UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-1926
DOCTORS HEALTH SYSTEM, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1907421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10451 MILL RUN CIRCLE
10TH FLOOR
OWINGS MILLS, MARYLAND 21117
(Address of principal executive offices)
(Zip Code)
(410) 654-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
As of May 14, 1997 810,000 shares of the registrant's Class A Common stock
and 2,634,448 shares of the Registrant's Class B Common Stock were outstanding.
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
FORM 10-Q
MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
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PAGE
NO.
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets.......................................................... 1
Unaudited Consolidated Statements of Operations................................................ 2
Unaudited Consolidated Statements of Cash Flows................................................ 3
Notes to Unaudited Consolidated Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................ 12
Item 6. Exhibits and Reports on Form 8-K............................................................... 12
SIGNATURES
</TABLE>
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
PRO-FORMA
JUNE 30, JUNE 30, MARCH 31,
1996 1996 1997
--------- --------- ----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 1,419,295 $ 1,419,295 $ 3,309,833
Accounts receivable (net of allowance for doubtful accounts of $324,521 at June 30,
1996, and $334,000 at March 31, 1997, respectively)............................... 1,303,941 1,303,941 2,102,120
Accounts receivable-affiliates...................................................... 1,208,685 1,208,685 1,194,349
Other receivables................................................................... 64,251 64,251 752,410
Prepaid expenses.................................................................... 117,096 117,096 316,493
Due from affiliates................................................................. 891,985 891,985 923,743
TOTAL CURRENT ASSETS.............................................................. 5,005,253 5,005,253 8,598,948
PROPERTY AND EQUIPMENT, NET........................................................... 2,485,547 2,485,547 3,075,071
OTHER ASSETS
Intangibles (net of accumulated amortization of $65,170 at June 30, 1996 and
$257,846 at March 31, 1997, respectively)......................................... 2,448,030 2,448,030 5,902,071
Deferred charges (net of accumulated amortization of $147,475 at June 30, 1996 and
$410,089 at March 31, 1997, respectively)......................................... 636,772 636,772 1,147,864
Note receivable..................................................................... 300,000 300,000 --
Accrued interest receivable......................................................... 253,976 253,976 342,076
Deposits............................................................................ 24,560 24,560 75,756
3,663,338 3,663,338 7,467,767
TOTAL ASSETS...................................................................... $ 11,154,138 $11,154,138 $ 19,141,786
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes Payable....................................................................... 303,915 303,915 3,605,689
Current maturities of capital lease obligations..................................... 101,985 101,985 110,493
Accounts payable.................................................................... 330,647 330,647 249,738
Accrued medical claims.............................................................. 550,520 550,520 3,412,554
Other accrued expenses.............................................................. 2,069,579 2,069,579 2,319,543
Due to affiliates................................................................... 766,475 766,475 479,337
TOTAL CURRENT LIABILITIES......................................................... 4,123,121 4,123,121 10,177,354
LONG-TERM OBLIGATIONS
Note payable........................................................................ 3,400,000 3,400,000 2,853,044
Notes payable and purchase obligations-related parties.............................. 2,077,364 2,077,364 2,605,469
Capital lease obligations, less current maturities.................................. 320,673 320,673 236,260
5,798,037 5,798,037 5,694,773
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000 shares
(liquidation value $3,500,000).................................................... 5,273,305 5,273,305 5,517,055
Less subscription receivable........................................................ (1,500,000) (1,500,000) (1,500,000)
3,773,305 3,773,305 4,017,055
9.75% cumulative, Series B, $11.25 par value, authorized and issued 355,556 shares
(liquidation
value $4,000,000)................................................................. 4,137,526 4,137,526 4,430,059
8% cumulative, Series C, $17.50 par value, authorized 1,500,000 shares; issued and
outstanding 571,428 shares (liquidation value $10,000,000)........................ -- -- 10,379,656
7,910,831 7,910,831 18,826,770
REDEEMABLE CLASS A COMMON STOCK
$.01 per value, authorized, issued and outstanding 800,000 shares at June 30,
1996.............................................................................. 2,400,000 -- --
STOCKHOLDERS' EQUITY (Deficit)
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
810,000 shares at March 31, 1997................................................ -- 8,000 8,100
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 2,398,000
shares at June 30, 1996 and 2,623,100 at March 31, 1997.......................... 23,980 23,980 26,231
Class C, $.01 par value; authorized 29,050,000; no shares issued.................. -- -- --
Additional paid in capital.......................................................... 2,323,600 2,323,798 4,684,157
Retained earnings (accumulated deficit)............................................. (11,425,431) (9,033,629) (20,275,599)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............................................. (9,077,851) (6,677,851) (15,557,111)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).............................. $ 11,154,138 $11,154,138 $ 19,141,786
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C>
REVENUES
Net revenue.................................................... $ 1,813,021 $ 3,599,391 $ 3,285,990 $ 8,499,743
Capitation revenue............................................. 246,349 3,163,080 246,349 6,650,255
Total Revenue............................................... 2,059,370 6,762,471 3,532,339 15,149,998
EXPENSES
Medical services expense....................................... 372,889 3,096,363 372,889 6,842,259
Care center costs.............................................. 1,709,371 3,463,540 3,033,074 8,263,302
General and administrative..................................... 2,303,626 3,184,840 3,690,376 9,039,310
Depreciation and amortization.................................. 128,414 480,473 273,269 993,550
Total Expenses.............................................. 4,514,300 10,225,216 7,369,608 25,138,421
Loss from operations........................................... (2,454,930) (3,462,745) (3,837,269) (9,988,423)
OTHER INCOME (EXPENSE)
Interest and other income...................................... 51,735 65,084 163,490 202,889
Interest expense............................................... (80,310) (222,752) (174,777) (529,696)
Total Other Income (Expense)................................ (28,575) (157,668) (11,287) (326,807)
Loss before income taxes....................................... (2,483,505) (3,620,413) (3,848,556) (10,315,230)
Income taxes................................................... -- -- -- --
NET LOSS......................................................... $(2,483,505) $(3,620,413) $(3,848,556) $(10,315,230)
Loss applicable to common stock
Net loss....................................................... $(2,483,505) $(3,620,413) $(3,848,556) $(10,315,230)
Preferred stock dividends accreted............................. 178,770 374,955 373,770 926,740
Loss applicable to common stock................................ (2,662,275) (3,995,368) (4,222,326) (11,241,970)
Net loss per share............................................... $ (.87) $ (1.17) $ (1.39) $ (3.39)
Weighted average number of shares outstanding.................... 3,068,538 3,411,801 3,022,680 3,313,169
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1997 1996 1997
--------- ---------- --------- ---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITY
Net loss....................................................... $(2,483,505) $(3,620,413) $(3,848,556) $(10,315,230)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization............................... 128,414 480,473 273,269 993,550
Provision for uncollectible accounts receivables............ 97,915 (16,960) 152,375 98,519
Changes in assets and liabilities, net of effects of medical
practice receivables acquired
Accounts receivable....................................... (1,090,744) (142,941) (828,838) (57,391)
Accounts receivable -- affiliates......................... 314,374 182,753 282,354 59,998
Prepaid expenses and other receivables.................... (226,864) (198,005) (215,985) (975,656)
Due from/to affiliates.................................... (872,328) (754,395) (1,521,089) (318,896)
Accounts payable.......................................... 586,310 (389,231) 720,830 (80,909)
Accrued and other liabilities............................. 843,601 1,206,905 1,225,497 2,818,904
Organizational costs and deferred charges................. (99,324) (16,650) (107,709) (783,573)
Net cash used in operating activities.................. (2,802,151) (3,268,464) (3,867,852) (8,560,684)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............................. (392,524) (271,972) (1,086,164) (979,895)
Payments for acquisition costs................................. (173,085) (309,642) (182,439) (1,132,756)
Deposits....................................................... (3,046) (14,939) 127,017 (51,196)
Net cash used in investing activities.................. (568,655) (596,553) (1,141,586) (2,163,847)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible preferred
stock....................................................... -- 2,500,000 4,410,000 9,989,200
Borrowings under notes payable................................. 1,012,578 2,800,000 1,012,578 3,983,017
Principal payments on capital lease obligations................ (20,096) (25,182) (57,743) (75,905)
Issuance of Note Receivable.................................... (300,000) -- (300,000) --
Payments on notes payable...................................... (8,278) (983,017) (26,986) (1,281,243)
Net cash provided by financing activities.............. 684,204 4,291,801 5,037,849 12,615,069
Net increase (decrease) in cash and
cash equivalents..................................... (2,686,602) 426,784 28,411 1,890,538
Cash and cash equivalents at beginning of period................. 2,846,898 2,883,049 131,885 1,419,295
Cash and cash equivalents at end of period....................... $ 160,296 $ 3,309,833 $ 160,296 $ 3,309,833
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................................... $ 35,425 $ 93,453 $ 79,150 $ 281,905
Cash paid for income taxes..................................... $ -- $ -- $ -- $ --
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles of interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the 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.
The consolidated financial statements for the three months and nine months
ended March 31, 1996 and 1997 are unaudited and should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Amendment No. 7 to its S-1 Registration Statement for the year ended June 30,
1996.
NOTE 2 -- ACQUISITIONS
The Company acquires certain assets of medical practices from Equity
Physicians and enters into long-term contracts with Core Medical Groups (CMG)
who employ the physicians. The Company currently derives a significant portion
of its total revenues pursuant to the Physician Services Organization Agreements
(PSO Agreement), which are long-term contracts between CMGs and the Company. The
Company's PSO Agreements have a 30-year term with an unlimited number of 10-year
renewals. Under the PSO Agreements, the Company provides a number of services
including general management, billing and collection, office personnel, managed
care contracting and care 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. The PSO
Agreements do not convey any equity interest in the CMGs, which retain autonomy
and independence over clinical matters.
On March 4, 1997, the Company completed the merger of Medtrust Medical
Group, Inc. into Doctors Health of Virginia, Inc. ("DHVA"), a wholly-owned
subsidiary of the Company. In connection with the Merger, DHVA became the
successor to Medtrust's non-exclusive independent practice association and
certain Medtrust members entered into exclusive participation agreements with a
Company-owned independent practice association. Pursuant to the merger, members
of Medtrust and certain directors and officers of Medtrust received
approximately $140,000 in cash and 30,100 shares of the Company's Class B Common
Stock.
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 CMGs 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 in the
PSO Agreements. Contractual fees are accrued when collection is probable.
Revenue from all CMGs is recorded at established rates reduced by allowances for
doubtful accounts and contractual adjustments and amounts retained by physician
groups.
The following represents amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C>
Gross physician revenue........................................... $ 3,850,238 $ 8,656,935 $ 8,139,288 $22,361,570
Less: Provision for contractual and other adjustments........... (1,144,893) (3,479,763) (2,799,980) (9,136,134)
Gatekeeper capitated income....................................... 304,886 829,381 758,663 2,221,885
Net physician revenue............................................. 3,010,231 6,006,553 6,097,971 15,447,321
Amount retained by affiliated core medical groups:
Physicians...................................................... 787,444 2,106,193 2,162,008 6,431,159
Ancillary employees and expenses................................ 409,766 300,969 649,973 516,419
Net revenue....................................................... $ 1,813,021 $ 3,599,391 $ 3,285,990 $ 8,499,743
</TABLE>
4
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- NET REVENUE -- Continued
During the three months ended March 31, 1996 and 1997, the Company derived
substantially all of its net revenue from two and five, respectively, affiliated
CMGs with which it has PSO agreements. For the three months ended March 31, 1996
and 1997, one of these CMGs comprised approximately 97% and 40%, respectively,
of the Company's net revenue.
NOTE 4 -- CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
As of March 31, 1997, the Company has three global capitation contracts and
five gatekeeper capitation contracts with seven separate Health Maintenance
Organizations (HMOs). Under the contracts, the Company receives monthly
capitation fees based on the number of enrollees selecting any one of the
Company's affiliated primary care physicians. The capitation 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 three months ended March 31, 1997, $2,796,098 and $366,982, were
recorded as global capitation and gatekeeper capitation revenue, respectively,
in the Company's financial statements. During the nine months ended March 31,
1997, $5,294,940 and $1,355,315 were recorded as global capitation and
gatekeeper capitation revenue, respectively, in the Company's financial
statements. During the three months ended March 31, 1996, $106,349 and $140,000
were recorded as global capitation and gatekeeper capitation revenue,
respectively, in the Company's financial statements. The Company had no
capitation contracts prior to January 1, 1996.
The Company's commercial capitation contract also includes a provision
whereby the Company can earn 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 March 31, 1997 is
approximately $85,000 and $50,000 of estimated amounts due to the HMO under this
arrangement for the 1996 and 1997 contract years respectively.
Under the Company's two Medicare global capitation contracts, the Company
has assumed responsibility for managing and paying for substantially all of the
medical care for the respective payor's enrollees. Consequently, the Company
does not perform a settlement with the HMOs under the two Medicare contracts.
The Company is responsible for the cost of the medical services provided by
its affiliated physicians and other providers who are covered under global
capitation 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 several methods of projecting costs including 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 March 31, 1997, approximately $3,277,000 was recorded
as accrued medical services for incurred but not reported services.
NOTE 5 -- CAPITALIZATION
On January 2, 1997, the Company issued 142,857 shares of Series C
Redeemable Convertible Preferred Stock to the Series C Preferred Stockholder for
$2,500,000. Subsequent to that issuance, the Series C Preferred Stockholder held
571,428 shares of Series C Redeemable Convertible Preferred Stock. In addition,
on January 31, 1997, the Company and the Series C Preferred Stockholder entered
into a Note Purchase Agreement pursuant to which the Series C Preferred
Stockholder established a $5,000,000 credit facility for the Company. The
Company issued its Convertible Subordinated 11% Promissory Note ("Subordinated
Debt Facility") to the Series C Preferred Stockholder. On January 31, 1997, and
the Series C Preferred Stockholder advanced the sum of $2,800,000 pursuant to
the Subordinated Debt Facility. Interest shall be payable at maturity in shares
of Series C Preferred Stock at the rate of $14 per share. The Subordinated Debt
Facility matures on January 31, 1999 or upon the earlier consummation of a
$30,000,000 debt and/or equity financing ("the Permanent Financing"). The
Company contemplates that the Permanent Financing will be completed on or before
July 31, 1997. The Series C Preferred
5
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DOCTORS HEALTH SYSTEM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- CAPITALIZATION -- Continued
Stockholder and the Company have agreed to amend certain terms of the
Subordinated Debt Facility as part of the "Permanent Financing" (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources"). The Subordinated Debt Facility
is now convertible into shares of Convertible Series C Preferred Stock. The
Company may request additional advances under the Subordinated Debt Facility,
from time to time (See Note 8).
On January 31, 1997, the Company issued to the Series C Preferred
Stockholder a Warrant to purchase 250,000 shares of Class A Common stock at
$14.00 per share in consideration of the Series C Preferred Stockholder's
efforts to assist the Company in securing additional financing for the Company.
On January 13, 1997, the Company repaid to First National Bank of Maryland
$983,017 which represents the retirement of the bridge loan facility.
NOTE 6 -- COMMON STOCK REPURCHASE AGREEMENT
Under the terms of the stockholders' agreement with three founding
shareholders (who are also officers and directors of the Company), the Company
may be required to purchase shares of the Company's Class A Common Stock in
certain circumstances including death or disability. As of June 30, 1996, the
Company had obtained insurance to cover the purchase of the capital stock in the
event of death. On December 20, 1996, the Company obtained insurance to cover
the purchase of the capital stock in the event of a disability. By agreement
dated February 1, 1997, one of the founding shareholders agreed to waive the
repurchase requirement with respect to any disability not covered by insurance.
As of February 17, 1997, the insurance lapsed with respect to the founding
shareholder who had waived the repurchase requirement. Under each of the above
policies, the Company has obtained insurance that is in excess of the estimated
fair value of its Class A Common Stock. In order to comply with Article 5 of
Regulation S-X, the Company has presented the common stock that is redeemable
based on events outside the Company's control (i.e. a disability) as Redeemable
Class A Common Stock in the accompanying Balance Sheet as of June 30, 1996. As a
result of the coverage provided by the life and disability policies described
above and the waiver of certain stock repurchase rights described above, there
are no circumstances in which a redemption event would result in a decrease in
the Company's stockholders' equity. Accordingly, the Company will present the
Class A Common Stock as stockholders' equity in all balance sheets subsequent to
December 20, 1996. The Company has presented an unaudited Pro Forma Balance
Sheet as of June 30, 1996 assuming the Class A Common Stock is covered by
insurance for any event of redemption and consequently presented all the Class A
Common Stock as Stockholders' equity. The Company intends to maintain insurance
at levels sufficient to finance its redemption obligations. The terms of the
stock purchase agreement terminate in the event of an initial public offering or
a change in control of the Company as defined in the stockholders' agreement.
NOTE 7 -- NOTES PAYABLE
The Company has presented the $3,600,000 note payable due on December 31,
1997 as a current liability in the accompanying March 31, 1997 balance sheet.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for discussion regarding the
Company's intent to refinance or retire this amount as part of the Permanent
Financing.
NOTE 8 -- SUBSEQUENT EVENTS
On March 31, 1997, the Company entered into a System Implementation
Agreement with IDX Corporation, pursuant to which it has licensed certain
billing and accounts receivable and managed care software and purchased computer
hardware. The System Implementation Agreement and related agreements provide
that the Company will spend approximately $1,500,000 to purchase such software
and hardware.
On April 23, 1997 the Series C Preferred Stockholder advanced an additional
$525,000 pursuant to the Subordinated Debt Facility.
6
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUBSEQUENT EVENTS -- Continued
On May 2, 1997, the Company and an institutional investor ("Investor")
entered into a Letter of Understanding, pursuant to which the Company intends to
issue to the Investor 3,000,000 shares of Series D Preferred Stock for an
aggregate purchase price of $30,000,000 (the "Permanent Financing"). The
transaction is subject to various conditions, including satisfactory completion
of customary business and legal due diligence and the execution of definitive
stock purchase and other agreements. The Company and the Investor anticipate
that the transaction will be completed on or before July 31, 1997. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.")
On May 14, 1997, the Company borrowed $2,000,000 from HBO & Company
("HBOC"), the Company's current information system vendor, and issued its
subordinated promissory note to HBOC in the principal amount of $2,000,000 (the
"Note"). The Note is payable in full on May 14, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Doctors Health System is a managed care and medical management company
which develops and consolidates individual and groups of internists,
pediatricians and family practitioners ("primary care physicians" -- PCPs),
specialist physicians, hospitals and other health care providers into primary
care-driven, comprehensive managed care health delivery networks. PCPs and
specialist physicians are referred to herein as the "Network Physicians." The
Company is focusing on the development of its networks in the Baltimore and
Washington metropolitan area and surrounding regions. As of March 31, 1997, the
Company had PCPs in six regional networks throughout the state of Maryland and
one regional network in Northern Virginia.
The Company provides services to its Network Physicians, who deliver health
care services to patients under various reimbursement arrangements. The
Company's level of profitability depends on (i) increasing the number of Network
Physicians; (ii) attracting patients that seek medical services in benefit plans
that enter into Global Capitated Contracts with the Company; (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. As of March 31, 1997,
the Company has two Global Capitated Medicare Contracts and one Global Capitated
Commercial Contract.
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 also expects to derive revenues and earnings from the participation of
physicians in its Independent Practice Association (IPAs).
RESULTS OF OPERATIONS
The Company's operating results are affected by the number of 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 PCPs participating in Global Capitated
Contracts, executed Global Capitated Contracts and patients enrolled in benefit
plans under Global Capitated Contracts with the Company:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1996 1996 1996 1997
-------- -------- ------------- ------------ ----------
<S> <C>
Number of PCPs participating in Global Capitated Contracts as
of............................................................ -- 45* 45 62 78
Number of regional networks as of............................... 1 5 6 7 7
Number of Global Capitated Contracts as of...................... -- 3 3 3 3
Number of Global Capitated Patients:
Commercial.................................................... -- 2,039 2,174 2,272 4,195
Medicare...................................................... -- 491 965 1,283 2,351
</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 and enpaneling processes and other internal Company procedures.
7
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
The following table shows the percentage of total revenues represented by
various expense and other income items reflected in the Company's unaudited
consolidated statements of operations. The information that follows should be
read in conjunction with the Company's unaudited consolidated financial
statements and notes thereto included elsewhere herein. As a result of the
Company's rapid growth and the limited period of affiliation with the physician
practices, the Company does not believe that the period-to-period comparisons
and percentage relationships within periods are meaningful at this time.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C>
Net revenue...................................................... 88.0% 53.2% 93.0% 56.1%
Capitation revenue............................................... 12.0% 46.8% 7.0% 43.9%
Total revenues................................................... 100.0% 100.0% 100.0% 100.0%
Medical services expense......................................... 18.1% 45.8% 10.6% 45.1%
Care center costs................................................ 83.0% 51.2% 85.9% 54.5%
General and administrative....................................... 111.9% 47.1% 104.5% 59.7%
Depreciation and amortization.................................... 6.2% 7.1% 7.7% 6.6%
Interest and other income........................................ (2.5)% (1.0)% (4.6)% (1.3)%
Interest expense................................................. 3.9% 3.3% 4.9% 3.5%
Income tax expense............................................... -- -- -- --
Net loss......................................................... (120.6)% (53.5)% (109.0)% (68.1)%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996.
TOTAL REVENUES. The Company's total revenues increased to $6,762,471 for
the three months ended March 31, 1997 from $2,059,370 for the three months ended
March 31, 1996. This increase was attributable to the growth in net revenue to
$3,599,391 or 53.2% of total revenue from $1,813,021 or 88.0% of total revenue
and the increase in capitation revenue to $3,163,080 ($2,796,098 for Global
Capitated Contracts and $366,982 for Gatekeeper Capitation Contracts) or 46.8%
of total revenue from $246,349 or 12.0% of total revenue. These increases
resulted primarily from the increase in the number of physicians included in
Core Medical Groups from 54 to 88, the increase in the number of PCP's
participating in Global Capitated Contracts from 36 to 78, the increase in the
number of Global Capitated Contracts from 1 to 3, the increase in the number of
Global Capitated patients from 1,777 to 4,195 (Commercial) and 0 to 2,351
(Medicare), and the increase in the number of Gatekeeper Capitation Contracts
from 4 to 5.
MEDICAL SERVICES EXPENSE. Medical services expense was $3,096,363 or 45.8%
of total revenue for the three months ended March 31, 1997 compared to $372,889
or 18.1% of total revenue for the three months ended March 31, 1996. This
increase resulted from the increase in the number of PCP's participating in
Global Capitated Contracts from 36 to 78, the increase in the number of Global
Capitated Contracts from 1 to 3, the increase in the number of Global Capitated
patients from 1,777 to 4,195 (Commercial) and 0 to 2,351 (Medicare), and the
increase in the number of Gatekeeper Capitated Contracts from 4 to 5. The
Company expects these expenses to increase as the number of PCP's 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 $3,463,540 or 51.2% of total
revenue for the three months ended March 31, 1997 compared to $1,709,371 or
83.0% of total revenue for the three months ended March 31, 1996. This increase
in dollar amount resulted from the increase in the number of physicians included
in Core Medical Groups from 54 to 88. While these expenses are expected to
increase as the Company continues adding Network Physicians, the Company expects
that these expenses will continue to decline as a percentage of total revenue
assuming continued growth in capitation revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3,184,840 or 47.1% of total revenue for the three months ended March 31,
1997 compared to $2,303,626 or 111.9% of total revenue for the three months
ended March 31, 1996. 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 operating 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
8
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
Company adds Network Physicians, the Company expects that these expenses will
continue to decline as a percentage of total revenues assuming continued growth
in revenue.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $480,473 or 7.1% of total revenue for the three months ended March
31, 1997 compared to $128,414 or 6.2% of total revenue for the three months
ended March 31, 1996. The increase in dollar amount resulted primarily from
intangibles acquired in connection with the purchase of certain medical practice
assets from Equity Physicians, accelerated depreciation of the Company's billing
system in preparation for the transition to a new information system, as well as
fixed asset additions. 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 assuming continued growth
in revenue.
INTEREST AND OTHER INCOME. Interest and other income was $65,084 or 1.0% of
total revenue for the three months ended March 31, 1997 compared to $51,735 or
2.5% of total revenue for the three months ended March 31, 1996.
INTEREST EXPENSE. Interest expense was $222,752 or 3.3% of total revenue
for the three months ended March 31, 1997 compared to $80,310 or 3.9% of total
revenue for the three months ended March 31, 1996. The increase in dollar amount
resulted primarily from the increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's losses and its allowance for
deferred tax assets, for the three months ended March 31, 1997 and 1996, the
Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $3,620,413 for the three months
ended March 31, 1997 compared to $2,483,505 for the three months ended March 31,
1996.
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 $3,995,368 for the three months ended March
31, 1997 compared to $2,662,275 for the three months ended March 31, 1996.
NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996.
TOTAL REVENUES. The Company's total revenues increased to $15,149,998 for
the nine months ended March 31, 1997 from $3,532,339 for the nine months ended
March 31, 1996. This increase was attributable to the growth in net revenue to
$8,499,743 or 56.1% of total revenue from $3,285,990 or 93.0% of total revenue
and the increase in capitation revenue to $6,650,255 ($5,294,940 Global
Capitation and $1,355,315 from Gatekeeper Capitation Contracts) or 43.9% of
total revenue from $246,344 or 7.0% of total revenue. These increases resulted
primarily from the increase in the number of physicians included in Core Medical
Groups from 54 to 88, the increase in the number of PCP's participating in
Global Capitated Contracts from 36 to 78, the increase in the number of Global
Capitated Contracts from 1 to 3, the increase in the number of Global Capitated
patients from 1,777 to 4,195 (Commercial) and 0 to 2,351 (Medicare), and the
increase in the number of Gatekeeper Capitation Contracts from 4 to 5.
MEDICAL SERVICES EXPENSE. Medical services expense was $6,842,259 or 45.1%
of net revenue for the nine months ended March 31, 1997 compared to $372,889 or
10.6% of net revenue for the nine months ended March 31, 1996. These increases
resulted form the increase in the number of PCP's participating in Global
Capitation Contracts from 36 to 78, the increase in the number of Global
Capitated Contracts from 1 to 3, the increase in the number of Global Capitated
patients from 1,777 to 4,195 (Commercial) and 0 to 2,351 (Medicare), and the
increase in the number of Gatekeeper Capitation Contracts from 4 to 5. The
Company expects these expenses to increase as the number of PCPs participating
in and the number of patients enrolled in benefit plans under Global Capitation
Contracts with the Company grows.
CARE CENTER COSTS. Care center costs were $8,263,302 or 54.5% of total
revenue for the nine months ended March 31, 1997 compared to $3,033,074 or 85.9%
of total revenue for the nine months ended March 31, 1996. The increase in
dollars resulted from the increase in the number of physicians included in Core
Medical Groups from 54 to 88.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $9,039,310 or 59.7% of total revenue for the nine months ended March 31,
1997 compared to $3,690,376 or 104.5% of net revenue for the nine months ended
March 31, 1996. The increase in dollars 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.
9
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses were $993,550 or 6.6% of total revenue for the nine months ended March
31, 1997 compared to $273,269 or 7.7% of total revenue for the nine months ended
March 31, 1996. The increase in dollars resulted primarily from intangibles
acquired in connection with the purchase of certain medical practice assets from
Equity Physicians, accelerated depreciation on the company's billing system in
preparation for the transition to a new information system, as well as fixed
asset additions.
INTEREST AND OTHER INCOME. Interest and other income was $202,889 or 1.3%
of total revenue for the nine months ended March 31, 1997 compared to $163,490
or 4.6% of total revenue for the nine months ended March 31, 1996.
INTEREST EXPENSE. Interest expense was $529,696 or 3.5% of total revenue
for the nine months ended March 31, 1997 compared to $174,777 or 4.9% of total
revenue for the nine months ended March 31, 1996. The increase in dollars
resulted primarily from the increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's losses and its allowance for
deferred tax assets, for the nine months ended March 31, 1997 and 1996, the
Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $10,315,230 for the nine months
ended March 31, 1997 compared to $3,848,556 for the nine months ended March 31,
1996.
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 $11,241,970 for the nine months ended March
31, 1997 compared to $4,222,326 for the nine months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had approximately $2,680,000 in available
cash and negative working capital of $1,578,406. The negative working capital is
a result of the presentation of the $3,600,000 note payable due on December 31,
1997, as a current liability. See the discussion below regarding the Company's
intent to refinance or retire this amount as part of the Permanent Financing.
On January 31, 1997, the Company established a $5,000,000 credit facility
(the "Subordinated Debt Facility") with an affiliate of the Series C Preferred
Stockholder, which was guaranteed by the Series C Preferred Stockholder. The
Subordinated Debt Facility will mature on January 31, 1999, unless made part of
the Permanent Financing (as described below). Advances under the Subordinated
Debt Facility bear interest at a rate of 11% per annum. Such interest shall be
payable at maturity in shares of Series C Preferred Stock at the rate of $14.00
per share. The Subordinated Debt Facility is subordinated to the Company's bank
line-of-credit and is secured by a second lien on all accounts receivable and
assets of the Company. Advances under the Subordinated Debt Facility are
convertible into shares of Series C Preferred Stock at maturity or in
conjunction with the Permanent Financing at a price per share equal to the
lesser of (i) the price which would result in a weighted average price of $14.00
per share for all shares of Series C Preferred stock issued by the Company or
(ii) the price assigned to shares of the Company's securities issued in the
Permanent Financing. These terms are anticipated to change as part of the
Permanent Financing described below.
In connection with the execution of the Subordinated Debt Facility, the
Company and the Series C Preferred Stockholder amended the Option Agreement
dated September 4, 1996 to reduce the shares issuable pursuant to the Option
from 500,000 shares of Series C Preferred Stock to 250,000 shares of Series C
Preferred Stock, and a reduction in the cash available to the Company under the
Option from $10,000,000 to $5,000,000. The amended Option Agreement dated
January 31, 1997, provides that the Company may require the Series C Preferred
Stockholder to purchase 250,000 shares of Series C Preferred Stock at a price of
$20.00 per share when the Company's Global Capitation Contracts include at least
20,000 Medicare lives. The Series C Preferred Stockholder may exercise the
option at any time prior to the occurrence of certain events, including
completion of a public offering or Permanent Financing transaction.
The Company has established a Certificate of Deposit in the amount of
$630,000 in accordance with a Medicare Capitated Contract which requires the
Company to provide a letter of credit or other similar security, for a portion
of the capitation revenue received by the Company. The certificate of deposit
was funded with the Company's working capital and excluded from the $3,587,000
of available cash.
Until the Company and its Payors attract an adequate number of Capitation
Lives in Global Capitated Contracts, the Company anticipates that it will incur
operating losses and experience negative operating cash flows. The Company
believes
10
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
that its available cash at May 14, 1997, of approximately $3,587,000, amounts
remaining under a bank line of credit and the amounts remaining available under
the Subordinated Debt Facility or other resources will be sufficient to fund the
Company's operations through July 31, 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
the Permanent Financing described below, the Company will not be able to execute
its business strategy and the Company's operating results and financial
condition would be materially and adversely affected.
On May 2, 1997, the Company entered into a Letter of Understanding with the
Investor pursuant to which the Company intends to issue to the Investor
3,000,000 shares of Series D Preferred Stock for an aggregate purchase price of
$30,000,000. (the "Permanent Financing"). The Series D Preferred Stock will be
convertible into Class C Common Stock on a one for one basis. The conversion
ratio of Series D Preferred Stock is subject to adjustment, up or down, based on
whether the Company achieves certain Medicare medical loss ratio and physician
recruitment targets in Fiscal Year 1998. Consummation of the Permanent Financing
is subject to various conditions, including customary due diligence and the
preparation of a definitive purchase agreement and other agreements. The Company
and the Investor anticipate that the transaction will be completed on or before
July 31, 1997. Pursuant to the Letter of Understanding, the Company has agreed
not to pursue alternative financing until August 2, 1997, and to pay to the
Investor a $1,000,000 "break-up fee" in the event there is a failure to close
the Permanant Financing that is followed (within 6 months) by an investment in
the Company by a person unaffiliated with the Investor. Under the terms of the
Letter of Understanding, Series D Preferred Stock will be senior to the existing
holders of Series A, Series B, and Series C Preferred Stock. The holders of the
Series A, Series B and Series C Preferred Stock have either consented to such
seniority and to the other terms of the Permanent Financing, or have made
arrangements to transfer their shares at the time of the Permanent Financing to
existing preferred stockholders who have consented to such seniority and such
other terms. At the option of the holder of Series B Preferred Stock, the
Investor has under certain circumstances agreed to permit the conversion of
Series B Preferred Stock to debt senior to Series D Preferred Stock at the
closing of the Permanent Financing.
The anticipated proceeds from the Permanent Financing will be used to fund
working capital needs, including operating losses, to acquire certain assets of
physician practices, and the payment of signing bonuses to IPA Equity
Physicians, and, subject to certain conditions, to repay a bank line of credit
guaranteed by the Series B Preferred Stockholder. The Investor will be granted a
variety of investor protections and negative covenants, as well as Board and
Executive Committee representation. In certain defined material financial
default scenarios involving Medicare medical loss ratios, the Investor will also
have the right to control of the Company's Board and Executive Committee.
The Series C Preferred Stockholder and the Company have agreed to change
the terms of the Subordinated Debt Facility as part of the Permanent Financing.
The Company believes the Subordinated Debt Facility will be convertible into up
to 285,714 shares of Convertible Series C Preferred Stock. As part of the
Permanent Financing, the Series C Preferred Stock will convert into Class C
Common Stock at a ratio of 1.25 shares of Common Stock for every share of Series
C Preferred Stock at the time of a Qualifying Initial Public Offering or change
of control. Also, in connection with the Permanent Financing, the Company has
agreed to adjust the exercise price of the warrants issued to the Series C
Preferred Stockholder on January 31, 1997 to purchase 250,000 shares of the
Company's Class A Common Stock from $14.00 per share to $10.00 per share.
Furthermore, as part of the Permanent Financing, the Series C Preferred
Stockholder has entered into a binding contractual commitment to purchase
approximately 408,000 shares of DHS Series B Preferred Stock from Medical Mutual
Insurance Company ("Medical Mutual") for $4,590,000. Such shares represent
Medical Mutual's original investment and all accrued dividends and interest paid
in shares. This commitment is expressly conditioned on the closing of a
$30,000,000 transaction with the Investor. The Company anticipates that pursuant
to the Permanent Financing, the Note issued to the Series C Preferred
Stockholder pursuant to the Subordinated Debt Facility will remain outstanding.
The inability of the Company to complete the Permanent Financing or obtain
alternative financing in a timely manner would adversely impact the Company's
ability to execute its planned strategy, impair the Company's ability to make
intended capital expenditures and would have a material adverse effect on the
Company's results of operations and financial condition.
11
<PAGE>
DOCTORS HEALTH SYSTEM, INC.
FORWARD-LOOKING STATEMENT REGARDING
FUTURE OPERATING RESULTS
This Quarterly Report on Form 10-Q contains statements which, to the extent
they are not recitations of historical fact, may constitute forward-looking
statements regarding future operating results and financial condition. All
forward-looking statements involve risks and uncertainties. Although the Company
believes that its expectations are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not materially differ from its expectations.
The future operating results and financial condition of the Company are
dependent upon the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. In addition, the future operating results and financial condition of the
Company may also be affected by several factors, including (i) the Company's
growth strategy and its ability to raise sufficient capital to support growth,
(ii) government regulation of the health care industry; (iii) integration risks,
(iv) dependence on managed care contracts and dependence on enrollment patients
in managed care contracts with HMOs, (v) health care cost-containment decisions
of Payors; (vi) controlling and estimating health care costs; and (vii)
competition for opportunities to expand the Company's network of physicians and
health care providers. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous consent in lieu of meeting dated January 29, 1997, the
following matters were submitted to a vote of the Registrant's stockholders:
1. Adoption of Articles of Amendment and Restatement and Bylaws of the
Registrant to (i) increase the size of the Board of Directors from 18 to 19
members to provide the Series C Preferred Stockholders an additional seat on the
Board; (ii) increase the size of the Executive Committee of the Board from seven
to eight members to provide the Series C Preferred Stockholder an additional
seat on the Executive Committee; (iii) to provide that a majority of the
Executive Committee members constitutes a quorum; and (iv) to increase the
number of authorized shares of Series C Preferred Stock from 1,071,428 shares to
1,500,000 shares.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
Class A and Class B Common Stock...... 4,403,000 0 0
Series B Preferred Stock.............. 355,556 0 0
Series C Preferred Stock.............. 571,428 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.6) Amended and Restated Employment Agreement dated April 21, 1997 by
and between Doctors Health System, Inc. and Scott Rifkin M.D.
(10.7) Letter Agreement dated February 1, 1997 between Scott Rifkin, M.D.
and Doctors Health System, Inc.
(10.8) Promissory Note dated May 14, 1997 (payable to HBO & Company of
Georgia)
(27) Financial Data Schedule
(b) Reports on Form 8K
None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DOCTORS HEALTH SYSTEM, INC.
By: /s/ John R. Dwyer, Jr.
__________________________
John R. Dwyer, Jr.
Chief Financial Officer
Exhibit 10.6
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EMPLOYMENT AGREEMENT, entered into on
December 9, 1994 (the "Signing Date"), amended on February 24, 1995, October 11,
1996, and April 21, 1997 and dated as of the 1st day of July, 1994 (the
"Effective Date"), between DOCTORS HEALTH SYSTEM, INC., a Maryland corporation
(the "Company") and SCOTT M. RIFKIN (the "Physician Executive").
-------------
Background
-------------
The Company is engaged, directly or through service contracts
with others, in the business of (i) negotiating contracts to provide health care
services and products, (ii) managing health care providers, and (iii) providing
health care services and products (the "Business").
The Physician Executive is a primary care physician with
substantial skills and knowledge in the management and development of physician
practices, and is experienced in creating and expanding a physician run equity
model group practice working with hospitals, managed care organizations and
other physicians.
The Executive and the Company previously entered into an
Employment Agreement dated November 4, 1994, a copy of which is attached hereto
(the "Prior Agreement"), and each desires to amend and restate the Prior
Agreement in its entirety to incorporate certain additional matters.
The Company desires to hire the Physician Executive, and the
Physician Executive desires to work for the Company, on the terms and conditions
set forth in this Agreement.
1. Employment, Duties and Acceptance.
1.1 Employment. (a) Effective upon t he Effective
Date, the Company shall employ the Physician Executive as its Executive Vice
President and Director of Development. In such capacities, the Physician
Executive shall have the duty, responsibility and authority for designing and
implementing medical and non-medical policies and procedures, and investigating,
structuring and negotiating on behalf of the Company and its Subsidiaries the
purchase of primary care physician practices, and shall assist with the
creation of, contractual relationships with hospitals, physician specialists,
medical institutions and providers, negotiating managed care and other
contracts, and related matters involving the growth and
1
<PAGE>
development of the Business, all after consultation with the Company's Executive
Vice President and Director of Medical Affairs and subject to the guidelines,
policies and control of the Company's Chief Executive Officer and Board of
Directors (the "Board"), to whom he shall report. The Physician Executive shall
perform such other duties within these general parameters as the Chief Executive
Officer or the Board may from time to time designate. The Physician Executive
shall perform his duties faithfully and to the best of his abilities. The
Physician Executive shall also serve (A) during the Term, as a director of the
Company (subject to the power of the Board and the Shareholders of the Company
to remove him as set forth in the Company's Bylaws), (B) as a director of all of
the Company's Subsidiaries (as defined in Section 5.2), and (C) until the
"Financing Date" (as defined in Section 3.1(b)), as the Chairman of the Board,
all without any additional compensation.
(b) The Physician Executive shall
devote a significant portion of his working time and creative energies to the
performance of his duties hereunder and will at such times devote such efforts
as are reasonably sufficient for fulfilling the significant responsibilities
entrusted to him. So long as such activities, in the aggregate, do not interfere
with the performance by the Physician Executive of his duties hereunder: (i)
the Physician Executive shall be permitted a reasonable amount of time to engage
in the practice of medicine as an employee of Baltimore Medical Group, Inc.
and to supervise his personal, passive, investments; (ii) the Physician
Executive shall be permitted a reasonable amount of time to participate
(as board member, officer or volunteer) in civic, political and charitable
activities; (iii) the Physician Executive shall be permitted to deliver
lectures to and teach at educational institutions and business organizations;
and (iv) subject to the provisions of Section 5 hereof, the Physician Executive
may serve as a director or trustee of one or more corporations not affiliated
with the Company.
1.2 Place of Employment. The Physician Executive's
principal place of employment shall be in the Baltimore, Maryland metropolitan
area, subject to such travel as may be reasonably required by his employment
pursuant to the terms hereof. The Physician Executive shall not be required
to relocate outside of the Baltimore, Maryland metropolitan area during the
Term, except by mutual agreement.
2. Term of Employment. The term of the Physician Executive's
employment under this Agreement (the "Term") shall commence on the Effective
Date and shall end on April 1, 2000 unless sooner terminated, or later extended,
as herein provided. Not later than February 1, 2000 (and each February 1 of each
calendar year during any Extension Period (defined below)), the Company and the
Physician Executive shall enter into good faith negotiations to determine
whether and on what terms to extend or renew this Agreement beyond April 1 of
such calendar year. If by October 15, 1999 (and October 15 of any calendar year
occurring during an Extension Period) either party gives written notice to the
other of its desire to terminate this Agreement as of April 1, then this
Agreement shall so terminate, and
2
<PAGE>
the Physician Executive shall be permitted a reasonable amount of time during
the balance of the Term within which to explore alternative employment
opportunities. If no such written notice to terminate is given by either party
by October 15, 1999 (or by October 15 of any calendar year occurring during an
Extension Period), then the Term shall, without further act or deed,
automatically be extended upon the same terms and conditions as previously in
effect, for an additional 12 month period, commencing on April 1 of the
applicable calendar year and ending on March 31 of the immediately following
calendar year. Each such 12 month extension during the Term is referred
to herein as an "Extension Period", and shall constitute a part of the Term of
this Agreement for all purposes, including the provisions regarding extensions
contained in this Section 2.
3. Compensation.
3.1 Salary. As compensation for all services to be
rendered pursuant to this Agreement, the Company shall pay to the Physician
Executive, during the Term, a "Base Salary" (as defined in this Section
3.1) less such deductions as shall be required to be withheld by applicable
laws and regulations. The "Base Salary" shall be a salary of $100,000 per annum.
The amount of the Base Salary has been established based upon the mutual
assumption by the Company and the Physician Executive that the Physician
Executive shall devote approximately fifty percent (50%) of his working
time and creative energies to the performance of his duties hereunder. The
Company and the Physician Executive acknowledge and agree that because the
performance by the Physician Executive of his duties hereunder will be of
critical importance to the growth and prosperity of the Company, the Company
shall from time to time, in its reasonable discretion, evaluate and determine
the working time and creative energies that the Physician Executive has devoted
to the performance of his duties hereunder during any preceding three (3) month
period (it being understood and agreed that the Physician Executive's use of
permitted vacation hereunder shall not be included in such determination). If
the Company determines that the Physician Executive has devoted significantly
more or significantly less of his working time and creative energies to his
duties hereunder during any such period, his Base Salary will be adjusted, up or
down, by the Company (in the exercise of its reasonable discretion) on each such
occasion, commencing with the beginning of the fiscal quarter of the Company
immediately following the Signing Date. The Base Salary shall accrue from and
after the Effective Time, and shall be payable as follows:
(a) The Company has paid Base Salary of
$65,068 on the date hereof, the receipt of which is hereby acknowledged by the
Physician Executive; and
(b) The Company shall, during the Term,
pay to the Physician Executive his Base Salary in arrears in equal monthly
installments each year, commencing March 31, 1995 (for the month of March,
1995).
3
<PAGE>
3.2 Bonus Pool. (a) Beginning with the calendar
year 1995, the Company shall establish for the benefit of the Physician
Executive and other key Company employees a "Bonus Pool", in an amount
calculated as described herein, with respect to each calendar year, or
portion thereof, that occurs during the Term (each a "Bonus Year").
(b) During the Term, the Physician
Executive shall be allocated at least five percent (5%) of the Bonus Pool, if
any, annually, which amount represents his minimum agreed upon share of the
Bonus Pool. The determination of whether, and to what extent, the Physician
Executive shall be entitled to an allocation from the Bonus Pool in excess of
said five percent (5%) shall be made by the Chief Executive Officer of the
Company in accordance with policies established by the Board. All amounts
allocated to the Physician Executive pursuant to this Section 3.2 shall become
payable to the Physician Executive and are hereinafter collectively referred to
as the "Bonus". Upon the closing of the initial underwritten public offering of
the capital stock of the Company pursuant to a registration statement filed with
the Securities and Exchange Commission (other than a registration statement on a
Form S-8 or any successor or similar Form) (the "IPO"), the Physician
Executive's right to participate in the Bonus Pool with respect to any period of
time subsequent to the closing of the IPO shall terminate (other than the
Physician Executive's right to receive all accrued but unpaid Bonus, which right
shall survive such closing), provided that the Company and the Physician
Executive each covenant and agree to enter into good faith negotiations to
establish a new bonus arrangement for the Physician Executive that fairly
compensates the Physician Executive for the services to the Company and provides
appropriate incentives consistent with prevailing market standards for similarly
situated and skilled executives.
(c) Provided that the Company has available
net cash flow, the Company shall pay the Bonus to the Physician Executive
within three (3) business days of the final determination of the amount
of each year's Bonus Pool pursuant to Section 3.2(e) below (each, a "Payment
Date"), and shall pay any accrued but unpaid Bonus to the Physician as soon
after such Payment Date as there is sufficient available net cash flow. For
each partial calendar year that occurs during the Term, the amount of the
Physician Executive's Bonus payable hereunder shall be prorated by multiplying
the amount, if any, of the Bonus that would have been payable had the entire
calendar year occurred during the Term by a fraction, the numerator of which
is the number of days of the calendar year that occurred during the Term and
the denominator of which is 365. Any accrued but unpaid Bonus shall accrue
simple interest from the date of the final determination of the amount of each
year's Bonus Pool until such amount is paid, at the rate of six and
one-half percent (6 1/2%) per annum, and shall be paid by the Company as soon
after such Payment Date as there is sufficient available net cash flow. In all
events, all accrued and unpaid Bonus, plus accrued interest thereon, shall be
paid to the Physician Executive upon the earlier to occur of (i) closing of the
IPO, or (ii) the
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redemption of all of the outstanding shares of Series A Preferred Stock
of the Company, or (iii) the conversion of all of the outstanding
shares of the Series A Preferred Stock of the Company, or (iv) upon any merger
or consolidation where the Company is not the survivor.
(d) The amount of the Bonus Pool with
respect to each Bonus Year, if any, shall be equal to ten percent (10%) of
the amount of the excess, if any, of (A) Operating Revenues (as defined in
Section 3.2(e) below) for the calendar year in which the Bonus Year occurs
over (B) Operating Expenses (as defined in Section 3.2(c) below) for the
calendar year in which the Bonus Year occurs.
(e) For purposes of this Section 3.2,
"Operating Revenues" shall be determined by the Company and the Chief
Physician Executive Officer pursuant to established procedures, and shall
mean all revenues earned by the Company and its controlled
subsidiaries whose revenues are consolidated with those of the Company during
such Bonus Year, including revenues from or in respect of the Company's direct
or indirect (i) provision of professional services, group consulting fees,
specialty contract and managed care risk taking revenues, (ii) provision of
related non-professional services, and (iii) sales of products related to the
provision of professional and non-professional services, plus an amount equal to
the lab and ancillary testing revenues of Baltimore Medical Group LLC, a
Maryland limited liability company ("BMG") and any Additional Primary Care
Entities as defined in the Practice Purchase Agreement of even date herewith
among the Company and other parties. "Operating Expenses" shall mean all
expenditures made by the Company in the ordinary course of its business during
the Bonus Year associated with the Company's provision of services and sale of
products, including corporate, administrative, lab and other ancillary salaries
and overhead, employed physician salaries and group information system expenses
and shall also include routinely scheduled payments in respect of the Company's
financing activities (such as scheduled amortization of principal and interest
on debt and dividends on securities), state, federal and local tax payments and
the amount of any reasonable reserves which the Board sets aside or establishes
to meet working capital requirements as such reserves are approved as being
adequate by the Accountants, future liabilities or contingencies or otherwise,
plus all expenses of BMG associated with lab and ancillary testing revenue.
"Operating Expenses" shall not include capital expenditures made by the Company,
including, without limitation, for the acquisition of physician practices, or
non-scheduled payments in retirement or redemption of debt or securities issued
by the Company. For purposes of this Section 3.2, references to "the Company"
shall include any Subsidiary of the Company. The Company agrees to treat the
Physician Executive and other Company employees fairly and in good faith with
respect to the calculation of the Bonus Pool, and not unfairly to attempt to
discriminate against the Physician Executive, whether by lowering Operating
Revenues, increasing Operating Expenses, shifting the same to or from any year
or otherwise, for the purpose or with the intention of lowering the amount of
the Bonus Pool in any year.
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(f) A failure by the Company to make
available to the Physician Executive, within the appropriate time period
provided in Section 3, cash equal to that portion of the Bonus Pool which the
Physician Executive is entitled to receive, shall constitute a breach of
this Agreement by the Company and shall entitle the Physician Executive to
terminate this Agreement for "constructive termination" under Section 4.4.
3.3 Stock; Option Grant.
(a) The Company has transferred to the
Physician Executive twenty-five (25) shares of the voting common stock of the
Company. As a result of duly adopted resolutions of the Company's directors
and shareholders, and the filing with the Maryland SDAT of Amended Articles of
Incorporation of the Company, such 25 shares of voting common stock have been
reclassified and a stock dividend declared, so that the Physician Executive on
the date hereof is the registered owner of 100,000 shares of the Company's
Class A Common Stock (the "Class A Common Stock"). On August 10, 1995, the
Company issued to the Physician Executive, in addition to the Stock, an
option (the "Option") to purchase an additional 100,000 shares of its Class A
Common Stock (the "Additional Stock").
(b) So long as the Physician Executive's
employment hereunder has not been earlier terminated by the Company pursuant
to the provisions of Section 4.3(a) hereof, the Option shall vest in full upon
the earlier to occur of (i) a Change in Control of the Company, or (ii)
twenty-four (24) months from the Signing Date, or (iii) termination of the
Physician Executive's employment pursuant to Section 4.3(b) or Section 4.4
(such earlier date, the "Vesting Date"). The option price for the Additional
Shares shall be $25 in the aggregate; to the extent the number of shares, or
the class, or designation, of the Stock is changed as the result of a
reclassification, stock split, stock dividend or other similar event, the number
and/or class of shares of Additional Stock issuable under the Option shall be
adjusted accordingly. The option may not be exercised within one year of the
Vesting Date, except upon an earlier Change in Control of the Company.
(c) All Stock and Additional Stock
transferred to the Physician Executive hereunder is and shall remain subject
to any transfer restrictions and other protections as are set forth in the
Company's Charter, By-laws, or in any Shareholder's Agreement, and the
certificates or other instruments representing such stock shall bear or contain
a legend or statement regarding such transfer restrictions.
(d) "Change in Control" shall mean the
earlier to occur of (i) a liquidating distribution to Company's shareholders
(or similar event); (ii) a contribution, consolidation or merger where Company
is not the survivor; (iii) any sale, exchange or other disposition of all, or
substantially all of Company's assets; (iv) any public offering of
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Company's securities at a company value of at least $25,000,000 with proceeds to
Company of at least $15,000,000.
3.4. Withholding. The Company is authorized to
withhold from the amount of any Salary and Bonuses and any other things of
value paid to or for the benefit of the Physician Executive (other than
transfers of Stock), all sums authorized by the Physician Executive or required
to be withheld by law, court decree, or Physician Executive order, including
(but not limited to) such things as income taxes, employment taxes, and
employee contributions to fringe benefit plans sponsored by the Company.
3.5 Participation in Physician Executive Benefit
Plans. The Physician Executive shall be permitted during the Term, if and to
the extent eligible, to participate in any group life, hospitalization or
disability insurance plan, health program, automobile allowance, pension plan
or similar benefit plan of the Company which may be available to other
comparable executives and professional employees of the Company, generally
on the same terms as such other executives.
3.6 Vacation. The Physician Executive will receive
at least 4 weeks vacation per year, to be scheduled and taken at the Physician
Executive's option at such times as his duties may permit. Should the
Company's policy provide for more vacation to comparable Physician
Executives the Physician Executive will be accorded such higher vacation.
Unused vacation time shall not be cumulated or carried over nor shall the
Physician Executive receive any compensation for unused vacation time.
3.7 Expenses. Subject to such policies as may
from time to time be established by the Board, the Company shall pay or
reimburse the Physician Executive for all ordinary, necessary and
reasonable expenses (including, without limitation, travel, meetings, dues,
subscriptions, fees, educational expenses, computer equipment and the like)
actually incurred or paid by the Physician Executive during the Term in the
performance of the Physician Executive's services under this Agreement
(including, without limitation, expenses incident to attendance at board or
management meetings of the Company, or its Subsidiaries or Affiliates), upon
presentation of expense statements or vouchers or such other supporting
information as the Board may require.
4. Termination.
4.1 Termination upon Death. If the Physician
Executive dies during the Term, the Physician Executive's employment shall
terminate as of the date of death of the Physician Executive.
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4.2 Termination upon Disability. Notwithstanding
any other provision of this Agreement (except the other provisions of this
Section 4.2), if during the Term the Physician Executive becomes
physically, mentally or emotionally disabled, whether totally or partially, as
determined by an independent qualified physician, so that the Physician
Executive is, in the good faith determination of the Board,
substantially unable to perform his services hereunder for (i) a period of three
consecutive months, or (ii) shorter periods aggregating three months during any
twelve month period, the Company may (a) continue the Physician Executive's
employment hereunder until one (1) year following the end of the Term at a Base
Salary equal to the Base Salary in effect at the time of the determination of
the disability, or (b) by written notice to the Physician Executive, terminate
the Physician Executive's employment hereunder as of the date of such written
notice and pay the Physician Executive as severance an amount equal to the
amount he would have been paid (at the Base Salary that is in effect on the date
of termination) for the period from the date of termination until one (1) year
following the end of the Term if his employment had not been terminated. The
preceding sentence shall be in effect only until, and shall terminate upon, the
occurrence of any of the following events: (a) the cessation of the Company's
business, (b) the bankruptcy, liquidation, receivership, or dissolution of, or
assignment for the benefit of creditors by, the Company, (c) any Change in
Control of the Company (as defined in the Company's Amended and Restated
Stockholders Agreement, as it may be amended from time to time), or (d) the
consummation of any public offering of the Company's capital stock (the
"Extraordinary Events"). If any Extraordinary Event occurs and thereafter the
Physician Executive becomes physically, mentally or emotionally disabled,
whether totally or partially, as determined by an independent qualified
physician, so that the Physician Executive is, in the good faith determination
of the Board, substantially unable to perform his services hereunder for (i) a
period of three consecutive months, or (ii) shorter periods aggregating three
months during any twelve month period, the Company may at any time after the
last day of the three consecutive months of disability or on the last day of the
shorter period aggregating three months of disability, by written notice to the
Physician Executive, terminate the Physician Executive's employment hereunder as
of the date such written notice becomes effective.
4.3 Termination at Election of Company.
(a) Notwithstanding any other provision
of this Agreement, the Company may terminate the Physician Executive's
employment hereunder at any time upon: (i) the continued failure or refusal by,
or manifest inability of, the Physician Executive to perform his duties
after reasonable prior notice to the Physician Executive; (ii) the
Physician Executive engaging in any acts or omissions involving dishonesty
or acts or omissions that demonstrate a lack of integrity; (iii) the conviction
of the Physician Executive of a felony; (iv) the Physician Executive engaging
in acts or omissions that demonstrably and materially injure the business
and affairs of the Company, monetarily or otherwise; and/or (v) any knowing
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material misrepresentation made by the Physician Executive to the Company
or any material breach by the Physician Executive of his obligations
hereunder.
(b) In addition to the Company's right to
terminate the Physician Executive's employment pursuant to Section 4.3(a),
and notwithstanding any other provision of this Agreement, the Company may,
for any or for no reason, terminate the Physician Executive's employment
upon 60 days prior written notice to the Physician Executive.
4.4 Termination by the Physician Executive.
(a) Provided that the Physician Executive
has delivered to the Board at least sixty (60) days prior written notice
setting forth in reasonable detail any alleged material breach by the Company
of this Agreement or other acts or omissions engaged in by the Company
constituting "constructive termination" of the Physician Executive's employment
with the Company, which breach, acts or omissions have not been cured by the
Company as of the end of such period to the reasonable satisfaction of the
Physician Executive, then, notwithstanding any other provision of this
Agreement, the Physician Executive shall be entitled to terminate his employment
for such reasons, effective immediately upon the delivery by the Physician
Executive to the Board of a notice to the effect that such breach, acts or
omissions have not been cured to the reasonable satisfaction of the Physician
Executive; provided, however, that if such constructive termination is caused by
the Physician Executive's incapacity or inability to serve due to a disability
of the type described in Section 4.2 above and the Company elects to terminate
the Physician Executive pursuant to the provisions of Section 4.2, the Physician
Executive shall, for purposes of this Agreement, be deemed to have been
terminated pursuant to the provisions of Section 4.2 and not of this Section
4.4.
(b) For purposes of this Section 4.4,
"constructive termination" shall be limited to those circumstances where (i)
the Company creates working conditions that a reasonable person in the Physician
Executive's position would consider unreasonable or intolerable which is
not remedied by the Company sixty (60) days after notice thereof given by the
Physician Executive;; and (ii) such working conditions are not generally
applicable to other Physician executives of the Company.
4.5 Compensation and Benefits Following
Termination of Employment.
(a) In the event of termination of the
Physician Executive's employment for any reason other than a termination
pursuant to Section 4.3(b) or Section 4.4 (or a termination caused merely by
the expiration of the Term): (i) all compensation and other benefits
payable or provided hereunder shall cease as of the date of
termination; and (ii) Base Salary (if any) then payable or accrued through the
date of termination and all accrued benefits (if any) then payable to the
Physician Executive pursuant to the terms of any plans or
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arrangements referred to in Section 3.5 shall be paid to the Physician
Executive (or to his heirs, legatees and/or legal representatives) through the
date of termination.
(b) In the event of termination of the
Physician Executive's employment pursuant to Section 4.3(b) or Section
4.4, the Physician Executive (or, in the event of the Physician
Executive's subsequent death or disability, his heirs, legatees and/or legal
representatives) shall receive, when and as the same would have been
payable hereunder if the Physician Executive's employment had not been so
terminated, each of the following payments and benefits:
(i) all accrued benefits (if any)
then payable to the Physician Executive pursuant to the terms of any plans or
arrangements referred to in Section 3.5;
(ii) with respect to any periods
on or prior to June 30, 1996, all payments of the full Base Salary which
would have been due to the Physician Executive through June 30, 1996, at the
times such payments would otherwise be made, all as if this Agreement were
still in effect;
(iii) with respect to any periods
after June 30, 1996, 50% of the Base Salary which would have been due to the
Physician Executive from July 1, 1996 through the remainder of the Term, at
the times such payments would otherwise be made, all as if this Agreement were
still in effect;
(iv) with respect to any periods on
or prior to June 30, 1996, all payments in respect of all Bonuses that the
Physician Executive would have received with respect to each calendar year, or
each portion thereof, through June 30, 1996, at the times such payments would
otherwise be made, all as if this Agreement were still in effect;
(v) with respect to any periods
after June 30, 1996, 25% of the payments in respect of all Bonuses that the
Physician Executive would have received with respect to each calendar year,
or each portion thereof, from July 1, 1996 through the remainder of the Term,
at the times such payments would otherwise be made, all as if this Agreement
were still in effect; and
(vi) subject to the provisions
of the Company's Amended and Restated Articles, By-laws, the Shareholder's
Agreement, and the Option Agreement all of the shares of Additional Stock
issuable under the Option pursuant to Section 3.3 shall be issued to the
Physician Executive free of any restrictions.
(c) In the event of termination under
Section 4.2 (disability), the Physician Executive or his legal
representative, as the case may be, shall, in addition to such
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other payments as may be due hereunder, be entitled to receive the proceeds
of any disability policies maintained by the Company and payable to the
Physician Executive.
5. Certain Covenants of the Physician Executive.
5.1 Necessity for Covenants. The Physician
Executive acknowledges that (i) the Company, its Subsidiaries and its
Affiliates (as defined in Section 5.2) are engaged in the Business, and will in
the future be engaged in the Business; (ii) his work and providing management
services to health care entities for the Company and its Affiliates will give
him access to customers and suppliers of, and trade secrets of and confidential
information concerning, the Company, its Subsidiaries and its Affiliates; and
(iii) the agreements and covenants contained in this Section 5 are essential
to protect the business and goodwill of the Company, its Subsidiaries and
its Affiliates. In order to induce the Company to enter into this Agreement
and pay the compensation and other benefits at the levels requested by the
Physician Executive, the Physician Executive enters into the following
covenants:
5.2 Definitions.
(a) For purposes of Sections 5.3
through 5.8 only, the term "Company" shall include the Company and all of
the Company's, Subsidiaries and Affiliates.
(b) "Provider" shall mean any health care
service provider or Affiliate thereof to whom the Company provided management
or other services.
(c) "Payor" means any insurer, employer,
health maintenance organization, preferred provider organization, health
benefit plan or other entity or organization to which, or to whose members,
insured's, employees, enrollees, beneficiaries or other persons affiliated
with it (collectively "Beneficiaries"), the Company provides services or
products.
(d) "Service Area" means the geographic
area in which the Company provides health care services and in which the
Beneficiaries of those services generally reside, which shall include all
areas within a 25 mile radius of the site of any Provider's office.
(e) "Subsidiary" means any person or
entity in which the Company owns, beneficially or otherwise, an equity
interest of more than 50%.
(f) "Affiliate" means a Subsidiary of the
Company; a person or entity which is owned, controlled, or operated by
the Company; any person owning an equity interest in the Company; any person who
has appointed the Company as its exclusive agent for the provision of
professional services and the collection of revenues therefrom; and any
partner,
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member, employee, owner or agent of any Affiliate and any person or entity
which is under common ownership, control or operation with the specified person
or entity.
5.3 Restrictions. During the Term and, unless the
Physician Executive's employment is terminated other than pursuant to
Sections 4.3(b) or 4.4 hereof, for a period of twelve (12) months after the
Physician Executive's employment hereunder is terminated (the "Termination
Date") (the "Restricted Period"), the Physician Executive shall not, directly
or indirectly, for himself or on behalf of any other person, firm, corporation
or other entity, whether as a principal, agent, employee, stockholder,
partner, officer, member, director, sole proprietor, or otherwise:
(a) call upon or solicit any Provider for
the purpose of persuading the Provider to engage the Physician Executive or
any other person, firm, corporation or other entity to provide services which
are the same or similar to those the Company provided to the Provider;
(b) call upon or solicit any Payor for
the purpose of persuading the Payor to engage any person or entity other
than the Company to provide health care services to the Payor with respect to
any of its Beneficiaries in the Service Area;
(c) solicit, participate in or promote the
solicitation of any person who was employed by the Company or a Provider at any
time during the twelve (12) months preceding the Termination Date to leave the
employ of the Company, or hire or engage any of those persons;
(d) make any disparaging remarks about the
Company's business, services or personnel;
(e) interfere in any way with the Company's
business, prospects or personnel; or
(f) become affiliated with or render
services to any person engaged in any business that competes with the
Business within the Service Area, directly or indirectly, in any capacity,
including, without limitation, as an individual, partner, shareholder,
officer, director, principal, agent, employee, trustee or consultant;
provided, however, that the Physician Executive may own, directly or indirectly,
solely as an investment, securities which are publicly traded if the Physician
Executive (a) is not a controlling person of, or a member of a group which
controls, the issuer and (b) does not, directly or indirectly, own 5% or more
of any class of securities of the issuer.
5.4 Trade Secrets and Confidential Information
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5.4.1 Trade Secrets Defined. The term
"Trade Secrets," as used in this Agreement, includes, without limitation,
(i) all information concerning billing practices and procedures of the
Company, (ii) the rates and amounts that the Company pays to its personnel,
(iii) information about the Company's contracts with insurers, health
maintenance organizations, employers, and other payors, (iv) all
formulae, compilations, programs, devices, lists, methods, techniques or
processes of the Company, and (v) all other information of the Company that
would be deemed to be "trade secrets" within the meaning of the Maryland Uniform
Trade Secrets Act (the "Act").
5.4.2 Confidential Information Defined.
Any other information not qualifying as a Trade Secret, but relating to the
business of the Company which is disclosed by the Company to the Physician
Executive, or is discovered by the Physician Executive in the course of
employment, is Confidential Information.
5.4.3 Duty to Maintain Secrecy and
Confidentiality. During the Period of the Physician Executive's
employment with the Company, the Physician Executive shall maintain the secrecy
and confidentiality of the Trade Secrets and the Confidential Information
and shall not (i) divulge, furnish or make accessible to anyone or in any way
or use, for his own benefit or for the benefit of any other individual
firm or entity (other than in the ordinary course of the Company's business),
any Trade Secret or Confidential Information; (ii) take or permit any action to
be taken which would reduce the value of the Trade Secrets or
Confidential Information to the Company; or (iii) otherwise misappropriate or
suffer the misappropriation of the Trade Secrets or the Confidential
information, within the meaning of the Act. After the Termination Date,
Physician Executive shall continue to maintain the secrecy and confidentiality
of such information, but only to the extent that the Physician Executive is
prohibited from directly or indirectly competing with Company pursuant to the
provisions of Section 5.3.
5.4.4 Information Which is Publicly Known.
Notwithstanding anything herein to the contrary, the obligations of secrecy
and confidentiality set forth herein shall not apply to any information
which is now generally publicly known or which subsequently becomes
generally publicly known other than as a direct or indirect result of the
breach of this Agreement by the Physician Executive, or which is required by law
or order of any court to be disclosed.
5.5 Property of the Company. All memoranda,
notes, lists, records and other documents or papers (and all copies thereof),
including but not limited to, such items stored in computer memories, on
microfiche or by any other means, made or compiled by or on behalf of the
Physician Executive, or made available to the Physician Executive
concerning the Business, are and shall be the property of the Company and shall
be delivered to the
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Company promptly upon the termination of the Physician Executive's
employment with the Company or at any other time on request; provided
however, that the Physician Executive may inspect during normal business
hours such records as shall be necessary for the purpose of assisting the
Physician Executive to file, or prepare for an audit of, his personal income tax
returns.
5.6 Physician Executive's Ideas, Etc. All
inventions, prototypes, discoveries, improvements, innovations and the
like ("Inventions") and all works of original authorship or images that are
fixed in any tangible medium of expression and all copies thereof
("Works") which are designed, created or developed by Physician
Executive, solely or in conjunction with others, in the course of performance of
the Physician Executive's duties which relate to the Business, shall be made or
conceived for the exclusive benefit of and shall be the exclusive property of
the Company. The Physician Executive shall immediately notify the Company upon
the design, creation or development of all Inventions and Works. At any time
thereafter, the Physician Executive, at the request and expense of the Company,
shall execute and deliver to the Company all documents or instruments which may
be necessary to secure or perfect the Company's title to or interest in the
Inventions and Works, including but not limited to applications for letters of
patent, and extensions, continuations or reissues thereof, applications for
copyrights and documents or instruments of assignment or transfer. All Works are
agreed and stipulated to be "works made for hire," as that term is used and
understood within the Copyright Act of 1976, as amended. To the extent any Works
are not deemed to be works made for hire as defined above, and to the extent
that title to or ownership of any Invention or Work and all other rights therein
are not otherwise vested exclusively in the Company, the Physician Executive
shall, without further consideration but at the expense of the Company, assign
and transfer to the Company the Physician Executive's entire right, title and
interest (including copyrights and patents) in or to those Inventions and Works.
5.7 Rights and Remedies Upon Breach. If the
Physician Executive breaches, or threatens to commit a breach of, any of the
provisions of Sections 5.1 through 5.6 (the "Restrictive Covenants"), the
Company shall, in addition to its right immediately to terminate this
Agreement, have the right and remedy (which right and remedy shall be
independent of others and severally enforceable, and which shall be in addition
to, and not in lieu of, any other rights and remedies available to the Company
under law or in equity) to have the Restrictive Covenants specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach could cause irreparable injury
to the Company or its Affiliates and that money damages may not provide adequate
remedy to the Company.
5.8 Covenants Currently Binding Physician
Executive. The Physician Executive warrants that his employment by the
Company will not (a) violate any non-
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disclosure agreements, covenants against competition, or other restrictive
covenants made by the Physician Executive to or for the benefit of any previous
employer or partner, or (b) violate or constitute a breach or default under,
any statute, law, judgment, order, decree, writ, injunction, deed,
instrument, contract, lease, license or permit to which the Physician
Executive is a party or by which the Physician Executive is bound.
5.9 Litigation. There is no litigation, proceeding
or investigation of any nature (either civil or criminal) which is pending
or, to the best of the Physician Executive's knowledge, threatened against
or affecting the Physician Executive or which would adversely affect his
ability to substantially perform the duties herein.
5.10 Review. The Physician Executive has
received or been given the opportunity to review the provisions of this
Agreement, and the meaning and effect of each provision, with independent legal
counsel of the Physician Executive's choosing.
5.11 Severability of Covenants. The Physician
Executive acknowledges and agrees that the Restrictive Covenants are
reasonable and valid in geographical and temporal scope and in all respects. If
any court determines that any of the Restrictive Covenants, or any part
thereof, is invalid or unenforceable, the remainder of the Restrictive
Covenants shall not thereby be affected and shall be given full effect, without
regard to the invalid portions.
5.12 Blue-Penciling. If any court determines
that any of the Restrictive Covenants, or any part thereof, is
unenforceable because of the duration or geographic scope of such provision,
such court shall have the power to reduce the duration or scope of such
provision, as the case may be, and, in its reduced form, such provision shall
then be enforceable and shall be enforced. If any such court declines to so
revise such covenant, the parties agree to negotiate in good faith a
modification that will make such duration or scope enforceable.
5.13 Enforceability in Jurisdictions. The parties
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the geographical scope of such
Covenants. If the courts of any one or more of such jurisdictions hold any
Restrictive Covenant unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties that such determination not bar
or in any way affect the Company's right to the relief provided above in the
courts of any other jurisdiction within the geographical scope of such
Covenants, as to breaches of such Covenants in such other respective
jurisdictions, such Covenants as they relate to each jurisdiction being, for
this purpose, severable into diverse and independent covenants.
15
<PAGE>
5.14 Extension. If the Physician Executive violates
any Restrictive Covenant, the Company shall not be deprived of the full
benefit of the period of the covenant. Accordingly, the duration of that
covenant shall be extended by the period of any violation of that covenant.
5.15 Remedies. The Company shall be entitled to
injunctive or other equitable relief because it will be caused irreparable
injury and damage by a breach of the provisions of any of the Restrictive
Covenants. The right to injunctive relief shall include the right to both
preliminary and permanent injunctions. The Company shall not be required to post
a bond or other similar assurance if it brings an action to enforce the
provisions of any of the Restrictive Covenants. The Company's right to equitable
relief shall not preclude any other rights or remedies which the Company may
have, all of which rights and remedies are cumulative.
6. Dispute Resolution.
6.1 Costs of Litigation. If either party files suit
or brings an arbitration proceeding to enforce its rights under this Agreement,
the prevailing party shall be entitled to recover from the other party all
expenses incurred by it in preparing for and in trying the case, including,
but not limited to, investigative costs, court costs and reasonable attorney's
fees.
6.2 Consent to Jurisdiction. The parties submit
to the jurisdiction and venue of the courts of the State of Maryland.
6.3 No Jury Trial. NEITHER PARTY SHALL ELECT A
TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR IN ANY WAY CONNECTED WITH THIS AGREEMENT.
6.4 Arbitration. Any dispute between the Company
and the Physician Executive concerning any part of the Physician
Executive's compensation arising under Section 3 or Section 4 hereof
(including the amount of the Bonus Pool) shall be resolved by binding
arbitration pursuant to the terms of Schedule 6.4, attached hereto as a part
hereof.
7. Other Provisions.
7.1 Notices. Any notice or other communication
required or which may be given hereunder shall be in writing and shall be
delivered personally, telegraphed, telexed, sent by facsimile transmission or
sent by certified, registered or express mail, postage paid, and shall be
deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, four days after the date of mailing, as
follows:
16
<PAGE>
(i) if to the Company, to:
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Attention: President
with copies to:
St. Joseph Medical Center, Inc.
c/o John Ellis
7620 York Road
Towson, Maryland 21204
Paul A. Serini, Esquire
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
(ii) if to the Physician Executive, to:
Scott M. Rifkin
Doctors Health System, Inc.
10451 Mill Run Circle
10th Floor
Owings Mills, Maryland 21117
Any party may by notice given in accordance with this Section
to the other party designate another address or person for receipt of notices
hereunder.
7.2 Entire Agreement. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings, written or oral, with
respect thereto, including the Prior Agreement.
17
<PAGE>
7.3 Waivers and Amendments. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms
and conditions hereof may be waived, only by a written instrument signed by
the Physician Executive and a duly authorized officer of the Company (each, in
such capacity, a party) or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver
on the part of any party of any right, power or privilege hereunder, nor any
single or partial exercise of any right, power or privilege hereunder, preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege hereunder.
7.4 Governing Law. This Agreement has been
negotiated and is to be performed in the State of Maryland, and shall be
governed and construed in accordance with the laws of the State of Maryland
applicable to agreements made and to be performed entirely within such State.
7.5 Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
7.6 Confidentiality. Neither party shall disclose
the contents of this Agreement or of any other agreement they have
simultaneously entered into to any person, firm or entity, except the agents or
representatives of the parties, or except as required by law.
7.7 Word Forms. Whenever used herein, the
singular shall include the plural and the plural shall include the singular.
The use of any gender, tense or conjugation shall include all genders, tenses
and conjugations.
7.8 Headings. The Section headings have been
included for convenience only, are not part of this Agreement, and are not
to be used to interpret any provision hereof.
7.9 Binding Effect and Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties, their
successors, heirs, personal representatives and other legal representatives.
This Agreement may be assigned by the Company to any entity which buys
substantially all of the Company's assets. However, the Physician Executive
may not assign this Agreement without the prior written consent of the Company.
7.10 Separability. The covenants contained in this
Agreement are separable, and if any court of competent jurisdiction declares
any of them to be invalid or unenforceable, that declaration of
invalidity or unenforceability shall not affect the validity or enforceability
of any of the other covenants, each of which shall remain in full force and
effect.
18
<PAGE>
7.11 Consent or Approval. Whenever under the
terms of this Agreement the approval or consent of the Company is required
or the Company must make any determination, the Company, unless this
Agreement specifically requires otherwise, may not unreasonably withhold or
delay that consent or approval.
7.12 Background. The Background is a part of this
Agreement.
IN WITNESS WHEREOF, the parties, intending to be legally
bound, have executed this Agreement or caused it to be executed and attested by
their duly authorized officers as a document under seal on the day and year
first above written.
ATTEST/WITNESS: DOCTORS HEALTH SYSTEM, INC.
___________________, Secretary By: _________________________(SEAL)
Stewart Gold, President
PHYSICIAN EXECUTIVE:
___________________ _________________________(SEAL)
Scott M. Rifkin
19
<PAGE>
SCHEDULE 6.4
ARBITRATION PROCEDURE
1. Institution of Arbitration Proceeding.
1.1. Any party to this Agreement (an "Initiating Party") may initiate
an arbitration proceeding (the "Proceeding") to resolve a dispute subject to
resolution under this Schedule (a "Dispute") by giving written notice (the
"Dispute Notice") to the other party (the "Responding Party") to such Dispute.
The Dispute Notice shall describe the substance of the Dispute with sufficient
specificity to give the Responding Party adequate notice of its nature. Unless
otherwise specified, time periods specified in this Schedule 6.4 shall be
calculated from the date of the Dispute Notice (the "Commencement Date").
2. Selection of Arbitral Panel.
2.1. The Arbitral Panel (the "Panel") shall consist of three
arbitrators, two of whom (the "Party Designated Arbitrators") shall be selected
by the parties pursuant to Section 2.2 hereof. The third arbitrator shall be a
"Neutral Arbitrator" selected by the Party Designated Arbitrators pursuant to
Section 2.3 hereof.
2.2. The Initiating Party shall designate its Party Designated
Arbitrator in the Dispute Notice. Within fifteen days of the Commencement Date,
the Responding Party shall designate its Party Designated Arbitrator.
2.3. Within forty-five days of the Commencement Date, the two Party
Designated Arbitrators shall agree upon and appoint a Neutral Arbitrator who
shall be an accountant and a partner in an international, "Big Six" accounting
firm.
2.4. Each party agrees promptly to disclose to the other party any
circumstances known to it which would cause reasonable doubt regarding the
impartiality of an individual under consideration or appointed as the Neutral
Arbitrator and any such individual shall also promptly disclose to the parties
any such circumstances.
2.5. During the process of selecting the Neutral Arbitrator and
thereafter during the course of this Proceeding, ex parte communications with
the Neutral Arbitrator or any individual under consideration as the Neutral
Arbitrator are prohibited and shall be disclosed by the party making any ex
parte communication, the Neutral Arbitrator or any individual under
consideration as a Neutral Arbitrator immediately upon discovery.
20
<PAGE>
3. Pre-Hearing Procedures.
3.1. Within fifteen days of the appointment of the Neutral Arbitrator,
the Panel may convene a Pre-Hearing Conference to, inter alia, familiarize the
Neutral Arbitrator with the nature of the Dispute between the Parties, determine
the need for and the nature of discovery and establish a procedural schedule for
the further conduct of the Proceeding.
4. Discovery.
4.1. Discovery, appropriately limited by the nature of the Dispute, is
expressly contemplated and permitted. However, the Parties acknowledge and agree
that one of the benefits of resolving Disputes through arbitration is the
opportunity reasonably to limit discovery. The Parties further agree that they
will endeavor to agree upon procedures and a schedule for discovery that will
result in a prompt and fair hearing under these procedures.
4.2. Discovery requests and responses need not be served upon the Panel
but the Panel shall promptly convene upon motion of either party to resolve
discovery disputes, if any.
4.3. Discovery will be completed within sixty days of the Pre-Hearing
Conference.
5. Submission of Evidence and Hearing.
5.1. The Panel may receive evidence in the form of written statements
filed prior to Hearing for cross-examination on such statements or may receive
oral testimony at Hearing. Each party shall be entitled to submit rebuttal
testimony. The Panel may also permit opening and closing statements of counsel
at Hearing.
5.2. The Panel shall convene for Hearing the evidence and argument of
the parties at a time and place to be established by the Panel. The Hearing
shall be held no later than thirty days after the close of discovery or thirty
days after the Pre-Hearing Conference if there is no discovery.
5.3. At the Hearing, and for all other purposes related to the
Proceeding, the Initiating Party shall be deemed the party seeking affirmative
relief, shall go first and shall bear the burdens of proof and of persuasion.
5.4. The Hearing shall be transcribed.
6. Post-Hearing Procedures.
21
<PAGE>
6.1. The Panel may request Post-Hearing briefs and, if it does so,
shall establish a schedule for submission of such briefs at the close of
Hearing.
6.2. Within thirty days of the later of the close of the Hearing or its
receipt of Post-Hearing briefs, the Panel shall issue a written Decision and
Award which shall include findings of fact and explain the reasons for the
Decision.
7. Confidentiality.
7.1. Unless otherwise agreed, the Proceeding and all information and
documents relating to it shall be kept confidential by the Parties, the Panel,
witnesses and all other persons involved with the Proceeding. Specifically, but
without limitation, the Confidential Information of the parties shall be
safeguarded and maintained as confidential by all participants in the
Proceeding.
8. Costs.
8.1. The Neutral Arbitrator's fees and expenses, and all expenses of
the Pre-Hearing Conference, Hearing or any other aspect of the Proceeding not
directly attributable to either party, such as the cost of transcription of
Panel Hearings and rental of Hearing rooms, shall be borne equally by the
parties.
8.2. The Panel shall in its Decision and Award determine whether and to
what extent either party is a prevailing party and entitled to an award of its
costs, including attorneys' fees.
9. Miscellaneous.
9.1. The parties may agree at any time to depart from these procedures,
including the time periods herein established. Although not favored, the Panel
may also permit departures from these procedures and time periods absent
agreement of the parties to prevent a miscarriage of justice.
9.2. Until the Neutral Arbitrator is appointed, any issue relating to
the Proceeding that is not provided for in these procedures shall be governed by
the Commercial Arbitration Rules of the American Arbitration Association. Once
the Neutral Arbitrator is appointed, the Panel is empowered to resolve all
issues not contemplated by these procedures and upon which the parties cannot
agree.
9.3. The Panel may grant any remedy or relief that it deems just and
equitable and within the scope of the agreement of the parties, including, but
not limited to, specific performance of a contract, injunctive relief or other
equitable relief.
22
<PAGE>
9.4. These procedures contemplate a two-party Proceeding. If there are
more than two parties to a Proceeding, and they are unable by unanimous
agreement to align themselves as two parties, each party shall be entitled to
all the rights of a party hereunder, including specifically but without
limitation the right to appoint a Party Designated Arbitrator, and the Neutral
Arbitrator shall have a number of votes as to all matters decided by the Panel
equal to the sum of (i) the votes of all Party Designated Arbitrators, and (ii)
one.
9.5. The Panel may, in its discretion, convene and act by conference
call for all purposes other than taking oral testimony.
Exhibit 10.7
February 1, 1997
Doctors Health System, Inc.
10451 Mill Run Circle, 10th Floor
Owings Mills, Maryland 21117
Attention: Stewart B. Gold, President
Dear Stewart:
My understanding is that Section 4(f)(ii) of the Amended and Restated
Stockholders Agreement among Doctors Health System, Inc. ("DHS") and the
stockholders of DHS (the "Stockholders Agreement") provides that, in the event
of my disability, I may require DHS to purchase my shares of DHS Common Stock
in the event that the other stockholders decline to purchase such stock. In
addition, it is my understanding that DHS may terminate my Employment Agreement
with DHS dated December 9, 1994, as amended from time to time (the "Employment
Agreement") in the event of a disability pursuant to Section 4.2 of the
Employment Agreement. By signing this letter, I agree to execute amendments to
the Stockholders Agreement and Employment Agreement in accordance with the
terms of this letter.
This letter will confirm my agreement that, effective as of February 1,
1997, in the event I become disabled (and not for any other reason), I waive my
right to require DHS to purchase any of my shares of DHS Common Stock of
whatever class, including shares issuable upon the exercise of stock options
(i) to the extent such purchase price would exceed the amount payable to DHS
pursuant to any disability insurance policy maintained by DHS to fund such
purchase right and/or (ii) to the extent any disability is not covered by such
disability insurance policy. You have agreed that the DHS will use its
commercially reasonable efforts to obtain the maximum amount of disability
insurance coverage to fund the stock repurchase right described in the
Stockholders Agreement.
<PAGE>
Doctors Health System, Inc.
February 1, 1997
Page 2
I have agreed to waive these rights in consideration that DHS shall amend
the Employment Agreement to provide that if my employment with DHS is
terminated due to a disability which is not covered by the applicable
disability insurance policy, DHS shall in such event provide me with a
severance benefit equal to my salary pursuant to the Employment Agreement, from
the date of termination of employment due to disability until the first
anniversary of expiration of the term of the Employment Agreement.
I understand that the arrangements described above shall terminate upon
the occurrence of a Change in Control as defined in the Stockholders Agreement.
Very truly yours,
Scott Rifkin
Agreed and Accepted as of
this 1st day of February, 1997
DOCTORS HEALTH SYSTEM, INC.
By: __________________________
Stewart B. Gold, President
Exhibit 10.8
PROMISSORY NOTE
Due May 14, 1998
$2,000,000 May 14, 1997
FOR VALUE RECEIVED, the undersigned, Doctors Health System,
Inc., a Maryland corporation (hereinafter called the "Company"), hereby promises
to pay to HBO & Company of Georgia, a Delaware Corporation (hereinafter called
the "Holder"), at its offices located at 301 Perimeter Center North, Atlanta,
Georgia 30346, or at such other place as the Holder may from time to time in
writing designate, on May 14, 1998 (the "Maturity Date") the principal sum of
Two Million Dollars ($2,000,000), or so much thereof as may be advanced or
readvanced from time to time and remain outstanding, with interest payable on
the principal balance outstanding on any advance or readvance as set forth in
Section 2 hereof.
1. Repayment of Principal. The principal of this Note shall
be payable in full, in lawful money of the United States of America and in
immediately available funds without offset, on the Maturity Date.
2. Interest. All accrued interest on this Note shall be
deemed paid by the delivery of a Warrant on the Maturity Date. Such Warrant
shall entitle the Holder to purchase 60,000 shares of Class A Common Stock of
Doctors Health System, Inc. with an exercise price of $15.00 per share. The form
of Warrant is attached hereto as Schedule A.
3. Subordination. This Note is subordinated and subject in
right of payment to the payment, in accordance with the terms, of (1) any bank
or other institutional indebtedness of the Company or any successor or
replacement indebtedness (collectively, the "Senior Debt") and (2) the dividend,
redemption, and liquidation preferences of Beacon Group III Focus Value Fund as
holder of the Company's Series D Preferred Stock; provided, however, that
nothing herein shall be construed to impair the ability of the Company to pay to
the registered owner hereof any installments of principal or interest owing
hereunder so long as there shall not have occurred and be continuing a default
or similar event under the Senior Debt.
1
<PAGE>
4. Miscellaneous.
(a) This Promissory Note is issued in connection with the
Release Agreement dated May 14, 1997 by and among Doctors Health System, Inc.
and HBO & Company. This Promissory Note is subject to the terms of such Release
Agreement and is entered into in consideration of the mutual covenants and
agreement set forth in such Release Agreement.
(b) Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Note, and (in case of
loss, theft or destruction) of indemnity satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Note, if mutilated, the Company will
make and deliver a new Note of like tenor in the principal amount of this Note
then outstanding in lieu of this Note. Any Note so made and delivered shall be
dated as of the date to which interest shall have been paid on this Note.
(c) The terms of this Note shall be governed by and construed
in accordance with the laws of Maryland (but not including the choice of law
rules thereof).
(d) This Note shall not be valid or obligatory for any purpose
until authenticated by the execution hereof by the President or a Vice President
of the Company.
IN WITNESS WHEREOF, Doctors Health System, Inc., a Maryland
corporation, has caused this Note to be signed in its corporate name by its
President, by authority duly given, all as of the day and year first above
written.
DOCTORS HEALTH SYSTEM, INC.
By:
___________________________
Print Name: Stewart B. Gold
Title: President
2
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