain assets
of medical practices; or (ii) as consideration pursuant independent practice
association ("IPA") agreements; or (iii) as issuances of Securities pursuant to
employment arrangements between the physician and a Core Medical Group. See
"PLAN OF DISTRIBUTION--Acquisition of Medical Practices," "--Contractual
Arrangements--IPA Arrangements" and "--Contractual Arrangements--Employment
Arrangements." Except in connection with the exercise of the Options, the
Company will not receive cash proceeds in connection with the issuance of the
Securities.
The Securities offered pursuant to this Prospectus may be issued in amounts
and at prices to be determined at the time of the offering of such Securities.
It is anticipated that the affiliations of the medical practices will
involve (a) in the case of the acquisition of medical practices, the receipt by
the Company of substantially all of certain assets of such medical practices
(primarily enumerated tangible assets of such practices and related contractual
rights), and (b) in the case of contractual arrangements such as the IPA
arrangements or employment arrangements, the receipt of the contractual
consideration specified in the relevant contract. The consideration for
acquisitions and contractual rights will consist of shares of Class B Common
Stock, cash, Options, assumption of liabilities or a combination of some or all
of them, as determined from time to time by negotiations between the Company and
the physicians or physician groups operating such practices. In addition, such
physicians may enter into employment agreements and IPA participation
agreements, pursuant to which the Company may also issue Securities.
The terms of an affiliation are determined by negotiations between the
Company's representatives and physicians. Factors taken into account in such
transactions include the established size, quality and reputation of the
practice and with respect to the amount of Securities to be issued the Company's
estimate of the value of the Class B Common Stock. It is anticipated that shares
of Class B Common Stock issued in any such acquisitions will, in most cases, be
valued at a price reasonably related to the current value of the Class B Common
Stock, either at the time the terms of a transaction are tentatively agreed
upon, or at or about the time of closing, or during the period or periods prior
to delivery of the Securities. The value of the Class B Common Stock will be
determined by the Company's management and Board of Directors based upon the
Company's results of operations and current financial condition, recent sales of
the Company's securities and arms' length negotiations with potential
purchasers, estimates of the business potential and prospects of the Company,
the economics of the health care industry in general, the general condition of
the equity securities markets in general and other relevant factors. It is not
expected that underwriting discounts or commissions will be paid by the Company
(See "PLAN OF DISTRIBUTION").
Certain details as to 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 details include, without limitation, to the extent
applicable (1) in the case of the Options, the number of shares of Class B
Common Stock for which each such Option is exercisable, and the exercise price
of each such Option; and (2) in the case of any offering of Securities, the
offering price, and, to the extent applicable, certain Federal income tax
consequences. With respect to offerings of Securities in connection with the
acquisition of certain assets of medical practices, a Prospectus Supplement will
be provided which will contain information about the specific transaction and
the particular medical practice involved in the transaction. The resale or
transfer of the Securities will be subject to certain restrictions. See
"Description of Capital Stock."
In the event that the physician exercises reacquisition rights granted by
the Company, the physician will be required to transfer the securities issued
pursuant to this Prospectus to the Company. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"BUSINESS--Development of Integrated Health Care Delivery System--Reacquisition
Rights.")
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of this
Prospectus together with a Prospectus Supplement relating to specific Securities
shall not constitute an offer in such jurisdiction of any other Securities
covered by this Prospectus but not described in such Prospectus Supplement.
The Securities offered pursuant to this Prospectus will be subject to
significant contractual restrictions or transfer. Further, it is not currently
anticipated that any of the Securities will be listed on an exchange or other
public market. Accordingly, resales of the Securities may be subject to various
regulatory structures which could severely limit the liquidity of the
Securities. There can be no assurance as to the price at which purchasers may be
able to resell the Securities, and such price may be below the value of the
Securities as offered and sold by the Company hereby.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 8 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 NOVEMBER , 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. Such information with the Commission may also be
obtained from the web site maintained by the Commission. The Commission's web
site address is http://www.sec.gov.
"Doctors Health System--It's the Sure Sign of Caring" is a service mark of
Doctors Health System, Inc. This Prospectus also includes other service marks of
Doctors Health System, Inc.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements with respect to
the financial condition, results of operations and business of the Company. The
words "estimate", "project", "intend", "expect" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward
looking-statements. For a discussion of certain of such risks and uncertainties,
see "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
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<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 is a managed care and medical management company which develops
and consolidates individual and groups of internists, pediatricians and family
practitioners ("primary care physicians" or "PCPs"), specialist physicians,
hospitals and other health care providers into primary care-driven,
comprehensive managed care health delivery networks. Through contracts with
PCPs, specialists, hospitals and other health care providers, the Company
designs its networks: (i) to manage the provision of quality medical services to
patients; (ii) to furnish Network Physicians with access to managed care
contracts and related services while giving them the opportunity to associate
with clinically independent, autonomous medical groups; (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 a managed care company, the Company's primary source of future earnings
is expected to be Global Capitation Revenue. Under such arrangements, the
Company receives a fixed fee from a Payor in exchange for undertaking the
obligation to provide or arrange for the provision of substantially all of the
health care services required by the Enrollees. These services include not only
services provided by the Company's Network Physicians but also hospitalization,
specialty care and ancillary services which are subcontracted by the Company.
The Company's ability to generate earnings is significantly predicated upon its
ability to provide the health care services for which it contracts at a cost
which is less than the fixed fees it receives under its Global Capitated
Contracts--See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General--Source of Revenue and Earnings."
As a medical management company, the Company provides to Network Physicians
that join Core Medical Groups certain patient care management, managed care
contracting, and administrative and financial services, including information
systems and billing services, and provides facilities, non-physician staff
personnel, equipment and other goods. See "Business--Managed Care
Contracting,--Practice Management Services,--Control of Patient Data and
Information Systems, and--Care Management."
The Core Medical Groups, which contract with the Company for the provision
of these services, engage exclusively in the practice of medicine through their
employed physicians and maintain autonomy and independence over clinical
matters.
Currently, the Company is focusing on the development and establishment of
its networks in the Baltimore and Washington metropolitan area and surrounding
regions. As of November 15, 1996, the Company had approximately 1,152 Network
Physicians in six regional networks throughout the state of Maryland and one
regional network in Northern Virginia, including approximately 297 PCPs, 95
obstetrician/gynecologists, and 760 specialist physicians. Of the 1,152 Network
Physicians, 90 were Equity Physicians, of which 58 had transferred certain of
their practice assets to the Company or one of its subsidiaries, 16 had entered
into binding agreements to complete such transactions, and 16 were subject to a
letter of intent with respect to an acquisition which the Company believes will
be completed by December 31, 1996. While primary care-based, the Company
encourages its Core Medical Groups to develop into multi-specialty group
practices and provides or arranges financing and other resources to enable such
Core Medical Groups to develop into diversified multi-specialty practices. See
"Business--Development of Integrated Health Care Delivery System."
The Company offers medical groups and independent physicians a variety of
methods of participating in the Company's Integrated Health Care Delivery
System. The Company may acquire certain medical practice assets or certain
contracting rights, either for cash or for Securities, or by execution of a
variety of Independent Physician Association ("IPA") participation agreements.
The Company typically enters into Physician Services Organization Agreements
("PSO Agreements") with the Core Medical Groups, pursuant to which the Company
provides care management, managed care contracting and related business
management services while the Core Medical Groups retain their clinical
autonomy.
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<PAGE>
The Company's strategy is to capitalize upon changes in the health care
industry by: (i) establishing networks of primary care physicians and specialist
physicians to integrate a full spectrum of health care providers into one or
more high quality, cost-effective health care delivery networks; (ii)
transitioning the patients of Network Physicians to the Company's Global
Capitated Contracts; (iii) providing HMOs and other Payors with a single source
of access to geographically proximate networks of physicians and other
providers; (iv) focusing on obtaining Global Capitated Contracts and operating
profitably under a capitated reimbursement system; (v) allowing physicians
greater access to managed care, while relieving physicians of some of the
administrative responsibilities and economic risks of providing managed care
services; (vi) effectively managing the cost and quality of providing care
through the use of sophisticated information systems and a broad range of
practice management and administrative services; and (vii) expanding
aggressively by recruiting additional physicians to networks that have already
been established and by establishing additional networks. See
"Business--Strategy".
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<PAGE>
GLOSSARY
Capitated Contract Carve-Outs--Medical services that are not included in a
capitated arrangement. Examples of typical carve-outs from global capitated
contracts include pharmacy, dental care, eye care, organ transplants, home
health, mental health, infusion care, durable medical equipment, marketing and
administration.
Capitated Gatekeeper--A PCP who is compensated pursuant to a Gatekeeper
Capitated Contract.
Capitated Gatekeeper Income--Income received by PCPs pursuant to a Gatekeeper
Capitated Contract.
Capitated Life--An Enrollee who is a member in a Managed Care Plan that pays a
fixed amount to a provider pursuant to a capitation arrangement.
Capitation--A method of paying health care providers in which a fixed amount is
paid per Enrollee to cover a defined set of services over a specified period,
regardless of the cost of the actual services provided.
Core Medical Group--An entity formed by Equity PCPs to conduct a medical group
practice that enters into a PSO Agreement or similar long-term management
agreement with the Company. The Core Medical Groups are clinically autonomous
entities whose equity interests are owned by physicians.
Enrollee--A patient who is covered for health benefits under an HMO contract or
other insurance.
Equity PCP--A Network PCP who transfers substantially all of his medical
practice assets to the Company and who receives an equity interest in the
Company.
Equity Physician--A Network Physician, including an Equity PCP, who transfers
substantially all of his medical practice assets to the Company and who
receives an equity interest in the Company.
Exclusive IPA--An IPA that enters into an exclusive contractual arrangement,
pursuant to which the IPA and each of its participating physicians agrees to
conduct all managed care contracting activity exclusively through the Company
and to take as patients any capitated patients referred by the Company to the
Company pursuant to the Company's Global Capitated Contracts.
Fee-for-service--A method of reimbursing health care providers in which payment
is made for each unit of service rendered.
Full Risk Contract--A contract, usually a Global Capitated Contract, pursuant to
which a health care provider and/or management company (such as the Company)
assumes all financial risks for medical services related to patient care (with
or without Capitated Contract Carve-Outs).
Gatekeeper Capitated Contract--A contract pursuant to which a Primary Care
Physician receives a fixed, prepaid monthly fee for each Enrollee in exchange
for providing primary care medical services, regardless of the costs of the
actual services provided.
Global Capitated Contract--A contract pursuant to which a health care provider
and/or a management company (such as the Company) is paid a fixed amount per
Enrollee to cover medical services and assume all or part of the financial
risk associated with such services with or without Capitated Contract
Carve-Outs over a specified period, regardless of the cost of the services
provided.
HCFA--The U.S. Health Care Financing Administration which administers the
Medicare program.
Health Maintenance Organization (HMO)--A managed care plan that integrates
financing and delivery of a comprehensive set of health care services to an
enrolled population.
Independent Physician Association (IPA)--An organization of independently
practicing physicians which contracts with the Company, managed care plans or
others for the provision of professional medical services to Enrollees of the
Managed Care Plan.
Integrated Health Care Delivery System--An organization in which physicians,
hospitals and other providers combine their efforts to deliver comprehensive
health care services to the community. The single entity (or group of
entities) manages and coordinates the system, including Payor contracting for
the providers, and allocation of compensation and capital among the various
interests. The system generally includes a single legal entity or related
entities, unified governance and management mechanisms, use of consolidated
management and information systems, and use of consolidated budgets for the
entire system.
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<PAGE>
IPA--Independent Physician Association.
IPA Participant Physicians--Primary Care Physicians who enter into Exclusive or
Non-Exclusive IPA agreements with the Company.
Managed Care--A payment or delivery arrangement used by a Payor to control or
coordinate use of health services with the goal of providing quality care at a
lower cost, including Capitation arrangements.
Managed Care Plan--A health plan that uses managed care arrangements and has a
defined system of selected providers that contract with the plan. Under
Managed Care Plans, Enrollees have a financial incentive to use participating
providers that agree to furnish a broad range of services, and providers may
be paid on a prenegotiated fee-for-service, capitated, per diem or salaried
basis.
Medicaid--A program of Federal matching grants to the states to provide health
insurance for categories of the poor and medically indigent. States determine
eligibility, payments and benefits consistent with Federal standards.
Medicare--A federal act (Health Insurance for the Aged Act) to provide hospital
and medical insurance for persons eligible for social security or railroad
retirement benefits under the Social Security Act and who are over the age of
65 or disabled or other eligible individuals over the age of 65.
Network PCP or Network Physician--A PCP or other physician, including an Equity
Physician, who participates in the Company's Integrated Health Care Delivery
System through employment in a Core Medical Group, through an Exclusive or
Non-Exclusive IPA or through a joint contracting venture, or other
arrangement.
Non-Exclusive IPA--An IPA that has a non-exclusive contractual arrangement with
the Company, pursuant to which the IPA and some or all of its participant
physicians may contract with or through other IPAs and entities but agree to
take all managed care patients referred by the Company.
Operating Agreement--An agreement providing for the operation of a Core Medical
Group.
Payor--An organization, such as an insurance company, employer, HMO, or HCFA,
that pays or reimburses a health care provider or other entity for health care
services to be provided to a patient or health plan.
PCP--A Primary Care Physician.
Physician Hospital Organization (PHO)--Generally, an organization jointly owned
and governed by hospitals and physicians formed and controlled for the purpose
of procuring and administering Payor contracts.
Physician Services Organization Agreement (PSO Agreement)--An agreement entered
into between the Company and each Core Medical Group, pursuant to which the
Core Medical Group appoints the Company to act as its exclusive agent to
provide all assets, facilities and non-medical services necessary for the Core
Medical Group's medical practice and to obtain Managed Care contracts with
Payors on behalf of the Network Physicians who are members of the Core Medical
Group.
Practice Participation Agreement--An agreement entered into among the Company, a
Core Medical Group and each of the physicians who is a member of such Core
Medical Group, pursuant to which (1) each such physician sells to the Company
certain assets of his medical practice, (2) each physician enters into an
exclusive Employment Agreement with the Core Medical Group, (3) the Core
Medical Group and the Company enter into a PSO Agreement, and (4) each
physician enters into an Operating Agreement with each of the other member
physicians of the Core Medical Group which governs the operation of the Core
Medical Group.
Primary Care Physician (PCP)--A physician practicing as a general practitioner
or in the specialties of family practice, general internal medicine, or
general pediatrics. PCPs are sometimes referred to as "gatekeepers" because
they enjoy patient loyalty and continuity and are the initial providers when
patients seek medical services and control, through referrals, patients'
access to other providers such as specialists.
PSO Agreement--A Physician Services Organization Agreement.
Risk Sharing Arrangement--An arrangement or contract pursuant to which the
parties receive a fixed amount to provide or pay for defined services (usually
including, but not limited to, hospital and other institutional services)
regardless of the actual costs and share the benefits or risks under the
arrangement in the event that the costs of such services are less than or
exceed such fixed amount.
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Specialty Care Core Medical Group--an entity formed by specialist physicians to
conduct a medical group practice to provide specialty services and that enters
into a PSO Agreement or similar long-term management agreement with the
Company.
Subcapitation--An arrangement in which a health care provider receiving
capitated income pays subcontracting providers (for example, for specialty
services) on a capitated basis with the subcontracting providers assuming the
financial risk of providing all of the subcapitated medical services, the
payment representing subcapitation.
Utilization--The frequency with which a medical benefit is used, a service is
performed, or a referral is made.
Utilization Review--The review of services delivered by a health care provider
to evaluate the appropriateness, necessity, and quality of the prescribed
services.
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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 June 30, 1996 and the three months ended September 30, 1996, the
Company recorded a net loss of approximately $6.6 million and $2.8 million,
respectively. The Company is likely to record a net loss for the year ending
June 30, 1997, and at September 30, 1996 had an accumulated deficit of
approximately $12.1 million. There can be no assurance that future operating
losses would not have a material adverse effect on the operating results and
financial condition of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
LIQUIDITY; RESTRICTIONS ON FINANCING
Until the Company and its Payors attract an adequate number of Capitated
Lives in the Company's Global Capitated Contracts, the Company expects to incur
operating losses and experience negative operating cash flows. The Company
believes that its cash on hand at November 15, the $2,500,000 to be received on
or before December 27, 1996 from the holder of its Series C Preferred Stock, the
balance remaining available under the NationsBank Credit Facility, and some
portion of the additional capital outlined in Management's Discussion and
Analysis--Liquidity, Cash Flow and Capital Resources will be sufficient to meet
the Company's working capital needs through June 30, 1997. However, in the event
that the Company and its Payors either have not attracted an adequate number of
Capitated Lives in Global Capitated Contracts sufficient to offset the Company's
operating expenses, or the Company has not secured a substantial amount of
additional capital, the Company's operating results and financial condition
would be materially and adversely affected. There can be no assurance that the
Company will be able to secure such additional capital, or that such capital, if
available, will be on terms favorable to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Cash Flow and Capital Resources--Subsequent Events."
The Company's Series A, Series B and Series C Preferred Stock Directors
have the right under the Company's constituent documents to approve the
incurrence by the Company of indebtedness (including both borrowed money and
capitalized leases) in excess of $1 million beyond the amount budgeted by the
Company from time to time. In addition, the Company's ability to conduct equity
financings may be affected by certain rights of consent of the holders of the
Company's Series A, Series B and Series C Preferred Stock. See "Description of
Capital Stock." There can be no assurance that such holders of Preferred Stock
will grant their consent to the terms of any such financings.
UNCERTAINTY OF STRATEGY; ACQUISITION RISKS
The Company's strategy is based upon assumptions relating to the Company's
likely rate of growth of affiliations of medical practices, the rate at which
capitated lives can be added to the Company's networks, the likely referral and
other business practices of physicians and health care institutions in the
Baltimore and Washington metropolitan area and surrounding regions, and
assumptions relating to the rate and character of reimbursement for services
provided through the various arrangements negotiated by the Company, including
the continued willingness of Payors to enter into risk sharing arrangements.
Certain of the Company's assumptions may prove to be incorrect, which could have
a material adverse effect on the operating results and financial condition of
the Company. Thus, no assurance can be given that the Company's strategy will be
successfully and profitably implemented.
Further, the Company's strategy depends upon the successful recruitment of
additional physicians to join Core Medical Groups and Exclusive IPAs. There can
be no assurance that the Company will be able to grow in existing or new markets
or successfully identify, complete or integrate any additional acquisitions or
IPA contracts. The process of identifying suitable candidates, and proposing,
negotiating and implementing an economically feasible transaction with a
physician group or forming or managing a physician network, is lengthy and
complex. The Company's strategy involves focusing the development of its
Integrated Health Care Delivery System in the Baltimore and Washington
metropolitan area and surrounding regions. Accordingly, the Company is subject
to and may be adversely affected by any changes in laws and regulations in these
areas pertaining to its business. See "Business--Regulation." Further, currently
substantially all of the Company's net revenues are used to pay for costs of and
in support of the Core Medical Groups and Network Physicians. Thus, the
Company's ability to generate any profit is dependent upon its ability to
transition its Network Physicians and other providers in
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the Company's provider networks away from unmanaged fee-for-service compensation
arrangements and into a profitable Managed Care environment. The failure of the
Company to execute its strategy effectively could have a material adverse effect
on the operating results and financial condition of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REGULATION
GENERAL. While the Company is not currently subject to regulation as an
insurer or health care provider, the insurance and health care business
generally and the Company's business described generally herein are subject to
extensive and pervasive Federal and state regulation pursuant to current
statutes and regulations. Health care regulation has been subject to rapid and
pervasive change in recent years. Congress and various state legislatures are
expected to continue to consider various legislative proposals for health care
reform, including proposals intended to control public and private spending on
health care as well as provide increased public access to the health care system
and maintain broad physician access to health care delivery systems. Changes in
the regulations or reinterpretations of existing regulations may adversely
affect the Company. See "Business--Regulation."
INSURANCE. States heavily regulate the activities of insurance companies.
The Company is not licensed as an insurance company. 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 by compensating Network Physicians to capitation payment
arrangements may require the Company and such other Managed Care entities to
subject themselves to regulation as insurance companies. There can be no
assurance that the Company's efforts to structure the payment arrangements with
HMOs to conduct itself in such a manner so as not to subject itself to
regulation will be successful, and the imposition of such regulation could have
a material adverse effect on the Company. Regulations which affect the IPAs,
Core Medical Groups, hospitals and other providers of health care could have a
material adverse effect on the operating results and financial condition of the
Company. See "Business--Regulation--Insurance."
MEDICARE FRAUD AND ABUSE RULES. 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 Company has or will have entered, has violated or is violating such laws, or
that if any such assertion were made, that the Company would prevail, or whether
any sanction imposed would have a material adverse effect on the operations of
the Company. Even the assertion of a violation of such laws could have a
material adverse effect on the operating results and financial condition of the
Company. See "Business--Regulation--Medicare and Medicaid Fraud and Abuse
Limitations."
TAXATION. The Company enters into contracts with physicians, who are not
employees of Core Medical Groups, and other health care professionals as
independent contractors and, in accordance with federal and state tax guidelines
pertaining to independent contractors, and neither the Company nor any Core
Medical Groups withholds federal or state income taxes, make federal or state
unemployment tax payments or provide workers' compensation insurance with
respect to such independent contractors. However, a determination by taxing
authorities to the contrary with respect to the classification of such
physicians or other health care professionals as independent contractors could
have a material adverse effect on the operating results and financial condition
of the Company.
CHANGES IN HEALTH CARE REIMBURSEMENT SYSTEMS. 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 such
amendment or change would not have a material adverse effect on the operating
results and financial condition of the Company.
INTEGRATION OF OPERATIONS
Since its formation, the Company has grown principally through affiliations
and is pursuing an aggressive growth strategy. If the Company is to realize the
anticipated benefits of acquisitions, the operations of the acquired entities
must be
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integrated and combined efficiently. The process of integrating the acquisitions
by providing management, financial, administrative, facilities, and management
information systems, while managing a larger and geographically expanded entity,
presents a significant challenge to the management of the Company. There can be
no assurance that the integration process will be successful or that the
anticipated benefits of its business combinations will be realized. The
dedication of management resources to such integration may detract attention
from the day-to-day operations of the Company. There can be no assurance that
there will not be substantial unanticipated costs associated with such
activities or that there will not be other material adverse effects of these
integration efforts. Such effects could have a material adverse effect on the
operating results and financial condition of the Company.
DEPENDENCE ON MANAGED CARE CONTRACTS
The profitability of the Company depends on securing and maintaining
contractual relationships with Managed Care plans and other Payors and
successfully managing the expenses involved in the provision of services under
those contracts without sacrificing the quality of medical care. The Company,
not the Core Medical Groups, is the party to the Global Capitated Contracts and
therefore is the recipient of the capitated payments. Such medical expenses are
subject to adverse selection and other utilization risks and are not otherwise
within the Company's or the Core Medical Groups' control. The Company has
entered into three Global Capitated Contracts with two HMOs. The inability of
the Company and its Network Physicians to obtain such contracts or successfully
manage such expenses could have a material adverse effect on the operating
results and financial condition of the Company. In addition, the success of
Payors depends substantially on their ability to reduce, or significantly
restrain the growth of, spending for health care services. Accordingly, there is
a risk that the Company will not be able to obtain or maintain the numbers of
Managed Care contracts presently contemplated or that, if such contracts are
obtained, payments from such Payors will decrease over time, either of which
could have a material adverse effect on the Core Medical Groups or the operating
results and financial condition of the Company. Further, the coverage of the
Managed Care plans with which the Company contracts may be limited to the State
of Maryland, the District of Columbia, Virginia or other limited geographic
regions. There can be no assurance that the coverage of such Managed Care plans
will extend beyond such areas. Finally, the Company's contracts with Payors are
generally for one year and may be terminated earlier upon notice. There can be
no assurance that Managed Care contracts will not be terminated. The loss of any
Payors or the failure to retain such Payors' Enrollees could have a material
adverse effect on the operating results and financial condition of the Company.
ENROLLMENT IN MEDICARE MANAGED CARE PLANS
The Company has entered and will enter into Full Risk Contracts and Global
Capitated Contracts with HMOs and other Managed Care Plans covering Medicare
patients. The Company's profitability is highly dependent on the Company's
ability to attract existing patients and new Medicare patients who enroll in the
Medicare Managed Care contracts with licensed HMOs pursuant to Global Capitated
Contracts with the Company. See "Business--Strategy--Medicare Managed Care." The
Company's strategy depends on successful joint marketing efforts by HMOs and the
Company and the willingness of Medicare patients to enroll in Managed Care
plans. There can be no assurance that the Company will be able to successfully
attract a sufficient number of Medicare patients into Medicare Managed Care
plans under contract with the Company or that such patients can be converted in
accordance with the Company's strategy. The failure of the Company to attract a
sufficient number of Medicare patients to Medicare Managed Care plans could have
a material adverse effect on the operating results and financial condition of
the Company.
ISSUANCE OF NOTES; SUBSTANTIAL INDEBTEDNESS
The Company intends to place with institutional investors up to $35 million
of senior subordinated notes (the "Notes") and warrants (the "Warrants") to
purchase Class A Common Stock. Assuming the issuance of the Notes, the Company
will have substantial indebtedness in relation to its total capitalization. On a
pro forma basis, after giving effect to the sale of the Notes (but not giving
effect to the exercise of the Warrants), the Company at September 30, 1996 would
have had approximately $35 million in long-term indebtedness, and its long-term
indebtedness as a percentage of its total capitalization would have been
approximately 66%.
This indebtedness poses substantial risks including the possibility that
the Company might not generate sufficient cash flow to pay the principal of and
interest on its indebtedness. This indebtedness may also adversely affect the
Company's ability to finance its future operations and capital needs, limit its
ability to pursue other business opportunities and make its results of
operations more susceptible to adverse economic conditions. All of the foregoing
could have a material adverse effect on the operating results and financial
condition of the Company.
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The terms of the agreements with holders of the Notes are expected to
include significant restrictive financial and operating covenants that, among
other things, will limit the ability of the Company to incur certain additional
indebtedness and pay dividends or make other distributions on its capital stock.
In the event of liquidation of the Company, the holders of the Notes and other
holders of indebtedness of the Company are expected to have priority of payment
over the holders of the Company's common stock. There can be no assurance that
the Company will consummate the sale of the Notes and Warrants or, in the event
that such Notes or Warrants are issued, that such issuance will be made on
expected terms.
RISKS OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The profitability of the Company may be adversely affected by Medicare and
Medicaid regulations, cost containment decisions of Payors and other payment
factors over which the Company has no control. The Federal Medicare program has
undergone significant legislative and regulatory changes in the reimbursement
and fraud and abuse areas, including the adoption of the resource-based relative
value scale ("RBRVS") schedule for physician compensation under Medicare, which
may have a negative impact on the Company's revenue. Efforts to control the cost
of health care services are increasing. Future profitability in the changing
health care environment, with differing methods of payment for medical services,
is likely to be affected significantly by management of health care costs,
pricing of services and agreements with Payors. Because the Company derives its
revenues from the revenues generated by Network Physicians, further reductions
in payments to physicians generally or other changes in payment for health care
services could have a material adverse effect on the operating results and
financial condition of the Company.
HCFA recently announced its intention to conduct an experimental pilot
program designed to reduce expenditures under Medicare Managed Care plans in
selected areas, including the Baltimore metropolitan area. The effect of any
such experimental program, if implemented, cannot be predicted, but could have a
material adverse effect on the operating results and financial condition of the
Company. See "Business--Regulation."
DEPENDENCE OF THE COMPANY ON CORE MEDICAL GROUPS AND IPAS
The Company enters into Managed Care contracts with Payors pursuant to
which the Company agrees to arrange for the delivery of medical services to
Enrollees in exchange for Managed Care compensation. The Company does not own
any equity interest in the Core Medical Groups or engage in the practice of
medicine and will be largely dependent upon medical services provided by Network
Physicians for its Managed Care revenues. The success of the Company initially
will be dependent in large part upon its ability to attract Network Physicians
to join Core Medical Groups or to participate in IPA arrangements with the
Company, and upon the Core Medical Groups' and the Network Physicians' ability
to deliver high quality patient care in a cost-efficient manner. There can be no
assurance that the Company will be able to attract and retain the requisite
number of PCPs and specialist physicians, or that such physicians will deliver
high quality medical services profitably, either of which could have a material
adverse effect on the operating results and financial condition of the Company.
Because each Core Medical Group and independent IPA retains its clinical
autonomy and operates as a separate legal entity, there can be no assurance that
physicians employed by the Core Medical Groups and the other Network Physicians
will perform high quality, cost-effective medical services, the failure of which
could have a material adverse effect on the operating results and financial
condition of the Company.
The Company enters into a PSO Agreement which obligates the Core Medical
Group to contract solely and exclusively with the Company for 30 years (with
automatic ten-year renewals) for all managed care contracts, and for the
provision of all of the non-medical services, including provision of facilities,
equipment, supplies and other goods and assets, used by the Core Medical Groups
and their employee physicians to engage in the practice of medicine. See
"Business--Development of Integrated Health Care Delivery System--Focus on
Primary Care Physicians." There can be no assurance that the Company will be
able to meet its contractual obligations to the Core Medical Groups in a manner
that is reasonably acceptable to the Core Medical Groups. A failure of the
Company to meet its contractual obligations could result in the termination of
such arrangements, which could have a material adverse effect on the operating
results and financial condition of the Company.
RISKS ASSOCIATED WITH CAPITATION PAYMENTS FOR MEDICAL SERVICES
As an increasing percentage of patients are being placed under the control
of managed care entities, the Company believes that its success will, in large
part, be dependent upon the Company's ability to negotiate contracts with HMOs
pursuant to which services will be provided on a risk-sharing or capitated basis
by the Company. The Company has entered into three Global Capitated Contracts
with two HMOs and intends to expand the number of Global Capitated Contracts or
Full Risk Contracts in which it participates and convert medical services
currently compensated on a fee-for-service basis to capitation arrangements.
Under the Company's Global Capitated Contracts, the Company accepts a
predetermined amount
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per Enrollee per month (capitation) to provide to Enrollees of the HMO who
select a Network PCP all necessary covered services covered under the Global
Capitated Contract. Such contracts pass much of the business risk of providing
care, such as overutilization, from the HMO to the Company. The proliferation of
such contracts in markets served by the Company could result in greater
predictability of revenues, but greater unpredictability of expenses. There can
be no assurance that the Company will be able to negotiate, generally on behalf
of the Company, satisfactory arrangements on a risk-sharing or capitated basis.
In addition, to the extent that patients or Enrollees covered by such contracts
require more frequent or extensive care than is anticipated, the Company's
operating margins may be reduced, or in the worst case, the revenues derived
from such contracts may be insufficient to cover the costs of the services
provided. As a result, the Company may incur additional costs, which would
reduce or eliminate anticipated earnings under such contracts. Any such
reduction or elimination of earnings could have a material adverse effect on the
Company's results of operations.
In addition, the Company is dependent upon the collection of
fee-for-service revenues attributable to the medical practices of the Core
Medical Groups because a portion of such revenues are necessary to pay the
expenses of the Core Medical Groups medical practice operations. The Company is
liable for providing office space, personnel billing and collection services,
and other bookkeeping and management services to the Core Medical Groups and the
Company relies on the fee-for-service revenues and other capitation revenues to
pay the cost of these services. Failure of the Core Medical Groups to earn
sufficient revenues to fund such costs, would have a material adverse effect on
the Company.
The Company enters into Global Capitated Contracts or Full Risk Contracts
only with licensed HMOs and would only enter into such contracts with licensed
insurance companies and HMOs only if allowed by state law of any particular
state. To the extent such contracts are prohibited by law or in any particular
state, the Company would not enter into such contracts in that state. In 1995,
the National Association of Insurance Commissioners (the "NAIC") issued a report
opining that such risk-sharing arrangements might constitute the business of
insurance, to which state insurance licensing laws may apply. The NAIC further
opined that such state licensing laws would not apply if the unlicensed entity,
such as the Company, contracts to assume "downstream risk" from a duly licensed
health insurer or HMO for health care provided to that insurance carrier's
Enrollees. The NAIC's conclusions are not binding on the states. Maryland's
attorney general has opined, in writing, that the Company's arrangements with
HMOs do not subject the Company to regulation as an insurer under Maryland law.
If the Company were to be regulated as an insurer because it accepts
capitation payments, the Company would be subject to substantial additional
costs to comply with state regulations, including the maintenance of substantial
reserves, which would 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 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, and companies that actually own all or some portion of medical
groups. Such competitors may include local, regional and national entities.
Some of these companies provide traditional management services to primary
care, multi-specialty and specialty physician groups, while other companies
provide claims processing, utilization review and other more focused management
services. Some competitors are significantly larger and better capitalized than
the Company and have access to greater resources, provide a wider variety of
services, have greater experience in providing health care management services,
have longer established relationships with buyers of such services than does the
Company, and, through actual ownership of physicians and medical groups, can
exercise more pervasive control over the clinical activities of the medical
groups 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 certain assets of or contract with physician
practices. Such competition could increase the cost of making such acquisitions
and contracts and could endanger the success of the Company's strategy of
acquiring or contracting with PCPs in selected markets. There can be no
assurance that the Company will be able to acquire certain assets of or contract
with a sufficient number of physician practices and thereby compete favorably in
contracting with Payors or to expand or maintain its physician networks in
existing or new markets. Any of the foregoing could have a material adverse
effect on the operating results and financial condition of the Company.
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DILUTION
The Company contemplates that it will acquire additional medical practices
for existing Core Medical Groups and will organize additional Core Medical
Groups. The Company also contemplates contracting with additional physicians
through IPAs and other arrangements and compensating IPAs for recruiting their
IPA Participant Physicians to contract with the Company. The Company may issue
Securities in connection with any of such transactions. The Company may make
such acquisitions and contracts if it believes, in the exercise of its
discretion, that such acquisitions are beneficial, and without any requirement
that the Company's stockholders approve such transactions, all on terms as may
be negotiated by the Company. In addition, the Company intends to obtain
additional financing, some of which could result in dilution to the then
existing Stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity, Cash Flow and Capital
Resources--Subsequent Events."
Accordingly, the percentage ownership interest of each then existing
stockholder in the Company will be reduced proportionately and, depending upon
the valuation at which such securities are issued, such issuances may be
dilutive to the then existing stockholders. Although the Company contemplates
that additional securities will be issued in the future, there can be no
assurance as to the number, if any, of new physicians, IPAs or investors who
will become stockholders of the Company.
INTANGIBLES
As a result of the Company's acquisitions during 1995 and 1996, intangibles
increased from $23,104 as of June 30, 1995 to $2,886,235 as of September 30,
1996. The Company's policy is to amortize intangibles over a 10 to 40 year
period. The intangibles acquired during fiscal 1995 and fiscal 1996 are being
amortized over 20 years using the straight-line method in the Company's
consolidated financial statements. Such amortization is expected to
significantly affect the Company's profitability in the near term. In addition,
the Company's future acquisitions may generate additional intangibles. As
required under generally accepted accounting principles, the Company reviews the
carrying value of intangibles at each reporting period to determine if facts or
circumstances exist which suggest that intangibles may be impaired. If
impairment is determined to have occurred, intangibles will be adjusted
downward. There can be no assurance that impairment of intangibles with respect
to the Company's acquisitions will not occur. Such adjustment, if required,
could have a material adverse effect on the operating results and financial
condition of the Company. See Note 3 to Notes to Consolidated Financial
Statements.
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., J. David Nagel, M.D., Howard
Goldman, M.D. 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., William D. Lamm, M.D., and Mark Eig, M.D., Directors of the
Company, are also the respective Chairmen of Carroll Medical Group, LLC,
Cumberland Valley Medical Group, LLC, and Doctors Health Montgomery, LLC. Such
members of management of the Company from time to time may find it necessary
take certain actions contrary to the interests of the Core Medical Group
physicians (which may include such members of management), including decisions
with respect to compensation of physicians (setting of reimbursement rates for
physicians and bonus pools), and reimbursement for inappropriate utilization of
medical services. 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."
VOTING LIMITATIONS; RESTRICTIONS ON RESALE OF SECURITIES
Each of the classes of Common Stock is entitled to elect a certain number
of the Company's directors and has its own particular voting requirements. The
holders of the Class A Common Stock are entitled to elect five of the Company's
18 directors (each a "Class A Director") by an affirmative vote of a plurality
of all votes cast at a meeting at which a quorum of Class A Common Stock is
present. The holders of the Class B Common Stock are entitled to elect eight of
the Company's 18 directors (each a "Class B Director") by an affirmative vote of
a plurality of all votes cast at a meeting at which a quorum of Class B Common
Stock is present. The holders of the Series A Preferred Stock are entitled to
elect two of the Company's 18 directors (each a "Series A Preferred Director")
by an affirmative vote of a plurality of all votes cast at a meeting at which a
quorum of Series A Preferred Stock is present. The holders of the Series B
Preferred Stock are entitled to elect two of the Company's 18 directors (each a
"Series B Preferred Director") by an affirmative vote of a plurality of all
votes cast at a meeting at which a quorum of Series B Preferred Stock is
present. Prior to the Company's 1998 annual meeting, the holders of the Series C
Preferred Stock are entitled to elect one of the Company's 18 directors (each a
"Series C
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Preferred Director") by an affirmative vote of a plurality of all votes cast at
a meeting at which a quorum of Series C Preferred Stock is present. At the
Company's 1998 annual meeting of stockholders, the number of directors of the
Company shall be increased to 19, and thereafter, the holders of the Series C
Preferred Stock will be entitled to elect two of the Company's directors. Upon
conversion of all of the Series A, Series B and Series C Preferred Stock to
Class C Common Stock, the holders of shares of Class C Common Stock shall be
entitled to elect five directors of the Company prior to the Company's 1998
annual meeting and six directors thereafter (each a "Class C Common Director").
Further, the Company must obtain the consent of the holders of the Company's
Series A, Series B and Series C Preferred Stock (collectively, the "Preferred
Stock") in connection with a variety of significant corporate activities. All of
the Company's stockholders (with the exception of employee participants in the
Company's Omnibus Stock Option Plan which, by its terms, restricts in certain
ways the resale of stock issued thereunder) are parties to a Stockholders
Agreement which governs a variety of matters, including voting as to directors.
Purchasers of Securities will also be subject to significant contractual
restrictions on the resale of such Securities until an underwritten initial
public offering for cash of Common Stock, and all shares will carry a legend to
reflect such restrictions. There can be no assurance that such an offering will
occur. See "Management--Stockholders Agreement" and "Description of Capital
Stock."
ABSENCE OF PUBLIC MARKET
It is not currently anticipated that any of the Securities described in
this Prospectus will be listed on an exchange or other public market or that a
trading market will develop for the Securities. Consequently, the price of the
Securities which may be obtained by a seller in a secondary resale may be
subject to volatility, and given the contractual restrictions or transfer
described in "--Voting Limitations; Restrictions on Resales of Securities" and
"Description of Capital Stock," the resale of such Securities may be difficult
to effect in any case.
PENNY STOCK RULES
As described in "--Absence of Public Market," it is not currently
anticipated that any of the Securities described in this Prospectus will be
listed on an exchange or other public market or that a trading market will
develop for the Securities. As it is not expected that any of the Securities
will be traded on an exchange or quoted on Nasdaq, the Securities will be
subject to Rule 15g-9 under the Exchange Act, which, among other things,
requires that brokers/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and receiving
any purchaser's written consent prior to any transaction. If the Securities
could also be deemed penny stocks under the Securities Enforcement and Penny
Stock Reform Act of 1990, this would require additional disclosure in connection
with trades in the Securities, including the delivery of a disclosure schedule
explaining the nature and risks of the penny stock market. Such requirements
could severely limit the liquidity of the Securities and the ability of the
purchasers in this offering to sell their Securities in the secondary market.
FEDERAL AND STATE REGISTRATION REQUIREMENTS; POSSIBLE INABILITY TO EXERCISE
OPTIONS
Holders of Options will have the right to exercise such option only if
there is a current registration statement in effect with the Commission relating
to the shares of Class B Common Stock issuable upon exercise of the Options and
such shares are qualified with or approved for sale by various state securities
agencies, or if, in the opinion of counsel for the Company, there is an
effective exemption from registration. There can be no assurance that the
Company will be able to keep a registration statement covering the shares
underlying the Options current. If a registration statement covering such shares
of Class B Common Stock is not kept current for any reason, or if the shares
underlying the Options are not registered in the state in which a holder
resides, the Options will not be exercisable and will be deprived of any value.
See "Description of Capital Stock--Options."
OWNERSHIP OF STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company own 100% of the Class A
Common Stock of the Company (which as of November 15, 1996 represents
approximately 16% of the outstanding capital stock of the Company). The holders
of Class A Common Stock are entitled to elect five of the 18 members of the
Board of Directors.
The executive officers and directors of the Company own, either directly or
indirectly through their equity interests in Medical Holdings Limited
Partnership ("MHLP") approximately 16.5% of the Class B Common Stock (which as
of November 15, 1996 represents approximately 8.1% of the Company's outstanding
capital stock). Five directors of the Company own approximately 29.4% of the
issued and outstanding capital stock of BMGGP, Inc., the general partner of
MHLP. MHLP owns 87.9% of the Company's issued and outstanding Class B Common
Stock (which as of November 15, 1996 represents
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approximately 43.2% of the outstanding capital stock of the Company). The
holders of Class B Common are entitled to elect eight of the 18 members of the
Board of Directors.
Two directors of the Company are executive officers of the holder of Series
A Preferred Stock. The holder of Series A Preferred Stock is entitled to elect
two of the Company's directors. Two directors of the Company are executive
officers or directors of the parent company of the holder of Series B Preferred
Stock. The holder of Series B Preferred Stock is entitled to elect two of the
Company's directors. One of the directors of the Company is an executive officer
of the holder of Series C Preferred Stock. The holder of Series C Preferred
Stock is entitled to elect one of the Company's directors. Upon conversion of
the Series A Preferred Stock to Class C Common Stock, the holders of such stock
will own approximately 19.7% of the Company's outstanding capital stock. Upon
conversion of the Series B Preferred Stock to Class C Common Stock, the holders
of such stock will own approximately 7% of the Company's outstanding capital
stock. Upon conversion of the Series C Preferred Stock to Class C Common Stock,
the holders of such stock will own approximately 8.4% of the Company's
outstanding capital stock. The holders of Class C Common Stock would together
own approximately 35.1% of the Company's outstanding capital stock.
Accordingly, the executive officers and directors may have a significant
impact on the business, policies and affairs of the Company. See "Principal
Stockholders".
KEY EMPLOYEES
The Company depends to a significant extent on key management, technical
and marketing personnel, and depends particularly on the efforts of Mr. Gold and
Drs. Rifkin and Kimmel. The Company's growth and future prospects will depend in
large part upon its ability to attract, motivate and retain highly qualified
personnel. The loss of any key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect on the operating
results and financial condition of the Company. See "Management."
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 PSO Agreements for
liabilities resulting from the negligent performance of services or other
misconduct by such Core Medical Group members. Although the Company currently is
not a party to any material litigation relating to the practice of medicine,
there can be no assurance that the Company will not become involved in such
litigation in the future, that any claim or claims arising from such litigation
will not exceed the Company's insurance coverage or that such coverage will
continue to be available, any of which could have a material adverse effect on
the Company.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws
and agreements to which the Company is a party could, together or separately,
discourage potential acquisition proposals or delay or prevent a change in
control of the Company, even when stockholders other than the Company's
principal stockholders consider such a transaction to be in their best interest.
For example, the Company's outstanding stock options to management and employees
will vest upon a change in control of the Company, thereby potentially diluting
the equity ownership of a purchaser of the Company's securities. The Company's
Articles of Incorporation require, in certain instances, the approval of the
holders of Series A and Series B Preferred Stock of the sale by the Corporation
of all or substantially all of its assets, of certain mergers, and certain
public offerings of the Company's common stock. 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."
15
<PAGE>
ANTITRUST CONSIDERATIONS
The Company and its Network Physicians, and other entities with which it
contracts are subject to the United States, state and District of Columbia
antitrust statutes as well as to the interpretations of such statutes by the
courts. Because the Company will be contracting with Payors and with providers
for the provision of health care services by providers who could be deemed to
compete for the provision of such services, and for other reasons, the Company,
Network Physicians and other entities with which it contracts could be subject
to public and private investigations and enforcement actions under such
statutes. The health care sector is undergoing significant change and is highly
competitive. See "Risk Factors--Competition." The Company has consulted with
counsel concerning the appropriateness of its contracting activities under such
statutes and believes that all of its present and proposed activities are
consistent with such statutes and interpretive guidelines issued by the
Department of Justice, the Federal Trade Commission and other regulatory
agencies. There can, however, be no assurance that the Company will not be
challenged on these grounds.
USE OF PROCEEDS
Securities may be issued from time to time in connection with the
affiliation of medical practices by the Company. In exchange for such Securities
(and other consideration), the Company expects to receive certain enumerated
assets of such practices or the consideration specified in the relevant
contract. The Company will issue Securities only in connection with the
affiliation of medical practices by the Company and will not, except in
connection with the exercise of the Options, receive cash proceeds in connection
with the issuance of the Securities. See "PLAN OF DISTRIBUTION--Acquisition of
Medical Practices," "--Contractual Arrangements--IPA Arrangements" and
"--Contractual Arrangements--Employment Arrangements".
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
Company's period ended June 30, 1995 and year ended June 30, 1996 have been
derived from the audited consolidated financial statements of the Company. The
selected financial data with respect to the three months ended September 30,
1995 and 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 each of the interim periods presented.
Operating results for the three months ended September 30, 1996, are not
necessarily indicative of the results that may be obtained for the entire year
ending June 30, 1997. The data set forth below are qualified in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, the notes thereto and the other financial and
statistical information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
PERIOD ENDED YEAR ENDED --------------------------
JUNE 30, 1995 JUNE 30, 1996 1995 1996
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
(RESTATED) UNAUDITED
STATEMENT OF OPERATIONS:
Net revenue....................................................... $ 850,665 $ 5,428,561 $ 557,067 $ 2,194,511
Capitation revenue................................................ -- 689,068 -- 1,267,613
------------- ------------- ----------- -----------
Total revenues.................................................... 850,665 6,117,629 557,067 3,462,124
Medical services expense.......................................... -- 969,677 -- 1,195,501
Care center costs................................................. 776,865 5,287,348 486,251 2,103,519
General and administrative........................................ 1,877,735 6,082,902 536,115 2,670,080
Depreciation and amortization..................................... 27,508 435,573 50,545 224,384
Interest and other income......................................... (99,673) (272,666) (71,805) (69,038)
Interest expense.................................................. 23,915 226,908 35,111 148,215
------------- ------------- ----------- -----------
Loss before taxes................................................. (1,755,685) (6,612,113) (479,150) (2,810,537)
------------- ------------- ----------- -----------
Income tax expense................................................ -- -- -- --
------------- ------------- ----------- -----------
Net loss.......................................................... (1,755,685) $ (6,612,113) $ (479,150) $(2,810,537)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Loss applicable to common stock:
Net loss........................................................ $ (1,755,685) $ (6,612,113) $ (479,150) $(2,810,537)
Less: preferred stock dividends accreted........................ 113,300 552,531 81,250 223,024
------------- ------------- ----------- -----------
Loss applicable to common stock................................. $ (1,868,985) $ (7,164,644) $ (560,400) $(3,033,561)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Net loss per share................................................ $(.62) $(2.34) $(.19) $(.94)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Weighted average number of shares outstanding..................... 3,000,000 3,063,205 3,000,000 3,206,217
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 131,885 $ 1,419,295 $ 799,395 $ 6,620,516
Working capital (deficit)......................................... 73,314 882,132 (63,559) 5,345,956
Total assets...................................................... 1,510,171 11,154,138 2,778,193 17,999,178
Long term obligations............................................. 587,339 5,798,037 733,303 6,125,650
Redeemable convertible preferred stock............................ 1,948,300 7,910,831 2,529,550 15,623,055
Total stockholders' deficit....................................... $ (1,837,467) $ (6,677,851) $(2,396,547) $(9,417,412)
</TABLE>
- ---------------
(1) Weighted average number shares restated to reflect two-for-one stock split
in fiscal 1995.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
OVERVIEW. As of September 30, 1996, there were approximately 690 Network
Physicians in five regional networks throughout the State of Maryland, including
approximately 176 PCPs, 95 obstetrician/gynecologists and 419 specialist
physicians. Of these, 90 were Equity Physicians, of which 51 had transferred
their practice assets to the Company or one of its subsidiaries and 23 had
entered into binding agreements to complete such transactions and 16 were
subject to a letter of intent with respect to an affiliation which the Company
believes will be completed by December 31, 1996. As of November 15, 1996, there
were approximately 1,152 Network Physicians in six regional networks throughout
the state of Maryland and one regional network in Northern Virginia, including
approximately 297 PCPs, 95 obstetrician/gynecologists, and 760 specialist
physicians. Of the 1,152 Network Physicians, 90 were Equity Physicians, of which
58 had transferred their practice assets to the Company or one of its
subsidiaries, 16 had entered into binding agreements to complete such
transactions and 16 were subject to a letter of intent with respect to an
affiliation which the Company believes will be completed by December 31, 1996.
The Company provides services to its Network Physicians, who deliver health
care services to patients under various reimbursement mechanisms. The Company's
level of profitability depends on (i) increasing the number of Network
Physicians, (ii) attracting patients to enroll in benefit plans that enter into
Global Capitated Contracts with the Company (principally Medicare
beneficiaries), (iii) securing additional and maintaining Global Capitated
Contracts, with adequate reimbursement rates and (iv) generating earnings
through assisting Network Physicians in managing the delivery of high quality
care at a cost less than the reimbursement received under Global Capitated
Contracts.
SOURCE OF REVENUES AND EARNINGS. The Company's total revenues represent (i)
the contractual management and similar fees earned under its long-term PSO
Agreements with Core Medical Groups ("Net Revenues") and (ii) payments made by
Payors to the Company pursuant to Full Risk Contracts or Global Capitated
Contracts and Gatekeeper Capitation Contracts ("Capitation Revenue"). Under the
PSO Agreements, the Company is contractually responsible and at risk for the
operating costs of the Core Medical Groups with the exception of amounts
retained by physicians for their salaries. Because the Company owns no equity
interest in the Core Medical Groups and is not engaged in the practice of
medicine, the Company does not reflect physician revenues in the Company's
financial statements. The Company's Net Revenues include the reimbursement of
all medical practice operating costs and the contractual management fees
pursuant to the PSO Agreements and other agreements. Net Revenue is recognized
when services are performed and collection from the Core Medical Groups is
probable.
The Company acquires certain assets of medical practices from Equity
Physicians and enters into long-term contracts with Core Medical Groups who
employ the physicians. The Company currently derives a significant portion of
its Total Revenues pursuant to the PSO Agreements, which are long-term contracts
between Core Medical Groups and the Company. The Company's PSO Agreements have a
30-year term with an unlimited number of 10-year renewals and provide that the
Company and the Core Medical Groups will each perform certain duties with
respect to operation of the Company's Integrated Health Care Delivery System.
The Company agrees to provide the Core Medical Groups with general management
services (including financing, marketing, advertising, budgeting, physician
acquisition, information systems, and bookkeeping); billing and collection of
patient care fees; office personnel; equipment and office space; maintenance of
patient records and other medical practice management services. Under the PSO
Agreements, the Core Medical Groups agree to comply with the terms of Managed
Care Contracts, including the delivery of health care services, 24-hour
coverage, cooperation with utilization review, quality assurance and peer review
programs and credentialling matters.
As consideration for the services, assets, and facilities provided by the
Company, the Core Medical Groups in the PSO Agreements typically agree to pay
the Company the cost of services, assets and facilities provided by the Company
to the Core Medical Groups. Such amounts paid to the Company are reflected in
the Company's financial statements as Net Revenues.
In addition, pursuant to the PSO Agreements, the Company typically is
entitled to compensation from the Core Medical Groups calculated by subtracting
the costs of operating the Core Medical Groups' medical practices (including
physician salaries) from the Core Medical Groups' income. To date, the Company
has not received any revenues pursuant to this provision of the PSO Agreements.
As described in "BUSINESS--Development of Integrated Health Care Delivery
System--PSO Agreement with the Core Medical Group," PSO Agreements with PCP Core
Medical Groups provide that the Company may pay to the Core
18
<PAGE>
Medical Group, as a Managed Care Incentive Payment, an annual negotiated amount
of up to 25% of the total amount of all Company net income before taxes and
bonuses, attributable to the provision of health care to the Core Medical
Group's managed care patients during each calendar year, not to exceed, in the
aggregate, 25% of the base salaries paid to all PCPs of the Core Medical Group.
Such payments are not required if the Company has not earned net income during
the applicable years. To the extent that the Company records net income in the
future, such payments may be expected to have an effect on its results of
operations.
The PSO Agreement for Doctors Health Montgomery, LLC provides a different
method of calculating the Company's compensation. The Company is entitled to
retain as its compensation 40% of an amount determined by subtracting the fees
received from the provision of ancillary medical services by the Core Medical
Group, including laboratory and radiology services, from the direct costs of
providing these services. In addition, the Company is entitled to a "practice
growth amount," equal to the amount derived by subtracting (i) the Core Medical
Group physician's salary guarantee from (ii) the excess of physician revenues
over expenses of the physician's medical practice. The Company is entitled to
38% of this practice growth amount which reflects growth in the practice because
the physician's salary guarantee is based upon an average of the two prior years
net revenues. The Company's financial relationship with each practice offers the
physicians access to capital, management expertise, sophisticated information
systems and Managed Care contracts.
The historical results of operations presented herein are not necessarily
indicative of anticipated future results. Physicians, prior to becoming
employees of the Core Medical Groups, derived substantially all of their
revenues through activities related to Net Revenue. A central tenet of the
Company's strategy is changing the revenue mix of its Network Physicians from
fee-for-service reimbursement to pre-paid arrangements, principally those
involving Global Capitated Contracts for Medicare beneficiaries.
The Company's primary source of future earnings is expected to be Global
Capitation Revenue. Under such arrangements, the Company receives a fixed fee
from a Payor in exchange for undertaking the obligation to provide or arrange
for the provision of substantially all of the health care services required by
the Enrollees (the majority of expenses associated with such activities are
reported as "Medical Services Expense"). These services include not only
services provided by the Company's Network Physicians but also hospitalization,
specialty care and ancillary services which are subcontracted by the Company.
The Company expects to realize reimbursement rates of approximately $4,000 to
$5,000 per year per Medicare patient and approximately $1,000 under Commercial
Capitated Contracts.
Due to the Company's strategy of seeking future earnings from Global
Capitated Contracts and Full Risk Contracts, the Company is exposed to certain
financial risks. Under these arrangements, the Company is responsible through
its Network Physicians, for the provision of certain covered medical services
including primary care and specialist services and hospitalization. The Company
does not control the medical decisions made by health care providers. However,
in accordance with the policies and procedures established by the HMOs and other
Payors, the Company communicates whether requested services are covered pursuant
to an Enrollee's HMO or other managed care plan. To the extent that Enrollees
require more care than may be anticipated or require care that is not reimbursed
by the HMO, aggregate capitation payments received by the Company may not be
sufficient to cover the costs of treating the Enrollees. If the capitation
revenue is not sufficient to cover the costs, the Company's revenues would be
adversely affected. The Company has had limited historical experience under
capitated arrangements because the Company's three Global Capitated Contracts
were effective January 1, April 1 and June 1, 1996. During this limited period
of time operating under such contracts, the Company has recognized a loss of
approximately $280,000 for the year ended June 30, 1996. For the three months
ended September 30, 1996. The Company recorded approximately $927,000 of Global
Capitated Revenue and a profit of approximately $72,000.
The inability of the Company to renew its current Payor contracts, to
maintain favorable terms of such contracts, to attract patients who enroll in
such benefit plans, to expand such contracts to other geographical areas in the
Baltimore and Washington metropolitan area and surrounding regions or to manage
successfully the cost of care would materially and adversely affect the
Company's revenues and primary source of earnings.
As of November 15, 1996, the Company is working cooperatively with two
Payors to attract both Medicare and commercial patients who enroll in benefit
plans that enter into Global Capitated Contracts with the Company. As of
September 30, 1996 and as of November 15, 1996, there were not a sufficient
number of patients enrolled in benefit plans under the Company's Global
Capitated Contracts to cover its operating costs. To the extent patients do not
enroll in such benefit plans in adequate numbers, it will have a material
adverse effect on the operating results and financial condition of the Company.
The Company's ability to manage successfully the cost of care under such
contracts depends on the overall health of its patients, its ability to manage
appropriate and timely utilization of medical resources and its ability to
maintain favorable
19
<PAGE>
agreements with other health care providers (E.G., hospital and ancillary
services). To the extent the Company is unable to provide or arrange for the
provision of substantially all of the health care services required by its
patients at a cost less than the fixed fee received from a Payor, it will have a
material adverse effect on the operating results and financial condition of the
Company.
In the future, the Company expects to derive meaningful revenues and
earnings from other sources including (i) the management of Specialty Care Core
Medical Groups, (ii) the management fees growth of multi-specialty Core Medical
Group revenue, (iii) other management fees and (iv) the growth of Core Medical
Groups revenue from increased physician productivity.
ACQUISITIONS/OTHER PHYSICIAN TRANSACTIONS. The Company has acquired the
furniture, fixtures and equipment (at net book value, which the Company and each
Equity Physician agree approximates fair value), intangible assets, and the
accounts receivable of certain medical practices in exchange for consideration
of cash, stock and/or notes payable. In addition to such consideration,
substantially all direct costs associated with the acquisition are capitalized.
(See "History of the Company" for a description of the number of practices
acquired and the amount and form of consideration paid to consummate each
transaction.) The Company acquires no equity interest in the Core Medical Groups
that employ the Equity Physicians.
At the time of acquisition, Equity Physicians typically enter into 10-year
employment agreements with a Core Medical Group. Further, each Core Medical
Group enters into a PSO Agreement with the Company generally for 30 years, with
automatic terms of renewal, pursuant to which the Company provides management
and administrative services to the Core Medical Group and the Core Medical Group
agrees to provide medical services to the Company's patients. The PSO Agreement
does not convey any equity interest in the Core Medical Groups, which retain
autonomy and independence over clinical matters.
Certain acquisitions are subject to reacquisition rights whereby the
physicians may rescind the transaction typically within a nine month period from
the date of closing. Pursuant to such reacquisition rights, such physicians may
repurchase substantially all of the assets previously acquired at the price paid
by the Company at the closing. To date, one physician had exercised his
reacquisition rights. In that instance, the practice had not actually been
consolidated into the operations of the Company and as a consequence had no
material financial effect on the Company. As of September 30, 1996, of the 44
physicians who had been granted reacquisition rights, 17 had such rights still
available. These physicians represented approximately $1,511,905 or 20% of the
Company's total pro forma revenue of $7,579,000. As of November 15, 1996, of the
50 physicians who had been granted reacquisition rights, 16 had such rights
still available. Although the Company does not believe that substantial
rescissions will occur, the exercise of such rights by a substantial number of
physicians would have a material and adverse effect on the operating results and
financial condition of the Company.
Of the 90 Equity Physicians as of September 30, 1996, 23 had entered into
binding letters of intent to sell certain assets of their medical practices to
the Company and become employees of Core Medical Groups. As of November 15,
1996, 7 of these physicians had consummated the aforementioned transactions. The
Company expects the remainder of these transactions to close by December 31,
1996.
The Company intends to continue acquiring certain assets of medical
practices and obtaining managed care contracting rights and is currently in
active discussions with a number of primary and specialty care physicians. The
Company intends to begin management of multi-specialty Core Medical Groups
pursuant to a medical practice asset acquisition of and merger with a
16-physician cardiology practice and the integration of such physicians as the
Cardiology Department of an existing Core Medical Group. The consideration in
such transaction will consist of shares of Class B Common Stock and a note
payable for the accounts receivable.
The Company also expects to derive revenues and earnings from the
participation of physicians in its IPAs. As of September 30, 1996, 50 Network
PCPs were participants in the Company's IPAs. As of November 15, 1996, 175
Network PCPs were participants in the Company's IPAs. (See
"Business--Development of Integrated Health Care Delivery System--Independent
Physician Associations".)
20
<PAGE>
RESULTS OF OPERATIONS
The Company's operating results are significantly affected by the number of
Network PCPs, the number of Network PCPs participating in Global Capitated
Contracts, the number of executed Global Capitated Contracts, and the number of
patients enrolled in benefit plans under Global Capitated Contracts with the
Company. The following table summarizes the Company's history with respect to
Network PCPs, executed Global Capitated Contracts and patients enrolled in
benefit plans under Global Capitated Contracts with the Company:
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 SEPTEMBER 30, 1996
------------- ------------- ------------------
<S> <C> <C> <C>
Number of Network PCPs as of................................................ 24 155 176
Number of Network PCPs participating in Global Capitated Contracts
as of..................................................................... 0 45* 45
Number of regional networks as of........................................... 1 5 6
Number of Global Capitated Contracts as of.................................. 0 3 3
Number of Global Capitated Contract Patients:
Commercial................................................................ 0 2,039 2,174
Medicare.................................................................. 0 491 965
</TABLE>
- ---------------
* There is a lag between when physicians join networks and when they become
eligible to participate in Global Capitated Contracts as a result of the
credentialing process and other internal Company controls.
The increase in the number of Network Physicians has contributed to the
increase in net revenue growth as well as the increase in operating costs to
support physician growth. In preparation for the acquisition of medical
practices and other physician transactions, the Company had invested in the
personnel and infrastructure necessary to accommodate its anticipated growth,
which resulted in substantial increases in corporate expenses throughout 1996
and 1995.
The Company's three Global Capitated Contracts noted above were effective
January 1, April 1 and June 1, 1996, respectively. Since the Company executed
its Global Capitated Contracts in the latter half of the year ended June 30,
1996 and its Network PCPs experienced the lag time in becoming eligible to
participate in such contracts, the Company's global capitated revenue was less
than expected.
Due to the limited operating period of the Global Capitated Contracts, the
number of physicians eligible to participate in Global Capitated Contracts, the
resulting relatively small number of patients enrolled in benefit plans under
Global Capitated Contracts with the Company and the Company's limited experience
with the Payors, the Company has recognized a loss of approximately $280,000
related to such contracts for the year ended June 30, 1996. For the three months
ended September 30, 1996, the Company has recorded approximately $927,000 Global
Capitated Revenue and recognized a profit of approximately $72,000.
Although the Company expects that it will derive earnings from such
contracts in the future given larger numbers of Network PCPs participating in
Global Capitated Contracts, the expected larger number of enrolled patients and
greater experience with the Payors, there can be no assurance that this will be
the case. (See "Risk Factors--Dependence on Managed Care".) Because of the
Company's limited operating history, the limited period in which it has been
assisting and managing Network Physicians, its limited experience with full and
shared-risk capitated arrangements and the effects of the acquisitions, the
Company does not believe that the period to period comparisons, percentage
relationships within periods and apparent trends set forth below are necessarily
indicative of future operations.
21
<PAGE>
The following table sets forth the percentages of total revenue represented
by certain items reflected in the Company's consolidated statements of
operations:
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
------------ ----------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
------------ ---------- ------ ------
Net revenue.................................................................. 100.0% 88.7% 100.0 % 63.4 %
Capitation revenue........................................................... 0.0% 11.3% 0.0 % 36.6 %
------------ ---------- ------ ------
Total revenues............................................................... 100.0% 100.0% 100.0 % 100.0 %
Medical services expense..................................................... 0.0% 15.8% 0.0 % 34.5 %
Care center costs............................................................ 91.3% 86.5% 87.4 % 60.8 %
General and administrative................................................... 220.7% 99.4% 96.2 % 77.1 %
Depreciation and amortization................................................ 3.3% 7.1% 9.0 % 6.5 %
Interest and other income.................................................... (11.7%) (4.5%) (12.9 %) (2.0 %)
Interest expense............................................................. 2.8% 3.7% 6.3 % 4.3 %
Income tax expense........................................................... -- -- -- --
------------ ---------- ------ ------
Net loss..................................................................... (206.4%) (108.0%) (86.0 %) (81.2 %)
------------ ---------- ------ ------
------------ ---------- ------ ------
</TABLE>
YEAR ENDED JUNE 30, 1996 COMPARED TO THE PERIOD ENDED JUNE 30, 1995.
The period ended June 30, 1995 and the year ended June 30, 1996 are not
comparable periods as the period ended June 30, 1995 represents only
approximately four months of operations. Therefore, a comparison of increases
from one period to another generally is not meaningful.
TOTAL REVENUES. The Company's total revenues increased to $6,117,629 for
the year ended June 30, 1996 from $850,665 for the period ended June 30, 1995.
Capitation revenue increased to $689,068 ($382,068 Global Capitation and
$307,000 Gatekeeper Capitation) or 11.3% of total revenue from $0 over the prior
period. This increase in capitation revenue during the year ended June 30, 1996
is primarily attributable to an increase in the number of Network Physicians
from 24 to 88, the increase in the number of Network Physicians participating in
Global Capitated Contracts from 0 to 45, the increase in the number of Global
Capitated Contracts from 0 to 3 and the increase in the number of Gatekeeper
Capitation Contracts from 0 to 10.
MEDICAL SERVICES EXPENSE. Medical services expense was $969,677 or 15.8% of
total revenue for the year ended June 30, 1996 compared to $0 of total revenue
for the period ended June 30, 1995. This increase resulted from the increase in
the number of Network Physicians participating in Global Capitated Contracts
from 0 to 45, the increase in the number of Global Capitated Contracts from 0 to
3 and the increase in the number of Gatekeeper Capitation Contracts from 0 to
10. The Company expects these expenses to increase as the number of Network
Physicians participating in and the number of patients enrolled in benefit plans
under Global Capitated Contracts with the Company grows.
CARE CENTER COSTS. Care center costs were $5,287,348 or 86.5% of total
revenue for the year ended June 30, 1996 compared to $776,865 or 91.3% of total
revenue for the period ended June 30, 1995. This increase in dollar amount
resulted from the increases in the number of Network Physicians from 24 to 88.
While these expenses are expected to increase as the Company continues adding
Network Physicians, the Company expects that these expenses will decline as a
percentage of total revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $6,082,902 or 99.4% of total revenue for the year ended June 30, 1996
compared to $1,877,735 or 220.7% of total revenue for the period ended June 30,
1995. This increase in dollar amount resulted primarily from increased
compensation expenses from expansion of the Company's corporate management team,
as well as its marketing, acquisitions, network development and care management
departments and additional costs incurred in adding physicians to the Company's
networks and attracting patients who enroll in benefit plans under Global
Capitated Contracts. While these expenses are expected to increase as the
Company adds Network Physicians, the Company expects that these expenses will
decline as a percentage of total revenues.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $435,573 or 7.1% of total revenue for the year ended June 30, 1996
compared to $27,508 or 3.3% of total revenue for the period ended June 30, 1995.
These increases resulted primarily from intangibles acquired in connection with
the purchase of certain medical practice assets from Equity Physicians, as well
as purchasing certain fixed asset additions. While these expenses are expected
to
22
<PAGE>
increase as the Company continues adding Equity Physicians to the affiliated
Core Medical Groups, the Company expects that these expenses will decline as a
percentage of total revenue.
INTEREST AND OTHER INCOME. Interest and other income was $272,666 or 4.5%
of total revenue for the year ended June 30, 1996 compared to $99,673 or 11.7%
of total revenue for the period ended June 30, 1995.
INTEREST EXPENSE. Interest expense was $226,908 or 3.7% of total revenue
for the year ended June 30, 1996 compared to $23,915 or 2.8% of total revenue
for the period ended June 30, 1995. These increases resulted primarily from the
increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's loss and its allowance for
deferred tax assets, for the year ended June 30, 1996 and the period ended June
30, 1995, the Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $6,612,113 for the year ended June
30, 1996 compared to $1,755,685 for the period ended June 30, 1995.
LOSS APPLICABLE TO COMMON STOCK. The Company's net loss is increased by
dividends payable to the Redeemable Convertible Preferred Stockholders. The net
loss applicable to common stock was $7,164,644 for the year ended June 30, 1996
compared to $1,868,985 for the period ended June 30, 1995.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
TOTAL REVENUES. The Company's total revenues increased to $3,462,124 for
the three months ended September 30, 1996 from $557,067 for the three months
ended September 30, 1995. This trend was attributable to the increase in net
revenue to $2,194,511 or 63.4% of total revenue from $557,067 or 100% of total
revenue and the increase in capitation revenue to $1,267,613 ($926,613 Global
Capitation and $341,000 Gatekeeper Capitation) or 36.6% of total revenue from $0
over the prior year. This increase resulted primarily from the increase in the
number of Network Physicians from 28 to 114, the increase in the number of
Network Physicians participating in Global Capitated Contracts from 0 to 45, the
increase in the number of Global Capitated Contracts from 0 to 3 over the prior
comparable period and the increase in the number of Gatekeeper Capitation
Contracts from 0 to 12 over the prior comparable period.
MEDICAL SERVICES EXPENSE. Medical services expense was $1,195,501 or 34.5%
of net revenue for the three months ended September 30, 1996 compared to $0 or
0% of net revenue for the three months ended September 30, 1995. These increases
resulted from the increase in the number of Network Physicians participating in
Global Capitated Contracts from 0 to 45, the increase in the number of Global
Capitated Contracts from 0 to 3 over the prior comparable period and the
increase in the number of Gatekeeper Capitation Contracts from 0 to 12 over the
prior comparable period. The Company expects these expenses to increase as the
number of Network PCPs participating in and the number of patients enrolled in
benefit plans under Global Capitated Contracts with the Company grows.
CARE CENTER COSTS. Care center costs were $2,103,519 or 60.8% of total
revenue for the three months ended September 30, 1996 compared to $486,251 or
87.4% of total revenue for the three months ended September 30, 1995. These
increases resulted from the increases in the number of Network Physicians from
28 to 114.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2,670,080 or 77.1% of total revenue for the three months ended September
30, 1996 compared to $536,115 or 96.2% of net revenue for the three months ended
September 30, 1995. These increases resulted primarily from increased
compensation expenses from development of the Company's corporate management
team, as well as the formation of its marketing, acquisitions, network
development and care management functions and additional organizational costs
from developing physician networks.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $224,384 or 6.5% of total revenue for the three months ended
September 30, 1996 compared to $50,545 or 9.0% of total revenue for the three
months ended September 30, 1995. These increases resulted primarily from
intangibles acquired in connection with the purchase of certain medical practice
assets from Equity Physicians, as well as purchasing certain fixed assets.
INTEREST AND OTHER INCOME. Interest and other income was $69,038 or 2.0% of
total revenue for the three months ended September 30, 1996 compared to $71,805
or 12.9% of total revenue for the three months ended September 30, 1995.
INTEREST EXPENSE. Interest expense was $148,215 or 4.3% of total revenue
for the three months ended September 30, 1996 compared to $35,111 or 6.3% of
total revenue for the three months ended September 30, 1995. These increases
resulted primarily from the increase in the level of borrowings.
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INCOME TAX EXPENSE. In light of the Company's loss and its allowance for
deferred tax assets, for the three months ended September 30, 1996 and the three
months ended September 30, 1995, the Company did not require a provision for
income taxes.
NET LOSS. The Company had a net loss of $2,810,537 for the three months
ended September 30, 1996 compared to $479,150 for the three months ended
September 30, 1995.
LOSS APPLICABLE TO COMMON STOCK. The Company's net loss is increased by
dividends payable to the Redeemable Convertible Preferred Stockholders. The net
loss applicable to common stock was $3,033,561 for the three months ended
September 30, 1996 compared to $560,400 for the three months ended September 30,
1995.
LIQUIDITY, CASH FLOW AND CAPITAL RESOURCES
OVERVIEW. The Company requires capital primarily to acquire certain medical
practices from Equity Physicians, to develop and install information systems for
care management functions (necessary for the management of provider risk-sharing
contracts), for billing and collection services and to meet working capital
requirements to cover operating expenses. Through September 30, 1996, the
Company had met its cash requirements primarily through private placements of
preferred stock and through bank borrowings. As of June 30, September 30 and
October 31, 1996, the Company had cash and cash equivalents of approximately
$1,419,295, $6,620,516 and $5,522,884, respectively.
Capitation arrangements generally have a favorable impact on cash flow
because the Company receives capitation revenue prior to incurring costs
associated with services provided under those contracts. Certain risk pool
arrangements negatively impact cash flow because certain medical service
expenses in connection with these arrangements are not finalized and settled by
the Company until significantly after it has received payment for the services.
LIQUIDITY. At June 30, September 30 and October 31, 1996, the Company had
working capital and available credit facilities of approximately $1,409,887,
$6,588,089 and $5,065,978, respectively.
CASH FLOW. Net cash used in operating activities was $5,057,464 for the
year ended June 30, 1996 compared to $1,292,824 for the period ended June 30,
1995. The use of cash for operating activities resulted primarily from (i)
$6,612,113 in net losses, (ii) a $854,283 increase in accounts receivable offset
by (iii) a $2,340,798 increase in accrued and other liabilities. Net cash used
in operating activities was $2,689,730 for the three months ended September 30,
1996.
Net cash used in investing activities was $2,044,842 for the year ended
June 30, 1996 compared to $410,489 for the period ended June 30, 1995. The
Company used $2,129,464 and $238,926 of cash for the acquisition of certain
assets of medical practices and other fixed assets during the year ended June
30, 1996 and the period ended June 30, 1995, respectively. Net cash used in
investing activities was $588,442 for the three months ended September 30, 1996.
Net cash provided by financing activities was $8,389,716 for the year ended
June 30, 1996 compared to $1,835,198 for the period ended June 30, 1995. (See
"--Capital Resources".) Net cash provided by financing activities was $8,479,393
for the three months ended September 30, 1996.
CAPITAL EXPENDITURES. The Company has entered into binding letters of
intent for the acquisition of certain assets of medical practices which, if
completed, would require approximately $2,500,000 in cash and has not committed
to any material additional capital expenditures. Management intends to finance
these expenditures from available capital sources. If additional capital sources
are secured, the Company intends to acquire additional assets of medical
practices as well as incur certain additional liabilities (See "--Subsequent
Events").
CAPITAL RESOURCES. On February 24, 1995, the Company issued 1,000,000
shares of Series A Preferred Stock to St. Joseph's Medical Center, Inc. (the
"Series A Preferred Stockholder") in exchange for $2,000,000 in cash and
$3,000,000 in a note (the "Series A Note"). The proceeds from this initial
issuance were used to fund the formation of the Company and for the acquisition
of certain medical assets from medical practices of certain Equity Physicians,
the incurrence of corporate expenses and the development of infrastructure in
conjunction with the Company's business strategy.
On September 27, 1995, the Company received $500,000 in cash payments on
the Series A Note from the Series A Preferred Stockholder. These proceeds were
used to fund corporate expenses and the continuing development of the Company's
infrastructure.
On December 1, 1995, the Company issued 355,556 shares of Series B
Preferred Stock to Med-Lantic Management Services, Inc. ("the Series B Preferred
Stockholder") in exchange for $4,000,000 in cash and entered into an agreement
("the NationsBank Credit Facility Agreement") with NationsBank of Maryland, N.A.
("NationsBank") as agent, which provides a
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revolving bank credit facility ("the NationsBank Credit Facility") with a
maximum availability of $4,000,000. Advances under the NationsBank Credit
Facility bear interest at the Company's option at either NationsBank prime rate
or the Eurodollar rate plus 0.75%. The NationsBank Credit Facility expires on
December 31, 1997, and is renewable, at the sole discretion of NationsBank, for
two additional periods of one year each.
Loans made pursuant to the NationsBank Credit Facility are guaranteed by
the Company's Series B Preferred Stockholder. In exchange for the guarantee of
the NationsBank Credit Facility, the Company issued 88,889 warrants to the
Series B Preferred Stockholder. The guarantee is collateralized by a security
interest in certain contract rights, including rights to the Company's patient
and global capitation receivables, under the PSO Agreements between the Company
and Core Medical Groups. Upon redemption of the Series B Preferred Stock in the
event of the issuance of junior preferred stock to a holder whose interest are
deemed adverse to the guarantor, the Company is required to obtain a release of
the guarantee.
The proceeds from the issuance of the Series B Preferred Stock were used
for the acquisition of certain medical practices from Equity Physicians, the
incurrence of corporate expenses and the development of the Company's
infrastructure in conjunction with the Company's business strategy. The proceeds
from the NationsBank Credit Facility were used for the acquisition of certain
medical practices from Equity Physicians, the funding of operating expenses and
the funding of capital expenditures. At June 30, 1996, September 30, 1996 and
October 31, 1996 approximately $3,400,000, $3,600,000 and $3,600,000,
respectively, were outstanding under the NationsBank Credit Facility.
On June 25, 1996, the Company received $1,000,000 in additional cash
payments on the Series A Note from the Series A Preferred Stockholder. These
proceeds were used to fund the incurrence of corporate expenses and the
continuing development of infrastructure in conjunction with the business
strategy.
The Company may receive up to $1,500,000 in additional cash payments on the
Series A Note from the Series A Preferred Stockholder, subject to borrowings
under the Bridge Loan Facility described below.
(For a discussion of the terms of conversion of the Preferred Stock into
Class C Common Stock, see "Description of Capital Stock".)
On August 15, 1996, the Company established a $1,500,000 bridge loan
facility (the "Bridge Loan Facility") with First National Bank of Maryland, N.A.
("First National"). The Bridge Loan Facility is collateralized by certain assets
of the Company and its affiliates and is guaranteed by the Series A Preferred
Stockholder. Advances under this facility bear interest at a rate of 6.71% per
annum. Unless extended, the Bridge Loan Facility matures on January 15, 1997.
The Company intends to replace the Bridge Loan Facility with a $10,000,000
credit facility with First National (the "First National Credit Facility" for
working capital and other general corporate purposes). As of November 15, 1996,
approximately $983,000 had been advanced under the Bridge Loan Facility for
working capital and other corporate purposes. Although there can be no
assurances the Company will obtain the First National Credit Facility, the
Company is proceeding with the loan approval process with the First National
Bank. In the event the Company is unable or unwilling to secure the First
National Bank Credit Facility by the maturity date of the Bridge Loan Facility,
the Bridge Loan Facility will be repaid from the Company's available cash. The
inability of the Company to obtain the First National Credit facility could have
a material adverse effect on the Company.
On September 4, 1996, the Company issued 428,571 shares of Series C
Preferred Stock to Genesis Health Ventures, Inc. (the "Series C Preferred
Stockholder"), in exchange for $7,500,000 in cash. The Company will issue
142,857 additional shares of the Series C Preferred Stock in exchange for
$2,500,000 in cash prior to December 31, 1996 which represents an obligation of
Genesis that must be fulfilled unless the Company is in breach of any of its
loan agreements. The proceeds from these issuances (the "Initial Genesis
Funding") will be used to fund corporate expenses in conjunction with the
business strategy and the acquisition of medical practices or IPA contracting
rights. The Company may issue up to 500,000 additional shares of the Series C
Preferred Stock in exchange for up to $10,000,000 in cash (the "Additional
Genesis Funding") if certain Medicare capitated milestones are achieved. There
can be no assurance that such Medicare milestones can be achieved and that the
Company will receive the Additional Genesis Funding.
SUBSEQUENT EVENTS. The Company intends to meet its cash requirements after
June 30, 1996 through a combination of some or all of the following sources of
capital: (i) up to $10,000,000 from the proceeds of the sale of Series C
Preferred Stock, (ii) up to $10,000,000 from the establishment of the First
National Bank Facility, (iii) up to $35,000,000 from the private placement of
the Notes and Warrants and (iv) up to $20,000,000 from the private placement of
one or more new series of Preferred Stock. The Company's ability to consummate
the First National Credit Facility or the Notes and Warrants is subject to the
consent of the holders of the Series A, Series B and Series C Preferred Stock
under certain circumstances. (See "Risk Factors--Liquidity: Restrictions on
Financing".) There can be no assurance that any of the foregoing financials will
be
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consummated or that, if consummated, that such financials will be made on terms
favorable to the Company. The Company expects to consummate at least one of the
tranactions exercised above pursuant to which the Company expects to receive net
proceeds of at least $10 million.
Until the Company and its Payors attract an adequate number of Capitated
Lives in Global Capitated Contracts, the Company expects to incur operating
losses and experience negative operating cash flows. The Company believes that
its cash on hand at November 15, 1996, the $2,500,000 to be received on or
before December 27, 1996 from the holder of Series C Preferred Stock, the
balance remaining available under the NationsBank Credit Facility and some
portion of the additional capital outlined above, will be sufficient to meet the
Company's operations through June 30, 1997. However, in the event that the
Company either has not attracted an adequate number of Capitated Lives in Global
Capitated Contracts in order to offset operating expenses, or has not secured
some substantial portion of the additional capital described above, the
Company's operating results and financial condition could be materially and
adversely affected.
In the event that the Company is successful in obtaining the additional
capital described above, in addition to the commitments for capital expenditures
described above (see "--Capital Expenditures"), the Company intends to expend
capital on improving information systems, expanding corporate infrastructure,
and to acquiring medical practices. There can be no assurance that the Company
will be able to establish a First National Credit Facility, consummate an
offering of Notes, close the additional issuance of Series C Preferred Stock
pursuant to the Additional Genesis Funding, or consummate an offering of Series
D Preferred Stock on terms favorable or acceptable to the Company. The inability
of the Company to obtain such funding, either in whole or part, would impair the
Company's ability to make intended capital expenditures and to execute its
planned strategy and therefore could have a material adverse effect on the
Company's results of operations and financial condition.
The Company expects that it will require significant additional capital to
fund additional expenses (primarily acquisition of medical practices and
expenses of corporate infrastructure) for the foreseeable future, and expects to
seek additional financing of debt and/or equity. The amount of such additional
capital will depend to a large degree as the rate of the Company's expansion and
can not be predicted with certainty.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future operating results and financial condition of the Company could
be materially and adversely affected by a number of factors such as risks
relating to the Company's growth strategy including competition for expansion
opportunities, integration risks, dependence on HMO Enrollee growth and the
ability to raise the capital required to support growth; the capitated nature of
revenues and control of health care costs; exposure to professional liability;
health care reform and government regulation; and the Company's ability to sell
its services profitably, successfully increase market share and manage expense
growth relative to revenue growth. See "Risk Factors."
BUSINESS
INDUSTRY
HCFA estimates that 1995 national health spending was approximately one
trillion dollars. The Company believes that physicians control more than 80% of
overall expenditures. Physicians have traditionally provided medical care on a
fee-for-service basis, which provides few incentives for the efficient
utilization of resources and has contributed to increases in health care costs
that are significantly higher than historical inflation rates. Concerns over the
accelerating cost of health care have resulted in the increasing prominence of
managed care, and employers, individuals and the government have increasingly
turned to HMOs and other forms of managed care in an attempt to manage health
care costs more effectively. According to industry sources, the number of
individuals enrolled in HMOs grew from 15 million Enrollees in 1984 to over 50
million in 1996, an 11% compound annual growth rate. According to the United
States General Accounting Office, there are approximately 600 HMOs currently
operating in the United States, covering approximately 20% of the U.S.
population. Moreover, Federal and State governments are increasingly using HMOs
to cover health benefits under Medicare and Medicaid programs. The Company
believes that overall enrollment in HMOs will continue to increase due to the
fact that HMOs generally offer lower overall premium costs than traditional
fee-for-service indemnity health insurance.
Health care in the United States historically has been delivered through a
fragmented system of health care providers, including individual or small groups
of PCPs and specialists. According to the American Medical Association, there
are approximately 565,000 active physicians in the United States, with
approximately 70% of these physicians, or 397,000, practicing individually or in
a two person group. HCFA estimates that the physician services market is $200
billion.
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In an effort to manage their costs and minimize their risk, HMOs are
shifting from fee-for-service payments for physicians and are increasingly
utilizing "capitation" arrangements. Under capitation arrangements, physicians
receive a fixed monthly fee per assigned enrollee, and in return provide all
services required by such Enrollee in specified areas. Under these arrangements,
physicians assume the risk that they will be able to provide medical care at
costs less than the capitation payment. The Company believes that traditional
PCP and small group specialty practices are at a disadvantage in a managed care
environment because they typically have high operating costs, little bargaining
power with HMOs and other Payors and little or no information or data regarding
utilization or the total health care costs of treating their patients, and
therefore are unable to assess the business risks of managed care. In addition,
these physician practices almost always have insufficient capital to purchase
new technologies and lack the sophisticated systems necessary to track patient
data and performance and to contract effectively with HMOs and other managed
care entities. As a result, the Company believes PCPs and specialist physicians
are increasingly abandoning traditional practices in favor of affiliating with
larger organizations, such as the Company.
Traditionally, the primary care or "general practice" physician has enjoyed
broad patient loyalty and continuity and has been the point of entry into the
health care system for many patients, including those who require the services
of a specialist physician. The traditional role of the PCP has been to refer the
patient to a specialist physician who is typically not affiliated with the PCP
in the practice of medicine. Fee-for-service reimbursement to, and therefore
compensation levels for, specialist physicians have significantly exceeded the
compensation levels for PCPs. The result is that, under a traditional fee-for-
service environment, the PCP largely controls the amount of care their patients
receive without any information about the cost or efficacy of the care or
sharing in any of the revenues generated by that care.
The Company believes that its strategy of establishing and consolidating
Core Medical Groups, IPAs and related networks based upon PCPs, and entering
into arrangements with specialist networks, to compete in the managed care
marketplace will result in significant revenues from capitated contracts with
HMOs and other Payors to pay for flexible managed care of patients.
STRATEGY
The Company's strategy is based upon the concept that recent changes in the
health care industry have created an opportunity to establish physician provider
groups and IPAs that can provide a broad range of medical services to patients
and prepaid Managed Care members, more efficiently and profitably than is
possible under the traditional "fee-for-service" or "HMO network" models. The
Company believes that the development of an integrated health care delivery
system will allow it to negotiate Global Capitated Contracts with HMOs and other
Payors that will enable the Company to reduce administrative costs and derive
revenues by encouraging preventive medicine and by the appropriate utilization
of medical resources. The key elements of this strategy are as follows:
INTEGRATING HEALTH CARE PROVIDERS INTO COMPREHENSIVE NETWORKS. The Company
consolidates individual or groups of PCPs, specialists, hospitals and other
providers in the Baltimore and Washington metropolitan areas and surrounding
regions into primary care-driven comprehensive health care networks, permitting
the Company to assume full risk under contracts with Managed Care Plans for
certain health care services. Physicians will enter employment, IPA, joint
venture or other contractual relationships with the Company, while the Company
will negotiate favorable rates, to the extent feasible, from hospitals and other
providers of medical services. All participants must agree to follow the
Company's PCP-driven clinical protocols and procedures, unless they determine it
is medically inappropriate to do so, and are closely supervised by the PCPs. The
Company believes that its health care delivery networks (i) provide physicians
with greater access to managed care contracts by facilitating contractual
relationships with multiple HMOs or other Payors, (ii) establish a single point
of entry into an integrated health care delivery network for HMOs and other
Payors, and (iii) offer patients a comprehensive range of high quality medical
care. The Company's development of its healthcare network is currently focused
on the Baltimore and Washington metropolitan area and surrounding areas. After
the establishment of its network in this market, the Company may expand outside
of this region.
ATTRACTIVE TO PHYSICIANS. The Company seeks to be attractive to physicians,
and particularly to PCPs. The Company is dedicated to the creation of
professionally managed networks that grant physicians clinical autonomy and the
ability to practice medicine using clinical protocols and procedures developed
in cooperation with fellow physicians and other sources. 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. A key component of the Company's strategy is the ability of
the Core Medical Groups and IPAs to retain
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broad clinical autonomy over the manner in which physicians conduct the practice
of medicine. As a result of this strategy, the Company owns no equity interest
in the Core Medical Groups.
While the Company provides clinical protocols and procedures, Network
Physicians are always free to diverge from such protocols when they determine
that it is medically appropriate to do so. The Company's contracts with
physicians and other health care providers expressly state that the Company
shall not interfere with the physician's relationship with and responsibility to
the patient. The Company does not believe that the development and dissemination
of clinical protocols and quality assurance programs that may assist the
physician in providing cost effective and high quality medical care does not
make the Company or any other entity which provides quality assurance a health
care provider. Each Network Physician remains free and has the duty under all of
the Company's contracts to treat his or her patient as they determine necessary,
and not to discriminate against patients covered by the Company's managed care
plans. Further, the Company does not include in any of its contracts financial
penalties for physicians who choose not to follow any guidelines or who refer
patients without complying with the Company's reasonable notification
requirements.
FOCUS ON MANAGED CARE. The Company designs its physician-driven health care
delivery networks to meet the needs of HMOs, other Payors and patients, to
identify and recruit primary and specialty care physicians, hospitals and other
providers and to integrate such providers into networks that provide coordinated
medical coverage to such Payors' Enrollees. The Company seeks to benefit from
the desire of Payors and employers to reduce health care costs and risks, and
the trend toward prepaid managed health care. Rather than entering into an
exclusive arrangement with any single Payor, the Company seeks contracts with a
risk sharing arrangement, including Global Capitated Contracts, with each of the
HMO Payors in a region in which Network Physicians and other physicians operate
their medical practices. Because the Company's networks are PCP-driven and
patient-PCP relationships are typically strong, the Company expects that the
relatively large, pre-existing patient base of such PCP practices will be
attractive to Payors. The Company believes that its emphasis on wellness network
structure and management techniques (including the collection of meaningful
data, information systems, care utilization and quality management systems,
referral procedures, risk management programs, assistance with physician
credentialing and contracting with Payors) will enable it to effectively contain
costs and negotiate favorable capitation and shared risk arrangements.
MEDICARE MANAGED CARE. An important component of the Company's strategy is
the enrollment of Medicare-eligible persons in the Medicare managed care plans
with which the Company contracts. Reimbursement rates for Medicare patients are
considerably higher than for non-Medicare patients, reflecting the greater
historical expense of providing care to Medicare patients. HCFA estimates that
as of 1995 there were approximately 613,000 Medicare recipients in Maryland,
including over 300,000 in the greater Baltimore area, and that, as of September
1996, only approximately 39,000 were enrolled in HMOs in the state of Maryland.
The Company's results of operations are highly dependent on its ability to
convert its present portion of Network Physicians' current Medicare
fee-for-service patients to Medicare managed care plans and attract new Medicare
patients that enroll in Medicare HMOs with whom the Company contracts.
The Company currently has a Medicare Global Capitated Contract with Health
Care Corporation of the Mid-Atlantic and a Medicare Global Capitated Contract
with Chesapeake Health Plan under which the Company receives capitation payments
on a per member per month basis for each subscriber who participates in one of
the plans and is enrolled with a Network Physician. For the Medicare patients
enrolled in the plans contracting with a Network Physician, the Company receives
capitation payment revenue, assumes the risk of the cost of providing care to
the patients, and seeks to earn revenues by encouraging preventative medicine,
high quality care and appropriate utilization of medical resources.
EFFECTIVELY MANAGE THE DELIVERY OF MEDICAL CARE. The Company seeks to
deliver quality medical care while controlling costs and ensuring patient
satisfaction. Accordingly, the Company seeks qualified physicians and
coordinates the provision of health care services among the physicians,
hospitals, and other providers within its networks. The Company seeks (i) to
change the focus of health care utilization to foster health promotion at the
PCP and care manager level, (ii) to reduce specialist and other provider costs
through early and aggressive intervention by affiliation with fewer specialists
who will benefit from increased Managed Care activities at lower reimbursement
rates, and (iii) to reduce hospital, particularly inpatient, costs through more
efficient utilization of lower cost components of the health care delivery
system when appropriate without sacrificing quality. In addition, the Company
will monitor the delivery of high-quality medical care through the development
and implementation of information systems tailored to managed care. The Company
believes that much of the high cost of health care is caused by the lack of
incentives in the health care system to help patients avoid high-cost, episodic
care, and excessive utilization of high cost services. The Company believes that
lower cost care, such as outpatient or home care, where appropriate, is both
preferable to the patient and less expensive to the Payor.
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EXPANSION STRATEGY. The Company must actively develop or consolidate
existing and new markets through selective acquisitions and joint ventures. The
Company develops existing markets by (i) capturing additional revenues from
existing practices as patients migrate from traditional fee-for-service plans to
capitated managed care programs, (ii) adding new physicians to existing
networks, and (iii) contracting with Payors to expand the number of capitated
lives within existing physician practices.
HISTORY OF THE COMPANY
INITIAL TRANSACTIONS. The Company is a managed care and medical management
company which was incorporated in June 1994 and commenced operations on February
24, 1995.
Baltimore Medical Group, P.A. ("BMGPA") was incorporated in January 1993
and commenced operations in May 1993 as a primary care-driven provider group
that would ultimately create enough critical mass effectively to compete in the
rapidly changing health care market. The physicians of BMGPA also planned the
formation of one or more business entities to provide the management,
administrative, contracting, recruiting and marketing services needed by the
physicians. The Company was organized as a managed care and medical management
company to provide, or cause to be provided, all of the business services that
were required by BMGPA other than the provision of medical care to patients. In
February 1995, the Company commenced operations by (i) reorganizing BMGPA and
facilitating the transfer of its laboratory assets to Baltimore Medical Group,
LLC, the Company's first Core Medical Group, (ii) assuming exclusive management
responsibility and control over the practice assets and employees of the 15
BMGPA physicians, and (iii) issuing Class B Common Stock of the Company to a
partnership owned primarily by the 15 BMGPA physicians. Scott Rifkin, M.D., Alan
Kimmel, M.D., J. David Nagel, M.D., Peter LoPresti, D.O. and Robert Ancona,
M.D., five of the original members of Baltimore Medical Group, LLC, are
currently directors of the Company.
The Company received the BMGPA physicians' assets in a reorganization
through Medical Holdings Limited Partnership, a Maryland limited partnership
("MHLP"), a stockholder of the Company. In February 1995, at the time of the
establishment of Baltimore Medical Group, LLC, MHLP was formed and BMGPA
physicians transferred certain assets of their medical practices, excluding
laboratory and other ancillary assets, to MHLP in exchange for an aggregate
consideration of approximately $467,000, consisting of (i) limited partnership
interests in MHLP that are currently equal to approximately a 22.5% interest in
MHLP, (ii) approximately $19,000 in cash, and (iii) promissory notes with an
aggregate face value of approximately $443,000. In order to comply with
applicable regulatory requirements, the laboratory and other ancillary assets
were transferred directly to Baltimore Medical Group, LLC by BMGPA. MHLP
simultaneously conveyed substantially all of its remaining assets to the
Company, and the Company issued to MHLP 1,100,000 shares of the Company's Class
B Common Stock. As a result of a subsequent stock split, MHLP now holds
2,200,000 shares of the Company's Class B Common Stock. The physician owners of
BMGPA became members and employees of Baltimore Medical Group, LLC, and have
continued the practice of medicine through Baltimore Medical Group, LLC. The
Company and Baltimore Medical Group, LLC entered into a PSO Agreement pursuant
to which the Company provides Managed Care contracting and practice management
services to Baltimore Medical Group, LLC, leases to Baltimore Medical Group,
LLC, the assets used by the physicians in their medical practices, and provides
non-medical employees to Baltimore Medical Group, LLC. See "Development of
Integrated Health Care Delivery System--Focus on Primary Care Physicians."
Under the Partnership Agreement and other documents related to MHLP, shares
of the Company's Class B Common Stock held by MHLP will be distributed to the
partners of MHLP upon a change in control of the Company, including an
underwritten public offering, or other event of liquidation of MHLP. The General
Partner of MHLP is BMGGP, Inc., a Maryland corporation, which owns a one percent
(1%) interest in MHLP. The stockholders of BMGGP, Inc., are 17 of the initial
members of Baltimore Medical Group, LLC, and the 17 initial limited partners of
MHLP, including Drs. Rifkin, Kimmel, Nagel, LoPresti and Ancona. Accordingly,
the members of Baltimore Medical Group, LLC, indirectly own shares of the Class
B Common Stock through their limited partnership interests in MHLP and, for the
initial 17 members of Baltimore Medical Group, LLC, as stockholders of BMGGP,
Inc.
Since the formation of Baltimore Medical Group, LLC and MHLP, additional
physicians have sold 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, Cumberland Valley Medical Group,
LLC or Doctors Health Montgomery, LLC. In addition, such Equity Physicians have
become employees of one of these Core Medical Groups. In some instances, Equity
Physicians received shares of the Company's Class B Common Stock directly in
lieu of partnership interests in MHLP. The equity interests of all Core Medical
Groups are owned exclusively by member Equity Physicians, who have broad
autonomy and control over clinical matters. Following the reorganization of
BMGPA in February 1995, the Company acquired five
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practices during fiscal year 1995 for an aggregate consideration of
approximately $184,000, consisting of (i) limited partnership interests in MHLP
that are currently equal to approximately a 6% interest in MHLP (equivalent to
132,000 shares of the Company's Class B Common Stock, valued at $.01 per share),
(ii) approximately $16,000 in cash, and (iii) promissory notes with an aggregate
face value of approximately $167,000. During fiscal year 1996, the Company
acquired 29 additional practices for which physicians received an aggregate
consideration of approximately $3,867,000, consisting of (i) limited partnership
interests in MHLP that are currently equal to approximately a 31% interest in
MHLP (equivalent to 683,000 shares of the Company's Class B Common Stock,
231,000 of which were valued at $.01 per share and 452,000 of which were valued
at $3.00 per share), (ii) 198,000 shares of the Company's Class B Common Stock
(valued at $3.00 per share), (iii) approximately $290,000 in cash, and (iv)
promissory notes with an aggregate face value of approximately $1,625,000.
During fiscal year 1997 through November 15, 1996, the Company acquired certain
assets of ten additional practices for which physicians received an aggregate
consideration of approximately $1,799,000, consisting of (i) limited partnership
interests in MHLP that are currently equal to approximately a 1.8% interest in
MHLP (equivalent to 39,000 shares of the Company's Class B Common Stock, valued
at $7.00 per share), (ii) 106,000 shares of the Company's Class B Common Stock
(valued at $7.00 per share), (iii) approximately $422,000 in cash, and (iv)
promissory notes with an aggregate face value of approximately $362,000.
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SET FORTH BELOW IS AN ORGANIZATIONAL CHART REFLECTING, AS OF NOVEMBER 15,
1996, THE EQUITY, CONTRACTUAL AND OTHER RELATIONSHIPS AMONG THE COMPANY, ITS
STOCKHOLDERS, ITS CORE MEDICAL GROUPS, AND OTHER PARTICIPANTS IN THE COMPANY'S
INTEGRATED HEALTH CARE DELIVERY SYSTEM.
[CHART]
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The Company is constructing its Integrated Health Care Delivery System
throughout the Baltimore-Washington metropolitan area and contiguous regions by
acquiring certain medical practice assets, obtaining the right to negotiate and
execute managed care contracts for individual physicians and medical groups.
EXPANSION INTO CARROLL COUNTY, MARYLAND. In November 1995, the Company
acquired certain assets of the practices of five primary care physicians and
formed Carroll Medical Group, LLC ("Carroll Medical Group") located in Carroll
County, Maryland. Like the majority of the Baltimore Medical Group, LLC
physicians, these doctors acquired cash and limited partnership interests in
MHLP and became members of and employed by Carroll Medical Group. Carroll
Medical Group entered into a PSO Agreement with the Company on terms
substantially identical to the Baltimore Medical Group, LLC PSO Agreement. In
September 1996, an additional physician joined Carroll Medical Group.
EXPANSION INTO MONTGOMERY COUNTY, MARYLAND. In February 1996, the Company
entered into binding letters of intent to acquire the primary care practices of
21 physicians in Montgomery County, Maryland. The Company consummated
transactions involving twelve physicians through November 15, 1996 and formed
Doctors Health Montgomery, LLC ("Doctors Health Montgomery"). The Company
expects to consummate the remaining nine transactions in the third quarter of
fiscal year 1997. Doctors Health Montgomery entered into a PSO Agreement with
the Company in September 1996.
EXPANSION INTO ANNE ARUNDEL COUNTY, MARYLAND. In February 1996, the Company
entered into binding letters of intent to acquire certain assets of primary care
practices of nine physicians in Anne Arundel County, Maryland. The Company
expects to consummate these transactions in December 1996. The Company will
enter into a PSO Agreement with Anne Arundel Medical Group when the Company
acquires certain medical practice assets of these physicians and they become
members of the Anne Arundel Medical Group.
EXPANSION INTO ALLEGANY COUNTY, MARYLAND. In May 1996, the Company
consummated the acquisition of five primary care physician practices located in
Cumberland, Maryland, which on May 1, 1996, formed the Cumberland Valley Medical
Group ("CVMG"). Like Carroll Medical Group and Doctors Health Montgomery, CVMG
entered into a PSO Agreement with the Company on terms substantially identical
to the Baltimore Medical Group, LLC PSO Agreement. The Company is establishing
an IPA in Allegany County.
EXPANSION INTO WASHINGTON COUNTY, MARYLAND. The Company has established an
exclusive Managed Care contracting arrangement with Quality Healthcare IPA
("QHC"), an IPA representing approximately 20 primary care physicians in
Washington County, Maryland. Thirteen of the 20 physicians have agreed to
conduct all managed care contracting through the Company and QHC on an exclusive
basis. Pursuant to the IPA agreement, the Company is the exclusive Managed Care
contracting entity on behalf of the IPA's PCPs, and is developing a network of
specialists.
EXPANSION INTO HARFORD COUNTY, MARYLAND. The Company has established a
Managed Care contracting arrangement with a group of 10 primary care physicians
in Harford County, Maryland. Pursuant to the IPA Agreement, the Company is the
exclusive Managed Care contracting entity for Medicare managed care patients of
this IPA.
EXPANSION INTO NORTHERN VIRGINIA. The Company has entered into a merger
agreement and a management services agreement with Medtrust Medical Group, Inc.,
an IPA based in Springfield, Virginia. Pursuant to the merger agreement, the IPA
will be merged into a subsidiary of the Company and the members of the IPA will
receive consideration in the form of cash and shares of the Class B Common
Stock. Completion of the merger and related transactions are expected to result
in the creation of a Core Medical Group and Exclusive IPA consisting of primary
care physicians providing medical care throughout northern Virginia and a
network of specialist physicians. As of November 15, 1996, the IPA had
approximately 126 PCP and 328 specialist participating physicians. Fifty-four of
the PCPs have indicated an interest in joining a Core Medical Group or
conducting managed care contracting solely through the Company. Completion of
the merger is subject to conditions, including but not limited to the agreement
that at least 30 of the physicians must execute 3-year exclusive managed care
contracting agreements with the Company, Medtrust's members must approve the
merger, compliance with Virginia blue sky laws, and no more than 20% of
Medtrust's members shall have dissented to the consummation of the merger. The
Company believes the merger will be completed before January 31, 1997.
The Company also entered into a network contracting and management services
agreement with the IPA, pursuant to which the Company will pay certain operating
expenses of Medtrust and Medtrust has designated the Company as the exclusive
managed care contracting entity for the IPA.
JOINT CONTRACTING ARRANGEMENTS IN BALTIMORE. The Company has entered into a
Contracting and Managed Care Services Agreement with an organization which
operates health care facilities in Baltimore City and employs and contracts with
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approximately 37 physicians in Maryland. Under the arrangement, the Company acts
as the organization's exclusive contracting entity for Medicare managed care
contracts. Under the arrangement, the Company pays to the organization the
primary care and specialty care portion of the global capitation revenue
received by the Company. The remaining portion of the Global Capitation Revenue
related to medical services provided by the organization is managed by the
Company in a "risk pool" and the difference between the actual expenses incurred
by the Enrollees and the global capitation funded to the "risk pool" between the
Company and the organization.
FORMATION OF CARDIOLOGY DEPARTMENT. The Company has entered into a letter
of intent with the Board of Directors of a 16-physician cardiology practice,
providing services to patients in the Baltimore metropolitan area, to acquire
the practice assets pursuant to a merger. The practice would receive 120,000
shares of Class B Common Stock, cash in the amount of $50,000, and a promissory
note with a face value of approximately $1.1 million and the practice would be
integrated into Baltimore Medical Group as a department dedicated to cardiology
(the "Cardiology Department"). The Company believes that it is probable that the
acquisition will be completed in December 1996. The Company intends to acquire
additional specialists and create either stand-alone Core Medical Groups or
integrate such acquired specialists into existing Core Medical Groups.
The Company expects it will continue to expand by increasing the number of
physicians in each Core Medical Group, forming new Core Medical Groups, entering
into Non-Exclusive and Exclusive IPA Agreements with physicians and pursuing
acquisition and expansion opportunities in the Baltimore and Washington
metropolitan area and surrounding regions.
OVERVIEW OF BUSINESS ACTIVITIES
The Company is a managed care and medical management company. The Company
is engaged in its activities through its Integrated Health Care Delivery
Newtork. The Company's ability to generate earnings is significantly predicated
upon its ability to arrange for the delivery of health care services for which
it contracts at a cost which is less than the fixed fees which it receives under
its Global Capitated Contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Source of Revenue and
Earnings."
As a managed care company, the Company negotiates and enters into a variety
of risk-sharing arrangements with HMOs and other Payors, including Global
Capitated Contracts (and sub-capitation contracts) pursuant to which (i) such
Payors pay the Company a fixed amount per Enrollee per month and the Company is
responsible for meeting all of the primary and specialty care, hospital and
certain other related health care needs (or specified portions thereof) of such
Enrollee and (ii) the Company pays PCPs and specialists, hospitals and other
providers within its network, or those having other contractual arrangements
with the Company for providing the required medical care. The Company, not the
Core Medical Groups, is the party to the Global Capitated Contracts and
therefore is the recipient of the capitation payments. The Company receives fee-
for-service revenues arising from the Core Medical Group's medical practices
pursuant to certain assignment provisions of the PSO Agreements. The ability of
the Company to achieve and maintain profitability will depend to a great degree
on (i) reducing the incidence of high cost acute care episodes, primarily
through wellness, prevention initiatives and aggressive care management, and
(ii) negotiating compensation arrangements that result in payments to the
Company that exceed the cost of care by the Company to PCPs, specialists,
hospitals and other providers. The Company will seek to achieve this result by
negotiating reduced fee-for-service, sub-capitation and other arrangements with
PCPs, specialists, hospitals and other health care providers, creating economic
incentives for all Network Physicians and other providers with whom the Company
contracts to utilize specialists and hospitals prudently, carefully monitoring
the quality and cost of care provided to patients, and developing programs to
promote wellness among patients. The Company has purchased insurance from
independent insurance companies which limits the amount of risk it ultimately
bears by providing reimbursements payments once medical services provided to an
individual Enrollee exceed an agreed-upon amount.
The Company intends to offset most of the cost of its centralized patient
data and information systems through profits earned from managed care
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.
The Company under such managed care contracts takes some of the risks of
utilization, and the risk of adverse selection by Enrollees. The Company
currently protects itself against such risks by paying for as much of the
physician services as practical through capitation (which passes on the risk to
the physicians), by obtaining stop loss insurance for high hospital and other
charges of outlier cases, by implementing and monitoring utilization review by
and among its participating Physicians, and by obtaining actuarial reviews of
the proposed capitation payments. However, there can be no assurance that the
Company will not be subject to expenses in excess of its capitated revenue. The
Company is not required to obtain an
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insurance or an HMO license as long as it enters into such arrangements
exclusively through HMOs under provisions of Maryland law that expressly permit
a HMO to enter into such capitation arrangements subject to specified financial
arrangements. The Company complies with all required financial safeguards under
Maryland law.
As a medical management company, the Company has created an Integrated
Health Care Delivery Network that includes PCPs and other physicians who
transfer certain medical practice assets to the Company and become employees of
a Core Medical Group, such as Baltimore Medical Group. PCPs may also join IPAs.
The Company also enters into network contracts with specialists who agree to
provide services to managed care patients referred by PCPs and, in certain
cases, acquires the medical practices of such specialists. The Company provides
to such Network Physicians who join Core Medical Groups certain patient care
management, managed care contracting, and administrative and financial services,
including information systems and billing services, and provides facilities,
non-physician staff personnel, equipment and other goods to the physicians for
use in their medical practices. The Company provides these medical practice
management services to certain of its Network Physicians to free the physicians
from the administrative burdens of practicing medicine and to enable them to
concentrate on providing medical care to their patients. The physicians join and
become employees of Core Medical Groups, which contract with the Company for the
provision of the medical management services. The Core Medical Groups engage
exclusively in the practice of medicine through their employed physicians and
maintain autonomy and independence over clinical matters.
The Company receives fee-for-service revenues arising from the Core Medical
Group's medical practices pursuant to certain assignment provisions of the PSO
Agreements.
A Network Physician who becomes employed by a Core Medical Group agrees to
conduct his medical practice only through the Core Medical Group and to permit
the Company to act as his exclusive agent for the purpose of negotiating managed
care risk and other contracts in which the PCP must participate. The Company
owns no equity or similar interest in the Core Medical Groups. The PCP's
obligation to participate in managed care contracts negotiated by the Company is
set forth in the PCP's Employment Agreement with the Core Medical Group and the
PSO Agreement between the Core Medical Group and the Company. If a PCP joins a
Company-sponsored IPA, the PCP agrees to participate in managed care contracts
negotiated and administered by the Company on either an exclusive or
non-exclusive basis.
When a physician becomes an employee of one of the Company's Core Medical
Groups, the Company transitions any primary care Managed Care contracts in which
the physician participates into the Company's group contract or the applicable
Core Medical Group contract if any is in effect with respect to that Payor. If
the Company or the Core Medical Group does not have a PCP group contract in
place with the Payor and the Payor allows the contract to be assigned to the
Company, the Company will maintain the contract on the physician's behalf under
the same contract terms. The reimbursement provisions under such contracts are
on either a fee-for-service or capitated basis.
Physicians participating in the Company's networks may derive benefit from
the successful implementation of the Company's strategy in several ways. A
physician to whom Securities are issued in the various affiliation transactions
described elsewhere herein will benefit through the ownership of Securities if
the Company achieves and grows in profitability. A physician, whether or not he
becomes an owner of Securities, may also receive capitated income from the
Company's managed care contracts and may also receive cash bonus payments out of
the bonus pool established by the Company for Network Physicians.
As of November 15, 1996, there were 1,152 Network Physicians in six
regional networks throughout the state of Maryland and one regional network in
Northern Virginia, including approximately 297 PCPs, 95
obstetrician-gynecologists and 760 specialist physicians. Of these,
approximately 90 were Equity Physicians who had transferred, or entered into
binding letters of intent or otherwise agreed to convey, certain practice assets
of their practices to the Company and become employees of Core Medical Groups.
As of such time, the networks established by the Company were providing services
in Central and Western Maryland. As described in "Strategy--Expansion Strategy,"
the Company intends to enter into selective medical practice acquisitions and
other contractual arrangements that will result in the Company operating in
areas beyond those in which it currently operates.
OPERATIONS
The Company's operations to date have consisted of recruiting and acquiring
certain assets of PCP and other physician's practices, negotiating and managing
risk, capitated or fee-for-service contracts with HMOs and other Payors,
contracting with individual specialists, specialist networks and IPAs,
developing and implementing a marketing program to convert Medicare patients
from traditional fee-for-service insurance to Medicare HMO programs, and
providing billing, accounting, legal,
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contracting support and care management services to its Equity Physicians and
certain Network Physicians. Beginning in February 1995 with respect to Baltimore
Medical Group, December 1995 with respect to Carroll Medical, May 1996 with
respect to Cumberland Valley Medical Group, June 1996 with respect to Quality
Healthcare IPA, September 1996 with respect to the Doctors Health Montgomery
Medical Group, and October 1996 with respect to the Harford County IPA
physicians, the Company has negotiated managed care contracts with HMOs and
other Payors on behalf of the PCP practices of such medical groups. The Company
also manages primary care IPAs in Central and Western Maryland.
The Company also maintains primary care and specialist contracts on behalf
of Network PCPs and certain specialists under similar or improved non-risk
contract terms. The reimbursement provisions under such contracts are on either
a fee-for-service (FFS) or capitated basis. The Company currently maintains such
contracts for certain of its PCPs and specialists 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,
Mid-Atlantic Medical Services, Inc., U.S. Healthcare, USA Health Network,
Employee Health Plan and John Hancock Health Plan.
To date, the Company has entered into two Medicare Global Capitation
Contracts and one commercial Global Capitation Contract with Payors and is
continuing to negotiate Global Capitation Contracts with additional Payors who
conduct business in the Baltimore and Washington metropolitan area and
surrounding regions. Under these risk contracts, the Company receives a
capitation payment and must provide Enrollees with primary care and certain
specialist and hospitalization services.
In October 1995, the Company entered into a contract with Free State Health
Plan, Inc., an affiliate of Blue Cross-Blue Shield of Maryland ("Free State")
pursuant to which the Company's PCPs provide medical services to commercially
insured Enrollees on a global capitated basis (the "Free State Commercial
Contract"). In this contract, the Company assumes risk for all professional
services and shares risk with Free State on institutional services.
In February 1996, the Company entered into a Global Capitated Contract with
Health Care Corporation of the Mid-Atlantic, an affiliate of Blue Cross-Blue
Shield of Maryland, ("HCCMA") pursuant to which the Company's PCPs provide
medical services to Medicare patients on a global capitated basis (the "HCCMA
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 HCCMA Medicare Contract provides that the Company
will receive a capitation payment per patient per month and pay for all medical
expenses for covered medical services based upon rates developed by the U.S.
Health Care Financing Administration ("HCFA").
In May 1996, the Company entered into a Global Capitated Contract with
Chesapeake Health Plan, an affiliate of United Healthcare, pursuant to which the
Company's PCPs will provide medical services to Medicare patients (the
"Chesapeake Contract"). Under the Chesapeake Contract, Chesapeake pays a
capitation payment (which may be increased based on enrollment) to the Company
on a per member per month basis based on the projected demographic distribution
of the patients enrolled with the PCPs, as well as the age, sex and Medicaid
eligibility of the subscribers enrolled with a Network PCP in Chesapeake's
Advantage 65 Medicare HMO programs. Under the contract, Chesapeake has delegated
to the Company the right to manage the utilization of medical services.
As of November 15, 1996, the Company had approximately 30,000 Capitated
Lives derived from the participation of 45 of the Company's 297 Network PCPs in
the Managed Care contracts of the Company, its subsidiaries and affiliates. Of
these 30,000 capitated lives, approximately 26,800 participate in the Company's
commercial Gatekeeper Capitated contracts, approximately 2,200 participate in
commercial Global Capitated Contracts, and approximately 1,000 in Medicare
Global Capitated Contracts. The Company derives no earnings from the commercial
Gatekeeper Capitated Contracts and plans to convert the managed care lives in
commercial gatekeeper contracts to Full Risk and/or Global Capitated commercial
contracts. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Sources of Revenues and Earnings.") The Company believes
that there are approximately 100,000 additional Medicare subscribers who are
patients of the Company's Network PCPs. The Company's ability to derive earnings
from any of its capitated lives is affected by whether the Network Physician is
a member of a Core Medical Group or a participant in an IPA.
The Company has developed and is implementing a marketing program in
conjunction with HCCMA and Chesapeake to enroll Medicare-eligible patients in
HCCMA'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 HCCMA and Chesapeake
arrangements.
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The Company's operations also include the recruitment of specialists into
Core Medical Groups and/or developing a network of preferred provider
specialists who are paid on a discounted fee-for-service or subcapitated basis.
As of November 15, 1996, the Company had access to approximately 760 specialists
in its networks pursuant to direct or indirect contractual arrangements. The
Company expects that an increasing percentage of the specialist networks will
enter into contracts that provide for compensation on a capitated basis. The
Company currently has capitated payment arrangements with Womancare IPA, a
Company-owned network of 95 physicians providing obstetrical/gynecological
services, and with outside providers of radiology and laboratory services. Under
the Company's agreements with the respective specialty network, the
participating specialist providers provide services to the Company's members
referred by a Network Physician, and the network is reimbursed on a capitated
basis. The Company owns a majority interest in Womancare IPA.
In addition, the Company's operations include the provision of traditional
management services to the individual medical practices of each Core Medical
Group, including administrative, legal and accounting services, lease
negotiations, and financial, billing and collection services. As of November 15,
1996, the Company has installed its information systems in 36 PCP offices to
facilitate development of a unified information system for referral management,
billing and collection activity, utilization review, and group purchasing and
risk management programs. As of November 15, 1996, the Company had assumed
responsibility for the billing operations of 34 PCP practices, representing 62
physicians, and two laboratories which provide services to two Core Medical
Groups, which employ 60 physicians.
As of the date of this prospectus, the Company has not yet conducted
material operations through Doctors Health System-Medalie Equipment Corporation,
a wholly-owned subsidiary of the Company, except to transfer certain cardiology
equipment, to the subsidiary, or through Doctors Health System Primary Care IPA,
Inc., a wholly-owned subsidiary of the Company.
DEVELOPMENT OF INTEGRATED HEALTH CARE DELIVERY SYSTEM
CONTRACTS WITH PHYSICIANS.
The Company contracts with Network Physicians and other physicians in one
of several ways: (1) through the transfer of certain of their medical practice
assets and contracts to the Company, as a result of which the physician may
obtain, directly or indirectly, cash and/or an equity interest in the Company;
(2) through an Exclusive IPA arrangement, pursuant to which such physician
agrees to conduct all managed care contracting activity exclusively through the
Company and to take as patients any capitated patient referred by the Company up
to a certain level; (3) through a Non-Exclusive IPA arrangement, in which the
physician may contract with or through other IPAs but agrees to take all managed
care patients referred by the Company; or (4) a myriad of other contractual
arrangements involving an IPA, joint venture or other arrangement in which the
physician may contract with others and may also elect to accept or not any
patients referred by the Company. The Company's goal is to remain flexible and
to accommodate the needs of physicians in each local market.
The Company also enters into contracts with group practice entities,
clinics and IPAs through joint venture relationships as well as the contractual
relationships described above. The use of any particular contractual arrangement
is influenced by a number of factors, including the needs of the physicians, the
type of practice in which such physicians are engaged, the geographic location
of the practice, financial considerations, regulatory concerns, and pre-existing
contracts. Because the Company owns no equity interest in the Core Medical
Groups and is not engaged in the practice of medicine, the Company does not
reflect physician revenues in the Company's financial statements.
FOCUS ON PRIMARY CARE PHYSICIANS.
Consistent with the Company's primary care-driven strategy, the primary
focus of the Company's contractual arrangements with physicians has been
establishing relationships with PCPs. Since the Company's inception, entities
have been formed or consolidated to conduct group medical practices as Core
Medical Groups. Each Core Medical Group is comprised of a group of physicians
under common management and with a common information system and provider number
and is designed to provide a full and coordinated spectrum of medical services
to patients and meet Payors' needs. To date, Core Medical Groups have been
formed in five geographic markets in Maryland using a limited liability company
organizational structure.
From February of 1995 to December 31, 1995, the Company assumed exclusive
management responsibility for and became the sole contracting entity for 32 PCP
practices through Baltimore Medical Group, LLC, and Carroll Medical Group. Since
December 31, 1995, the Company assumed, or entered into binding letters of
intent to acquire certain assets and
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became the sole contracting entity for an additional 43 PCP practices. Thus, as
of November 15, 1996, a total of approximately 75 PCPs have transferred their
medical practice assets and became employees of the various Core Medical Groups,
or have entered into binding letter agreements to transfer their medical
practices and become employees.
Although the details of each transaction may differ, the practice of the
Company upon establishment of a Core Medical Group is to enter into a Practice
Participation Agreement with the Core Medical Group and each of the Equity
Physicians who is a member of such Core Medical Group, pursuant to which the
following transactions occur:
TRANSFER OF MEDICAL PRACTICES. Under the Practice Participation Agreement,
an Equity Physician transfers to the Company certain medical practice assets as
well as contract rights under certain business contracts of the medical
practice, to the extent that such rights are assignable. The Company may also
assume specified liabilities or obligations of the medical practice. Although
the form of consideration paid to such Physicians may vary, typically the
Physician receives a combination of cash and Securities of the Company. For a
description of such Securities, see "Description of Capital Stock." The amount
and type of consideration payable to each Physician is determined by negotiation
between such Equity Physician and the Company. Such transactions consist of an
acquisition by the Company of certain tangible and intangible assets of the
medical practice, including contract rights, and the collection by the Company
of the accounts receivable of the Physician. Such transactions do not convey to
the Company an equity interest in the Core Medical Groups.
REACQUISITION RIGHTS. The acquisitions are generally subject to
reacquisition rights whereby the Physician may rescind the transaction typically
within a nine-month period from the date of closing. Pursuant to such
reacquisition rights, the Physicians may repurchase substantially all of the
assets previously acquired by the Company at the price paid by the Company at
the closing. Any Securities acquired by the Physician in connectioin with the
acquisition will be transferred back to the Company upon the reacquisition.
EMPLOYMENT OF PHYSICIANS BY THE CORE MEDICAL GROUP. Each Physician enters
into an Employment Agreement with the Core Medical Group of which he is a
member. Typically, Employment Agreements have a term of 10 years, during which
time the Physician will be obligated to devote his full professional time to the
practice of medicine with, for and through such Core Medical Group. As an
inducement to sign the agreement and as an incentive to remain as an
employee-physician, each "full time" PCP also may receive additional shares or
options of Class B Common Stock. The Employment Agreement provides for the
payment of a base salary and benefits and for the eligibility of such Physician
to participate in distributions from a bonus pool (each, a "Core Medical Group
Bonus Pool"). Each Core Medical Group Bonus Pool is distributed by the
Management Committee of the Core Medical Group and rewards high clinical
quality, appropriate utilization, patient satisfaction and retention, and
general cooperation and attitude. The employed physician may be eligible to
participate in such distributions in such years in which such physician meets or
exceeds such standards as may reasonably be required by the Management
Committee. See "--Operation of the Core Medical Group".
The base salary of PCPs in most Core Medical Groups is generally an amount
equal to the sum of certain revenues collected on behalf of the Core Medical
Group by the Company in respect of the physician services provided by such
physician, less the allocated costs attributable to the medical practice of, and
provision of related health care services by, such physician. The Company and
certain of the Physicians employed by Doctors Health Montgomery agreed that
Doctors Health Montgomery will provide base salaries to such Physicians. In
return for its commitment to provide financial resources, if necessary, for such
Physician's salaries, the Company and Doctors Health Montgomery will receive a
percentage of the growth in revenues generated by their medical practices and
other fees.
PSO AGREEMENT WITH THE CORE MEDICAL GROUP. The Company provides managed
care contracting and practice management services to the Core Medical Groups
(and indirectly to its Physicians) pursuant to 30 year PSO Agreements (with
automatic, renewable 10 year terms) entered into between the Company and each
Core Medical Group. The following is a summary of the principal provisions of a
PSO Agreement. The PSO Agreement does not convey to the Company an equity or
similar interest in the Core Medical Groups.
The PSO Agreement typically gives the Company the exclusive right to
provide to the Core Medical Group (i) all of the non-medical management and
financial services, including provision of non-physician employees, office space
and other facilities, equipment, assets, goods and supplies, that the Core
Medical Group and its Physicians will use to engage in the practice of medicine
and (ii) other related services.
Pursuant to a typical PSO Agreement, the Company is given discretion and
authority to manage and conduct the business affairs of the Core Medical Group
and is appointed the agent and attorney-in-fact of the Core Medical Group to
enable the Company to fulfill these functions. The Company negotiates for and
enters into agreements with Payors for health care services, including managed
care contracts providing for compensation on a capitated basis, that will
obligate both the Core
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Medical Group and its Physicians to provide medical services at the levels of
compensation negotiated solely by the Company. The Company also negotiates for,
and enters into agreements with, other providers of medical services for the
provision of medical services to the patients of the Core Medical Group and for
the provision of medical services to such providers by the Core Medical Group
and its Physicians, all on terms and for the compensation determined solely by
the Company. The Company has a broad range of financial responsibility and
authority by the Core Medical Group pursuant to the PSO Agreement, leaving the
Core Medical Group with the right to manage only those professional components
of its business requiring a license to practice medicine.
PSO Agreements typically provide that the Company is entitled to an amount
equal to the difference between (i) the cash it collects on behalf of the Core
Medical Group and each of its physicians in receivables which have been conveyed
to the Company and (ii) the amount paid out by the Company in respect of the
business costs and expenses of the Core Medical Group. The Company will pay that
amount over to itself in each month during which there is sufficient cash in the
Core Medical Group's accounts, in the discretion of the Company, to pay the
amount after satisfying all of the Core Medical Group's business costs and
expenses, including such reserves therefor as the Company deems appropriate, and
including all accruals for unpaid base salaries of the physicians of the Core
Medical Group for prior periods. The Company may reserve the right to charge
separate fees for additional services, as agreed between the Company and the
Core Medical Group.
PSO Agreements with PCP Core Medical Groups provide that the Company may
pay to the Core Medical Group, as a Managed Care Incentive Payment, an annual
negotiated amount of up to 25% of the total amount of all Company net income
before taxes and bonuses, attributable to the provision of health care to the
Core Medical Group's managed care patients during each calendar year, not to
exceed, in the aggregate, 25% of the base salaries paid to all PCPs of the Core
Medical Group. Such payments are not required if the Company has not earned net
income during the applicable years. Such payments may be utilized by the Core
Medical Group to fund the Core Medical Group Bonus Pool in which the physician
employees of the Core Medical Group may participate. See "--Employment of
Physicians by the Core Medical Group." It is anticipated that the full amount of
any Core Medical Group Bonus Pool will be paid out by the Core Medical Group to
its physicians as bonuses in each year.
PSO Agreements that will govern the Company's relationship with specialists
will typically provide for (i) a term of 30 years with automatic, renewable 10
year terms; (ii) a commitment among the specialist group and the Company to
develop innovative, risk sharing payment arrangements; and (iii) use of
commercially reasonable efforts to provide the specialist group with managed
care referrals. Such specialist PSO Agreements will also provide for payment of
a management fee consisting of a negotiated percentage of actual operating costs
of the specialist Core Medical Group (excluding compensation to the group's
Physicians) and a percentage of collections available after payment of operating
costs, the Company's operating cost percentage, and the physician compensation.
All of the PSO Agreements in effect have terms of 30 years (with automatic
10 year renewals) and generally may be terminated prior to expiration of its
term only under limited circumstances. Generally, absent insolvency, malfeasance
or a material uncured breach, the PSO Agreement cannot be terminated by the
Company or the Core Medical Group.
The Company's structure and the clinical independence of the Core Medical
Groups enable the Core Medical Groups' member physicians to retain their
autonomy through their ownership interests in the Core Medical Groups and
control over clinical decisions. The Company believes this governance structure
has been critical to the Company's success in the early stages of its
development.
OPERATION OF THE CORE MEDICAL GROUP. Each physician joining a Core Medical
Group enters into an Operating Agreement or similar agreement with each of the
other physicians in the Core Medical Group. Pursuant to the Operating Agreement,
the business and affairs of the Core Medical Group are managed under the
direction and control of a Management Committee, one of whom is the Chief
Executive Officer of the Company (or his designee) serving EX OFFICIO. The
Management Committee has the power, among other things, to determine the amount
of any or all bonuses payable pursuant to the Core Medical Group Bonus Pool
which it delegates to a Bonus Committee. The Members of the Management Committee
are elected by the affirmative vote of the Physicians of the Core Medical Group
(other than the Company designees). The Bonus Committee also establishes, in
consultation with the Company and the bonus committees of other Core Medical
Groups, practice protocols.
INDEPENDENT PHYSICIAN ASSOCIATIONS.
The Company has expanded its network by contracting with physicians in a
variety of ways through IPAs in which IPA Participant Physicians authorize the
IPA to negotiate service contracts on their behalf. In some cases, the Company
contracts
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with or through an existing IPA, while in other cases the Company assists
physicians who may wish to establish an IPA. The models utilized by the Company
involving IPAs consist of Exclusive IPAs, pursuant to which a physician is
obligated to conduct all managed care contracting through the Company,
Non-Exclusive IPAs, pursuant to which a physician may contract for managed care
with others but agrees to take all patients referred by the Company, and other
contractual arrangements which may involve a physician contracting for managed
care through others or choosing to accept or deny patients referred by the
Company. In some cases, the Company may issue Securities as incentives for
physicians to enter into Exclusive IPA Agreements. The Company may also issue
Securities as compensation for the recruitment of physicians to join the
Company's Core Medical Groups or Exclusive IPAs.
COMPANY CREATED IPAS; PREVIOUSLY EXISTING IPAS: The Company may assist in
the creation of an IPA or may contract with a previously existing IPA or
independent medical group. In the case of previously existing IPAs or groups, in
addition to being subject to the various types of contractual arrangements
discussed below to which the Company is a party, the IPA and its network
physicians will also be subject to a previously existing participation agreement
among the previously existing IPA and its network physicians. In such cases, the
previously existing IPA also enters into a network agreement with the Company
which governs the contractual relations between the IPA and the Company. The
network agreement will contain provisions unique to the situation of each
existing IPA with which the Company contracts but should typically contemplate
the provision of various management services by the Company to the IPA and the
appointment of the Company as the IPAs agent and attorney-in-fact for the
purpose of negotiating managed care contracts with risk sharing arrangements for
the IPA on an exclusive or non-exclusive basis and providing other services such
as billing and information systems.
ORGANIZATION OF THE IPA: The IPA is typically organized as a corporation or
limited liability company. Each of the IPA Participant Physicians enters into an
operating agreement among each of the other Participant Physicians in the IPA.
Pursuant to such operating agreement, each Participant Physician will agree to
be bound by the by-laws of the IPA which contain substantive requirements for
participation in the IPA.
EXCLUSIVE IPAS: The IPA Participant Physician enters into an Exclusive IPA
Agreement with the Company and the IPA in which he participates, pursuant to
which the Company markets the physician to Payors, and includes the physician in
its provider network. The IPA Participant Physician may choose to participate in
Exclusive IPA Agreements for either Medicare or commercial products offered by
HMOs with whom the Company contracts, pursuant to which such physician agrees to
contract exclusively with the Company for Medicare or commercial managed care
contracts, respectively. As of November 15, 42 physicians were participating
with the Company's Exclusive IPAs. Although there can be no assurances, the
Company expects that additional physicians will commit to participate in
Exclusive IPAs.
Under an Exclusive IPA Agreement, an initial primary care base capitation
rate and risk-sharing arrangements are negotiated between the Company and the
IPA. The IPA Participant Physician may also be eligible to participate in a
bonus pool. A one-time incentive payment, or periodic panel growth and managed
care bonuses which may include cash or Securities, may also be payable by the
Company pursuant to an Exclusive IPA Agreement. Further, the agreement may
contain a practice option, pursuant to which the physician may elect, subject to
the satisfaction of certain conditions, to sell his or her medical practice to
the Company.
NON-EXCLUSIVE IPAS: The IPA Participant Physician enters into a
Non-Exclusive IPA Agreement with the Company and the IPA, pursuant to which the
Company markets the physician to Payors under capitation contracts and includes
the physician in its provider network. The physician reserves the right to
contract directly with HMOs or other Payors, and to participate in other IPAs,
but usually agrees to accept managed care patients referred by the Company, up
to agreed-upon levels. Other provisions of the Non-Exclusive IPA Agreement may
be similar to the provisions of the Exclusive IPA Agreement.
JOINT VENTURE ARRANGEMENT. The Company has entered into a Contracting and
Managed Care Services Agreement with an organization which operates healthcare
facilities in Baltimore City, and employs and contracts with approximately 42
physicians in Maryland. Under the arrangement, the Company acts as the
organization's exclusive contracting entity for Medicare and Medicaid managed
care contracts. The arrangement involves a sharing of Managed Care surplus and
losses between the parties.
OTHER CONTRACTUAL ARRANGEMENTS. Although other contractual arrangements may
take a variety of forms, generally these arrangements involve the IPA
Participant Physician entering into an agreement with the Company pursuant to
which the Company markets the physician to Payors but the physician reserves the
right to participate in other IPAs and to determine whether to accept managed
care patients referred by the Company.
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CONTRACTING WITH SPECIALISTS, HOSPITALS AND OTHER HEALTH CARE PROVIDERS
The Company contracts with specialists, hospitals and other providers of
health care services as part of its effort to develop an integrated health care
delivery network.
CONTRACTING WITH SPECIALISTS: The Company contracts with specialist
physicians for the provision of services to the Company and the Core Medical
Groups in a variety of ways, generally consisting of employment in a Core
Medical Group, or contractual arrangements involving reduced fee-for-fee service
or sub-capitated arrangements. Other than employment in a Core Medical Group and
the formation of a cardiology Core Medical Group (see "Business--History of the
Company--Formation of Cardiology Core Medical Group"), arrangements with
specialists typically have terms of between one and five years. Specialists may
under appropriate circumstances also receive an equity interest in the Company.
CONTRACTING WITH HOSPITALS AND OTHER PROVIDERS: The Company contracts with
hospitals ("Participant Hospitals") and other health care providers to
participate in its managed care networks. The Company envisions that many of its
arrangements with Participant Hospitals may involve "key hospital" arrangements.
The Company and the Participant Hospital will enter into a Hospital
Participation Agreement ("Hospital Participation Agreement"), pursuant to which
the Company will agree to make the hospital the referral hospital of choice for
specified categories of managed care patients and specified categories of
service. The Participant Hospital must meet cost and quality standards and agree
to cooperate with the Company in the implementation of utilization review, to
include preadmission guidelines and processes, patient care and cost tracking,
information exchanges and management reporting systems and the development of
innovative pricing arrangements. The Company also negotiates contractual
arrangements with other health care providers (for example, home health care
aides) as needed to deliver quality and cost-effective service to patients.
Although the term of such arrangements would vary, the Company expects to
negotiate discounted fee-for-service or sub-capitated arrangements with such
providers.
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Set forth below is an chart depicting the Company's Integrated Health Care
Delivery System:
INTEGRATED HEALTH CARE DELIVERY SYSTEM
[CHART]
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PHYSICIAN RECRUITMENT
The Company recruits physicians through direct marketing efforts, Core
Medical Groups, and IPAs. The Company has a physician recruitment staff managed
jointly by the Company's Chairman, who is Executive Vice President of Corporate
Development, and the Executive Vice President of Strategic Planning. The Company
also employs a Director of Recruiting, recruiting assistants and other staff.
The Company also recruits PCPs through relationships with current Core Medical
Group physicians, IPA Participants and other contacts. The Company also seeks
assistance from recruiting consulting arrangements. Such recruiting consultants
provide the Company with access to potential Network Physicians.
MANAGED CARE CONTRACTING
CONTRACTS WITH PHYSICIANS, HOSPITALS AND OTHER PROVIDERS OF HEALTH CARE.
As discussed above in "--PSO Agreement with the Core Medical Group" and
"--Independent Practice Associations," the Company is authorized to negotiate
for and enter into agreements with Payors for health care services, including
managed care contracts providing for compensation on a capitated basis, that
will or may obligate Core Medical Groups and their respective physicians, IPAs
and their respective IPA Participant Physicians and other physicians to provide
medical services at the levels of compensation negotiated solely by the Company.
Further, as described above in "--Contracting with Specialists, Hospitals and
other Health Care Providers," the Company is also authorized to negotiate for
and enter into agreements with Payors for the provision of services available
from such providers. The Global Capitated Contracts and certain Gatekeeper
Capitated Contracts have been executed by the Company and an HMO or other Payor.
The Core Medical Groups and Network Physicians are not parties to the Global
Capitated Contracts. The Core Medical Groups and Network Physicians may be party
to Gatekeeper Capitated Contracts pending conversion to the Company's Contracts.
The Company's goal is to enter into shared risk arrangements with HMOs and
other Payors and to enter into full capitation/full risk arrangements with such
Payors. The Company believes that its capabilities in information systems and
care management will allow it to operate successfully and manage patient care in
a rapidly changing environment. See "Control of Patient Data and Information
Systems." The Company believes that the access to the Company's information
management systems and bonus payments for Physicians in Core Medical Groups and
IPA Participant Physicians in IPAs will allow such physicians to exercise
appropriate control over the cost of health care, providing better care at lower
overall cost. See "--PSO Agreement with the Core Medical Group" and
"--Independent Practice Association."
CONTRACTS WITH PAYORS.
The Company enters into contracts with Payors on behalf of Network
Physicians. Global Capitated Contracts typically obligate the Company to provide
and pay for all physician services (except for negotiated carve-outs) and, in
certain contracts, hospital and ancillary services for a percentage of the
premium or a fixed capitated amount. The Company then subcontracts with
physicians and other health care providers to provide the required services in
compliance with the Company's care protocols when applicable. The payment from a
Payor to the Company is typically calculated based on the number of Members of
the HMO enrolled with the Company's PCPs. Such Payor contracts generally have
terms of approximately one year and, after the initial term, are renewable for
one-year terms unless canceled by either party. In its Payor contracts, the
Company currently attempts to assume risk for all services, except mental health
and pharmacy. Eye care, home health and durable medical equipment (DME) also may
be carved out of the Company's risk due to more competitive terms for these
services being available to Payors based on their existing national
relationships. The Payor in each contract also retains a percentage of the
premium to perform marketing, enrollment and some administrative services.
In entering into or renewing Payor contracts, the Company considers a
number of specific factors which affect capitated rates, the amount of the
shared risk and scope of covered services for which the Company is responsible.
These factors include, but are not limited to, the demographic risk profile of
the enrollee pool, the premium received by the Payor, prior financial
experience, cost and availability of stop-loss protection and an understanding
of the fee-for-service equivalent charges. In addition, the Company will work
with certain HMOs to establish preferential and/or partnership type
relationships in which incentives are provided in the contract to reward the
Company for accepting and retaining a high number of the plan's Enrollees. In
undertaking this process, the Company analyzes pertinent data in order to assess
the providers' contractual and economic opportunity and exposure, and then
conducts the negotiations on behalf of the physician networks.
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PRACTICE MANAGEMENT SERVICES
The Company recognizes the administrative burdens associated with the
practice of medicine and recognizes that time spent by a physician managing a
medical practice reduces the time available for providing medical care to
patients. Accordingly, the Company's operations consist in large part of
providing medical practice management services to its Network Physicians who
join Core Medical Groups, thereby allowing the physicians to concentrate on
providing quality care to patients.
Under the Company's PSO Agreements with the Core Medical Groups, the
Company provides the Core Medical Groups and their employed physicians with
administrative and financial services, including information systems and billing
services, and provides facilities, non-medical staff personnel, equipment and
other goods. The Company operates a billing and claims processing center in
White Marsh, Maryland which processes claims, generates and delivers bills to
patients and payors, and collects amounts owed. The practice management services
provided by the Company also include maintaining the financial and business
books and records of the Core Medical Groups, providing legal support, providing
marketing and advertising, and paying for costs and expenses incurred in
connection with the operation and administration of the Core Medical Group's
practice of medicine. The Company also leases as tenant medical office space and
subleases such space to the Core Medical Groups, employs the non-physician staff
personnel who assist the physicians, and provides or arranges for the provision
of the furniture, fixtures and equipment used by the physicians in their
practices.
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.
The Company's information systems strategy consists of using sophisticated
hardware and software to (i) monitor PCP referrals to specialists, hospitals and
other providers; (ii) collect information regarding PCP compliance with medical
care protocols; (iii) allow physician offices to use Company-installed hardware
for billing through the Company's billing and claims management staff; and (iv)
eventually provide the Company and its care management staff with direct
computer access to hospitals in order to facilitate quality and cost-effective
care of Core Medical Group patients.
The Company believes that its information systems will encourage exchange
of information among the Company's utilization review and care management staff
and physician practices, hospitals and other providers in the Company's provider
network to allow the Company to react promptly to changes in patient care
requirements, costs and utilization issues. The Company makes its information
systems available to all Core Medical Groups and Equity Physicians currently
participating in its networks and will make such systems available on a uniform
basis to other providers when they meet certain threshold requirements, while
also tailoring the system to meet unique needs of individual medical practices
to best serve the patients.
CARE MANAGEMENT
The Company believes the most successful approach to managing risk and the
costs associated with that risk is through the care management process. Care
Management seeks to promote the wellness of patients, control costs, encourage
patient satisfaction and provide better integrated health care with services
provided by the Core Medical Groups and other Network Physicians. The Company's
care management program consists of credentialing, utilization review and
referral management, disease management, case management, and quality assurance.
These programs seek to improve and preserve the quality of health care services
provided by the Core Medical Group's physicians and other Network Physicians and
control the cost of medical care. Under certain of the Company's Global
Capitated Contracts, Payors have delegated to the Company utilization review and
care management. The Company employs 17 care management personnel with nursing,
social work, case management and other patient care management experience to
assist in coordination of quality health care for a potential population of
80,000 members. All of the Company's care management staff are registered nurses
or licensed social workers and are required to possess the Certified Case
Manager designation from the Commissioner of Case Manager Certification.
All Network Physicians must complete the Company's credentialing process.
In accordance with the Company's credentialling policies and procedures,
physicians submit a comprehensive application to the Company's credentialing
staff. The application materials are reviewed by the Company and submitted to an
external credentialing verification organization, which provides primary source
verification of information submitted in the application. The application is
then submitted to
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the Company's Physician Credentialing Committee and Medical Director for
approval. The Company's credentialing process helps ensure the quality of its
Network Physicians and promotes the quality of care provided to patients.
The Company also performs referral and utilization management. The
Company's utilization management staff reviews for medical appropriateness all
referrals by Network Physicians under the Company's Global Capitated Contracts
to other providers for the use of ancillary services, and for inpatient hospital
admissions. The Company utilizes health care management guidelines that are
widely accepted in the health care industry to review referrals for clinical
appropriateness. The Company shares the guidelines with physicians and prepares
and provides other educational programs regarding utilization and referrals,
including comparative data, to its Network Physicians. Network Physicians
provide information regarding referrals to the Company's utilization management
staff which reviews referrals for services not provided by Network Physicians.
The Company's utilization management coordinator and Medical Director perform a
network assessment and appropriateness review. Utilization and referral
management is a critical component of the Company's operations because it
promotes the effective and efficient use of medical resources, controls the cost
of medical care, and contributes to the Company's ability to negotiate and
obtain favorable shared risk arrangements with payors.
The Company seeks to promote wellness and avoid hospitalizations, reduce
length of in-patient stays, and otherwise reduce costs associated with
high-frequency and high-cost chronic patient conditions through its disease
management program. The Company's program is currently focused on three of the
most expensive and debilitating ailments suffered by Medicare patients,
congestive heart failure, diabetes, and chronic obstructive pulmonary disease.
The disease management process involves physicians and employees from many of
the Company's departments, including care management, utilization management,
case management, social workers, education specialists, physician liaisons and
contracting. The Company gathers data and other information regarding these
conditions, such as morbidity and mortality statistics, length of stay and
hospital admission rates, and other data related to the cost of care associated
with such condtions. The Company also identifies patients participating in its
Global Capitated Contracts that are at risk or suffering from one of these
conditions. Physicians design a recommended disease-specific medical approach,
and the Company's employees involved in disease management, utilizing the
resources of many of the Company's departments, develop a plan to provide
cost-effective, high quality care to patients suffering from ailments.
Specifically, the Company establishes utilization and referral parameters,
develops specialized pharmaceutical and nutritional programs, provides education
to patients, monitors specific cases and provides patient support.
The Company develops its clinical protocols in consultation with physicians
and other sources. Physicians in the Company's networks remain free to diverge
from the protocols when they determine that it is medically appropriate to do
so. The Company's contracts with physicians and other health care providers
expressly state that the Company shall not interfere with the physician's
relationship with and responsibility to the patient. While the clinical
protocols and procedures may assist the physician in providing cost-effective
and high quality care, the physician remains free and has the duty under all of
the Company's contracts to treat patients as he deems necessary, and not to
discriminate against patients covered by the Company's managed care plans.
The Company's case management program also focuses on patient satisfaction
and cost savings by identifying patients whose diagnosis will require
significant medical care. The Company's staff of case 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 case 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.
In order to help ensure the quality of health care services to patients and
manage the costs of health care, the Company's care management department
administers a quality assurance program which monitors patient satisfaction,
compliance with HEDIS standards and quality of medical records. The care
management department conducts reviews of random samples of cases to monitor
consistency with the Company's policies and procedures regarding referral
management, utilization management and case management. The Company's care
management department has developed and implemented its policies and procedures
in compliance with the standards as specified by certain national accreditation
organizations for the health care industry.
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COMPETITION
The Company's provider network competes with other provider networks and
medical groups, including those established by hospitals and other individual
physicians, and IPAs in obtaining managed care contracts with health maintenance
organizations and other Payors. The competitive factors that the Company
encounters include the number of physicians in each group, geographical coverage
of Network Physicians, the quality of care that can be provided to the Payors'
enrollees, and the ability to effectively manage care. The Company believes that
it can successfully compete with other entities seeking managed care contracts
with Payors because of the Company's large number of Network Physicians, thereby
providing Payors with an extensive network of providers to offer the Enrollees
of the Payors with whom the Company contracts. The Company also has an
increasing geographic coverage of Network Physicians with extensive coverage in
the Baltimore metropolitan area and Core Medical Groups (either existing or with
letters of intent) or IPAs in Allegany, Carroll, Anne Arundel, Harford, and
Montgomery Counties. However, a large number of physicians remain who may join
other provider networks and who may be competing for managed care contracts. The
Company also believes it can effectively compete with other networks because it
was one of the first established physician owned networks in Maryland, although
other provider networks in the region have recently been developed and the
Company expects others to be established.
The Company competes with certain HMOs, other Payors, other provider
networks, medical groups, and hospitals in acquiring certain assets of physician
practices. Further, large established traditional indemnity insurance companies
also are entering the managed care field and may compete with the Company in
acquiring certain assets of physician practices and developing physician
networks. Certain of the Company's competitors (i) employ physicians, (ii) own
such physicians' medical practices, clinics or medical groups and (iii) exercise
broad control over clinical decisions of such physicians and their medical
practices. Competitive methods include the type and amount of compensation
offered to physicians in exchange for their practices, the level of clinical
autonomy afforded the physician, terms of employment arrangements, the level and
extent of care management imposed on the physician, and the types of management
services that will be provided to physicians. The Company believes it can
effectively compete with other groups in acquiring certain assets of physician
practices because the Company is driven by primary care physicians and primary
care strategies. Although other entities may offer cash consideration for
physician practices in amounts greater than the Company, the Company believes
that offering an equity interest in the Company to its physicians provides an
incentive of ownership which will encourage the implementation of managed care.
The Company believes its physician ownership will attract greater numbers of
physicians to its network, and because of the significant percentage of the
Company which is owned by physicians, such physicians will be better able and
more willing to implement managed care. Further, the Company believes that it
provides its Network Physicians with greater clinical autonomy than may be
offered by hospitals, HMOs or insurance companies.
The Company also will compete with other management companies providing
management services to physicians. While many of these companies have greater
marketing and financial resources than the Company and may be better able to
provide services to its health care providers, the Company will provide
comprehensive business management services to its Equity Physicians and certain
of its other Network Physicians, including administrative, legal and accounting
services, billing and collection services, referral management, utilization
review, and computer systems and training, thereby providing such physicians
more time to devote to the practice of medicine. See "Risk
Factors--Competition."
EMPLOYEES
As of November 15, 1996, the Company had approximately 360 employees, of
which approximately 140 are full time employees in its headquarters in Owings
Mills, Maryland and approximately 220 have been assigned by the Company to work
in physician offices. An additional 90 physicians and laboratory personnel are
employed by the affiliated Core Medical Groups.
PROPERTIES AND ASSETS
The Company leases approximately 25,800 square feet in Owings Mills,
Maryland for its corporate headquarters. The term of the lease continues until
2001. The Company also has entered into a sublease through 1999 and a lease
through 2002 for approximately 18,770 square feet in Baltimore, Maryland for its
billing and claims processing operation. The Company also leases physician
offices of varying sizes, generally ranging from approximately 900 square feet
to more than 5,000 square feet. The Company anticipates that as it continues to
grow, expanded facilities will be required. The Company does not anticipate
significant difficulties in obtaining additional or new facilities.
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As of the date of this Prospectus, the Company's principal assets consist
of certain assets of the medical practices of Equity Physicians, computer
hardware and software, the rights granted to it pursuant to the PSO Agreements,
contractual relations with providers and Payors, accounts receivable, and cash.
The Company has filed service mark applications to register its logo and
corporate names "Doctors Health System Managing Quality Health Care", "Doctors
Health", "Doctors Health, It's the Sure Sign of Caring", and "WomanCare".
LEGAL PROCEEDINGS
The Company is a party from time to time in lawsuits incidental to its
business. The Company is not currently subject to any material legal
proceedings.
REGULATION
Both the health care business generally and the activities of the Company,
including those by or with managed care entities, the CMGs 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, "Stark" 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 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
proposed from time to time. Some of these Safe Harbors are applicable to the
activities of the CMGs, 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. Basically, all lease
and services agreements must be in writing, 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
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the provider, including a direct or indirect ownership or investment interest,
or a compensation arrangement with a provider (including the physician's own
CMG), 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, physician 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, and is not within an exception,
(i) neither the patient nor the payor may be billed; (ii) payors can recover all
amounts previously billed and paid in respect of non-excepted self-referrals;
and (iii) the referring physician and the provider are jointly and severally
liable to repay any amounts paid in respect of non-excepted self-referrals. Both
State and Federal law also impose 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 CMGs, and the physician members of
the CMGs, 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 CMGs and with IPA entities.
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 or
statutes might require the Company to restructure its relationships with the
CMGs and other managed care networks, and violation of Stark II by the Company
or its CMGs could result in significant fines and financial losses which could
adversely affect the Company.
ANTITRUST
The affiliated CMGs and the Company's other Network physicians 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 Federal Trade Commission has 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.
INSURANCE
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.
On August 10, 1995, the NAIC issued a report opining that risk-transferring
arrangements may constitute the business of insurance to which state licensing
laws apply. The NAIC opined that such licensing laws would not apply to the
Company's Global Capitated Contracts or Full Risk Contracts because the Company
assumes "downstream risk" from a duly licensed health insurer or HMO for health
care provided to that carrier's Enrollees. The NAIC's conclusions are not
binding on the states.
In Maryland, for example, licensed HMOs are permitted to enter into
capitation arrangements with entities like the Company which assume the
obligation to pay providers directly as long as the HMO has obtained approval
for the form of
47
<PAGE>
the "administrative service provider contract" with the entity. All of the
Company's Global Capitated Contracts are administrative service provider
contracts with licensed HMOs. The Attorney General of the State of Maryland has
issued an advisory opinion that calls into question the ability of an unlicensed
entity to provide health care services under global capitated contracts in
situations where a licensed HMO was not the entity contracting with the insured,
and the Company has no such arrangements and no present intention to enter into
any such arrangements. The Company has no present plans to become an HMO or
insurance company licensed to offer health insurance in Maryland or elsewhere,
and intends to continue to offer services under Global Capitated Contracts only
under administrative service provider contracts.
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. The Company is required under its Global Capitated Contracts to either
post a letter of credit or create a segregated fund for the benefit of health
care providers which provide services to enrollees under Global Capitated
Contracts to which the Company is a party. These added financial requirements
have not created any financial burden to date for the Company.
CORPORATE PRACTICE OF MEDICINE AND THE PROHIBITION AGAINST FEE SPLITTING
Physicians must be licensed in order to practice medicine. Both Maryland
law and the ethical rules of the American Medical Association and Medical
Chiurgical Society of Maryland prohibit fee splitting, which is generally
defined, as relevant here 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, but not in Maryland,
Virginia, nor any of the other states contiguous to Maryland, has been coupled
with the corporate practice of medicine doctrine to question management
agreements pursuant to which non-physicians in a management company obtain
substantial financial benefits from a physician practice. The Company's
management has no evidence that Maryland or its neighboring states would choose
to follow those states which have sought to prohibit management agreements as
fee splitting, and Maryland, in particular, expressly permits entities organized
as LLCs to engage in the practice of medicine.
The corporate practice of medicine doctrine is founded in state medical
licensure statutes which prohibit the practice of medicine without a license.
Corporations, which cannot be licensed, are therefore prohibited from practicing
medicine. The corporate practice doctrine was originally designed to protect the
public against commercial exploitation of medicine by middlemen intervening in
the doctor-patient relationship to make a profit. It is unlawful to practice
medicine in Maryland without a license. Practicing medicine with an unauthorized
person or aiding such person in the practice of medicine is grounds for
disciplinary action, including license revocation.
To permit physicians to practice medicine in a corporate form, Maryland and
each of the contiguous states has adopted a professional corporations ("PC")
statute. Under Maryland's Professional Service Corporations statute, a
corporation that is eligible to be a PC may not organize under any other
corporate form. This precludes use of a general corporation to render
professional services. A PC may only render professional services through
individuals licensed or otherwise authorized to provide them. The majority of
the directors and officers of the PC must be qualified persons. Moreover, a PC
may only issue stock to a licensed individual, general partnership comprised
entirely of licensed members, or a PC organized to perform the same professional
service, and stock may only be transferred to a qualified person. Consequently,
a non-licensed individual could serve as a director, but could not own stock or
vote in the PC.
However, a Maryland limited liability company ("LLC") may render
professional services, including medical services. There is no requirement that
all members of an LLC organized to perform professional services be licensed.
Each of the CMGs is organized as an LLC in accordance with Maryland law. The
Company does not employ any physicians to provide medical services, and operates
in strict accord with Maryland law.
The Company will operate as management company on behalf of the CMGs and
will enter into Managed Care contracts with Managed Care companies in which the
CMGs and IPAs and other physician groups participate. The management of the
Company believes that, under the presently applicable interpretations of
Maryland law and ethical rules applicable to the practice of medicine in
Maryland, the activities of the Company under the PSO Agreement are not in
conflict with or violation of any applicable legal or ethical requirements
imposed on the practice of medicine or on fee splitting. The Company charges a
management fee for some services, but the physicians in the CMGs do not share
fees with members of other CMGs or with the Company.
48
<PAGE>
FUTURE REGULATION
The health care industry is subject to extensive regulation and is in a
state of change. A variety of legislative proposals to substantially reform the
payment for and delivery of healthcare 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 healthcare, to reform the payment methodology for healthcare goods
and services by both the public (Medicare and Medicaid) and private sectors,
limitations on federal spending for healthcare benefits, and universal access to
healthcare. 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 healthcare goods and services, may result in reduced or
limited payment for healthcare services or in controlled or limited access to
certain healthcare 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.
The Maryland statute and Stark II have been recently enacted and there is
considerable uncertainty concerning how they will be interpreted, including
specifically how broadly the exemptions and exceptions to their application will
be applied. Regulations applying to Stark I and applicable to some, but not all,
of Stark II have recently been adopted. The Core Medical Groups, and the Equity
PCPs, as well as other entities that contract with the Company through
arrangements similar to the IPA arrangements described above, will have both an
ownership interest in and a compensation arrangement with the Company, and the
physicians will have similar relationships with the Core Medical Groups and with
IPAs. Physicians will refer patients among themselves within their practices and
as part of the managed care networks which the Company will establish. The
Company believes that it is not an entity to which referrals can be made, and
that the referrals of patients by participating physicians within the managed
care networks managed by the Company should fall within one or more of the
exceptions permitted by Stark II and the state self referral laws. Future
regulations, statutes or interpretations might require the Company to
restructure its relationships with the Core Medical Groups and other managed
care networks, and violation of Stark II by the Company or its Core Medical
Groups could result in significant fines and financial losses which could
adversely affect the Company.
ANTITRUST AND INSURANCE CONCERNS.
The Core Medical Groups and the physicians who are members of the IPAs with
which the Company contracts are separate legal entities and may be deemed to be
competitors subject to a range of antitrust laws which prohibit anti competitive
behavior, including price fixing, division of markets, and group boycotts and
refusals to deal. The managed care network contracting activities which are the
Company's main business are susceptible to antitrust challenge. The Department
of Justice and the Federal Trade Commission have published guidelines for the
formation and activities of managed care contracting networks, and the Company
intends to comply with those guidelines in developing networks. However, there
is no assurance that review of the Company's business by courts or state or
federal regulatory authorities, or private antitrust challenges by competitors,
will not result in a determination that could adversely affect the operation of
the Company and its managed care networks.
States heavily regulate the activities of insurance companies and health
maintenance organizations. The Company is not registered as an insurance company
or HMO with any state, and does not believe that its activities constitute the
business of insurance, but there can be no assurance that state regulators might
not challenge some of the Company's present or future activities as falling
within the business of insurance, or that the Company might not be required to
become a licensed insurer at some time in the future. See "Risk
Factors--Regulation." Some states impose requirements on entities which contract
with HMOs and insurers, and such requirements might impose significant costs on
the business of the Company, which might adversely affect the business or
operations of the Company. [NAIC; Md Atty General opinion]
CORPORATE PRACTICE OF MEDICINE AND THE PROHIBITION AGAINST FEE SPLITTING.
However, a Maryland limited liability company ("LLC") may render
professional services, including medical services. There is no requirement that
all members of an LLC organized to perform professional services be licensed.
Each of the CMGs is organized as an LLC in accordance with Maryland law. The
CMGs could have qualified as PCs.
49
<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. ............ 38 Chairman, Director, Executive Vice President of Corporate
Development
Stewart B. Gold................... 55 President and Chief Executive Officer and Director
John R. Dwyer, Jr................. 40 Executive Vice President, Chief Financial Officer, Treasurer and
Director
Alan L. Kimmel, M.D. ............. 43 Executive Vice President for Medical Policy and Practice; Medical
Director and Director
Paul A. Serini.................... 37 Executive Vice President of Strategic Operations and Director of
Legal Affairs, Secretary and Director
Beth A. Beale..................... 42 Vice President of Managed Care Operations
James A. Gast..................... 34 Vice President of Administration
Elizabeth A. Hennessey 46 Vice President of Information Technology
Thomas F. Mapp.................... 40 Vice President and Corporate Counsel
Kyle R. Miller.................... 34 Vice President of Finance
Theresa A. Spoleti................ 38 Vice President of Managed Care Products and Services
Robert Ancona, M.D. .............. 49 Director
Mark H. Eig, M.D. ................ 46 Assistant Medical Director and Director
John W. Ellis, CPA................ 44 Director
Howard I. Goldman, M.D............ 43 Assistant Medical Director and Director
Robert G. Graw, Jr., M.D.......... 55 Vice President of Physician Practice Operations and Director
Richard R. Howard................. 47 Director
William D. Lamm, M.D. ............ 44 Assistant Medical Director and Director
Peter J. LoPresti, D.O............ 34 Director
J. David Nagel, M.D............... 56 Director
John S. Prout..................... 47 Director
D. Alexander Rocha, M.D........... 40 Director
Robert S. Zetzer.................. 66 Director
</TABLE>
Scott M. Rifkin, M.D. is the Chairman, Executive Vice President and
Director of Development and a Director of the Company. Dr. Rifkin is a
co-founder of Baltimore Medical Group, LLC and currently is the President and a
Management Committee member of Baltimore Medical Group, LLC. Baltimore Medical
Group, LLC was founded in February 1995. Dr. Rifkin has also served as Medical
Director of Fairfield Nursing Center since 1989 and as Director of Pre-Admission
Consultation Service at Union Memorial Hospital since 1990. Dr. Rifkin has been
engaged in the private practice of medicine since 1988. Dr. Rifkin is also an
expert in long-term care issues and has advised the State of Maryland on this
subject.
Stewart B. Gold is the Chief Executive Officer, President and a Director of
the Company. Prior to joining the Company in 1994, Mr. Gold was CEO and
President of Veritus Services Inc., an arm of Blue Cross of Western Pennsylvania
from 1992 to 1993, where he was responsible for for-profit ventures in managed
care, utilization and information systems. From 1991 to 1992, Mr. Gold served as
President and Chief Executive Officer of Health Care Affiliated Services, Inc.
John R. Dwyer, Jr., is the Executive Vice President, Chief Financial
Officer, and Treasurer of the Company, and has been a Director of the Company
since May 1996. Prior to joining the Company in May 1996, he was a principal in
the Washington based private investment bank of Graham, Hamilton & Dwyer, Inc.
Before joining Graham, Hamilton & Dwyer, Inc. in October 1990, Mr. Dwyer was the
President of Dimetrics, Inc., a wholly-owned subsidiary of Talley Industries in
California, a position he held since August 1987. Before joining Dimetrics,
Inc., Mr. Dwyer was the President of Merrick East, Inc. from April 1985 to July
1987, an entity subsequently acquired by Dimetrics. Before joining Merrick East,
Inc., Mr. Dwyer practiced law with Arent, Fox, Kinter, Plotkin and Kahn in
Washington, D.C. from September 1981 to March 1985.
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
50
<PAGE>
Baltimore Medical Group and has had an active clinical practice of Internal
Medicine in Baltimore since 1982. Dr. Kimmel's professional memberships include
American College of Physicians, American Society of Internal Medicine, Baltimore
City Medical Society and the Southern Medical Association.
Paul A. Serini is the Company's Executive Vice President of Strategic
Operations and Director of Legal Affairs, a position he has held since February
1995, and has been a Director of the Company since May 1996. From 1990 to 1995,
Mr. Serini was a partner in the Baltimore and Washington offices of the law firm
of Venable, Baetjer and Howard, LLP, where he headed the business transaction
group's Health Care Strategic Business Unit.
Beth A. Beale has been the Company's Vice President of Managed Care
Operations since January of 1996. Prior to joining the Company in 1995, from
1991 to 1995 Ms. Beale was employed as the Vice President/Management Director of
HRS Maine, Inc., a joint venture company owned by Blue Cross of Western
Pennsylvania and Blue Cross/Blue Shield of Maine. HRS Maine provides health care
and workers' compensation cost management services for 200,000 employees.
James A. Gast serves as Vice President of Administration. He has been with
the Company since February of 1996. Prior to joining the Company Mr. Gast served
as Corporate Counsel at The Bank of Baltimore from September 1991 until the bank
was acquired by First Fidelity Bancorporation. From 1988 to 1991, Mr. Gast
served as Corporate Counsel at Hale Intermodal Transport Co., an international
shipping company.
Elizabeth A. Hennessey is the Company's Vice President of Information
Technology, a position she has held since August 1996. Ms. Hennessey joined the
Company in July 1995 as Director, Information Systems. Prior to joining the
Company, Ms. Hennessey served as Director, Information Systems for University of
Maryland's faculty practice, University Physicians, Inc. since 1989.
Thomas F. Mapp serves as Vice President and Corporate Counsel of the
Company. Prior to joining the Company in 1995, he was in the private practice of
law. From 1986 to 1994, Mr. Mapp practiced with the law firm of Venable, Baetjer
and Howard, LLP.
Kyle R. Miller, the Company's Vice President of Finance, joined the Company
in August 1996. From 1984 until he joined the Company, Mr. Miller was employed
by Arthur Andersen, LLP, CPAs where he was a senior manager in the firm's health
care audit and business consulting division. Mr. Miller is a member of the
American Institute of Certified Public Accountants (AICPA).
Theresa A. Spoleti is the Company's Vice President of Managed Care and
Services, a position she has held since January of 1996. Prior to joining the
Company in 1995, Ms. Spoleti was Director of Management Services Organization,
then Director of Physician Alliances, at Greater Baltimore Medical Center, from
1992 to June of 1995. From 1987 to 1992 she was a principal in Management
Consulting at Health Care Systems Associates (HSA), Inc. in Potomac Maryland.
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.
Mark H. Eig, M.D. has served as Director of the Company and Assistant
Medical Director since May 1996. Dr. Eig has practiced internal medicine and
critical care medicine in Silver Spring, Maryland since 1980. Dr. Eig currently
serves on the Board of Directors for the Jewish Social Service Home Health
Agency and as the Chairman for their Utilization Review Committee and
Professional Advisory Committee. Dr. Eig also serves as the Chairman for Holy
Cross Hospital Pharmacy and Therapeutics Committee and Montgomery County Medical
Society Emergency Medical Service Committee.
John W. Ellis, CPA has served as a Director of the Company since February
1995. Mr. Ellis is currently the Chief Financial Officer and Treasurer of St.
Joseph Medical Center, Inc., a position he has held since June 1992. Prior to
joining St. Joseph Medical Center, Mr. Ellis served as Vice President, Finance
of Maryland General Hospital from June 1989 to June 1992.
Howard I. Goldman, M.D. has served as a Director of the Company and as
Assistant Medical Director since July 1995. Dr. Goldman has been a physician in
private practice since 1991.
Robert G. Graw, Jr., M.D. is a Director of the Company, a position he has
held since May 1996. He has been in the private practice of General Pediatrics
and Pediatric Hematology and Oncology since 1975 in Davidsonville, Maryland.
Since April 1996, Dr. Graw has served as the Company's Vice President of Medical
Practice Operations. Dr. Graw is currently 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.
51
<PAGE>
Richard R. Howard has served as a Director of the Company since September
1996. He has served as a director of Genesis Health Ventures, Inc. since May
1985 and as Chief Operating Officer of Genesis Health Ventures, Inc. since June
1986. He joined Genesis Health Ventures, Inc. in September 1985 as Vice
President of Development. Mr. Howard's background in healthcare includes two
years as the Chief Financial Officer of HGCC. Mr. Howard's experience also
includes over ten years with Fidelity Bank, Philadelphia, Pennsylvania and one
year with Equibank, Pittsburgh, Pennsylvania.
William D. Lamm, M.D. has served as a Director of the Company since May
1996 and has been in the private practice of medicine since 1983. Dr. Lamm's
professional memberships include The American Medical Association, the American
Academy of Family Practice and the Medical and Chirurgical Faculty of Maryland.
Dr. Lamm is President of the Medical Staff at Memorial Hospital and is on the
Board of Trustees with both Memorial Hospital and Western Maryland Health
System. Dr. Lamm has served as the Chairman of Cumberland Valley Medical Group,
LLC and Assistant Medical Director of the Company since May 1996.
Peter J. LoPresti, D.O. is a Director of the Company, a position he has
held since February 1995. Dr. LoPresti has been a physician in private practice
since 1992.
J. David Nagel, M.D. has served as a Director of the Company and as
Director of Legislative Affairs since February 1995. Dr. Nagel has been in the
private practice of medicine since 1968 and is a past president of the Medical
and Chirurgical Faculty of Maryland.
John S. Prout is a Director of the Company, a position he has held since
February 1995. Mr. Prout currently serves as President and Chief Executive
Officer of St. Joseph Medical Center, Inc., where he has served since July 1994.
From 1988 to 1993, Mr. Prout was Executive Vice President, Little Company of
Mary Hospital and Health Care Centers in Evergreen Park, Illinois.
D. Alexander Rocha, M.D. has served as a Director of the Company since May
1996 and is currently the President of North Carroll Family Physicians, where he
has served since November 1989. Dr. Rocha has been Chairman of Carroll Medical
Group, LLC since December 1995.
Robert S. Zetzer has served as a Director of the Company since January
1996. Mr. Zetzer is a Licensed Property and Casualty Insurance Advisor in
Maryland. He was appointed to Medical Mutual Liability Insurance Society of
Maryland's Board of Directors, in July 1975, by the Governor of Maryland. Mr.
Zetzer is currently a member of the Boards of Directors of Medical Mutual
Liability Insurance Society of Maryland, Mid-Atlantic Medical Insurance Company,
and Med-Lantic Management Services, Inc. and serves as Chairman of the Audit
Committee for both companies. He also serves on Medical Mutual's Executive
Committee. Mr. Zetzer formerly served as President of Stanley-Schuchhardt,
Inc./Zetzer Insurance in Baltimore, from 1948 to 1993, and as President of the
Grand Central Insurance Company in Maryland from 1958 to 1968. A graduate of the
University of Baltimore, Mr. Zetzer is a Lieutenant Colonel (Comptroller), U.S.
Air Force Reserve (Retired).
COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors has established an Audit Committee and a
Compensation Committee.
AUDIT COMMITTEE: The Audit Committee has responsibility for reviewing and
supervising the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors regarding the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices and meets with the Company's
independent public accountants. The members of the Audit Committee are Messrs.
Gold, Ellis, Dwyer, Serini, and Dr. Graw.
COMPENSATION COMMITTEE: The Compensation Committee has the responsibility
for reviewing the performance of officers of the Company and recommending to the
Board of Directors of the Company annual salary, option grants, and bonus
amounts for all officers of the Company. The Compensation Committee also has the
responsibility for oversight and administration of the Company's long-term
incentive plans and other compensatory plans. The members of the Compensation
Committee are Messrs. Gold and Ellis, 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.
52
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY.
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and each of the other four
most highly compensated executive officers during the fiscal year ended June 30,
1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION (1) UNDERLYING
----------------------- OPTION/SARS
SALARY($) BONUS($) (#)(2)
--------- -------- ------------
<S> <C> <C> <C>
Stewart B. Gold,
Chief Executive Officer......................................................... $ 203,848 $109,856 0
Paul A. Serini,
Executive Vice President........................................................ 165,885 37,125 50,080
Scott M. Rifkin, M.D.,
Chairman and Executive Vice President........................................... 126,923 65,068 100,000
Allan C. Sanders, CPA,
Vice President of Financial Affairs (3)......................................... 114,664 21,750 22,550
Theresa A. Spoleti,
Vice President of Managed Care Products and Services............................ 110,000 57,500 20,000
</TABLE>
- ---------------
(1) In accordance with SEC rules, perquisites constituting less than the lesser
of $50,000 or 10% of the total salary and bonuses are not reported.
(2) See "Option Grants," "Option Exercises and Year-End Values" and "Omnibus
Stock Option Plan" for disclosure regarding outstanding stock options.
(3) Mr. Sanders resigned from the Company effective July 23, 1996.
53
<PAGE>
OPTION GRANTS.
Options granted to the Named Executive Officers during the fiscal year
ended June 30, 1996 are set forth in the following table. For disclosure
regarding the terms of stock options, see "Stock Option Plans." No stock
appreciation rights ("SARs") were granted during the fiscal year ended June 30,
1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT
ASSUMED
ANNUAL
RATES
OF
OPTIONS GRANTS IN LAST FISCAL YEAR STOCK
INDIVIDUAL GRANTS PRICE
------------------------------------------------------------------- APPRECIATION
NUMBER OF PERCENT OF FOR
SHARES TOTAL OPTIONS OPTION
UNDERLYING GRANTED TO EXERCISE TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION -----
NAME GRANTED(#)(1) IN FY 1996 ($/SHARE)(2) DATE 5%($)
- ------------------------------------------ -------------- ------------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C>
Stewart B. Gold........................... 0 0 N/A N/A N/A
Paul A. Serini............................ 50,080 24.9% .01 08/09/05 356
Scott M. Rifkin, M.D...................... 0 0 N/A N/A N/A
Allan C. Sanders, CPA..................... 22,550(4) 11.2% .01 08/09/05 160
Theresa A. Spoleti........................ 20,000 9.9% .01 (5) 126
<CAPTION>
NAME 10%($)
- ------------------------------------------ ------
<S> <C<C>
Stewart B. Gold........................... N/A
Paul A. Serini............................ 928
Scott M. Rifkin, M.D...................... N/A
Allan C. Sanders, CPA..................... 417
Theresa A. Spoleti........................ 319
</TABLE>
- ---------------
(1) Options are exercisable April 1, 1996 and 40% of the shares vest immediately
and 60% vest at 1/48 per month beginning May 15, 1996.
(2) The exercise price of each option was the fair market value of the
underlying Common Stock on the date of the grant, as determined by the Board
of Directors of the Company.
(3) Future value of current-year grants assuming the indicated percentage rates
per year over the applicable option term. The actual value realized may be
greater than or less than the potential realizable values set forth in the
table.
(4) 12,550 of such options were terminated as of July 23, 1996.
(5) 10,000 options expire on 08/09/05 and 10,000 options expire on 10/17/05.
OPTION EXERCISES AND YEAR-END VALUES.
No stock options were exercised by the Named Executive Officers during the
fiscal year ended June 30, 1996. There were no SARs outstanding during the
fiscal year ended June 30, 1996. The following table sets forth certain
information regarding unexercised options held by each of the Named Executive
Officers as of June 30, 1996:
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
-----------------------------------------------
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS
UNDERLYING UNEXERCISED AT FISCAL
OPTIONS AT FISCAL YEAR-END(#) YEAR-END($)(1)
------------------------------ -----------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Stewart B. Gold................................................. 0 0 N/A
Paul A. Serini.................................................. 50,080 0 $ 149,739
Scott M. Rifkin................................................. 100,000 0 $ 299,000
Allan C. Sanders, CPA........................................... 22,550(2) 0 $ 67,424
Theresa A. Spoleti.............................................. 20,000 0 $ 59,800
<CAPTION>
NAME UNEXERCISABLE
- ---------------------------------------------------------------- -------------
<S> <C<C>
Stewart B. Gold................................................. N/A
Paul A. Serini.................................................. N/A
Scott M. Rifkin................................................. N/A
Allan C. Sanders, CPA........................................... N/A
Theresa A. Spoleti.............................................. N/A
</TABLE>
- ---------------
(1) Value determined by the Board of Directors of the Company.
(2) 12,550 options were canceled as of July 23, 1996.
STOCK OPTION PLANS.
OMNIBUS STOCK OPTION PLAN:
On August 9, 1995, the Company adopted the Omnibus Stock Option Plan (the
"Omnibus Plan"). All employees, officers, directors and other key contributors
to the Company may participate in the Omnibus Plan. The aggregate number of
shares of Common Stock which may be issued under the Omnibus Plan is 6,175,000.
The Omnibus Plan authorizes the grant of options to purchase Common Stock
intended to qualify as incentive stock options or non-qualified options as well
as stock appreciation rights and restricted or unrestricted share awards. The
Omnibus Plan is administered by the Compensation Committee of the Board of
Directors which, subject to the provisions of the Omnibus Plan, has full
authority (i) to select the individuals to participate in the Omnibus Plan, (ii)
grant awards provided under the Omnibus Plan, (iii) modify, renew or extend
outstanding grants in accordance with the Omnibus Plan, (iv) interpret the
Omnibus Plan, and (v) adopt, amend or rescind rules and regulations for carrying
out the Omnibus Plan.
The option exercise price for each option is determined by the Compensation
Committee, but in the case of incentive stock options shall not be less than
100% of the fair market value of the shares on the grant date and in the case of
non-
54
<PAGE>
qualified stock options shall be as determined by the Compensation Committee.
Incentive stock options may be granted only to employees of the Company. The
terms of each option may not exceed ten years from the grant date. As of the
date of this Prospectus, the Company has granted options to purchase 469,380
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 241,630 of such options granted is $.01 per share, 70,000
options have an exercise price of $11.00 per share, 68,500 have an exercise
price of $15.00 per share, 29,250 have an exercise price of $20.00 per share,
and 60,000 have an exercise price of $30.00 per share. Of such options, 85,130
were granted on August 10, 1995, 33,250 shares were granted on October 18, 1995,
12,500 were granted on December 21, 1995, 70,000 were granted in May 1996 and
268,500 were granted on November 7, 1996. In April 1996, 2,500 options
terminated due to termination of employment as of June 1, 1996, 5,000 options
were terminated June 30, 1996 due to termination of employment, and 12,550 were
terminated July 23, 1996 due to termination of employment. As of the date of
this Prospectus, 449,330 options to purchase Class A Common Stock were issued
and outstanding. The Company also has granted options to purchase 117,000 shares
of Class B Common Stock. 100,000 of such options were issued in February 1995 at
an exercise price of $.01 per share, 5,000 of such options were issued as of
October 1, 1995 at an exercise price of $.01 per share, 3,000 of such options
were issued on July 1, 1996 at an exercise price of $.01 per share, 3,000 of
such options were issued on September 12, 1996 at an exercise price of $15.00
per share, 2,000 of such options were issued on October 1, 1996 at an exercise
price of $15.00 per share and 4,000 of such options were issued on October 3,
1996 at an exercise price of $15.00 per share.
Pursuant to the Omnibus Plan, the Company may award shares of Common Stock
to such participants and in such amounts and for such consideration, including
no consideration or such minimum consideration as may be required by law, as it
determines. Restricted shares may be issued pursuant to the Omnibus Plan,
subject to forfeiture if the restrictions do not lapse.
The Company may also grant to any participant who holds an outstanding
stock option the right to surrender such option (to the extent such option is
otherwise exercisable) and to receive from the Company an amount equal to the
excess, if any, of the fair market value of the Class A Common Stock with
respect to which such option is surrendered on the date of such surrender over
the exercise price of the surrendered option.
Unless earlier terminated, the Omnibus Plan will terminate in 2005.
ISSUANCE OF WARRANTS:
On December 1, 1995, the Company issued to Medical Mutual Liability
Insurance Society of Maryland warrants to purchase 88,889 shares of Class A
Common Stock of the Company at an exercise price of $5.625 per share and issued
to each of Stephen Graham, Andrew Hamilton and John Dwyer, a director of the
Company, warrants to purchase 8,000 shares each of Class A Common Stock of the
Company at an exercise price of $11.25 per share.
EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with Messrs. Gold,
Serini and Sanders, Dr. Rifkin and Ms. Spoleti.
Pursuant to the employment agreement with Mr. Gold, Mr. Gold receives a
1996 base salary of $200,000 per annum, a $75,000 bonus and at least 40% of the
Company's bonus pool (the "Bonus Pool"). The Bonus Pool will be equal to 10% of
the amount of the excess, if any, of operating revenues of the Company over its
operating expenses. Mr. Gold has the authority and discretion to determine
awards to be made from the remainder of the Bonus Pool to employees of the
Company, including himself. Mr. Gold also received 150,000 shares of Class A
Common Stock (currently 600,000 shares as a result of the August 1995 stock
split), in which Mr. Gold was fully vested in May 1996. The employment agreement
with Mr. Gold terminates in April of 2000, and unless notice of termination is
given will be automatically extended for succeeding 12-month periods. In the
event that Mr. Gold is terminated by the Company other than for "cause," he will
be entitled to all or a portion of his base salary and bonus in accordance with
the terms of his employment agreement.
Pursuant to the employment agreement with Mr. Serini, Mr. Serini receives a
base salary of $175,000 per annum. Mr. Serini will be entitled to participate in
the Bonus Pool to the extent determined by the Chief Executive Officer, and the
standards by which such bonus will be determined for each applicable year will
be established upon agreement between Mr. Serini and the Chief Executive
Officer.
For 1996, the Company and Mr. Serini have agreed upon a base bonus of at
least $50,000. Pursuant to the employment agreement, Mr. Serini received an
option to purchase 50,080 shares of Class A Common Stock. Mr. Serini may
exercise such
55
<PAGE>
option beginning on April 1, 1996, and will become fully vested in such shares
in April of 2000, or earlier under certain circumstances. The employment
agreement with Mr. Serini terminates in April of 2000, and unless notice of
termination is given will be automatically extended for succeeding 12 month
periods. In the event that Mr. Serini is terminated by the Company other than
for "cause," he will be entitled to all or a portion of his base salary and
bonus in accordance with the terms of his employment agreement.
Pursuant to the employment agreement with Mr. Sanders, Mr. Sanders received
a base salary of $112,500 per annum. Pursuant to a stock option agreement, Mr.
Sanders received an option to purchase 22,550 shares of Class A Common Stock. In
connection with Mr. Sanders' resignation, 12,500 of such options were canceled.
The remaining 10,000 options are fully vested and exercisable. Mr. Sanders
resigned from the Company effective July 23, 1996 and his employment agreement
was terminated as of that date.
Pursuant to the employment agreement with Dr. Rifkin, Dr. Rifkin receives a
base salary of $100,000 per year and at least 5% of the Bonus Pool. Dr. Rifkin
also received 100,000 shares of the Company's Class A Common Stock and was
granted an option to purchase an additional 100,000 shares of the Company's
Class A Common Stock that will vest upon the earlier to occur of (i) a Change in
Control of the Company, (ii) termination of his employment without cause or
under circumstances constituting "constructive termination", or (iii) December
9, 1996. The employment agreement with Dr. Rifkin terminates in April 2000, and
unless notice of termination is given, will be automatically extended for
succeeding 12 month periods on the same terms as previously in effect. In the
event that Dr. Rifkin's employment is terminated by the Company other than "for
cause," he will be entitled to all or a portion of his base salary and bonus in
accordance with the terms of his employment agreement.
Pursuant to the employment agreement with Ms. Spoleti, Ms. Spoleti received
a base salary of $110,000 per year through June 4, 1996 and receives a Base
Salary of $140,000 per year thereafter. Ms. Spoleti is entitled to participate
in the Bonus Pool to the extent determined by the Chief Executive Officer, and
the standard by which such bonus will be determined for each applicable year
will be established upon agreement between Ms. Spoleti and the Company. Under
the agreement, Ms. Spoleti was granted an option to purchase 10,000 shares of
Class A Common Stock and is eligible to participate in the Company's Omnibus
Stock Option Plan and receive options upon attainment of certain performance
criteria. The employment agreement with Ms. Spoleti terminates in June 1998, and
unless notice of termination is given, will be automatically extended for
succeeding 12 month periods on the same terms as previously in effect. In the
event that Ms. Spoleti's employment is terminated by the Company without cause,
she will be entitled to accrued Base Salary and benefits and an amount equal to
the Base Salary that would have been payable through the end of the contract
term, and options held by Ms. Spoleti will become fully vested and exercisable,
all in accordance with the terms of her employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Gold, the Company's President and Chief Executive Officer, and Dr.
Rifkin, the Company's Chairman, are the only officers or employees of the
Company who serves on the Compensation Committee. During the last completed
fiscal year through May 1996, the members of the Compensation Committee were
Messrs. Gold and Ellis, Ms. Linda Dembiec and Dr. LoPresti. After May 1996, the
Compensation Committee consisted of Messrs. Gold and Ellis, Ms. Dembiec and Drs.
Rifkin and Eig. Ms. Dembiec resigned from the Board of Directors and from the
Compensation Committee in November 1996. The holder of the Series B Preferred
Stock has not yet designated a successor for her seat on the Board of Directors.
See " -- Employment Agreements" and "Certain Transactions."
KEY MAN LIFE INSURANCE. The Company maintains key man life insurance on
Messrs. Gold, Rifkin and Kimmel in the face amounts of $6,000,000, $3,000,000
and $3,000,000, respectively.
STOCKHOLDERS AGREEMENT
In December 1995, the "Management Stockholders" (consisting of Mr. Gold and
Drs. Rifkin and Kimmel), Medical Holdings Limited Partnership ("MHLP"), St.
Joseph Medical Center ("SJMC"), Medical Mutual Liability Insurance Society of
Maryland ("Med Mutual"), Med-Lantic Management Services, Inc., Genesis Health
Ventures, Inc. ("Genesis") and certain physician stockholders of the Company
(collectively, the "Stockholders") entered into a Stockholders Agreement, which
was amended in September 1996 (the "Stockholders Agreement") to which the
Company is also a party which governs certain aspects of the Company's
management plans and operations.
Pursuant to the Stockholders Agreement, each of the Stockholders has agreed
to sell and transfer the stock of the Company held by them only pursuant to such
agreement. The Stockholders Agreement provides that upon the occurrence of the
56
<PAGE>
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.
Purchasers of Securities hereunder also will be required to execute and
become a party to the Stockholders Agreement or otherwise be subject to
significant contractual restrictions on the resale of such Securities until an
initial public offering for cash of Common Stock.
CERTAIN TRANSACTIONS
Drs. Rifkin and Kimmel, who are directors, officers and stockholders of the
Company, and Drs. Ancona and Nagel, who are directors of the Company, are
members of the management committee, officers and employees of Baltimore Medical
Group, LLC. The Company and Baltimore Medical Group, LLC have entered into a PSO
Agreement and a Management Services Agreement pursuant to which Baltimore
Medical Group, LLC has accrued fees of $365,000 payable to the Company
57
<PAGE>
in connection with certain professional management services rendered in 1995 and
the first six months of 1996. Dr. Lamm is the Chairman and an employee of
Cumberland Valley Medical Group, LLC, and an employee and director of the
Company. Dr. Rocha is the Chairman and an employee of Carroll Medical Group, LLC
and is a Director of the Company. Dr. Eig is the Chairman and an employee of
Doctors Health Montgomery and is a Director of the Company.
The Company has agreed that it would consult with Med Mutual and follow Med
Mutual's recommendation regarding the provision of medical malpractice coverage
to Equity Physicians and certain of its other Network Physicians. Such decisions
include, but are not limited to, the selection of the underwriter, the form of
the insurance policy and the premium payment provisions. Med Mutual has agreed
to provide medical malpractice coverage to the Company for premiums consistent
with its rates as approved by the Maryland Insurance Administration. In
addition, Med Mutual will consider alternative insurance programs to meet the
Company's special needs and will request the necessary approvals for such
alternative programs from the Maryland Insurance Administration. This agreement
terminates upon the earlier of a change in control of the Company or termination
of the loan guarantee provided by Med Mutual. If the Company breaches this
agreement, the Company may be required to pay Med Mutual $400,000 and Med Mutual
could require the Company to redeem all or a portion of the Series B Preferred
Stock at the price equal to the greater of the fair market value per share or
the sum of the issue price per share and all accumulated and unpaid interest and
dividends.
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.
Pursuant to Stock Purchase Agreement dated September 4, 1996 (the "Stock
Purchase Agreement"), the Company agreed that it would (i) advise Genesis Health
Ventures, Inc., the Company's Series C Preferred stockholder ("Genesis"), of all
substantive discussions and plans with respect to the delivery of long term
care, pharmacy services, durable medical equipment and home health care services
(the "Services") for the Company, (ii) provide Genesis with all information
needed by Genesis to submit a proposal to provide the Services and (iii) provide
Genesis with an opportunity to provide the Services on commercially reasonable
terms. In addition, the Company has agreed that it will not enter into exclusive
arrangements with third parties that would preclude Genesis from competing to
provide Services to the Company. Genesis and the Company have agreed that
commitments regarding the Services shall not prevent the Company from purchasing
the Services from third parties other than Genesis.
Mr. Dwyer, who was named Executive Vice President, Chief Financial Officer
and Treasurer of the Company in May 1996, and is a Director of the Company, was
previously a principal of Graham, Hamilton & Dwyer ("GHD"), which provides
financial advisory services to the Company. In 1995, GHD received $100,000 for
such services, and in December 1995, the three principals of GHD each received
warrants to purchase 8,000 shares of Class A Common Stock. At that time, Mr.
Dwyer 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.
The Company has entered into acquisition transactions with certain of its
directors who are physicians. These transactions were entered into on
commercially reasonable terms, substantially similar to the terms of its
acquisition transactions with other Equity Physicians, and the consideration
paid in connection with such acquisitions was based on the fair market value of
the medical practice assets or services acquired.
In December 1995, the Company purchased certain assets of the medical
practice of Dr. Rocha, a director of the Company, and four physician partners of
Dr. Rocha. Dr. Rocha was elected to the Board of Directors in May 1996 and was
elected Chairman of Carroll Medical Group, LLC in December 1995. Dr. Rocha and
his four partners received a limited partnership interest in MHLP equivalent to
167,000 shares of Class B Common Stock, valued at $3.00 per share, and a
promissory note with a face value of approximately $138,000 as consideration for
the acquisition.
In May 1996, the Company purchased certain assets of the medical practice
of Dr. Lamm, a director of the Company. Dr. Lamm was elected to the Board of
Directors in May 1996 and was elected Chairman of Cumberland Valley Medical
Group, LLC in May 1996. Dr. Lamm received a limited partnership interest in MHLP
equivalent to 33,000 shares of Class B Common Stock, valued at $3.00 per share,
approximately $34,000 in cash and a promissory note with a face value of
approximately $45,000 as consideration for the acquisition.
In September 1996, the Company purchased certain assets of the medical
practice of Dr. Eig, a director of the Company. Dr. Eig was elected to the Board
of Directors in May 1996 and as Chairman of Doctor Health Montgomery in
September 1996. Dr. Eig received 16,000 shares of Class B Common Stock and 1,000
options to acquire Class B Common Stock, valued
58
<PAGE>
at $7.00 per share, cash in the amount of $5,000 and a promissory note with a
face value of approximately $38,000 as consideration for the acquisition.
The Company entered into a letter of intent with Dr. Graw, a director of
the Company since May 1996, to purchase certain assets of his medical practice.
In connection with the acquisition, Dr. Graw's limited liability partnership,
which he owns with other physicians, will receive a limited partnership interest
in MHLP equivalent to 74,000 shares of Class B Common Stock, an option to
acquire a limited partnership interest equivalent to 20,000 shares of Class B
Common Stock, exercisable at $15.00 per share, and cash for the practice's
collectable accounts receivable, which will not exceed $625,000. The Company has
advanced $300,000 to Dr. Graw and the practice as an advance against the
purchase of the practice's accounts receivable and received a promissory note
from Dr. Graw evidencing such advance. The promissory note will be canceled at
the closing of the acquisition. The Company has delegated to Dr. Graw's
practice, and the practice will perform, certain practice management business
functions, which the Company ordinarily performs for its physicians at its
headquarters. The Company reimburses Dr. Graw's practice for the expenses it
incurs in performing the business management services.
PRINCIPAL STOCKHOLDERS
The following tables set forth as of November 15, 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 November 15,
1996 ("Current Options") are deemed outstanding for computing the percentage of
the person holding such options, but are not deemed outstanding for computing
the percentage of any other person.
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Stewart B. Gold................................................................................... 600,000 75.0%
Scott M. Rifkin, M.D.............................................................................. 100,000 12.5
Alan L. Kimmel, M.D............................................................................... 100,000 12.5
Paul A. Serini.................................................................................... 50,080(1) 5.9
Allan C. Sanders, CPA............................................................................. 10,000(1) 1.2
Theresa A. Spoleti................................................................................ 20,000 2.4
Directors and executive officers as a group (24).................................................. 890,080(2) 100
</TABLE>
- ---------------
(1) Consists of shares in respect of Current Options.
(2) Includes 90,080 shares in respect of Current Options and warrants to
purchase 8,000 shares.
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- ------------------------------------------------------------------------------------------------ --------- ----------------
<S> <C> <C>
Medical Holdings Limited Partnership (1)........................................................ 2,200,000 87.9%
Directors and executive officers as a group (24)................................................ 17,000(2) (3)
</TABLE>
- ---------------
(1) Drs. Rifkin, Kimmel, Nagel, LoPresti and Ancona, Directors of the Company,
are officers or directors of the managing general partner of Medical
Holdings Limited Partnership. Includes options for 100,000 shares of Common
Stock granted to Dr. Rifkin under his employment agreement.
(2) Represents 16,000 shares and 1,000 shares in respect of Current Options held
by Dr. Eig.
(3) Less than 1%.
59
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- ------------------------------------------------------------------------------------------------ --------- ----------------
<S> <C> <C>
St. Joseph Medical Center, Inc. (1)............................................................. 1,000,000(2) 100%
Directors and Executive Officers as a group (24)................................................ 0 0
</TABLE>
- ---------------
(1) Mr. Prout and Mr. Ellis, Directors of the Company, are officers of St.
Joseph Medical Center, Inc.
(2) Convertible into 1,000,000 shares of Class C Common Stock, assuming
conversion of all Preferred Stock, will equal 56% of the maximum outstanding
Class C Common Stock.
SERIES B CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Med-Lantic Management Services, Inc. (1).......................................................... 355,556(2) 100%
Directors and Executive Officers as a group (24).................................................. 0 0
</TABLE>
- ---------------
(1) Mr. Zetzer, a Director of the Company, is a director of Medical Mutual
Liability Insurance Society of Maryland, Inc., the parent company of
Med-Lantic Management Services, Inc.
(2) Convertible into 355,556 shares of Class C Common Stock, which, assuming
conversion of all Preferred Stock, will equal 19.9% of the maximum
outstanding Class C Common Stock.
SERIES C CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NAME NUMBER PERCENT OF CLASS
- -------------------------------------------------------------------------------------------------- ------- ----------------
<S> <C> <C>
Genesis Health Ventures, Inc. (1)................................................................. 428,571(2) 100%
Directors and Executive Officers as a group (24).................................................. 0 0
</TABLE>
- ---------------
(1) Mr. Richard Howard, a Director of the Company, is President and Chief
Executive Officer of Genesis Health Ventures, Inc.
(2) Convertible into 428,571 shares of Class C Common Stock, which, assuming
conversion of all Preferred Stock, will equal 24% of the maximum outstanding
Class C Common Stock. The Company and Genesis Health Ventures, Inc. executed
an Option Agreement dated September 4, 1996 pursuant to which the Company
may issue Genesis an additional 642,857 shares of Series C Convertible
Preferred Stock.
The following tables set forth certain information with respect to the
ownership of the Company by physician stockholders in relation to other
stockholders. The information presented assumes conversion of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock to Class C Common Stock.
STOCKHOLDERS OF DOCTORS HEALTH SYSTEM, INC.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS A STOCKHOLDERS SHARES OWNERSHIP
- ------------------------------------------------------------------------------------------- --------- --------------------
<S> <C> <C>
Alan Kimmel, M.D. ......................................................................... 100,000 2.0
Scott Rifkin, M.D. ........................................................................ 100,000 2.0
Stewart B. Gold............................................................................ 600,000 11.8
<CAPTION>
CLASS B STOCKHOLDERS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Medical Holdings Limited Partnership....................................................... 2,200,000(1) 43.2
Other Primary Care Physicians.............................................................. 304,000 5.9
<CAPTION>
CLASS C STOCKHOLDERS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
St. Joseph Medical Center, Inc............................................................. 1,000,000 19.7
Med-Lantic Management Services, Inc........................................................ 355,556 7.0
Genesis Health Ventures, Inc............................................................... 428,571 8.4
Total.................................................................................... 5,088,127 100%
</TABLE>
- ---------------
(1) Includes an option to purchase 100,000 shares of the Company's Common Stock
pursuant to Dr. Rifkin's employment agreement.
60
<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)............................................. 2,704,000(1) 53.0
Management Stockholders (Stewart B. Gold)................................................. 600,000 11.8
Investor Stockholders (St. Joseph Medical Center, Inc., Med-Lantic Management
Services, Inc., and Genesis Health Ventures, Inc.)...................................... 1,784,127 35.2
Total................................................................................ 5,088,127 100%
</TABLE>
- ---------------
(1) Includes an option to purchase 100,000 shares of the Company's Common Stock
pursuant to Dr. Rifkin's employment agreement.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Class B Common Stock, par value
$0.01 per share; (ii) Options to purchase Class B Common Stock; and (iii) any
combination of the foregoing, either individually or as units consisting of one
or more of the types of Securities described in clauses (i) and (ii). The terms
of any specific offering of Securities, including the terms of any units
offered, will be set forth in a Prospectus Supplement relating to such offering.
The Company is authorized to issue 20,700,000 shares of Class A Common
Stock, par value $0.01 per share (the "Class A Common Stock"), 10,000,000 shares
of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock")
29,050,000 shares of Class C Common Stock, par value $0.01 per share (the "Class
C Common Stock") (the Class A Common Stock, the Class B Common Stock and the
Class C Common Stock are hereinafter collectively referred to as the "Common
Stock"), 1,000,000 shares of Series A Convertible Preferred Stock, par value
$5.00 per share (the "Series A Preferred Stock"), 355,556 shares of Series B
Convertible Preferred Stock, par value $11.25 per share (the "Series B Preferred
Stock"), 1,071,428 shares of Series C Convertible Preferred Stock, par value
$17.50 per share (the "Series C Preferred Stock") (the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock are hereinafter
collectively referred to as the "Preferred Stock"), and 1,000,000 shares of
other preferred stock having a par value of one cent ($0.01) per share. Shares
of the Preferred Stock are convertible into shares of Class C Common Stock.
As of November 15, 1996, 800,000 shares of Class A Common Stock are issued
and outstanding and held by three holders of record, 2,504,000 shares of Class B
Common Stock are issued and outstanding and held by fourteen holders of record,
1,000,000 shares of Series A Preferred Stock are issued and outstanding and held
by one holder of record, 355,556 shares of Series B Preferred Stock are issued
and outstanding and held by one holder of record and 428,571 shares of Series C
Preferred Stock are issued and outstanding and held by one holder of record.
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the Company's Articles of Amendment
and Restatement (the "Charter") and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Subject to the rights, privileges and restrictions described below, each issued
and outstanding share of the Common Stock and the Preferred Stock entitles the
holder thereof to one vote on all matters to be voted on by the stockholders of
the Company. There are no preemptive rights or sinking fund provisions with
respect to any of the Company's capital stock.
All shares of the Company's capital stock are subject to significant
restrictions on transfer and will carry a legend to reflect such restrictions.
Except as permitted by the Stockholders Agreement of the Company and the
Charter, the Securities cannot be transferred. The Stockholders Agreement
contemplates that the Company may redeem shares of its stock upon an
"Involuntary Transfer" resulting generally from the insolvency of a stockholder
or upon divorce of an individual stockholder. Voluntary transfers are permitted
only after a stockholder offers its stock, upon the same terms and conditions
contained in the offer it wishes to accept, to all other stockholders on the
terms set out in the Stockholders Agreement. See "Management--Stockholders
Agreement." Individual Stockholders may in certain circumstances make estate
planning transfers for the benefit of themselves or family members on certain
conditions.
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COMMON STOCK
Except as provided in the Charter, holders of Common Stock are entitled to
one vote per share with respect to all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Subject to preferences
that may be applicable to any outstanding shares of Preferred Stock, holders of
Common Stock are entitled to receive dividends when, as and if declared by the
Board of Directors, out of funds legally available therefor. Upon liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in assets available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of any
preferred stock then outstanding.
CLASS A COMMON STOCK
The holders of the Class A Common Stock are entitled to elect five of the
18 directors of the Company (each a "Class A Director"). The affirmative vote of
a majority of the stock of Class A Common Stock represented at a meeting at
which a quorum is present is sufficient to approve any matter with respect to
which such holders are entitled to vote; provided, that the affirmative vote of
a plurality of all votes cast shall be sufficient to elect a Class A Director.
The holders of Class A Common Stock, at any annual meeting or upon a special
meeting called by the holders of not less than 25% of the shares of Class A
Common Stock then outstanding may remove any Class A Director by the affirmative
vote of 80% of all of the votes entitled to be cast for such Class A Director.
CLASS B COMMON STOCK
The holders of the Class B Common Stock are entitled to elect eight of the
18 directors of the Company (each a "Class B Director"). The affirmative vote of
a majority of the stock of Class B Common Stock represented at a meeting at
which a quorum is present is sufficient to approve any matter with respect to
which such holders are entitled to vote; provided, that the affirmative vote of
a plurality of all votes cast shall be sufficient to elect a Class B Director.
The holders of Class B Common Stock, at any annual meeting or upon a special
meeting called by the holders of not less than 25% of the shares of Class B
Common Stock then outstanding may remove any Class B Director by the affirmative
vote of at least a majority of all of the votes entitled to be cast for such
Class B Director. Upon issuance in accordance with the terms of this Prospectus,
the shares of Class B Common Stock being offered hereby will be fully paid and
non-assessable.
CLASS C COMMON STOCK
Upon the conversion of all of the Series A Preferred Stock then outstanding
into shares of Class C Common Stock, the holders of such Class C Common Stock
into which such Series A Preferred Stock has been converted, voting as a single
sub-class (the "Series A Subclass"), shall be entitled to elect two of the 18
directors of the Company (each a "Converted Series A Class C Director"). Upon
the conversion of all of the Series B Preferred Stock then outstanding into
shares of Class C Common Stock, the holders of such Class C Common Stock into
which such Series B Preferred Stock has been converted, voting as a single
sub-class ("the Series B Subclass"), shall be entitled to elect two of the 18
directors of the Company (each a "Converted Series B Class C Director"). Upon
the conversion of all of the Series C Preferred Stock then outstanding into
shares of Class C Common Stock, the holders of such Class C Common Stock into
which such Series C Preferred Stock has been converted, voting as a single
sub-class ("the Series C Subclass"), shall, prior to the Company's 1998 annual
meeting of stockholders, be entitled to elect one of the 18 directors of the
Company. After the Company's 1998 annual meeting of stockholders, the Company
shall have 19 directors, and the Series C Subclass shall be entitled to elect
two directors of the Company (each a "Converted Series C Class C Director").
Except with respect to the election of Directors, the affirmative vote of a
majority of the stock of Class C Common Stock represented at a meeting at which
a quorum is present is sufficient to approve any matter with respect to which
such holders are entitled to vote; provided, that the affirmative vote of a
plurality of all votes cast by such Series A Subclass, Series B Subclass, or
Series C Subclass, as the case may be, shall be sufficient to elect a Converted
Series A Class C, Converted Series B Class C Director, or Converted Series C
Class C Director, respectively. The Series A Subclass, the Series B Subclass, or
the Series C Subclass, as the case may be, at any annual meeting or upon a
special meeting called by the holders of not less than 25% of the shares of such
subclass outstanding may remove the Converted Series A Class C, Converted Series
B Class C, or Converted Series C Class C Director, respectively, by the
affirmative vote of 80% of all of the votes entitled to be cast for such
director.
The Charter of the Company includes a provision pursuant to which, upon
completion of a "Qualified" or "Non-Qualified" Public Offering, each share of
the Company's Class A Common Stock, Class B Common Stock, and Class C Common
Stock shall be converted, without any action on the part of the stockholder or
the Company, into an identical share of the Company's Class A Common Stock, and
all special rights granted to the holders of Class A, Class B, and Class C
Common Stock and to all holders of Series A, Series B and Series C Preferred
Stock shall cease and terminate.
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SERIES A, SERIES B AND SERIES C PREFERRED STOCK
VOTING RIGHTS. Except with respect to the election and removal of
directors, every holder of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock shall be entitled to cast that number of votes
equal to the full number of shares of Class C Common Stock into which such
holder's Preferred Stock is then convertible.
SERIES A DIRECTORS. The holders of Series A Preferred Stock voting as a
single class, are entitled to elect two directors (each, a "Series A Director").
The affirmative vote of a majority of the shares of Series A Preferred Stock
represented at a meeting at which a quorum is present is sufficient to approve
any matter with respect to which such holders are entitled to vote; provided,
that the affirmative vote of a plurality of all votes cast shall be sufficient
to elect Series A Directors. The holders of Series A Preferred Stock, at any
annual meeting or upon a special meeting called by the holders of not less than
25% of the shares of Series A Preferred Stock then outstanding, may remove any
Series A Director by the affirmative vote of at least 80% of all of the votes
entitled to be cast for such Series A Director.
SERIES B DIRECTORS. The holders of Series B Preferred Stock, voting as a
single class, are entitled to elect two directors (each, a "Series B Director").
The affirmative vote of a majority of the shares of Series B Preferred Stock
represented at a meeting at which a quorum is present is sufficient to approve
any matter with respect to which such holders are entitled to vote; provided,
that the affirmative vote of a plurality of all votes cast shall be sufficient
to elect Series B Directors. The holders of Series B Preferred Stock, at any
annual meeting or upon a special meeting called by the holders of not less than
25% of the shares of Series B Preferred Stock then outstanding, may remove any
Series B Director by the affirmative vote of at least 80% of all of the votes
entitled to be cast for such Series B Director.
SERIES C DIRECTORS. The holders of Series C Preferred Stock, voting as a
single class, are entitled to elect one director until the Company's 1998 annual
meeting of stockholders and thereafter, shall be entitled to elect two directors
(each, a "Series C Director"). The affirmative vote of a majority of the shares
of Series C Preferred Stock represented at a meeting at which a quorum is
present is sufficient to approve any matter with respect to which such holders
are entitled to vote; provided, that the affirmative vote of a plurality of all
votes cast shall be sufficient to elect Series C Directors. The holders of
Series C Preferred Stock, at any annual meeting or upon a special meeting called
by the holders of not less than 25% of the shares of Series C Preferred Stock
then outstanding, may remove any Series C Director by the affirmative vote of at
least 80% of all of the votes entitled to be cast for such Series C Director.
SPECIAL DIRECTOR APPROVAL REQUIREMENT. Pursuant to the Charter, the Company
is generally prohibited from taking certain actions without the separate
affirmative vote of each of the Series A Directors, Series B Directors, and
Series C Directors including (i) the incurrence of certain indebtedness, (ii)
amendments of the Charter or By-Laws that adversely affect the holders of Series
A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock, as the
case may be, or Class C Common Stock, (iii) with respect to the Series A and
Series B Directors, amendments to any of the employment agreements between the
Company and a Management Stockholder, or (iv) with respect to the Series C
Directors, pay any dividend on the Series A or Series B Preferred Stock prior to
September 1, 1998 unless paid in connection with a redemption.
SPECIAL PREFERRED STOCKHOLDER APPROVAL REQUIREMENT. Pursuant to the
Charter, the Company is generally prohibited from taking certain actions (each a
"Preferred Stockholder Major Decision") without the separate affirmative vote of
a majority of the shares of Series A Preferred Stock and Series B Preferred
Stock, represented at a meeting, including (i) the adoption of any business plan
of the Company, (ii) the issuance of shares or rights to acquire shares to
employees of the Company which, when aggregated with all other such issuances,
exceeds 10% of the fully diluted shares of capital stock of the Company
(provided; that shares of Class A Common Stock and rights to acquire such shares
issued to the Management Stockholders and other executive employees in amounts
not to exceed 25% of the fully diluted shares of capital stock of the Company as
of December 1, 1995 shall not be counted toward such 10% limitation), (iii) the
issuance of shares of capital stock to any person or entity which has legitimate
business interests that are materially adverse to the holders of Series A
Preferred Stock or the Series B Preferred Stock, as the case may be, (iv) any
sale or other disposition of all or any substantial portion of its assets, or
(v) certain mergers or consolidations of the Company, (vi) any underwritten
public offering other than an offering which is based upon a total market
capitalization of the Company, at the time of such offering, of at least $25
million and from which the Company receives net proceeds of not less than $15
million. Additionally, the separate vote of the holders of Series A Preferred
Stock is required for any optional redemption of the Series B Preferred Stock,
unless the Company has previously redeemed the Series A Preferred Stock. The
Charter provides that notwithstanding the failure to obtain the approval of such
Preferred Stockholder Major Decisions, the Company may nonetheless take such
actions; provided that the Company provide advance written notice of the action
and subject to the right of the holders of each Series of Preferred Stock to
require the Company to redeem all of each such Series in accordance with the
terms of the Charter.
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REDEMPTION. The Series A Preferred Stock, the Series B Preferred Stock and
the Series C Preferred Stock must be redeemed by the Company (unless such right
is waived in writing by the holder of Preferred Stock), or may be redeemed at
the request of the holders of Preferred Stock, in a number of different
circumstances, including: (i) sale of all or substantially all of the assets of
the Company; (ii) the filing by the Company of a voluntary or involuntary
petition in bankruptcy, unless dismissed within certain prescribed time periods;
(iii) the default by the Company of any obligation under certain material
indebtedness which results in the acceleration of the maturity of such
indebtedness or in any action to possess any property or assets of the Company
in respect of such indebtedness; (iv) the entry of a material judgment against
the Company, which is not dismissed, stayed, or fully bonded within 60 days; (v)
the failure by the Company to pay any amount due to the holders of the Preferred
Stock when due; (vi) any failure by the Company to perform its other material
obligations in respect of the Preferred Stock which is not cured within
prescribed time periods; (vii) with respect to the Series C Preferred Stock,
upon an initial public offering of the Company's equity securities; and (viii)
certain other events, including changes of control of various types.
CONVERSION. All, but not less than all, of the shares of the Series A and
Series B Preferred Stock are convertible, one share for one share (subject to
increase if the Company issues shares at a dilutive price), into shares of Class
C Common Stock at the option of holders of the Series A and Series B Preferred
Stock at any time prior to 5:00 p.m. (EST) on February 24, 2000. However,
holders of the Series A Preferred Stock who have not made full payment in cash
to the Company for the shares of Series A Preferred Stock may not convert their
shares. All, but not less than all, of the shares of Series C Preferred Stock
are convertible, one share for one share (subject to increase if the Company
issues shares at a dilutive price), into shares of Class C Common Stock at the
option of holders of the Series C Preferred Stock at any time. Shares of
Preferred Stock will automatically be converted (unless redeemed), one share for
one share (subject to dilution adjustments), into shares of Class C Common Stock
upon the occurrence of a combination, consolidation or merger transaction
involving the Company in which the Company is not the survivor, the sale,
exchange or other disposition of all, or substantially all, of the Company's
assets, and upon the consummation of any public offering of securities of the
Company.
The special voting and approval rights of the holders of the Preferred
Stock and their rights to require the redemption of the Preferred Stock or to
convert such Preferred Stock into Class C Common Stock may prevent the Company
from consummating one or more transactions, including equity and debt financings
that could be beneficial to the Company's stockholders.
DIVIDENDS. Prior to April 1, 2000, cash dividends at the rate of $0.325 per
share per annum accrue on the Series A Preferred Stock. Such dividends are
cumulative and will accrue, whether or not earned or declared or payment is
legally available, from and after the 24th day of February, 1995 and bear
interest on accrued but unpaid amounts at the rate of 6.5% per annum, compounded
quarterly. Such accrued dividends and interest are payable only upon the
liquidation of the Company or the redemption or conversion of the Series A
Preferred Stock and if not paid prior to April 1, 2000, the amount of such
accrued but unpaid dividends and interest payments will become an unsecured
obligation of the Company. On or after April 1, 2000, holders of the Series A
Preferred Stock are entitled to receive, when and as declared by the directors
of the Company and when legally available, cash dividends at the per annum rate
of 100 basis points over the Wall Street Journal Prime Rate as of the last
business day prior to April 1, 2000 based on the original issue price of the
Series A Preferred Stock. So long as any shares of Series A Preferred Stock are
issued and outstanding, no dividends may be declared and no other distribution
may be made, with certain exceptions, with respect to any other class or series
of stock or equity interest of the Company without the consent of each director
elected by the holders of the Series A Preferred Stock.
Prior to April 1, 2000, cash dividends at the rate of $1.097 per share per
annum accrue on the Series B Preferred Stock. Such dividends are cumulative and
will accrue, whether or not earned or declared or payment is legally available,
from and after the first day of December, 1995 and bear interest on accrued but
unpaid amounts at the rate of 9.75% per annum, compounded quarterly. Such
dividends and interest are payable only after all dividends and interest accrued
on or with respect to the Series A Preferred Stock have been paid and only upon
the liquidation of the Company or the redemption or conversion of the Series B
Preferred Stock and if not paid prior to April 1, 2000, the amount of such
accrued but unpaid dividends and interest payments will become an unsecured
obligation of the Company. On and after April 1, 2000, holders of the Series B
Preferred Stock are entitled to receive, when and as declared by the directors
of the Company and when legally available, cash dividends at the per annum rate
of 100 basis points over the Wall Street Journal Prime Rate as of the last
business day prior to April 1, 2000 based upon the original issue price of the
Series B Preferred Stock.
Cash dividends at the rate of $1.40 per share per annum accrue on the
issued and outstanding Series C Preferred Stock and cash dividends at the rate
of $1.60 per share per annum shall accrue on shares to be issued pursuant to the
Option Agreement with Genesis. Such dividends are cumulative and will accrue,
whether or not earned or declared or payment is
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legally available, from and after September 4, 1996 and bear interest on accrued
but unpaid amounts at the rate of 8.00% per annum. Such dividends and interest
are payable only after all dividends and interest accrued on or with respect to
the Series A and Series B Preferred Stock have been paid and only upon the
liquidation of the Company or the redemption or conversion of the Series C
Preferred Stock and if not paid, the amount of such accrued but unpaid dividends
and interest payments will become an unsecured obligation of the Company,
bearing interest at the per annum rate of 100 basis points over the Wall Street
Journal Prime Rate as of the last business day prior to such liquidation,
redemption or conversion. All accrued dividends and unpaid interest on the
Series C Preferred Stock shall be canceled and no longer be payable in the event
the Company consummates a Qualified Public Offering on or before August 30, 1998
at a price per share of not less than the weighted average price paid or to be
paid by the holders of Series C Preferred Stock for all shares of Series C
Preferred Stock then outstanding or subject to the Option, plus all accrued but
unpaid dividends and interest thereon. So long as any shares of Series C
Preferred Stock remain outstanding, no dividends shall be declared or paid upon,
nor shall any dividend or other distribution be made with respect to, any shares
or any other class or series of stock or equity interest of the Company other
than the Series A Preferred Stock or Series B Preferred Stock without the
consent of the Series C Preferred Director or Directors.
The Company may not issue any shares of capital stock which are senior in
dividend and/or liquidation rights to the Preferred Stock, and the Preferred
Stockholders have certain anti-dilution rights with respect to most issuances of
capital stock by the Company which are junior to the Preferred Stock and which
are issued for a share price less than the original per share price of the
Preferred Stock.
LIQUIDATION RIGHTS. Upon liquidation of the Company, holders of the Series
A Preferred Stock, if any, are entitled to receive a liquidating distribution
equal to the greater of (i) the sum of the fair market value per share of the
Series A Preferred Stock plus all accrued but unpaid dividends thereon, or (ii)
the sum of the original purchase price per share of the Series A Preferred Stock
plus all accrued but unpaid dividends thereon. After payment of such
preferential amount to the holders of the Series A Preferred Stock, holders of
the Series B Preferred Stock, if any, are entitled to receive a liquidating
distribution equal to the greater of (i) the sum of the fair market value per
share of the Series B Preferred Stock plus all accrued but unpaid dividends
thereon, or (ii) the sum of the original purchase price per share of the
Preferred Stock plus all accrued but unpaid dividends thereon. After payment of
such preferential amount to the holders of the Series A and Series B Preferred
Stock, holders of the Series C Preferred Stock, if any, are entitled to receive
a liquidating distribution in the amount of $17.50 per share of Series C
Preferred Stock issued pursuant to the Stock Purchase Agreement which is then
outstanding and $20.00 per share of Series C Preferred Stock issued pursuant to
the Option Agreement which is then outstanding, plus all accrued but unpaid
dividends and interest thereon. After payment of the preferential liquidation
amounts to the holders of Series A, Series B and Series C Preferred Stock, each
share of Common Stock is entitled to share ratably with all other shares of
Common Stock in the remaining net assets of the Company upon liquidation.
PERMITTED REDEMPTIONS
The Charter provides that the Company may effect the following redemptions
without the consent or approval of any of the Series A Preferred Directors, the
Series B Preferred Directors, the Series C Preferred Directors, the holders of
Series A Preferred Stock, the holders of Series B Preferred Stock and the
holders of Series C Preferred Stock:
(i) upon the payment in full of all accumulated and unpaid accrued
dividends and interest on all outstanding shares of Preferred
Stock, redemptions of shares of Class A Common Stock owned by any
"Management Stockholders" (Mr. Gold and Drs. Kimmel and Rifkin)
only and to the extent required by such Management Stockholder's
employment agreement, except that such redemptions may be made
without payment of accrued dividends and interest on outstanding
shares of Series C Preferred Stock if the Company completes a
Qualified Public Offering of its securities prior to August 30,
1998;
(ii) redemptions of shares of Class A Common Stock owned by any
employee (other than a Management Stockholder) when and as
approved by the Board or required by law or by the terms of any
agreement with such employee;
(iii) redemptions of Class B Common Stock issued by the Company to
MHLP, until such time as there are more than 66 physicians
holding limited partnership interests in MHLP;
(iv) redemptions under any other circumstances expressly contemplated
by the Stockholders Agreement, including any amendments thereto
(see "Stockholders Agreement");
(v) certain redemptions of Series A Preferred Stock;
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(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; or
(vii) certain redemptions of Series C Preferred Stock in accordance
with the Charter; provided, that no such redemption shall be
permitted or effected unless and until the Company has elected
to redeem all of the issued and outstanding Series A and Series
B Preferred Stock and the price applicable to such redemption
shall have been paid in full or adequate provision made
therefor.
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 Class B Common Stock
covered by the Registration Statement and offered by this Prospectus and any
accompanying Prospectus Supplement and may be attached to or separate from such
Class B Common Stock. Certain details as to each offering 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 certain details as to
each offering of such Options, including the following where applicable: (i) the
offering price; (ii) the number of shares of Class B Common Stock for which each
such Option is exercisable; and (iii) certain federal income tax consequences.
The Options will be issued pursuant to an Option Agreement, between the
Company and the holder of such Option. None of the Options have been issued
prior to the date of this Prospectus. The following discussion of the material
terms and provisions of the Options is qualified in its entirety by reference to
the detailed provisions of the Option Agreement, the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus forms a part.
Each Option will entitle the holder to purchase, at any time until the
tenth anniversary of the date of the Option Agreement, one share of Class B
Common Stock at an exercise price set forth in the Option Agreement. The Options
may be exercised in whole or in part. Unless exercised, the Options will
automatically expire on the tenth anniversary of the date of this Prospectus.
For a holder to exercise the Options, there must be a current registration
statement in effect with the Commission and qualification with or approval from
various state securities agencies with respect to the shares of Class B Common
Stock underlying the Options, or an opinion of counsel for the Company that
there is an effective exemption from registration. As long as the Options remain
outstanding and exercisable, the Company will use its reasonable efforts to
maintain the effectiveness of such registration statement. There can be no
assurance, however, that the effectiveness of such registration statement can be
maintained. If a registration statement covering such shares of Class B Common
Stock is not kept current for any reason, or if the shares underlying the
Options are not registered in the state in which a holder resides, the Options
will not be exercisable unless there is an exemption from applicable
registration requirements. See "Risk Factors--Federal and State Registration
Requirements; Possible Inability to Exercise Options."
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, unexercised
Options will become void.
Options may be exercised by delivering to the Company payment, as provided
in the applicable Option Agreement, 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 necessary notice 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 are exercised, a new option agreement will be executed for the
remaining amount of Options.
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AMENDMENTS AND SUPPLEMENTS TO OPTION AGREEMENTS.
Each Option Agreement may be amended or supplemented without the consent of
the holders of the Options issued thereunder to effect changes that are not
inconsistent with the provisions of the Options and that do not adversely affect
the interests of the holders of the Options.
OPTION ADJUSTMENTS.
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) in the event that any change is made to the Class B Common Stock (whether by
reason of a recapitalization or stock dividend, stock split or other change in
capital structure); or (ii) in the event of a merger or other business
combination; or (iii) the distribution to all holders of Common Stock of
evidences of indebtedness or assets of the Company.
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.
PLAN OF DISTRIBUTION
Securities may be issued from time to time in connection with the
affiliation of medical practices with the Company. Except in connection with the
exercise of the Options, the Company will not receive cash proceeds from the
issuance of the Securities. Securities may be issued by the Company as
consideration in one or a combination of the following types of transactions:
(i) as consideration for acquisitions of certain assets of medical practices;
(ii) as consideration pursuant to IPA participation agreement; or (iii) as
compensation pursuant to employment arrangements between the physician and a
Core Medical Group. A Prospectus Supplement will set forth certain details as to
the offering of the Securities offered thereby, including, without limitation,
to the extent applicable (1) in the case of Options, the Class B Common Stock
for which each such Option is exercisable, and the exercise price; and (2) in
the case of any offering of Securities, to the extent applicable, the offering
price, and certain Federal income tax consequences. With respect to offerings of
Securities in connection with the acquisition of certain assets of medical
practices, a Prospectus Supplement will be provided which will contain
information about the specific transaction and the particular medical practice
involved in the transaction. It is not expected that underwriting discounts or
commissions will be paid by the Company.
The value of the Class B Common Stock will be determined by the Company's
management and Board of Directors based upon the Company's results of operations
and current financial condition, recent sales of the Company's securities and
arms' length negotiations with potential purchasers, estimates of the business
potential and prospects of the Company, the economics of the health care
industry in general, the general condition of the equity securities market in
general and other relevant factors.
The Securities issued hereunder will be new issues of securities with no
established trading market. The Company does not currently intend to apply for
the listing of any Securities on any national securities exchange. No assurance
can be given as to the liquidity of the trading market for any such Securities.
The Securities offered hereby will be subject to certain contractual
restrictions on resale, including the Stockholders Agreement. See "Description
of Capital Stock", "Risk Factor--Voting Limitations; Restrictions on Resale of
Securities" and "--Absence of Public Market" and "--Penny Stock Rules."
ACQUISITION OF MEDICAL PRACTICES.
It is anticipated that the acquisitions of the medical practices will
involve the receipt by the Company of substantially all of the business of such
medical practices (primarily enumerated tangible assets of such practices and
related contractual rights). The terms of an acquisition of a medical practice
are determined by negotiations between the Company's representatives and
physicians. Factors taken into account in such transactions with respect to the
amount of Securities to be issued in such transactions include the established
size, quality and reputation of the practice and the Company's estimate of the
value of the Securities. It is anticipated that shares of Class B Common Stock
issued in any such acquisitions will, in most cases, be valued at a price
reasonably related to the current value of the Class B Common Stock, either at
the time that the terms of the
67
<PAGE>
affiliation agreement are tentatively agreed upon, or at or about the time of
closing, or during the period or periods prior to delivery of the Securities.
CONTRACTUAL ARRANGEMENTS--IPA ARRANGEMENTS.
It is anticipated that the entry by the Company into IPA arrangements will
involve the agreement by a medical practice to authorize the Company to
negotiate service contracts on its behalf. See "BUSINESS--Development of
Integrated Health Care Delivery System--Independent Physicians Associations."
The terms of an IPA arrangement are determined by negotiations between the
Company's representatives and physicians. Factors taken into account in such
transactions with respect to the amount of Securities to be issued in such
transactions include the commercial terms of the particular IPA arrangement, the
established size, quality and reputation of the practice and the Company's
estimate of the value of the Class B Common Stock. It is anticipated that shares
of Class B Common Stock issued in any such IPA arrangements will, in most cases,
be valued at a price reasonably related to the current value of the Class B
Common Stock, either at the time that the terms of the IPA arrangement are
tentatively agreed upon, or at or about the time of closing, or during the
period or periods prior to delivery of the Securities.
CONTRACTUAL ARRANGEMENTS--EMPLOYMENT ARRANGEMENTS
It is anticipated that the entry by the Company into employment
arrangements will involve the agreement by the employee to furnish services to
the Company or a Core Medical Group. See "BUSINESS--Development of Integrated
Health Care Delivery System--Employment of Physicians by the Core Medical
Group." The terms of an employment arrangement are determined by negotiations
between the Company's representatives and employees. Factors taken into account
in such transactions with respect to the amount of Securities to be issued in
such transactions include the commercial terms of the particular employment
arrangement, the established size, quality and reputation of the practice of the
employee and the Company's estimate of the value of the Class B Common Stock. It
is anticipated that shares of Class B Common Stock issued in any such employment
arrangements will, in most cases, be valued at a price reasonably related to the
current value of the Class B Common Stock, either at the time that the terms of
the affiliation agreement are tentatively agreed upon, or at or about the time
of closing, or during the period or periods prior to delivery of the shares.
SHARES ELIGIBLE FOR RESALE
Although there is no public market for the Securities and it is not
anticipated that a public market will develop in the near future, sales of
substantial shares of the Company's capital stock could adversely affect the
price at which the Securities could be resold and could impair the Company's
future ability to raise capital through an offering of its equity securities.
All of the Class B Common Stock issued pursuant to this Prospectus or
issued upon exercise of Options granted pursuant to this Prospectus will be
subject to significant restrictions on transfer pursuant to the Stockholders
Agreement to which each person acquiring shares will be a party. Additionally,
the Options will be non-transferable except in the case of death. Without regard
to such contractual restrictions, however, such Securities will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchases by an existing "affiliate" of the Company as
that term is defined under the Securities Act (an "Affiliate"), which Securities
will be subject to the resale limitations of Rule 144 adopted under the
Securities Act.
As of the date of this Prospectus, there are 800,000 shares of Class A
Common Stock and 2,504,000 shares of Class B Common Stock issued and
outstanding. In addition, up to 562,219 shares of Class A Common Stock, 117,000
shares of Class B Common Stock and 1,784,127 shares of Class C Common Stock are
issuable upon the exercise or conversion of options, warrants or Preferred
Stock. Securities previously acquired were issued by the Company in private
transactions not involving a public offering and are "restricted securities" for
purposes of Rule 144 adopted under the Securities Act. In addition to the
contractual limitations set forth in the Stockholders Agreement, such securities
may not be resold in a public distribution, except in compliance with the
registration requirements of the Securities Act, pursuant to a valid exemption
therefrom or pursuant to Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Securities which are restricted securities for at
least two years (including the holding period of any prior owner except an
affiliate of the Company) would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of: (i) one percent
of the number of Securities then outstanding; or (ii) the average weekly trading
volume of the Securities during the four calendar weeks preceding such sale,
subject to the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of
68
<PAGE>
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an Affiliate at any time during the 90 days immediately
preceding a sale, and who has beneficially owned the Securities proposed to be
sold for at least three years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such Securities without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144. Persons deemed to be Affiliates must always sell pursuant to Rule
144, even after the applicable holding periods have been satisfied.
The Commission has recently proposed amendments to Rule 144 that would
permit resales of restricted securities after a one-year, rather than a two-year
holding period, subject to compliance with the other provisions of Rule 144, and
would permit resale of restricted securities by non-Affiliates under Rule 144(k)
after a two-year, rather than a three-year holding period. If adopted, such
amendments could result in resales of restricted securities sooner than would be
the case under Rule 144 as currently in effect.
Ninety days after the date of this Prospectus, all of the 800,000 shares of
Class A Common Stock presently outstanding will be available for resale in
compliance with all of the conditions of Rule 144. In February 1995, 2,200,000
shares of the outstanding Class B Common Stock will be available for resale in
compliance with all of the conditions of Rule 144. The remaining 304,000 shares
of Class B Common Stock outstanding may be resold at various times in 1998 in
compliance with all of the conditions of Rule 144. The 1,000,000 outstanding
shares of Series A Preferred Stock (or the shares of Class C Common Stock
acquired upon conversion of those shares) will be available for resale in
compliance with all of the conditions of Rule 144 in February 1997. The 355,556
outstanding shares of Series B Preferred Stock (or the shares of Class C Common
Stock acquired upon conversion of those shares) will be available for resale
pursuant to all of the conditions of Rule 144 in December 1997. The 428,571
outstanding shares of Series C Preferred Stock (or the shares of Class C Common
Stock acquired upon conversion of those shares) will be available for resale, in
compliance with all of the conditions of Rule 144, in September 1998.
The 112,889 shares of Class A Common Stock issuable upon exercise of
outstanding warrants will also be deemed restricted securities. Depending on the
method of exercise, such shares may be available for resale in December 1997 or
two years from the date of exercise, subject to all of the conditions of Rule
144.
Subject to certain limitations, Rule 701 promulgated under the Securities
Act may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants or
advisors prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act pursuant to written compensatory benefit plans
or written contracts relating to the compensation of such persons. The
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercise of such options
(including exercises after the date of this Prospectus). Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions of the Stockholders Agreement beginning 90 days after the date of
this Prospectus, may be sold by persons other than Affiliates subject only to
the manner of sale provisions of Rule 144 and by Affiliates under Rule 144
without compliance with its two-year minimum holding period requirements.
As of the date of this Prospectus, options to purchase 467,330 shares of
Class A or Class B Common Stock have been issued, pursuant to the Company's
Omnibus Stock Option Plan of which options to purchase approximately 92,580
shres are vested and exercisable. Options to purchase 92,500 shares of Class A
Common Stock will vest in December 1996. The remaining options outstanding
options will vest at various times in 1997 through 2001. Shares of common stock
issued upon exercise of such options may be resold 90 days after the date of
this Prospectus by persons other than affiliates subject only to the manner of
sale provisions of Rule 144 and by Affiliates without compliance with its
two-year minimum holding period requirements.
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 Company's financial statements as of June 30, 1996 and 1995 and for the
year and period then ended, respectively 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.
69
<PAGE>
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DOCTORS HEALTH SYSTEM, INC.
JUNE 30, 1995 AND 1996
AND
SEPTEMBER 30, 1995
AND 1996 (UNAUDITED)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-----
<S> <C>
DOCTORS HEALTH SYSTEM, INC.
Report of Independent Certified Public Accountants.................................................................... F-2
Consolidated Financial Statements
Balance Sheets...................................................................................................... F-3
Statements of Operations............................................................................................ F-4
Statements of Stockholders' Equity.................................................................................. F-5
Statements of Cash Flows............................................................................................ F-6
Notes to Consolidated Financial Statements............................................................................ F-7
Schedule II--Valuation and Qualifying Accounts........................................................................ F-24
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Description........................................................................................................... F-25
Consolidated Pro Forma Financial Statements--June 30, 1996
Balance Sheet....................................................................................................... F-26
Balance Sheet--Supplemental Schedules
Acquisitions Completed Subsequent to June 30, 1996............................................................... F-27
Probable Acquisitions............................................................................................ F-28
Notes to Balance Sheet........................................................................................... F-29
</TABLE>
<TABLE>
<S> <C>
Consolidated Pro Forma Financial Statements--September 30, 1996
Description......................................................................................................... F-30
Balance Sheet....................................................................................................... F-31
Balance Sheet--Supplemental Schedules
Acquisitions Completed Subsequent to September 30, 1996.......................................................... F-32
Probable Acquisitions............................................................................................ F-33
Notes to Balance Sheet........................................................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
DOCTORS HEALTH SYSTEM, INC.
We have audited the accompanying restated consolidated balance sheets of
Doctors Health System, Inc. (a Maryland corporation), as of June 30, 1996 and
1995, and the related restated consolidated statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 1996 and for
the period February 24, 1995 (date of inception) to June 30, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the restated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
Doctors Health System, Inc. as of June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the year ended June 30, 1996
and for the period February 24, 1995 (date of inception) to June 30, 1995, in
conformity with generally accepted accounting principles.
We have also audited Schedule II--Valuation and Qualifying Accounts for the
year ended June 30, 1996 and the period February 24, 1995 (date of inception) to
June 30, 1995. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Baltimore, Maryland
October 3, 1996
F-2
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
(RESTATED) NOTE 1 (UNAUDITED) NOTE 20
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes 1, 4 and 9)........................... $ 131,885 $ 1,419,295 $ 799,395 $ 6,620,516
Accounts receivable (net of allowance for doubtful accounts of $43,425
and $324,521 at June 30, 1995 and 1996, respectively) (notes 1, 2, 6
and 7)............................................................... 339,802 1,303,941 362,078 1,702,499
Accounts receivable-affiliates (note 1)................................ 215,437 1,208,685 244,000 1,154,740
Other receivables...................................................... 29,998 64,251 25,402 82,613
Prepaid expenses....................................................... 154,490 117,096 90,992 180,559
Due from affiliates (note 19).......................................... 13,701 891,985 286,461 1,272,914
----------- ----------- ------------- -------------
Total current assets................................................. 885,313 5,005,253 1,808,328 11,013,841
PROPERTY AND EQUIPMENT, net (notes 1, 2, 6 and 7)........................ 248,172 2,485,547 564,483 2,650,245
OTHER ASSETS
Intangibles (net of accumulated amortization of $216 and $65,170 at
June 30, 1995 and 1996 respectively) (notes 1 and 2)................. 23,104 2,448,030 26,625 2,886,235
Deferred charges (net of accumulated amortization of $9,733, and
$147,475, at June 30, 1995 and 1996, respectively) (note 1).......... 136,267 636,772 127,579 793,965
Note receivable (note 5)............................................... -- 300,000 -- 300,000
Accrued interest receivable............................................ 67,752 253,976 120,000 303,664
Deposits............................................................... 149,563 24,560 131,178 51,228
----------- ----------- ------------- -------------
376,686 3,663,338 405,382 4,335,092
----------- ----------- ------------- -------------
TOTAL ASSETS......................................................... $ 1,510,171 $11,154,138 $ 2,778,193 $ 17,999,178
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bridge Loan (note 18).................................................. -- -- -- 983,017
Notes payable (note 7)................................................. $ 54,366 $ 303,915 63,438 135,800
Current maturities of capital lease obligations (notes 7 and 8)........ 6,702 101,985 5,788 105,521
Accounts payable....................................................... 76,420 330,647 571,388 394,363
Accrued medical services............................................... -- 550,520 -- 990,050
Other accrued expenses................................................. 352,967 2,069,579 1,214,717 1,772,387
Due to affiliates (note 19)............................................ 321,544 766,475 16,556 1,286,747
----------- ----------- ------------- -------------
Total current liabilities............................................ 811,999 4,123,121 1,871,887 5,667,885
LONG-TERM OBLIGATIONS
Note payable (note 7).................................................. -- 3,400,000 -- 3,600,000
Notes payable and purchase obligations--related parties (notes 7 and
14).................................................................. 584,406 2,077,364 773,303 2,233,222
Capital lease obligations, less current maturities (notes 7 and 8)..... 2,933 320,673 -- 292,428
----------- ----------- ------------- -------------
587,339 5,798,037 773,303 6,125,650
COMMITMENTS AND CONTINGENCIES (note 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK (notes 7, 9, 10, and 14)
6.5% cumulative, Series A, $5 par value, authorized and issued
1,000,000 shares (liquidation value $3,500,000 at June 30, 1996)..... 4,948,300 5,273,305 5,029,550 5,354,555
Less subscription receivable........................................... (3,000,000) (1,500,000) (2,500,000) (1,500,000)
----------- ----------- ------------- -------------
1,948,300 3,773,305 2,529,550 3,854,555
9.75% cumulative, Series B, $11.25 par value, authorized and issued
355,556 shares (liquidation value $4,000,000 at June 30)............. -- 4,137,526 -- 4,235,037
8% cumulative, Series C, $17.50 par value, authorized 1,071,428 shares;
issued and outstanding 428,751 shares (liquidation value
$7,500,000).......................................................... -- -- -- 7,533,463
----------- ----------- ------------- -------------
1,948,300 7,910,831 2,529,550 15,623,055
STOCKHOLDERS' EQUITY (DEFICIT) (notes 11, 12 and 13)
Preferred Stock, $.01 par value; authorized 1,000,000 shares, no shares
issued............................................................... -- -- -- --
Common Stock
Class A, $.01 par value, authorized 20,700,000 shares, issued and
outstanding 800,000 shares at June 30, 1995 and 1996,
respectively....................................................... 8,000 8,000 8,000 8,000
Class B, $.01 par value; authorized 10,000,000; issued and
outstanding 2,200,000 shares and 2,398,000 shares, respectively, at
June 30, 1995 and 1996............................................. 22,000 23,980 22,000 24,400
Class C, $.01 par value; authorized 29,050,000; no shares issued..... -- -- -- --
Additional paid in capital........................................... 1,518 2,323,798 2,838 2,617,378
Retained earnings (accumulated deficit).............................. (1,868,985) (9,033,629) (2,429,385) (12,067,190)
----------- ----------- ------------- -------------
Total stockholders' equity (deficit)............................... (1,837,467) (6,677,851) (2,396,547) (9,417,412)
----------- ----------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)............... $ 1,510,171 $11,154,138 $ 2,778,193 $ 17,999,178
----------- ----------- ------------- -------------
----------- ----------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 24, THREE MONTHS THREE MONTHS
1995 (INCEPTION) YEAR ENDED ENDED ENDED
TO JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
----------------- ----------- ------------- -------------
<CAPTION>
(RESTATED) NOTE 1 (UNAUDITED) NOTE 20
<S> <C> <C> <C> <C>
REVENUES
Net revenue (notes 1 and 3)................................ $ 850,665 $ 5,428,561 $ 557,067 $ 2,194,511
Capitation revenue (note 1)................................ -- 689,068 -- 1,267,613
----------------- ----------- ------------- -------------
850,665 6,117,629 557,067 3,462,124
----------------- ----------- ------------- -------------
EXPENSES
Medical services expense................................... -- 969,677 -- 1,195,501
Care center costs.......................................... 776,865 5,287,348 486,251 2,103,519
General and administrative................................. 1,877,735 6,082,902 536,115 2,670,080
Depreciation and amortization.............................. 27,508 435,573 50,545 224,384
----------------- ----------- ------------- -------------
2,682,108 12,775,500 1,072,911 6,193,484
----------------- ----------- ------------- -------------
Loss from operations.................................... (1,831,443) (6,657,871) (515,844) (2,731,360)
OTHER INCOME (EXPENSE)
Interest and other income.................................. 99,673 272,666 71,805 69,038
Interest expense........................................... (23,915) (226,908) (35,111) (148,215)
----------------- ----------- ------------- -------------
75,758 45,758 36,694 (79,177)
----------------- ----------- ------------- -------------
Loss before income taxes................................ (1,755,685) (6,612,113) (479,150) (2,810,537)
Income taxes (note 16)..................................... -- -- -- --
----------------- ----------- ------------- -------------
NET LOSS.............................................. $(1,755,685) $(6,612,113) $ (479,150) $(2,810,537)
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
Loss applicable to common stock
Net loss................................................ $(1,755,685) $(6,612,113) $ (479,150) $(2,810,537)
Preferred stock dividends accreted...................... 113,300 552,531 81,250 223,024
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
Loss applicable to common stock......................... $(1,868,985) $(7,164,644) $ (560,400) $(3,033,561)
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
Net loss per share (note 16)................................. $(.62) $(2.34) $(.19) $(.95)
------ ----------- ------ ------
------ ----------- ------ ------
Weighted average number of shares outstanding (note 16)...... 3,000,000 3,063,205 3,000,000 3,206,217
----------------- ----------- ------------- -------------
----------------- ----------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(RESTATED) NOTE 1
<TABLE>
<CAPTION>
COMMON STOCK-- COMMON STOCK-- RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS/
----------------- -------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
-------- ------ ---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 24, 1995(1).... 800,000 $8,000 -- $ -- $ 198 $ -- $ 8,198
Net loss for the period.......... -- -- -- -- -- (1,755,685) (1,755,685)
Issuance of Class B Common
Stock (1)..................... -- -- 2,200,000 22,000 -- -- 22,000
Series A Preferred Stock dividend
accretion..................... -- -- -- -- -- (113,300) (113,300)
Capital related to MHLP
transactions.................. -- -- -- -- 1,320 -- 1,320
-------- ------ ---------- ------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1995........... 800,000 8,000 2,200,000 22,000 1,518 (1,868,985) (1,837,467)
Net loss for the year............ -- -- -- -- -- (6,612,113) (6,612,113)
Issuance of common stock purchase
warrants for services (note
13)........................... -- -- -- -- 370,000 -- 370,000
Issuance of Class B Common
Stock......................... -- -- 198,000 1,980 592,020 -- 594,000
Series A Preferred Stock dividend
accretion..................... -- -- -- -- -- (325,005) (325,005)
Series B Preferred Stock dividend
accretion..................... -- -- -- -- -- (227,526) (227,526)
Capital related to MHLP
transactions.................. -- -- -- -- 1,360,260 -- 1,360,260
-------- ------ ---------- ------- ----------- ------------ -----------
BALANCE AT JUNE 30, 1996........... 800,000 8,000 2,398,000 23,980 2,323,798 (9,033,629) (6,677,851)
-------- ------ ---------- ------- ----------- ------------ -----------
Net loss for the three month
period........................ -- -- -- -- -- (2,810,537) (2,810,537)
Series A Preferred Stock dividend
accretion..................... -- -- -- -- -- (81,250) (81,250)
Series B Preferred Stock dividend
accretion..................... -- -- -- -- -- (97,511) (97,511)
Series C Preferred Stock dividend
accretion..................... -- -- -- -- -- (44,263) (44,263)
Issuance of Class B Common
Stock......................... -- -- 42,000 420 293,580 -- 294,000
-------- ------ ---------- ------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1996
(UNAUDITED)...................... 800,000 $8,000 2,440,000 $24,400 $ 2,617,378 $(12,067,190) $(9,417,412)
-------- ------ ---------- ------- ----------- ------------ -----------
-------- ------ ---------- ------- ----------- ------------ -----------
</TABLE>
- ---------------
(1) All DHS share amounts have been restated to give effect to a two-for-one
stock split.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FEBRUARY 24 THREE MONTHS THREE MONTHS
(INCEPTION) YEAR ENDED ENDED ENDED
TO JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
---------------- ----------- ------------- -------------
<CAPTION>
(RESTATED) NOTE 1 (UNAUDITED) NOTE 20
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (1,755,685) $(6,612,113) $(479,150) $(2,810,537)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization............................ 27,508 435,573 50,545 224,234
Provision for uncollectible accounts receivables......... 43,425 281,096 17,315 60,211
Changes in assets and liabilities, net of effects of
medical practice receivables acquired
Accounts receivable.................................... 40,559 (526,897) 59,709 (391,447)
Accounts receivable--affiliates........................ (31,931) (327,386) 38,354 99,607
Prepaid expenses and other receivables................. (219,436) (178,583) 15,846 (131,513)
Due from/to affiliates................................. 307,843 (433,353) (577,748) 139,343
Accounts payable....................................... 76,420 231,649 494,968 63,716
Accrued and other liabilities.......................... 364,473 2,340,798 884,430 185,212
Organizational costs and deferred charges.............. (146,000) (268,248) -- (226,122)
---------------- ----------- ------------- -------------
Net cash (used in) provided by operating
activities........................................ (1,292,824) (5,057,464) 504,269 (2,787,296)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (238,926) (2,129,464) (340,664) (371,222)
Payments for acquisition costs.............................. (22,000) (42,773) (2,840) (92,986)
Deposits.................................................... (149,563) 127,395 18,385 (26,668)
---------------- ----------- ------------- -------------
Net cash used in investing activities............... (410,489) (2,044,842) (325,119) (490,876)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible
preferred stock.......................................... 1,835,000 5,410,000 500,000 7,489,200
Net proceeds from issuance of common stock.................. 198 -- -- --
Borrowings under notes payable.............................. -- 3,400,000 -- 1,183,017
Principal payments on capital lease obligations............. -- (79,157) (3,847) (24,709)
Payment on notes payable.................................... -- (41,127) (7,793) (168,115)
Issuance of note receivable................................. -- (300,000) -- --
---------------- ----------- ------------- -------------
Net cash provided by financing activities........... 1,835,198 8,389,716 488,360 8,479,393
Net increase in cash and cash equivalents........... 131,885 1,287,410 667,510 5,201,221
Cash and cash equivalents at beginning of period.............. -- 131,885 131,885 1,419,295
---------------- ----------- ------------- -------------
Cash and cash equivalents at end of period.................... $ 131,885 $ 1,419,295 $ 799,395 $ 6,620,516
---------------- ----------- ------------- -------------
---------------- ----------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Doctors Health System, Inc., a Maryland corporation, and its subsidiaries
(collectively "the Company") is a health care management company are engaged in
operating care centers, managing physician groups and developing a regional
integrated health care delivery system through contracts with primary care
physicians ("PCPs"), specialist physicians, hospitals and other providers. The
Company was incorporated in June, 1994 and commenced operations on February 24,
1995. The Company, directly and through wholly-owned subsidiaries, acquires
certain assets of and operates physician practices under long-term physician
service agreements ("PSO Agreements") with affiliated core medical groups
("CMG's") that practice exclusively through such physician practices.
The Company provides administrative and technical support for professional
services rendered by the CMG's under service agreements. Under the PSO
agreements, the Company is reimbursed for all care center expenses, as defined
in the agreement, and participates at varying levels in the excess of net
physician revenue over care center expenses.
The Company conducts its operations through the following wholly owned and
majority owned subsidiaries and affiliated medical groups under long-term PSO
Agreements:
SUBSIDIARIES
<TABLE>
<S> <C>
Doctors Health System Primary Care IPA, Inc. 100.0% owned
(inactive during 1996 and 1995)...................................................
Doctors Health System--Medalie Equipment 100.0% owned
Corporation (incorporated in 1996)................................................
Mishner Newco, Inc. (incorporated in January 1996).................................. 100.0% owned
Williams Newco, Inc. (incorporated in May 1996)..................................... 100.0% owned
WomanCare IPA, LLC 87.5% owned
(formed in May 1995; inactive during 1995)........................................
PCPA Newco, Inc. (incorporated in February 1996).................................... 100.0% owned
</TABLE>
AFFILIATES
Baltimore Medical Group, LLC (Baltimore Medical, formed in February
1995)
Carroll Medical Group, LLC (Carroll Medical, formed in November 1995)
Cumberland Valley Medical Group, LLC (Cumberland Valley Medical, formed
in May 1996)
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company previously prepared its consolidated financial statements
including the asset, liability and results of operations of certain affiliates
with which the Company entered into long-term management contracts.
Notwithstanding the financial, administrative and other relationships that exist
between the Company and the affiliates, management has determined that its
business is effectively a health care management company. Accordingly these
financial statements have been restated to give effect to this change and the
assets, liabilities and results of operations of affiliates are no longer
consolidated.
BASIS OF PRESENTATION/PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its
subsidiaries. The Company has adopted a June 30th year end. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
F-7
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
NET REVENUE RECOGNITION
The Company's net revenues represent contractual management and similar
fees earned under its long-term PSO Agreements with Core Medical Groups. Under
the PSO Agreements, the Company is contractually responsible and at risk for the
operating costs of the Core Medical Groups, with the exception of amounts
retained by physicians. The Company's net revenues include the reimbursement of
all medical practice operating costs and the contractual management fees due as
defined and stipulated in the PSO Agreements. Contractual fees are recognized
when collection is probable. (See Note 3)
CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
The Company has three global capitated contracts and ten gatekeeper
capitation contracts with eleven HMOs. Under the contracts, the Company receives
monthly capitation fees based on the number of enrollees electing any one of the
Company's affiliated primary care physicians. The captitation revenue under
these contracts is prepaid monthly based on the number of enrollees and is
recognized as capitation revenue during the month services are provided to the
enrollees. During the year ended June 30, 1996, approximately $382,000 and
$307,000, were recorded as global capitation and gatekeeper capitation revenue,
respectively, in the Company's financial statements. During the period ended
June 30, 1995, the Company had no global or gatekeeper capitation contracts.
The Company's commercial capitation contract also includes a provision
whereby the Company can earn additional incentive revenue or incur medical
services expenses based upon the enrollees' utilization of hospital services.
Estimated amounts receivable or payable from the HMO are recorded based upon
actual hospital utilization and associated costs incurred by assigned HMO
enrollees, compared to the portion of the Commercial capitation fees allocated
for hospitalization. Differences between actual contract settlements and
estimated receivables or payables relating to the arrangement are recorded in
the year of settlement. Included in accrued medical services as of June 30, 1996
is approximately $68,000 of estimated amounts due to the HMO under this
arrangement. Also, as of June 30, 1996, the Company has included in accrued
medical services a provision of approximately $77,000 which represents an
estimate of the loss to be incurred over the remaining term of the commercial
capitation contract. Under the Company's two Medicare full risk capitation
contracts, the Company has assumed responsibility for managing and paying for
substantially all of the medical care for the respective payors' enrollees.
The Company is responsible for some or all of the medical services provided
by its affiliated physicians and other providers to which it refers patients who
are covered under global capitated contracts. The cost of medical services is
recognized in the period in which it is provided and includes an estimate of the
cost of services which have been incurred but not yet reported. The estimate for
accrued medical services is based on projections of costs using historical
studies of claims paid. Estimates are continually monitored and reviewed and, as
settlements are made or estimates are adjusted, differences are reflected in
current operations. As of June 30, 1996, approximately $400,000 was recorded as
accrued medical services for incurred but not reported services.
The Company purchases insurance from independent insurance companies which
limits the amount of risk it ultimately bears by providing reimbursement
payments once medical services provided to an individual enrollee exceed an
agreed-upon amount. Under the Commercial capitation contract, the Company is
insured for 90% of all medical services expense over $5,000 per enrollee per
year. Under the Medicare full risk capitation contracts, the Company is insured
for 90% of all physician and hospital medical services expense over $5,000 and
$75,000, respectively, per enrollee per year. Estimates of insurance recoveries
as of June 30, 1996 under this arrangement were approximately $23,000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
F-8
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from third party
payors and patients for patient medical services provided by affiliated CMG's.
The accounts receivable have been assigned to the Company under the terms of the
PSO agreements. Such amounts are recorded net of contractual allowances and
estimated bad debts.
ACCOUNTS RECEIVABLE--AFFILIATES
Accounts receivable--affiliates include amounts due from the CMG for
Medicare and Medicaid services provided in respect of which the Company has
legal rights to the proceeds. As of June 30, 1995 and 1996, $215,437 and
$1,208,685, respectively represented such amounts.
MEDICAL SUPPLIES
The Company expenses the cost of routine medical and laboratory supplies
when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, ranging from three to ten
years. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter. Leased
property under capital leases is amortized over the lives of the respective
leases or over the service lives of the assets, whichever is shorter. The
straight-line method of depreciation is followed for substantially all assets
for financial reporting purposes and accelerated methods are used for tax
purposes.
DEFERRED CHARGES AND INTANGIBLE ASSETS
Deferred charges include deferred loan acquisition costs and organization
costs. These costs are being amortized to operations using the straight-line
basis over the term of the Series B Preferred shareholder's loan guarantee (25
months) and five years for organization costs.
As a result of the Company's acquisitions of certain practice assets and
affiliations with CMG's, the Company acquires and reports intangible assets.
These assets consist principally of long-term management agreements between the
Company and the CMGs. The Company evaluates on a on going basis the period of
amortization of the intangible and determine if the value of the underlying
assets has been impaired. Since events and circumstances surrounding the
acquisition will change over time there can be no assurance that the value of
the intangibles will be realized by the Company. At June 30, 1996 the net
unamortized balance of intangibles acquired was not considered to be impaired.
The Company's policy is to amortize the intangibles over a 10 to 40 year period.
The contracts acquired by the Company in 1995 and 1996 are being amortized over
20 years.
INCOME TAXES
The Company is a corporation subject to federal and state income taxes. The
Company's year-end for tax reporting purposes is December 31. Deferred income
taxes result from the future tax consequences associated with temporary
differences between the amount of assets and liabilities recorded for financial
accounting and income tax purposes. Currently, these temporary differences
relate primarily to net operating loss carryforwards and depreciation
differences. Future use of the net operating loss carryforwards by the Company
may be limited due to certain changes in control as provided for in the Internal
Revenue Code.
Certain of the Company's consolidated subsidiaries are limited liability
companies (LLCs), which are treated as partnerships for federal and state income
tax purposes. The Company's compensation plans for physicians result in these
entities reporting little or no taxable income. To the extent that additional
amounts are paid to member physicians to cover income tax expense incurred, they
will be reported as distributions. These amounts are not deductible for federal
or state income tax purposes.
F-9
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
USE OF ESTIMATES
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, which requires that long-lived assets and
certain identifiable intangibles held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If this review indicates
that the carrying amount of the long-lived assets may not be recoverable, the
carrying value of those assets would be reduced to fair value. The Company has
implemented the standard. Implementation of the standard did not have a material
impact on the Company's financial statements.
In October 1995, FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. Under the fair value method, compensation expense is
measured at the grant date based on the fair value of the award. Under the
intrinsic value method, compensation expense is equal to the excess, if any, of
the quoted market price of the stock at the grant date over the amount the
employee must pay to acquire the stock. Entities electing to measure
compensation costs using the intrinsic value method must make pro forma
disclosures for fiscal years beginning after December 15, 1995, of net income
and earnings per share as if the fair value method had been applied. The Company
has elected to account for stock-based compensation programs using the intrinsic
value method and, therefore, the standard will only impact financial statement
disclosures.
NOTE 2--ACQUISITIONS OF CERTAIN ASSETS OF PHYSICIAN GROUPS
During the period ended June 30, 1995 and the year ended June 30, 1996, the
Company acquired certain operating assets and assumed certain operating
liabilities of physician groups located in Maryland. The purchase price has been
allocated to the assets acquired based on the estimated fair values at the dates
of acquisition and the consideration related to long term management agreements.
The estimated fair value of assets acquired, liabilities assumed and
consideration paid are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24
THROUGH
JUNE 30, YEAR ENDED
ASSETS ACQUIRED, NET 1995 JUNE 30, 1996
- ------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Accounts receivable, net..................................... $134,349 $ 1,384,200
Fixed assets, net............................................ 33,283 138,188
Management service agreements................................ 1,320 2,447,107
Other assets................................................. 32,804 6,892
------------ -------------
$201,756 $ 3,976,387
------------ -------------
------------ -------------
<CAPTION>
CONSIDERATION:
- -------------------------------------------------------------
<S> <C> <C>
Cash......................................................... $ 16,114 $ 289,581
Notes payable and liabilities assumed........................ 184,322 1,732,546
Fair value of common stock interest issued................... 1,320 1,952,280
Common stock issued.......................................... -- 1,980
------------ -------------
$201,756 $ 3,976,387
------------ -------------
------------ -------------
</TABLE>
F-10
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2--ACQUISITIONS OF CERTAIN ASSETS OF PHYSICIAN GROUPS--CONTINUED
On February 24, 1995 the Company issued 2,200,000 shares of Class B Common
Stock to MHLP (Medical Holdings Limited Partnership--a Maryland limited
partnership formed to hold the stock). These shares were in consideration of
current and future affiliation of physicians to the CMGs and an expansion of the
physican base encompassed by the PSO Agreements. The affiliation of physicians
and the purchase of their accounts receivable and fixed assets occur when the
practice assets are sold to MHLP in exchange for a limited partnership interest
and the assets are then conveyed to the Company. Simultaneously, the physicians
enter into an employment agreement with one of the affiliated CMGs. Management
believes that the underlying fair value of the PSO Agreement acquired is equal
to the value of the underlying stock held by MHLP at the time of the
acquisition. The percentage of limited partnership interests in MHLP that are
issued are adjusted to reflect the estimated fair value of the Company's stock
at the time the transaction occurs.
Generally the contracts with individual physicians provide for a nine month
period during which the parties may cancel the contract. If this option is
exercised, the Company and the physician would be restored to their respective
positions before the acquisition. Expenses and fees incurred for professional
services in connection with acquisitions are considered part of the acquisition
cost and are capitalized in the financial statements as intangibles. During 1995
and 1996, the Company has capitalized costs of approximately $22,000 and
$43,000, respectively, as part of the acquisitions. In the event that a
physician exercises his option to leave or retire, the Company charges any
unamortized intangibles associated with the acquisition to operations in the
period when notice of withdrawal is received. At June 30, 1996, 25 physicians
had remaining reacquisition options for periods expiring through February 1997.
Total assets at June 30, 1996 and net physician revenues for the year ended June
30, 1996 attributable to physicians with reacquisition rights amounted to
$1,349,499 and $2,574,826, respectively. As of October 3, 1996, reacquisition
rights for 8 of the 25 physicians, or $277,533 in total assets and $1,062,921 in
net physician revenues, have expired without recission. During 1995, one
physician canceled his interest in the Company. This cancellation did not
require the disbursement of cash or other assets since the transaction was never
funded.
NOTE 3--NET REVENUE
The Company's net revenues represent the contractual management and similar
fees earned under its long-term PSO Agreements with CMGs. Under the PSO
Agreements, the Company is contractually responsible and at risk for the
operating costs of the Core Medical Groups with the exception of amounts
retained by physicians. The Company's net revenues include the reimbursement of
all medical practice operating costs and the contractual management fees as
defined and stipulated in the PSO Agreements. Contractual fees are accrued when
collection is probable.
Revenue for all CMGs is recorded at established rates reduced by allowances
for doubtful accounts and contractual adjustments and amounts retained by
physician groups. Contractual adjustments arise due to the terms of certain
reimbursement and managed care contracts. Such adjustments represent the
difference between charges at established rates and estimated recoverable
amounts and are recognized in the period the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are reported as contractual
adjustments in the year final settlements are made.
F-11
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 3--NET REVENUE--CONTINUED
The following represent amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24
THROUGH YEAR ENDED
JUNE 30, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Gross physician revenue......................................................................... $ 1,760,503 $13,613,426
Less: Provision for contractual and other adjustments......................................... (562,024) (5,206,105)
Gatekeeper capitated income..................................................................... 146,983 1,345,207
----------- -----------
Net physician revenue........................................................................... 1,345,462 9,752,528
Amount retained by affiliated core medical groups:
Physicians.................................................................................... 374,761 4,016,712
Ancillary employees and expenses.............................................................. 120,036 307,255
----------- -----------
Net revenue..................................................................................... $ 850,665 $ 5,428,561
----------- -----------
----------- -----------
</TABLE>
The Company derives substantially all of its net revenue from three
affiliated core medical groups with which it has PSO agreements. For the year
ended June 30, 1996, one of these core medical groups comprised approximately
93% of the Company's net revenue.
The Company's affiliated core medical groups derived approximately 42% and
21%, respectively, of their net revenues from services provided under
government-sponsored health programs (principally the Medicare and Medicaid
programs) and various Blue Shield contracts, respectively, for the year ended
June 30, 1996. Other than the payors noted, the physician groups have no
customers which represent more than 10% of aggregate net physician revenue for
the year ended June 30, 1996.
NOTE 4--OPERATING MATTERS AND LIQUIDITY
It is reasonably possible that future near term events may result in
changes in estimates that would be material to the financial statements.
OPERATING LOSSES; LIQUIDITY
The foregoing business description discusses the current nature of the
Company's operations. Until there are an adequate number of capitated patients
in the Company's global capitated contracts, the Company expects to incur
operating losses and experience negative operating cash flows. The Company
believes that its cash on hand at June 30, 1996, the $7,500,000 received on
September 4, 1996 and the $2,500,000 to be received on or before December 27,
1996 from the holder of its Series C Preferred Stock, the amount of remaining
availability under the NationsBank Credit Facility described in Note 7 and some
portion of the additional capital outlined in Note 18 or other capital, will be
sufficient to meet the Company's working capital needs through June 30, 1997.
However, in the event that the Company either has not attracted an adequate
number of capitated patients in global capitated contracts in order to offset
operating expenses, or has not secured some substantial portion of the
additional capital outlined in Note 18 or other capital, the Company's
operations and liquidity would be adversely affected.
INVESTMENT IN TANGIBLE ASSETS AND INFRASTRUCTURE
For the year ended June 30, 1996, the majority of the Company's revenue
resulted from net revenue generated under the PSO Agreements. In order to
achieve its business objectives and to recover amounts that have been invested
in tangible assets, the formation of the infrastructure and development of the
business, it is necessary for management to renew its current global capitated
contracts and increase the number of enrolled lives. In the event these
contracts are not renewed and expanded to other geographical areas in the
Baltimore and Washington metropolitan area and surrounding regions or the
Company does not increase the number of enrolled lives, the Company would most
likely be unable to generate sufficient revenues to cover its ordinary and
necessary expenses or would not require all of the assets owned or leased.
F-12
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5--NOTE RECEIVABLE
The Company has a note receivable that results from an advance to a medical
practice from which the Company has a binding letter of intent to acquire
certain assets for the approximate value of a portion of the practice's net
realizable accounts receivable. The note was issued to secure the Company's
right to repayment of the face amount of the note in the event that the Company
does not complete the acquisition of certain assets of the medical practice.
Interest on the note is calculated based on the prime rate (8.25% as of June 30,
1996). The note matures on March 1, 1997. Upon consummation of the purchase of
certain assets of the physician's practice by the Company the note receivable
will be cancelled and the advance will be treated as part of the consideration
paid, accordingly, this note has been reflected as a non-current asset.
NOTE 6--PROPERTY AND EQUIPMENT
Property and equipment at cost, as of June 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Furniture and fixtures.......................................... $ 88,161 $ 976,430
Computer equipment.............................................. 104,802 1,156,829
Computer software............................................... 4,404 265,259
Medical equipment............................................... -- 57,507
Leasehold improvements.......................................... 68,364 279,957
-------- ----------
265,731 2,735,982
Less accumulated depreciation and amortization.................. 17,559 250,435
-------- ----------
Property and equipment, net..................................... $248,172 $2,485,547
-------- ----------
-------- ----------
</TABLE>
NOTE 7--NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Long-term obligations at June 30 are comprised as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Note payable.................................................... $ -- $3,400,000
Notes payable and purchase obligations--related parties......... 584,406 2,077,364
Capital lease obligations (note 8).............................. 9,635 422,658
-------- ----------
594,041 5,900,022
Less current maturities of capital lease obligations............ 6,702 101,985
-------- ----------
$587,339 $5,798,037
-------- ----------
-------- ----------
</TABLE>
In December 1995, the Company entered into a loan agreement with
NationsBank, N.A. (the NationsBank Credit Facility), under which the Company may
request advances up to a maximum of $4 million. Interest on advances is payable
monthly and is calculated based on the bank's prime rate, unless the Company
designates a portion of the advances to be subject to the Eurodollar rate plus
.75% (effective rate of 6.2% at June 30, 1996). All advances are due at December
31, 1997. The Company has outstanding advances under this agreement of
$3,400,000 at June 30, 1996. The bank has the right to offset the Company's
demand deposit accounts with the bank against any past due amounts.
The NationsBank Credit Facility is guaranteed by the holder of the
Company's Series B Preferred Stock. The guarantee is collateralized by a
security interest in all receivables and the PSO Agreements between the Company
and Baltimore Medical. The guarantee agreement also provides for certain
restrictions on the Company, including limitations on incurring additional debt
and reduction of amounts due from the Series A Preferred Stockholder. Upon
redemption of the Series B Preferred Stock in connection with issuance of
"junior stock" to a holder whose interests are deemed adverse to the guarantor,
then the Company is required to obtain a release of the guarantee. As
consideration for the guarantee, the Company issued a warrant valued at $370,000
for the purchase of its common stock (see note 13).
F-13
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7--NOTES PAYABLE AND LONG-TERM OBLIGATIONS--CONTINUED
In connection with the acquisitions of certain assets of medical practices
and other transactions, the Company is obligated on short-term notes payable to
physicians and others aggregating approximately $303,915 at June 30, 1996.
The Company is also obligated on notes payable to various physicians, who
are members of either Baltimore Medical, Carroll Medical or Cumberland Valley
Medical, in connection with the original purchase of the accounts receivable
from the physicians' former practices. The notes bear interest at rates ranging
from 9.75% to 10% and the notes mature at the earlier of seven years from the
date of closing or any of the following events: (i) termination of the
respective Professional Services Employment Agreements, (ii) a liquidating
distribution to the stockholders of the Company, (iii) combination,
consolidation or merger where the Company is not the survivor, (iv) disposal of
substantially all of the Company' assets, or (v) a public offering with a
certain cash issuance amount to the Company. The notes may be reduced or
adjusted based on receivable collections and may be prepaid without penalty. The
Company does not expect to conclude an underwritten public offering of the
Company's securities for cash before June 30, 1997. Accordingly, these notes
have been classified as long-term obligations.
NOTE 8--CAPITAL LEASE OBLIGATIONS
The Company has entered into capital leases for computer equipment and
software and for laboratory equipment. These leases are noncancelable and have
terms that expire at various dates through 2000. Assets under capital leases as
of June 30 were approximately:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Software........................................................... $ -- $220,000
Computer equipment................................................. -- 380,290
------- --------
-- 600,290
Less accumulated depreciation...................................... -- 120,058
------- --------
$ -- $480,232
------- --------
------- --------
</TABLE>
Future minimum lease payments under capital leases, together with the
present value of the minimum payments as of June 30, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................................... $155,146
1998.......................................................................... 152,036
1999.......................................................................... 152,036
2000.......................................................................... 77,818
--------
537,036
Less amount representing interest............................................. 114,378
--------
Present value of future minimum lease payments................................ $422,658
--------
--------
Current maturities............................................................ $101,985
Long-term obligations......................................................... 320,673
--------
$422,658
--------
--------
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
MALPRACTICE COVERAGE
The Company and its affiliated CMGs have purchased a claims-made policy
with coverage limits of $1 million per medical professional per incident and $3
million annual aggregate per medical professional. This policy expires on
January 1, 1997 and it is management's intention to obtain renewal coverage. The
Company has obtained retroactive coverage for affiliated physicians that were
not previously covered by the current carrier (prior to the physician's
affiliation with the
F-14
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9--COMMITMENTS AND CONTINGENCIES--CONTINUED
Company). Management believes that losses and costs related to unknown incidents
not provided for, if any, would not be material to the financial position,
liquidity or results of operations of the Company.
Pursuant to an agreement dated December 1, 1995, the prior written approval
of the Series B Preferred Stockholder is required in connection with decisions
regarding medical malpractice coverage for the Company, participating physicians
and affiliated entities. Such decisions include, but are not limited to, the
selection of the underwriter, the form of the insurance policy and the premium
payment provisions. The Company must make certain payments to the Series B
Preferred Stockholder if the required approval is not obtained: the Series B
Preferred Stockholder could require the Company to pay it $400,000 and to redeem
all or a portion of the Series B Preferred Stock at the price equal to the
greater of the fair market value per share or the sum of the issue price per
share and all accumulated and unpaid interest and dividends. The Series B
Preferred Stockholder agrees to provide medical malpractice coverage to the
Company for premiums consistent with its rates as approved by the Maryland
Insurance Administration. In addition, the Series B Preferred Stockholder will
consider alternative insurance programs to meet the Company's special needs and
will request the necessary approvals for such alternative programs from the
Maryland Insurance Administration. This agreement terminates upon the earlier of
a change in control of the Company or termination of the loan guarantee provided
by the Series B Preferred Stockholder.
EMPLOYEE BENEFIT PLANS
Effective January 1, 1996, the Company adopted a 401(k) Plan (the Plan)
covering all its employees. Subject to certain limitations, participants may
elect to defer a portion of their compensation as contributions to the Plan. The
Company will make matching contributions of 50% of each participant's
contribution up to six percent of the participant's salary. Participants vest in
the Company's contributions at the rate of 20% per year beginning in fiscal
1997. Contributions of $160,000 were expensed in fiscal 1996.
Effective February 1, 1996, the Company adopted a Flexible Benefits Plan
covering all full-time employees. Subject to certain limitations, the Company
may make "non-elective contributions" on behalf of employees and employees may
elect to defer a portion of their compensation as "flexible pay contributions"
to pay for certain covered expenses.
OPERATING LEASES
The Company conducts its operations at leased facilities and uses leased
office equipment under noncancelable operating leases. Certain of the leased
facilities are owned by physicians who have membership interests in affiliates.
Amounts paid to the related parties approximated $8,700 and $14,500 in 1995 and
1996, respectively. 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
$74,228 and 454,000 for 1995 and 1996, respectively. Effective October 1, 1996,
the Company entered into a 35 month operating lease for additional corporate
office space. Lease payments for the additional office space approximate
$189,000 per year. Minimum rental commitments, excluding sublease income, under
operating leases as of June 30, 1996, with existing or renewable terms greater
than one year are as follows (the Company has $34,800 of minimum rental
commitments due in 1997 to related parties):
<TABLE>
<S> <C>
1997.......................................................................... $ 717,800
1998.......................................................................... 793,500
1999.......................................................................... 822,000
2000.......................................................................... 799,275
2001.......................................................................... 699,668
Thereafter.................................................................... 688,200
</TABLE>
CASH AND CASH EQUIVALENTS
The Company maintains its cash balances in two financial institutions in
Maryland. At times the cash balances may exceed the federally insured limits.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
F-15
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9--COMMITMENTS AND CONTINGENCIES--CONTINUED
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
management employees, which include, among other terms, noncompetition
provisions and salary and benefits continuation.
COMMITMENTS TO AFFILIATED CMGS
Under the terms of certain of its PSO agreements, the Company is committed
to provide minimum guarantees of certain affiliated physician salaries based on
a defined formula. In addition, the Company has also committed to provide
guarantees to the affiliated CMGs with respect to the collection of certain
accounts receivable.
NOTE 10--REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 6.5% cumulative Series A shares and
9.75% cumulative Series B shares of redeemable convertible preferred stock at
June 30, 1996.
PREFERRED STOCK CONVERSION AND REDEMPTION RIGHTS
Both Series A Redeemable Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock are convertible to Class C Common on a
share for share basis at the holder's option, at any time before February 25,
2000. In addition, the Preferred Stock is automatically converted to Class C
Common Stock on a share for share basis upon the occurrence of certain events,
including a public offering of the Company's stock. Only the fully-paid shares
are subject to conversion.
Between March 1 and June 1, 2000, the Series A and Series B Redeemable
Convertible Preferred Stockholders have the right to require the Company to
redeem all of their shares at the greater of fair value (as determined by an
independent appraiser selected jointly by the parties) or the issuance price
plus unpaid dividends and interest thereon. Upon expiration of these rights, and
if the shares are not otherwise converted to Class C Common Stock, the Company
has the right to redeem the outstanding shares of Series A Preferred Stock at
the issuance price plus unpaid dividends and interest thereon. It may also
redeem the Series B Preferred Stock on the same terms that the holders could
require the Company to pay on a requested redemption by the holders.
In addition, upon the occurrence of certain events, the Series A and Series
B Redeemable Convertible Preferred Stockholders have the right to require the
Company, and the Company has the right, to redeem all of the respective
preferred shares then held. In the event of any non-compliance (as defined), the
Preferred Stock is mandatorily redeemable. If the Company decides to take
certain actions without the approval of the Series A and Series B Redeemable
Convertible Preferred Stockholders then the Preferred Stockholders have the
right to require the Company to redeem all of their outstanding shares. In the
foregoing instances the redemption price is the greater of fair value or the
issuance price plus unpaid dividends and interest thereon. If the Company elects
to enforce certain non-competition covenants with the Series B Preferred
Stockholder, then the holder may require the Company to redeem the shares held
for the greater of $4.8 million or par value plus unpaid dividends and interest
thereon. If the Company issues Series A Junior Stock or Series B Junior Stock to
holders deemed to have interests adverse to the respective Preferred
Stockholder, then the holder may require the Company to redeem their shares at
the greater of: (i) the purchase price of the adverse junior stock on a fully
diluted basis, (ii) fair value, or (iii) one and one-half (1 1/2) times the
liquidation preference.
SERIES A PREFERRED STOCK SUBSCRIPTION RECEIVABLE
As partial consideration for the issuance of Series A Preferred Stock, the
Company received a note in the original amount of $3 million ($3 and $1.5
million balances outstanding at June 30, 1995 and 1996). The note bears interest
at 6.5% per annum, compounded quarterly, and interest is payable only to the
extent that the Company pays dividends on the Series A Preferred Stock. The
parties have the right to offset like amounts of dividends and interest.
Scheduled note payments are subject to deferral at the option of the
Company until February 14, 1998, but interest continues to accrue on any unpaid
balance. As of June 30, 1996 the Company had elected to defer payments of
$375,000
F-16
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10--REDEEMABLE CONVERTIBLE PREFERRED STOCK--CONTINUED
scheduled for 1996. Upon redemption or conversion of Series A Preferred Stock,
any unpaid principal on the note is to be canceled in an amount equal to five
dollars times the number of shares converted or redeemed. The Company has the
option to require payment of any outstanding principal and interest on February
14, 1998, or the Company may elect to redeem the outstanding Series A Preferred
Stock and cancel the remaining principal and interest.
PREFERRED STOCK DIVIDENDS
Series A Redeemable Convertible Preferred Stock accrues dividends quarterly
at the rate of thirty-two and one half cents ($0.325) per share per annum
beginning on February 24, 1995. Unpaid dividends accrue interest at the rate of
6.5% per annum, compounded quarterly, and may be offset by the Company against
any unpaid interest that is owed by the holders of the Series A Redeemable
Convertible Preferred Stock under the related note receivable.
Series B Redeemable Convertible Preferred Stock accrues dividends quarterly
at the rate of one dollar and nine and seven tenths cents ($1.097) per share per
annum beginning December 1, 1995. Unpaid dividends accrue interest at the rate
of 9.75% per annum, compounded quarterly.
Until April 1, 2000, payment of dividends on Series A Preferred Stock and
Series B Preferred Stock are only permitted in the event of redemption,
conversion or liquidation, and, in any event, dividends on Series B Preferred
Stock may only be paid after all dividends and interest on the Series A
Redeemable Convertible Preferred Stock have been satisfied. Beginning April 1,
2000, dividends on Series A Preferred Stock and Series B Preferred Stock will
accrue at a rate equal to the prime rate plus 100 basis points.
Cumulative Series A and Series B Redeemable Convertible Preferred Stock
accrued and undeclared dividends at June 30 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Series A.......................................................... $ 113,300 $ 438,305
Series B.......................................................... -- 227,526
--------- ---------
$ 113,300 $ 665,831
--------- ---------
--------- ---------
</TABLE>
The Company's cumulative Series A and Series B Preferred Stock are subject
to redemption; accordingly, for financial reporting purposes accrued dividends
are reflected as an accretion in the value of the preferred stock with a
corresponding reduction in stockholders' equity to reflect redemption value.
PREFERRED STOCK LIQUIDATION PREFERENCES
Upon liquidation or dissolution of the Company, the Series A and Series B
Preferred Stockholders are entitled to receive a liquidating distribution in an
amount equal to the greater of: (i) the fair value (as defined) per share of the
respective series of preferred stock or (ii) the original purchase price per
share of the respective stock. The distribution will also include all unpaid
cumulative dividends and accrued interest thereon; however, the total
distributable amount due to each preferred stockholder is limited to the amount
of cash paid to the Company for the purchase of the respective shares. No
distribution will be paid to the Series B Preferred Stockholder until all
amounts due to the Series A Preferred Stockholder have been fully paid.
NOTE 11--STOCKHOLDERS' EQUITY
All of the Company stockholders are parties to an agreement dated December
1, 1995 (see Note 18 for September 4, 1996 amendment), that restricts transfer
of the Company stock. The agreement terminates upon occurrence of certain
specified events, including a public offering of the Company stock. Under the
terms of the stockholders' agreement, the Company may be required to purchase
shares of the Company's capital stock in certain circumstances, such as: (i)
Class A Common Stock owned by management stockholders, in the event of their
death or disability (for which the Company has purchased insurance), if other
management stockholders do not exercise their rights to acquire the shares
offered, in which case the Company is required to purchase all of the offered
shares at fair value (as agreed to by the parties or as determined by an
F-17
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 11--STOCKHOLDERS' EQUITY--CONTINUED
independent appraisal); (ii) Class A Common Stock purchased by Dr. Rifkin or Dr.
Kimmel after December 1, 1995, if their employment is terminated, in which case
the Company is required to purchase these shares at fair value (as agreed to by
the parties or as determined by an independent appraisal); (iii) Class A Common
Stock owned by other management stockholders if their employment is terminated
and the remaining management stockholders do not exercise their rights to
acquire the shares offered, then the Company is required to purchase all of the
shares offered. If termination is without cause, the purchase price is based on
fair value (as agreed to by the parties or as determined by an independent
appraisal). If termination is with cause, then the purchase price is the lesser
of $1 per share or the original issuance cost of the shares. At June 30, 1996,
600,000 shares of Class A Common Stock were subject to such repurchase
requirement. If the Company is required to purchase shares of the management
stockholder under the foregoing circumstances, then all accrued dividends due to
Series A and Series B Preferred Stockholders must first be paid; (iv) All
classes of capital stock--upon the occurrence of an involuntary transfer
involving any of its outstanding capital stock, the Company has the right of
first refusal to purchase the offered shares at fair value (as agreed to by the
parties or as determined by an independent appraisal).
All classes of Common Stock have the same preferences, rights and voting
powers. A portion of the Class A Common Stock is reserved for issuance upon
exercise of warrants, and a portion of the Class C Common Stock is reserved for
issuance to the holders of Series A Preferred Stock and Series B Preferred Stock
upon conversion of those shares of stock.
NOTE 12--STOCK OPTIONS
The Company has an Omnibus Stock Plan (the Plan) which is accounted for
under APB Opinion 25 and related Interpretations with respect to employee
transactions. Transactions with non-employees are accounted for at fair value at
the date of grant and are immaterial as of June 30, 1996. The Plan permits the
Company to grant incentive and non-qualified stock options, stock appreciation
rights (SARs) and restricted or unrestricted share awards to directors,
officers, employees and other key contributors to the Company. SARs entitle the
optionee to surrender unexercised stock options for cash or stock equal to the
excess of the fair value of the surrendered shares over the option value of such
shares. The Plan is administered by a committee (the Committee) appointed by the
Company's Board of Directors. Subject to adjustment as provided in the Plan, the
aggregate number of shares of the Company Common Stock which may be awarded is
limited to 6,175,000. Shares under any grants that expire unexercised are
available for further grant.
The exercise price and exercise period for stock options is determined by
the Committee, provided that the exercise period may not exceed 10 years from
the grant date and the exercise price for incentive stock options may not be
less than 100% of the fair value of the shares on the date the option is
granted. Incentive stock options are granted only to employees of the Company.
In August and October 1995, the Company granted incentive stock options, to
purchase Class A Common Stock, to ten employees for a total of 118,380 shares at
the exercise price of $0.01 per share, the estimated fair value of the shares at
the date of grant based on the financial position and liquidity of the Company
and the limited marketability of the shares. The options become exercisable on
various dates ranging from April 1, 1996 through April 1, 2000. Upon exercise,
68,832 shares will be fully vested and nonforfeitable; the remainder vest
ratably over four years. Options may expire or become exercisable, and shares
issued may be fully vested, at earlier dates upon occurrence of certain
specified events, including a change in control of the Company or the employee's
death, disability, retirement, or termination without cause. During 1996,
employees forfeited 20,050 Class A Common Stock options.
In December 1995, the Company granted non-qualified stock options to
purchase Class A Common Stock to three employees for a total of 12,500 shares at
the exercise price of $0.01 per share. The options become exercisable on
December 21, 1996. Upon exercise, 5,000 shares issued will be fully vested and
nonforfeitable; the remainder vest ratably over four years. Options may expire
or become exercisable, and shares issued may be fully vested, at earlier dates
upon occurrence of certain specified events, including a change in control of
the Company or the employee's death, disability, retirement, or termination
without cause. The Company will recognize compensation expense as the shares
vest in future periods, based upon the option price and fair value at the date
of grant. The fair value of the common stock at the time of grant in December
1995, $3.00 per share, was based on a discounted value of the per share price of
the Company's Series B Redeemable Convertible Preferred Stock.
F-18
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 12--STOCK OPTIONS--CONTINUED
In May 1996, the Company granted incentive stock options to purchase Class
A Common Stock for 70,000 shares with an exercise price of $11.00 per share to
an employee, which was deemed to be in excess of management's estimate of fair
value at the date of grant.
As of June 30, 1996, the Company has also granted options to purchase
105,000 shares of Class B Common Stock. In February 1995, the Company granted an
incentive stock option to purchase 100,000 shares of Class B Common Stock to an
officer of the Company at an exercise price of $0.01 per share, and in October
1995, the Company granted an incentive stock option to purchase 5,000 shares of
Class B Common Stock to a physician at an exercise price of $0.01 per share. The
estimated fair value of the stock was determined to be equal to the exercise
prices on the July 1994 and October 1995 grant dates.
NOTE 13--COMMON STOCK PURCHASE WARRANTS
In consideration for the guarantee of a loan agreement, the Company issued
on December 1, 1995 a warrant to its Series B Preferred Stockholder for the
purchase of 88,889 shares of the Company Class A Common Stock at $5.625 per
share. The warrant expires on December 1, 2005 and is exercisable (i) if the
holder does not receive notice of a change in control within thirty days after
the change is effective or (ii) ninety days prior to the filing of a
registration statement for a public offering that includes shares held by
management stockholders. The warrant was valued at the present value of the
difference between the estimated fair value of the common stock subject to the
warrant and the aggregate strike price, discounted at the interest savings rate
(the difference between the rate obtained on the loan agreement and the rate of
interest that management believes would have been available without the
guarantee). At June 30, 1996, this amount ($370,000) is reflected as additional
paid-in capital and a deferred charge, which is being amortized on the interest
method over 25 months (the length of the guarantee).
On December 1, 1995, in consideration for certain consulting services, the
Company issued warrants for the purchase of 24,000 shares of the Company common
stock at $11.25 per share (a price greater than management's estimate of fair
value at the date of grant). A value was not attributed to these warrants at the
time of issue. These warrants expire December 1, 2005, and are exercisable if
there is a change in control of the Company.
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current assets
and current liabilities approximate fair values because of the short maturity of
those instruments. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A PREFERRED STOCK
SUBSCRIPTION RECEIVABLE
The Series A and Series B Preferred Stock are carried at issue price plus
accrued dividends, and have features unique to these securities including, but
not limited to, the right to appoint directors and the right to approve certain
significant activities of the Company. There is no quoted market price for the
Series A or Series B Preferred Stock, however, management believes that the
initial recorded amounts approximate fair value.
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.
F-19
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS--CONTINUED
LONG-TERM OBLIGATIONS
Long-term obligations, excluding capital lease obligations, were incurred
by the Company when individual physicians joined the affiliated CMGs. These
notes are payable upon an initial public offering of the Company's stock or a
change in control as defined in the stockholders' agreement. The fair value of
these obligations is assumed to approximate recorded value because there have
not been any significant changes in circumstances since the obligations were
recorded.
NOTE 15--INCOME TAXES
The Company has accumulated net losses from operations of $8,414,261.
Significant temporary differences between the determination of this loss for
financial reporting and income tax purposes include depreciation, the allowance
for uncollectible receivables, and certain accrued liabilities. These losses may
be carried forward for 15 years and expire at various dates through 2010. Under
federal tax law, certain changes in ownership of the Company, which may not be
within the Company's control, may operate to restrict future utilization of
these carryforwards. As of June 30, 1996, based on the available information, it
is more likely than not that the deferred tax assets will not be realized and as
a result have been fully reserved at June 30, 1995 and 1996. Deferred tax assets
(liabilities) at June 30, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Tax benefit of NOL carryforward............................... $ 830,000 $ 2,236,800
Depreciation.................................................. (60,000) (360,000)
Allowance for doubtful receivables............................ -- 118,000
Accrued liabilities........................................... -- 236,000
Other (net)................................................... -- 40,000
--------- -----------
770,000 2,270,800
Less valuation allowance...................................... (770,000) (2,270,800)
--------- -----------
Net deferred tax asset...................................... $ -- $ --
--------- -----------
--------- -----------
</TABLE>
NOTE 16--EARNINGS PER SHARE
The weighted average common shares outstanding presented for the period
ended June 30, 1995 and the year ended June 30, 1996 were 3,000,000 and
3,063,205, respectively. Stock options and warrants have been excluded in fiscal
1995 and 1996 since they are anti-dilutive. The weighted average shares in
fiscal 1995 have been restated to reflect the two-for-one stock split in fiscal
1995. The net loss for purposes of the calculation of loss per share has been
adjusted for the redeemable preferred stock dividends.
NOTE 17--SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24
THROUGH YEAR ENDED
JUNE 30, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Cash paid for interest............................................................................ $ 11,825 $ 176,169
SIGNIFICANT SUPPLEMENTARY NONCASH INVESTING AND FINANCING INFORMATION
Liabilities assumed in connection with purchase of medical practice assets........................ $ 184,322 $ 1,732,546
Assets acquired under capital leases.............................................................. -- 600,290
Issuance of common stock purchase warrants for services........................................... -- 370,000
Common stock issued in connection with purchase of medical practice assets........................ -- 1,980
</TABLE>
F-20
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 18--SUBSEQUENT EVENTS
AMENDED ARTICLES OF INCORPORATION
SERIES C PREFERRED STOCK
The Company amended and restated its charter on September 4, 1996. The
amended and restated articles authorize the Company to issue 63,176,984 shares
of capital stock as follows:
<TABLE>
<CAPTION>
SHARES PAR
AUTHORIZED VALUE
---------- ------
<S> <C> <C>
Redeemable Convertible Preferred Series A......................... 1,000,000 $ 5.00
Redeemable Convertible Preferred Series B......................... 355,556 11.25
Redeemable Convertible Preferred Series C......................... 1,071,428 17.50
Preferred Stock................................................... 1,000,000 0.01
Class A Common.................................................... 20,700,000 0.01
Class B Common.................................................... 10,000,000 0.01
Class C Common.................................................... 29,050,000 0.01
----------
63,176,984
----------
----------
</TABLE>
On September 4, 1996, the Company issued 428,571 shares of Series C
Preferred Stock to Genesis Health Ventures, Inc. (the "Series C Preferred
Stockholder"), in exchange for $7,500,000 in cash. The Company will issue
142,857 additional shares of the Series C Preferred Stock in exchange for
$2,500,000 in cash prior to December 31, 1996 which represents an obligation of
Genesis that must be fulfilled unless the Company is in breach of any of its
loan agreements. The proceeds from these issuances will be used to fund the
incurrence of corporate expenses in conjunction with the business strategy and
the acquisition of certain assets of medical practices or IPA contracting
rights. The Company may issue up to 500,000 additional shares of the Series C
Preferred Stock in exchange for up to $10,000,000 in cash if certain Medicare
capitated milestones are attained. Genesis Health Ventures, Inc. became a party
to the stockholders agreement effective September 4, 1996.
FINANCING
On August 15, 1996, the Company established a $1,500,000 bridge loan
facility (the "Bridge Loan") with First National Bank of Maryland, N.A. ("First
National"). The Bridge Loan is collateralized by certain assets of the Company
and its affiliates and is guaranteed by the Series A Preferred Stockholder.
Advances under this facility bear interest at a rate of 6.71% per annum. The
Bridge Loan matures on January 15, 1997 and management is currently negotiating
with First National to replace the Bridge Loan with a $10,000,000 credit
facility (the "First National Credit Facility"). As of September 30, 1996,
approximately $983,000 had been advanced under the Bridge Loan to fund corporate
expenses in conjunction with the Company's strategy. Although there can be no
assurances the Company will obtain the First National Credit Facility, the
Company is proceeding with the loan approval process with First National and the
Company believes, based on conversations with First National and the Series A
Preferred Stockholder, if the loan approval process is not completed before the
maturity date of the Bridge Loan, that the maturity date will be extended until
such time that the loan approval process is completed. In the event the Company
is unable or unwilling to secure the First National Credit Facility or the
maturity date of the Bridge Loan is not extended, the Bridge Loan is expected to
be repaid on or before January 15, 1997 from the Company's available cash.
ACQUISITIONS
The Company intends to continue its ongoing acquisition of certain assets
of primary care and specialty practices. The Company is currently engaged in
negotiations with several providers of health care services. Certain of these
acquisitions provide for the purchase of the assets under terms and conditions
similar to those that the Company has entered into previously. When the Company
closes one of the acquisitions that it is currently negotiating, it will
guarantee indebtedness of approximately $850,000 and assume $325,000 in
outstanding debt.
The Company will issue approximately 513,000 shares of the Company's Class
B Common Stock having an estimated fair value of $3,591,000 as part of the
consideration paid on all of the providers of health care services it is in
negotiation
F-21
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 18--SUBSEQUENT EVENTS--CONTINUED
with. Of this total approximately 195,000 shares having an estimated fair value
of $1,365,000 represent 10 limited partnership interests in MHLP and the
remaining 318,000 shares to be issued by the Company have an estimated fair
value of $2,226,000. Certain of the individual physicians involved in these
acquisitions will be granted options to purchase additional shares of the
Company's Class B Common Stock in the event certain agreed upon performance
criteria are met. These agreements which have not yet closed provide for a total
of 53,000 option shares. In addition, 14,000 shares of Class B Common Stock have
been reserved for future issuance to physician employees of one of the practices
purchased subsequent to June 30, 1996.
In the event that all of the acquisitions are consumated under the terms
currrently agreed upon the Company will acquire assets of approximately
$5,260,000.
NOTE 19--RELATED PARTIES
Amounts due under the terms of the PSO agreements between the Company and
the affiliated medical groups are reflected in the Due to/from Affiliates on the
consolidated balance sheet. The amounts due from the affiliates represents
working capital advances, amounts due for management fees from BMG LLC related
to the management of the laboratory and management fees due under the PSO
agreement. The amounts due to the affiliates represents amounts due to the
physicians related to the collection of accounts receivable.
Because of the nature of the Company's arrangements with Affiliated CMGs,
substantially all transactions included in Net Revenues, Medical Services
Expense and Care Center Costs in the accompanying financial statements are
viewed as related party transactions.
MHLP was formed on February 24, 1995 to hold the Class B Common Stock that
was issued by the Company and intended to be used for the acquisition of PSO
agreements by the Company. MHLP has no assets other than the Class B Common
Stock of the Company and has no liabilities or operations.
Three of the Company's executive management members and four directors are
practicing physicians with CMGs affiliated with the Company.
During the year ended June 30, 1996, the Company paid approximately $98,000
to the Series B Redeemable Convertible Preferred Stockholder for professional
liability insurance on behalf of the affiliated CMGs in connection with the PSO
agreement.
The Company has entered into acquisition transactions with certain of its
directors who are physicians. These transactions were entered into on
commercially reasonable terms, substantially similar to the terms of its
acquisition transactions with other affiliated physicians, and the consideration
paid in connection with such acquisitions was based on the fair market value of
the medical practice assets or services acquired:
(a) During the year ended June 30, 1996, the Company purchased certain
assets of a director of the Company, and four physician partners of the
physician. The physician and his four partners received a limited partnership
interest in MHLP equivalent to 167,000 shares of Class B Common Stock, valued at
$3.00 per share, and a promissory note with a face value of approximately
$158,000 as consideration for the acquisition.
(b) During the year ended June 30, 1996, the Company purchased certain
assets of a director of the Company. In addition, the physician received a
limited partnership interest in MHLP equivalent to 33,000 shares of Class B
Common Stock, valued at $3.00 per share, approximately $34,000 in cash and a
promissory note with a face value of approximately $45,000 as consideration for
the acquisition.
(c) Subsequent to June 30, 1996, the Company purchased certain assets of a
director of the Company. The physician received 16,000 shares of Class B Common
Stock and 1,000 options to acquire Class B Common Stock, valued at $7.00 per
share, cash in the amount of $5,000 and a promissory note with a face value of
approximately $38,000 as consideration for the acquisition.
F-22
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 19--RELATED PARTIES--CONTINUED
(d) Subsequent to June 30, 1996, the Company entered into a letter of
intent with a director of the Company to purchase certain assets of his medical
practice. In connection with the acquisition, the physician's limited liability
partnership, which he owns with five other physicians, will receive a limited
partnership interest in MHLP equivalent to 74,000 shares of Class B Common
Stock, an option to acquire a limited partnership interest equivalent to 20,000
shares of Class B Common Stock, exercisable at $15.00 per share, and cash for
the practice's collectable accounts receivable, which will not exceed $625,000.
The Company has advanced $300,000 to the physician and the practice for the
purchase of the practice's accounts receivable and received a promissory note
from the physician evidencing such advance. The promissory note will be canceled
at the closing of the acquisition. The Company has delegated to the physician's
practice, and the practice will perform, certain practice management business
functions, which the Company ordinarily performs for its physicians at its
headquarters. The Company reimburses the physician's practice $50,000/month for
the expenses it incurs in performing the business management services. The
amount reimbursed for the year ended June 30, 1996 was $100,000.
NOTE 20--NOTES TO UNAUDITED SEPTEMBER 30, 1995 AND 1996 CONSOLIDATED FINANCIAL
STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto for the period ended June 30, 1995 and the year ended June 30, 1996
included elsewhere herein.
NET REVENUE
The following represent amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Gross physician revenue........................................................................ $ 1,731,489 $ 5,883,910
Less: Provision for contractual and other adjustments........................................ (646,792) (2,307,886)
Gatekeeper capitated income.................................................................... 158,478 617,441
------------- -------------
Net physician revenue.......................................................................... 1,243,175 4,193,465
Amounts retained by affiliated core medical groups:
Physicians................................................................................... 598,840 1,834,717
Ancillary employees and expenses............................................................. 87,268 164,237
------------- -------------
Net revenue.................................................................................. $ 557,067 $ 2,194,511
------------- -------------
------------- -------------
</TABLE>
For the three months ended September 30, 1996, approximately $926,000 and
$341,000, were recorded as global capitation and gatekeeper capitation revenue,
respectively in the Company's financial statements. During the three months
ended September 30, 1995, the Company had no global or gatekeeper capitation
contracts. In addition, as of September 30, 1995 and 1996, $244,000 and
$1,154,740, respectively represented amounts due from the CMGs for Medicare and
Medicaid services provided in respect of which the Company has legal rights to
the proceeds.
F-23
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------------------------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Period from February 24 through June 30, 1995
Allowance for doubtful receivables......................... $ 0 $ 43,425 $ -- $ -- $ 43,425
---------- ---------- -------- ---------- ----------
Valuation allowances on deferred tax assets................ -- 770,000 -- -- 770,000
---------- ---------- -------- ---------- ----------
Year ended June 30, 1996
Allowance for doubtful receivables......................... 43,425 281,096 -- -- 324,521
---------- ---------- -------- ---------- ----------
Valuation allowances on deferred tax assets................ 770,000 1,500,800 -- -- 2,270,800
---------- ---------- -------- ---------- ----------
</TABLE>
F-24
<PAGE>
PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
The following pro forma consolidated balance sheet as of June 30, 1996
gives effect to (1) issuance of Series C Redeemable Convertible Preferred Stock
subsequent to June 30, 1996, (2) probable issuance of Senior Subordinated Notes
Payable, (3) the acquisition of certain assets of physician practices during the
year ended June 30, 1996, (4) the acquisition of certain assets of physician
practices subsequent to June 30, 1996 and (5) the proposed acquisition of
certain assets of physician practices subsequent to June 30, 1996, which are
probable (collectively the "Acquired Assets") by Doctors Health System, Inc.
(DHS). Subsequent to the purchase of certain assets of the physician practices,
the Company entered into long-term PSO agreements with the Core Medical Groups
which employ the physicians. These transactions are reflected as of June 30,
1996 for the pro forma consolidated balance sheet. The pro forma information is
based on the respective historical financial statements of Doctors Health
System, Inc. and the Acquired Assets, giving effect to the completed and
proposed acquisitions at cost and the assumptions and adjustments described in
the accompanying notes to the pro forma consolidated financial statements.
Management of DHS does not believe that the pro forma consolidated
financial statements are indicative of the results that actually would have
occurred if the combinations had been in effect on the dates indicated or which
may be obtained in the future. The pro forma consolidated financial statements
should be read in conjunction with the financial statements and notes of DHS
contained elsewhere herein.
F-25
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ISSUANCE OF
SERIES C
REDEEMABLE
CONVERTIBLE ISSUANCE OF ACQUISITIONS
PREFERRED STOCK SENIOR COMPLETED
SUBSEQUENT TO SUBORDINATED SUBSEQUENT TO PROBABLE
HISTORICAL JUNE 30, 1996 NOTES PAYABLE JUNE 30, 1996 ACQUISITIONS
(A) (B) (C) (D) (E)
----------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...... $ 1,419,295 $10,000,000 $30,000,000 (469,277) $ (741,783)
Accounts receivable (net of
allowance for doubtful
accounts of $324,521)........ 1,303,941 -- -- 187,900 1,075,129
Accounts
receivable-affiliates........ 1,208,685 -- -- 174,173 996,587
Other receivables.............. 64,251 -- -- -- --
Prepaid expenses............... 117,096 -- -- -- 100,060
Due from affiliates............ 891,985 -- -- -- --
----------- --------------- ------------- ------------- ------------
Total current assets......... 5,005,253 10,000,000 30,000,000 (107,204) 1,429,993
PROPERTY AND EQUIPMENT, net..... 2,485,547 -- -- 51,799 1,278,612
OTHER ASSETS
Intangibles (net of accumulated
amortization of $65,170)..... 2,448,030 -- -- 1,432,478 2,673,192
Deferred charges (net of
accumulated amortization of
$147,475).................... 636,772 -- 1,600,000 -- --
Note receivable................ 300,000 -- -- -- (300,000)
Accrued interest receivable.... 253,976 -- -- -- (8,525)
Deposits....................... 24,560 -- -- -- --
----------- --------------- ------------- ------------- ------------
3,663,338 -- 1,600,000 1,432,478 2,364,667
----------- --------------- ------------- ------------- ------------
TOTAL ASSETS............... $11,154,138 $10,000,000 31,600,000 $ 1,377,073 $ 5,073,272
----------- --------------- ------------- ------------- ------------
----------- --------------- ------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Bridge loan.................... $ -- $ -- $ -- $ -- $ --
Notes payable.................. 303,915 -- -- -- --
Current maturities of long-term
obligations.................. 101,985 -- -- -- 433,372
Accounts payable............... 330,647 -- -- -- 117,302
Accrued medical services....... 550,520 -- -- -- --
Other accrued expenses......... 2,069,579 -- -- -- 196,316
Due to affiliates.............. 766,475 -- -- -- --
----------- --------------- ------------- ------------- ------------
Total current liabilities.... 4,123,121 -- -- -- 746,990
----------- --------------- ------------- ------------- ------------
LONG-TERM OBLIGATIONS
Note Payable................... 3,400,000 -- 31,600,000 -- --
Notes payable and purchase
obligations--related
parties...................... 2,077,364 -- -- 362,073 1,639,716
Capital lease obligations, less
current maturities........... 320,673 -- -- -- 116,366
----------- --------------- ------------- ------------- ------------
5,798,037 -- 31,600,000 362,073 1,756,082
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED
STOCK
6.5% cumulative, Series A, $5
par value, authorized and
issued 1,000,000 shares
(liquidation value
$2,500,000).................... 5,273,305 -- -- -- --
Less subscription
receivable--................. (1,500,000) -- -- -- --
----------- --------------- ------------- ------------- ------------
3,773,305 -- -- -- --
9.5% cumulative, Series B,
$11.25 par value, authorized
and issued 355,556 shares
(liquidation value
$4,000,000).................. 4,137,526 -- -- -- --
8% cumulative, Series C, $17.50
par value, 1,071,428
authorized, 571,428 shares
issued (liquidation value
$10,000,000)................. -- 10,000,000 -- -- --
----------- --------------- ------------- ------------- ------------
7,910,831 10,000,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par
value, authorized 1,000,000
shares, no shares issued..... -- -- -- -- --
Common Stock
Class A, $.01 par value;
authorized 20,700,000
shares, issued and
outstanding 800,000
shares..................... 8,000 -- -- -- --
Class B, $.01 par value;
authorized 10,000,000;
issued and outstanding
2,398,000 shares........... 23,980 -- -- 1,450 3,670
Class C, $.01 par value;
authorized 29,050,000; no
shares issued and
outstanding................ -- -- -- -- --
Additional paid in capital..... 2,323,798 -- -- 1,013,550 2,566,530
Accumulated deficit............ (9,033,629) -- -- -- --
----------- --------------- ------------- ------------- ------------
Total stockholders'
equity................... (6,677,851) -- -- 1,015,000 2,570,200
----------- --------------- ------------- ------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..... $11,154,138 $10,000,000 $31,600,000 $ 1,377,073 $ 5,073,272
----------- --------------- ------------- ------------- ------------
----------- --------------- ------------- ------------- ------------
<CAPTION>
PRO FORMA
AS ADJUSTED
JUNE 30,
REFERENCE 1996
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...... $40,208,235
Accounts receivable (net of
allowance for doubtful
accounts of $324,521)........ 2,566,970
Accounts
receivable-affiliates........ 2,379,445
Other receivables.............. 64,251
Prepaid expenses............... 217,156
Due from affiliates............ 891,985
-----------
Total current assets......... 46,328,042
PROPERTY AND EQUIPMENT, net..... 3,815,958
OTHER ASSETS
Intangibles (net of accumulated
amortization of $65,170)..... 6,553,700
Deferred charges (net of
accumulated amortization of
$147,475).................... 2,236,772
Note receivable................ --
Accrued interest receivable.... 245,451
Deposits....................... 24,560
-----------
9,060,483
-----------
TOTAL ASSETS............... $59,204,483
-----------
-----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Bridge loan.................... $ --
Notes payable.................. 303,915
Current maturities of long-term
obligations.................. 535,357
Accounts payable............... 447,949
Accrued medical services....... 550,520
Other accrued expenses......... 2,265,895
Due to affiliates.............. 766,475
-----------
Total current liabilities.... 4,870,111
-----------
LONG-TERM OBLIGATIONS
Note Payable................... 35,000,000
Notes payable and purchase
obligations--related
parties...................... 4,079,153
Capital lease obligations, less
current maturities........... 437,039
-----------
39,516,192
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED
STOCK
6.5% cumulative, Series A, $5
par value, authorized and
issued 1,000,000 shares
(liquidation value
$2,500,000).................... 5,273,305
Less subscription
receivable--................. (1,500,000 )
-----------
3,773,305
9.5% cumulative, Series B,
$11.25 par value, authorized
and issued 355,556 shares
(liquidation value
$4,000,000).................. 4,137,526
8% cumulative, Series C, $17.50
par value, 1,071,428
authorized, 571,428 shares
issued (liquidation value
$10,000,000)................. 10,000,000
-----------
17,910,831
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par
value, authorized 1,000,000
shares, no shares issued..... --
Common Stock
Class A, $.01 par value;
authorized 20,700,000
shares, issued and
outstanding 800,000
shares..................... 8,000
Class B, $.01 par value;
authorized 10,000,000;
issued and outstanding
2,398,000 shares........... (F) 29,100
Class C, $.01 par value;
authorized 29,050,000; no
shares issued and
outstanding................ --
Additional paid in capital..... (F) 5,903,878
Accumulated deficit............ (9,033,629 )
-----------
Total stockholders'
equity................... (3,092,651 )
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..... (G) $59,204,483
-----------
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-26
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ACQUISITIONS COMPLETED SUBSEQUENT TO JUNE 30, 1996
JUNE 30, 1996
<TABLE>
<CAPTION>
PRACTICE N PRACTICE O PRACTICE P PRACTICE Q
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $(152,605) $(243,059) $ (21,135) $ (52,478)
Accounts receivable, net.................................. 58,632 36,813 76,287 16,168
Other receivables......................................... 54,352 34,123 70,713 14,985
Prepaid expenses.......................................... -- --
Due from affiliates....................................... -- -- -- --
----------- ----------- ----------- -----------
Total current assets.................................... (39,621) (172,123) 125,865 (21,325)
PROPERTY AND EQUIPMENT, net................................. 47,605 3,059 1,135 --
OTHER ASSETS
Intangibles, net.......................................... 399,000 422,000 468,000 143,478
Deferred charges, net..................................... -- -- -- --
Note receivable........................................... -- -- -- --
Accrued interest receivable............................... -- -- -- --
Deposits.................................................. -- -- -- --
----------- ----------- ----------- -----------
399,000 422,000 468,000 143,478
----------- ----------- ----------- -----------
TOTAL ASSETS.......................................... $ 406,984 $ 252,936 $ 595,000 $ 122,153
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................................... -- -- -- --
Note payable.............................................. $ -- $ -- $ -- $ --
Current maturities of long-term obligations............... -- -- -- --
Accounts payable.......................................... -- -- -- --
Accrued medical services.................................. -- -- -- --
Other accrued expenses.................................... -- -- -- --
Due to affiliates.........................................
----------- ----------- ----------- -----------
Total current liabilities............................... -- -- -- --
LONG-TERM OBLIGATIONS
Notes payable............................................. -- -- -- --
Notes payable and purchase obligations--related parties... 112,984 70,936 147,000 31,153
Capital lease obligations, less current maturities........ -- -- -- --
----------- ----------- ----------- -----------
112,984 70,936 147,000 31,153
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and
issued 1,000,000 shares (liquidation value
$2,500,000)............................................. -- -- -- --
Less subscription receivable--.......................... -- -- -- --
9.5% cumulative, Series B, $11.25 par value, authorized
and issued 355,556 shares (liquidation value
$4,000,000)............................................. -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized 1,000,000
shares, no shares issued................................
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares,
issued and outstanding 800,000 shares................. -- -- -- --
Class B, $.01 par value; authorized 10,000,000; issued
and outstanding 2,200,000 shares...................... 420 260 640 130
Class C, $.01 par value; authorized 29,050,000; no
shares issued......................................... -- -- -- --
Additional paid in capital................................ 293,580 181,740 447,360 90,870
Accumulated deficit....................................... -- -- -- --
----------- ----------- ----------- -----------
Total stockholders' equity............................ 294,000 182,000 448,000 91,000
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 406,984 $ 252,936 $ 595,000 $ 122,153
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
TOTAL
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ (469,277)
Accounts receivable, net.................................. 187,900
Other receivables......................................... 174,173
Prepaid expenses.......................................... --
Due from affiliates....................................... --
----------
Total current assets.................................... (107,204)
PROPERTY AND EQUIPMENT, net................................. 51,799
OTHER ASSETS
Intangibles, net.......................................... 1,432,478
Deferred charges, net..................................... --
Note receivable........................................... --
Accrued interest receivable............................... --
Deposits.................................................. --
----------
1,432,478
----------
TOTAL ASSETS.......................................... $1,377,073
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................................... --
Note payable.............................................. $ --
Current maturities of long-term obligations............... --
Accounts payable.......................................... --
Accrued medical services.................................. --
Other accrued expenses.................................... --
Due to affiliates.........................................
----------
Total current liabilities............................... --
LONG-TERM OBLIGATIONS
Notes payable............................................. --
Notes payable and purchase obligations--related parties... 362,073
Capital lease obligations, less current maturities........ --
----------
362,073
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and
issued 1,000,000 shares (liquidation value
$2,500,000)............................................. --
Less subscription receivable--.......................... --
9.5% cumulative, Series B, $11.25 par value, authorized
and issued 355,556 shares (liquidation value
$4,000,000)............................................. --
----------
--
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized 1,000,000
shares, no shares issued................................
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares,
issued and outstanding 800,000 shares................. --
Class B, $.01 par value; authorized 10,000,000; issued
and outstanding 2,200,000 shares...................... 1,450
Class C, $.01 par value; authorized 29,050,000; no
shares issued......................................... --
Additional paid in capital................................ 1,013,550
Accumulated deficit....................................... --
----------
Total stockholders' equity............................ 1,015,000
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $1,377,073
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-27
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
PROBABLE ACQUISITIONS
JUNE 30, 1996
<TABLE>
<CAPTION>
PRACTICE M PRACTICE L ALL OTHERS
---------- ---------- ----------
<S> <C> <C> <C>
(C)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $(231,482 ) $ -- $(510,301)
Accounts receivable, net.................................................... 224,189 698,612 152,328
Accounts receivable-affiliates.............................................. 207,811 647,576 141,200
Other receivables........................................................... -- -- --
Prepaid expenses............................................................ -- 100,060 --
Due from affiliates......................................................... -- -- --
---------- ---------- ----------
Total current assets...................................................... 200,518 1,446,248 (216,773)
PROPERTY AND EQUIPMENT, net................................................... 743,749 524,562 10,301
OTHER ASSETS
Intangibles, net............................................................ 480,258 754,934 1,438,000
Deferred charges, net....................................................... -- -- --
Note Receivable............................................................. (300,000 ) -- --
Accrued interest receivable................................................. (8,525 ) -- --
Deposits.................................................................... -- -- --
---------- ---------- ----------
171,733 754,934 1,438,000
---------- ---------- ----------
TOTAL ASSETS.............................................................. $1,116,000 $2,725,744 $1,231,528
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan................................................................. $ $ $ --
Note payable................................................................ -- -- --
Current maturities of long-term obligations................................. 325,000 108,372 --
Accounts payable............................................................ -- 117,302 --
Accrued medical services.................................................... -- -- --
Other accrued expenses...................................................... -- 196,316 --
Due to affiliates........................................................... --
---------- ---------- ----------
Total current liabilities................................................. 325,000 421,990 --
LONG-TERM OBLIGATIONS
Notes Payable............................................................... -- -- --
Notes payable and purchase obligations--related parties..................... -- 1,346,188 293,528
Capital lease obligations, less current maturities.......................... -- 116,366 --
---------- ---------- ----------
-- 1,462,554 293,528
COMMITMENTS AND CONTINGENCIES................................................. --
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000)..................................... -- -- --
Less subscription receivable................................................ -- -- --
---------- ---------- ----------
9.5% cumulative, Series B, $11.26 par value, authorized and issued 355,556
shares (liquidation value $4,000,000)..................................... -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued.................................................................... -- -- --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares.............................................. -- -- --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares........................................................ 1,130 1,200 1,340
Class C, $.01 par value; authorized 20,060,000; no shares issued and
outstanding............................................................. -- -- --
Additional paid in capital.................................................. 789,870 840,000 936,660
Accumulated deficit......................................................... -- -- --
---------- ---------- ----------
Total stockholders' equity................................................ 791,000 841,200 938,000
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $1,116,000 $2,725,744 $1,231,528
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
TOTAL
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $ (741,783)
Accounts receivable, net.................................................... 1,075,129
Accounts receivable-affiliates.............................................. 996,587
Other receivables........................................................... --
Prepaid expenses............................................................ 100,060
Due from affiliates......................................................... --
----------
Total current assets...................................................... 1,429,993
PROPERTY AND EQUIPMENT, net................................................... 1,278,612
OTHER ASSETS
Intangibles, net............................................................ 2,673,192
Deferred charges, net....................................................... --
Note Receivable............................................................. (300,000)
Accrued interest receivable................................................. (8,525)
Deposits.................................................................... --
----------
2,364,667
----------
TOTAL ASSETS.............................................................. $5,073,272
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan................................................................. $ --
Note payable................................................................ --
Current maturities of long-term obligations................................. 433,372
Accounts payable............................................................ 117,302
Accrued medical services.................................................... --
Other accrued expenses...................................................... 196,316
Due to affiliates........................................................... --
----------
Total current liabilities................................................. 746,990
LONG-TERM OBLIGATIONS
Notes Payable............................................................... --
Notes payable and purchase obligations--related parties..................... 1,639,716
Capital lease obligations, less current maturities.......................... 116,366
----------
1,756,082
COMMITMENTS AND CONTINGENCIES................................................. --
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000)..................................... --
Less subscription receivable................................................ --
----------
9.5% cumulative, Series B, $11.26 par value, authorized and issued 355,556
shares (liquidation value $4,000,000)..................................... --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued.................................................................... --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares.............................................. --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares........................................................ 3,670
Class C, $.01 par value; authorized 20,060,000; no shares issued and
outstanding............................................................. --
Additional paid in capital.................................................. 2,566,530
Accumulated deficit......................................................... --
----------
Total stockholders' equity................................................ 2,570,200
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $5,073,272
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL OF THESE FINANCIAL STATEMENTS.
F-28
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
A. Represents the historical audited consolidated balance sheet of the Company
at June 30, 1996.
B. To reflect the issuance of Series C Redeemable Convertible Preferred Stock.
This amount represents the proceeds of $7.5 million received on September 4,
1996 and the $2.5 million to be received on or before December 27, 1996. See
subsequent events (Note 18) footnote on page F-22.
C. To reflect the expected issuance of $35 million in senior subordinated debt.
A portion of the proceeds from the issuance will be used to retire the
Nations Bank Credit facility ($3,400,000) and to fund issuance costs
($1,600,000).
D. Represents the acquisitions completed subsequent to June 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
ACQUISITIONS
COMPLETED
SUBSEQUENT
ASSETS ACQUIRED, NET: TO JUNE 30, 1996
----------------
<S> <C>
Accounts receivable, net.................................................................................. 362,073
Fixed assets, net......................................................................................... 51,799
Management service agreements............................................................................. 1,432,478
----------------
$1,846,350
----------------
----------------
CONSIDERATION:
Cash...................................................................................................... 469,277
Notes payable............................................................................................. 362,073
Fair value of common stock issued......................................................................... 1,013,550
Common stock issued....................................................................................... 1,450
----------------
$1,846,350
----------------
----------------
</TABLE>
E. Represents the probable acquisitions which have not yet been completed. All
others represents Probable Acquisitions which are not significant to the
Unaudited pro Forma Balance Sheet. See "Management's Discussion and Analysis
of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
PROBABLE
ASSETS ACQUIRED, NET: ACQUISITIONS
------------
<S> <C>
Accounts receivable, net...................................................................................... 2,071,716
Prepaids...................................................................................................... 100,060
Fixed assets, net............................................................................................. 1,278,612
Liabilities assumed........................................................................................... (863,356)
Management service agreements................................................................................. 2,673,192
------------
$5,260,224
------------
------------
CONSIDERATION:
Cash.......................................................................................................... 741,783
Note Receivable applied to purchase price..................................................................... 308,525
Notes payable................................................................................................. 1,639,716
Fair value of common stock issued............................................................................. 2,566,530
Common stock issued........................................................................................... 3,670
------------
$5,260,224
------------
------------
</TABLE>
F. The estimated fair value of the stock issued in the acquisitions was $7.00
and was based on a discounted price of the Series C Redeemable Convertible
Preferred Stock issued on September 4, 1996.
G. Practices A through K are not included in the Pro Forma Consolidated Balance
Sheets as they were acquired prior to June 30, 1996.
H. None of the transactions to acquire certain assets of physician practices
subsequent to June 30, 1996 required the Company to assume any liabilities
of the practices.
F-29
<PAGE>
PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
The following pro forma consolidated balance sheet as of September 30,
1996, gives effect to (1) the acquisition of certain assets of physician
practices during the three months ended September 30, 1996, (2) probable
issuance of Senior Subordinated Notes Payable, (3) the acquisition of certain
assets of physician practices subsequent to September 30, 1996 and (4) the
proposed acquisition of certain assets of physician practices subsequent to
September 30, 1996, which are probable (collectively the "Acquired Assets") by
Doctors Health System, Inc. (DHS). Subsequent to the purchase of certain assets
of the physician practices, the Company entered into long-term PSO agreements
with the Core Medical Group which employs the physicians. These transactions are
reflected as of September 30, 1996 for the pro forma consolidated balance sheet.
The pro forma information is based on the respective historical unaudited
financial statements of Doctors Health System, Inc. and the Acquired Assets,
giving effect to the completed and proposed acquisitions at cost and the
assumptions and adjustments described in the accompanying notes to the pro forma
consolidated financial statements.
Management of DHS does not believe that the pro forma consolidated
financial statements are indicative of the results that actually would have
occurred if the combinations had been in effect on the dates indicated or which
may be obtained in the future. The pro forma consolidated financial statements
should be read in conjunction with the financial statements and notes of DHS
contained elsewhere herein.
F-30
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ISSUANCE OF
SERIES C ISSUANCE OF ACQUISITIONS
PREFERRED STOCK SENIOR COMPLETED
SUBSEQUENT TO SUBORDINATED SUBSEQUENT TO PROBABLE
HISTORICAL SEPTEMBER 30, NOTES PAYABLE SEPTEMBER 30, ACQUISITIONS
(A) 1996 (B) (C) 1996 (D) (E) REFERENCE
------------ --------------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 6,620,516 $ 2,500,000 $28,816,983 $ (316,672) $ (741,783)
Accounts receivable, net................ 1,702,499 -- -- 148,421 1,234,442
Accounts receivable--affiliates......... 1,154,740 -- -- 100,668 837,274
Other receivables....................... 82,613 -- -- -- --
Prepaid expenses........................ 180,559 -- -- -- 100,060
Due from affiliates..................... 1,272,914 -- -- -- --
------------ --------------- ------------- ------------- ------------
Total current assets.................. 11,013,841 2,500,000 28,816,983 (67,583) 1,429,993
PROPERTY AND EQUIPMENT, net.............. 2,650,245 -- -- 4,194 1,278,612
OTHER ASSETS
Intangibles, net........................ 2,886,235 -- -- 1,033,478 2,673,192 (D)
Deferred charges, net................... 793,965 -- 1,600,000 -- --
Note receivable......................... 300,000 -- -- -- (300,000)
Accrued interest receivable............. 303,664 -- -- -- (8,525)
Deposits................................ 51,228 -- -- -- --
------------ --------------- ------------- ------------- ------------
4,335,092 -- 1,600,000 1,033,478 2,364,667
------------ --------------- ------------- ------------- ------------
TOTAL ASSETS........................ $ 17,999,178 $ 2,500,000 30,416,983 $ 970,089 $ 5,073,272
------------ --------------- ------------- ------------- ------------
------------ --------------- ------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................. $ 983,017 $ -- $ (983,017) $ -- $ --
Notes payable........................... 135,800 -- -- -- --
Current maturities of long-term
obligations........................... 105,521 -- -- -- 433,372
Accounts payable........................ 394,363 -- -- -- 117,302
Accrued medical services................ 990,050 -- -- -- --
Other accrued expenses.................. 1,772,387 -- -- -- 196,316
Due to affiliates....................... 1,286,747 -- -- -- --
------------ --------------- ------------- ------------- ------------
Total current liabilities............. 5,667,885 -- (983,017) -- 746,990
------------ --------------- ------------- ------------- ------------
LONG-TERM OBLIGATIONS
Note Payable............................ 3,600,000 31,400,000
Notes payable and purchase
obligations--related parties.......... 2,233,222 -- -- 249,089 1,639,716
Capital lease obligations, less current
maturities............................ 292,428 -- -- -- 116,366
------------ --------------- ------------- ------------- ------------
6,125,650 -- 31,400,000 249,089 1,756,082
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value,
authorized and issued 1,000,000 shares
(liquidation value $2,500,000).......... 5,354,555 -- -- -- --
Less subscription receivable--.......... (1,500,000) -- -- -- --
------------ --------------- ------------- ------------- ------------
3,854,555 -- -- -- --
9.5% cumulative, Series B, $11.25 par
value, authorized and issued 355,556
shares (liquidation value
$4,000,000)........................... 4,235,037 -- -- -- --
8% cumulative, Series C, $17.50 par
value, 1,071,428 authorized, 571,428
shares issued (liquidation value
$10,000,000).......................... 7,533,463 2,500,000 -- -- --
------------ --------------- ------------- ------------- ------------
2,500,000 -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 1,000,000 shares, no shares
issued................................ -- -- -- -- --
Common Stock
Class A, $.01 par value; authorized
20,700,000 shares, issued and
outstanding 800,000 shares.......... 8,000 -- -- -- --
Class B, $.01 par value; authorized
10,000,000; issued and outstanding
2,200,000 shares.................... 24,400 -- 1,030 3,670 (F)
Class C, $.01 par value; authorized
29,050,000; no shares issued........ -- -- -- -- --
Additional paid in capital.............. 2,617,379 -- -- 719,970 2,566,530 (F)
Accumulated deficit..................... (12,067,190) -- -- -- --
------------ --------------- ------------- ------------- ------------
Total stockholders' equity.......... (9,417,412) -- -- 721,000 2,570,200
------------ --------------- ------------- ------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ $ 17,999,178 $ 2,500,000 $30,416,983 $ 970,089 $ 5,073,272
------------ --------------- ------------- ------------- ------------
------------ --------------- ------------- ------------- ------------
<CAPTION>
PRO FORMA
AS ADJUSTED
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 36,879,044
Accounts receivable, net................ 3,085,362
Accounts receivable--affiliates......... 2,092,682
Other receivables....................... 82,613
Prepaid expenses........................ 280,619
Due from affiliates..................... 1,272,914
-------------
Total current assets.................. 43,693,234
PROPERTY AND EQUIPMENT, net.............. 3,933,051
OTHER ASSETS
Intangibles, net........................ 6,592,905
Deferred charges, net................... 2,393,965
Note receivable......................... --
Accrued interest receivable............. 295,139
Deposits................................ 51,228
-------------
9,333,237
-------------
TOTAL ASSETS........................ $ 56,959,522
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................. $ --
Notes payable........................... 135,800
Current maturities of long-term
obligations........................... 538,893
Accounts payable........................ 511,665
Accrued medical services................ 990,050
Other accrued expenses.................. 1,968,703
Due to affiliates....................... 1,286,747
-------------
Total current liabilities............. 5,431,858
-------------
LONG-TERM OBLIGATIONS
Note Payable............................ 35,000,000
Notes payable and purchase
obligations--related parties.......... 4,122,027
Capital lease obligations, less current
maturities............................ 408,794
-------------
39,530,821
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value,
authorized and issued 1,000,000 shares
(liquidation value $2,500,000).......... 5,354,555
Less subscription receivable--.......... (1,500,000)
-------------
3,854,555
9.5% cumulative, Series B, $11.25 par
value, authorized and issued 355,556
shares (liquidation value
$4,000,000)........................... 4,235,077
8% cumulative, Series C, $17.50 par
value, 1,071,428 authorized, 571,428
shares issued (liquidation value
$10,000,000).......................... 10,033,463
-------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
authorized 1,000,000 shares, no shares
issued................................ --
Common Stock
Class A, $.01 par value; authorized
20,700,000 shares, issued and
outstanding 800,000 shares.......... 8,000
Class B, $.01 par value; authorized
10,000,000; issued and outstanding
2,200,000 shares.................... 29,100
Class C, $.01 par value; authorized
29,050,000; no shares issued........ --
Additional paid in capital.............. 5,903,878
Accumulated deficit..................... (12,067,190)
-------------
Total stockholders' equity.......... (6,126,212)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ $ 56,959,522
-------------
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-31
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ACQUISITIONS COMPLETED SUBSEQUENT TO SEPTEMBER 30, 1996
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRACTICE O PRACTICE P PRACTICE Q TOTAL
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................................. $(243,059) $ (21,135) $ (52,478) $ (316,672)
Accounts receivable, net............................................... 42,267 87,591 18,563 148,421
Accounts receivable--affiliates........................................ 28,669 59,409 12,590 100,668
Other receivables...................................................... -- -- -- --
Prepaid expenses....................................................... -- -- -- --
Due from affiliates.................................................... -- -- -- --
----------- ----------- ----------- ----------
Total current assets................................................. (172,123) 125,865 (21,325) (67,583)
PROPERTY AND EQUIPMENT, net.............................................. 3,059 1,135 -- 4,194
OTHER ASSETS
Intangibles, net....................................................... 422,000 468,000 143,478 1,033,478
Deferred charges, net.................................................. -- -- -- --
Accrued interest receivable............................................ -- -- -- --
Deposits............................................................... -- -- -- --
----------- ----------- ----------- ----------
422,000 468,000 143,478 1,033,478
----------- ----------- ----------- ----------
TOTAL ASSETS....................................................... $ 252,936 $ 595,000 $ 122,153 $ 970,089
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................................................ $ -- $ -- $ -- $ --
Accounts payable....................................................... -- -- -- --
Accrued medical services............................................... -- -- -- --
Other accrued expenses................................................. -- -- -- --
Note payable........................................................... -- -- -- --
Current maturities of long-term obligations............................ -- -- -- --
Due to affiliates...................................................... -- -- -- --
----------- ----------- ----------- ----------
Total current liabilities............................................ -- -- -- --
LONG-TERM OBLIGATIONS
Notes Payable.......................................................... -- -- -- --
Notes payable and purchase obligations--related parties................ 70,936 147,000 31,153 249,089
Capital lease obligations, less current maturities..................... -- -- -- --
----------- ----------- ----------- ----------
70,936 147,000 31,153 249,089
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued
1,000,000 shares (liquidation value $2,500,000)...................... -- -- -- --
Less subscription receivable--....................................... -- -- -- --
----------- ----------- ----------- ----------
9.5% cumulative, Series B, $11.25 par value, authorized and issued
355,556 shares (liquidation value $4,000,000)........................ -- -- -- --
----------- ----------- ----------- ----------
8% cumulative, Series C, $17.50 par value, 1,071,428 authorized,
571,428 shares issued (liquidation value $10,000,000)................ -- -- -- --
----------- ----------- ----------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued............................................................... -- -- -- --
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares......................................... -- -- -- --
Class B, $.01 par value; authorized 10,000,000; issued and
outstanding 2,200,000 shares....................................... 260 640 130 1,030
Class C, $.01 par value; authorized 29,050,000; no shares issued .... -- -- -- --
Additional paid in capital............................................. 181,740 447,360 90,870 719,970
Accumulated deficit.................................................... -- -- -- --
----------- ----------- ----------- ----------
Total stockholders' equity......................................... 182,000 448,000 91,000 721,000
----------- ----------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 252,936 $ 595,000 $ 122,153 $ 970,089
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-32
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
PROBABLE ACQUISITIONS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRACTICE M PRACTICE L ALL OTHERS
---------- ---------- --------------
<S> <C> <C> <C>
(D)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................... $(231,482 ) $ -- $ (510,301)
Accounts receivable, net................................................ 257,410 802,132 174,900
Accounts receivable--affiliates......................................... 174,590 544,056 118,628
Other receivables....................................................... -- -- --
Prepaid expenses........................................................ -- 100,060 --
Due from affiliates..................................................... -- -- --
---------- ---------- --------------
Total current assets.................................................. 200,518 1,446,248 (216,773)
PROPERTY AND EQUIPMENT, net............................................... 743,749 524,562 10,301
OTHER ASSETS
Intangibles, net........................................................ 480,258 754,934 1,438,000
Deferred charges, net................................................... -- -- --
Note Receivable......................................................... (300,000 )
Accrued interest receivable............................................. (8,525 ) -- --
Deposits................................................................ -- -- --
---------- ---------- --------------
171,733 754,934 1,438,000
---------- ---------- --------------
TOTAL ASSETS.......................................................... $1,116,000 $2,725,744 $1,231,528
---------- ---------- --------------
---------- ---------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................................................. -- -- --
Note payable............................................................ $ -- $ -- $ --
Current maturities of long-term obligations............................. 325,000 108,372 --
Accounts payable........................................................ -- 117,302 --
Accrued medical services................................................ -- -- --
Other accrued expenses.................................................. -- 196,316 --
Due to affiliates....................................................... -- -- --
---------- ---------- --------------
Total current liabilities............................................. 325,000 421,990 --
LONG-TERM OBLIGATIONS
Notes payable........................................................... -- -- --
Notes payable and purchase obligations--related parties................. -- 1,346,188 293,528
Capital lease obligations, less current maturities...................... -- 116,366 --
---------- ---------- --------------
-- 1,462,554 293,528
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000)................................. -- -- --
Less subscription receivable--.......................................... -- -- --
---------- ---------- --------------
-- -- --
9.5% cumulative, Series B, $11.26 par value, authorized and issued
355,556 shares (liquidation value $4,000,000)......................... -- -- --
8% cumulative, Series C, $17.50 par value, 1,071,428 authorized, 571,428
shares issued (liquidation value $10,000,000)......................... -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued................................................................ -- -- --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares.......................................... -- -- --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares.................................................... 1,130 1,200 1,340
Class C, $.01 par value; authorized 20,060,000; no shares issued...... -- -- --
Additional paid in capital.............................................. 789,870 840,000 936,660
Accumulated deficit..................................................... -- -- --
---------- ---------- --------------
Total stockholders' equity............................................ 791,000 841,200 938,000
---------- ---------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $1,116,000 $2,725,744 $1,231,528
---------- ---------- --------------
---------- ---------- --------------
<CAPTION>
TOTAL
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................... $ (741,783)
Accounts receivable, net................................................ 1,234,442
Accounts receivable--affiliates......................................... 837,274
Other receivables....................................................... --
Prepaid expenses........................................................ 100,060
Due from affiliates..................................................... --
----------
Total current assets.................................................. 1,429,993
PROPERTY AND EQUIPMENT, net............................................... 1,278,612
OTHER ASSETS
Intangibles, net........................................................ 2,673,192
Deferred charges, net................................................... --
Note Receivable......................................................... (300,000)
Accrued interest receivable............................................. (8,525)
Deposits................................................................ --
----------
2,364,667
----------
TOTAL ASSETS.......................................................... $5,073,272
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bridge loan............................................................. --
Note payable............................................................ $ --
Current maturities of long-term obligations............................. 433,372
Accounts payable........................................................ 117,302
Accrued medical services................................................ --
Other accrued expenses.................................................. 196,316
Due to affiliates....................................................... --
----------
Total current liabilities............................................. 746,990
LONG-TERM OBLIGATIONS
Notes payable........................................................... --
Notes payable and purchase obligations--related parties................. 1,639,716
Capital lease obligations, less current maturities...................... 116,366
----------
1,756,082
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000
shares (liquidation value $2,500,000)................................. --
Less subscription receivable--.......................................... --
----------
--
9.5% cumulative, Series B, $11.26 par value, authorized and issued
355,556 shares (liquidation value $4,000,000)......................... --
8% cumulative, Series C, $17.50 par value, 1,071,428 authorized, 571,428
shares issued (liquidation value $10,000,000)......................... --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized 1,000,000 shares, no shares
issued................................................................ --
Common Stock:
Class A, $.01 par value; authorized 20,700,000 shares, issued and
outstanding 800,000 shares.......................................... --
Class B, $.01 par value; authorized 10,000,000; issued and outstanding
2,200,000 shares.................................................... 3,670
Class C, $.01 par value; authorized 20,060,000; no shares issued...... --
Additional paid in capital.............................................. 2,566,530
Accumulated deficit..................................................... --
----------
Total stockholders' equity............................................ 2,570,200
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $5,073,272
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL OF THESE FINANCIAL STATEMENTS.
F-33
<PAGE>
DOCTORS HEALTH SYSTEM, INC. AND ACQUIRED ASSETS
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
A. Represents the historical unaudited consolidated balance sheet of the
Company at September 30, 1996.
B. To reflect the issuance of Series C Redeemable Convertible Preferred Stock.
This amount represents the $2.5 million to be received on or before December
27, 1996. See subsequent events (Note 19) footnote on page F-21.
C. To reflect the expected issuance of $35 million in senior subordinated debt.
A portion of the proceeds from the issuance will be used to retire the
NationsBank Credit facility ($3,600,000), to retire the Bridge loan
($983,000), and to fund issuance costs ($1,600,000).
D. Represents the acquisitions completed subsequent to September 30, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
ACQUISITIONS
COMPLETED SUBSEQUENT
ASSETS ACQUIRED, NET: TO SEPTEMBER 30, 1996
---------------------
<S> <C>
Accounts receivable, net............................................................................. 249,089
Fixed assets, net.................................................................................... 4,194
Management Service Agreements........................................................................ 1,033,478
---------------------
$ 1,286,761
---------------------
---------------------
CONSIDERATION:
Cash................................................................................................. 316,672
Notes payable........................................................................................ 249,089
Fair value of common stock issued.................................................................... 719,970
Common Stock issued.................................................................................. 1,030
---------------------
$ 1,286,761
---------------------
---------------------
</TABLE>
E. Represents the probable acquisitions which have not yet been completed. All
others represents Probable Acquisitions which are not significant to the
Unaudited pro Forma Balance Sheet. See "Management's Discussion and Analysis
of Financial Condition and Results of
Operations--Acquisitions/Affiliations."
<TABLE>
<CAPTION>
PROBABLE
ASSETS ACQUIRED, NET: ACQUISITIONS
------------
<S> <C>
Accounts receivable, net...................................................................................... 2,071,716
Prepaids...................................................................................................... 100,060
Fixed assets, net............................................................................................. 1,278,612
Liabilities assumed........................................................................................... (863,356)
Management Service Agreements................................................................................. 2,673,192
------------
$5,260,224
------------
------------
CONSIDERATION:
Cash.......................................................................................................... 741,783
Notes payable................................................................................................. 1,639,716
Note Receivable applied to purchase price..................................................................... 308,525
Fair value of common stock issued............................................................................. 2,566,530
Common Stock issued........................................................................................... 3,670
------------
$5,260,224
------------
------------
</TABLE>
F. The estimated fair value of the stock issued in the acquisitions was $7.00
and was based on a discounted price of the Series C Redeemable Convertible
Preferred Stock issued on September 4, 1996.
G. Practices A through K are not included in the Pro Forma Consolidated Balance
Sheets as they were acquired prior to September 30, 1996.
H. None of the transactions to acquire certain assets of physician practices
subsequent to June 30, 1996 required the Company to assume any liabilities
of the practices.
F-34
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 2
Forward-Looking Statements..................... 2
Prospectus Summary............................. 3
Glossary....................................... 4
Risk Factors................................... 8
Use of Proceeds................................ 16
Selected Consolidated Financial Data........... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 26
Management..................................... 50
Certain Transactions........................... 57
Principal Stockholders......................... 59
Description of Capital Stock................... 61
Plan of Distribution........................... 67
Legal Matters.................................. 69
Experts........................................ 69
Financial Statements........................... F-1
</TABLE>
[DOCTORS HEALTH SYSTEM, INC. LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth a statement of all expenses payable by the
Registrant in connection with the registration, issuance and distribution of the
Securities offered hereby, other than the underwriting discount.
<TABLE>
<S> <C>
SEC Registration Fee........................................................................................... $ 24,848.48
Accounting Fees and Expenses................................................................................... *
Legal Fees and Expenses........................................................................................ *
Printing and Engraving Expenses................................................................................ *
Blue Sky Fees and Expenses..................................................................................... *
Miscellaneous Fees and Expenses................................................................................ *
-----------
Total..................................................................................................... $ *
-----------
-----------
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that the Registrant may indemnify any director who was, is or is threatened to
be made a named defendant or respondent to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director of the
Registrant, or while a director, is or was serving at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan, against reasonable expenses
(including attorneys' fees), judgments, penalties, fines and settlements,
actually incurred by the director in connection with such action, suit or
proceeding, unless it is established that: (i) the act or omission of the
director was material to the matter giving rise to such action, suit or
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the director actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. If the action, suit or proceeding was one by or in the
right of the Registrant, no indemnification shall be made with respect to any
action, suit or proceeding in which the director shall have been adjudged to be
liable to the Registrant. A director also may not be indemnified with respect to
any action, suit or proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official capacity,
in which the director is adjudged to be liable on the basis that a personal
benefit was improperly received. Unless limited by the Registrant's Charter: (i)
a court of appropriate jurisdiction, upon application of a director, may order
such indemnification as the court shall deem proper if it determines that the
director is fairly and reasonably entitled to indemnification in view of all of
the relevant circumstances, regardless of whether the director has met the
standards of conduct required by Section 2-418; and (ii) the Registrant shall
indemnify a director if such director is successful on the merits or otherwise
in defense of any action, suit or proceeding referred to above. However, with
respect to any action, suit or proceeding by or in the right of the Registrant
or in which the director was adjudged to be liable on the basis that a personal
benefit was improperly received, the Registrant may only indemnify the director
for any expenses (including, attorneys' fees) incurred in connection with such
action, suit or proceeding.
Section 2-418 of the MGCL further provides that unless limited by the
Registrant's Charter, the Registrant: (i) shall (a) indemnify an officer of the
Registrant if such officer is successful on the merits or otherwise in defense
of any action, suit or proceeding referred to above, and (b) indemnify an
officer of the Registrant if a court of appropriate jurisdiction, upon
application of an officer, shall order indemnification; (ii) may indemnify and
advance expenses to an officer, employee or agent of the Registrant to the same
extent that it may indemnify directors; and (iii) may indemnify and advance
expenses to an officer, employee or agent who is not a director to such further
extent, consistent with law, as may be provided by the Charter, Bylaws, general
or specific action of the Registrant's Board of Directors or contract.
The Registrant's Bylaws provide that, to the maximum extent permitted by
the MGCL, as from time to time amended, the Registrant shall indemnify (i) its
current and former directors, officers, agents and employees, and (ii) those
persons who, at the request of the Registrant, serve or have served another
corporation, partnership, joint venture, trust or other enterprise in one or
more of such capacities, against any and all liabilities incurred in connection
with their services in such capacities,
II-1
<PAGE>
to the extent determined appropriate by the Board of Directors. The Bylaws
further provide that, to the extent required by the Charter or applicable law,
the Registrant shall indemnify such individuals.
The Registrant's Charter provides that, to the fullest extent permitted by
the MGCL, as amended or interpreted, no director or officer of the Registrant
shall be personally liable to the Registrant or its stockholders for monetary
damages in connection with events occurring at the time such person served as a
director or officer. The Registrant's Charter also provides that, to the maximum
extent permitted by the MGCL, as from time to time amended, the Registrant shall
indemnify its current and former directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities. The Registrant also may, if approved by the Board of Directors,
indemnify officers, employees, agents and persons who serve or have served at
its request with another corporation, partnership or other entity.
The provisions in the Charter and Bylaws do not eliminate the duty of care.
In appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief remain available under Maryland law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Registrant or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under the MGCL. These provisions also do not
affect a director's or officer's responsibilities under any other law, such as
the federal or state securities laws or state or federal environmental laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In December 1994, the Company issued 150,000 shares of its Class A Common
Stock to Stewart B. Gold (which pursuant to a stock split are currently 600,000
shares of Class A Common Stock). Additionally, the Company issued to Scott
Rifkin and Alan Kimmel 25,000 shares each of Class A Common Stock (which
pursuant to a stock split are currently 100,000 shares of Class A Common Stock).
The shares were issued for $200 in cash and in consideration for services
performed for the Company as founders of the Company.
In February 1995, the Company issued 1,100,000 shares of its Class B Common
Stock (now 2,200,000 shares as a result of a stock split) to Medical Holdings
Limited Partnership in consideration of the transfer of receivables, equipment,
and other assets of medical practices from MHLP to the Company with an aggregate
value of approximately $492,000.
In February 1995, the Company issued to St. Joseph Medical Center, Inc., a
Maryland non-profit, non-stock corporation, 500,000 shares of Series A Preferred
Stock (now 1,000,000 shares and convertible to 1,000,000 shares of Class C
Common Stock, subject to certain dilutive events) for $2 million in cash and a
note in the principal amount of $3 million.
In December 1995, the Company issued to Med-Lantic Management Services,
Inc. 355,556 shares of the Company's Series B Preferred Stock and Warrants to
Medical Mutual Liability Insurance Society of Maryland to purchase 88,889 shares
of Class A Common Stock in consideration of $4 million in cash and a loan
guarantee in the amount of $4 million.
In 1995 and 1996 (August 10, 1995, October 18, 1995, December 21, 1995, May
1996 and November 1996), the Company issued options to purchase a total of
469,380 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. The options were
issued at exercise prices ranging from $0.01 per share to $30.00 per share. None
of the options been exercised as of the date of this Registration Statement. The
options were issued in consideration of services performed and to be performed
for the Company.
In December 1995, the Company paid $40,000 in cash and issued warrants to
purchase a total of 24,000 shares of Class A Common Stock in the aggregate to
Stephen Graham, Andrew Hamilton and John Dwyer as compensation for investment
advice rendered to the Company.
In January 1996, the Company issued 33,000 shares of its Class B Common
Stock to a primary care physician, and in February 1996, issued an aggregate of
132,000 shares of its Class B Common Stock to four primary care physicians, in
connection with the mergers of their medical practices into wholly-owned
subsidiaries of the Company. The aggregate amount of consideration transferred
to the Company for the issuance of the shares was approximately $495,000.
In May 1996, the Company issued 33,000 shares of Class B Common Stock to a
primary care physician, in connection with the merger of his medical practice
into a wholly-owned subsidiary of the Company. The amount of consideration
transferred to the Company for the issuance of the shares was approximately
$99,000.
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<PAGE>
In September 1996, the Company issued 428,571 shares of Series C Preferred
Stock to Genesis Health Ventures, Inc. for $7.5 million in cash.
In September 1996, the Company issued to Dr. Mark Eig, a director of the
Company, 16,000 shares and 1,000 options to purchase shares of the Company's
Class B Common Stock in consideration of the merger of his medical practice into
a wholly-owned subsidiary of the Company. The amount of consideration
transferred to the Company for the issuance of the shares was approximately
$112,000.
In September 1996, the Company issued an aggregate of 26,000 shares and
2,000 options to purchase shares of the Company's Class B Common Stock to two
primary care physicians in consideration of the merger of their medical
practices into wholly-owned subsidiaries of the Company. The aggregate amount of
consideration transferred to the Company for the issuance of the shares was
approximately $182,000.
In October 1996, the Company issued an aggregate 64,000 shares of the
Company's Class B Common Stock to four primary care physicians in consideration
of the merger of their medical practices into a wholly owned subsidiary of the
Company. The amount of consideration transferred to the Company for the issuance
of the shares was approximately $448,000.
The sale and issuance of the securities listed above were exempt from
registration under the Securities Act by virtue of Sections 4(2) of the
Securities Act and, with respect to the options listed above, in reliance on
Rule 701 promulgated thereunder. The recipients of the above-described
securities represented their intention to acquire the securities for investment
only and not with a view to distribution thereof. Appropriate restrictive
legends were affixed to stock certificates and options issued in such
transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 (a) Articles of Amendment and Restatement of the Registrant, dated December 8, 1995.*
(b) Articles of Amendment and Restatement of the Registrant, dated September 4, 1996.*
3.2 (a) Amended Bylaws of the Registrant.*
(b) Amended Bylaws of the Registrant, as of September 4, 1996.*
4 Form of Option Agreement (filed herewith).
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 (a) Stockholders Agreement dated December 1, 1995, by and among the Registrant, Stewart Gold, Scott Rifkin, Alan
Kimmel, Medical Holdings Limited Partnership, St. Joseph Medical Center, Inc., Medical Mutual Liability
Insurance Society of Maryland, and Med-Lantic Management Services, Inc.*
(b) Amended Stockholders Agreement, dated September 4, 1996.*
10.2 Registration Rights Agreement dated December 1, 1995 , by and among the Registrant, Medical Mutual Liability
Insurance Society of Maryland and Med-Lantic Management Services, Inc.*
10.3 Securities Purchase Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.4 Registration Rights Agreement dated February 24, 1995 by and between the Registrant and St. Joseph Medical Center,
Inc. and amendment thereto dated December 1, 1995.*
10.5 Baltimore Medical Group, LLC Operating Agreement dated February 24, 1995.*
10.6 Agreement of Limited Partnership of Medical Holdings Limited Partnership dated February 24, 1995.*
10.7 Stockholders Agreement between BMGGP, Inc. and Stockholders dated as of February 24, 1995.*
10.8 Financing Transaction Agreement dated as of February 24, 1995 by and among the Registrant and Baltimore Medical
Group, LLC, BMG Limited Partnership, BMGGP, Inc., and St. Joseph Medical Center, Inc.*
10.9 Form of Exclusive Physician Participation Agreement.*
10.10 Form of Non-Exclusive Physician Participation Agreement.*
10.11 Amended and Restated Physician Services Organization Agreement of Baltimore Medical Group, LLC.*
10.12 Form of Practice Participation Agreement.*
10.13 Form of Professional Services Employment Agreement.*
10.14 Form of Specialist Physician Employment Agreement.*
10.15 Form of Medical Director Employment Agreement.*
10.16 Form of Specialist Physician Network Agreement.*
10.17 Major Decision Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
10.18 Promissory Note dated as of December 1, 1995 by and between the Registrant and Medical Mutual Liability Insurance
Society of Maryland.*
10.19 Non-negotiable, non-transferable Promissory Note dated February 24, 1995 by and between the Registrant and St.
Joseph Medical Center, Inc.*
10.20 Loan Agreement dated as of December 1, 1995, by and between the Registrant and NationsBank, N.A.*
10.21 Guaranty Agreement dated December 1, 1995 by and between Medical Mutual Liability Insurance Society of Maryland
and NationsBank, N.A.*
10.22 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Stewart B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul A. Serini and amendment
thereto dated January 1, 1996.*
10.25 Employment Agreement dated as of March 20, 1995 by and between the Registrant and Allan C. Sanders, CPA.*
10.26 Employment Agreement between the Registrant and Theresa A. Spoleti.*
10.27 Form of Employment Agreement.*
10.28 Form of Practice Transfer Agreement.*
10.29(a) Form of Offer Letter.*
(b) Amended Form of Offer Letter.*
10.30 Free State Health Plan, Inc., IPA Service Agreement (subject to confidentiality request for certain portions of
the exhibit).*
10.31 Binding Letter of Intent with Health Care Corporation of the Mid-Atlantic for Medicare Risk Service Agreement
(subject to confidentiality request for certain portions of the exhibit).*
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (subject to
confidentiality request for certain portions of the exhibit).*
10.33 Form of Reacquisition Agreement.*
10.34 Amended and Restated Physician Services Organization Agreement of Carroll Medical Group, LLC.*
10.35 Amended and Restated Physician Services Organization Agreement of Cumberland Valley Medical Group, LLC.*
10.36 Physician Services Organization Agreement of Doctors Health Montgomery, LLC.*
10.37 Stock Purchase Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996.*
10.38 Registration Rights Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996.*
10.39 Option Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996.*
10.40 IPA Percentage of Premium Service Agreement with Chesapeake Health Plan, dated as of June 1, 1996 (subject to
confidentiality request for certain portions of the exhibit).*
10.41 $1,500,000 Promissory Note to First National Bank.*
10.42 Credit Enhancement Letter dated August 15, 1996 between the Registrant and St. Joseph Medical Center.*
10.43 Employment Agreement dated as of May 1,1996 between the Registrant and John R. Dwyer, Jr.*
10.44 Primary Care Limited Participation Agreement.*
10.45 Medicare HMO--Primary Care Limited Participation Agreement.*
10.46 Agreement and Plan of Merger between Medtrust Medical Group, Inc. and the Registrant (filed herewith).
10.47 Management Services Agreement between Medtrust Medical Group, Inc. and the Registrant (filed herewith).
11 Computation of Earnings Per Common and Common Equivalent Share (filed herewith).
23.1 Consent of Grant Thornton LLP (filed herewith).
23.2 Consent of Venable, Baetjer and Howard, LLP.**
24.1 Power of Attorney.*
24.2 Power of Attorney of Mark H. Eig, M.D. *
24.3 Power of Attorney of Robert G. Graw, Jr., M.D.*
24.4 Power of Attorney of William Lamm, M.D.*
24.5 Power of Attorney of Alexander Rocha, M.D.*
24.6 Power of Attorney of Richard R. Howard (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
II-4
<PAGE>
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 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 November 22, 1996.
DOCTORS HEALTH SYSTEM, INC.
/s/ Stewart B. Gold____________________
Name: Stewart B. Gold
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ------------------
<C> <S> <C>
/s/ STEWART B. GOLD Chief Executive Officer; President; November 22, 1996
- ------------------------------------------------------ Director (Principal Executive Officer)
STEWART B. GOLD
/s/ * Chairman November 22, 1996
- ------------------------------------------------------
SCOTT M. RIFKIN, M.D.
/s/ JOHN R. DWYER, JR. Chief Financial Officer; Treasurer and November 22, 1996
- ------------------------------------------------------ Director (Principal Financial Officer)
JOHN R. DWYER, JR.
/s/ PAUL A. SERINI Director; Executive Vice President of November 22, 1996
- ------------------------------------------------------ Strategic Operations and Director of
PAUL A. SERINI Legal Affairs
/s/ KYLE R. MILLER Vice President of Finance (Principal November 22, 1996
- ------------------------------------------------------ Accounting Officer)
KYLE R. MILLER
/s/ * Executive Vice President for Medical Policy November 22, 1996
- ------------------------------------------------------ and Practice; Director
ALAN L. KIMMEL, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
JOHN S. PROUT
/s/ * Director November 22, 1996
- ------------------------------------------------------
JOHN W. ELLIS
/s/ * Director November 22, 1996
- ------------------------------------------------------
J. DAVID NAGEL, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
PETER J. LOPRESTI, D.O.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ------------------
<C> <S> <C>
/s/ * Director November 22, 1996
- ------------------------------------------------------
HOWARD L. GOLDMAN, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
ROBERT L. ANCONA, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
ROBERT S. ZETZER
/s/ * Director November 22, 1996
- ------------------------------------------------------
WILLIAM D. LAMM, M.D.
/s/ * Director November 22, 1996
- -----------------------------------------------------
D. ALEXANDER ROCHA, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
MARK H. EIG, M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
ROBERT G. GRAW, JR., M.D.
/s/ * Director November 22, 1996
- ------------------------------------------------------
RICHARD R. HOWARD
</TABLE>
<TABLE>
<C> <S> <C>
*By: /s/ STEWART B. GOLD November 22, 1996
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
3.1 (a) Articles of Amendment and Restatement of the Registrant, dated December 8, 1995.*
(b) Articles of Amendment and Restatement of the Registrant, dated September 4, 1996.*
3.2 (a) Amended Bylaws of the Registrant.*
(b) Amended Bylaws of the Registrant, as of September 4, 1996.*
4 Form of Option Agreement (filed herewith).
5 Legal Opinion of Venable, Baetjer & Howard, LLP.**
10.1 (a) Stockholders Agreement dated December 1, 1995, by and among the Registrant, Stewart Gold, Scott Rifkin,
Alan Kimmel, Medical Holdings Limited Partnership, St. Joseph Medical Center, Inc., Medical Mutual
Liability Insurance Society of Maryland, and Med-Lantic Management Services, Inc.*
(b) Amended Stockholders Agreement, dated September 4, 1996.*
10.2 Registration Rights Agreement dated December 1, 1995 , by and among the Registrant, Medical Mutual
Liability Insurance Society of Maryland and Med-Lantic Management Services, Inc.*
10.3 Securities Purchase Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual
Liability Insurance Society of Maryland.*
10.4 Registration Rights Agreement dated February 24, 1995 by and between the Registrant and St. Joseph Medical
Center, Inc. and amendment thereto dated December 1, 1995.*
10.5 Baltimore Medical Group, LLC Operating Agreement dated February 24, 1995.*
10.6 Agreement of Limited Partnership of Medical Holdings Limited Partnership dated February 24, 1995.*
10.7 Stockholders Agreement between BMGGP, Inc. and Stockholders dated as of February 24, 1995.*
10.8 Financing Transaction Agreement dated as of February 24, 1995 by and among the Registrant and Baltimore
Medical Group, LLC, BMG Limited Partnership, BMGGP, Inc., and St. Joseph Medical Center, Inc.*
10.9 Form of Exclusive Physician Participation Agreement.*
10.10 Form of Non-Exclusive Physician Participation Agreement.*
10.11 Amended and Restated Physician Services Organization Agreement of Baltimore Medical Group, LLC.*
10.12 Form of Practice Participation Agreement.*
10.13 Form of Professional Services Employment Agreement.*
10.14 Form of Specialist Physician Employment Agreement.*
10.15 Form of Medical Director Employment Agreement.*
10.16 Form of Specialist Physician Network Agreement.*
10.17 Major Decision Agreement dated December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.18 Promissory Note dated as of December 1, 1995 by and between the Registrant and Medical Mutual Liability
Insurance Society of Maryland.*
10.19 Non-negotiable, non-transferable Promissory Note dated February 24, 1995 by and between the Registrant and
St. Joseph Medical Center, Inc.*
10.20 Loan Agreement dated as of December 1, 1995, by and between the Registrant and NationsBank, N.A.*
10.21 Guaranty Agreement dated December 1, 1995 by and between Medical Mutual Liability Insurance Society of
Maryland and NationsBank, N.A.*
10.22 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Stewart B. Gold.*
10.23 Employment Agreement dated as of July 1, 1994 by and between the Registrant and Scott M. Rifkin, MD.*
10.24 Employment Agreement dated as of April 1, 1995 by and between the Registrant and Paul A. Serini and
amendment thereto dated January 1, 1996.*
10.25 Employment Agreement dated as of March 20, 1995 by and between the Registrant and Allan C. Sanders, CPA.*
10.26 Employment Agreement between the Registrant and Theresa A. Spoleti.*
10.27 Form of Employment Agreement.*
10.28 Form of Practice Transfer Agreement.*
10.29(a) Form of Offer Letter.*
(b) Amended Form of Offer Letter.*
10.30 Free State Health Plan, Inc., IPA Service Agreement (subject to confidentiality request for certain
portions of the exhibit).*
10.31 Binding Letter of Intent with Health Care Corporation of the Mid-Atlantic for Medicare Risk Service
Agreement (subject to confidentiality request for certain portions of the exhibit).*
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
10.32 Binding Letter of Intent with Chesapeake Health Plan for Medicare Risk Service Agreement (subject to
confidentiality request for certain portions of the exhibit).*
10.33 Form of Reacquisition Agreement.*
10.34 Amended and Restated Physician Services Organization Agreement of Carroll Medical Group, LLC.*
10.35 Amended and Restated Physician Services Organization Agreement of Cumberland Valley Medical Group, LLC.*
10.36 Physician Services Organization Agreement of Doctors Health Montgomery, LLC.*
10.37 Stock Purchase Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4,
1996.*
10.38 Registration Rights Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4,
1996.*
10.39 Option Agreement between the Registrant and Genesis Health Ventures, Inc., dated September 4, 1996.*
10.40 IPA Percentage of Premium Service Agreement with Chesapeake Health Plan, dated as of June 1, 1996 (subject
to confidentiality request for certain portions of the exhibit).*
10.41 $1,500,000 Promissory Note to First National Bank.*
10.42 Credit Enhancement Letter dated August 15, 1996 between the Registrant and St. Joseph Medical Center.*
10.43 Employment Agreement dated as of May 1,1996 between the Registrant and John R. Dwyer, Jr.*
10.44 Primary Care Limited Participation Agreement.*
10.45 Medicare HMO--Primary Care Limited Participation Agreement.*
10.46 Agreement and Plan of Merger between Medtrust Medical Group, Inc. and the Registrant (filed herewith).
10.47 Management Services Agreement between Medtrust Medical Group, Inc. and the Registrant (filed herewith).
11 Computation of Earnings Per Common and Common Equivalent Share (filed herewith).
23.1 Consent of Grant Thornton LLP (filed herewith).
23.2 Consent of Venable, Baetjer and Howard, LLP.**
24.1 Power of Attorney.*
24.2 Power of Attorney of Mark H. Eig, M.D. *
24.3 Power of Attorney of Robert G. Graw, Jr., M.D.*
24.4 Power of Attorney of William Lamm, M.D.*
24.5 Power of Attorney of Alexander Rocha, M.D.*
24.6 Power of Attorney of Richard R. Howard (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
II-9
Exhibit 4
DOCTORS HEALTH SYSTEM, INC.
OPTION AGREEMENT
This Option Agreement (the "Option Agreement") is
entered into this ____ day of ______________, 199_, by and between Doctors
Health System, Inc., a Maryland corporation ("DHS"), and ("Optionee").
RECITALS:
1. DHS has registered certain shares of its
Class B Common Stock ,par value $.01 per share ("Class B Common Stock") and
options to acquire Class B Common Stock ("Options") with the Securities and
Exchange Commission ("SEC") and with certain applicable states.
2. Pursuant to such registration, DHS is
offering of some or all of such registered securities (the "Offering") the terms
of which are set forth in a Prospectus and a Prospectus Supplement (together
referred to herein as the "Prospectus") that are part of the registration
statement on Form S-1 filed with the SEC (the "Registration Statement").
3. Optionee desires to acquire the securities
offered pursuant to the terms of the Offering and, in connection therewith has
executed a [Sale Agreement/Independent Practice Association Agreement/Employment
Agreement](the "Main Agreement[s]; capitalized terms used and not otherwise
defined herein shall have the meanings ascribed to them in the Main
Agreement[s]").
4. Pursuant to the Offering and the Main
Agreement[s], the Company has agreed to grant Optionee __________ Options.
AGREEMENTS:
In consideration of the foregoing and of the mutual
agreements herein contained and set forth in the Main Agreement[s], the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
For the purposes of this Option Agreement, the
definitions set forth in Sections 1.1 through 1.11 shall be applicable.
Section 1.1 Affiliate. "Affiliate" shall mean: (i)
any corporation in which DHS owns, directly or indirectly, fifty percent (50%)
or more of the total combined voting power of all classes of stock of such
corporation; and (ii) any Core Medical Group which is affiliated with DHS.
Section 1. 2 Class B Common Stock. "Class B Common
Stock" shall mean shares of DHS's authorized but unissued Class B common stock,
par value of one cent ($0.01) per share.
Section 1. 3 Exercise Date. "Exercise Date" shall mean
the date on which the Committee receives the written notice required under
Section 3.2 of this Option Agreement that Optionee has exercised the Option.
Section 1. 4 Grant Date. "Grant Date" shall mean the
date on which DHS issues an Option to Optionee pursuant to this Option
Agreement.
Section 1. 5 Offering. "Offering" shall mean the
offering of securities by DHS pursuant to which Optionee is acquiring the
Options, the terms of which are set forth in the Prospectus.
Section 1. 6 Options. "Options" shall mean those
options to acquire shares of Class B Common Stock of DHS granted to Optionee
pursuant to this Option Agreement, each such option, upon proper exercise,
entitling the Optionee to one share of Class B Common Stock pursuant to the
terms set forth in the Prospectus, the Purchase Agreement and this Option
Agreement.
Section 1.7 Fair Market Value. "Fair Market Value" of
a share of Class B Common Stock on the Grant Date or Exercise Date, as the case
may be, shall mean the last reported sale price per share of Class B Common
Stock, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on a national securities exchange or
included for quotation on the NASDAQ-National Market, or if the Class B Common
Stock is not so listed or admitted to trading or included for quotation, the
last quoted price, or if the Class B Common Stock is not so quoted, the average
of the high bid and low asked prices, regular way, in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if such system is no longer in use, the principal
other automated quotations system that may then be in use or, if the Class B
Common Stock is not quoted by any such organization, the average of the closing
bid and asked prices, regular way, as furnished by a professional market maker
making a market in the Class B Common Stock as selected in good faith by the
Company or by such other source or sources as shall be selected in good faith by
the Class B Company for any other reason, the Fair Market Value of shares of
Class B Common Stock shall be determined by the Company in such other manner as
it may deem appropriate. If, as the case may be, the relevant date is not a
trading day, the determination shall be made as of the next preceding trading
day. As used herein, the term "trading day" shall mean a day on which public
trading of securities occurs and is reported in the principal consolidated
reporting system referred to above, or if the Class B Common Stock is not listed
or admitted to trading on a national securities exchange or included for
quotation on the NASDAQ-National Market, any day other than a Saturday, a Sunday
or a day in which banking institutions in the State of New York are closed.
Section 1. 8 Option Price. "Option Price" shall mean
the price per share of Common Stock at which the Option may be exercised.
"Aggregate Option Price" shall mean the Option Price multiplied by the number of
Options to be exercised pursuant to a notice of exercise.
Section 1. 9 Prospectus. "Prospectus" shall mean the
Prospectus and Prospectus Supplement that are part of the Registration Statement
filed on Form S-1 by DHS and which set forth the terms of the Offering.
Section 1. 10 Main Agreement[s]. "Main Agreement[s]"
shall mean the [sale/independent practice association/employment]agreement
between DHS and Optionee pursuant to which Optionee agreed to the terms of the
Offering and pursuant to which Optionee is entitled to receive the Options.
Section 1. 11 Registration Statement. "Registration
Statement" shall mean the registration statement filed by DHS with the SEC with
respect to the registration of the securities of DHS, some or all of which are
the subject of the Offering.
ARTICLE 2
ISSUANCE OF OPTIONS
Section 2.1 Issuance of Options. DHS hereby grants to
Optionee, as of the date hereof (the "Grant Date") _____________________
(__________) Options to purchase shares of Class B Common Stock at an option
price of _______________________ ($________), (the "Option Price") or such
adjusted number of Options at such adjusted Option Price as may be established
from time to time pursuant to the provisions of Article V hereof. Each Option,
upon proper exercise thereof in accordance with this Option Agreement, entitles
Optionee to one share of DHS Class B Common Stock.
<PAGE>
Section 2.2 Term of Options. The Options granted
pursuant to Section 2.1 shall expire on the day prior to the tenth anniversary
of the Grant Date, unless such Options terminate earlier pursuant to other
provisions of this Option Agreement.
ARTICLE 3
EXERCISE OF OPTIONS
Section 3.1 Exercisability of Options. The Options
shall be exercisable, in whole or in part, at any time on or after ____________,
199___ or, if earlier, upon Optionee's death, unless the Options have earlier
terminated pursuant to the provisions of this Option Agreement. Notwithstanding
anything to the contrary herein, no Option may be exercised unless the shares of
Class B Common Stock issuable upon exercise of such Options then subject to a
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), and unless such other action or consent as may
be required by federal or state law relating to the issuance or distribution of
securities shall have been taken or obtained.
Section 3.2 Manner of Exercise. The Options may be
exercised, in whole or in part, by delivering written notice of excercise to DHS
in such form as DHS may require from time to time. Such notice shall specify the
number of Options being exercised, and shall be accompanied by full payment of
the Aggregate Option Price. In addition, such notice shall be accompanied by (i)
a written acknowledgment of the restrictions on the transferability of the
shares of Class B Common Stock executed in the form of the letter attached
hereto and marked Exhibit A and (ii) a signed copy of a Stockholders Agreement
in such form as DHS may prescribe. Notwithstanding anything herein to the
contrary, all Class B Common Stock issued pursuant to the Options shall be
subject to the terms and conditions of said Stockholders Agreement. Payment of
the Aggregate Option Price may be made (i) in cash, (ii) in a number of shares
of Class B Common Stock (including shares of Class B Common Stock acquired upon
the exercise of an option) having a total Fair Value on the Exercise Date equal
to the Aggregate Option Price, or (iii) by a combination of the foregoing. The
Options may be exercised only in multiples of whole shares of Class B Common
Stock and no partial shares shall be issued.
Section 3.3 Issuance of Shares and Payment of Cash upon
Exercise. Upon exercise of the Options, in whole or in part, in accordance with
the terms of this Agreement and upon payment of the Aggregate Option Price, DHS
shall issue to Optionee the number of shares of Class B Common Stock equal to
the number of Options being exercised and for which payment was received, in the
form of fully paid and non-assessable Class B Common Stock.
Section 3.4 Reservation of Shares. DHS shall at all
times reserve and keep available for issuance upon the exercise of Options a
number of its authorized but unissued shares of Class B Common Stock that will
be sufficient to permit the exercise in full of all outstanding Options.
[Section 3.5 is applicable only to Options granted in
connection with acquisitions of medical practices.]
Section 3.5 Reacquisition Rights. As a condition to
exercising the Options, Optionee shall waive any rights which Optionee then has
to the reacquisition of such Optionee's practice. Upon such waiver, DHS and
Optionee agree that such reacquisition rights shall be terminated and shall be
null and void and of no further force and effect.
ARTICLE 4
TERMINATION OF OPTIONS
[Sections 4.2 and 4.3 are applicable only to Options
granted in connection with employment agreements.]
Section 4.1 Upon Optionee's Death. Unless such Options
are earlier terminated pursuant to the provisions of this Option Agreement, upon
Optionee's death Optionee's executor, personal representative or the person to
whom the Options shall have been transferred by will or the laws of descent and
distribution, as the case may be, may exercise all or any part of the Options
not previously exercised, provided such exercise occurs within twelve (12)
months after the date Optionee dies, but not later than the end of the stated
term of the Option and, provided further, that such person executes a
Stockholders Agreement in such form as DHS may prescribe.
Section 4.2 Termination of Employment For Reason Other
Than Death, Disability, Retirement or Wrongful Termination. Unless earlier
terminated pursuant to the provisions of this Option Agreement, Options granted
to Optionee that have not been exercised as of the date Optionee is no longer
employed by either DHS or an Affiliate for any reason other than Optionee's
death, Disability, Retirement or Wrongful Termination (as such terms are defined
in the Employment Agreement).
Section 4.3 Termination of Employment By Reason of
Disability, Retirement or Wrongful Termination. Unless the Options have earlier
terminated pursuant to the provisions of this Option Agreement, in the event
that Optionee ceases to be an employee of DHS or an Affiliate by reason of
Disability, Retirement or Wrongful Termination, Options that have not yet been
exercised may be exercised in whole or in part at any time on or after the date
of Disability, Retirement or Wrongful Termination, but not later than the end of
the stated term of the Option or as otherwise provided by the provisions of
Section 4.1 of this Option Agreement.
ARTICLE 5
ADJUSTMENTS
Section 5.1 Adjustment of Number of Options; Option
Price. Subject to the provisions of this Article 5, the Option Price shall be
subject to adjustment as follows:
(a) In the event any change is made to the Class
B Common Stock (whether by reason of (i) a merger, consolidation, reorganization
or recapitalization or (ii) a stock dividend, stock split, combination of
shares, exchange of shares or other change in capital structure effected without
receipt of consideration), then, appropriate adjustments shall be made to the
number of shares and Option Price of the Class B Common Stock subject to the
Options.
(b) If DHS is the surviving entity in any merger
or other business combination then the Options outstanding immediately after
such merger or other business combination, shall be appropriately adjusted to
apply and pertain to the number and class of securities that would be issuable
to the Optionee in the consummation of such merger or business combination if
the Options were exercised immediately prior to such merger or business
combination, and appropriate adjustments shall also be made to the Option Price.
ARTICLE 6
MISCELLANEOUS
Section 6.1 No Rights of Stockholder. Optionee shall
not have any of the rights of a stockholder with respect to the shares of Class
B Common Stock that may be issued upon the exercise of the Options until such
shares of Class B Common Stock have been issued to Optionee upon the due
exercise of the Options.
Section 6.2 Nontransferability of Option. The Option
shall be nontransferable otherwise than by will or the laws of descent and
distribution. During the lifetime of Optionee, the Options may be exercised only
by Optionee or, during the period Optionee is under a legal disability, by
Optionee's guardian or legal representative.
Sections 6.3 and 6.4 to be included if Optionee is
entering into Employment Agreement] Section 6.3 Non-Guarantee of Employment.
Nothing in the Offering, the Main Agreement or this Option Agreement shall be
construed as a contract of employment between DHS (or an Affiliate) and
Optionee, or as a contractual right of Optionee to continue in the employ of DHS
or an Affiliate, or as a limitation of the right of DHS or an Affiliate to
discharge Optionee at any time.
Section 6.4 Withholding Taxes. DHS or any Affiliate
shall have the right to deduct from any compensation or any other payment of any
kind (including withholding the issuance of shares of Class B Common Stock) due
Optionee the amount of any federal, state or local taxes required by law to be
withheld as the result of the exercise of the Option or the disposition of
shares of Class B Common Stock acquired pursuant to the exercise of the Option.
In lieu of such deduction, DHS may require Optionee to make a cash payment to
DHS or an Affiliate equal to the amount required to be withheld. If Optionee
does not make such payment when requested, DHS may refuse to issue any Class B
Common Stock certificate until arrangements satisfactory to the Company for such
payment have been made.
Section 6.5 Agreement Subject to Charter and By-Laws.
This Agreement is subject to the Charter and By-Laws of DHS, and any applicable
federal or state laws, rules or regulations.
Section 6.6 Headings. The headings in this Option
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Option Agreement.
Section 6.7 Notices. All notices and other
communications made or given pursuant to this Option Agreement shall be in
writing and shall be sufficiently made or given if hand delivered or mailed by
certified mail, addressed to Optionee at the address contained in the records of
DHS or an Affiliate, or to DHS for the attention of its Secretary at its
principal office.
ARTICLE 7
MISCELLANEOUS
Section 7.1 Entire Agreement; Modification. This
Option Agreement contains the entire agreement between the parties with respect
to the subject matter contained herein and may not be modified, except in a
written document signed by each of the parties hereto.
Section 7.2 Counterparts. This Option Agreement may be
executed simultaneously in one or more counterparts, each of which shall be
deemed to be an original and all of which together shall constitute one and the
same instrument.
Section 7.3 Governing Law. This Option Agreement shall
be governed by and construed under the laws of the State of Maryland without
regard to conflicts of law.
Section 7.4 Counterparts. This Option Agreement may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this
Option Agreement as of the date first above written.
DOCTORS HEALTH SYSTEM, INC.
By:
------------------------
OPTIONEE
---------------------------
<PAGE>
EXHIBIT A
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
Gentlemen:
I hereby exercise _________ Options granted to me on
____________________, 199____, by Doctors Health System, Inc. (the "Company"),
subject to all the terms and provisions thereof, and notify you of my desire to
purchase ____________ shares of Class B Common Stock of DHS at a price of
$___________ per share pursuant to the exercise of said Option. This will
confirm my understanding with respect to the shares to be issued to me by reason
of this exercise of the Option (the shares to be issued pursuant hereto shall be
collectively referred to hereinafter as the "Shares") as follows:
(a) I am a party to a Stockholders Agreement
with DHS (or will be upon DHS's execution of the Stockholders Agreement executed
by me and attached hereto) pursuant to which I have agreed to certain
restrictions on the transferability of the shares of Class B Common Stock and
other matters relating thereto, and the certificates for the Shares to be issued
to me shall contain a legend to that effect.
Total Amount Enclosed: $__________
Date:________________________ __________________________________________
(Optionee)
Received by Doctors Health System, Inc. on
________________________________, 19______
By:_______________________________________
Exhibit 10.46
________________________________________________________________________________
PLAN AND AGREEMENT OF MERGER
among
MEDTRUST MEDICAL GROUP, INC.,
a Virginia nonstock corporation,
DOCTORS HEALTH SYSTEM, INC.,
a Maryland corporation,
and
DOCTORS HEALTH OF VIRGINIA, INC.
a Virginia corporation
---------------
Dated as of November 15, 1996
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and
is not intended to define, limit or describe the scope or
intent of any provision of this Agreement.)
Page
ARTICLE 1
THE TRANSACTION
Section 1.1. Merger............................................... 1
------
Section 1.2. The Closing.......................................... 2
-----------
Section 1.3. Employment of Drs. Wiederhorn and Marcus............. 2
----------------------------------------
Section 1.4. Compensation to Negotiating Team..................... 2
--------------------------------
ARTICLE 2
ARTICLES OF INCORPORATION, BY-LAWS,
SHAREHOLDER AGREEMENTS
Section 2.1. Articles of Incorporation............................ 2
-------------------------
Section 2.2. By-Laws.............................................. 2
-------
Section 2.3. Directors and Officers............................... 2
----------------------
ARTICLE 3
CONVERSION OF MEMBERSHIP INTERESTS
Section 3.1. Conversion of Membership Interests................... 3
----------------------------------
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDTRUST
Section 4.1. Organization; Authority.............................. 4
-----------------------
Section 4.2. Membership of Medtrust............................... 4
----------------------
Section 4.3. Charter Documents.................................... 4
-----------------
Section 4.4. Binding Obligation; Consents; Litigation............. 4
----------------------------------------
Section 4.5. Financial Statements................................. 5
--------------------
Section 4.6. Material Contracts and Agreements.................... 5
---------------------------------
Section 4.7. Tax Matters.......................................... 5
-----------
i
<PAGE>
TABLE OF CONTENTS
Section 4.8. Absence of Undisclosed Liabilities................... 6
----------------------------------
Section 4.9. Insurance............................................ 6
---------
Section 4.10. Finders or Brokers.................................. 6
------------------
Section 4.11. Employee Benefits................................... 6
-----------------
Section 4.12. Employment Matters.................................. 7
------------------
Section 4.13. Compliance With Laws................................ 7
--------------------
Section 4.14. Litigation.......................................... 7
----------
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF DHS AND SUB
Section 5.1. Organization; Authority.............................. 8
Section 5.2. Capitalization of DHS and Sub........................ 8
Section 5.3. Charter Documents.................................... 9
Section 5.4. Binding Obligation; Consents; Litigation............. 9
Section 5.5. Financial Statements................................. 9
Section 5.6. Compliance With Law; Permits......................... 10
Section 5.7. Litigation........................................... 10
Section 5.8. Material Contracts and Agreement .................... 10
Section 5.9. Tax Matters.......................................... 10
Section 5.10. Absence of Undisclosed Liabilities.................. 11
Section 5.11. Insurance........................................... 11
Section 5.12. No Material Adverse Change.......................... 11
Section 5.13. Required Consents................................... 12
Section 5.14. Disclosure Registration Statement................... 12
Section 5.15. Disclosure; Representations and Warranties.......... 12
Section 5.16. Finders or Brokers.................................. 12
ARTICLE 6
TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
Section 6.1. Special Meeting...................................... 13
---------------
Section 6.2. Effectiveness of Securities Act Registration
Statement............................................ 13
---------
Section 6.3. Management of Medtrust............................... 13
----------------------
ARTICLE 7
ii
<PAGE>
TABLE OF CONTENTS
CERTAIN COVENANTS AND AGREEMENTS
Section 7.1. Approvals; Consents.................................. 14
Section 7.2. Conduct of Business Prior To Effective Time.......... 14
Section 7.3. Access to Information and Documents.................. 15
Section 7.4. Periodic Information................................. 15
Section 7.5. Representations...................................... 15
Section 7.6. Information.......................................... 16
Section 7.7. Notice of Breach..................................... 16
Section 7.8. Director and Officer Insurance....................... 16
Section 7.9. Business Plan and Capitalization of Sub.............. 16
Section 7.10. Exclusivity......................................... 16
Section 7.11. Establishment of Woman Care, IPA, LLC. ............. 17
Section 7.12. Right of First Refusal to Specialists............... 17
Section 7.13. Primary Care Affiliation Agreements................. 17
Section 7.14. Registration of DHS Common Stock.................... 17
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF THE PARTIES
Section 8.1. Member Approvals..................................... 17
----------------
Section 8.2. Pending Litigation................................... 18
------------------
Section 8.3. Third Party Consents................................. 18
--------------------
ARTICLE 9
CONDITIONS TO DHS' OBLIGATIONS
Section 9.1. Representations and Warranties....................... 18
------------------------------
Section 9.2. Opinion of Medtrust's Counsel........................ 18
-----------------------------
Section 9.3. Legal Matters Satisfactory........................... 18
--------------------------
Section 9.4. No Material Adverse Change........................... 18
--------------------------
Section 9.5. Alliance with Primary Care Physicians................ 18
-------------------------------------
Section 9.6 Dissenters To Merger................................. 19
--------------------
Section 9.7 Virginia Blue Sky Laws............................... 19
----------------------
ARTICLE 10
iii
<PAGE>
TABLE OF CONTENTS
CONDITIONS TO MEDTRUST'S OBLIGATIONS
Section 10.1. Representations and Warranties...................... 19
------------------------------
Section 10.2. Opinion of Counsel for DHS and Sub.................. 19
----------------------------------
Section 10.3. Legal Matters Satisfactory.......................... 19
--------------------------
Section 10.4. No Material Adverse Change.......................... 19
--------------------------
Section 10.5. Registration Statement.............................. 19
----------------------
Section 10.6. Issue Price of DHS Common Stock..................... 20
-------------------------------
ARTICLE 11
TERMINATION
Section 11.1. Termination......................................... 20
-----------
Section 11.2. Effect of Termination. ............................ 20
---------------------
ARTICLE 12
MISCELLANEOUS
Section 12.1. Expenses............................................ 20
Section 12.2. Survival of Representations, Warranties and
Covenants........................................... 21
Section 12.3. Governing Law; Jurisdiction and Venue............... 21
Section 12.4. Notices............................................. 21
Section 12.5. Press Releases...................................... 23
Section 12.6. Assignment; Amendments, Waivers..................... 23
Section 12.7. Entire Agreement.................................... 23
Section 12.8. Severability........................................ 23
Section 12.9. Headings............................................ 23
Section 12.10. Counterparts....................................... 23
Section 12.11. Third Party Beneficiaries.......................... 23
Section 12.12. Enforcement Costs.................................. 24
iv
<PAGE>
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER (this "Agreement") is made as of
November 15, 1996 by and among MEDTRUST MEDICAL GROUP, INC., a Virginia nonstock
corporation ("Medtrust"), DOCTORS HEALTH SYSTEM, INC., a Maryland corporation
("DHS"), and DOCTORS HEALTH OF VIRGINIA, INC., a Virginia corporation
wholly-owned by DHS ("Sub").
RECITALS
A. Sub is a corporation duly organized and existing under
the laws of the Commonwealth of Virginia, having been incorporated on
November 15, 1996 for the purpose of effecting this transaction and having
engaged in no other business prior to the date hereof.
B. Medtrust is a nonstock corporation duly organized and
existing under the laws of the Commonwealth of Virginia, having been
incorporated on May 3, 1994.
C. DHS is a corporation duly organized and existing
under the laws of the State of Maryland, having been incorporated on June 10,
1994.
D. The respective Boards of Directors of DHS, Sub and
Medtrust have approved the business combination of Sub and Medtrust.
E. The respective Boards of Directors of DHS, Sub, and
Medtrust, have approved this Agreement and deem it advisable and in the best
interests of their respective corporations, and shareholders and Members (as
hereinafter defined) that Medtrust merge with and into Sub (the "Merger"),
subject to the approval and adoption of this Agreement by the Members of
Medtrust, pursuant to the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants and
agreements herein contained, the parties hereto agree as follows:
II. THE TRANSACTION
A. .Merger. Upon the approval and adoption of this Agreement by the
Members of Medtrust (the "Members") in accordance with the laws of the
Commonwealth of Virginia, and the satisfaction or waiver of the conditions set
forth herein to the obligations of the parties hereto, articles of merger
substantially in the forms of Exhibit A hereto, shall be filed with the State
Corporation Commission of the Commonwealth of Virginia in accordance with the
laws of the Commonwealth of Virginia. Effective on the date and at the time on
which a certificate of merger containing the provisions required by, and
executed in accordance with, Article 12 of the Virginia Stock Corporation Act
and Article 11 of the Virginia Nonstock Corporation Act (the "Certificate of
Merger") shall have been issued by the
<PAGE>
Virginia State Corporation Commission (or such later date and time as may be
specified in such Certificate of Merger) (the "Effective Time"), Medtrust shall
merge with and into Sub which, as the surviving corporation, shall continue its
corporate existence under the laws of the Commonwealth of Virginia under the
name of Doctors Health of Virginia, Inc.
B. .The Closing. The Merger and the other transactions contemplated
by this Agreement shall be effected at a closing (the "Closing") at the
offices of Kaufman & Canoles, One Commercial Place, Norfolk, Virginia 23514, or
such other place as the parties shall mutually agree, at 11:00 a.m. local
time on a mutually agreeable date (the "Closing Date") which is no later
than five (5) days following the satisfaction of the conditions set forth in
Articles 8, 9 and 10 hereof. The Effective Time shall occur on the Closing Date.
In no event shall the Closing Date occur later than January 31, 1997 (the
"Termination Date") without the mutual consent of the parties.
C. .Employment of Drs. Wiederhorn and Marcus. At Closing, DHS shall
execute and deliver those certain employment agreements attached hereto as
Exhibits B and C, respectively, under which DHS will employ Dr. Norman
Marcus and Dr. Roger Wiederhorn on a part-time basis to assist DHS with
further network development.
D. .Compensation to Negotiating Team. At Closing, DHS shall pay and/or
deliver to the individuals listed on Exhibit D (the "Negotiating Team") an
aggregate consideration of 6,000 shares of DHS Common Stock and $30,000 in
cash to be distributed ratably to the Negotiating Team Members in
consideration of their service in conducting the extended negotiations leading
to the consummation and implementation of this Agreement.
III. ARTICLES OF INCORPORATION, BY-LAWS,
SHAREHOLDER AGREEMENTS
A. .Articles of Incorporation. The articles of incorporation of Sub in
effect at the Effective Time shall be as set forth on Exhibit E attached hereto.
B. .By-Laws. The by-laws of Sub in effect at the Effective Time shall be
as set forth on Exhibit F which by-laws shall constitute a shareholder
agreement pursuant to Section 13.1-671.1 of the Code of Virginia (1950, as
amended).
C. .Directors and Officers. At and with effect from the Effective
Time, the directors of the Surviving Corporation shall be as set forth on
Schedule 2.3 hereto who shall hold office until their successors are elected and
qualify. At and with effect from the Effective Time, the officers of
the Surviving Corporation shall be as set forth on Schedule 2.3 hereto who
shall hold office until their successors are elected and qualify.
2
<PAGE>
IV. CONVERSION OF MEMBERSHIP INTERESTS
A. .Conversion of Membership Interests. The manner and basis of
converting the membership interests of Medtrust shall be as follows:
1. Subject to the provisions of paragraphs (c) and (d) below,
the Members of Medtrust shall receive in the aggregate 24,000 shares (the
"Share Consideration") of DHS Class B common stock, no par value per share
(the "DHS Common Stock") plus an aggregate amount of cash equal to
$120,000 plus the amount of cash or cash equivalents held by Medtrust as of the
date hereof (the "Cash Consideration").
2. Subject to the provisions of paragraphs (c) and (d) below,
each membership interest of the Members of Medtrust outstanding immediately
prior to the Effective Time will be converted into and represent the right to
receive the number of shares of DHS Common Stock and that amount of cash
determined by multiplying each of the Share Consideration and the Cash
Consideration by a fraction, the numerator of which is the aggregate Initial
Membership Fee paid by the respective Member for its Approved Physicians (as
defined in the Bylaws of Medtrust) and the denominator of which is the
aggregate Initial Membership Fees paid by all Members then holding
membership interests in Medtrust on behalf of their Approved
Physicians (the "Merger Consideration"). For purposes hereof, Initial
Membership Fee shall include only the initial membership fees paid by a Member
and shall expressly exclude any ongoing dues or assessments paid by a
Member in support of the operational expenses of Medtrust.
3. In the event that DHS changes the number of shares of DHS Common
Stock issued and outstanding after the date hereof and prior to the
Effective Time as a result of a stock split, stock dividend,
recapitalization or other similar transaction, the Share Consideration
shall be proportionately adjusted.
4. No certificates for fractions of shares of DHS Common Stock
and no scrip or other certificates evidencing fractional interests in such
shares shall be issuable and any such fractional share which would otherwise be
issued shall be rounded to the next highest whole share.
5. At the Closing, DHS shall deliver to counsel for Medtrust the
original of all certificates of DHS Common Stock to be issued as part of
the Share Consideration together with the Cash Consideration in
immediately available funds. Such certificates shall then be forwarded by
regular mail with appropriate checks for the Cash Consideration to the address
of record of each Member.
3
<PAGE>
6. At any time prior to the mailing of the notice of the Special
Meeting, the Board of Directors may revise the method of allocation of the
Share Consideration and Cash Consideration among the Members, make
appropriate revisions to the Plan of Merger and submit such revised plan to
the Members for their approval. The provisions of Section 3.1(b) regarding
allocation shall be amended to incorporate such revised allocations.
V. REPRESENTATIONS AND WARRANTIES OF MEDTRUST
Medtrust hereby represents and warrants to DHS and Sub that as of the
date of this Agreement:
A. .Organization; Authority. Medtrust is a nonstock corporation duly
organized and existing in good standing under the laws of the Commonwealth
of Virginia. Medtrust has all necessary corporate power and authority to own or
to lease, and to operate, its properties and assets and to carry on its
business as it is now being conducted.
B. .Membership of Medtrust. Medtrust has four classes of Members as provided
in the articles of incorporation. A true and complete copy of the Membership
roster as of the date hereof is attached hereto as Schedule 4.2. In
accordance with Section 13.1-837 of the Virginia Code, membership
interests are non-transferable.
C. .Charter Documents. A true and complete copy of the articles of
incorporation and by-laws of Medtrust are attached hereto as Exhibit G.
D. .Binding Obligation; Consents; Litigation. The execution and delivery
of this Agreement by Medtrust does not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles of incorporation or by-laws of Medtrust or (ii) any provision of, or
result in a breach of any of the terms or provisions of, or result in the
acceleration of any obligation under, or constitute a default under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award,
judgment or decree to which Medtrust is a party, or to which Medtrust is, or
the assets, properties or business of Medtrust are, subject, which would have
a material adverse effect on Medtrust or any of its assets except as set forth
on Schedule 4.4. The Board of Directors of Medtrust has approved this Agreement,
has authorized the execution and delivery hereof and has directed that this
Agreement be submitted to the Members of Medtrust for adoption at a special
meeting of such Members following the satisfaction of the condition described
in Section 10.5 hereof (the "Special Meeting"). Medtrust has full power,
authority and legal right to enter into this Agreement and, upon appropriate
vote of its Members in accordance with law, to consummate the transactions
contemplated hereby. Except for the approval of its Members, Medtrust has
taken all action required by law, its articles of incorporation, its
by-laws or otherwise to authorize and to approve the execution and
delivery of this Agreement and the documents, agreements and certificates
executed and delivered by Medtrust in connection herewith and the consummation
by Medtrust of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Medtrust and constitutes a valid and legally
binding obligation of Medtrust, enforceable against Medtrust in
accordance with its terms. No
4
<PAGE>
consent, action, approval or authorization of, or registration, declaration or
filing with, any governmental authority is required to be obtained by Medtrust
in order to authorize the execution and delivery by Medtrust of this Agreement
or the consummation by Medtrust of the Merger other than the filings with the
State Corporation Commission contemplated by this Agreement.
E. .Financial Statements. Medtrust has furnished to DHS copies of the
financial statements compiled by its accountant for 1994 and 1995 (the "Medtrust
Financial Statements"). The Medtrust Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered thereby, reflect and
provide adequate reserves in respect of all known liabilities of Medtrust in
accordance with GAAP, including all known contingent liabilities required
to be included therein, and present fairly the financial condition of
Medtrust as of the indicated dates and the results of operations of Medtrust
for the indicated periods.
F. .Material Contracts and Agreements. All material contracts of Medtrust
now in effect to which Medtrust is a party or by which it or its properties or
assets may be bound or affected are listed on Schedule 4.6. A true and complete
copy of each such material contract has been heretofore delivered to DHS (the
"Material Contracts"). No default, alleged default or anticipatory breach
exists on the part of Medtrust or, to the best knowledge of Medtrust, on the
part of any other party, under any Material Contract, and there are no material
agreements of the parties relating to any Material Contract that have not been
disclosed to DHS. Subject to receipt of the consents set forth on Schedule 4.6,
the consummation of the Merger will not give rise to a default under any such
Material Contract.
G. .Tax Matters.
1. Medtrust has filed all tax returns required to be filed by it
under the laws of the United States of America, the jurisdiction of its
incorporation, and each state or other jurisdiction in which it conducts
business activities and is required to file. Medtrust has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
returns. Medtrust does not have any tax liability for which no tax reserve
has been made in respect of any jurisdiction in which Medtrust has business
activities and is required to file.
2. There are no tax liens, whether imposed by any federal, state
or local taxing authority, outstanding against any of the assets, properties or
business of Medtrust.
3. All taxes and assessments that Medtrust is required to withhold
or to collect have been duly withheld or collected and all withholdings and
collections have either been duly and timely paid over to the appropriate
governmental authority or are, together with the payments due or to
become due in connection therewith, duly reflected on the Medtrust Financial
Statements in accordance with GAAP.
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4. Except as set forth in Schedule 4.7, no Medtrust tax returns
for tax years that are open under any applicable statute of limitations have
been examined by the Internal Revenue Service or other tax authorities, and
no deficiencies (including any penalties or interest) have been asserted
or assessments made as a result of examinations. There are no waivers,
agreements or other arrangements providing for extension of time with respect
to the assessment or collection of any unpaid tax, interest, or penalties
relating to Medtrust. No issues have been raised by (or are currently
pending before) the Internal Revenue Service or any other taxing authority
in connection with any of Medtrust's tax returns which could reasonably be
expected to have a material adverse effect on the financial condition of
Medtrust if decided adversely to Medtrust, nor are there any such issues
which have not been so raised but if so raised by the Internal Revenue Service
or any other taxing authority in connection with any of the Medtrust tax
returns could, in the aggregate, reasonably be expected to have such material
adverse effect.
H. .Absence of Undisclosed Liabilities. Medtrust does not have any
material indebtedness, liability or obligation of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, other than (i)
liabilities reflected in the Medtrust Financial Statements, (ii) liabilities
incurred in the ordinary course of business (or pursuant to the liquidation)
of Medtrust since the date of the Medtrust Financial Statements, (iii)
indebtedness, liabilities and obligations listed on Schedule 4.8 hereto, and
(iv) liabilities incurred in connection with the performance of this Agreement.
I. .Insurance. All significant policies of insurance, together with the
premiums currently paid thereon, providing for business interruption, personal,
employee, product or public liability coverage with respect to the business
of Medtrust are described on Schedule 4.9. The copies of such policies which
have previously been delivered to DHS are complete and correct. All such
policies will be outstanding and in full force and effect on the Closing Date
and thereafter in accordance with their terms. There are no claims, actions,
suits or proceedings arising out of or based upon any of such policies of
insurance, and, so far as is known to Medtrust or any of its officers, no
basis for any such claim, action, suit or proceeding exists. There are no
notices of any pending or threatened terminations with respect to any of such
policies and Medtrust is in compliance with all conditions contained therein.
J. .Finders or Brokers. Medtrust has not utilized the services of any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or commission
in connection with this Agreement or upon consummation of the transactions
contemplated hereby.
K. .Employee Benefits. Except for those plans set forth in Schedule 4.11,
Medtrust currently does not have, or has never had, an employee benefit plan,
including, without limitation, any plan, agreement or arrangement relating
to deferred compensation, pension, profit sharing, retirement income or
other benefits, stock purchase, stock ownership and stock option plan,
stock appreciation rights, bonus, severance arrangement, health and welfare
benefits, insurance benefits or any other employee benefits or fringe benefit
plan. Medtrust does not participate in, or contribute to, nor has
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Medtrust ever participated in or contributed to, any multi-employer plan
within the meaning of ERISA Section 4001(a)(3), nor does or will Medtrust
have, now or in the future, any multi-employer plan withdrawal liability
under Subtitle E of Part IV of ERISA.
L. .Employment Matters. Except as set out in Schedule 4.12, there are no
oral or written employment contracts or pension, bonus, profit sharing, stock
option, life, health, retirement, welfare, or other agreements or arrangements
providing for employee remuneration or benefits to which Medtrust is a party
or by which it is bound. To the knowledge of Medtrust, no person (including, but
not limited to, governmental agencies of any kind) has any claim, or basis for
any action or proceeding, against Medtrust arising out of any statute, ordinance
or regulation relating to discrimination in employment or employment practices
or occupational safety and health standards (including, but without limiting
the foregoing, The Fair Labor Standards Act, as amended; Title VII of the Civil
Rights Act of 1964, as amended; 42 U.S.C. 1981 or the Age Discrimination in
Employment Act of 1967, as amended), which, if upheld, would have an adverse
effect on Medtrust or its condition, financial or otherwise. To the knowledge
of Medtrust, there is no pending or threatened federal or state equal
employment opportunity enforcement action or labor dispute, strike or work
stoppage affecting Medtrust. Medtrust does not have any collective bargaining
or similar agreements, nor does it have any obligation to bargain with any
labor organization as the representative of Medtrust's employees, and there
is neither pending, nor to Medtrust's knowledge threatened, any labor dispute,
strike or work stoppage with affects or which may affect Medtrust or which may
interfere with the continued operation of Medtrust. No present or former
employee of Medtrust has any claim against Medtrust for (i) overtime pay,
other than overtime pay for the current payroll period, (ii) wages, salary
or other compensation or benefits for any period other than the current
payroll period, (iii) except as set forth in Medtrust's Financial
Statements, vacation, time off or pay in lieu of vacation or time off, other
than that earned in respect of the current fiscal year, or (iv) any violation of
any statute, ordinance or regulation relating to minimum wages or maximum hours
of work.
M. .Compliance With Laws. Medtrust 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 the transactions contemplated hereby, (ii)
have a material adverse effect on Medtrust's assets, or (iii) impair Medtrust's
obligations to perform fully on a timely basis any material obligations of
Medtrust under this Agreement.
N. .Litigation.
1. Except as set forth on Schedule 4.14, there is no (i) action,
suit, claim, proceeding or investigation pending or, to the knowledge of
Medtrust or any officer of Medtrust, threatened against or affecting
Medtrust or its assets, employees or properties, at law or in equity, or
before or by any court or governmental authority, (ii) arbitration
proceeding relating to Medtrust or its assets, employees or properties or
(iii) governmental inquiry pending or, to the knowledge of Medtrust or any
officer of Medtrust, threatened relating to or involving Medtrust, its
assets or properties or the
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business of Medtrust or the transactions contemplated by this Agreement
(including inquiries as to the qualification of Medtrust to hold or receive
any permit) and Medtrust does not know of any basis for any of the
foregoing. There are no pending actions, suits, claims or proceedings brought
by Medtrust against others.
2. Medtrust has not received any written opinion, memorandum,
legal advice or notice from legal counsel to the effect that they are
exposed, from a legal standpoint, to any liability or disadvantage which
may be material to their respective businesses and which would continue
past the Effective Time. Medtrust is not in default with respect to any order,
writ, injunction or decree known to or served upon Medtrust of any court or of
any governmental authority.
3. Medtrust knows of no pending or threatened action, suit,
proceeding, investigation, order or injunction before or by any court or
governmental body that seeks to restrain or to prevent the consummation of
the Merger or the other transactions contemplated by this Agreement.
VI. REPRESENTATIONS AND WARRANTIES OF DHS AND SUB
DHS and Sub jointly and severally represent and warrant to Medtrust
that as of the date of this Agreement:
A. .Organization; Authority; Sub Status. Each of DHS and Sub is a
corporation duly organized and existing in good standing under the laws of
Maryland and Virginia, respectively, and DHS is duly authorized to conduct
business and is in good standing under the laws of the Commonwealth of
Virginia. Each of DHS and Sub has all necessary power and authority to own
or to lease, and to operate, its properties and assets and to carry on its
business as it is now being conducted. Sub is recently incorporated for the
purpose of effecting this transaction and has not engaged in any business other
than the transactions contemplated by this Agreement.
B. .Capitalization of DHS and Sub. The authorized capital stock of DHS and
Sub is as set forth on Schedule 5.2 hereto which also sets forth the number of
shares of each class of capital stock to be outstanding at the Effective Time.
At the Effective Time, all such outstanding shares of capital stock of DHS and
Sub will have been duly authorized and validly issued and will be fully
paid and nonassessable. No shares of the capital stock of DHS and Sub are
held in treasury. Except as set forth on Schedule 5.2, at the Effective Time,
there will be no options, warrants, rights, calls, commitments or
agreements of any character obligating DHS or Sub to issue any shares of
capital stock or any security representing the right to purchase or
otherwise receive any such shares. Except for restrictions on transfer arising
under applicable federal and state securities laws, there are no existing
restrictions imposed by DHS or Sub or by their respective affiliates on the
transfer of any outstanding shares of capital stock of DHS and Sub and there
are no registration covenants with respect thereto. At the
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Effective Time, none of the outstanding shares of DHS or Sub will have been
issued in violation of the preemptive rights of any present or former Member.
The DHS Common Stock to be issued in connection with the Merger
Consideration and under Section 1.4 will not be subject to any
restrictions on transfer other than those arising under applicable federal and
state securities laws and the restrictions on transfer set forth in the Amended
and Restated Stockholders Agreement dated September 4, 1996. Notwithstanding the
foregoing, each of the Members shall be permitted to transfer their DHS Common
Stock to their respective shareholders and partners without restriction but
subject to the Stockholders Agreement with respect to any subsequent transfer.
C. .Charter Documents. A true and complete copy of the articles and
certificates of incorporation, as the case may be, and by-laws of DHS and
Sub are attached hereto as Exhibit H.
D. .Binding Obligation; Consents; Litigation. The execution and delivery
of this Agreement by DHS and Sub do not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles or certificate of incorporation, as the case may be, or by-laws of
DHS or Sub or (ii) any provision of, or result in a breach of any of the terms
or provisions of, or result in the acceleration of any obligation under, or
constitute a default under, any mortgage, lien, lease, agreement,
instrument, order, arbitration award, judgment or decree to which DHS or
Sub is a party, or to which DHS or Sub is, or the assets, properties or
business of DHS or Sub are, subject, which would have a material adverse
effect on DHS or any of their assets. The respective Boards of Directors of
DHS and Sub have approved this Agreement and authorized the execution and
delivery hereof. Each of DHS and Sub has full power, authority and legal
right to enter into this Agreement and to consummate the transactions
contemplated hereby. Each of DHS and Sub has taken all action required by law,
its articles of incorporation or certificate of incorporation, as the case
may be, its by-laws or otherwise to authorize and to approve the execution
and delivery of this Agreement and the documents, agreements and
certificates executed and delivered by it in connection herewith and the
consummation by it of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by each of DHS and Sub and
constitutes a valid and legally binding obligation of each of them, enforceable
against each of them in accordance with its terms. Except as set forth in
Section 10.5, no consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental authority is required to be
obtained by DHS in order to authorize the execution and delivery by DHS of this
Agreement or the consummation of the Merger.
E. .Financial Statements. DHS has furnished to Medtrust complete copies
of the audited financial statements of DHS for each of the fiscal years ended
June 30, 1995 and June 30, 1996 (the "DHS Financial Statements"), including in
each case, a balance sheet, the related statements of income and of changes
in financial position for the periods then ended, the accompanying notes, and
the unaudited financial statements of DHS for the period ended September 30,
1996, including a balance sheet and the related statements of income and of
changes in financial position for the period then ended (the balance sheet
therein and the notes thereto as at September 30, 1996 being called the "DHS
Balance Sheet"). All such financial statements (i) have been prepared in
conformity with GAAP, (ii)
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reflect and provide adequate reserves in respect of all known liabilities of DHS
in accordance with GAAP, including all known contingent liabilities as of their
respective dates, and (iii) present fairly the financial condition of DHS at
such dates.
F. .Compliance With Law; Permits. Except in all cases for non-compliance
which would not have a material adverse effect, each of DHS and Sub has
complied with all laws relating to its securities, property, employees or
business, including, without limitation, and all applicable statutes,
regulations, orders and restrictions relating to environmental standards or
controls.
G. .Litigation.
1. Except as set forth on Schedule 5.7, there is no (i) action,
suit, claim, proceeding or investigation pending or, to the knowledge of
DHS or any officer of DHS, threatened against or affecting DHS or its
assets, employees or properties, at law or in equity, or before or by
any court or governmental authority, (ii) arbitration proceeding relating
to DHS or its assets, employees or properties or (iii) governmental inquiry
pending or, to the knowledge of DHS or any officer of DHS, threatened relating
to or involving DHS, its assets or properties or the business of DHS or the
transactions contemplated by this Agreement (including inquiries as to the
qualification of DHS to hold or receive any permit) and DHS does not know of
any basis for any of the foregoing. There are no pending actions, suits,
claims or proceedings brought by DHS against others.
2. DHS has not received any written opinion, memorandum, legal
advice or notice from legal counsel to the effect that they are exposed, from a
legal standpoint, to any liability or disadvantage which may be material to
their respective businesses and which would continue past the Effective
Time. DHS is not in default with respect to any order, writ, injunction or
decree known to or served upon DHS of any court or of any governmental
authority.
3. DHS knows of no pending or threatened action, suit,
proceeding, investigation, order or injunction before or by any court or
governmental body that seeks to restrain or to prevent the consummation of
the Merger or the other transactions contemplated by this Agreement.
H. .Material Contracts and Agreement . No default, alleged default or
anticipatory breach exists on the part of DHS or, to the best knowledge of DHS
or any of its officers, on the part of any other party, under any material
agreement, written or oral, relating to the business of DHS.
I. .Tax Matters.
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1. DHS has filed all tax returns required to be filed by it
under the laws of the United States of America, the jurisdiction of its
incorporation, and each state or other jurisdiction in which it conducts
business activities and is required to file. DHS has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
returns. DHS does not have any tax liability for which no tax reserve has
been made in respect of any jurisdiction in which DHS has business activities
and is required to file. DHS has set up as provisions for taxes on the DHS
Balance Sheet amounts sufficient for all accrued and unpaid federal,
state, county and local taxes of DHS, whether or not disputed, including
any interest and penalties in connection therewith, for all fiscal periods
ending on or before the date of the DHS Balance Sheet.
2. No examinations of DHS' federal income tax returns are in
progress. The results of any settlements and any necessary adjustments in
state income tax resulting therefrom are properly reflected in DHS'
financial statements referred to in Section 5.5. DHS is not aware of any
fact which would constitute grounds for any further tax liability with
respect to the years which have not been examined. No agreements or waivers
have been made by or on behalf of DHS for the extension of time for the
assessment of any tax or for any applicable statute of limitations.
3. Except for taxes for the payment of which an adequate
reserve has been established on the DHS Balance Sheet, there are no tax
liens, whether imposed by any federal, state or local taxing authority,
outstanding against any of the assets, properties or business of DHS.
4. All taxes and assessments that DHS is required to withhold or
to collect have been duly withheld or collected and all withholdings and
collections have either been duly and timely paid over to the appropriate
governmental authority or are, together with the payments due or to become due
in connection therewith, duly reflected on the DHS Balance Sheet in accordance
with GAAP.
J. .Absence of Undisclosed Liabilities. DHS does not have any
material indebtedness, liability or obligation of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, other than (i)
liabilities reflected in the DHS Balance Sheet, (ii) liabilities incurred in
the ordinary course of business of DHS since the date of the DHS Balance
Sheet, (iii) indebtedness, liabilities and obligations listed on Schedule
5.10 hereto, and (iv) liabilities incurred in connection with the performance
of this Agreement.
K. .Insurance. All significant policies of insurance, together with the
premiums currently paid thereon, providing for personal, employee, product
or public liability coverage with respect to the business of DHS are and will
be in full force and effect at the Closing Date and thereafter in accordance
with their terms. There are no claims, actions, suits or proceedings
arising out of or based upon any of such policies of insurance, and, so far as
is known to DHS or any of its officers, no basis for any such
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claim, action, suit or proceeding exists. There are no notices of any pending
or threatened terminations with respect to any of such policies and DHS is in
compliance with all conditions contained therein.
L. .No Material Adverse Change. Since the date of the DHS Balance Sheet,
DHS has not experienced any material damage, destruction or loss (whether or not
covered by insurance) to its assets or material adverse change in the
business, financial condition, operations, or results of operations of DHS.
M. .Required Consents. There have been or will be timely filed, given,
obtained or taken all applications, notices, consents, approvals, orders,
registrations, qualifications, waivers or other actions of any kind required
by virtue of the execution and delivery of this Agreement by DHS or Sub or the
consummation by DHS or Sub of any of the transactions contemplated hereby.
N. .Disclosure Registration Statement. The Securities Act Registration
Statement, the Prospectus (as defined in Section 6.1(b) of the
Agreement), and any post-effective amendment thereto, on the date on which
the Securities Act Registration Statement (or the post-effective amendment
thereto) shall become effective, on the date on which the Proxy Statement is
mailed to the Members of Medtrust in connection with the Special Meeting and at
all times subsequent to such effectiveness and mailing, up to and including
the date of the Special Meeting with respect to all information set forth
therein furnished by DHS and relating to DHS (i) will comply as to form in all
material respects with the provisions of the Securities Act and the rules
and regulations of the SEC thereunder, as applicable, and (ii) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they will
be made, not misleading. DHS will advise Medtrust promptly after it
receives notice thereof, of the times when the Securities Act Registration
Statement has become effective or any supplement or amendment thereto has been
filed, of the issuance of any stop order, of the suspension of the
qualification of the shares of DHS Common Stock issuable in connection with
the Merger for offering or sale in any jurisdiction, of the initiation or
threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of the Securities Act Registration Statement
or for additional information. DHS has made all filings with the SEC that it
has been required to make under the Exchange Act (collectively the "Public
Reports"). Each of the Public Reports has complied with the Exchange Act in all
material respects. None of the Public Reports, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. DHS has
delivered to Medtrust a correct and complete copy of each Public Report
(together with all exhibits and schedules thereto and as amended to date).
O. .Disclosure; Representations and Warranties. DHS has made true and
complete responses to all Medtrust's requests for information, documents,
contracts, agreements and records of DHS relating to the business of DHS.
Neither this Agreement nor any statement, certificate, writing or document
furnished to Medtrust by DHS in connection with this Agreement contains, as
of the dates of
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such documents, any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained therein not misleading.
P. .Finders or Brokers. DHS has not utilized the services of any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to a fee or commission in
connection with this Agreement or upon consummation of the transactions
contemplated hereby.
VII. TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
A. .Special Meeting.
1. The Board of Directors of Medtrust has approved the execution
and delivery of this Agreement and the consummation of the Merger under
the terms set forth herein. If the Securities Act Registration Statement
shall become effective, DHS shall promptly notify Medtrust and furnish to
Medtrust at least one copy of its final Prospectus (as hereinafter
defined) for each Member. Thereafter, the Board of Directors of Medtrust
shall submit this Agreement to its Members for their adoption and will solicit
proxies in favor of and recommend to its Members such adoption at a
meeting thereof to be duly called and held upon the giving of the requisite
notices.
2. The parties hereto shall cooperate with each other in every
way in carrying out the transactions contemplated herein, including, but not
limited to, (i) in obtaining all required approvals and authorizations,
(ii) in furnishing information required for use in a proxy statement (the
"Proxy Statement") for use in connection with the Special Meeting to be held for
the purpose of considering the transactions contemplated by this Agreement,
(iii) in preparing and filing with the SEC a Registration Statement on Form S-1
under the Securities Act (or such other Form as may be appropriate) covering
the offer and sale of the shares of DHS Common Stock to be issued in
connection with the Merger (the "Securities Act Registration Statement"), the
prospectus and any prospectus supplement which shall constitute a part thereof
(the "Prospectus"), (iv) in preparing and filing such reports and applications
with state regulatory authorities in connection with the Merger, including the
issuance of the DHS Common Stock as may be required and (v) in executing and
delivering all documents, instruments or copies thereof deemed necessary or
useful by either party. Should the appearance of any of the officers, directors,
employees or counsel of any of the parties hereto be requested by any of the
parties or by any governmental agency at any hearing in connection with any such
application or in connection with any such agency's review of the transactions
contemplated hereby, the Securities Act Registration Statement, or the
Prospectus such party promptly shall use its best efforts to arrange for such
appearance. Medtrust and DHS, each promptly shall provide the other with copies
of all such applications and all amendments and supplements thereto filed
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or made in connection with the transactions contemplated hereby and promptly
shall advise the other of the substance of all oral or written comments
received thereon from applicable regulatory authorities.
B. .Effectiveness of Securities Act Registration Statement. DHS shall use
its best efforts to cause the Securities Act Registration Statement to become
effective as soon as practicable following the date hereof.
C. .Management of Medtrust. Contemporaneously herewith, DHS and Medtrust
have executed and delivered a Network Contracting and Management Services
Agreement in the form of Exhibit I (the "Management Services Agreement")
pursuant to which DHS will manage Medtrust until the earlier to occur of Closing
or termination of this Agreement.
VIII. CERTAIN COVENANTS AND AGREEMENTS
A. .Approvals; Consents. Medtrust will obtain or cause to be obtained all
consents, approvals and authorizations required by any applicable requirement of
law or by any contract or agreement to be obtained by Medtrust in connection
with the consummation of the Merger. DHS and Sub will obtain or cause to be
obtained all consents, approvals and authorizations required by any applicable
requirement of law or by any contract or agreement to be obtained by DHS and Sub
in connection with the consummation of the Merger.
B. .Conduct of Business Prior To Effective Time. Except as otherwise
provided in this Agreement, the Management Services Agreement and
the Exclusive Participation Agreements, Medtrust shall: (i) conduct its
business only in the ordinary course and consistent with past practices; (ii)
keep in full force and effect its corporate existence; (iii) comply with the
Material Contracts and other agreements by which it is bound; (iv) use
reasonable efforts to retain its employees and maintain its business
relationships with customers and suppliers; (v) use, operate and maintain in
all material respects its properties, as presently used, operated and
maintained, except for ordinary wear and tear; and (vi) except for increases in
the ordinary course of business and consistent with past practices, not grant
any increase in the compensation or rate of compensation payable or to
become payable to any of its employees. Except as otherwise provided in this
Agreement, DHS and Sub shall conduct its business in the ordinary course and
consistent with past practice. Without the prior written consent of the other
parties neither Medtrust on the one hand, nor Sub on the other hand, will:
(i) amend its charter or by-laws, (ii) except as expressly permitted by this
Agreement, declare, set aside or pay any dividend or distribution with
respect to its capital stock, or repurchase, redeem or otherwise acquire
or exchange, directly or indirectly, any shares of its capital stock or any
securities convertible into any shares of its capital stock, (iii) except as
expressly permitted by this Agreement, issue, sell or otherwise permit to become
outstanding any additional shares of its capital stock, or any option, warrant,
conversion, or other right to acquire any such stock or any security
convertible into any such stock, or
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enter into an agreement or commitment with respect to the foregoing, (iv) enter
into any other agreement or commitment not in the ordinary course of business,
including without limitation an agreement or commitment to acquire direct or
indirect control over any third party or to sell or otherwise dispose of any
substantial part of its assets or any asset other than in the ordinary
course of business for reasonable and adequate consideration; (v) incur
any indebtedness, other than indebtedness incurred in the ordinary course of
business; or (vi) make any new commitments for capital expenditures exceeding
Five Thousand Dollars ($5,000) per item or Ten Thousand Dollars ($10,000) in
the aggregate.
C. .Access to Information and Documents.
1. From the date hereof to the Closing Date, Medtrust shall give
to, or cause to be made available for, DHS and Sub shall give to, or cause
to be made available for, Medtrust and their respective counsels,
accountants and other representatives full access during normal business
hours to all properties, documents, contracts, employees and records of
Medtrust or DHS and Sub and furnish the other party with copies of such
documents and with such information as such party from time to time
reasonably may request. Each party will make available to the other for
examination correct and complete copies of all Federal, state, local and
foreign tax returns filed together with all available revenue agents'
reports, all other reports, notices and correspondence concerning tax audits
or examinations and analyses of all provisions for reserves or accruals of
taxes, including deferred taxes.
2. Until the Closing Date (and, if this Merger Agreement is
terminated prior to the Closing Date, at all times after such termination),
the parties will not disclose or use any confidential information obtained
in the course of their respective investigations, except to the extent
that any such confidential information subsequently becomes public knowledge.
3. If the Merger is not consummated and this Agreement is
terminated, then DHS and Sub promptly shall return all documents, contracts,
records or properties of Medtrust furnished by Medtrust to DHS and Sub and all
copies thereof, and Medtrust promptly shall return all documents, contracts,
records or properties of DHS and Sub furnished by DHS and Sub to Medtrust, and
all copies thereof.
D. .Periodic Information.
1. From the date hereof to the Closing Date, Medtrust shall
furnish DHS withsuch additional financial and operating data and other
information regarding its business, reasonably available to Medtrust, as DHS
shall from time to time reasonably request.
2. From the date hereof to the Closing Date, DHS and Sub shall
furnish Medtrust with such additional financial and operating data and
other information regarding its business, reasonably available to DHS and
Sub as Medtrust shall from time to time reasonably request.
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E. .Representations. Each of the parties to this Agreement (a) will take all
action necessary to render accurate as of the Closing Date their
respective representations and warranties contained herein, (b) will refrain
from taking any action which would render any such representation or warranty
inaccurate in any material respect as of such time, and (c) will perform
or cause to be satisfied each covenant or condition to be performed or
satisfied by them under this Agreement.
F. .Information.
1. Medtrust will furnish DHS with all information concerning
Medtrust reasonably required for inclusion in the Securities Act Registration
Statement, the Prospectus, and any other registration statement, application
or filing made by DHS to the SEC or any other governmental or regulatory
body in connection with the transactions contemplated by this Agreement.
2. DHS will furnish Medtrust with all information concerning
DHS and Sub reasonably required for inclusion in the Proxy Statement or
any other governmental or regulatory body in connection with the
transactions contemplated by this Agreement.
G. .Notice of Breach.
1. DHS will immediately give notice to Medtrust of the
occurrence of any event or the failure of any event to occur that results in a
breach of any representation or warranty by DHS or Sub or a failure by DHS or
Sub to comply with any covenant, condition or agreement contained herein.
2. Medtrust will immediately give notice to DHS of the
occurrence of any event or the failure of any event to occur that results in a
breach of any representation or warranty by Medtrust or a failure by Medtrust
to comply with any covenant, condition or agreement contained herein.
H. .Director and Officer Insurance.
(a) DHS and Sub will use its commercially reasonable efforts to provide
each individual who serves as a director or officer of Sub following the
Effective Time with liability insurance for a period of 3 years after the
Effective Time on such specific terms and conditions as are customary and
mutually agreed upon by the parties; provided, however, that such insurance
shall apply to acts of such directors and officers after the Effective Time.
(b) DHS and Sub will not take any action to alter or impair any
exculpatory or indemnification provisions now existing in the articles of
incorporation or by-laws of Sub for the benefit of any individual who serves as
a director or officer of Sub.
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I. .Business Plan and Capitalization of Sub. As soon as practicable
after the Effective Time, DHS and the Board of Directors of Sub shall develop
a Business Plan for the development of a physician network in the Northern
Virginia area and shall determine the amount of capital DHS should invest in
the Sub for the purpose of funding its operations and providing adequate
reserves for the implementation of its Business Plan.
J. .Exclusivity. For a period of at least five years following Closing, DHS
shall utilize Sub as its exclusive independent practice association in the
Northern Virginia marketplace defined as the geographic area set forth on
Exhibit J.
K. .Establishment of Woman Care, IPA, LLC. DHS shall use commercially
reasonable efforts to organize, at its expense, a network of Medtrust's ob/gyn
physicians which shall include as its members qualified ob/gyn physician who
are presently affiliated with Medtrust. Such network shall be granted a right of
first refusal with respect to ob/gyn services for all third-party payor
contracts executed by Sub during the five-year period following Closing.
L. .Right of First Refusal to Specialists. For a period of four years
following the Effective Time, each specialist who is a member of Medtrust shall
have the right to participate, at his option, in all third-party payor
contracts available within a reasonable geographic area of such specialist's
office and executed by DHS, Medtrust, or its assigns, unless excluded by the
third party payor. Each such specialist will be required to be approved
pursuant to DHS normal credentialling process and will be required to meet
the utilization, quality assurance and performance guidelines established from
time to time by the plans. The fee arrangements under any such provider
agreements will be subject to modification from time to time by DHS.
M. .Primary Care Affiliation Agreements. Prior to Closing, DHS and/or Sub
shall solicit Medtrust primary care physicians to sign Exclusive
Participation Agreements pursuant to which such primary care physicians
will be paid Ten Thousand Dollars ($10,000) in cash upon the completion of their
credentialling. Credentialling shall be completed within ninety (90) days after
execution of the Exclusive Participation Agreement. Following Closing,
each primary care physician shall have the right to extend his agreement by
an additional term of two (2) years in which event he shall receive an
additional Five Thousand Dollars ($5,000) in cash and options to acquire 1,000
shares of DHS Common Stock at an exercise price of Twenty Dollars ($20) per
share. For a period of at least two (2) years following Closing, any primary
care physician employed by a Medtrust Member shall be permitted to elect to
sign Exclusive Participation Agreements with DHS and/or Sub on the same terms
and conditions as described above, subject only to completion of DHS normal
credentialling process.
N. .Registration of DHS Common Stock. The DHS Common Stock shall be
included as registered shares under the .ecurities Act Registration Statement.
IX. CONDITIONS TO OBLIGATIONS OF THE PARTIES
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The obligations of the parties under this Agreement are subject to the
fulfillment and satisfaction of each of the following conditions:
A. .Member Approvals. At or before the Effective Time, the Members of
Medtrust holding more than two-thirds of the Membership interests shall have
approved the Merger and the terms of this Agreement ("Requisite Member
Approval").
B. .Pending Litigation. No legal, administrative, arbitrational,
investigatory or other proceeding shall be pending before any court, tribunal
or governmental authority at the Closing Date which seeks to challenge or
prevent the Merger or any transaction contemplated by this Agreement or which
seeks to obtain a remedy at law in connection therewith.
C. .Third Party Consents. At or before the Effective Time, all consents from
third parties necessary to consummate the transactions contemplated by this
Agreement shall have been obtained.
X. CONDITIONS TO DHS' OBLIGATIONS
The obligations of DHS and Sub hereunder are subject to the
satisfaction, at or before the Closing Date, of the following conditions (any of
which may be waived, in whole or in part, by DHS):
A. .Representations and Warranties. The representations and warranties of
Medtrust contained in this Agreement (including the Schedules and Exhibits
hereto), or in any certificate or document delivered to DHS in connection
herewith, shall be true in all material respects on the Closing Date as if
made again on and as of the Closing Date. Medtrust shall have duly
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by
Medtrust at or before the Closing Date. DHS shall have been furnished with
certificates of appropriate officers of Medtrust, dated the Closing Date,
certifying in such detail as Medtrust may reasonably request to the
fulfillment of the foregoing conditions.
B. .Opinion of Medtrust's Counsel. Kaufman & Canoles, counsel to Medtrust,
shall have delivered to DHS and Sub an opinion, dated the Closing Date and
addressed to DHS and Sub in a form reasonably acceptable to DHS and Medtrust.
C. .Legal Matters Satisfactory. All legal matters, and the form and
substance of all documents to be delivered by Medtrust to DHS at the Closing,
shall have been approved by, and shall be satisfactory to, counsel to DHS.
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D. .No Material Adverse Change. There shall not have been any material
adverse change in the business or financial condition of Medtrust from that
disclosed in the Financial Statements.
E. .Alliance with Primary Care Physicians. At least thirty (30)
primary care physicians affiliated with Medtrust shall have executed and
delivered Exclusive Participation Agreements in the form of Exhibit K;
provided that each such primary care physician is capable of being
credentialled and included in DHS's managed care payor contracts. The
Exclusive Participation Agreements shall only become effective upon consummation
of the Closing.
F. .Dissenters To Merger. Members holding no more than twenty percent (20%)
of the membership interests of Medtrust shall have dissented to the
consummation of the Merger at the Special Meeting.
G. .Virginia Blue Sky Laws. The issuance of DHS Common Stock to Medtrust
Members shall have been approved by the Virginia Stock Corporation Commission.
XI. CONDITIONS TO MEDTRUST'S OBLIGATIONS
The obligations of Medtrust hereunder are subject to the satisfaction,
at or before the Closing Date, of the following conditions (any of which may be
waived, in whole or in part, by Medtrust):
A. .Representations and Warranties. The representations and warranties
of DHS contained in this Agreement, or in any certificate or document
delivered to Medtrust in connection herewith, shall be true in all material
respects at the Closing Date as if made again on and as of the Closing Date. DHS
shall have duly performed and complied in all material respects with all
agreements and conditions required by this Agreement to be performed or
complied with by DHS at or before the Closing Date. Medtrust shall have been
furnished with certificates of appropriate officers of DHS, dated the Closing
Date, certifying in such detail as Medtrust may reasonably request to the
fulfillment of the foregoing conditions.
B. .Opinion of Counsel for DHS and Sub. Corporate counsel for DHS and Sub,
shall have delivered to Medtrust an opinion, dated the Closing Date and
addressed to Medtrust in a form reasonably acceptable to DHS and Medtrust.
C. .Legal Matters Satisfactory. All legal matter, and the form and substance
of all documents to be delivered by DHS to Medtrust at the Closing, shall
have been approved by, and shall be reasonably satisfactory to, counsel to
Medtrust.
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D. .No Material Adverse Change. There shall not have been any material
adverse change in the business or financial condition of DHS from that
disclosed in the DHS Balance Sheet for the period from the date of the DHS
Balance Sheet to the Closing Date.
E. .Registration Statement. At or before the Effective Time, the
Securities Act Registration Statement shall have been declared effective by
the SEC and be effective on the Closing Date, and all applicable approvals
of governmental regulatory authorities of the United States of America
or of any state or political subdivision thereof required to consummate the
Merger shall have been obtained.
F. .Issue Price of DHS Common Stock. Between the date hereof and the
Effective Time, the consideration for the issuance of DHS Common Stock to
physicians in physician acquisition transactions shall be based upon a price of
not less than $15 per share.
XII. TERMINATION
A. .Termination. This Agreement may be terminated and the Merger abandoned
at any time before the Closing Date:
1. by the written consent of Medtrust and DHS;
2. by DHS, in writing, if there has been a material
misrepresentation in this Agreement by Medtrust, or a material breach by
Medtrust of any of its warranties or covenants set forth herein, or a failure
of any condition to which the obligations of DHS hereunder are subject;
3. by Medtrust, in writing, if there has been a material
misrepresentation in this Agreement by DHS, or a material breach by DHS or
Sub of any of the warranties or covenants of DHS or Sub set forth herein, or a
failure of any condition to which the obligations of Medtrust hereunder are
subject;
4. by either Medtrust or DHS, in writing, if the Effective Time
shall not have occurred before January 31, 1997, for any reason other than
the failure of the party seeking to terminate this Agreement to perform its
obligations hereunder or a misrepresentation or breach of warranty by such party
herein;
B. .Effect of Termination. In the event of termination of this Agreement
pursuant to Section 11.1, the provisions of Section 7.3 and 12.12 shall survive
any such termination and no such termination will relieve any party from any
liability for any breach of this Agreement or any misrepresentation giving
rise to such termination.
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XIII. MISCELLANEOUS
A. .Expenses. Each party hereto shall pay its own costs and expenses
incident to its negotiation and preparation of this Agreement and to its
performance of and compliance with all agreements and conditions contained
herein to be performed or complied with by it, except that DHS will pay up to
$30,000 of the fees and expenses of Kaufman & Canoles as counsel to Medtrust
with respect to periods after August 14, 1996, irrespective of whether
this transaction shall be consummated.
B. .Survival of Representations, Warranties and Covenants.nties and Covenants
1. The representations, warranties and covenants of each party
hereto shall terminate upon (i) the Closing, or (ii) upon the date of
termination of this Agreement and abandonment of the Merger pursuant to the
provisions of Section 11.1 and the parties hereto shall have no continuing
obligations or liabilities with respect thereto except as may be provided in
Section 12.2(b) below and except for the covenants set forth in Sections 7.3,
7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14 and 12.12 which shall survive the
Closing.
2. If either DHS or Medtrust shall have the right to terminate
this Agreement and abandon the Merger pursuant to the provisions of
Section 11.1(b) or Section 11.1(c), then the party which does not have the
right so to terminate this Agreement will use its reasonable efforts to cure the
condition giving rise to such right. If such party is unable to cure the
condition giving rise to such right, the other may exercise its right under
Section 11.1(b) or Section 11.1(c) to terminate this Agreement and abandon the
Merger, or may waive such right and proceed to consummate the Merger. In any
such event, the representations, warranties, covenants and agreements of the
parties shall terminate, and the parties hereto shall have no continuing
obligations or liabilities with respect thereto, except that no termination
shall relieve any party from liability for a breach of any representation,
warranty or covenant giving rise to such termination and except that the
provisions of Sections 7.3, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14 and 12.12
shall survive the Closing or termination of this Agreement.
C. .Governing Law; Jurisdiction and Venue. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
COMMONWEALTH OF VIRGINIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED
WITHIN SUCH STATE. EACH PARTY AGREES THAT THE FEDERAL COURTS OF THE UNITED
STATES OR STATE COURTS OF VIRGINIA SHALL HAVE THE EXCLUSIVE JURISDICTION FOR
ANY DISPUTE UNDER THIS AGREEMENT. MEDTRUST, DHS AND SUB HEREBY CONSENT TO
PERSONAL JURISDICTION IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN
DISTRICT SITTING IN
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ALEXANDRIA, VIRGINIA OR ANY STATE COURT LOCATED WITHIN THE EASTERN DISTRICT
WITH RESPECT TO CLAIMS ARISING UNDER THIS AGREEMENT.
D. .Notices. All notices, consents, requests, instructions, approvals and
other communications provided for herein shall be deemed validly given, made or
served if in writing and delivered personally (as of such delivery) or
sent by certified mail (as of two days after deposit in a United States post
office), or sent by overnight courier service (as of two days after
delivery to an internationally recognized courier service), or by facsimile
(upon receipt), in any case, postage and charges prepaid,
1. if to DHS or Sub, addressed to:
10451 Mill Run Circle
Tenth Floor
Owings Mills, MD 21117
Attention: Paul Serini
Telephone: (410) 654-3421
Facsimile: (410) 654-5806
with copies to:
Gardner, Carton & Douglas
1301 K Street, N.W.
Suite 900, East Tower
Washington, DC 20005
Telephone: (202) 408-7100
Facsimile: (202) 289-1504
Attention: E. Michael Flanagan, Esq.
Thomas F. Mapp, Esq.
Corporate Counsel
10451 Mill Run Circle
Tenth Floor
Owings Mills, MD 21117
2. if to Medtrust, addressed to:
Medtrust Medical Group, Inc.
3251 Old Lee Highway, Suite 510
Fairfax, VA 22030-1504
Telephone: (703) 359-0414
Facsimile: (703) 359-0416
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with a copy to:
Kaufman & Canoles
One Commercial Place
P.O. Box 3037
Norfolk, VA 23514
Telephone: (757) 624-3000
Facsimile: (757) 624-3169
Attention: William R. Van Buren, III, Esq.
or such other address as shall be furnished in writing by either party to the
other.
E. .Press Releases. Medtrust and DHS will consult and cooperate in the
issuance, form, content and timing of any press releases issued in connection
with the transactions contemplated by this Agreement.
F. .Assignment; Amendments, Waivers
1. No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the
others.
2. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and permitted
assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement.
3. No provision of this Agreement may be amended, modified or
waived except by written agreement duly executed by each of the parties. No
waiver by either party of any breach of any provision hereof shall be deemed to
be a continuing waiver thereof in the future or a waiver of any other provision
hereof; nor shall any delay or omission of either party to exercise any right
hereunder in any manner impair the exercise of any such right accruing to it
thereafter.
G. .Entire Agreement. This Agreement represents the entire agreement
between the parties and supersedes and cancels any prior oral or written
agreement, letter of intent or understanding related to the subject matter
hereof.
H. .Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect, unless such action would substantially impair the benefits to
either party of the remaining provisions of this Agreement.
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I. .Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement, and shall not be deemed to limit or
affect any of the provisions hereof.
J. .Counterparts. This Agreement may be executed in one or more counterparts
which, taken together, shall constitute one and the same instrument, and this
Agreement shall become effective when one or more counterparts have been signed
by each of the parties.
K. .Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the parties to this Agreement
and their respective successors and permitted assigns. Notwithstanding the
foregoing, from and after Closing, any Member of Medtrust as of Closing
shall be entitled to enforce the provisions of Sections 7.8, 7.9, 7.10, 7.11,
7.12, 7.13 and 7.14 hereof as if such Member were an original party hereto
to the extent that the provisions of any such section are intended for the
benefit of such Member.
L. .Enforcement Costs. The prevailing party shall be entitled to recover its
costs of enforcement, including, without limitation, reasonable attorneys'
fees, in any action brought to enforce its rights hereunder or to seek
redress for a breach of any of the representations, warranties or covenants set
forth herein.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto on the day and year first above written.
MEDTRUST MEDICAL GROUP, INC. DOCTORS HEALTH SYSTEM, INC.
By:_____________________________ By:______________________________
Stewart B. Gold, President
Name:___________________________
Title:__________________________
DOCTORS HEALTH OF VIRGINIA, INC.
By:_____________________________
Stewart B. Gold, President
24
Exhibit 10.47
NETWORK CONTRACTING AND
MANAGEMENT SERVICES AGREEMENT
THIS NETWORK CONTRACTING AND MANAGEMENT SERVICES AGREEMENT (the
"Agreement") is made and entered into as of November 1, 1996 ("Effective Date")
by and between DOCTORS HEALTH SYSTEM, INC., a Maryland corporation ("DHS") and
MEDTRUST MEDICAL GROUP, INC., a Virginia nonstock corporation ("Medtrust").
WITNESSETH
WHEREAS, Medtrust is a non-stock corporation whose members consist of
primary and specialty care physicians licensed to practice medicine in the
Commonwealth of Virginia and which was formed for the purpose of engaging in
group purchasing, cost sharing and the joint marketing of medical services in
the Northern Virginia marketplace.
WHEREAS, DHS was formed for the purpose of developing and consolidating
groups of internists, pediatricians and family practitioners ("PCPs"),
specialist physicians, hospitals and other health care providers into
comprehensive managed health care delivery systems.
WHEREAS, Medtrust and DHS have entered into formal negotiations in
contemplation of a combination of their respective entities (the "Transaction")
and have executed and delivered a Plan and Agreement of Merger of even date
herewith (the "Plan and Agreement of Merger");
WHEREAS, between the date hereof and the date of consummation or
abandonment of the Transaction, Medtrust desires to arrange for the provision of
various management, administrative and support services by DHS;
WHEREAS, DHS has the resources to provide or arrange for the provision
of certain of the management services required by Medtrust and Medtrust desires
to enter into an agreement with DHS whereby DHS will provide such services;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements and covenants contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto do hereby agree as follows.
DEFINITIONS
As used in this Agreement, each of the following terms shall have the
meaning set forth below:
"Agreement". This Agreement, and the schedules and exhibits hereto as
the same may be amended from time to time.
<PAGE>
"Benefit Plan". Any health benefit plan or plans in which DHS
participates and which is designed or administered by a Payor or DHS under which
Medtrust provides Covered Services through its Participating Physicians. Copies
of all Benefit Plans will be kept on file at the offices of DHS and Medtrust and
shall be made available upon request to any Participating Physician. DHS
provides each Participating Physician an explanation of the terms and conditions
of each Benefit Plan.
"Care Management". A comprehensive program developed and administered
by DHS to facilitate the delivery of the highest quality, most appropriate care
in a cost effective manner. The components of Care Management include Referral
Management Utilization Management and Case Management.
"Case Management". A program developed and administered by DHS that
provides Physicians with the skills of registered nurses and licensed clinical
social workers (collectively a "Case Manager") necessary to assist in the
coordination of the care and services required by Members with catastrophic
and/or chronic illnesses or injuries. Through this program the Case Manager
works in conjunction with the Physician, Member and Member's family to identify
health care needs, develop a plan of care, establish realistic treatment goals,
coordinate and monitor necessary resources and evaluate treatment progress.
"Covered Services". Those services that Medtrust agrees on behalf of
the Participating Physicians to render, provide or arrange to or for Members
under any Services Agreement, and that are approved by the Payor and DHS and
payable under the terms of a Benefit Plan.
"Data Management". A service developed and administered by DHS that
coordinates the receipt and maintenance of payor eligibility and health benefit
plan information and coordinates and integrates a variety of data necessary to
yield reports reflecting the utilization, cost and quality performance of the
provider network.
"Medically Necessary". The provision of medical services by a Physician
or other provider of health care which is: (i) consistent with the symptoms,
diagnosis, and treatment of illness, disease, or medical problems; (ii) commonly
and customarily recognized in the Physician's profession as appropriate in the
treatment of a diagnosed illness or injury; (iii) not primarily for the
convenience of the Member or the Physician; and (iv) the most appropriate level
of service that can safely be provided. Those services which constitute
medically necessary services may be specifically defined in the Services
Agreement, in which case the provisions of such contract shall control and
supersede the definition of medically necessary services contained herein.
"Member". An enrolled person (including subscribers and eligible
dependents) entitled to benefits under any Benefit Plan from a Payor contracting
under a Services Agreement with DHS for the provision of health care and who is
entitled to receive care from a Participating PCP.
2
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"Outcomes Measurement". The outcomes measurement program provided by
DHS for outcomes measurement activities, or a similar program developed,
established and administered by a Payor.
"Patient Services". A program developed and administered by DHS that
provides Members with access to specially trained nurses who answer questions
regarding access to services, treatment alternatives and self care options.
"Payor". Any insurer, health maintenance organization, preferred
provider organization, self-insured employer, labor union or other organization
or entity that arranges for the delivery of health care services to Members
under a Benefit Plan. If and to the extent that DHS is or becomes legally
entitled and otherwise qualified to arrange for the delivery of health care
services directly to Members under a Benefit Plan, then DHS (or an affiliate
established by DHS for such purpose) shall be deemed a Payor for purposes
hereof.
"Participating Physicians". The PCPs and specialty care physicians
licensed to practice medicine in the Commonwealth of Virginia who have entered
into a Physician Participation Agreement with Medtrust, DHS, or a DHS affiliate.
"Physician Participation Agreements". Those agreements by and between
Medtrust and the Participating Physicians under which the Participating
Physicians agree to provide Covered Services to Members under Service
Agreements.
"PCP". Any primary care physician, to include internal medicine,
family practice, or pediatrician, as defined by Medtrust and DHS.
"Professional Services". The professional services which are Covered
Services provided or supervised by a licensed physician and rendered directly to
a Member, including diagnosis, therapy, surgery and consultation, as defined by
the Services Agreement. Those services which constitute Covered Services for a
given Payor contract may be specifically set forth in the Services Agreement
between Medtrust and a Payor, in which case the provisions of such Services
Agreement shall control and supersede this definition of Professional Services.
"Provider". Any physician, group medical practice, hospital, ambulatory
surgical center, ancillary service or other health care provider which is a
Participating provider of a Payor with which Medtrust contracts.
"Referral Management". A process developed and administered by DHS
that provides for the maintenance of referral directories; authorization of
referrals; clinical review of referrals for appropriateness and tracking and
reporting of referral patterns.
3
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"Services Agreement". Those agreements between DHS and a Payor under
which Medtrust Physicians agree to provide Covered Services to Members covered
by a Benefit Plan in accordance with the terms of this Agreement and the
Services Agreement.
"Specialist Physician". Any physician who is not a PCP.
"Third Party Administration". A function performed by DHS for Medtrust
to provide for the appropriate adjudication of claims, coordination of benefits,
subrogation services and integration with the reinsurance carrier.
"Utilization Review". A function performed by DHS for Medtrust, or the
Payor or its designee, to review and approve whether the services provided by
Physicians to or for Members are Covered Services and medically necessary and/or
appropriate under the Benefit Plans.
"Utilization Review Program". The utilization review program adopted
by Medtrust and administered by DHS or its agents for the determination of the
medical necessity of medical services provided to Members, or a similar program
developed, established and administered by a Payor.
<PAGE>
1 RELATIONSHIP OF THE PARTIES
.1 Control Retained in Board. Medtrust, through its
Board of Directors, shall at all times exercise ultimate authority and
control over the policies and assets of Medtrust and shall retain the ultimate
authority and responsibility regarding the powers, duties, and
responsibilities vested in Medtrust by law and regulation. Except as
otherwise expressly permitted in Article 2 herein, DHS shall have no
authority to enter into contracts on behalf of Medtrust or to otherwise bind
or make commitments for Medtrust without the prior approval of the Medtrust
Board of Directors.
.2 Relationship of the Parties. It is mutually
understood and agreed that Medtrust and DHS, in performing their respective
duties and obligations under this agreement, are at all times acting and
performing as independent contractors with respect to each other, and nothing
in this Agreement is intended and nothing shall be construed to create an
employer/employee, partnership or joint venture relationship, or to allow
DHS to exercise control or direction over the manner or method by which the
Participating Physicians perform Covered Services or other professional
health care services. DHS shall be the agent of Medtrust solely for the
purposes set forth in this Agreement that are related to the administration
of the business and contracting activities of Medtrust relating to managed
health care services and not with respect to provision of Covered Services by
the Participating Physicians.
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2 APPOINTMENT OF DHS AS AGENT
.1 Engagement of DHS.
(a) Medtrust hereby appoints DHS as its
exclusive and preferred provider of all Network Contracting and Management
Services solely with respect to any risk based managed care contracts
("Managed Care Contracts") for the term of this Agreement. For purposes
hereof, contracts shall be considered to be "risk based" if such contracts
incorporate payment methodologies based upon capitation arrangements,
global fee arrangements or which involve the use of substantial risk
withholds. As part of this appointment Medtrust agrees that it shall not,
directly or indirectly through others, enter into or solicit or otherwise
negotiate or attempt to enter into, or make any substantive commitments
regarding, any Managed Care Contract with any Payor unless (1) DHS has informed
Medtrust in writing that it does not desire to negotiate a Managed Care Contract
with such Payor; (2) the negotiations and/or agreement involves only a Fee for
service contract opportunity; or (3) DHS has been unable to secure a Managed
Care Contract with such Payor as contemplated by Section 2.1(c). Medtrust
acknowledges that DHS may assign any or all of its obligations under this
Agreement to a DHS Affiliate without obtaining the consent of Medtrust.
(b) Medtrust shall promptly inform DHS of any
unsolicited proposal it receives or obtains knowledge of to provide
Professional Services for any Payor under a Managed Care Contract (each a
"contracting opportunity"). DHS shall have thirty (30) days following actual
receipt of written notice from Medtrust of a contracting opportunity in
which to decide whether to pursue a Managed Care Contract with the Payor.
If DHS chooses not to pursue a Managed Care Contract with the Payor, it shall
so inform Medtrust and Medtrust shall be free to pursue a contract directly
with such Payor, but not through another entity or intermediary the
business of which may be competitive with the business of DHS.
(c) If DHS determines it is unable to secure a
Managed Care Contract with a Payor, Medtrust shall be free to pursue a
contract with such Payor for the contract year in question, after having
obtained DHS' written consent, which consent shall not be unreasonably
withheld or delayed.
(d) The right granted Medtrust to pursue a
separate contract with a Payor under (b) or (c) above is specific to such
Payor, and shall not include the right to contract through or as a contractor
with some other entity other than the Payor or an Affiliate of the Payor. If
Medtrust contracts with a Payor under this section 2.1, DHS shall with
respect to such Payor have no further duties under this Agreement for the
current term of such contract.
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3 NETWORK MANAGEMENT SERVICES
.1 General Responsibilities and Services. During the
term hereof, DHS shall perform all management services described in this
Article 3 that are reasonably necessary for the operations of Medtrust and the
implementation of Medtrust's policies, as established by Medtrust's Board of
Directors and as approved by DHS, which approval will not be unreasonably
denied, withheld, or delayed. Such services shall be performed in accordance
with applicable law, accepted standards in the industry and the commercially
reasonable exercise of DHS' judgment.
.2 Specific Services. DHS shall provide at its expense
those contracting, management, administrative and support services as are
reasonably necessary for Medtrust's ongoing operations, including quality
assurance, utilization management and review, finance, management,
information systems, claims administration, Provider credentialling, and
other necessary services. In furtherance of this, DHS and Medtrust shall
cooperate to:
(a) Improve and continue to administer
Medtrust's quality assurance program that determines clinical effectiveness,
patient satisfaction, patient compliance, accessibility and availability of
services, efficiency and appropriateness of services, and continuity of care.
(b) Improve and continue to administer
Medtrust's utilization management and review program that provides prospective,
concurrent and retrospective review of services rendered by Medtrust.
(c) Improve and continue to administer
accounting procedures and controls for the efficient administration of
Medtrust's participation in Service Agreements, including, but not limited
to, auditing, budgeting, cash management, and systems for the preparation of
appropriate financial reports related to the Medtrust's ongoing operations.
(d) Collect all accounts due and moneys owed to
Medtrust or its Participating Physicians under Service Agreements (with the
exception of co-payments and deductibles, which shall be accounted for on a
contract by contract basis, but which are normally to be collected and managed
by Medtrust or the Participating Physicians) for Medtrust's services.
(e) Continue to maintain bank accounts in the
name of Medtrust; deposit in such bank accounts all moneys received from
Medtrust's participation in the Service Agreements and make such
disbursements from such accounts on behalf of Medtrust or its Participating
Physicians in such amounts and at such times as the same are reasonably
required for the operation of the business or as directed by Medtrust's Board
of Directors. DHS will keep Medtrust's funds separate from its other moneys at
all times.
(f) Design, implement and administer such
systems and procedures as may be necessary for the appropriate adjudication and
timely payment of all claims.
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(g) Develop, maintain, and conduct a
coordination of benefits and a subrogation program where applicable. DHS shall
not have the responsibility of collecting or distributing subrogation revenue on
behalf of Providers.
(h) Provide access to the appropriate parts of
the DHS information system, including necessary hardware and software as are
appropriate to enable the Participating Physicians to provide services to
Members under the Service Agreements ("DHS Information System"). After the
Term of this Agreement, the Participating Physicians shall return to DHS
the DHS Information System. Continued use of the hardware and software after
the Term of the Agreement shall be determined on a case by case basis at a rate
to be mutually agreed upon.
(i) Assist Medtrust in complying with DHS
credentialling standards and protocols which are designed to permit inclusion
and verify the professional credentials of Participating Physicians in
Service Agreements; provided, however, that Medtrust shall interview and
make the ultimate decision as to the suitability and compliance with
credentialling and recredentialling standards of any new physician to become
associated with Medtrust and Medtrust will be responsible for implementing
the appropriate credentialling standards and admitting or denying
admittance to Medtrust. In the event that a Payor precludes a
Participating Physician from participating in a Service Agreement, DHS shall
notify the Participating Physician, in writing, within 30 days of learning of
such an action, and may assist Participating Physician, if requested, in seeking
to overturn such an action.
(j) Develop marketing materials designed to
promote the quality image of Medtrust in the Northern Virginia marketplace and
solicit contracting opportunities with Payors within the bounds of applicable
legal requirements and subject to such further restriction as may be imposed
by the Board of Directors of Medtrust.
(k) Provide detailed monthly financial and
operational reports concerning the operations of Medtrust to the Medtrust Board
of Directors.
.3 Personnel. DHS shall be responsible for selecting,
training, supervising and terminating such personnel as DHS deems reasonably
necessary and appropriate for DHS' performance of its duties and obligations
under this Agreement. In the event that Medtrust has any problems with such
personnel DHS shall cooperate with Medtrust to replace such personnel upon
request by Medtrust. DHS shall have the sole responsibility for determining the
salaries and fringe benefits of all such non medical management and
administrative personnel, for paying such salaries and providing such fringe
benefits, and for withholding, as required by law, any sums for income tax,
unemployment insurance, social security, or any other withholding required
by applicable law or governmental requirement. Notwithstanding the
foregoing, during the Term hereof, DHS shall employ at their current salary
(which annual salaries are currently $35,000 and $40,000 respectively)
and shall either provide or reimburse Medtrust for the provision of fringe
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benefits comparable to their current fringe benefits, Lilly Callahan and
Karynsue Frank (the "Medtrust Employees"), who shall continue to perform
their current job responsibilities at the current Medtrust offices. In the event
this Agreement is terminated for reasons other than the occurrence of closing
under the Plan and Agreement of Merger, DHS shall terminate the Medtrust
Employees and permit them to be immediately rehired by Medtrust. The Northern
Virginia recruiters, including without limitation Lilly Callahan and Karynsue
Frank, shall report to and be subject to the supervision of DHS's Director of
Business Development and Recruiting.
.4 Accounting and Financial Records. DHS shall
establish and administer for Medtrust reasonable accounting procedures,
controls, and systems for the development, preparation and safekeeping of
records and books of account relating to Medtrust's operations. Ownership
of these records and books of accounts shall reside with Medtrust.
.5 Funding of Operations. DHS shall pay all ongoing
operational expenses of Medtrust undertaken in the ordinary course of business
during the term hereof; provided however, that Medtrust may not materially
increase such expenses without the prior written approval of DHS. Any material
expenditures will be reviewed and discussed with DHS in advance.
.6 Compliance with Applicable Laws. DHS and Medtrust
shall each comply in all material respects with all applicable federal, state
and local laws, regulations and restrictions in the conduct of its
obligations under this Agreement and shall carry out its duties under this
Agreement exercising normal and customary business standards.
4 KEY EMPLOYEES OF MEDTRUST
.1 Norman A. Marcus, M.D. Commencing November 15,
1996, and for the remainder of the Term hereof, DHS shall reimburse Medtrust
for the base salary and corporate payroll taxes of Medtrust's Chairman of
the Board of Directors and Chief Executive Officer, Norman A. Marcus,
M.D., which is payable at the rate of $100,000 per annum. DHS shall
reimburse Medtrust for the payment of such base salary within five (5) days of
payment of the same by Medtrust to Dr. Marcus.
.2 A. Roger Wiederhorn, M.D. Commencing November 15,
1996, and for the remainder of the Term hereof, DHS shall reimburse Medtrust
for the base salary and corporate payroll taxes of Medtrust's President, A.
Roger Wiederhorn, M.D., which is payable at the rate of $36,650 per annum.
DHS shall reimburse Medtrust for the payment of such base salary within
five (5) days of payment of the same by Medtrust to Dr. Wiederhorn.
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5 AGREEMENTS AND RESPONSIBILITIES OF MEDTRUST
.1 Medtrust Responsibilities. Medtrust will retain
responsibility for any required management or administrative service not assumed
by DHS under this Agreement. Such responsibilities include, but are not
necessarily limited to:
(a) Procure such insurance as may be required
by Medtrust to satisfy all regulatory requirements and in accordance with sound
risk management standards; and to cooperate with DHS in coordinating
insurance coverage to minimize insurance costs through, among other things,
a common professional liability insurance policy, or a policy with the same
insurer providing professional liability insurance.
(b) Establish and implement procedures to
maintain regulatory compliance;
(c) Actively recruit PCPs to enter into the
Exclusive Participation Agreements or to merge or integrate their practices into
a medical group exclusively owned or managed by DHS as contemplated by the Plan
and Agreement of Merger.
(d) Perform administrative services reasonably
necessary and appropriate to develop the Medtrust network of Participating
Physicians and to recruit potential physicians to contract with Medtrust. It
will be and shall remain the responsibility of Medtrust to interview, select,
contract with, and terminate all physicians performing Covered Services or
other professional services and DHS shall have no responsibility with respect
to such activities.
(e) Not act in a manner which would prevent DHS
from efficiently performing its responsibilities under this Agreement in a
business-like manner.
(f) Coordinate all press releases, public
statements and other distributed literature, letters, notices or marketing
materials with and through DHS.
.2 Licenses. Medtrust shall be responsible for causing
each of Medtrust's Participating Physicians to be licensed without
restriction in the state in which the Participating Physician will
render the Covered Services under Services Agreements and to maintain such
licensure during the term of this Agreement. Medtrust shall make a good faith
effort to cause its Participating Physicians to comply with all applicable
federal, state and local laws, regulations and restrictions in the conduct
of its obligations under this Agreement and with all legal requirements
relating to the furnishing of Covered Services and other medical services
to the public and will obtain and maintain, and shall cause each of its
Participating Physicians to obtain and maintain in effect all permits,
licenses and governmental or board approvals which may be necessary for that
purpose.
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.3 Medical Practice. Medtrust shall make a good faith
effort to cause its Participating Physicians to render medical services in
a manner which seeks to provide availability, adequacy and continuity of
care pursuant to Service Agreements. Each Participating Physician shall be
responsible for his or her medical practice and shall maintain the
physician-patient relationship, both in accordance with the best medical
judgment and discretion of the Participating Physicians. Participating
Physicians shall remain responsible for the quality of medical services
provided, shall render such services in accordance with generally accepted
medical practice and professional recognized standards, and shall exercise
independent medical judgment and have full authority over all Covered
Services and all clinical decisions pertaining to the delivery of Covered
Services, as may be described in applicable Services Agreements.
.4 Outcomes Measurement/Utilization Management and
Related Programs. Medtrust shall receive from DHS and adopt and monitor,
with DHS, the implementation of reasonable outcomes measurement, risk and
utilization management, concurrent review and case management programs
appropriately modified for Northern Virginia and the surrounding areas and
designed to monitor and evaluate the quality of Covered Services provided by
Participating Physicians and to evaluate the professional skills of
potential Participating Physicians. Through the assistance of Medtrust,
DHS will incorporate the information derived from these categories and
criteria into DHS' ongoing qualitative and economic credentialling of
its provider network.
.5 Access. Medtrust shall, with reasonable notice and
during reasonable business hours, permit DHS to have access to Medtrust's books,
records and reports, contracts, agreements, licenses, survey, accreditation
and any and all other information reasonably requested by DHS to perform its
duties under this Agreement in Northern Virginia and surrounding areas or
another site in Virginia. Throughout the Term of this Agreement, DHS shall
provide a non transferable sub-license to Medtrust for the use of any software
or other proprietary computer programs, without payment of any royalties,
which are necessary for access to and the use of data pertinent to Medtrust
operations.
.6 Distribution Mechanism. DHS shall, as part of its
administrative duties, be responsible for the distribution of reimbursement
to and among Medtrust's Participating Physicians, including capitation
payments made directly to a Participating Physician pursuant to a Service
Agreement. Such capitation payments shall be made in a timely manner pursuant
to allocations determined by the Board of Directors of Medtrust.
6 OWNERSHIP OF WORK PRODUCT
.1 Work Product. All data, patient lists and reports
("Data") of Medtrust created or developed by DHS in performing DHS activities
under this Agreement shall be and remain the property of Medtrust. DHS shall
not disclose to unaffiliated third parties any confidential data, reports or
other materials containing information specific to Medtrust without the prior
consent of Medtrust except as otherwise required by law or regulation
applicable to Medtrust or DHS.
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.2 Records. Medtrust and DHS shall maintain records
and procedures as may be required to account accurately for all Covered
Services and other medical services provided pursuant to this Agreement.
Such records shall be kept in accordance with applicable law, generally accepted
principles and recognized standards of professional practice.
7 INSURANCE
.1 Medtrust Insurance. Medtrust shall cause each
Participating Physician to purchase and maintain professional liability
insurance including such tail or prior acts coverage as may be necessary to
avoid a gap in coverage for claims arising from incidents occurring during
the term of such Participating Physician's participation in Medtrust.
Said insurance shall: (i) be obtained from a carrier which meets such reasonable
solvency and other standards as may be set from time to time by Medtrust, in
consultation with DHS; (ii) provide minimum policy limits at commercially
reasonable levels, which initially shall not be less than $1,000,000 per
occurrence/$3,000,000 annual aggregate; and (iii) and shall include coverage
for the rendering of or failure to render professional services by the
Participating Physician or by any employee, agent or other person for whose
acts or omissions Participating Physician is responsible. DHS will explore the
feasibility of offering a global insurance policy for all or a portion of the
insurance requirements if cost savings can be obtained, and will offer such
insurance policy or policies when feasible.
.2 DHS Insurance. DHS shall obtain and maintain at its
expense, throughout the Term of this Agreement if and as appropriate, a
policy of managed health care professional liability insurance, general
liability insurance, property and casualty insurance and such other kinds of
insurance in such amounts, with such companies, and on such terms and
conditions as are customary for similarly situated companies.
8 CONSIDERATION
.1 Transaction. In consideration of services to be
provided by DHS and the granting of contracting authority by Medtrust to DHS
under this Agreement, Medtrust has entered into the Plan and Agreement of
Merger. In the event the Transaction is not consummated for any reason
whatsoever, DHS shall not be entitled to any reimbursement by Medtrust and
shall not be entitled to maintain any action against Medtrust for
expenditures or reimbursements of salaries made by DHS in connection with this
Agreement and the services required to be performed by DHS hereunder.
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9 TERM AND TERMINATION
.1 Term of Agreement. The term of this Agreement (the
"Term") shall commence on the date first set forth above, and, unless sooner
terminated as set forth below, shall terminate upon the earlier of (i) the
closing of the Plan and Agreement of Merger, or (ii) termination or abandonment
of the Plan and Agreement of Merger.
.2 Bankruptcy and Insolvency. This Agreement shall
terminate, at the option of any other party, upon the filing of a petition
in voluntary bankruptcy or an assignment for the benefit of creditors by a
party, or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of insolvents by a party,
except for the filing of a petition in involuntary bankruptcy against a party
with the dismissal thereof within sixty (60) days thereafter.
.3 Failure of Performance. If any party to this
Agreement substantially fails to perform any material duty or obligation
imposed upon it by this Agreement or otherwise is in material breach of this
Agreement, and such default shall continue for a period of ten (10) days
after written notice thereof specifying the nature of the default has been
given to it by another party hereto, (or such longer time if the failure can not
be cured within such ten (10) days as long as the party in breach has initiated
and is diligently pursuing a cure within the ten (10) day time period which
is reasonably likely to cure the breach in a commercially reasonable time
frame), the other party may terminate this Agreement upon ten (10) days
prior written notice and seek such relief or pecuniary loss or damages
caused by such breaching party, including, without limitation, actual
damages. Failure to make payments by DHS in accordance with this Agreement is
grounds for immediate termination after DHS has had ten (10) days to cure such
default. For purposes of this Agreement failure of performance of any material
duty or obligation shall include failure by a party to respond to
communications, telephonic or written, within five (5) business days of
receipt of such communication, excluding physician referral or management of
patient inquiries, which shall be handled in all events in less than 48 hours
unless there exist special circumstances.
.4 Termination by Agreement. In the event Medtrust and
DHS shall mutually agree in writing, this Agreement may be terminated on the
date specified in such written agreement.
.5 Procedure Upon Termination. In the event of the
termination of this Agreement by either party for any reason, the
Participating Physicians and other Providers obligations in any Service
Agreement shall remain in full force and effect until the end of the term of
such contract. During this period, DHS shall assist Medtrust in effecting
an orderly transition of the claims administration and other functions
undertaken by DHS as follows:
(a) Beginning on the date of receipt of notice
of termination for any reason by either party, DHS shall, upon written request
of Medtrust, immediately cooperate with Medtrust in transferring all property of
Medtrust in DHS' possession, and in arranging for the delivery of information
and record keeping functions to Medtrust or such entity as is selected by
Medtrust to
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assume the duties performed by DHS (the "Designated Entity"), so as to
assist Medtrust in minimizing any interruption in its operations.
Consistent with the usual and customary industry practices, and subject to
applicable vendor contracts between DHS and any third party, DHS shall, or
shall cause any such third party to: (a) deliver or cause to be delivered to
Medtrust or the Designated Entity, prior to the termination date, all
documents, information and material of Medtrust (including electronic,
microfilm and magnetic media records); and (b) cooperate with Medtrust in the
transfer to Medtrust or the Designated Entity of all information and
records directly relating to and necessary to perform the various
functions and services undertaken by DHS under this Agreement in the
operation of Medtrust, including the planning and execution of such transfer and
diagnosis and correction of errors arising in the course of such transfers.
(b) All records, data and other information
transferred pursuant to this Section 8.5 (the "Transferred Information")
shall be furnished to the Medtrust or the Designated Entity in machine
readable form or in such other format and medium designated by Medtrust, which
shall be reasonable and appropriate for the nature of the specific type of
Transferred Information.
(c) Each party shall use its commercially
reasonable best efforts to ensure that the transfer of Transferred Information
and any other property of Medtrust under this Section 8.5 shall be completed on
or before the termination date; provided, however, that within the time period
before such completion, DHS shall use its commercially reasonable best efforts
to meet reasonable scheduling, directed by Medtrust, during normal business
hours.
10 CONFIDENTIALITY
.1 Confidentiality of Medtrust Proprietary Information.
During the term hereof and in the event the Plan and Agreement of Merger is
abandoned or terminated, for a period of three (3) years following the
termination hereof, DHS will not use or disclose to any third party any
confidential or proprietary information of Medtrust without the prior
written consent of Medtrust including without limitation fee schedules,
marketing plans, business systems, quality assurance and utilization review
data and financial information. Medtrust and DHS agree that the remedies at
law for any breach of the covenant set forth herein will be inadequate and that
Medtrust shall be entitled to seek injunctive relief to enforce this covenant
in addition to any other remedy and damage available.
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11 GENERAL PROVISIONS
.1 Contract Modifications for Prospective Legal Events.
In the event that any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel to
either party in such a manner as to indicate that the structure of this
Agreement may be in violation of such laws or regulations, Medtrust and DHS
shall amend this Agreement as necessary to bring it into compliance with the
law. To the maximum extent possible, any such amendment shall preserve the
underlying economic and financial arrangements between Medtrust and DHS.
.2 Assignment. Neither DHS or Medtrust may assign its
rights and obligations under this Agreement without the prior written consent of
the other party.
.3 Whole Agreement; Modification. This Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and supersedes all prior agreements between the parties. There
are no other agreements or understandings, written or oral, between the parties
regarding this Agreement other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by
both parties to this Agreement, and such written modifications shall be
attached hereto.
.4 Notices. All notices required or permitted by this
Agreement shall be in writing and shall be addressed as follows:
If to DHS: Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attn: Paul A. Serini
Executive Vice President,
Strategic Planning
With a copy to: Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attn: Thomas F. Mapp, Esq.
Corporate Counsel
If to Medtrust: Medtrust Medical Group, Inc.
3251 Old Lee Highway, Suite 510
Fairfax, VA 22030-1504
Norman A. Marcus, M.D.
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With a copy to: William R. Van Buren, III, Esq.
Kaufman & Canoles
2000 NationsBank Center
Norfolk, VA 23510
or to such other address as either party shall notify in writing.
.5 Binding on Successors. Subject to Section 10.2,
this Agreement shall be binding upon the parties hereto, and their respective
successors and assigns. It is not the intention of Medtrust or DHS that Payors
or Members or Participating Providers shall be third party beneficiaries of
the obligations of either party to this Agreement, and no such Payors, Members
or Participating Providers shall have the right to enforce any such obligations.
.6 Waiver of Provisions. Any waiver of any terms and
conditions hereof must be in writing, and signed by the parties hereto. The
waiver of any of the terms and conditions of this Agreement shall be construed
as a waiver of any subsequent breach of the same or any other terms and
conditions hereof.
.7 Governing Law. The validity, interpretation and
performance of this Agreement shall be governed and construed in accordance
with the laws of the State of Maryland. The parties acknowledge that DHS is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or
service required of DHS in this Agreement should be construed or deemed, by
any governmental authority, agency or court to constitute the practice of
medicine, the performance of said act or service by DHS shall be deemed
waived.
.8 Severability. The provisions of this Agreement
shall be deemed severable and if any portion shall be held invalid, illegal or
unenforceable for any reason, the remainder of this Agreement shall be
effective and binding upon the parties.
.9 Additional Documents. Each of the parties hereto
agrees to execute any document or documents that may be requested from time
to time by the other party to implement or complete such party's obligations
pursuant to this Agreement.
.10 Confidentiality. Each party to this Agreement
agrees to hold all information about this contract and about the other party in
the strictest of confidence, and not to disclose any such information to any
person or entity without the consent of the other.
.11 Remedies Cumulative. No remedy set forth in this
Agreement or otherwise conferred upon or reserved to any party shall be
considered exclusive of any other remedy
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available to any party, but the same shall be distinct, separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient.
.12 Events Excusing Performance. Neither DHS nor
Medtrust shall be liable to the other for failure to perform any of the
services required herein in the event of strikes, lock-outs, calamities,
acts of God, or other events over which one respective party has no control
for so long as such events continue, and for a reasonable period of time
thereafter.
.13 Third Party Rights. This Agreement is not intended
to create or confer a third party beneficiary status or rights in any
person not a party to this Agreement, including Members, Payors,
Participating Physicians or other third parties, unless such rights are
expressly set forth in this Agreement.
.14 Records. To the extent required by Section 952 of
the Medicare and Medicaid Amendments of 1980, Medtrust shall, on behalf of
itself and its Participating Physicians,:
(a) until the expiration of four (4) years
after the furnishing of services under this Agreement, make available, upon
written request, to the Secretary of Health and Human Services (the
"Secretary") or the Comptroller General of the United States, or to any of
their duly authorized representatives, the Agreement and such of its books,
documents and records as are necessary to certify the nature and extent of costs
under the Agreement; and
(b) if Medtrust enters into a subcontract with
a related organization, as defined in federal law and regulations, under which
any of Medtrust's duties under the Agreement are to be performed by such
related organization, which contract has a value or cost of $10,000 or more
over a twelve-month period, include in such subcontract a clause requiring
the related organization to make available, upon written request to the
Secretary or Comptroller General, or any of their duly authorized
representatives, the subcontract, and any of the related
organization's books, documents and records as are necessary to verify the
nature and extent of such costs.
.15 Enforcement Costs. In the event any action is
instituted to enforce the rights of any party under this Agreement, the
prevailing party shall be entitled to recover its costs of enforcement,
including reasonable attorneys' fees.
IN WITNESS WHEREOF, this Agreement is entered into and executed as of
the date first written above.
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MEDTRUST MEDICAL GROUP, INC.
By:_____________________________
Title:__________________________
DOCTORS HEALTH SYSTEM, INC:
By:_____________________________
Stewart B. Gold, President
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EXHIBIT 23.1
CONSENT
We have issued our report dated October 3, 1996 accompanying the financial
statements and schedule of Doctors Health System, Inc. contained in Amendment
No. 3 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
November 22, 1996
Ex. 24.6
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 R. Dwyer, Jr. 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.
/s/ Richard R. Howard
Date: October 31, 1996 -----------------------------
Richard R. Howard
