PROXY STATEMENT/PROSPECTUS SUPPLEMENT
(TO THE PROSPECTUS DATED JANUARY 24, 1997)
30,377 SHARES
[DOCTORS HEALTH SYSTEM LOGO]
CLASS B COMMON STOCK
This Proxy Statement/Prospectus Supplement relates to the proposed merger
(the "Merger") of Medtrust Medical Group, Inc. ("Medtrust") into Doctors Health
of Virginia, Inc. ("Doctors Health Virginia"), a wholly-owned subsidiary of
Doctors Health System, Inc., a Maryland corporation ("Doctors Health" or the
"Company"). On the effective date of the Merger, 24,377 shares ("Share
Consideration") of the Class B Common Stock of Doctors Health, par value $.01
per share (the "Class B Common Stock") will be issued and $167,477.56 less any
applicable transaction expenses of Medtrust not reimbursed by Doctors Health
("Cash Consideration") will be paid to the Members of Medtrust in accordance
with the Conversion Ratio described in this Proxy Statement/Prospectus. The
maximum amount of such transaction expenses of Medtrust not reimbursed by
Doctors Health is $25,000. Doctors Health has agreed to pay $35,000 of
transaction expenses applicable to the Merger and the costs of mailing the Proxy
Statement/Prospectus Supplement. In addition, 6,000 shares of the Class B Common
Stock and $30,000 will be issued to certain members of the Medtrust Board of
Directors in consideration of certain services rendered as described in this
Proxy Statement/Prospectus Supplement. This Proxy Statement/Prospectus
Supplement is being provided to the Members of Medtrust (the "Members") in
connection with a Special Meeting at which they will vote on a proposal to
approve the Merger.
Doctors Health's principal executive office is located at 10451 Mill Run
Circle, Tenth Floor, Owings Mills, Maryland 21117, telephone number (410)
654-5800. Medtrust's principal executive office is located at 3251 Old Lee
Highway, Suite 510, Fairfax, Virginia 22030-1509, telephone number (703)
359-0414. The information presented in this Proxy Statement/Prospectus
Supplement concerning Doctors Health has been provided by Doctors Health, and
the information concerning Medtrust has been provided by Medtrust.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SUPPLEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER TO ANY PERSON TO EXCHANGE OR SELL, OR A SOLICITATION FROM
ANY PERSON OF AN OFFER TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS SUPPLEMENT, OR THE SOLICITATION OF A PROXY FROM ANY
PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS SUPPLEMENT
NOR ANY DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS
SUPPLEMENT RELATES SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
See "Risk Factors" on page S-4 for certain information that should be
considered by the Members.
The date of this Proxy Statement/Prospectus Supplement is January 24, 1997
and the approximate date on which it is being furnished to the Members is
January 30, 1997.
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TABLE OF CONTENTS
PROXY STATEMENT/PROSPECTUS SUPPLEMENT
<TABLE>
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PAGE
SUMMARY OF THE TRANSACTION............................................................................................ S-1
Parties to the Merger............................................................................................... S-1
The Merger; Effective Date.......................................................................................... S-1
The Conversion Ratio................................................................................................ S-1
Meeting of Members.................................................................................................. S-1
Record Date, Votes Required......................................................................................... S-2
Reasons for the Merger.............................................................................................. S-2
Recommendations of Medtrust Board and Approval by the Doctors Health Board.......................................... S-2
Dissenters' Rights.................................................................................................. S-2
Conditions to Consummation.......................................................................................... S-2
Business of Medtrust and Doctors Health Pending the Merger.......................................................... S-2
Termination......................................................................................................... S-3
Interests of Certain Persons in the Merger.......................................................................... S-3
Resale of Class B Common Stock...................................................................................... S-3
Certain Federal Income Tax Consequences of the Merger............................................................... S-3
Comparative Rights of Members of Medtrust and Holders of Class B Common Stock....................................... S-3
RISK FACTORS.......................................................................................................... S-4
Financial Performance of Medtrust and Doctors Health................................................................ S-4
Managed Care Contracting............................................................................................ S-4
Risk Factors set forth in the Prospectus dated January 24, 1997..................................................... S-4
PROPOSED MERGER OF MEDTRUST AND DOCTORS HEALTH VIRGINIA............................................................... S-4
General............................................................................................................. S-4
Background of the Merger............................................................................................ S-4
Reasons for the Merger.............................................................................................. S-5
Approval by the Doctors Health Board and Recommendation of the Medtrust Board....................................... S-6
Determination of Conversion Ratio................................................................................... S-8
Effective Date of the Merger........................................................................................ S-8
Exchange Procedure.................................................................................................. S-8
Business of Doctors Health and Medtrust Pending the Merger.......................................................... S-8
Conditions to Consummation of the Merger............................................................................ S-9
Amendment and Termination of the Merger Agreement................................................................... S-9
Accounting Treatment................................................................................................ S-9
Interests of Certain Persons in the Merger.......................................................................... S-9
Certain Federal Income Tax Consequences............................................................................. S-10
Operations of Doctors Health Virginia after the Effective Date...................................................... S-11
THE MERGER AGREEMENT.................................................................................................. S-11
Conditions to the Merger............................................................................................ S-11
Representations and Warranties...................................................................................... S-12
Conduct of Business Pending the Merger.............................................................................. S-12
Additional Agreements............................................................................................... S-13
Termination, Amendment and Waiver................................................................................... S-14
VOTING INFORMATION.................................................................................................... S-14
Proxy Solicitation.................................................................................................. S-14
Votes Required...................................................................................................... S-15
Dissenters' Rights.................................................................................................. S-15
BUSINESS OF DOCTORS HEALTH............................................................................................ S-15
BUSINESS OF MEDTRUST.................................................................................................. S-15
MEDTRUST SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.............................................................. S-17
MANAGEMENT OF MEDTRUST................................................................................................ S-17
COMPARATIVE RIGHTS OF MEMBERS OF MEDTRUST AND THE HOLDERS OF CLASS B
COMMON STOCK........................................................................................................ S-17
RESALE OF CLASS B COMMON STOCK........................................................................................ S-21
LEGAL MATTERS......................................................................................................... S-22
ANNEX A -- Plan and Agreement of Merger (excluding Exhibits and Schedules)
ANNEX B -- Form of Stockholders Agreement
</TABLE>
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TABLE OF CONTENTS
PROSPECTUS
<TABLE>
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PAGE
Available Information.................................................................................................. 2
Forward-Looking Statements............................................................................................. 2
Prospectus Summary..................................................................................................... 3
Glossary............................................................................................................... 5
Risk Factors........................................................................................................... 8
Use of Proceeds........................................................................................................ 16
Selected Consolidated Financial Data................................................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 18
Business............................................................................................................... 26
Management............................................................................................................. 50
Certain Transactions................................................................................................... 57
Principal Stockholders................................................................................................. 59
Description of Capital Stock........................................................................................... 61
Plan of Distribution................................................................................................... 67
Shares Eligible for Resale............................................................................................. 69
Legal Matters.......................................................................................................... 70
Experts................................................................................................................ 70
Financial Statements................................................................................................... F-1
</TABLE>
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SUMMARY OF THE TRANSACTION
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SUBJECT TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DATED JANUARY 24, 1997.
UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS HAVE THE MEANINGS ASSIGNED TO
THEM IN THE PROSPECTUS. SEE THE DEFINITIONS SET FORTH IN THE GLOSSARY TO THE
"PROSPECTUS."
PARTIES TO THE MERGER
DOCTORS HEALTH. Doctors Health is a Maryland corporation organized in 1994
to develop and consolidate individual and groups of internists, pediatricians
and family practitioners, specialist physicians, hospitals and other health care
providers into primary care-driven, comprehensive managed care health care
delivery networks. As of January 10, 1997, the Company had approximately 1,150
Network Physicians in six regional networks throughout the state of Maryland and
one regional network in Northern Virginia, including approximately 310 PCPs, 84
obstetrician/gynecologists, and 756 specialist physicians.
MEDTRUST. Medtrust is a Virginia non-stock membership corporation organized
in 1994 for the purpose of providing its member physician groups (the "Members")
with an appropriate vehicle for the joint marketing of medical services, the
achievement of cost savings through group purchasing and the development of a
quality marketing identity to attract managed care contracts for the benefit of
its Members. There are 213 group practices and proprietorships consisting of
nearly 450 physician providers in Northern Virginia, which are Members of
Medtrust.
DOCTORS HEALTH VIRGINIA. Doctors Health Virginia is a Virginia corporation
incorporated in 1996 for the purpose of consummating the Merger. Doctors Health
Virginia is a wholly-owned subsidiary of Doctors Health, and no other person or
entity owns capital stock of Doctors Health Virginia.
THE MERGER; EFFECTIVE DATE
Pursuant to the Plan and Agreement of Merger dated November 15, 1996 by and
among Medtrust, Doctors Health and Doctors Health Virginia, as amended (the
"Merger Agreement"), on the Effective Date, Medtrust will merge with and into
Doctors Health Virginia (the "Merger") at which time the separate corporate
existence of Medtrust will cease. A copy of the Merger Agreement is attached to
this Proxy Statement/Prospectus Supplement as Annex A and is incorporated herein
by reference.
The Merger is to become effective as soon as practicable after all
approvals and events required for the Merger (including the approval of the
Members) have occurred and all conditions precedent to the Merger have been
fulfilled or waived or on such other date on which Medtrust and Doctors Health
may agree (the "Effective Date"). It is expected that the Effective Date will
occur in the first calendar quarter of 1997.
THE CONVERSION RATIO
On the Effective Date of the Merger, each of the outstanding membership
interests of Medtrust will be converted into and represent the right to receive
the number of shares of Class B Common Stock and that amount of cash determined
by multiplying each of the Share Consideration and Cash Consideration by a
fraction, the numerator of which is the aggregate Initial Membership Fee paid by
the respective Member for such Member's Approved Physicians (as defined in the
Bylaws of Medtrust) and the denominator of which is the aggregate Initial
Membership Fees paid by all Members holding membership interests in Medtrust
(immediately prior to the Effective Date of the Merger) on behalf of their
Approved Physicians (the "Conversion Ratio").
By way of example, if the initial assessments paid by a Member professional
corporation on behalf of its three approved physicians totalled $6,000 and the
aggregate of the initial assessments paid by all Members was $463,150, such
Member would receive Class B Common Stock in an amount equal to the product of
(i) 24,377 (representing the shares available pursuant to the Merger) multiplied
by (ii) the fraction the numerator of which is 6,000 and the denominator of
which is 463,150. Pursuant to the terms of the Merger Agreement, fractional
shares are to be rounded to the next highest whole share. In addition, such
Member would receive cash in an amount equal to the product of (i) 167,477.56
(less any reduction for transaction expenses) multiplied by (ii) the fraction
the numerator of which is 6,000 and the denominator of which is 463,150. As a
result, the Member in this example would receive 316 shares of Class B Common
Stock, plus $2,169.63 in cash before any reduction for transaction expenses.
MEETING OF MEMBERS
This Proxy Statement/Prospectus Supplement is being provided to the Members
of Medtrust in connection with a Special Meeting of Members of Medtrust (the
"Special Meeting"), which is to be held at the Holiday Inn, located at 1960
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Bridge Road, McLean, Virginia 22102. Notice of the Special Meeting is being
delivered together with this Proxy Statement/Prospectus Supplement. The purpose
of the Special Meeting will be to consider and vote on a proposal to approve,
ratify and confirm the Merger Agreement, the Merger and related transactions.
RECORD DATE; VOTES REQUIRED
Only Members of record at the close of business on January 29, 1997, will
be entitled to notice of the Special Meeting. Only Members of record at the
close of business on February 27, 1997 will be entitled to vote at the Special
Meeting or any adjournments or postponements thereof. Each Member is entitled to
that number of votes equal to the number of approved physicians credentialled by
Medtrust and employed by such Member.
The presence in person or by properly executed proxy, of the Members
holding a majority of the votes entitled to be cast is necessary to constitute a
quorum at the Special Meeting. The directors of Medtrust have passed a
resolution declaring the Merger advisable and unanimously recommending that the
Members vote to approve, ratify and confirm the Merger Agreement and the Merger.
As of the date of the notice, the directors and executive officers of Medtrust
are affiliated with Members which hold an aggregate of 39 votes, or 8.7% of the
votes entitled to be cast at the Special Meeting. The executive officers and
directors of Medtrust do not directly own any membership interests.
An affirmative vote of more than two-thirds of the issued and outstanding
votes entitled to be cast is required to approve, ratify and confirm the Merger
Agreement and the Merger.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE MEDTRUST BOARD AND APPROVAL BY
THE DOCTORS HEALTH BOARD
The Medtrust Board of Directors believes that the Merger Agreement and the
Merger are advisable, fair to, and in the best interests of Medtrust and the
Members. In considering the terms and conditions of the Merger, the Medtrust
Board considered its financial terms, in particular that the Conversion Ratio
provides the Members with an opportunity to receive partial reimbursement for
their initial membership investment and to have an opportunity for capital
appreciation and liquidity through an investment in Class B Common Stock. Among
other things, the Medtrust Board also considered the benefits of introducing its
members to a larger corporation in a broader geographic area; the increased
access to capital to fund risk-based contracts and to enable its Members to have
access to necessary information systems and the history and business strategy of
Doctors Health. See "Proposed Merger of Doctors Health and
Medtrust -- Background of the Merger," " -- Reasons for the Merger";
" -- Recommendations of the Medtrust Board and Approval by the Doctors Health
Board". THE MEDTRUST BOARD UNANIMOUSLY RECOMMENDS THAT THE MEMBERS VOTE TO
APPROVE, RATIFY AND CONFIRM THE MERGER AGREEMENT AND THE MERGER PROVIDED FOR
THEREIN.
DISSENTERS' RIGHTS
The holders of membership interests of Medtrust who vote against the Merger
will not receive appraisal rights or be entitled to payment of cash (other than
the Cash Consideration) for the fair value of their membership interests under
the Virginia Nonstock Corporation Act.
CONDITIONS TO CONSUMMATION
Consummation of the Merger is subject to certain conditions, including but
not limited to (i) the execution by at least 30 primary care physicians who are
affiliated with Members of Medtrust of exclusive Independent Physician
Association agreements with Doctors Health; (ii) the effectiveness of the
Registration Statement of which this Proxy Statement/Prospectus Supplement is a
part; and (iii) Members holding more than twenty percent of the membership
interests of Medtrust shall not have voted against the consummation of the
Merger at the Special Meeting. See "Proposed Merger of Medtrust and Doctors
Health Virginia -- Conditions to Consummation of the Merger" and "The Merger
Agreement -- Conditions to the Merger."
BUSINESS OF MEDTRUST AND DOCTORS HEALTH PENDING THE MERGER
Medtrust has agreed to conduct its business prior to the Effective Date
only in the ordinary course of business. Medtrust and Doctors Health have each
agreed to give the other party and its representatives reasonable access
throughout the period prior to the Effective Date to their respective books and
records. Effective on November 1, 1996, Medtrust and Doctors Health entered into
a Network Contracting and Management Services Agreement (the "Management
Agreement") pursuant to which Medtrust appointed Doctors Health as Medtrust's
exclusive and preferred provider of managed care contracting services including
the right to negotiate managed care contracts on behalf of Medtrust with any
Payor. In addition, Doctors Health has agreed to pay substantially all of the
operating expenses of Medtrust from November 1, 1996 to the Effective Date
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<PAGE>
and certain executive salaries from November 15, 1996 to the Effective Date. See
"Proposed Merger of Medtrust and Doctors Health Virginia -- Business of Doctors
Health and Medtrust Pending the Merger."
TERMINATION
The Merger Agreement may be terminated by either Medtrust or Doctors Health
if the Merger is not consummated by March 31, 1997 through no fault of the party
seeking to terminate. Medtrust or Doctors Health may terminate the Merger
Agreement prior to March 31, 1997 if any other party commits a material
misrepresentation, materially breaches a covenant or warranty, or materially
fails to perform its obligations under the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Two officers and directors of Medtrust, Norman Marcus, M.D. and Roger
Wiederhorn, M.D., will enter into employment agreements with Doctors Health upon
the consummation of the Merger. These employment agreements provide for
employment for a term of three years. In addition, at closing these two officers
and directors of Medtrust, together with Donald Colvin, M.D., Beal Lowen, M.D.,
Samuel Shor, M.D., and Ronald Bortnick, M.D., will be entitled to a pro rata
portion of 6,000 shares of Class B Common Stock and $30,000 in cash to be
divided among them in consideration of the extensive time which they have
committed to the Merger negotiations, which compensation the Medtrust Board of
Directors has determined to be fair and reasonable. See "Proposed Merger of
Doctors Health and Medtrust -- Interests of Certain Persons in the Merger."
RESALE OF CLASS B COMMON STOCK
The shares of Class B Common Stock offered to the Members by this Proxy
Statement/Prospectus Supplement have been registered under the Securities Act.
The shares will be subject to the Stockholders Agreement attached hereto as
Annex B and, therefore, will not be freely transferable. In addition, under the
Securities Act certain additional restrictions on transfer apply to resale of
shares of the Class B Common Stock received by "affiliates" of Medtrust or
Doctors Health. There is no public market for the Class B Common Stock. See
"Resale of Class B Common Stock."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is intended that the Merger will qualify as a tax-free reorganization
for federal income tax purposes. Accordingly, (except for cash and shares of
Class B Common Stock received for services rendered by certain Medtrust Board
Members) (i) Members will not recognize taxable income or loss upon the receipt
of shares of Class B Common Stock in exchange for their Medtrust Member's
Interest by reason of the Merger, and (ii) Medtrust will not recognize taxable
income or loss by reason of the Merger. Although not a condition to the
consummation of the Merger, counsel to Medtrust has provided an opinion as to
(i) and (ii) above.Members are urged to consult their own tax advisors as to the
specific tax consequences to them of the Merger. See "Proposed Merger of
Medtrust and Doctors Health -- Certain Federal Income Tax Consequences."
COMPARATIVE RIGHTS OF MEMBERS OF MEDTRUST AND HOLDERS OF CLASS B COMMON STOCK
The rights of Members under the Medtrust Articles of Incorporation, and
Bylaws and under the Virginia Nonstock Corporation Act differ considerably from
the rights of holders of Class B Common Stock under the Doctors Health Articles
of Incorporation and Bylaws and under the Maryland General Corporation Law. See
"Comparative Rights of Members of Medtrust and the Holders of Class B Common
Stock."
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RISK FACTORS
FINANCIAL PERFORMANCE OF MEDTRUST AND DOCTORS HEALTH
Doctors Health negotiated the Share Consideration and Cash Consideration on
the basis of the presence of Medtrust's Members in a desirable geographic market
into which Doctors Health intends to expand. After the Effective Date, Doctors
Health will recruit primary care physicians to join an IPA and a Core Medical
Group in Northern Virginia. There can be no assurance that after the Effective
Date of the Merger, such recruitment will be successful, that Medtrust's
Pre-Merger relationships with its members will be beneficial to Doctors Health
and Doctors Health Virginia, that Doctors Health will be able to successfully
develop an integrated health care delivery network in Northern Virginia, or that
Doctors Health can successfully integrate Medtrust physicians into Global
Capitated Contracts. See the sections in the Prospectus "Risk Factors --
Uncertainty of Strategy; Acquisition Risks," " -- Integration of Operations,"
and " -- Dependence of the Company on Core Medical Groups and IPAs."
Doctors Health has a limited operating history and for the fiscal year
ended June 30, 1996 and the three months ended September 30, 1996, recorded a
net loss of approximately $6.6 million and $2.8 million, respectively. Doctors
Health is likely to record a net loss for the fiscal year ending June 30, 1997.
There can be no assurance that after the Effective Date Doctors Health will earn
operating profits.
MANAGED CARE CONTRACTING
Doctors Health does not currently have any Global Capitated Contracts with
HMOs covering patients in the state of Virginia. Doctors Health expects to
implement a Global Capitated Contract with an affiliate of Blue Cross-Blue
Shield by June 1997, pursuant to which the Company's PCPs will provide medical
services to Medicare patients in Virginia on a global capitated basis, and to
enter into a Global Capitated Contract with United Healthcare Health Plan for
commercially insured enrollees by March 1997. However, there can be no assurance
that Doctors Health will successfully implement the foregoing arrangements. See
"Risk Factors -- Dependence on Managed Care Contracts" and " -- Enrollment in
Medicare Managed Care Plans."
RISK FACTORS SET FORTH IN THE PROSPECTUS DATED JANUARY 24, 1997
The Risk Factors set forth in the Prospectus are incorporated herein by
reference and should be read carefully by the Members.
PROPOSED MERGER OF MEDTRUST AND DOCTORS HEALTH VIRGINIA
The following description of the Merger does not purport to be complete and
is qualified in its entirety by reference to the Merger Agreement, a copy of
which is attached to this Proxy Statement/Prospectus Supplement as Annex A and
is incorporated herein. Medtrust Members are urged to read the Merger Agreement
in its entirety.
GENERAL
On the Effective Date of the Merger, Medtrust will merge with and into
Doctors Health Virginia, and Doctors Health Virginia will conduct its business
pursuant to the Doctors Health Virginia Articles of Incorporation and Bylaws as
in effect immediately before the Effective Date. The separate existence of
Medtrust shall cease, and Doctors Health of Virginia shall conduct business as a
wholly-owned subsidiary of Doctors Health. Each membership interest of Medtrust
outstanding immediately prior to the Effective Date will, without any action of
the holder thereof, be canceled and converted into the number of shares of Class
B Common Stock which results after multiplication of the Conversion Ratio. No
cash will be paid in lieu of fractional shares, but all fractional shares will
be rounded up to the next highest whole share.
BACKGROUND OF THE MERGER
The health care industry is undergoing rapid evolution, including the
consolidation of individual medical practices into larger medical groups and
independent practice associations as well as radical changes in the way
physicians are compensated for the delivery of medical services.
In Baltimore, Maryland, Washington, D.C., Northern Virginia and surrounding
regions, physicians have increasingly become affiliated with managed care and
medical management companies such as Doctors Health which provide physicians
with certain administrative, billing, bookkeeping and budgeting services.
Companies such as Doctors Health also provide the
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physician with access to Managed Care contracts and necessary tools to perform
such contracts, including state of the art disease management protocols, care
management, referral management and utilization review services. In this
environment, Doctors Health has been entering into contractual and equity
ownership relationships with primary care physicians, specialists and other
health care providers in order to develop an Integrated Health Care Delivery
System that focuses on managed care. At the same time, Medtrust has been seeking
to develop managed care contracts that provide its member primary care
physicians and specialists with access to Managed Care contracts with HMOs and
other Payors which pay its Members on a capitated or other risk basis.
Against this backdrop, Doctors Health and the Board of Medtrust
independently reached the conclusion that developing alliances with additional
provider groups and companies focusing on the efficient delivery of health care
would enhance their abilities to respond to changing conditions in the health
care industry.
In February of 1996, Dr. Norman Marcus, the President and Chairman of the
Board of Medtrust, Stewart B. Gold, President of Doctors Health and Dr. Scott
Rifkin, Chairman of the Board of Doctors Health, met to discuss various
strategic options, including mergers, acquisitions, strategic business
combinations and management arrangements. The parties continued discussion of
possible options and in February, Medtrust retained a law firm, Kaufman &
Canoles to provide legal advice concerning permissible transactions. Members of
Doctors Health's management conducted initial evaluations of the feasibility of
developing a relationship with Medtrust for the purpose of negotiating IPA or
Core Medical group transactions with the members and discussed potential
arrangements with the Board of Directors of Doctors Health, beginning in March,
1996.
In March 1996, Dr. Rifkin and Mr. Gold met with Dr. Marcus to enable Dr.
Marcus to explain the discussions to the Medtrust Executive Committee. During a
subsequent meeting of the Executive Committee, the Executive Committee
authorized its representatives to continue negotiations with Doctors Health.
During April 1996, Dr. Marcus and representatives of Doctors Health
developed a draft term sheet and presented such draft term sheet to the Medtrust
Board in April 1996. In May the Medtrust Board approved the execution and
delivery of a letter of intent. The Doctors Health Board of Directors approved
the letter of intent on May 24, 1996.
During the summer of 1996, negotiations regarding the form of the
transaction continued at a slow pace pending the efforts of Doctors Health to
register shares of its Class B Common Stock for issuance to the Medtrust Members
among others. In July and August representatives of Doctors Health and Medtrust
met to discuss the legal structure of the transaction and decided that Doctors
Health would enter into a network contracting and service agreement to allow
Doctors Health to become the exclusive managed care contracting representative
for Medtrust pending consummation of the Merger. During the summer, due
diligence activities continued including meetings to evaluate the feasibility of
developing a Core Medical Group in northern Virginia and an Exclusive IPA.
In October and November representatives of Doctors Health and Medtrust
drafted the Merger Agreement, the Management Agreement, and employment
agreements for Dr. Marcus and Dr. Wiederhorn. On November 19, 1996, the Medtrust
Board approved the merger and authorized Dr. Marcus to enter into the Merger
Agreement and related documents. On November 19, 1996, representatives of
Doctors Health and Medtrust executed the Merger Agreement to be effective as of
November 15, 1996, and the Management Agreement. Representatives of Doctors
Health and Medtrust then jointly developed a press release.
REASONS FOR THE MERGER
As part of its business strategy, Doctors Health seeks to negotiate Global
Capitated Contracts by, among other things, providing Payors with established
health care delivery networks capable of providing for the delivery of medical
care to Enrollees of the HMO or other Payor. In order to accomplish this
strategy, Doctors Health seeks to establish networks throughout the Baltimore
and Washington metropolitan area, Northern Virginia and surrounding regions.
Medtrust created a non-stock membership organization of approximately 123 PCPs
and 326 specialist and hospital based physicians and obtained fee-for-service
medical insurance contracts with payors, workers compensation and other vendor
contracts on behalf of the Members. Doctors Health would like to recruit
substantial numbers of the Medtrust PCPs to exclusive IPA arrangements, or
membership in a Core Medical Group. In addition, Doctors Health desires to
develop and maintain non-exclusive managed care contracting relationships with
the other Medtrust physicians.
For Doctors Health, Medtrust represents an opportunity to implement its
business plan in a market where it does not currently operate, and to earn
revenues through inclusion of Medtrust physicians in Doctors Health's Managed
Care contracts.
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For Medtrust, the Merger represents the opportunity to give its members the
opportunity to develop long-term contractual relationships with a larger entity
with more substantial financial resources than those of Medtrust. In addition,
Medtrust believes Doctors Health has established attractive practice management
services for physicians in addition to providing access to more lucrative,
Managed Care contracts. Such practice management and managed care services
include billing, bookkeeping, administrative and related services as well as
care management, utilization review and referral management services necessary
to manage the medical care of the Enrollees of the HMOs and other Payors who
contract with Doctors Health. Although Medtrust could continue to exist as an
independent IPA, it would need to conduct a substantial reorganization and
attract considerable equity or debt financing to build an infrastructure capable
of providing the services performed by Doctors Health. The Merger represents a
more immediate means to enable the Members to compete in the rapidly changing
health care industry.
APPROVAL BY THE DOCTORS HEALTH BOARD AND RECOMMENDATION OF THE MEDTRUST BOARD
DOCTORS HEALTH
For the reasons described below, the Doctors Health Board has unanimously
approved the Merger.
Doctors Health continuously analyzes potential acquisition candidates in
Maryland, the District of Columbia and Virginia. The Doctors Health Board of
Directors believes that the Merger is fair to and in the best interests of
Doctors Health for the reasons described below. Accordingly, the Doctors Health
Board of Directors has approved the Merger Agreement and the Merger.
The Doctors Health Board of Directors consulted with Doctors Health
management and legal counsel. It considered the following factors to be material
to and in support of its final determination:
(i) The Merger is expected to enable Doctors Health to take advantage
of Medtrust's existing goodwill, infrastructure and leadership in the
Northern Virginia market in order to establish an Integrated Health Care
Delivery System in Northern Virginia. Such expansion of Doctors Health's
existing network is expected to enhance Doctors Health's ability to win new
Payor contracts and to attract additional Enrollees.
(ii) The Merger and the efforts of Doctors Health to establish a
Northern Virginia Integrated Health Care Delivery System are expected to
substantially increase Doctors Health's size in terms of revenues, profits,
physicians and locations which is expected to enhance Doctors Health's
reputation in the Mid-Atlantic region, making it easier to attract and
retain new physicians and win new Payor contracts.
(iii) The Merger is expected to create in Doctors Health Virginia a
company with a number of anticipated strengths, including the opportunity
to develop new patient care programs in markets not currently served by
Doctors Health and to develop additional strategies to promote higher
quality health care.
(iv) The Merger is expected to be treated as a tax-free
reorganization.
In addition to the foregoing, the Doctors Health Board of Directors
generally considered those matters discussed under "RISK FACTORS," which
included risks associated with expansion into Northern Virginia in the absence
of Global Capitated Contracts with HMOs covering patients in Northern Virginia.
The Board also considered the difficulty of establishing a network in a region
outside of its initial markets in Baltimore City, Baltimore County and
surrounding areas. The Board of Doctors Health concluded that the risks did not
outweigh the advantages of the Merger and that the Merger was in the best
interests of Doctors Health and its stockholders.
MEDTRUST
THE BOARD OF DIRECTORS OF MEDTRUST HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, AND RECOMMENDS A VOTE FOR THE MERGER. MEDTRUST'S BOARD OF DIRECTORS
BELIEVES THE MERGER IS FAIR AND IN THE BEST INTERESTS OF THE MEDTRUST MEMBERS.
The material factors considered by the Medtrust Board of Directors in
reaching its conclusion to approve and recommend the Merger Agreement are as
follows:
(i) The Medtrust Board of Directors observed the rapid changes in the
health care industry including the continued consolidation, increasing
competition and expansion of the prepaid segment of the health care
industry. The Board recognized that medical practices affiliated with
entities similar in size and resources to Medtrust were unable to achieve
Global Capitated Contracts from HMOs and other payors. Based upon this
review, the Medtrust Board determined that
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the Merger with Doctors Health Virginia would better position the Members
of Medtrust because of Doctors Health's size, geographic scope and
expertise to more effectively participate in managed care programs and to
more profitably operate in the rapidly changing health care industry.
Further, Doctors Health's access to capital would enable Medtrust Members
to provide medical care under Global Capitated Contracts.
(ii) The Medtrust Board's review of information concerning Doctors
Health's business, prospects, historical financial performance and
financial condition. Based on these factors, Medtrust's Board determined
that the consideration to be received by the Members of Medtrust in the
Merger reflected an appropriate percentage ownership of Class B Common
Stock immediately following consummation of the Merger and that the Merger
presented an attractive growth opportunity for the Members of Medtrust that
could not be achieved as quickly, if at all, if the Members were to rely on
any services that could be provided by Medtrust.
(iii) The Medtrust Board of Directors' review of the terms of the
Merger, including the agreement of Doctors Health to give specialist and
primary care Members of Medtrust the opportunity to participate in any
Integrated Health Care Delivery System established in Northern Virginia.
(iv) The expectation that exchange of the Member Interests for the
Class B Common Stock would be treated as a tax-free reorganization under
the Internal Revenue Code.
In addition to the factors described under "RISK FACTORS," the potentially
negative factors the Medtrust Board of Directors considered in connection with
its deliberation regarding the Merger were as follows:
(i) The fact that there is no current market for the Class B Common
Stock and there can be no assurance that Doctors Health's Common Stock will
be listed on an exchange or other public market or that a trading market
will develop for the Common Stock.
(ii) Doctors Health does not have any Global Capitated Contracts
covering medical care in Northern Virginia.
(iii) The risk that despite the efforts of both Doctors Health and
Medtrust, key Members may not participate in Doctors Health's Core Medical
Groups or IPAs subsequent to the Merger. The Medtrust Board of Directors
believed this risk was mitigated by the expertise of Doctors Health
management and by the condition to closing that certain Directors of
Medtrust would serve as Directors of Doctors Health Virginia.
The Medtrust Board of Directors developed the Conversion Ratio and
determined that the Share Consideration, Cash Consideration and Conversion Ratio
were fair and in the best interests of the Members. The Medtrust Board
determined that the most appropriate method of allocating the Share
Consideration and Cash Consideration was to distribute such consideration on a
pro rata basis taking into account the Members' initial membership fees even
though the Members had been promised and expected no return of their initiation
fees and annual dues upon joining Medtrust. Thus, the Board determined that the
Conversion Ratio should consist of a fraction the numerator of which is the
Members' initial membership fee and the denominator of which is the total
initial membership fees paid by all Members and concluded that this formula was
fair to the Members.
In considering whether the Merger was in the best interests of the Medtrust
Members, the Medtrust Board concluded that any compensation to be paid to
certain directors and officers of Medtrust was fair and reasonable in light of
the time and resources committed by these individuals in analyzing and
negotiating the transactions and that such compensation would not materially
decrease the Merger consideration paid to the Members. In addition, the Medtrust
Members believed that the Merger would have no material adverse effects on any
Medtrust Members. For a discussion of the Medtrust Board of Directors' analysis
of the interests of certain persons in the Merger, including its chairman, Dr.
Norman Marcus, see "Proposed Merger of Medtrust and Doctors Health
Virginia -- Interests of Certain Persons in the Merger."
The foregoing discussion of the information and factors considered is not
intended to be exhaustive, but it does include all material factors considered
by the Medtrust Board of Directors. In view of the wide variety of information
and factors, both positive and negative, considered by the Medtrust Board, the
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors considered and individual Directors may
have given differing weights to different factors.
The Medtrust Board of Directors did not seek or obtain a fairness opinion
from an independent party and determined that such assistance was not necessary
in its evaluation of the Merger. After taking into consideration all of the
factors set forth above including (i) Doctors Health's financial condition and
prospects, (ii) the rapid changes in the health care industry, and (iii) the
amount of the Merger consideration and additional business transactions that may
be entered into between
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Doctors Health and individual Members after consummation of the Merger, the
Board of Directors of Medtrust determined that the Merger was fair to and in the
best interests of the Members. Moreover, the Medtrust Board determined that
Medtrust should proceed with the Merger at this time.
THE MEDTRUST BOARD BELIEVES THAT THE MERGER AGREEMENT AND THE MERGER ARE
ADVISABLE, ARE FAIR TO, AND IN THE BEST INTERESTS OF MEDTRUST AND THE MEMBERS.
THE MEDTRUST BOARD UNAINMOUSLY RECOMMENDS THAT THE MEMBERS VOTE TO APPROVE,
RATIFY AND CONFIRM THE MERGER AGREEMENT AND THE MERGER PROVIDED FOR THEREIN.
DETERMINATION OF THE CONVERSION RATIO
Each Member's interest shall be converted into a percentage of the Share
Consideration and Cash Consideration to be issued in the Merger equal to a
fraction, the numerator of which is the aggregate initial membership fee paid by
the Member for its approved physicians credentialled by Medtrust and the
denominator of which is the aggregate initial membership fees paid by all
Members then holding Membership interests on behalf of their approved physicians
credentialled by Medtrust. Dues and assessments paid in support of ongoing
operations of Medtrust are excluded from the determination of the Conversion
Ratio. All fractional shares produced using this conversion factor are to be
rounded to the next highest whole share and no fractional shares are to be
issued.
EFFECTIVE DATE OF THE MERGER
The Effective Date of the Merger Agreement and the Merger shall be as soon
as practicable following the satisfaction or waiver of all of the conditions to
closing. Medtrust and Doctors Health may agree that the Effective Date will
occur on another date. On the Effective Date, Doctors Health and Medtrust will
prepare and execute appropriate Articles of Merger, and will file them with the
Virginia Corporation Commission.
EXCHANGE PROCEDURE
Membership interests will be automatically cancelled upon consummation of
the Merger without further act or submission or documentation by the Members. As
soon as practicable following the Effective Date, Doctors Health will deliver a
form of Letter of Transmittal to each Member. Each Member shall be required to
sign and return the Letter of Transmittal to Kaufman & Canoles. Certificates for
the Share Consideration and checks for the Cash Consideration shall be delivered
at the Closing to Kaufman & Canoles, as counsel for Medtrust. Kaufman & Canoles
shall deliver the respective certificates together with checks for the Cash
Consideration promptly to the address of record of each Medtrust Member upon
receipt of the Letter of Transmittal.
BUSINESS OF DOCTORS HEALTH AND MEDTRUST PENDING THE MERGER
Pursuant to the Merger Agreement, each of Medtrust and Doctors Health has
made certain covenants relating to the conduct of business pending consummation
of the Merger. Among other things, Medtrust has agreed (except as otherwise
contemplated by the Merger Agreement or with the written consent of Doctors
Health) not to: (i) conduct its business other than in the ordinary and unsual
course; (ii) pay dividends; or (iii) increase any salaries or employee benefits,
except for certain increases in the ordinary course of business and certain
changes required by law or to satisfy pre-existing contractual obligations.
On November 15, 1996, Medtrust and Doctors Health entered into the
Management Agreement pursuant to which Doctors Health provides certain
management, administrative and support services to Medtrust and Medtrust has
designated Doctors Health as its exclusive and preferred provider of Managed
Care contracts. In particular, Doctors Health has agreed to administer
Medtrust's quality assurance; and utilization management programs, provide third
party administration, collection and coordination of benefit services. The
Management Agreement also provides that Doctors Health will reimburse Medtrust
for its operating expenses commencing on November 1, 1996 and will reimburse
Medtrust for the base salaries and corporate payroll taxes of Drs. Marcus and
Wiederhorn at the rate of $100,000 and $36,650 per year, respectively,
commencing November 15, 1996.
The Management Agreement provides that Medtrust must implement procedures
to comply with regulatory requirements to recruit PCPs to enter into Exclusive
Participation Agreements or become employees of Core Medical Groups affiliated
with Doctors Health, and to assist Doctors Health in the development of a
Medtrust network of participating physicians and other health care providers.
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CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is conditioned upon the following: (a) the
approval of the Members of Medtrust holding more than two-thirds of the issued
and outstanding membership interests of Medtrust, (b) no proceedings shall be
pending before any court or governmental authority which seeks to challenge or
prevent the Merger, and (c) all consents from third parties necessary to
consummate the Merger shall have been obtained.
The obligations of Doctors Health and Doctors Health of Virginia to
consummate the Merger are further conditioned upon the following conditions: (a)
the representations and warranties of Medtrust shall be true in all material
respects as of the Closing Date and Medtrust shall, in all material respects,
have performed and complied with all agreements and conditions required by the
Merger Agreement to be performed or complied with by Medtrust; (b) there shall
not have been any materially adverse change in the business or financial
condition of Medtrust not disclosed in the Financial Statements of Medtrust; (c)
counsel to Medtrust shall have delivered to Doctors Health and Doctors Health of
Virginia an opinion in a form reasonably acceptable to Doctors Health and
Doctors Health of Virginia; (d) all legal matters and the form and substance of
all documents to be delivered by Medtrust to Doctors Health shall have been
approved by and shall be satisfactory to counsel to Doctors Health; (e) at least
30 primary care physicians affiliated with Medtrust shall have executed and
delivered Exclusive Participation Agreements, provided that each such primary
care physician is capable of being credentialed and included in Doctors Health's
managed care payor contracts; (f) Members holding no more than twenty percent of
the Membership interests of Medtrust shall have objected to the consummation of
the Merger at the Special Meeting; and (g) the issuance of Doctors Health Common
Stock to Medtrust Members shall have been approved by the Virginia State
Corporation Commission.
The obligations of Medtrust to consummate the Merger are further
conditioned upon the following conditions: (a) the representations and
warranties of Doctors Health shall be true in all material respects as of the
Closing Date, and Doctors Health shall, in all material respects, have performed
and complied with all agreements and conditions required by the Merger Agreement
to be performed or complied with by them; (b) there shall not have been any
materially adverse change in the business or financial condition of Doctors
Health from that disclosed on the Doctors Health's Balance Sheet for the period
from the date of the Doctors Health Balance Sheet to the Closing Date; (c)
counsel for Doctors Health shall have delivered to Medtrust an opinion in a form
reasonably acceptable to Doctors Health and Medtrust; (d) all legal matters, and
the form and substance of all documents to be delivered by Doctors Health to
Medtrust shall have been approved by and shall be reasonably satisfactory to
counsel to Medtrust; (e) at or before the Effective Time the Registration
Statement shall have been declared effective by the Commission and be effective
on the Closing Date, and all applicable approvals of governmental or regulatory
authorities required to consummate the Merger shall have been obtained; and (f)
the issue price of Class B Common Stock from the date of the Merger Agreement to
the Effective Date issued in physician acquisition transactions shall have been
based upon a price of not less than fifteen dollars ($15.00) per share.
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be amended by mutual agreement of the parties.
The Merger Agreement may be terminated and abandoned by mutual consent of
Doctors Health and Medtrust, or by Doctors Health and Medtrust if the other
party commits an uncured material breach of any representation, warranty,
covenant or agreement contained in the Merger Agreement.
Furthermore, the Merger Agreement may be terminated by Doctors Health or
Medtrust if the Merger is not consummated by March 31, 1997 through no fault of
the party seeking to terminate the Merger Agreement.
In the event of the termination of the Merger Agreement by either Doctors
Health or Medtrust, the Merger Agreement shall thereafter become void and there
shall be no liability on the part of Doctors Health or Medtrust, their
respective officers or directors, except that any such termination shall be
without prejudice to the rights of Doctors Health or Medtrust arising out of the
willful breach of the other party of any covenant or any misrepresentation
contained in the Merger Agreement.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase transaction for financial
reporting purposes under APB 16.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In connection with the Merger Agreement, Doctors Health has entered into
employment agreements with each of Norman Marcus and Roger Wiederhorn (the
"Employment Agreement"). Under these Employment Agreements, Dr. Marcus will
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serve as Vice President of Network Development of Doctors Health for an annual
compensation of $100,000 and Dr. Wiederhorn is to serve as Regional Vice
President for an annual compensation of $36,650. The effectiveness of each
Employment Agreement is conditioned upon completion of the Merger. The term of
each Employment Agreement is three years, commencing on the Effective Date of
the Merger.
Pursuant to these employment agreements, each of the executives has agreed
to maintain the confidentiality of certain information pertaining to the
businesses of Doctors Health. The employment agreements contain certain
non-competition provisions in the event the executive's employment is terminated
during its term by Doctors Health or the executive without cause. For one year
after such termination, each executive has agreed not to accept employment from
an integrated health care delivery system in Northern Virginia which engages in
the business conducted by Doctors Health. In connection with their employment,
the executives shall be entitled to bonuses and other benefits provided to
similarly situated employees of Doctors Health.
Pursuant to the Management Agreement between Doctors Health and Medtrust,
Doctors Health has agreed to reimburse Medtrust for the base salary and
corporate payroll taxes incurred by Medtrust with respect to Norman A. Marcus,
at a rate of $100,000 per year, and A. Roger Wiederhorn at a rate of $36,650 per
year.
Pursuant to the Merger Agreement, Doctors Health has agreed to provide
director and officer insurance to cover persons who will be directors and
officers of Doctors Health Virginia after the Effective Date. Such insurance
shall apply only to the acts of such directors and officers on behalf of Doctors
Health Virginia after the Effective Date.
Pursuant to the Merger Agreement, Doctors Health has agreed to deliver to
six directors of Medtrust (the "Negotiating Team") an aggregate consideration of
6,000 shares of DHS Class B Common Stock and $30,000 in cash to be distributed
ratably to the Negotiating Team members in consideration of their services in
conducting the negotiations which led to execution of the Merger Agreement and
consummation of the Merger. The members of the Negotiating Team are Norman A.
Marcus, A. Roger Wiederhorn, Donald Colvin, Beal Lower, Samuel Shor and Ronald
Bortnick.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material federal income tax consequences of
the Merger and the exchange by the Medtrust Members of their interest in
Medtrust for shares of Class B Common Stock has been prepared in accordance with
applicable disclosure regulations. Each Member's individual circumstances may
affect the tax consequences of the Merger to such Member. In addition, no
information is provided herein with respect to the tax consequences of the
Merger under applicable foreign, state or local laws. This discussion assumes
the Medtrust Members hold their Members' Interests as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"). ACCORDINGLY, EACH MEDTRUST MEMBER IS ADVISED TO CONSULT SUCH MEMBER'S
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
MEMBER.
In the opinion of Kaufman & Canoles, counsel to Medtrust, the Merger will
constitute a tax-free reorganization under Section 368(a) of the Code, and
Doctors Health, Doctors Health Virginia and Medtrust will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
In rendering such opinion, counsel has relied upon the facts that are
described herein, upon certain customary representations made by the management
of Medtrust and by the management of Doctors Health and upon certain
assumptions. Such opinion is also based upon the Code, regulations currently in
effect thereunder, current administrative rulings and practice by the Service,
and judicial authority, all of which are subject to change. Any such change
could affect the continuing validity of such opinion and this discussion. No
ruling has been sought from the Internal Revenue Service as to the federal
income tax consequences of the Merger, and the opinion of counsel is not binding
on the Internal Revenue Service or any court.
As a tax-free reorganization, the Merger will have the following federal
tax consequences for the Members and Medtrust (except for cash and shares of
Class B Common Stock received for services rendered by certain Medtrust Board
Members):
(i) No gain or loss will be recognized by Medtrust as a result of the
Merger;
(ii) No gain or loss will be recognized by a Medtrust Member with respect
to shares of Class B Common Stock received from Doctors Health in exchange for
Medtrust Member Interests;
(iii) The tax basis of the shares of Class B Common Stock received by a
Medtrust Member will be equal to the aggregate tax basis of the Medtrust
Interests exchanged therefor; and
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(iv) The holding period of the shares of Class B Common Stock received by a
Medtrust Member will include the holding period or periods of the Medtrust
Member Interest exchanged therefor.
The foregoing discussion is intended only as a summary of the material
federal income tax consequences of the Merger and does not purport to be a
complete analysis or listing of all potential tax effects relevant to a decision
whether to vote in favor of approval and adoption of the Merger Agreement. The
discussion does not address the tax consequences arising under the laws of any
state, locality or foreign jurisdiction. Holders of Medtrust Member Interests
are urged to consult their own tax advisors concerning the federal, state, local
and foreign tax consequences of the Merger to them.
OPERATIONS OF DOCTORS HEALTH VIRGINIA AFTER THE EFFECTIVE DATE
After the Effective Date, Doctors Health Virginia will (i) seek to preserve
and enhance the relationships with primary care physicians and specialists
developed by Medtrust and (ii) develop an Integrated Health Care Delivery System
in Northern Virginia. Development of the health care system will include
recruiting PCPs, specialists and other health care providers to transfer certain
assets of medical practices to Doctors Health, enter into exclusive managed care
contracting arrangements or enter into other contractual arrangements for the
delivery of medical services under Doctors Health's Global Capitated
Contracts.
Pursuant to the Merger Agreement, Doctors Health has agreed to assist
Doctors Health Virginia in the development of a business plan for Northern
Virginia and agreed to use Doctors Health Virginia as its exclusive IPA in
Northern Virginia for at least five years after the Effective Date. In addition,
Doctors Health will create a Northern Virginia network of OB/GYN's who will
become affiliated with Doctors Health's Woman Care IPA of OB/GYN physicians, and
give Medtrust specialists a right of first refusal for four years after the
Effective Date to participate in Doctors Health's Managed Care contracts.
THE MERGER AGREEMENT
Set forth below is a summary of the material terms of the Merger Agreement.
The following description does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, a copy of which is attached
as Annex A to this Proxy Statement/Prospectus Supplement and is incorporated by
reference herein.
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the Merger are subject
to the fulfillment at or prior to the Effective Date of the following
conditions:
MEMBER APPROVAL. The Merger Agreement and the transactions contemplated
therein shall have been approved and adopted by at least two-thirds of the
Members.
NO LITIGATION. No legal, administrative, arbitral, investigatory or other
proceeding shall be pending or threatened that seeks to prevent the consummation
of the Merger or the transactions contemplated thereby or seeks a remedy at law
in connection therewith.
Unless waived by Medtrust, the obligations of Medtrust to effect the Merger
are subject to fulfillment at or prior to the Effective Date of the following
additional conditions:
OTHER CONSENTS. All third party consents required for the consummation of
the Merger and the transactions contemplated thereby shall have been obtained
and be in effect on the Effective Date.
PERFORMANCE OF OBLIGATIONS AND REPRESENTATIONS AND WARRANTIES OF DOCTORS
HEALTH. Doctors Health shall have performed in all material respects their
agreements contained in the Merger Agreement required to be performed on or
prior to the Effective Date and the representations and warranties of Doctors
Health contained in the Merger Agreement shall be true and correct in all
respects on and as of the date made and on and as of the Effective Date as if
made at and as of such date, and Medtrust shall have received a certificate of
the appropriate officers of Doctors Health.
LEGAL OPINION. Medtrust shall have received an opinion from Corporate
counsel to Doctors Health and Doctors Health Virginia, dated the Effective Date,
reasonably satisfactory to Medtrust's counsel and covering the due incorporation
of Doctors Health and Doctors Health Virginia, the binding nature of the Merger
Agreement, the effectiveness of the Merger, the validity of the Doctors Health
Common Stock to be issued in connection with the Merger and such other matters
as may be reasonably requested by Medtrust.
LEGAL MATTERS. All legal matters and documents delivered by Doctors Health
shall be satisfactory to counsel to Medtrust.
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NO MATERIAL ADVERSE CHANGES. After September 30, 1996, there shall have
been no changes that constitute, and no event or events shall have occurred
which have resulted in or constitute, a material adverse change in the business,
operations, properties, assets, condition (financial or other) or results of
operations of Doctors Health and its subsidiaries except as disclosed on the
Doctors Health Balance Sheet dated September 30, 1996.
THE REGISTRATION STATEMENT. The Registration Statement on Form S-1 shall
have become effective in accordance with the provisions of the Securities Act
and state blue sky laws, if applicable, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the Commission or any state
regulatory authorities.
Unless waived by Doctors Health and Doctors Health Virginia, the
obligations of Doctors Health and Doctors Health Virginia to effect the Merger
are subject to the fulfillment at or prior to the Effective Date of the
following additional conditions:
PERFORMANCE OF OBLIGATIONS AND REPRESENTATIONS AND WARRANTIES OF MEDTRUST.
Medtrust shall have performed in all material respects its agreements contained
in the Merger Agreement required to be performed on or prior to the Effective
Date and the representations and warranties of Medtrust contained in the Merger
Agreement shall be true and correct in all material respects on and as of the
date made and on and as of the Effective Date as if made at and as of such date
and Doctors Health shall have received a Certificate of the appropriate officer
of Medtrust to that effect.
LEGAL OPINION. Doctors Health shall have received an opinion from Kaufman &
Canoles, counsel to Medtrust, dated the Effective Date, reasonably satisfactory
to Doctors Health, and covering the due incorporation of Medtrust, the binding
nature of the Merger Agreement, the effectiveness of the Merger and such other
matters as may be reasonably requested by Doctors Health.
LEGAL MATTERS. All legal matters and documents delivered by Medtrust to
Doctors Health shall be satisfactory to counsel to Doctors Health.
NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business or financial condition of Medtrust from that disclosed in
the Doctors Health financial statements for the fiscal years ended June 30, 1995
and June 30, 1996.
ALLIANCE WITH PRIMARY CARE PHYSICIANS. At least thirty (30) primary care
physicians affiliated with Medtrust shall have executed and delivered Exclusive
Participation Agreements with Doctors Health, which shall become effective upon
consummation of the Merger.
DISSENTERS TO MERGER. Members holding no more than twenty percent of the
Membership interests of Medtrust shall have dissented to the consummation of the
Merger at the Special Meeting.
VIRGINIA BLUE SKY LAWS. The issuance of the Class B Common Stock to the
Members shall have been approved by the Virginia Stock Corporation Commission.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of Doctors Health, Doctors Health Virginia and Medtrust relating to, among
other things (i) organization and qualification to do business, (ii)
capitalization, (iii) subsidiaries, (iv) authority to enter into the Merger,
non-contravention of laws or governing documents and regulatory approvals, (v)
reports and financial statements, (vi) absence of undisclosed liabilities, (vii)
absence of certain changes or events, (viii) litigation, (ix) the Registration
Statement, (x) violations of law, (xi) compliance with agreements, (xii) taxes,
(xiii) employee benefit plans and ERISA matters, (xiv) title to assets, (xv)
insurance and (xvi) finders or brokers.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement and prior to the
Effective Date or earlier termination of the Merger Agreement, unless Doctors
Health shall otherwise agree in writing but subject to the Management Agreement
under which Doctors Health shall manage the affairs of Medtrust, Medtrust shall:
ORDINARY COURSE. Conduct its business in the ordinary and usual course of
business and consistent with past practice.
CHANGES IN CHARTER. Not (i) amend or propose to amend their respective
charter or by-laws, (ii) declare, set aside or pay any dividend or distribution
payable in cash, property or otherwise.
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OTHER CONDUCT. Not (i) incur any indebtedness other than borrowings in the
ordinary course of business, or (ii) make any new commitments for capital
expenditures exceeding Five Thousand Dollars per item or Ten Thousand Dollars in
the aggregate.
NO CHANGES IN COMPENSATION ARRANGEMENTS. Except in ordinary course of
business grant any increase in the compensation payable to any Medtrust
employees.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, Medtrust, Doctors Health and Doctors
Health Virginia have made the following additional agreements:
ACCESS TO INFORMATION. Medtrust shall afford to Doctors Health and Doctors
Health Virginia and their respective accountants, counsel, financial advisors
and other representatives and Doctors Health shall afford to Medtrust and its
accountants, counsel, financial advisors and other representatives reasonable
access during normal business hours throughout the period prior to the earlier
of the termination of the Merger Agreement or the Effective Date to all of their
respective properties, books, contracts, commitments and records (including, but
not limited to, tax returns) and, during such period, shall furnish promptly to
one another (i) a copy of each report, schedule and other document filed or
received by any of them pursuant to the requirements of federal or state
securities laws or filed by any of them with the Commission in connection with
the transactions contemplated by the Merger Agreement or which may have a
material effect on their respective businesses, properties or personnel and (ii)
such other information concerning their respective businesses, properties and
personnel as they shall reasonably request. The parties shall hold and shall use
their reasonable best efforts to hold in strict confidence all confidential
information obtained in the course of their respective investigations.
In the event that the Merger Agreement is terminated in accordance with its
terms, each party shall promptly return to the other all non-public written
material provided pursuant to this section and shall not retain any copies,
extracts or other reproductions in whole or in part of such written material.
PERIODIC INFORMATION. Medtrust shall promptly advise Doctors Health and
Doctors Health shall promptly advise Medtrust in writing of any additional
financial or operating data after the date of the Merger Agreement.
REGISTRATION STATEMENT AND PROXY STATEMENT. Doctors Health and Medtrust
shall use all reasonable efforts to have the Registration Statement declared
effective by the Commission as promptly as practicable. Doctors Health shall
also take any action required to be taken under applicable state blue sky,
securities laws or rules or regulations of any national securities exchange or
Nasdaq in connection with the issuance of Class B Common Stock pursuant to the
Merger Agreement. Doctors Health and Medtrust shall promptly furnish to each
other all information, and take such other actions, as may reasonably be
requested in connection with any action by any of them in connection with the
preceding sentence.
MEMBER APPROVALS. Medtrust shall, as promptly as practicable after the
effectiveness of the Registration Statement, submit the Merger Agreement and the
transactions contemplated thereby for the approval of its Members at a meeting
of Members and, subject to the fiduciary duties of the Board of Directors of
Medtrust under applicable law, shall use its reasonable best efforts to obtain
approval and adoption of the Merger Agreement and the transactions contemplated
thereby. Such meeting of Members shall be held as soon as practicable following
the date upon which the Registration Statement becomes effective. Subject to the
fiduciary duties of the Board of Directors of Medtrust under applicable law,
Medtrust shall, through its Board of Directors, recommend to its Members
approval of the transactions contemplated by the Merger Agreement.
DIRECTOR AND OFFICER INSURANCE. Doctors Health and Doctors Health Virginia
shall use its reasonable efforts to provide each individual who serves as a
director or officer of Doctors Health Virginia following the Effective Date with
liability insurance for a period of three years after the Effective Date;
provided that such insurance shall not apply to the acts of such directors and
officers prior to the Effective Date. In addition, Doctors Health and Doctors
Health Virginia shall not impair any exculpatory or indemnification provisions
set forth in the charter or bylaws of Doctors Health Virginia for the benefit of
the directors or officers of Doctors Health Virginia.
BUSINESS PLAN OF DOCTORS HEALTH VIRGINIA. After the Effective Date, Doctors
Health and Doctors Health Virginia shall develop a business plan for the
development of a physician network in Northern Virginia and shall determine the
amount of capital Doctors Health shall invest in Doctors Health Virginia to
implement such business plan.
EXCLUSIVE IPA. For at least five years after the Effective Date, Doctors
Health shall use Doctors Health Virginia as its exclusive IPA in the Northern
Virginia marketplace.
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SPECIALISTS. For a period of four years following the Effective Date, each
specialist who is a Member shall have the right to participate in third party
payor contracts established by Doctors Health within a reasonable geographic
area of such specialist's office; subject to Doctors Health's credentialling,
utilization, quality assurance and performance guidelines.
PRIMARY CARE AFFILIATION AGREEMENTS. Prior to the Effective Date, primary
care physicians shall have the opportunity to execute Exclusive Participation
Agreements pursuant to which primary care physicians will be paid Ten Thousand
Dollars ($10,000) in cash upon completion of credentialling. Following the
Effective Date each primary care physician shall have the right to extend such
Exclusive Participation Agreements for an additional term of two (2) years for
an additional Five Thousand Dollars ($5,000) and options to purchase 1,000
shares of Class B Common Stock.
EMPLOYMENT OF DRS. WIEDERHORN AND MARCUS. At the Effective Date, Doctors
Health shall employ Dr. Norman Marcus, the Chairman and a director of Medtrust,
as Executive Vice President of Strategic Planning of Doctors Health; and Dr.
Roger Wiederhorn, a director of Medtrust, as Regional Vice President of
Strategic Planning.
EXPENSES AND FEES. All costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby shall be paid by the
party incurring such expenses, except that Doctors Health will pay up to $35,000
of the fees and expenses of Kaufman & Canoles, expenses incurred in connection
with printing the Proxy Statement/Prospectus Supplement, and the cost of an
opinion of tax counsel.
PRESS RELEASES. The parties shall consult with each other prior to issuing
any press release or any written public statement with respect to the Merger
Agreement or the transactions contemplated thereby.
BOARD OF DIRECTORS. On the Effective Date, the Board of Directors of
Doctors Health Virginia shall be Stewart B. Gold, Mark Eig, John Dwyer, Paul
Serini, Scott Rifkin, Alan Kimmel, Norman Marcus, Roger Wiederhorn, Donald
Colvin, Samuel Shor, Beal Lowen, and Robert Enelow.
TERMINATION, AMENDMENT AND WAIVER
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Date (i) by written consent of Medtrust and Doctors Health; (ii)
by either party if there has been a material misrepresentation in the Merger
Agreement or a material breach of the representations, warranties and covenants
set forth in the Merger Agreement; or (iii) by either party if the Effective
Date has not occurred before February 28, 1997 for any reason other than the
failure of a party to perform its obligations under the Merger Agreement or a
misrepresentation or breach of warranty.
EFFECT OF TERMINATION. In the event of termination of the Merger Agreement
by either Doctors Health or Medtrust, as provided above, the Merger Agreement
shall forthwith become void and there shall be no further obligation on the part
of Doctors Health, Doctors Health Virginia, Medtrust or their respective
officers or directors (except as set forth in parts of the Merger Agreement with
respect to confidential information and enforcement costs) and with respect to
obligations existing thereunder prior to the termination.
AMENDMENT. The Merger Agreement may only be amended by an instrument in
writing signed on behalf of each of the parties hereto.
VOTING INFORMATION
PROXY SOLICITATION
This Proxy Statement/Prospectus Supplement and the accompanying proxy
material are furnished in connection with the solicitation of proxies by the
Board of Directors of Medtrust for the Special Meeting.
The Special Meeting will be held at the Holiday Inn, 1960 Chain Bridge
Road, McLean, Virginia 22102 on February 27, 1997 at 7:00 p.m. local time. Only
Members of record at the close of business on January 29, 1997 will be entitled
to notice of the Special Meeting. Only Members of record at the close of
business on February 27, 1997 will be entitled to vote at the Special Meeting.
As of the date of the notice of the Special Meeting, the Medtrust Members are
entitled to 449 votes. Each Member is entitled to such number of votes equal to
the number of Approved Physicians employed by such Member. Any proxy given may
be revoked by a Member at any time prior to its exercise. Such right of
revocation is not limited or subject to compliance with any formal procedure.
Doctors Health will pay the costs of printing and mailing this Proxy
Statement/Prospectus Supplement. Doctors Health will pay all other expenses
which it may incur in the solicitation of proxies. Doctors Health will pay the
filing fees in respect
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of regulatory approvals required in order to consummate the Merger, including
the registration fee of the Commission, the filing fees in respect of state
"blue sky" laws. The parties do not expect to pay compensation for the
solicitation of proxies (but reserve the right to do so if necessary to obtain
the votes necessary). In addition to solicitation of proxies by mail, proxies
may be solicited personally or by telephone or telegram by directors, officers,
and employees of Medtrust without additional compensation to them.
VOTES REQUIRED
The affirmative vote of more than two-thirds of the outstanding member
interests of Medtrust will be required to approve, ratify and confirm the Merger
Agreement and the Merger provided for therein. Because the required vote of
Members on the Merger Agreement and the Merger is based upon the total number of
eligible votes of Members, the failure to submit a proxy card (or the failure to
vote in person at the Special Meeting), and the abstention from voting will have
the same effect as a vote against the Merger Agreement and the Merger. As of
December 17, 1996 the directors and executive officers of Medtrust and certain
related persons as a group owned beneficially through their respective
professional corporations 39 votes out of 449 votes, representing 8.7% of the
votes entitled to be cast on the Record Date.
All member interests of Medtrust represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. If no instructions are
indicated, such member interests of Medtrust represented by such proxies will be
voted to approve, ratify and confirm the Merger Agreement and the Merger
provided for therein.
DISSENTERS' RIGHTS
Holders of member interests in Medtrust who dissent and vote against the
Merger Agreement and the Merger will not receive appraisal rights or be entitled
to the payment in cash of the fair value of their member interests under the
VNCA. See "Comparative Rights of Members of Medtrust and the Holders of Class B
Common Stock -- Dissenters' Rights."
BUSINESS OF DOCTORS HEALTH
The business of Doctors Health is described in the Prospectus.
BUSINESS OF MEDTRUST
Medtrust was incorporated on May 3, 1994 as a non-stock membership
corporation under the laws of the Commonwealth of Virginia for the purpose of
providing its Members with an appropriate vehicle for the joint marketing of
medical services, the achievement of cost savings through group purchasing and
the development of a quality marketing identity to attract managed care
contracts for the benefit of its Members in the Northern Virginia marketplace.
The initial Members of Medtrust consisted largely of specialty medical practice
groups located within Fairfax County, Virginia and certain adjacent Northern
Virginia communities and was quickly expanded to recruit to its membership
primary care physician groups and hospital based providers to permit Medtrust to
market a full range of medical services to local employers and third party
payors. Medtrust leadership engaged in active recruiting of Members and
succeeded in recruiting over 200 physician group practices and proprietorships
consisting of a total of more than 400 physician providers in the Northern
Virginia marketplace.
Medtrust is governed by a Board of Directors consisting of eleven
individual physicians elected by a plurality vote of the Members. Each Member is
entitled to that number of votes equal to the number of approved physicians
employed by the group. The approved physicians constitute individuals who have
been credentialed by Medtrust for the provision of professional services to the
beneficiaries of health benefit plans which choose to contract with Medtrust. In
addition to the Board of Directors of eleven physicians, a Board of Governors
appointed by the Board of Directors advises the Board and makes policy
recommendations on credentialling, quality assurance and contracting issues. The
Board of Governors consists of at least one representative from each
subspecialty practice area.
Medtrust was funded by the initial capital contributions of each of the
Members which contributions ranged from a high of $2,500 per approved physician
for specialty physician groups to a low of $300 per approved physician for
primary care physician groups. In addition, the Board of Directors assessed dues
as necessary to fund the ongoing operations of Medtrust.
The formation of Medtrust was in response to industry trends which
included, among other factors, increased penetration of managed care, demand by
third party payors for effective quality assurance and utilization review
protocols within participating physician practices, the need to reduce costs and
consolidate services in order to maintain profit margins, and
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increased selectivity by third party payors in the selection of their provider
panels. In response to these industry trends, physicians in a number of
communities throughout the country have joined together to form marketing
entities which require less integration and expense of organization than the
traditional merger of independent practices. These loosely structured physician
organizations, sometimes known as "networks" or "messenger models" within
industry parlance, have been useful for their member providers by offering to
these providers a vehicle by which discounts can be negotiated on the purchase
of supplies and medical malpractice insurance can be purchased at reduced group
rates and by permitting the retention of marketing personnel for the purpose of
seeking contracting opportunities that would expand the patient populations of
the constituent groups and improve their payor mix to include higher paying
commercial customers. The effectiveness of the network model has been somewhat
limited by legal constraints which prohibit joint decision making and collective
price negotiation on fee for service contracts. Medtrust has been successful in
achieving purchasing discounts on medical malpractice insurance and other vendor
contracts for its Members. As of December 1996, Medtrust had successfully
procured on behalf of its Members fee-for-service, provider contracts covering,
on a non-exclusive basis, an aggregate of approximately 77,000 covered lives
with Dimensions Health Network, Inc., John Hancock Mutual Life Insurance
Company, Med Eval, Inc., Qual Choice of Virginia, NYLCARE Passport PPO, and
Preferred Health Network. During fiscal year 1996, Medtrust received no
compensation for negotiating such contracts.
Since the operations of Medtrust have been funded by Member contributions
and the assessment of dues and Medtrust has no other significant source of
revenue, Medtrust has actively sought strategic partners to provide the capital
necessary to expand its marketing activities and to accept risk under capitated
contracts. The merger of Medtrust with Doctors Health is expected to provide the
Medtrust members with this strategic relationship. Medtrust management believes
that because physicians are positioned to control treatment protocols and the
efficient utilization of the health care dollar, physician-driven capitation
models are uniquely positioned to compete in the marketplace if adequate capital
is available to purchase the requisite information systems and to provide the
reserves for operations necessary to undertake risk contracts. Although other
physician networks may exist within the Northern Virginia marketplace,
Medtrust's management believes that the prominence of its Members and the
quality of Medtrust's marketing efforts, have allowed Medtrust a pre-eminent
position in the marketplace. Nonetheless, Medtrust's ability to obtain new
contracts is somewhat limited by the inability to coordinate delivery of
hospital services and ancillary services with the professional component and the
lack of experience of third party payors negotiating with and integrating
provider networks.
Medtrust's principal assets include office equipment and fee-for-service
contracts with third party Payors as described herein. Medtrust has two
principal employees responsible for office administration and membership
recruitment.
Medtrust's general business purpose is to provide its Members increased
contracting efficiency through group contracting with HMOs or other Payors and
by obtaining certain economies of scale with respect to marketing and
purchasing. Medtrust's revenues consist almost exclusively of dues and initial
assessments paid by its Members and its expenses consist primarily of employee
compensation, marketing and consulting fees and office rental costs. Annual dues
and assessments generally match annual expenses. Therefore, Medtrust does not
attempt to operate at a profit or to create equity value for its Members.
Moreover, the Medtrust Members had no expectation of receiving any capital
appreciation on their initial assessment. For this reason, management of
Medtrust does not believe that a presentation of historical financial statements
for Medtrust and an analysis of historical financial information of Medtrust
would be meaningful.
There are four classes of voting members with membership in any class to be
determined by the credentialling committee of Medtrust in accordance with the
applicant's primary area of specialty or location of practice. The Board of
Directors may determine from time to time an initial membership fee and set such
other fees, dues and assessments for membership as the Board of Directors
determines appropriate in its sole discretion. Class A consists of 94 surgical
specialist members with 166 approved physicians whose initial membership fee
ranged from $1,000 to $2,500. Class B consists of 53 medical specialist members
with 121 approved physicians whose initial membership fee ranged from $300 to
$1,500. Class C consists of 60 primary care members with 123 approved physicians
whose initial membership fee ranged from $250 to $300. Class D consists of 6
hospital based members with 39 approved physicians whose initial membership fee
was $500. See "Comparative Rights of Members of Medtrust and the Holders of
Class B Common Stock" for a summary description of the voting rights and other
rights of Medtrust Members.
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MEDTRUST SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of Medtrust member interests as of December 17, 1996 by each of
Medtrust's directors and by all directors and executive officers of Medtrust as
a group.
<TABLE>
<CAPTION>
PERCENT OF
ALL MEMBER
BOARD OF DIRECTORS MEMBER INTEREST INTERESTS
<S><C>
Norman A. Marcus, M.D., Chairman & CEO........................... 1 .5%
A. Roger Wiederhorn, M.D., President............................. 1 .5
Donald Colvin, M.D., Vice President.............................. 1 .5
Samuel Shor, M.D., Vice President, Primary Care.................. 1 .5
Robert Pinnar, M.D., Secretary................................... 1 .5
Ronald Bortnick, M.D., Treasurer................................. 1 .5
Robert Enelow, M.D............................................... 1 .5
Grace Keenan, M.D................................................ 1 .5
Beal Lowen, M.D.................................................. 1 .5
Barry Rothman, M.D............................................... 1 .5
George Semchyshyn, M.D........................................... 1 .5
All Directors and Executive Officers as a Group (11 Persons)..... 11 5.5%
</TABLE>
The executive officers and directors of Medtrust do not individually own
any membership interests, although each such individual is employed by a medical
practice which owns one membership interest. Each Member is afforded that number
of votes equal to the approved credentialled physicians employed by such Member.
The Members with which the officers and directors are affiliated have an
aggregate of 39 votes out of a total of 449 votes, representing 8.7% of the
votes entitled to be cast on the Record Date.
MANAGEMENT OF MEDTRUST
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Medtrust are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH MEDTRUST TERM
<S> <C> <C>
Norman A. Marcus, M.D................................. Chairman & CEO and Director 5yrs.
A. Roger Wiederhorn, M.D.............................. President and Director 5yrs.
Donald Colvin, M.D.................................... Vice President and Director 4yrs.
Samuel Shor, M.D...................................... Vice President, Primary Care and Director 3yrs.
Robert Pinnar, M.D.................................... Secretary and Director 4yrs.
Ronald Bortnick, M.D.................................. Treasurer and Director 3yrs.
Robert Enelow, M.D.................................... Director 3yrs.
Grace Keenan, M.D..................................... Director 3yrs.
Beal Lowen, M.D....................................... Director 3yrs.
Barry Rothman, M.D.................................... Director 3yrs.
George Semchyshyn, M.D................................ Director 3yrs.
</TABLE>
The officers are chosen annually by the Board of Directors and hold their
respective offices until they resign or are removed or are otherwise
disqualified or their successor is elected and qualified.
COMPARATIVE RIGHTS OF MEMBERS OF MEDTRUST AND THE HOLDERS
OF CLASS B COMMON STOCK
The rights of members of Medtrust currently are governed by the Virginia
Nonstock Corporations Act ("VNCA"), Medtrust's Articles of Incorporation, and
the Medtrust Bylaws. Upon consummation of the Merger, Medtrust Members will
become stockholders of Doctors Health, which is a Maryland corporation. Their
rights as stockholders of Doctors Health will be governed by the Maryland
General Corporation Law ("MGCL"), Doctors Health's Articles of Incorporation,
and Doctors Health's Bylaws. The following is a summary comparison of the
material differences in the rights of Members of Medtrust
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and of holders of Doctors Health Class B Common Stock under governing provisions
of their constituent documents and the VNCA and the MGCL. This summary does not
purport to be a complete discussion of, and is qualified in its entirety by
reference to, the VNCA, the MGCL, and the constituent documents of Medtrust and
Doctors Health.
CAPITAL AND CORPORATE STRUCTURE
MEDTRUST. Medtrust is a nonstock corporation and as such has no authorized
capital stock. Its Bylaws provide for the following four classes of voting
members: (1) Class A, Surgical Specialists; (2) Class B, Medical Specialists;
(3) Class C, Primary Care Physicians; and (4) Class D, Hospital Based
Physicians. Eligibility for membership in any class is determined by the
Credentialling Committee (a committee of the Board) in accordance with the
applicant's primary area of specialty or location of practice. Election of
members of a particular class is made from time to time by the Board upon
recommendation of the Credentialling Committee. Members of each class are
entitled to such rights to use the facilities and property of Medtrust and such
other rights as shall be established from time to time by resolution of the
Board.
Medtrust Members do not have many of the rights commonly associated with
security ownership. For example, Members have no rights to receive dividends or
liquidation distributions. Membership interests are non-transferable and cease
to exist upon the death or liquidation of the member. The Medtrust Bylaws and
the VNCA expressly state that Members have no property interests in their
membership or in any of their rights of membership.
DOCTORS HEALTH. Doctors Health's authorized capital stock and the relative
rights of the various classes of stock are set forth under "Description of
Capital Stock" in the Prospectus.
VOTING RIGHTS
MEDTRUST. Pursuant to Medtrust's Bylaws, Members may vote on matters
presented to the membership by casting that number of votes equal to the number
of Approved Physicians who are employed by the Member. An "Approved Physician"
is a physician who has been authorized by the Credentialling Committee to
perform services under the Member's provider contract with Medtrust. Unless
otherwise provided by resolution of the Board of Directors, Medtrust Members do
not vote separately by class. Fifty percent (50%) of the voting power of the
corporation is required to be represented at a membership meeting either in
person or by proxy in order to constitute a quorum. The Medtrust Bylaws provide
that no cumulative voting is permitted with respect to the election of directors
and the articles of incorporation do not provide for cumulative voting. The VNCA
states that there is no cumulative voting for the election of directors unless
the articles of incorporation so provide.
In general, Members may vote in person or by proxy. However, the Bylaws
provide that, unless the proxy refers to the general nature of the matter upon
which the vote will be cast, votes may not be made by proxy with respect to the
following issues: (i) the removal of a director or directors without cause; (ii)
filling of vacancies on the Board of Directors not otherwise filled by the
Board, (iii) approval of transactions involving a director having a material
financial interest; (iv) amendment of the Articles of Incorporation or Bylaws
repealing, restricting, creating or expanding proxy rights; (v) amendment of the
Articles of Incorporation; (vi) sale, lease, conveyance, exchange, transfer or
other disposal of all or substantially all of the corporation's assets when such
transaction is not in the usual and regular course of business, (vii) approval
of merger terms; (viii) amendment of agreement of merger; and (ix) election to
dissolve the corporation.
Pursuant to the VNCA, Medtrust members must approve a plan of merger after
recommendation of approval by the Board of Directors. A plan of merger must be
approved by each voting group entitled to vote on the plan by more than two-
thirds of all the votes cast on the plan by that voting group at a meeting at
which a quorum of the voting group exists. A sale of all or substantially all of
the corporation's assets other than in the regular course of business also must
be approved by more than two-thirds of all the votes cast on the transaction at
a meeting at which a quorum exists. The VNCA provides that members must approve
amendments to the company's articles of incorporation by each voting group
entitled to vote on the proposed amendment by more than two-thirds of all the
votes cast on the amendment by that voting group at a meeting at which a quorum
of the voting group exists. The VNCA does not require the members of a surviving
corporation to vote on a merger if (i) the merger agreement does not amend the
existing articles of incorporation such that the amendment would otherwise
require shareholder approval; and (ii) each member of the surviving corporation
will retain the identical designation, preferences, limitations, and relative
rights, immediately after the effective date of the merger as held before.
DOCTORS HEALTH. In general, under the Doctors Health Articles of
Incorporation, each holder of Class B Common Stock is entitled to cast, in
person or by proxy, one vote for each share of Class B Common Stock held of
record by such holder on all matters to be voted on by stockholders. The holders
of Class B Common Stock generally vote together with holders of all
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other classes and series of stock of Doctors Health and not as a separate class
or series, except where specifically provided. The Doctors Health Bylaws provide
that a quorum at a stockholders' meeting consisting of the presence in person or
by proxy of stockholders entitled to cast two thirds of the votes thereat.
Two-thirds of the votes cast at a meeting of stockholders, duly called and at
which a quorum is present, shall be sufficient to take or authorize action upon
any matter, other than the election of directors, which may properly come before
the meeting, including the approval of a plan of merger or the sale of all or
substantially all of the assets of the corporation.
With respect to the election of directors, the holders of Class B Common
Stock, voting as a single class, are entitled to elect eight directors to the
Board ("Class B Common Director") The affirmative vote of a majority of the
shares of Class B Common Stock represented in person or by proxy at a meeting at
which a quorum of Class B Common Stock is present shall be sufficient to approve
any matter with respect to which said holders are entitled to vote; provided,
however, that the affirmative vote of a plurality of all votes cast shall be
sufficient to elect a Class B Common Director. Each share of Class B Common
Stock may be voted for as many individuals as there are Class B Common Directors
to be elected. The holders of Class B Common Stock, at any annual meeting or
upon a call of a special meeting of holders of Class B Common Stock by holders
of not less than 25% of the shares of Class B Common Stock then outstanding, may
remove any Class B Common Director at any time and from time to time with or
without cause, voting as a single class, by the affirmative vote of a majority
of all of the votes entitled to be cast for the election of a Class B Common
Director, and may elect a successor to fill any resulting vacancies for the
remainder of the term of such director. If any Class B Common Director shall
cease to be a director for any reason (including death, resignation, removal or
any other cause), the vacancy shall be filled by a vote of the remaining Class B
Common Directors (unless, with respect to removal, the holders of Class B Common
Stock have elected a successor Class B Common Director pursuant to the removal
process provisions). If there are no such remaining directors, then upon a call
of a special meeting of holders of Class B Common Stock, by any such holder, the
vacancy shall be filled by the vote of the holders of Class B Common Stock,
voting as a single class.
The MGCL does not require a stockholder vote of the surviving corporation
in a merger if the merger does not amend the surviving corporation's Articles of
Incorporation or change its outstanding stock and the number of shares to be
issued by the surviving corporation in the merger does not exceed 15% of the
shares outstanding immediately before the merger becomes effective.
The Articles of Incorporation of Doctors Health provide that, subject to
certain rights of preferred stockholders, the corporation reserves the right to
make, from time to time, any amendments to the Articles of Incorporation,
including any amendments which alter the contract rights of any holder of a
class of outstanding stock as expressly set forth in the charter.
DISSENTER'S RIGHTS
MEDTRUST. Under the VNCA, a Member who dissents from the corporation taking
certain actions such as a merger or a consolidation which are subsequently
approved and consummated does not have any rights to receive consideration other
than what such Member would receive pursuant to the transaction.
DOCTORS HEALTH. Pursuant to the MGCL, a stockholder who dissents from
certain reorganizational transactions may, under varying circumstances, receive
cash in the amount of the fair value of his or her shares (as may be ultimately
determined by a court) in lieu of the consideration he or she would otherwise
receive in any such transaction. However, the MGCL also provides that a
stockholder does not have appraisal rights in a merger or consolidation if such
stockholder's stock is listed on a national exchange or is designated as a
security listed on the The Nasdaq National Market or if such stockholder's stock
is that of the surviving corporation in the merger and the merger does not alter
or change such stock.
DIRECTORS
MEDTRUST. Medtrust's Bylaws presently provide that the Board of Directors
shall consist of that number of directors fixed by resolution of the Board
between five and 22 in number. The initial directors presently serving have
terms scheduled to end in 1997, 1998 and 1999. Upon the expiration of these
initial terms, the directors elected to fill the vacancies would all have three
year terms resulting in staggered terms. The Board of Directors of Medtrust
generally has all of the corporate power of the corporation and has the
authority to control all of its business and affairs, including the right to
levy dues and assessments and appoint officers and agents. By resolution, the
Board may delegate power and responsibility to committees, officers and agents.
To qualify to serve as a director of Medtrust an individual must be an Approved
Physician and must be employed by a Member of Medtrust. No physician who is
employed by a Class D member is eligible to serve as a director unless he or she
has been previously authorized by resolution of the Board of Directors. So long
as there are at least 100 physicians who are
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employed by Class C members, no more than 50% of the directors on the board may
be physicians employed by Class A or B members.
DOCTORS HEALTH. The Articles of Incorporation of Doctors Health provide
that, until the 1998 annual stockholders meeting, there shall be 18 directors of
which five directors shall be directors elected by Class A stockholders, eight
shall be elected by Class B stockholders, two shall be elected by Series A
Preferred Stockholders, two shall be elected by Series B Preferred Stockholders
and one shall be elected by Series C Preferred stockholders. The number of
directors will increase to 19 after the 1998 annual Stockholders meeting at
which time the Series C Preferred Stockholder shall have the right to elect two
directors. The number of directors comprising the Board of Directors and the
number of directors to be elected by each class of stock may not be changed
except by an amendment to the Articles of Incorporation approved by the vote of
stockholders entitled to vote at least two-thirds of the shares of each class of
the capital stock that is to be affected by the amendment.
STOCKHOLDER POWER TO CALL A SPECIAL MEETING
MEDTRUST. Pursuant to the Medtrust Bylaws, special meetings of the
membership may be called by the Chairman of the Board, the President, the Board
of Directors, or by one or more members constituting five percent (5%) or more
of the voting power of the corporation.
DOCTORS HEALTH. Under the MGCL and the Doctors Health Bylaws, the Board of
Directors, the Chairman of the Board, the president or the holders entitled to
cast at least two-thirds of all of the votes entitled to be cast at the meeting
may call a special meeting of the stockholders.
NOTICE OF MEETINGS
MEDTRUST. Under the VNCA and the Medtrust Bylaws, members are to be given
written notice of the date, time and place of each annual and special members
meeting. Such notice shall be given no less than 10 nor more than 60 days before
the date of the meeting. In the case of a special meeting called for the purpose
of acting on an amendment to the Articles of Incorporation, a plan of merger, or
a proposed sale of all or substantially all of the assets of the corporation,
the VNCA requires that notice be given not less than 25 nor more than 60 days
before the date of the meeting.
DOCTORS HEALTH. Pursuant to the Bylaws of Doctors Health, notice of the
time, date and place of each annual or special meeting shall be given at least
10 but not more than 90 days prior to the date of the meeting.
INSPECTION OF STOCKHOLDER OR MEMBER LISTS
MEDTRUST. Under the VNCA, Medtrust members may inspect a list of Medtrust
members during the ten days prior to a membership meeting during regular
business hours. Such list shall also be produced and kept open at the time and
place of the meeting.
DOCTORS HEALTH. Under the MGCL, holders of common stock only may inspect
stockholder lists if such stockholder has been a stockholder of record for at
least six months and owns 5% of the outstanding stock of the corporation,
provided that the appropriate request is made.
INDEMNIFICATION
MEDTRUST. Under the VNCA, a corporation may indemnify a director against
liability if the director (1) conducted himself in good faith, (2) believed that
his official conduct was in the best interests of the corporation and all other
non-official conduct was not opposed to the corporation's best interests, and
(3) in the case of a criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. A corporation may not indemnify a director in connection
with a proceeding in which the director is adjudged liable on the basis that he
received an improper personal benefit. A director also cannot be indemnified in
connection with a proceeding by or in the right of the corporation in which the
director is adjudged liable to the corporation. However, in such a proceeding
the liability of the director is limited to reasonable expenses incurred in
connection with the proceeding. To the fullest extent permitted by the VNCA, the
Medtrust Articles of Incorporation provide that the corporation shall indemnify
all directors and officers of Medtrust.
DOCTORS HEALTH. Under the MGCL, a corporation may indemnify any director,
officer, or agent made a party to any proceeding by reason of service in that
capacity unless: (i) the act or omission of the director, officer or agent was
material to the matter giving rise to the proceeding, and was committed in bad
faith or was the result of active and deliberate dishonesty; (ii) the director,
officer, or agent actually received an improper personal benefit; and (iii) in a
criminal proceeding, the
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director, officer, or agent had reasonable cause to believe that the act or
omission was unlawful. However, in a proceeding by or in the right of the
corporation, indemnification may not be made in respect of a proceeding in which
the director, officer, employee or agent shall have been adjudged to be liable
to the corporation. Doctors Health's Articles of Incorporation indemnify former
and current directors and officers against any and all liabilities and expenses
incurred in connection with their services in such capacities to the maximum
extent permitted under the MGCL. The Articles of Incorporation further provide
that the Board of Directors may approve indemnification by the corporation for
officers, employees, agents and persons who serve and have served, at the
request of Doctors Health, as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture or other enterprise as
may be determined by the Board.
BUSINESS COMBINATION AND AFFILIATION STATUTES
MEDTRUST. The VNCA has no provisions relating to "affiliated transactions."
DOCTORS HEALTH. The MGCL imposes conditions and restrictions on certain
"business combinations" (including among other various transactions, a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
of issuance of equity securities) between a Maryland corporation and any person
who beneficially owns at least 10% of the corporation's stock (an "Interested
Stockholder"). Unless approved in advance by the board of directors, or
otherwise exempted by the statute, such a business combination is prohibited for
a period of five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. After such five-year period, a
business combination with an Interested Stockholder must be: (a) recommended by
the corporation's board of directors; and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's common stockholders receive a
"fair price" (as defined in the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Stockholder for his shares. Under its Articles of Incorporation and in
accordance with the MGCL, Doctors Health elected not to be governed by the
MGCL's limitations and restrictions on "business combinations."
CONTROL SHARE ACQUISITION STATUTES
MEDTRUST. There are no provisions under the VNCA governing control share
acquisitions.
DOCTORS HEALTH. Under the MGCL's control share acquisition law, voting
rights of shares of stock of a Maryland corporation acquired by an acquiring
person at ownership levels of 20%, 33-1/3% and 50% of the outstanding shares are
denied unless conferred by a special stockholder vote of two-thirds of the
outstanding shares held by persons other than the acquiring person and officers
and directors of the corporation or, among other exceptions, such acquisition of
shares is made pursuant to a merger agreement with the corporation or the
corporation's Articles of Incorporation or by-laws permit the acquisition of
such shares prior to the acquiring person's acquisition thereof. Unless a
corporation's charter or Bylaws provide otherwise, the statute permits such
corporation to redeem the acquired shares at "fair value" if the voting rights
are not approved or if the acquiring person does not deliver a "control share
acquisition statement" to the corporation on or before the tenth day after the
control share acquisition. The acquiring person may demand a stockholder's
meeting to consider authorizing voting rights for control shares subject to
certain disclosure obligations and payment of certain costs. If voting rights
are approved for more than fifty percent of the outstanding stock, objecting
stockholders may have their shares appraised and repurchased by the corporation
for cash. Under its Articles of Incorporation and in accordance with the MGCL,
Doctors Health elected not to be governed by the control share acquisition
statute.
RESALE OF CLASS B COMMON STOCK
The shares of Class B Common Stock of Doctors Health offered by this Proxy
Statement/Prospectus Supplement have been registered under the Securities Act,
allowing Members of Medtrust who are not "affiliates" of Doctors Health or
Medtrust (as defined under the Securities Act, but generally including
directors, certain executive officers, and 10% or more stockholders of Doctors
Health or Medtrust) to trade them freely and without restriction under the
Securities Act except as limited by certain contractual restrictions set forth
in the Stockholders Agreement or otherwise. Each Member of Medtrust who may be
deemed an "affiliate" of Doctors Health will be subject to certain limitations
imposed by the Securities Act, and the rules, regulations and releases
promulgated thereunder, with respect to the sale or other disposition of the
shares of Class B Common Stock to be received by the "affiliate" pursuant to the
Merger. This Proxy Statement/Prospectus does not cover any resales of Class B
Common Stock received by affiliates of Medtrust.
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In addition to restrictions on resale that may be imposed on "affiliates"
under the Securities Act, the shares of Class B Common Stock of Doctors Health
received by the Members of Medtrust (whether or not they are deemed to be
"affiliates") pursuant to the Merger are and will be subject to the terms of
Doctors Health's Stockholders Agreement (a copy of which is attached hereto as
Annex B) which provides significant contractual restrictions on the resale of
such Common Stock until an initial public offering for cash of the Common Stock
of Doctors Health or other event constituting a "change in control" of Doctors
Health. The Stockholders Agreement provides that the signatories may sell and
transfer the stock of the Company held by them only pursuant to such agreement.
The Stockholders Agreement contemplates that Doctors Health may redeem shares of
the Class B Common Stock upon an "Involuntary Transfer" resulting generally from
the insolvency of a stockholder or upon divorce of an individual stockholder.
"Voluntary Transfers" are permitted only after a stockholder offers its stock,
upon the same terms and conditions contained in the offer it wishes to accept,
to all other stockholders on the terms set forth in the Stockholders Agreement.
Individual stockholders may in certain circumstances make estate planning
transfers for the benefit of themselves or family members on certain conditions.
Under the Stockholders Agreement, in the event of an "Involuntary Transfer"
or the death or disability of a Management Stockholder, the purchaser of the
stock and the transferring stockholder may agree on the purchase price of the
stock to be sold in such event. If the parties cannot agree on a price, the
price shall be the fair market value of the stock, as determined by a jointly
selected appraiser, as of the last day of the calendar month immediately
preceding the event giving rise to the purchase of the stock, in accordance with
the procedures set forth in the Stockholders Agreement. In the event of a
"Voluntary Transfer", the purchase price to be paid by the other stockholders or
Doctors Health, if they exercise their options to purchase the stock, will be
the price at which the stockholder proposes to transfer his stock to the
proposed third party transferee.
LEGAL MATTERS
The validity of the Securities offered hereby have been passed upon for the
Company by Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
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ANNEX A
PLAN AND AGREEMENT OF MERGER
among
MEDTRUST MEDICAL GROUP, INC.,
a Virginia nonstock corporation,
DOCTORS HEALTH SYSTEM, INC.,
a Maryland corporation,
and
DOCTORS HEALTH OF VIRGINIA, INC.
a Virginia corporation
Dated as of November 15, 1996
<PAGE>
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER (this "Agreement") is made as of November
15, 1996 by and among MEDTRUST MEDICAL GROUP, INC., a Virginia nonstock
corporation ("Medtrust"), DOCTORS HEALTH SYSTEM, INC., a Maryland corporation
("DHS"), and DOCTORS HEALTH OF VIRGINIA, INC., a Virginia corporation wholly-
owned by DHS ("Sub").
RECITALS
A. Sub is a corporation duly organized and existing under the laws of the
Commonwealth of Virginia, having been incorporated on November 15, 1996 for the
purpose of effecting this transaction and having engaged in no other business
prior to the date hereof.
B. Medtrust is a nonstock corporation duly organized and existing under the
laws of the Commonwealth of Virginia, having been incorporated on May 3, 1994.
C. DHS is a corporation duly organized and existing under the laws of the
State of Maryland, having been incorporated on June 10, 1994.
D. The respective Boards of Directors of DHS, Sub and Medtrust have
approved the business combination of Sub and Medtrust.
E. The respective Boards of Directors of DHS, Sub, and Medtrust, have
approved this Agreement and deem it advisable and in the best interests of their
respective corporations, and shareholders and Members (as hereinafter defined)
that Medtrust merge with and into Sub (the "Merger"), subject to the approval
and adoption of this Agreement by the Members of Medtrust, pursuant to the terms
and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE 1
THE TRANSACTION
SECTION 1.1. MERGER. Upon the approval and adoption of this Agreement by
the Members of Medtrust (the "Members") in accordance with the laws of the
Commonwealth of Virginia, and the satisfaction or waiver of the conditions set
forth herein to the obligations of the parties hereto, articles of merger
substantially in the forms of Exhibit A hereto, shall be filed with the State
Corporation Commission of the Commonwealth of Virginia in accordance with the
laws of the Commonwealth of Virginia. Effective on the date and at the time on
which a certificate of merger containing the provisions required by, and
executed in accordance with, Article 12 of the Virginia Stock Corporation Act
and Article 11 of the Virginia Nonstock Corporation Act (the "Certificate of
Merger") shall have been issued by the Virginia State Corporation Commission (or
such later date and time as may be specified in such Certificate of Merger) (the
"Effective Time"), Medtrust shall merge with and into Sub which, as the
surviving corporation, shall continue its corporate existence under the laws of
the Commonwealth of Virginia under the name of Doctors Health of Virginia, Inc.
SECTION 1.2. THE CLOSING. The Merger and the other transactions
contemplated by this Agreement shall be effected at a closing (the "Closing") at
the offices of Kaufman & Canoles, One Commercial Place, Norfolk, Virginia 23514,
or such other place as the parties shall mutually agree, at 11:00 a.m. local
time on a mutually agreeable date (the "Closing Date") which is no later than
five (5) days following the satisfaction of the conditions set forth in Articles
8, 9 and 10 hereof. The Effective Time shall occur on the Closing Date. In no
event shall the Closing Date occur later than January 31, 1997 (the "Termination
Date") without the mutual consent of the parties.
SECTION 1.3. EMPLOYMENT OF DRS. WIEDERHORN AND MARCUS. At Closing, DHS
shall execute and deliver those certain employment agreements attached hereto as
Exhibits B and C, respectively, under which DHS will employ Dr. Norman Marcus
and Dr. Roger Wiederhorn on a part-time basis to assist DHS with further network
development.
SECTION 1.4. COMPENSATION TO NEGOTIATING TEAM. At Closing, DHS shall pay
and/or deliver to the individuals listed on Exhibit D (the "Negotiating Team")
an aggregate consideration of 6,000 shares of DHS Common Stock and $30,000 in
cash to be distributed ratably to the Negotiating Team Members in consideration
of their service in conducting the extended negotiations leading to the
consummation and implementation of this Agreement.
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ARTICLE 2
ARTICLES OF INCORPORATION, BY-LAWS,
SHAREHOLDER AGREEMENTS
SECTION 2.1. ARTICLES OF INCORPORATION. The articles of incorporation of
Sub in effect at the Effective Time shall be as set forth on Exhibit E attached
hereto.
SECTION 2.2. BY-LAWS. The by-laws of Sub in effect at the Effective Time
shall be as set forth on Exhibit F which by-laws shall constitute a shareholder
agreement pursuant to Section 13.1-671.1 of the Code of Virginia (1950, as
amended).
SECTION 2.3. DIRECTORS AND OFFICERS. At and with effect from the Effective
Time, the directors of the Surviving Corporation shall be as set forth on
Schedule 2.3 hereto who shall hold office until their successors are elected and
qualify. At and with effect from the Effective Time, the officers of the
Surviving Corporation shall be as set forth on Schedule 2.3 hereto who shall
hold office until their successors are elected and qualify.
ARTICLE 3
CONVERSION OF MEMBERSHIP INTERESTS
SECTION 3.1. CONVERSION OF MEMBERSHIP INTERESTS. The manner and basis of
converting the membership interests of Medtrust shall be as follows:
(a) Subject to the provisions of paragraphs (c) and (d) below, the
Members of Medtrust shall receive in the aggregate 24,000 shares (the
"Share Consideration") of DHS Class B common stock, no par value per share
(the "DHS Common Stock") plus an aggregate amount of cash equal to $120,000
plus the amount of cash or cash equivalents held by Medtrust as of the date
hereof (the "Cash Consideration").
(b) Subject to the provisions of paragraphs (c) and (d) below, each
membership interest of the Members of Medtrust outstanding immediately
prior to the Effective Time will be converted into and represent the right
to receive the number of shares of DHS Common Stock and that amount of cash
determined by multiplying each of the Share Consideration and the Cash
Consideration by a fraction, the numerator of which is the aggregate
Initial Membership Fee paid by the respective Member for its Approved
Physicians (as defined in the Bylaws of Medtrust) and the denominator of
which is the aggregate Initial Membership Fees paid by all Members then
holding membership interests in Medtrust on behalf of their Approved
Physicians (the "Merger Consideration"). For purposes hereof, Initial
Membership Fee shall include only the initial membership fees paid by a
Member and shall expressly exclude any ongoing dues or assessments paid by
a Member in support of the operational expenses of Medtrust.
(c) In the event that DHS changes the number of shares of DHS Common
Stock issued and outstanding after the date hereof and prior to the
Effective Time as a result of a stock split, stock dividend,
recapitalization or other similar transaction, the Share Consideration
shall be proportionately adjusted.
(d) No certificates for fractions of shares of DHS Common Stock and no
scrip or other certificates evidencing fractional interests in such shares
shall be issuable and any such fractional share which would otherwise be
issued shall be rounded to the next highest whole share.
(e) At the Closing, DHS shall deliver to counsel for Medtrust the
original of all certificates of DHS Common Stock to be issued as part of
the Share Consideration together with the Cash Consideration in immediately
available funds. Such certificates shall then be forwarded by regular mail
with appropriate checks for the Cash Consideration to the address of record
of each Member.
(f) At any time prior to the mailing of the notice of the Special
Meeting, the Board of Directors may revise the method of allocation of the
Share Consideration and Cash Consideration among the Members, make
appropriate revisions to the Plan of Merger and submit such revised plan to
the Members for their approval. The provisions of Section 3.1(b) regarding
allocation shall be amended to incorporate such revised allocations.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDTRUST
Medtrust hereby represents and warrants to DHS and Sub that as of the date
of this Agreement:
SECTION 4.1. ORGANIZATION; AUTHORITY. Medtrust is a nonstock corporation
duly organized and existing in good standing under the laws of the Commonwealth
of Virginia. Medtrust has all necessary corporate power and authority to own or
to lease, and to operate, its properties and assets and to carry on its business
as it is now being conducted.
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SECTION 4.2. MEMBERSHIP OF MEDTRUST. Medtrust has four classes of Members
as provided in the articles of incorporation. A true and complete copy of the
Membership roster as of the date hereof is attached hereto as Schedule 4.2. In
accordance with Section 13.1-837 of the Virginia Code, membership interests are
non-transferable.
SECTION 4.3. CHARTER DOCUMENTS. A true and complete copy of the articles of
incorporation and by-laws of Medtrust are attached hereto as Exhibit G.
SECTION 4.4. BINDING OBLIGATION; CONSENTS; LITIGATION. The execution and
delivery of this Agreement by Medtrust does not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles of incorporation or by-laws of Medtrust or (ii) any provision of, or
result in a breach of any of the terms or provisions of, or result in the
acceleration of any obligation under, or constitute a default under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree to which Medtrust is a party, or to which Medtrust is, or the assets,
properties or business of Medtrust are, subject, which would have a material
adverse effect on Medtrust or any of its assets except as set forth on Schedule
4.4. The Board of Directors of Medtrust has approved this Agreement, has
authorized the execution and delivery hereof and has directed that this
Agreement be submitted to the Members of Medtrust for adoption at a special
meeting of such Members following the satisfaction of the condition described in
Section 10.5 hereof (the "Special Meeting"). Medtrust has full power, authority
and legal right to enter into this Agreement and, upon appropriate vote of its
Members in accordance with law, to consummate the transactions contemplated
hereby. Except for the approval of its Members, Medtrust has taken all action
required by law, its articles of incorporation, its by-laws or otherwise to
authorize and to approve the execution and delivery of this Agreement and the
documents, agreements and certificates executed and delivered by Medtrust in
connection herewith and the consummation by Medtrust of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Medtrust and constitutes a valid and legally binding obligation of Medtrust,
enforceable against Medtrust in accordance with its terms. No consent, action,
approval or authorization of, or registration, declaration or filing with, any
governmental authority is required to be obtained by Medtrust in order to
authorize the execution and delivery by Medtrust of this Agreement or the
consummation by Medtrust of the Merger other than the filings with the State
Corporation Commission contemplated by this Agreement.
SECTION 4.5. FINANCIAL STATEMENTS. Medtrust has furnished to DHS copies of
the financial statements compiled by its accountant for 1994 and 1995 (the
"Medtrust Financial Statements"). The Medtrust Financial Statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods covered thereby, reflect
and provide adequate reserves in respect of all known liabilities of Medtrust in
accordance with GAAP, including all known contingent liabilities required to be
included therein, and present fairly the financial condition of Medtrust as of
the indicated dates and the results of operations of Medtrust for the indicated
periods.
SECTION 4.6. MATERIAL CONTRACTS AND AGREEMENTS. All material contracts of
Medtrust now in effect to which Medtrust is a party or by which it or its
properties or assets may be bound or affected are listed on Schedule 4.6. A true
and complete copy of each such material contract has been heretofore delivered
to DHS (the "Material Contracts"). No default, alleged default or anticipatory
breach exists on the part of Medtrust or, to the best knowledge of Medtrust, on
the part of any other party, under any Material Contract, and there are no
material agreements of the parties relating to any Material Contract that have
not been disclosed to DHS. Subject to receipt of the consents set forth on
Schedule 4.6, the consummation of the Merger will not give rise to a default
under any such Material Contract.
SECTION 4.7. TAX MATTERS.
(a) Medtrust has filed all tax returns required to be filed by it
under the laws of the United States of America, the jurisdiction of its
incorporation, and each state or other jurisdiction in which it conducts
business activities and is required to file. Medtrust has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
returns. Medtrust does not have any tax liability for which no tax reserve
has been made in respect of any jurisdiction in which Medtrust has business
activities and is required to file.
(b) There are no tax liens, whether imposed by any federal, state or
local taxing authority, outstanding against any of the assets, properties
or business of Medtrust.
(c) All taxes and assessments that Medtrust is required to withhold or
to collect have been duly withheld or collected and all withholdings and
collections have either been duly and timely paid over to the appropriate
governmental authority or are, together with the payments due or to become
due in connection therewith, duly reflected on the Medtrust Financial
Statements in accordance with GAAP.
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(d) Except as set forth in Schedule 4.7, no Medtrust tax returns for
tax years that are open under any applicable statute of limitations have
been examined by the Internal Revenue Service or other tax authorities, and
no deficiencies (including any penalties or interest) have been asserted or
assessments made as a result of examinations. There are no waivers,
agreements or other arrangements providing for extension of time with
respect to the assessment or collection of any unpaid tax, interest, or
penalties relating to Medtrust. No issues have been raised by (or are
currently pending before) the Internal Revenue Service or any other taxing
authority in connection with any of Medtrust's tax returns which could
reasonably be expected to have a material adverse effect on the financial
condition of Medtrust if decided adversely to Medtrust, nor are there any
such issues which have not been so raised but if so raised by the Internal
Revenue Service or any other taxing authority in connection with any of the
Medtrust tax returns could, in the aggregate, reasonably be expected to
have such material adverse effect.
SECTION 4.8. ABSENCE OF UNDISCLOSED LIABILITIES. Medtrust does not have any
material indebtedness, liability or obligation of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, other than (i)
liabilities reflected in the Medtrust Financial Statements, (ii) liabilities
incurred in the ordinary course of business (or pursuant to the liquidation) of
Medtrust since the date of the Medtrust Financial Statements, (iii)
indebtedness, liabilities and obligations listed on Schedule 4.8 hereto, and
(iv) liabilities incurred in connection with the performance of this Agreement.
SECTION 4.9. INSURANCE. All significant policies of insurance, together
with the premiums currently paid thereon, providing for business interruption,
personal, employee, product or public liability coverage with respect to the
business of Medtrust are described on Schedule 4.9. The copies of such policies
which have previously been delivered to DHS are complete and correct. All such
policies will be outstanding and in full force and effect on the Closing Date
and thereafter in accordance with their terms. There are no claims, actions,
suits or proceedings arising out of or based upon any of such policies of
insurance, and, so far as is known to Medtrust or any of its officers, no basis
for any such claim, action, suit or proceeding exists. There are no notices of
any pending or threatened terminations with respect to any of such policies and
Medtrust is in compliance with all conditions contained therein.
SECTION 4.10. FINDERS OR BROKERS. Medtrust has not utilized the services of
any investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or commission in
connection with this Agreement or upon consummation of the transactions
contemplated hereby.
SECTION 4.11. EMPLOYEE BENEFITS. Except for those plans set forth in
Schedule 4.11, Medtrust currently does not have, or has never had, an employee
benefit plan, including, without limitation, any plan, agreement or arrangement
relating to deferred compensation, pension, profit sharing, retirement income or
other benefits, stock purchase, stock ownership and stock option plan, stock
appreciation rights, bonus, severance arrangement, health and welfare benefits,
insurance benefits or any other employee benefits or fringe benefit plan.
Medtrust does not participate in, or contribute to, nor has Medtrust ever
participated in or contributed to, any multi-employer plan within the meaning of
ERISA Section 4001(a)(3), nor does or will Medtrust have, now or in the future,
any multi-employer plan withdrawal liability under Subtitle E of Part IV of
ERISA.
SECTION 4.12. EMPLOYMENT MATTERS. Except as set out in Schedule 4.12, there
are no oral or written employment contracts or pension, bonus, profit sharing,
stock option, life, health, retirement, welfare, or other agreements or
arrangements providing for employee remuneration or benefits to which Medtrust
is a party or by which it is bound. To the knowledge of Medtrust, no person
(including, but not limited to, governmental agencies of any kind) has any
claim, or basis for any action or proceeding, against Medtrust arising out of
any statute, ordinance or regulation relating to discrimination in employment or
employment practices or occupational safety and health standards (including, but
without limiting the foregoing, The Fair Labor Standards Act, as amended; Title
VII of the Civil Rights Act of 1964, as amended; 42 U.S.C. 1981 or the Age
Discrimination in Employment Act of 1967, as amended), which, if upheld, would
have an adverse effect on Medtrust or its condition, financial or otherwise. To
the knowledge of Medtrust, there is no pending or threatened federal or state
equal employment opportunity enforcement action or labor dispute, strike or work
stoppage affecting Medtrust. Medtrust does not have any collective bargaining or
similar agreements, nor does it have any obligation to bargain with any labor
organization as the representative of Medtrust's employees, and there is neither
pending, nor to Medtrust's knowledge threatened, any labor dispute, strike or
work stoppage which affects or which may affect Medtrust or which may interfere
with the continued operation of Medtrust. No present or former employee of
Medtrust has any claim against Medtrust for (i) overtime pay, other than
overtime pay for the current payroll period, (ii) wages, salary or other
compensation or benefits for any period other than the current payroll period,
(iii) except as set forth in Medtrust's Financial Statements, vacation, time off
or pay in lieu of vacation or time off, other than that earned in respect of the
current fiscal year, or (iv) any violation of any statute, ordinance or
regulation relating to minimum wages or maximum hours of work.
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SECTION 4.13. COMPLIANCE WITH LAWS. Medtrust is not in violation of any
order, writ, decree or judgment of any court, arbitrator, or governmental or
regulatory body which violation would (i) affect the legality, validity or
enforceability of this Agreement or the transactions contemplated hereby, (ii)
have a material adverse effect on Medtrust's assets, or (iii) impair Medtrust's
obligations to perform fully on a timely basis any material obligations of
Medtrust under this Agreement.
SECTION 4.14. LITIGATION.
(a) Except as set forth on Schedule 4.14, there is no (i) action,
suit, claim, proceeding or investigation pending or, to the knowledge of
Medtrust or any officer of Medtrust, threatened against or affecting
Medtrust or its assets, employees or properties, at law or in equity, or
before or by any court or governmental authority, (ii) arbitration
proceeding relating to Medtrust or its assets, employees or properties or
(iii) governmental inquiry pending or, to the knowledge of Medtrust or any
officer of Medtrust, threatened relating to or involving Medtrust, its
assets or properties or the business of Medtrust or the transactions
contemplated by this Agreement (including inquiries as to the qualification
of Medtrust to hold or receive any permit) and Medtrust does not know of
any basis for any of the foregoing. There are no pending actions, suits,
claims or proceedings brought by Medtrust against others.
(b) Medtrust has not received any written opinion, memorandum, legal
advice or notice from legal counsel to the effect that they are exposed,
from a legal standpoint, to any liability or disadvantage which may be
material to their respective businesses and which would continue past the
Effective Time. Medtrust is not in default with respect to any order, writ,
injunction or decree known to or served upon Medtrust of any court or of
any governmental authority.
(c) Medtrust knows of no pending or threatened action, suit,
proceeding, investigation, order or injunction before or by any court or
governmental body that seeks to restrain or to prevent the consummation of
the Merger or the other transactions contemplated by this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF DHS AND SUB
DHS and Sub jointly and severally represent and warrant to Medtrust that as
of the date of this Agreement:
SECTION 5.1. ORGANIZATION; AUTHORITY; SUB STATUS. Each of DHS and Sub is a
corporation duly organized and existing in good standing under the laws of
Maryland and Virginia, respectively, and DHS is duly authorized to conduct
business and is in good standing under the laws of the Commonwealth of Virginia.
Each of DHS and Sub has all necessary power and authority to own or to lease,
and to operate, its properties and assets and to carry on its business as it is
now being conducted. Sub is recently incorporated for the purpose of effecting
this transaction and has not engaged in any business other than the transactions
contemplated by this Agreement.
SECTION 5.2. CAPITALIZATION OF DHS AND SUB. The authorized capital stock of
DHS and Sub is as set forth on Schedule 5.2 hereto which also sets forth the
number of shares of each class of capital stock to be outstanding at the
Effective Time. At the Effective Time, all such outstanding shares of capital
stock of DHS and Sub will have been duly authorized and validly issued and will
be fully paid and nonassessable. No shares of the capital stock of DHS and Sub
are held in treasury. Except as set forth on Schedule 5.2, at the Effective
Time, there will be no options, warrants, rights, calls, commitments or
agreements of any character obligating DHS or Sub to issue any shares of capital
stock or any security representing the right to purchase or otherwise receive
any such shares. Except for restrictions on transfer arising under applicable
federal and state securities laws, there are no existing restrictions imposed by
DHS or Sub or by their respective affiliates on the transfer of any outstanding
shares of capital stock of DHS and Sub and there are no registration covenants
with respect thereto. At the Effective Time, none of the outstanding shares of
DHS or Sub will have been issued in violation of the preemptive rights of any
present or former Member. The DHS Common Stock to be issued in connection with
the Merger Consideration and under Section 1.4 will not be subject to any
restrictions on transfer other than those arising under applicable federal and
state securities laws and the restrictions on transfer set forth in the Amended
and Restated Stockholders Agreement dated September 4, 1996. Notwithstanding the
foregoing, each of the Members shall be permitted to transfer their DHS Common
Stock to their respective shareholders and partners without restriction but
subject to the Stockholders Agreement with respect to any subsequent transfer.
SECTION 5.3. CHARTER DOCUMENTS. A true and complete copy of the articles
and certificates of incorporation, as the case may be, and by-laws of DHS and
Sub are attached hereto as Exhibit H.
SECTION 5.4. BINDING OBLIGATION; CONSENTS; LITIGATION. The execution and
delivery of this Agreement by DHS and Sub do not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles or
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certificate of incorporation, as the case may be, or by-laws of DHS or Sub or
(ii) any provision of, or result in a breach of any of the terms or provisions
of, or result in the acceleration of any obligation under, or constitute a
default under, any mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree to which DHS or Sub is a party, or to
which DHS or Sub is, or the assets, properties or business of DHS or Sub are,
subject, which would have a material adverse effect on DHS or any of their
assets. The respective Boards of Directors of DHS and Sub have approved this
Agreement and authorized the execution and delivery hereof. Each of DHS and Sub
has full power, authority and legal right to enter into this Agreement and to
consummate the transactions contemplated hereby. Each of DHS and Sub has taken
all action required by law, its articles of incorporation or certificate of
incorporation, as the case may be, its by-laws or otherwise to authorize and to
approve the execution and delivery of this Agreement and the documents,
agreements and certificates executed and delivered by it in connection herewith
and the consummation by it of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of DHS and Sub and
constitutes a valid and legally binding obligation of each of them, enforceable
against each of them in accordance with its terms. Except as set forth in
Section 10.5, no consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental authority is required to be
obtained by DHS in order to authorize the execution and delivery by DHS of this
Agreement or the consummation of the Merger.
SECTION 5.5. FINANCIAL STATEMENTS. DHS has furnished to Medtrust complete
copies of the audited financial statements of DHS for the period ended June 30,
1995 and June 30, 1996 (the "DHS Financial Statements"), including in each case,
a balance sheet, the related statements of income and of changes in financial
position for the periods then ended, the accompanying notes, and the unaudited
financial statements of DHS for the period ended September 30, 1996, including a
balance sheet and the related statements of income and of changes in financial
position for the period then ended (the balance sheet therein and the notes
thereto as at September 30, 1996 being called the "DHS Balance Sheet"). All such
financial statements (i) have been prepared in conformity with GAAP, (ii)
reflect and provide adequate reserves in respect of all known liabilities of DHS
in accordance with GAAP, including all known contingent liabilities as of their
respective dates, and (iii) present fairly the financial condition of DHS at
such dates.
SECTION 5.6. COMPLIANCE WITH LAW; PERMITS. Except in all cases for
non-compliance which would not have a material adverse effect, each of DHS and
Sub has complied with all laws relating to its securities, property, employees
or business, including, without limitation, all applicable statutes,
regulations, orders and restrictions relating to environmental standards or
controls.
SECTION 5.7. LITIGATION.
(a) Except as set forth on Schedule 5.7, there is no (i) action, suit,
claim, proceeding or investigation pending or, to the knowledge of DHS or
any officer of DHS, threatened against or affecting DHS or its assets,
employees or properties, at law or in equity, or before or by any court or
governmental authority, (ii) arbitration proceeding relating to DHS or its
assets, employees or properties or (iii) governmental inquiry pending or,
to the knowledge of DHS or any officer of DHS, threatened relating to or
involving DHS, its assets or properties or the business of DHS or the
transactions contemplated by this Agreement (including inquiries as to the
qualification of DHS to hold or receive any permit) and DHS does not know
of any basis for any of the foregoing. There are no pending actions, suits,
claims or proceedings brought by DHS against others.
(b) DHS has not received any written opinion, memorandum, legal advice
or notice from legal counsel to the effect that they are exposed, from a
legal standpoint, to any liability or disadvantage which may be material to
their respective businesses and which would continue past the Effective
Time. DHS is not in default with respect to any order, writ, injunction or
decree known to or served upon DHS of any court or of any governmental
authority.
(c) DHS knows of no pending or threatened action, suit, proceeding,
investigation, order or injunction before or by any court or governmental
body that seeks to restrain or to prevent the consummation of the Merger or
the other transactions contemplated by this Agreement.
SECTION 5.8. MATERIAL CONTRACTS AND AGREEMENT. No default, alleged default
or anticipatory breach exists on the part of DHS or, to the best knowledge of
DHS or any of its officers, on the part of any other party, under any material
agreement, written or oral, relating to the business of DHS.
SECTION 5.9. TAX MATTERS.
(a) DHS has filed all tax returns required to be filed by it under the
laws of the United States of America, the jurisdiction of its
incorporation, and each state or other jurisdiction in which it conducts
business activities and is required to file. DHS has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
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returns. DHS does not have any tax liability for which no tax reserve has
been made in respect of any jurisdiction in which DHS has business
activities and is required to file. DHS has set up as provisions for taxes
on the DHS Balance Sheet amounts sufficient for all accrued and unpaid
federal, state, county and local taxes of DHS, whether or not disputed,
including any interest and penalties in connection therewith, for all
fiscal periods ending on or before the date of the DHS Balance Sheet.
(b) No examinations of DHS' federal income tax returns are in
progress. The results of any settlements and any necessary adjustments in
state income tax resulting therefrom are properly reflected in DHS'
financial statements referred to in Section 5.5. DHS is not aware of any
fact which would constitute grounds for any further tax liability with
respect to the years which have not been examined. No agreements or waivers
have been made by or on behalf of DHS for the extension of time for the
assessment of any tax or for any applicable statute of limitations.
(c) Except for taxes for the payment of which an adequate reserve has
been established on the DHS Balance Sheet, there are no tax liens, whether
imposed by any federal, state or local taxing authority, outstanding
against any of the assets, properties or business of DHS.
(d) All taxes and assessments that DHS is required to withhold or to
collect have been duly withheld or collected and all withholdings and
collections have either been duly and timely paid over to the appropriate
governmental authority or are, together with the payments due or to become
due in connection therewith, duly reflected on the DHS Balance Sheet in
accordance with GAAP.
SECTION 5.10. ABSENCE OF UNDISCLOSED LIABILITIES. DHS does not have any
material indebtedness, liability or obligation of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, other than (i)
liabilities reflected in the DHS Balance Sheet, (ii) liabilities incurred in the
ordinary course of business of DHS since the date of the DHS Balance Sheet,
(iii) indebtedness, liabilities and obligations listed on Schedule 5.10 hereto,
and (iv) liabilities incurred in connection with the performance of this
Agreement.
SECTION 5.11. INSURANCE. All significant policies of insurance, together
with the premiums currently paid thereon, providing for personal, employee,
product or public liability coverage with respect to the business of DHS are and
will be in full force and effect at the Closing Date and thereafter in
accordance with their terms. There are no claims, actions, suits or proceedings
arising out of or based upon any of such policies of insurance, and, so far as
is known to DHS or any of its officers, no basis for any such claim, action,
suit or proceeding exists. There are no notices of any pending or threatened
terminations with respect to any of such policies and DHS is in compliance with
all conditions contained therein.
SECTION 5.12. NO MATERIAL ADVERSE CHANGE. Since the date of the DHS Balance
Sheet, DHS has not experienced any material damage, destruction or loss (whether
or not covered by insurance) to its assets or material adverse change in the
business, financial condition, operations, or results of operations of DHS.
SECTION 5.13. REQUIRED CONSENTS. There have been or will be timely filed,
given, obtained or taken all applications, notices, consents, approvals, orders,
registrations, qualifications, waivers or other actions of any kind required by
virtue of the execution and delivery of this Agreement by DHS or Sub or the
consummation by DHS or Sub of any of the transactions contemplated hereby.
SECTION 5.14. DISCLOSURE REGISTRATION STATEMENT. The Securities Act
Registration Statement, the Prospectus (as defined in Section 6.1(b) of the
Agreement), and any post-effective amendment thereto, on the date on which the
Securities Act Registration Statement (or the post-effective amendment thereto)
shall become effective, on the date on which the Proxy Statement is mailed to
the Members of Medtrust in connection with the Special Meeting and at all times
subsequent to such effectiveness and mailing, up to and including the date of
the Special Meeting with respect to all information set forth therein furnished
by DHS and relating to DHS (i) will comply as to form in all material respects
with the provisions of the Securities Act and the rules and regulations of the
SEC thereunder, as applicable, and (ii) will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements contained therein, in light of the
circumstances under which they will be made, not misleading. DHS will advise
Medtrust promptly after it receives notice thereof, of the times when the
Securities Act Registration Statement has become effective or any supplement or
amendment thereto has been filed, of the issuance of any stop order, of the
suspension of the qualification of the shares of DHS Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, of the
initiation or threat of any proceeding for any such purpose, or of any request
by the SEC for the amendment or supplement of the Securities Act Registration
Statement or for additional information. DHS has made all filings with the SEC
that it has been required to make under the Exchange Act (collectively the
"Public Reports"). Each of the Public Reports has complied with the Exchange Act
in all material respects. None of the Public Reports, as of their respective
dates, contained any untrue
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statement of a material fact or omitted to state a material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. DHS has delivered to Medtrust a correct
and complete copy of each Public Report (together with all exhibits and
schedules thereto and as amended to date).
SECTION 5.15. DISCLOSURE; REPRESENTATIONS AND WARRANTIES. DHS has made true
and complete responses to all Medtrust's requests for information, documents,
contracts, agreements and records of DHS relating to the business of DHS.
Neither this Agreement nor any statement, certificate, writing or document
furnished to Medtrust by DHS in connection with this Agreement contains, as of
the dates of such documents, any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein not
misleading.
SECTION 5.16. FINDERS OR BROKERS. DHS has not utilized the services of any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or commission in
connection with this Agreement or upon consummation of the transactions
contemplated hereby.
ARTICLE 6
TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
SECTION 6.1. SPECIAL MEETING.
(a) The Board of Directors of Medtrust has approved the execution and
delivery of this Agreement and the consummation of the Merger under the
terms set forth herein. If the Securities Act Registration Statement shall
become effective, DHS shall promptly notify Medtrust and furnish to
Medtrust at least one copy of its final Prospectus (as hereinafter defined)
for each Member. Thereafter, the Board of Directors of Medtrust shall
submit this Agreement to its Members for their adoption and will solicit
proxies in favor of and recommend to its Members such adoption at a meeting
thereof to be duly called and held upon the giving of the requisite
notices.
(b) The parties hereto shall cooperate with each other in every way in
carrying out the transactions contemplated herein, including, but not
limited to, (i) in obtaining all required approvals and authorizations,
(ii) in furnishing information required for use in a proxy statement (the
"Proxy Statement") for use in connection with the Special Meeting to be
held for the purpose of considering the transactions contemplated by this
Agreement, (iii) in preparing and filing with the SEC a Registration
Statement on Form S-1 under the Securities Act (or such other Form as may
be appropriate) covering the offer and sale of the shares of DHS Common
Stock to be issued in connection with the Merger (the "Securities Act
Registration Statement"), the prospectus and any prospectus supplement
which shall constitute a part thereof (the "Prospectus"), (iv) in preparing
and filing such reports and applications with state regulatory authorities
in connection with the Merger, including the issuance of the DHS Common
Stock as may be required and (v) in executing and delivering all documents,
instruments or copies thereof deemed necessary or useful by either party.
Should the appearance of any of the officers, directors, employees or
counsel of any of the parties hereto be requested by any of the parties or
by any governmental agency at any hearing in connection with any such
application or in connection with any such agency's review of the
transactions contemplated hereby, the Securities Act Registration
Statement, or the Prospectus such party promptly shall use its best efforts
to arrange for such appearance. Medtrust and DHS, each promptly shall
provide the other with copies of all such applications and all amendments
and supplements thereto filed or made in connection with the transactions
contemplated hereby and promptly shall advise the other of the substance of
all oral or written comments received thereon from applicable regulatory
authorities.
SECTION 6.2. EFFECTIVENESS OF SECURITIES ACT REGISTRATION STATEMENT. DHS
shall use its best efforts to cause the Securities Act Registration Statement to
become effective as soon as practicable following the date hereof.
SECTION 6.3. MANAGEMENT OF MEDTRUST. Contemporaneously herewith, DHS and
Medtrust have executed and delivered a Network Contracting and Management
Services Agreement in the form of Exhibit I (the "Management Services
Agreement") pursuant to which DHS will manage Medtrust until the earlier to
occur of Closing or termination of this Agreement.
ARTICLE 7
CERTAIN COVENANTS AND AGREEMENTS
SECTION 7.1. APPROVALS; CONSENTS. Medtrust will obtain or cause to be
obtained all consents, approvals and authorizations required by any applicable
requirement of law or by any contract or agreement to be obtained by Medtrust in
connection
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with the consummation of the Merger. DHS and Sub will obtain or cause to be
obtained all consents, approvals and authorizations required by any applicable
requirement of law or by any contract or agreement to be obtained by DHS and Sub
in connection with the consummation of the Merger.
SECTION 7.2. CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. Except as
otherwise provided in this Agreement, the Management Services Agreement and the
Exclusive Participation Agreements, Medtrust shall: (i) conduct its business
only in the ordinary course and consistent with past practices; (ii) keep in
full force and effect its corporate existence; (iii) comply with the Material
Contracts and other agreements by which it is bound; (iv) use reasonable efforts
to retain its employees and maintain its business relationships with customers
and suppliers; (v) use, operate and maintain in all material respects its
properties, as presently used, operated and maintained, except for ordinary wear
and tear; and (vi) except for increases in the ordinary course of business and
consistent with past practices, not grant any increase in the compensation or
rate of compensation payable or to become payable to any of its employees.
Except as otherwise provided in this Agreement, DHS and Sub shall conduct its
business in the ordinary course and consistent with past practice. Without the
prior written consent of the other parties neither Medtrust on the one hand, nor
Sub on the other hand, will: (i) amend its charter or by-laws, (ii) except as
expressly permitted by this Agreement, declare, set aside or pay any dividend or
distribution with respect to its capital stock, or repurchase, redeem or
otherwise acquire or exchange, directly or indirectly, any shares of its capital
stock or any securities convertible into any shares of its capital stock, (iii)
except as expressly permitted by this Agreement, issue, sell or otherwise permit
to become outstanding any additional shares of its capital stock, or any option,
warrant, conversion, or other right to acquire any such stock or any security
convertible into any such stock, or enter into an agreement or commitment with
respect to the foregoing, (iv) enter into any other agreement or commitment not
in the ordinary course of business, including without limitation an agreement or
commitment to acquire direct or indirect control over any third party or to sell
or otherwise dispose of any substantial part of its assets or any asset other
than in the ordinary course of business for reasonable and adequate
consideration; (v) incur any indebtedness, other than indebtedness incurred in
the ordinary course of business; or (vi) make any new commitments for capital
expenditures exceeding Five Thousand Dollars ($5,000) per item or Ten Thousand
Dollars ($10,000) in the aggregate.
SECTION 7.3. ACCESS TO INFORMATION AND DOCUMENTS.
(a) From the date hereof to the Closing Date, Medtrust shall give to,
or cause to be made available for, DHS and Sub shall give to, or cause to
be made available for, Medtrust and their respective counsels, accountants
and other representatives full access during normal business hours to all
properties, documents, contracts, employees and records of Medtrust or DHS
and Sub and furnish the other party with copies of such documents and with
such information as such party from time to time reasonably may request.
Each party will make available to the other for examination correct and
complete copies of all Federal, state, local and foreign tax returns filed
together with all available revenue agents' reports, all other reports,
notices and correspondence concerning tax audits or examinations and
analyses of all provisions for reserves or accruals of taxes, including
deferred taxes.
(b) Until the Closing Date (and, if this Merger Agreement is
terminated prior to the Closing Date, at all times after such termination),
the parties will not disclose or use any confidential information obtained
in the course of their respective investigations, except to the extent that
any such confidential information subsequently becomes public knowledge.
(c) If the Merger is not consummated and this Agreement is terminated,
then DHS and Sub promptly shall return all documents, contracts, records or
properties of Medtrust furnished by Medtrust to DHS and Sub and all copies
thereof, and Medtrust promptly shall return all documents, contracts,
records or properties of DHS and Sub furnished by DHS and Sub to Medtrust,
and all copies thereof.
SECTION 7.4. PERIODIC INFORMATION.
(a) From the date hereof to the Closing Date, Medtrust shall furnish
DHS with such additional financial and operating data and other information
regarding its business, reasonably available to Medtrust, as DHS shall from
time to time reasonably request.
(b) From the date hereof to the Closing Date, DHS and Sub shall
furnish Medtrust with such additional financial and operating data and
other information regarding its business, reasonably available to DHS and
Sub as Medtrust shall from time to time reasonably request.
SECTION 7.5. REPRESENTATIONS. Each of the parties to this Agreement (a)
will take all action necessary to render accurate as of the Closing Date their
respective representations and warranties contained herein, (b) will refrain
from taking any
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action which would render any such representation or warranty inaccurate in any
material respect as of such time, and (c) will perform or cause to be satisfied
each covenant or condition to be performed or satisfied by them under this
Agreement.
SECTION 7.6. INFORMATION.
(a) Medtrust will furnish DHS with all information concerning Medtrust
reasonably required for inclusion in the Securities Act Registration
Statement, the Prospectus, and any other registration statement,
application or filing made by DHS to the SEC or any other governmental or
regulatory body in connection with the transactions contemplated by this
Agreement.
(b) DHS will furnish Medtrust with all information concerning DHS and
Sub reasonably required for inclusion in the Proxy Statement or any other
governmental or regulatory body in connection with the transactions
contemplated by this Agreement.
SECTION 7.7. NOTICE OF BREACH.
(a) DHS will immediately give notice to Medtrust of the occurrence of
any event or the failure of any event to occur that results in a breach of
any representation or warranty by DHS or Sub or a failure by DHS or Sub to
comply with any covenant, condition or agreement contained herein.
(b) Medtrust will immediately give notice to DHS of the occurrence of
any event or the failure of any event to occur that results in a breach of
any representation or warranty by Medtrust or a failure by Medtrust to
comply with any covenant, condition or agreement contained herein.
SECTION 7.8. DIRECTOR AND OFFICER INSURANCE.
(a) DHS and Sub will use its commercially reasonable efforts to
provide each individual who serves as a director or officer of Sub
following the Effective Time with liability insurance for a period of 3
years after the Effective Time on such specific terms and conditions as are
customary and mutually agreed upon by the parties; provided, however, that
such insurance shall apply to acts of such directors and officers after the
Effective Time.
(b) DHS and Sub will not take any action to alter or impair any
exculpatory or indemnification provisions now existing in the articles of
incorporation or by-laws of Sub for the benefit of any individual who
serves as a director or officer of Sub.
SECTION 7.9. BUSINESS PLAN AND CAPITALIZATION OF SUB. As soon as
practicable after the Effective Time, DHS and the Board of Directors of Sub
shall develop a Business Plan for the development of a physician network in the
Northern Virginia area and shall determine the amount of capital DHS should
invest in the Sub for the purpose of funding its operations and providing
adequate reserves for the implementation of its Business Plan.
SECTION 7.10. EXCLUSIVITY. For a period of at least five years following
Closing, DHS shall utilize Sub as its exclusive independent practice association
in the Northern Virginia marketplace defined as the geographic area set forth on
Exhibit J.
SECTION 7.11. ESTABLISHMENT OF WOMAN CARE, IPA, LLC. DHS shall use
commercially reasonable efforts to organize, at its expense, a network of
Medtrust's ob/gyn physicians which shall include as its members qualified ob/gyn
physicians who are presently affiliated with Medtrust. Such network shall be
granted a right of first refusal with respect to ob/gyn services for all
third-party payor contracts executed by Sub during the five-year period
following Closing.
SECTION 7.12. RIGHT OF FIRST REFUSAL TO SPECIALISTS. For a period of four
years following the Effective Time, each specialist who is a member of Medtrust
shall have the right to participate, at his option, in all third-party payor
contracts available within a reasonable geographic area of such specialist's
office and executed by DHS, Medtrust, or its assigns, unless excluded by the
third party payor. Each such specialist will be required to be approved pursuant
to DHS normal credentialling process and will be required to meet the
utilization, quality assurance and performance guidelines established from time
to time by the plans. The fee arrangements under any such provider agreements
will be subject to modification from time to time by DHS.
SECITON 7.13. PRIMARY CARE AFFILIATION AGREEMENTS. Prior to Closing, DHS
and/or Sub shall solicit Medtrust primary care physicians to sign Exclusive
Participation Agreements pursuant to which such primary care physicians will be
paid Ten Thousand Dollars ($10,000) in cash upon the completion of their
credentialling. Credentialling shall be completed within ninety (90) days after
execution of the Exclusive Participation Agreement. Following Closing, each
primary care physician shall have the right to extend his agreement by an
additional term of two (2) years in which event he shall receive an
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additional Five Thousand Dollars ($5,000) in cash and options to acquire 1,000
shares of DHS Common Stock at an exercise price of Twenty Dollars ($20) per
share. For a period of at least two (2) years following Closing, any primary
care physician employed by a Medtrust Member shall be permitted to elect to sign
Exclusive Participation Agreements with DHS and/or Sub on the same terms and
conditions as described above, subject only to completion of DHS normal
credentialling process.
SECTION 7.14. REGISTRATION OF DHS COMMON STOCK. The DHS Common Stock shall
be included as registered shares under the Securities Act Registration
Statement.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF THE PARTIES
The obligations of the parties under this Agreement are subject to the
fulfillment and satisfaction of each of the following conditions:
SECTION 8.1. MEMBER APPROVALS. At or before the Effective Time, the Members
of Medtrust holding more than two-thirds of the Membership interests shall have
approved the Merger and the terms of this Agreement ("Requisite Member
Approval").
SECTION 8.2. PENDING LITIGATION. No legal, administrative, arbitrational,
investigatory or other proceeding shall be pending before any court, tribunal or
governmental authority at the Closing Date which seeks to challenge or prevent
the Merger or any transaction contemplated by this Agreement or which seeks to
obtain a remedy at law in connection therewith.
SECTION 8.3. THIRD PARTY CONSENTS. At or before the Effective Time, all
consents from third parties necessary to consummate the transactions
contemplated by this Agreement shall have been obtained.
ARTICLE 9
CONDITIONS TO DHS' OBLIGATIONS
The obligations of DHS and Sub hereunder are subject to the satisfaction,
at or before the Closing Date, of the following conditions (any of which may be
waived, in whole or in part, by DHS):
SECTION 9.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Medtrust contained in this Agreement (including the Schedules and
Exhibits hereto), or in any certificate or document delivered to DHS in
connection herewith, shall be true in all material respects on the Closing Date
as if made again on and as of the Closing Date. Medtrust shall have duly
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by
Medtrust at or before the Closing Date. DHS shall have been furnished with
certificates of appropriate officers of Medtrust, dated the Closing Date,
certifying in such detail as Medtrust may reasonably request to the fulfillment
of the foregoing conditions.
SECTION 9.2. OPINION OF MEDTRUST'S COUNSEL. Kaufman & Canoles, counsel to
Medtrust, shall have delivered to DHS and Sub an opinion, dated the Closing Date
and addressed to DHS and Sub in a form reasonably acceptable to DHS and
Medtrust.
SECTION 9.3. LEGAL MATTERS SATISFACTORY. All legal matters, and the form
and substance of all documents to be delivered by Medtrust to DHS at the
Closing, shall have been approved by, and shall be satisfactory to, counsel to
DHS.
SECTION 9.4. NO MATERIAL ADVERSE CHANGE. There shall not have been any
material adverse change in the business or financial condition of Medtrust from
that disclosed in the Financial Statements.
SECTION 9.5. ALLIANCE WITH PRIMARY CARE PHYSICIANS. At least thirty (30)
primary care physicians affiliated with Medtrust shall have executed and
delivered Exclusive Participation Agreements in the form of Exhibit K; provided
that each such primary care physician is capable of being credentialled and
included in DHS's managed care payor contracts. The Exclusive Participation
Agreements shall only become effective upon consummation of the Closing.
SECTION 9.6. DISSENTERS TO MERGER. Members holding no more than twenty
percent (20%) of the membership interests of Medtrust shall have dissented to
the consummation of the Merger at the Special Meeting.
SECTION 9.7. VIRGINIA BLUE SKY LAWS. The issuance of DHS Common Stock to
Medtrust Members shall have been approved by the Virginia Stock Corporation
Commission.
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ARTICLE 10
CONDITIONS TO MEDTRUST'S OBLIGATIONS
The obligations of Medtrust hereunder are subject to the satisfaction, at
or before the Closing Date, of the following conditions (any of which may be
waived, in whole or in part, by Medtrust):
SECTION 10.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of DHS contained in this Agreement, or in any certificate or document
delivered to Medtrust in connection herewith, shall be true in all material
respects at the Closing Date as if made again on and as of the Closing Date. DHS
shall have duly performed and complied in all material respects with all
agreements and conditions required by this Agreement to be performed or complied
with by DHS at or before the Closing Date. Medtrust shall have been furnished
with certificates of appropriate officers of DHS, dated the Closing Date,
certifying in such detail as Medtrust may reasonably request to the fulfillment
of the foregoing conditions.
SECTION 10.2. OPINION OF COUNSEL FOR DHS AND SUB. Corporate counsel for DHS
and Sub, shall have delivered to Medtrust an opinion, dated the Closing Date and
addressed to Medtrust in a form reasonably acceptable to DHS and Medtrust.
SECTION 10.3. LEGAL MATTERS SATISFACTORY. All legal matter, and the form
and substance of all documents to be delivered by DHS to Medtrust at the
Closing, shall have been approved by, and shall be reasonably satisfactory to,
counsel to Medtrust.
SECTION 10.4. NO MATERIAL ADVERSE CHANGE. There shall not have been any
material adverse change in the business or financial condition of DHS from that
disclosed in the DHS Balance Sheet for the period from the date of the DHS
Balance Sheet to the Closing Date.
SECTION 10.5. REGISTRATION STATEMENT. At or before the Effective Time, the
Securities Act Registration Statement shall have been declared effective by the
SEC and be effective on the Closing Date, and all applicable approvals of
governmental regulatory authorities of the United States of America or of any
state or political subdivision thereof required to consummate the Merger shall
have been obtained.
SECTION 10.6. ISSUE PRICE OF DHS COMMON STOCK. Between the date hereof and
the Effective Time, the consideration for the issuance of DHS Common Stock to
physicians in physician acquisition transactions shall be based upon a price of
not less than $15 per share.
ARTICLE 11
TERMINATION
SECTION 11.1. TERMINATION. This Agreement may be terminated and the Merger
abandoned at any time before the Closing Date:
(a) by the written consent of Medtrust and DHS;
(b) by DHS, in writing, if there has been a material misrepresentation
in this Agreement by Medtrust, or a material breach by Medtrust of any of
its warranties or covenants set forth herein, or a failure of any condition
to which the obligations of DHS hereunder are subject;
(c) by Medtrust, in writing, if there has been a material
misrepresentation in this Agreement by DHS, or a material breach by DHS or
Sub of any of the warranties or covenants of DHS or Sub set forth herein,
or a failure of any condition to which the obligations of Medtrust
hereunder are subject;
(d) by either Medtrust or DHS, in writing, if the Effective Time shall
not have occurred before January 31, 1997, for any reason other than the
failure of the party seeking to terminate this Agreement to perform its
obligations hereunder or a misrepresentation or breach of warranty by such
party herein;
SECTION 11.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to Section 11.1, the provisions of Section 7.3 and 12.12
shall survive any such termination and no such termination will relieve any
party from any liability for any breach of this Agreement or any
misrepresentation giving rise to such termination.
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ARTICLE 12
MISCELLANEOUS
SECTION 12.1. EXPENSES. Each party hereto shall pay its own costs and
expenses incident to its negotiation and preparation of this Agreement and to
its performance of and compliance with all agreements and conditions contained
herein to be performed or complied with by it, except that DHS will pay up to
$30,000 of the fees and expenses of Kaufman & Canoles as counsel to Medtrust
with respect to periods after August 14, 1996, irrespective of whether this
transaction shall be consummated.
SECTION 12.2. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) The representations, warranties and covenants of each party hereto
shall terminate upon (i) the Closing, or (ii) upon the date of termination
of this Agreement and abandonment of the Merger pursuant to the provisions
of Section 11.1 and the parties hereto shall have no continuing obligations
or liabilities with respect thereto except as may be provided in Section
12.2(b) below and except for the covenants set forth in Sections 7.3, 7.8,
7.9, 7.10, 7.11, 7.12, 7.13, 7.14 and 12.12 which shall survive the
Closing.
(b) If either DHS or Medtrust shall have the right to terminate this
Agreement and abandon the Merger pursuant to the provisions of Section
11.1(b) or Section 11.1(c), then the party which does not have the right so
to terminate this Agreement will use its reasonable efforts to cure the
condition giving rise to such right. If such party is unable to cure the
condition giving rise to such right, the other may exercise its right under
Section 11.1(b) or Section 11.1(c) to terminate this Agreement and abandon
the Merger, or may waive such right and proceed to consummate the Merger.
In any such event, the representations, warranties, covenants and
agreements of the parties shall terminate, and the parties hereto shall
have no continuing obligations or liabilities with respect thereto, except
that no termination shall relieve any party from liability for a breach of
any representation, warranty or covenant giving rise to such termination
and except that the provisions of Sections 7.3, 7.8, 7.9, 7.10, 7.11, 7.12,
7.13, 7.14 and 12.12 shall survive the Closing or termination of this
Agreement.
SECTION 12.3. GOVERNING LAW; JURISDICTION AND VENUE. THIS AGREEMENT SHALL
BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
COMMONWEALTH OF VIRGINIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WITHIN
SUCH STATE. EACH PARTY AGREES THAT THE FEDERAL COURTS OF THE UNITED STATES OR
STATE COURTS OF VIRGINIA SHALL HAVE THE EXCLUSIVE JURISDICTION FOR ANY DISPUTE
UNDER THIS AGREEMENT. MEDTRUST, DHS AND SUB HEREBY CONSENT TO PERSONAL
JURISDICTION IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT
SITTING IN ALEXANDRIA, VIRGINIA OR ANY STATE COURT LOCATED WITHIN THE EASTERN
DISTRICT WITH RESPECT TO CLAIMS ARISING UNDER THIS AGREEMENT.
SECTION 12.4. NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be deemed validly
given, made or served if in writing and delivered personally (as of such
delivery) or sent by certified mail (as of two days after deposit in a United
States post office), or sent by overnight courier service (as of two days after
delivery to an internationally recognized courier service), or by facsimile
(upon receipt), in any case, postage and charges prepaid,
(a) if to DHS or Sub, addressed to:
10451 Mill Run Circle
Tenth Floor
Owings Mills, MD 21117
Attention: Paul Serini
Telephone: (410) 654-3421
Facsimile: (410) 654-5806
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with copies to:
Gardner, Carton & Douglas
1301 K Street, N.W.
Suite 900, East Tower
Washington, DC 20005
Telephone: (202) 408-7100
Facsimile: (202) 289-1504
Attention: E. Michael Flanagan, Esq.
Thomas F. Mapp, Esq.
Corporate Counsel
10451 Mill Run Circle
Tenth Floor
Owings Mills, MD 21117
(b) if to Medtrust, addressed to:
Medtrust Medical Group, Inc.
3251 Old Lee Highway, Suite 510
Fairfax, VA 22030-1504
Telephone: (703) 359-0414
Facsimile: (703) 359-0416
with a copy to:
Kaufman & Canoles
One Commercial Place
P.O. Box 3037
Norfolk, VA 23514
Telephone: (757) 624-3000
Facsimile: (757) 624-3169
Attention: William R. Van Buren, III, Esq.
or such other address as shall be furnished in writing by either party to the
other.
SECTION 12.5. PRESS RELEASES. Medtrust and DHS will consult and cooperate
in the issuance, form, content and timing of any press releases issued in
connection with the transactions contemplated by this Agreement.
SECTION 12.6. ASSIGNMENT; AMENDMENTS, WAIVERS
(a) No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the
others.
(b) This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and permitted
assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement.
(c) No provision of this Agreement may be amended, modified or waived
except by written agreement duly executed by each of the parties. No waiver
by either party of any breach of any provision hereof shall be deemed to be
a continuing waiver thereof in the future or a waiver of any other
provision hereof; nor shall any delay or omission of either party to
exercise any right hereunder in any manner impair the exercise of any such
right accruing to it thereafter.
SECTION 12.7. ENTIRE AGREEMENT. This Agreement represents the entire
agreement between the parties and supersedes and cancels any prior oral or
written agreement, letter of intent or understanding related to the subject
matter hereof.
SECTOIN 12.8. SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect, unless
such action would substantially impair the benefits to either party of the
remaining provisions of this Agreement.
SECTION 12.9. HEADINGS. The headings herein are for convenience only, do
not constitute a part of this Agreement, and shall not be deemed to limit or
affect any of the provisions hereof.
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SECTION 12.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts which, taken together, shall constitute one and the same
instrument, and this Agreement shall become effective when one or more
counterparts have been signed by each of the parties.
SECTION 12.11. THIRD PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any person other than the parties to this Agreement
and their respective successors and permitted assigns. Notwithstanding the
foregoing, from and after Closing, any Member of Medtrust as of Closing shall be
entitled to enforce the provisions of Sections 7.8, 7.9, 7.10, 7.11, 7.12, 7.13
and 7.14 hereof as if such Member were an original party hereto to the extent
that the provisions of any such section are intended for the benefit of such
Member.
SECTION 12.12. ENFORCEMENT COSTS. The prevailing party shall be entitled to
recover its costs of enforcement, including, without limitation, reasonable
attorneys' fees, in any action brought to enforce its rights hereunder or to
seek redress for a breach of any of the representations, warranties or covenants
set forth herein.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto on the day and year first above written.
<TABLE>
<S> <C>
MEDTRUST MEDICAL GROUP, INC. DOCTORS HEALTH SYSTEM, INC.
By: /s/ Norman A. Marcus By: /s/ Stewart B. Gold
---------------------------- --------------------------
Name:Norman A. Marcus Stewart B. Gold, President
Title:Chairman and Chief Executive Officer
DOCTORS HEALTH OF VIRGINIA, INC.
By: /s/ Stewart B. Gold
----------------------------
Stewart B. Gold, President
</TABLE>
A-15
<PAGE>
ANNEX B
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
OF
DOCTORS HEALTH SYSTEMS, INC.
dated as of September 4, 1996
<PAGE>
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS RESTATED STOCKHOLDERS AGREEMENT is executed as of this 4th day of
September 1996, by and among DOCTORS HEALTH SYSTEM, INC., a Maryland corporation
("DHS"), STEWART GOLD ("GOLD"), SCOTT RIFKIN ("RIFKIN"), ALAN KIMMEL ("KIMMEL")
(Gold, Rifkin and Kimmel being collectively, the "MANAGEMENT STOCKHOLDERS" or
individually, a "MANAGEMENT STOCKHOLDER"), MEDICAL HOLDINGS LIMITED PARTNERSHIP,
a Maryland limited partnership (the "LP"), ST. JOSEPH MEDICAL CENTER, INC., a
Maryland non-profit, non-stock corporation (the "SERIES A INVESTOR"), MED-LANTIC
MANAGEMENT SERVICES, INC., a Maryland corporation (the "SERIES B INVESTOR"), and
GENESIS HEALTH VENTURES, INC., a Pennsylvania corporation (the "SERIES C
INVESTOR") (the Management Stockholders, the LP, the Series A Investor, the
Series B Investor and the Series C Investor each being a "STOCKHOLDER" and
collectively being the "STOCKHOLDERS"). As used in this Agreement, the terms
"Stockholder" and "Stockholders" shall include any successors, assigns,
transferees (whether by sale, gift, or other disposition), heirs, and personal
representatives of a Stockholder, whether permitted by the terms hereof or
otherwise.
WHEREAS, DHS has authorized capital stock consisting of Twenty Million,
Seven Hundred Thousand (20,700,000) shares of Class A Common Stock, with a par
value of one cent ($0.01) per share, of which Eight Hundred Thousand (800,000)
shares are issued and owned by the Management Stockholders in the proportions
set forth on Exhibit 1 attached hereto and made a part hereof (the "CLASS A
COMMON STOCK"); Ten Million (10,000,000) shares of Class B Common Stock, with a
par value of one cent ($0.01) per share, of which Two Million Two Hundred
Thousand (2,200,000) shares are issued and owned by the LP (the "CLASS B COMMON
STOCK"); Twenty-Nine Million, Fifty Thousand (29,050,000) shares of Class C
Common Stock, with a par value of one cent ($0.01) per share, of which no shares
are issued or outstanding (the "CLASS C COMMON STOCK"); One Million (1,000,000)
shares of Series A Convertible Preferred Stock with a par value of Five Dollars
($5.00) per share, One Million (1,000,000) of which are owned by the Series A
Investor (the "SERIES A PREFERRED STOCK"); Three Hundred Fifty-Five Thousand
Five Hundred Fifty-Six (355,556) shares of Series B Convertible Preferred Stock
with a par value of Eleven Dollars and Twenty-Five Cents ($11.25) per share,
Three Hundred Fifty-Five Thousand Five Hundred Fifty-Six (355,556) of which are
owned by the Series B Investor (the "SERIES B PREFERRED STOCK"), One Million
Seventy-One Thousand Four Hundred Twenty-Eight (1,071,428) shares of Series C
Convertible Preferred Stock with a par value of Seventeen Dollars and Fifty
Cents ($17.50) per share, One Million Seventy-One Thousand Four Hundred
Twenty-Eight (1,071,428) of which will be owned by the Series C Investor (the
"SERIES C PREFERRED STOCK") (the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock are hereinafter collectively
referred to as the "CONVERTIBLE PREFERRED STOCK"); and One Million (1,000,000)
shares of preferred stock, with a par value of One Cent ($0.01) per share, of
which no shares are issued and outstanding (the Class A Common Stock, the Class
B Common Stock, the Class C Common Stock, the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the preferred stock
each being a "CLASS" and collectively being the "STOCK"); and
WHEREAS, the Stockholders own all of the issued and outstanding shares of
DHS and, with DHS, desire to assure continuity and to perpetuate harmony in
DHS's management, policies and operations; and
WHEREAS, each Stockholder desires to facilitate the prompt liquidation of
the Management Stockholders' Stock in the event of the death of a Management
Stockholder, or, if necessary, during such Management Stockholder's lifetime;
and
WHEREAS, the Stockholders desire to maintain ownership and control of DHS
among themselves for the purposes of insuring continuity of management among
themselves; and
WHEREAS, the Stockholders and DHS deem it in their best interests to impose
certain restrictions and obligations on themselves in order to effectuate the
foregoing purposes; and
WHEREAS, certain of the Stockholders and DHS entered into a Stockholders
Agreement dated December 1, 1995, and in connection with the issuance to the
Series C Investor of the Series C Preferred Stock, the Stockholders and DHS wish
to enter into this Restated Stockholders Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, and other good and valuable consideration the receipt and
sufficiency of which are acknowledged, the parties, intending to be legally
bound, covenant and agree as follows:
1. RECITALS; DEFINITIONS.
(a) RECITALS. The foregoing recitals are made a part of this Agreement.
(b) CERTAIN DEFINITIONS.
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"CHANGE IN CONTROL" shall mean the earlier to occur of the following: (i) a
liquidating distribution to DHS' stockholders (or similar event); (ii) a
contribution, consolidation or merger where DHS is not the survivor; (iii) any
sale, exchange or other disposition of all, or substantially all, of DHS'
assets; or (iv) any public offering of DHS' securities at a company value of at
least $25,000,000 with proceeds to DHS of at least $15,000,000.
"DHS AMENDED AND RESTATED ARTICLES" shall mean the Articles of Amendment
and Restatement of DHS filed with the Maryland State Department of Assessments
and Taxation and effective on September 4, 1996
(c) OTHER DEFINED TERMS. When used in this Agreement with its initial
letter capitalized, a word that is not defined in this Section 1 shall have the
meaning set forth elsewhere in this Agreement. When a word used in this
Agreement with its initial letter capitalized is not defined in this Agreement,
such word shall have the meaning set forth in the Definition Appendix attached
to this Agreement as Appendix A.
2. STOCK, WARRANTS AND OPTIONS COVERED; ADDITIONAL PARTIES. Except as
otherwise provided herein, all of the provisions of this Agreement shall apply
to, and the term "Stock" shall include, the Stock and all other shares of
capital stock and rights, including warrants and options, to acquire shares of
capital stock and all other equity securities now owned or which may be issued
hereafter to the Stockholders in consequence of any additional issuance,
purchase, exchange or reclassification of shares, corporate reorganization, or
any other form of recapitalization, consolidation, merger, share split, share
dividend, or which are acquired by Stockholders in any other manner. For
purposes of this Agreement, the term "Stock" shall include (i) beneficial
interests held by any beneficiary in any trust permitted to be a transferee
hereunder, (ii) that certain Stock Warrant No. 1 executed and delivered on
November 28, 1995 by DHS to the Series B Investor granting to the Series B
Investor the right to acquire Eighty Eight Thousand Eight Hundred Eighty Nine
(88,889) shares of the Class A Common Stock of the Company (the "WARRANT"), and
(iii) the option of the Series C Investor to purchase Five Hundred Thousand
(500,000) shares of Series C Preferred Stock from DHS pursuant to the Option
Agreement dated as of September 4, 1996 between DHS and the Series C Investor
(the "OPTION"). The parties hereto acknowledge and agree that upon conversion of
shares of Convertible Preferred Stock into shares of Class C Common Stock all
references to "Stock" and all references to "Convertible Preferred Stock" herein
shall include all such shares of Class C Common Stock, and all references to
"holders of Convertible Preferred Stock" shall include "holders of Class C
Common Stock." DHS acknowledges and agrees that it will not issue any additional
shares of its capital stock (or options) to any person or entity which is not a
party to this Agreement without requiring, as a condition precedent to such
issuance, that such person or entity execute a counterpart to this Agreement
(provided that non-executive employees of DHS to whom shares of capital stock
are issued pursuant to any employment agreement or any stock option, stock
purchase or similar plan of DHS shall not be required to execute this Agreement
so long as DHS, as a condition of such issuance, retains rights to repurchase
such shares of capital stock under substantive terms and conditions consistent
with those granted to DHS herein), and any member of DHS' executive management
team who is granted shares (or options) shall be deemed a "Management
Stockholder" for purposes hereof.
3. PURCHASE AND SALE. DHS agrees to purchase and redeem, and each
Stockholder agrees to sell and transfer, the Stock in the manner and upon the
terms provided in this Agreement. No purchase, sale, gift, endorsement,
assignment, transfer, pledge, encumbrance or other disposition, whether
voluntary, involuntary or by operation of law, including, without limitation,
any transfer pursuant to a divorce decree, of any shares of Stock of any
Stockholder shall be valid and binding except as provided in, and in accordance
with, the terms and conditions of this Agreement. Any purported transfer by any
Stockholder of the Stock or issuance of capital stock by the Company other than
in accordance with this Agreement shall be null and void, and DHS shall refuse
to recognize any such transfer and shall not reflect on its records any change
in record ownership of the Stock pursuant to any such transfer. Any transferee
of the Stock becoming the owner of the Stock in compliance with this Agreement
shall thereafter be deemed a Stockholder. The personal representative of a
deceased Stockholder shall automatically be subject to the terms and conditions
of this Agreement. Notwithstanding the foregoing, the holders of Convertible
Preferred Stock are entitled, pursuant to the terms of the DHS Amended and
Restated Articles, to exercise rights to convert shares of Convertible Preferred
Stock into shares of Class C Common Stock, and to require DHS to purchase shares
of Convertible Preferred Stock under certain circumstances, and no such
conversion or redemption shall give any person any rights under this Agreement.
4. DEATH, DISABILITY AND TERMINATION OF EMPLOYMENT OF A MANAGEMENT
STOCKHOLDER; INVOLUNTARY TRANSFERS.
(a) GENERAL.
(i) Upon the occurrence of the termination of employment of any
Management Stockholder (except with respect to each of Rifkin and Kimmel,
the termination of whose employment is governed by Section 4(f) hereof)
with DHS for any reason, other than an "Involuntary Transfer" (as defined
below) including, but not limited to, death or "disability" (as
B-2
<PAGE>
defined in Section 4(c) below), such Management Stockholder or other
Stockholder, as the case may be, shall sell, and DHS shall purchase, all of
the Stock then registered in such Stockholder's name at the price provided
in Section 4(e) or Section 6 hereof, as the case may be, and upon the terms
provided in Section 7 hereof.
(ii) Upon the occurrence of an "Involuntary Transfer" (as defined in
Section 4(d) below) of the Stock of any Stockholder (the "INVOLUNTARY
TRANSFER STOCKHOLDER"), DHS shall have the right, for a period of thirty
(30) days from the date of such occurrence, to purchase such Stock by
providing written notice to such effect to such Involuntary Transfer
Stockholder and to any court which has then exercised jurisdiction over
such Involuntary Transfer Stockholder with respect to its Stock, or to any
assignee, trustee in bankruptcy or successor in interest, as the case may
be, and such Involuntary Transfer Stockholder shall be obligated if DHS
elects to exercise its right to purchase such Stock to sell all but not
less than all of the Stock then registered in such Involuntary Transfer
Stockholder's name at the price provided in Section 6 hereof and upon the
terms provided in Section 7 hereof. If DHS elects not to exercise its
purchase pursuant to this Section 4(a) (ii) within such thirty (30) day
period, it shall immediately provide written notice to that effect to all
of the other stockholders (the "NON-INVOLUNTARY TRANSFER STOCKHOLDERS"),
who shall have the option to purchase, and such Involuntary Transfer
Stockholder shall be obligated to sell to the extent such option is
exercised, all of the shares of such Stock at the price provided in Section
6 hereof and upon the terms provided in Section 7 hereof. If more than one
Non-Involuntary Transfer Stockholder desires to so purchase, then they
shall purchase in such proportions as they may agree. In the absence of
agreement, each of the Non-Involuntary Transfer Stockholders desiring to
purchase such stock shall be entitled to purchase up to that number of
shares of such Stock which is equal to the product of his percentage
interest of all of the shares of DHS Capital Stock then held by such
Non-Involuntary Transfer Stockholders multiplied by the number of shares of
stock available for purchase hereunder. The Non-Involuntary Transfer
Stockholders shall have the right to exercise their respective options for
a period of thirty (30) days following their receipt of DHS' notice that it
has elected not to purchase such Stock by providing notice in the manner
required of DHS as otherwise set forth in this Section 4(a)(ii).
(b) FURTHER ASSURANCES. Each Management Stockholder hereby agrees that he
and/or his personal representative, and each trustee of any permitted trust
hereunder, shall be bound to take any and all action necessary to enable DHS to
purchase his Stock pursuant to the provisions of this Section 4.
(c) DISABILITY. For purposes of this Section 4, "DISABILITY" with respect
to a Management Stockholder shall have the meaning set forth in said Management
Stockholder's DHS Employment Agreement or other employment agreement with DHS,
and if no such agreement exists, as determined by DHS' Board of Directors in the
exercise of its reasonable discretion.
(d) INVOLUNTARY TRANSFERS; PAYMENT. For purposes of this Section 4, the
occurrence of any of the following events shall constitute an "INVOLUNTARY
TRANSFER": (i) if any portion of a Stockholder's Stock is attached or taken in
execution, or (ii) if a Stockholder applies for the benefit of, or files a case
under, any provision of the federal bankruptcy law or any other law relating to
insolvency or relief of debtors, or (iii) if a case or proceeding is brought
against a Stockholder under any provision of the federal bankruptcy law or any
other law relating to insolvency or relief of debtors which is not dismissed
within sixty (60) days after the commencement thereof, or (iv) if a Stockholder
makes an assignment for the benefit of creditors, or (v) if any portion of a
Stockholder's Stock is made subject to a charging order, or (vi) if any portion
of a Management Stockholder's Stock or other Stock held by a natural person is
transferred pursuant to a divorce decree. For purposes of this Section 4(d), the
occurrence of any of the foregoing events described in Sections 4(d) (i) through
(v) above, (A) with respect to the General Partner of the LP, shall constitute
an Involuntary Transfer with respect to the LP of the Class B Common Stock, (B)
with respect to the Series A Investor, shall constitute an Involuntary Transfer
of the Series A Preferred Stock or the Class C Common Stock, as the case may be,
(C) with respect to the Series B Investor, shall constitute an Involuntary
Transfer of the Series B Preferred Stock, the Warrant or the Class C Common
Stock, as the case may be, and (D) with respect to the Series C Investor, shall
constitute an Involuntary Transfer of the Series C Preferred Stock, the Option
or the Class C Common Stock, as the case may be. If any Stockholder has actual
knowledge of an Involuntary Transfer by a Stockholder of his or its Stock, such
Stockholder shall give written notice to such effect to DHS, and the giving of
such written notice shall constitute the occurrence of such event for purpose of
the time period set forth in this Section 4(d).
(e) PAYMENT UPON TERMINATION OF EMPLOYMENT OF MANAGEMENT STOCKHOLDER OTHER
THAN RIFKIN OR KIMMEL. If the employment of a Management Stockholder other than
Rifkin or Kimmel with DHS is terminated, then the Management Stockholders whose
employment with DHS has not been terminated shall have the option, for a period
of sixty (60) days from the date of such termination, to purchase (in such
proportions as they shall agree upon or, if they cannot agree, in proportion to
their ownership of DHS Class A Common Stock other than the stock of the
terminated Management Stockholder) and, if such option is accepted, such
terminated Management Stockholder shall sell all of the shares of Stock held by
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such terminated Management Stockholder (the "TERMINATED MANAGER'S STOCK") on
terms substantially identical to those set forth in Section 7 hereof (other than
subsections (c) and (d) thereof) and for a price determined in accordance with
Subsections (i) and (ii) of this Section 4(e). If all of the Terminated
Manager's Stock is not purchased by the other Management Stockholders, DHS shall
purchase, within ninety (90) days after the date of said termination, and such
terminated Management Stockholder shall sell, all of the Terminated Manager's
Stock upon the following terms and at the following prices:
(i) if such Management Stockholder's employment is terminated (A) by
DHS for any of the specific reasons enumerated in Section 4.3(a) of such
Management Stockholder's DHS Employment Agreement, or, if no such agreement
is then in effect, for "good cause" under applicable law, or (B) by the
Management Stockholder for any reason not constituting "constructive
termination" as defined in Section 4.4(b) of such Management Stockholder's
DHS Employment Agreement, then at a price equal to the lower of such
Management Stockholder's acquisition cost for his Stock or One Dollar
($1.00) per share, and upon the terms set forth in Section 7 hereof; or
(ii) if such Management Stockholder's employment is terminated (A) by
death, or by "disability" (as defined herein), or (B) by expiration of the
term of such DHS Employment Agreement, or (C) by DHS without good cause as
contemplated by Section 4.3(b) of such Employment Agreement, or (D) by the
Management Stockholder for reasons constituting "constructive termination"
under such Agreement, then at the price set forth in Section 6 hereof, and
upon the terms set forth in Section 7 hereof.
If DHS is required, pursuant to the provisions of this Section 4(e), to purchase
the Terminated Manager's Stock at a price determined pursuant to Subsection (ii)
hereof, DHS shall, as a condition precedent to the closing of such purchase, on
or before the Closing Date for its acquisition of the Terminated Manager's
Stock, pay to (A) the Series A Investor all of the dividends then accrued but
unpaid on the Series A Preferred Stock plus all accrued and unpaid interest
thereon (whether by payment of cash or set off of any accrued but unpaid
interest under the Promissory Note issued by the Series A Investor to DHS), or
otherwise make provision for the payment of such dividends that is acceptable to
the Series A Investor, in its reasonable discretion, (B) the Series B Investor
all of the dividends then accrued but unpaid on the Series B Preferred Stock
plus all accrued and unpaid interest thereon or otherwise make provision for the
payment of such dividends that is acceptable to the Series B Investor, in its
reasonable discretion, and (C) the Series C Investor all of the dividends then
accrued but unpaid on the Series C Preferred Stock plus all accrued and unpaid
interest thereon or otherwise make provision for the payment of such dividends
that is acceptable to the Series C Investor, in its reasonable discretion.
Notwithstanding the foregoing, in the event DHS has paid the Series C Investor
as set forth in this paragraph prior to the consummation of a Qualified Public
Offering on or before August 30, 1998 as defined in the Articles of Amendment
and Restatement dated September 4, 1996, then on or before the consummation of a
Qualified Public Offering on or before August 30, 1998 (at a price per share not
less than the weighted average price paid or to be paid by the Series C Investor
for all shares of Series C Preferred Stock then oustanding) the Series C
Investor shall pay DHS an amount equal to the amount of dividends and interest
paid to the Series C Investor pursuant to this Section.
(f) TERMINATION OF EMPLOYMENT, DEATH, DISABILITY OF RIFKIN AND KIMMEL.
(i) TERMINATION OF EMPLOYMENT WITHOUT GOOD CAUSE. Except as set forth
in the proviso to this sentence, if the employment of Rifkin or Kimmel, as
the case may be, with DHS is terminated (A) by DHS for any of the specific
reasons enumerated in Section 4.3(a) of his respective DHS Employment
Agreement (or, if no such agreement is then in effect, for "good cause"
under applicable law), or (B) by Rifkin or Kimmel, as the case may be, for
any reason not constituting "constructive termination" as defined in
Section 4.4(b) of such DHS Employment Agreement, then Rifkin or Kimmel, as
the case may be, shall sell, and DHS shall purchase, all of the stock then
registered in Rifkin's or Kimmel's name, as the case may be, at a price
equal to the lower of Rifkin's or Kimmel's, as the case may be, acquisition
cost for his Stock or One Dollar ($1.00) per share, and upon the terms
provided in Section 7 hereof; provided, however, that the provisions of
this paragraph 4(f) (i) shall not apply to any shares of capital stock of
DHS held by Rifkin or Kimmel on the date hereof (or received as a
distribution on or in respect of such shares after the date hereof as the
result of any recapitalization, stock split or similar event).
(ii) DEATH; DISABILITY. Upon each of (A) the death of Rifkin or
Kimmel, as the case may be, and the appointment and qualification of such
deceased stockholder's personal representative, and (B) the "Disability" of
Rifkin or Kimmel (as such term is defined in each such shareholder's
current employment agreement with DHS or, if there is none, as reasonably
determined by the Board of Directors of DHS), as the case may be, such
personal representative, Rifkin or Kimmel, as the case may be, may, for a
period of sixty (60) days from the date of such appointment and
qualification or disability, as the case may be, offer to the other
Management Stockholders the option to purchase (in such proportions as they
shall agree upon or, if they cannot agree, in proportion to their ownership
of the DHS Class A Common Stock), all
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of the shares of Stock held by such personal representative, Rifkin or
Kimmel, as the case may be, on terms substantially identical to those set
forth in Section 7 hereof (other than Subsections (c) and (d) thereof) and
at a price determined in accordance with the terms of Section 6 hereof. If
the option to purchase all of the shares of Stock so offered is not
exercised or accepted within such sixty (60) day period, then such personal
representative, Rifkin or Kimmel, as the case may be, shall be entitled to
sell, by providing written notice to DHS, and DHS shall be required to
purchase upon receipt of such notice, all or any portion of such shares of
Stock held by Rifkin or Kimmel, as the case may be, as such number of
shares is set forth in such written notice, at the price and upon the terms
provided in Sections 6 and 7 hereof.
(iii) TERMINATION OF EMPLOYMENT UNDER OTHER CIRCUMSTANCES. If Rifkin's
or Kimmel's employment is terminated (A) by expiration of the term of his
respective DHS Employment Agreement, or (B) by DHS without good cause as
contemplated by Section 4.3(b) of such Employment Agreements, or (C) by
Rifkin or Kimmel, as the case may be, for reasons constituting
"constructive termination" under such Agreements, then DHS shall purchase,
within ninety (90) days after the date of such termination, and Rifkin and
Kimmel shall sell, as the case may be, those shares (and only those shares)
of capital stock of DHS acquired by Rifkin or Kimmel, as the case may be,
after the date hereof (other than as a distribution on or in respect of
shares held on the date hereof through a recapitalization, stock split, or
similar event) at the price set forth in Section 6 hereof, and upon the
terms set forth in Section 7 hereof.
If DHS is required, pursuant to the provisions of this Section 4(f), to purchase
the Terminated Manager's Stock at a price determined pursuant to Subsection (ii)
hereof, DHS shall, as a condition precedent to the closing of such purchase, on
or before the Closing Date for its acquisition of the Terminated Manager's
Stock, pay to (A) the Series A Investor all of the dividends then accrued but
unpaid on the Series A Preferred Stock plus all accrued and unpaid interest
thereon (whether by payment of cash or set off of any accrued but unpaid
interest under the Promissory Note issued by the Series A Investor to DHS), or
otherwise make provision for the payment of such dividends that is acceptable to
the Series A Investor, in its reasonable discretion, (B) the Series B Investor
all of the dividends then accrued but unpaid on the Series B Preferred Stock
plus all accrued and unpaid interest thereon or otherwise make provision for the
payment of such dividends that is acceptable to the Series B Investor, in its
reasonable discretion, and (C) the Series C Investor all of the dividends then
accrued but unpaid on the Series C Preferred Stock plus all accrued and unpaid
interest thereon or otherwise make provision for the payment of such dividends
that is acceptable to the Series C Investor, in its reasonable discretion.
Notwithstanding the foregoing, in the event DHS has paid the Series C Investor
as set forth in this paragraph prior to the consummation of a Qualified Public
Offering on or before August 30, 1998 as defined in the Articles of Amendment
and Restatement dated September 4, 1996, then on or before the consummation of a
Qualified Public Offering on or before August 30, 1998 (at a price per share not
less than the weighted average price paid or to be paid by the Series C Investor
for all shares of Series C Preferred Stock then oustanding) the Series C
Investor shall pay DHS an amount equal to the amount of dividends and interest
paid to the Series C Investor pursuant to this Section.
(g) PRICE ADJUSTMENTS FOLLOWING A CHANGE IN CONTROL OF DHS. If the
employment of a Management Stockholder other than Rifkin or Kimmel with DHS is
terminated pursuant to the provisions in Section 4(e)(ii)(C) or (D) above, and
there occurs a Change in Control of DHS within the first twenty-four months
following the date of such termination, DHS agrees to pay or cause to be paid to
such terminated Management Stockholder (or to his heirs, legatees and/or
guardians), in addition to the purchase price for such terminated Management
Stockholder's Stock as determined pursuant to Section 7 hereof, the value of
such terminated Management Stockholder's fair, allocative, share of any
consideration that would have been payable to such terminated Management
Stockholder (less any such consideration actually received by such Management
Stockholder as a result of a sale of his Stock, whether to another Management
Stockholder, DHS or another person) or to DHS upon, and as a result of, such a
Change in Control of DHS within such twenty-four month period. Such payment
shall be made by DHS when and as DHS or the other DHS Stockholders receive
consideration as a result of such a Change in Control, and shall be paid by DHS
based upon such terminated Management Stockholder's pro-rata equity interest in
DHS at the time of termination. Any payment by DHS pursuant to this Section 4(f)
may, at DHS' option, be made by delivery of (i) cash, (ii) a promissory note
with a term of not more than ten years and interest at a rate calculated
pursuant to Section 1274(d) of the Internal Revenue Code of 1986, or (iii) an
appropriate in-kind distribution of any consideration received as a result of
such Change in Control. The parties hereto acknowledge and agree that each
Partner of the LP who has entered into a Professional Service Employment
Agreement with the LLC shall be entitled to receive, and pursuant to Section
7.3.3 (i) of the Limited Partnership Agreement has received, the benefit of the
substantive provisions set forth in this Section 4(g), upon the sale of his
Limited Partner Interest in the LP due to the termination of his employment with
BMG resulting from a termination by the LLC without good cause or a
"constructive termination," as defined therein.
5. VOLUNTARY TRANSFERS OF STOCK.
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(a) STOCK RESTRICTED. Subject to the rights of the holders of Convertible
Preferred Stock set forth in the DHS Amended and Restated Articles, each
Stockholder agrees that, during his lifetime or its corporate existence or
otherwise, he or it will not sell, transfer, exchange, assign or otherwise
dispose of (by sale, gift, or otherwise), or mortgage, hypothecate, lien,
pledge, encumber or otherwise cause a security interest to be created in any of
his or its Stock, except upon satisfaction of the conditions set forth in this
Section 5 and Section 4 above. Notwithstanding the foregoing, (i) each
Management Stockholder shall be entitled to transfer all or any portion of his
shares of Stock to a trust solely for the benefit of himself, his spouse and/or
his lineal descendants provided that, as a condition of said transfer, (A) the
agreement governing said trust requires transfers of any beneficial interests
therein (other than among such permitted persons) to be treated as transfers of
Stock hereunder and subject to the terms hereof, and (B) all trustees of said
trust execute and deliver to the parties hereto a counterpart of this Agreement
and otherwise agree to be bound by all of the terms and provisions hereof with
respect to the Stock, and (ii) each holder of Convertible Preferred Stock and of
Class B Common Stock may transfer its Convertible Preferred Stock or Class B
Common Stock, as the case may be, to any entity all of the ownership interests
in which are owned by such holder, provided that such transferee executes and
delivers to the parties hereto a counterpart of this Agreement and otherwise
agrees to be bound by all of the terms and provisions hereof.
(b) DELEGATION RIGHTS. If DHS is unable to exercise any of its purchase
rights hereunder, it shall be entitled to delegate such rights to such of the
Stockholders who desire to purchase stock upon the occurrence of the events set
forth in Sections 4(a)(i) or (ii) hereof, provided such stockholders, as a
condition of such obligation, shall be entitled to purchase such stock pro rata
as consolidated pursuant to Section 4(a)(ii) hereof.
(c) VOLUNTARY TRANSFERS BY MANAGEMENT STOCKHOLDERS.
(i) OPTION OF OTHER MANAGEMENT STOCKHOLDERS. A Management Stockholder
shall have the right to receive a bona fide offer to purchase (which he is
willing to accept) (a "MANAGEMENT OFFER") from any independent third person
capable of consummating such a sale of all, but not less than all, of his
Stock (the "Management Offered Stock"). Before accepting a Management
Offer, such Management Stockholder shall first offer in writing (the
"MANAGEMENT STOCKHOLDER'S OFFER") to sell the Management Offered Stock to
the other Management Stockholders (the "OTHER MANAGEMENT STOCKHOLDERS") at
the price and on the terms on which such selling Management Stockholder
proposes to transfer the Management Offered Stock to the proposed third
party transferee. The Management Stockholder's Offer shall set forth (A)
the number of shares of the Management Offered Stock, (B) the name and
address of the proposed transferee, (C) the amount of consideration to be
received by the selling Stockholder, and (D) the method of proposed
payment. A copy of the Management Stockholder's Offer shall simultaneously
also be sent to all of the other Stockholders and to DHS.
The Other Management Stockholders shall have the option to acquire all
or any of the shares of Management Offered Stock at the price and upon the
terms provided in the Management Stockholder's Offer. If more than one
Other Management Stockholder desires to purchase the Management Offered
Stock, such Management Offered Stock shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each of the
Other Management Stockholders desiring to purchase the Management Offered
Stock shall be entitled to purchase up to that number of shares of
Management Offered Stock which is equal to the product of such number of
shares of Management Offered Stock divided by the number of other
Management Stockholders desiring to purchase such shares of Stock. The
Other Management Stockholders shall have the right to exercise their
respective options to purchase the Management Offered Stock, for a period
of thirty (30) days following their receipt of the Management Stockholder's
Offer, by notifying the selling Management Stockholder in writing of their
respective intentions to purchase at Closing (as defined in Section 7(e)
hereof) all or any shares of the Management Offered Stock.
(ii) OPTION OF THE HOLDERS OF CLASS B COMMON STOCK. If the Other
Management Stockholders do not accept the Management Stockholder's Offer to
purchase all of the shares of Management Offered Stock within the period of
thirty (30) days provided in Section 5(c)(i), then the selling Management
Stockholder, immediately thereafter, shall be deemed to have made an offer
(the "MANAGEMENT STOCKHOLDER'S SECOND OFFER") to sell all of the remaining
shares of the Management Offered Stock (the "REMAINING MANAGEMENT OFFERED
STOCK") to the holders of Class B Common Stock at the price and upon the
terms provided in the Management Stockholder's Offer. The holders of the
Class B Common Stock shall have the option, for a period of fifteen (15)
days after the earlier to occur of (A) expiration of the thirty (30) day
period provided in Section 5(c)(i), or (B) notification by all of the Other
Management Stockholders to the holders of Class B Common Stock to the
effect that the Other Management Stockholders, in the aggregate, have
elected to purchase less than all of the shares of Management Offered Stock
as provided in Section 5(c)(i), to purchase all of the Remaining Management
Offered Stock, upon written notification to the selling Management
Stockholder, at the price
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and upon the terms provided in this Section 5(c). If more than one holder
of Class B Common Stock desires to purchase the Remaining Management
Offered Stock, such Remaining Management Offered Stock shall be purchased
by them in such proportions as they may agree. In the absence of agreement,
each of the holders of Class B Common Stock desiring to purchase the
Remaining Management Offered Stock shall be entitled to purchase up to that
number of shares of Remaining Management Offered Stock which is equal to
the product of his percentage interest of all of the shares of Class B
Common Stock held by all such holders of Class B Common Stock times the
number of shares of Remaining Management Offered Stock available for
purchase hereunder. The holders of Class B Common Stock shall have the
right to exercise their respective options to purchase the Remaining
Management Offered Stock by notifying the selling Management Stockholder in
writing of their respective intentions to purchase at Closing (as defined
in Section 7(e) hereof) all or any shares of the Remaining Management
Offered Stock.
(iii) OPTION OF THE HOLDERS OF CONVERTIBLE PREFERRED STOCK. If the
holders of Class B Common Stock do not accept the Management Stockholder's
Second Offer to purchase all of the shares of Remaining Management Offered
Stock within the period of fifteen (15) days provided in Section 5(c)(ii),
then the selling Management Stockholder, immediately thereafter, shall be
deemed to have made an offer (the "MANAGEMENT STOCKHOLDER'S THIRD OFFER")
to sell all of the remaining shares of the Remaining Management Offered
Stock (the "AVAILABLE MANAGEMENT OFFERED STOCK") to the holders of
Convertible Preferred Stock at the price and upon the terms provided in the
Management Stockholder's Offer. The holders of Convertible Preferred Stock
shall have the option, for a period of fifteen (15) days after the earlier
to occur of (A) expiration of the fifteen (15) day period provided in
Section 5(c)(ii), or (B) notification by all of the holders of Class B
Common Stock to the holders of Convertible Preferred Stock to the effect
that the holders of Class B Common Stock have elected to purchase less than
all of the shares of Remaining Management Offered Stock as provided in
Section 5(c)(ii), to purchase all of the Available Management Offered
Stock, upon written notification to the selling Management Stockholder, at
the price and upon the terms provided in this Section 5(c). If more than
one holder of Convertible Preferred Stock desires to purchase the Available
Management Offered Stock, such Available Management Offered Stock shall be
purchased by them in such proportions as they may agree. In the absence of
agreement, each of the holders of Convertible Preferred Stock desiring to
purchase the Available Management Offered Stock shall be entitled to
purchase up to that number of shares of Available Management Offered Stock
which is equal to the product of his percentage interest of all of the
shares of Convertible Preferred Stock held by all such holders of
Convertible Preferred Stock times the number of shares of Available
Management Offered Stock available for purchase hereunder. The holders of
Convertible Preferred Stock shall have the right to exercise their
respective options to purchase the Available Management Offered Stock by
notifying the selling Management Stockholder in writing of their respective
intentions to purchase at Closing (as defined in Section 7(e) hereof) all
or any shares of the Available Management Offered Stock.
(iv) OPTION OF DHS. If the holders of Convertible Preferred Stock do
not accept the Management Stockholder's Third Offer to purchase all of the
shares of Available Management Offered Stock within the period of fifteen
(15) days provided above in Section 5(c)(iii), then the selling Management
Stockholder, immediately thereafter, shall be deemed to have made an offer
(the "FINAL MANAGEMENT STOCKHOLDER'S OFFER") to sell all of the remaining
shares of the Available Management Offered Stock (the "FINAL MANAGEMENT
OFFERED STOCK") to DHS at the price and upon the terms provided in the
Management Stockholder's Offer. DHS shall have the option, for a period of
fifteen (15) days after the earlier to occur of (i) expiration of the
fifteen (15) day period provided in Section 5(c)(iii), or (ii) notification
by all of the holders of Convertible Preferred Stock to DHS to the effect
that the holders of Convertible Preferred Stock have elected to purchase
less than all of the shares of Available Management Offered Stock as
provided in Section 5(c)(iii), to purchase all or some of the Final
Management Offered Stock, upon written notification to the selling
Management Stockholder, at the price and upon the terms provided in the
Management Stockholder's Offer.
(v) TRANSFERS TO THIRD PARTIES. If (A) a Management Stockholder elects
to transfer all of his shares of Management Stock; (B) said Management
Stockholder strictly complies with the provisions of Sections 5(c) (i)
through 5(c) (iv) above; (C) the Remaining Management Stockholders, the
holders of Class B Common Stock, the holders of Convertible Preferred Stock
and DHS elect to purchase, in the aggregate, less than all of the shares of
Management Offered Stock; and (D) the Management Stockholder who desires to
transfer the Management Offered Stock complies with the terms of this
Section 5(c)(v), then all of the Management Offered Stock remaining unsold
pursuant to the rights of refusal contained in this Section 5(c) may be
sold by the selling Management Stockholder to the third party named in the
Management Stockholder's Offer within a period of thirty (30) days after
the expiration of the fifteen (15) day period provided in Section 5(c)(iv).
Such remaining Management Offered Stock may be transferred to the third
party named in the Management Stockholder's Offer; provided that (X) such
shares are sold at the price and on the terms set forth in the
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Management Stockholder's Offer; (Y) the shares so transferred shall remain
subject to all of the provisions of this Agreement; and (Z) the third party
transferee shall execute an instrument acceptable to counsel for DHS,
pursuant to which such third party becomes a party to this Agreement and
agrees to be bound by all of the provisions and terms or conditions hereof.
(d) VOLUNTARY TRANSFERS BY THE HOLDERS OF CLASS B COMMON STOCK.
(i) OPTION OF OTHER STOCKHOLDERS. Each holder of Class B Common Stock
shall have the right to receive a bona fide offer to purchase (which it is
willing to accept) (a "CLASS B COMMON OFFER") from any independent third
person capable of consummating such a sale of all, but not less than all,
of its Class B Common Stock (the "CLASS B COMMON OFFERED STOCK"). Before
accepting a Class B Common Offer, the holder of Class B Common Stock shall
first offer in writing (the "CLASS B COMMON STOCKHOLDER'S OFFER") to sell
the Class B Common Offered Stock to the other Stockholders (the "OTHER
STOCKHOLDERS") at the price and on the terms on which such selling Class B
Common Stockholder proposes to transfer the Class B Common Offered Stock to
the proposed third party transferee. The Class B Common Stockholder's Offer
shall set forth (A) the number of shares of the Class B Common Offered
Stock, (B) the name and address of the proposed transferee, (C) the amount
of consideration to be received by the holder of Class B Common Stock, and
(D) the method of proposed payment. A copy of the Class B Common
Stockholder's Offer shall simultaneously also be sent to DHS.
The Other Stockholders shall have the option to acquire all or any of
the shares of Class B Common Offered Stock at the price and upon the terms
provided in the Class B Common Stockholder's Offer. If more than one Other
Stockholder desires to purchase the Class B Common Offered Stock, such
Class B Common Offered Stock shall be purchased by them in such proportions
as they may agree. In the absence of agreement, each of the Other
Stockholders desiring to purchase the Class B Common Offered Stock shall be
entitled to purchase up to that number of shares of Class B Common Offered
Stock which is equal to the product of his percentage interest of all of
the shares of DHS Capital Stock then held by all such Other Stockholders
times the number of shares of Class B Common Offered Stock available for
purchase hereunder. The Other Stockholders shall have the right to exercise
their respective options to purchase the Class B Common Offered Stock, for
a period of thirty (30) days following their receipt of the Class B Common
Stockholder's Offer, by notifying such holder of Class B Common Stock in
writing of their respective intentions to purchase at Closing (as defined
in Section 7(e) hereof) all or any shares of the Class B Common Offered
Stock.
(ii) OPTION OF DHS. If the Other Stockholders do not accept the Class
B Common Stockholder's Offer to purchase all of the shares of Class B
Common Offered Stock within the period of thirty (30) days provided above
in Section 5(d)(i), then the holders of Class B Common Stock, immediately
thereafter, shall be deemed to have made an offer (the "FINAL CLASS B
COMMON STOCK OFFER") to sell all of the remaining shares of the Class B
Common Offered Stock (the "REMAINING CLASS B COMMON OFFERED STOCK") to DHS
at the price and upon the terms provided in the Class B Common
Stockholder's Offer. DHS shall have the option, for a period of fifteen
(15) days after the earlier to occur of (i) expiration of the thirty (30)
day period provided in Section 5(d)(i), or (ii) notification by all of the
Other Stockholders to DHS to the effect that the Other Stockholders have
elected to purchase less than all of the shares of Class B Common Offered
Stock as provided in Section 5(d)(i), to purchase all of the Remaining
Class B Common Offered Stock, upon written notification to such holder of
Class B Common Stock, at the price and upon the terms provided in the Class
B Common Stockholder's Offer.
(iii) TRANSFERS TO THIRD PARTIES. If (A) the holder of Class B Common
Stock elects to transfer all of its shares of Class B Common Stock; (B) the
holder of Class B Common Stock strictly complies with the provisions of
Sections 5(d) (ii) and (iii); (C) the Other Stockholders and DHS elect to
purchase, in the aggregate, less than all of the shares of Class B Common
Offered Stock; and (D) the holder of Class B Common Stock complies with the
terms of this Section 5(c)(iii), then all of the Class B Common Offered
Stock may be sold by the holder of Class B Common Stock to the third party
named in the Class B Common Stockholder's Offer within a period of fifteen
(15) days after the expiration of the fifteen (15) day period provided in
Section 5(d)(ii). Such Class B Common Offered Stock may be transferred to
the third party named in the Class B Common Stockholder's Offer; provided
that (X) such shares are sold at the price and on the terms set forth in
the Class B Common Stockholder's Offer; (Y) the shares so transferred shall
remain subject to all of the provisions of this Agreement; and (Z) the
third party transferee shall execute an instrument acceptable to counsel
for DHS, pursuant to which such third party becomes a party to this
Agreement and agrees to be bound by all of the provisions and terms or
conditions hereof.
(e) VOLUNTARY TRANSFERS BY THE HOLDERS OF CONVERTIBLE PREFERRED STOCK.
Notwithstanding any other provision of this Agreement or any other agreement to
which DHS and either of the Series A Investor, the Series B Investor or the
Series C
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Investor are parties, no shares of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock, as the case may be, may be voluntarily
transferred pursuant to this Section 5(e) or otherwise if, at the time of such
attempt to transfer, (1) the Series A Investor, the Series B Investor or the
Series C Investor, respectively, has not made full payment to DHS in cash for
all shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, as the case may be, held by the Series A Investor, the Series B
Investor or the Series C Investor, respectively, including all amounts of
principal and interest under any note given in partial consideration for such
shares, or (2) any holder of Convertible Preferred Stock proposing to sell such
stock pursuant to this Section 5(e) holds, at the time of such attempt at
transfer, rights to purchase additional shares of Convertible Preferred Stock.
(i) OPTION OF DHS. Except as otherwise herein provided, each holder of
Convertible Preferred Stock shall have the right to receive a bona fide
offer to purchase (which it is willing to accept) (a "CONVERTIBLE PREFERRED
STOCK OFFER"), from any independent third person capable of consummating
such a sale, any or all of its shares of Convertible Preferred Stock (the
"PREFERRED OFFERED STOCK"). Before accepting a Convertible Preferred Stock
Offer, the holder of Convertible Preferred Stock shall first offer in
writing (the "CONVERTIBLE PREFERRED STOCKHOLDER'S OFFER") to sell the
Preferred Offered Stock to DHS at the price and on the terms on which the
holder of Convertible Preferred Stock proposes to transfer the Preferred
Offered Stock to the proposed third party transferee. The Convertible
Preferred Stockholder's Offer shall set forth (A) the number of shares of
the Preferred Offered Stock, (B) the name and address of the proposed
transferee, (C) the amount of consideration to be received by the holder of
Convertible Preferred Stock, and (D) the method of proposed payment.
DHS shall have the option to acquire all, but not less than all, of
the shares of Preferred Offered Stock at the price and upon the terms
provided in the Convertible Preferred Stockholder's Offer. DHS shall have
the right to exercise its option to purchase the Preferred Offered Stock,
for a period of thirty (30) days following its receipt of the Convertible
Preferred Stockholder's Offer, by notifying all of the holders of
Convertible Preferred Stock in writing of its intention to purchase at
Closing (as defined in Section 7(e) hereof) all or any shares of the
Preferred Offered Stock.
(ii) OPTION OF THE HOLDERS OF CONVERTIBLE PREFERRED STOCK. If DHS does
not accept the Convertible Preferred Stockholder's Offer to purchase all of
the Shares of Preferred Offered Stock within the period of thirty (30) days
provided in Section 5(e)(i), then the selling holder of Convertible
Preferred Stock, immediately thereafter, shall be deemed to have made an
offer (the "SECOND CONVERTIBLE PREFERRED STOCKHOLDER'S OFFER") to sell all
of the remaining shares of the Preferred Offered Stock (the "REMAINING
PREFERRED OFFERED STOCK") to the other holders of Convertible Preferred
Stock at the price and upon the terms provided in the Convertible Preferred
Stockholder's Offer. The other holders of Convertible Preferred Stock shall
have the option, for a period of fifteen (15) days after the earlier to
occur of (A) expiration of the thirty (30) day period provided in Section
5(e)(ii), or (B) notification by DHS to the holders of Convertible
Preferred Stock to the effect that DHS has elected to purchase less than
all of the shares of Remaining Preferred Offered Stock as provided in
Section 5(e)(ii), to purchase all of the Remaining Preferred Offered Stock
upon written notification to the selling holder of Remaining Preferred
Offered Stock, at the price and upon the terms provided in the Convertible
Preferred Stockholder's Offer. If more than one holder of Convertible
Preferred Stock desires to purchase the Remaining Preferred Offered Stock,
such Remaining Preferred Offered Stock shall be purchased by them in such
proportions as they may agree. In the absence of agreement, each of the
holders of Convertible Preferred Stock desiring to purchase the Remaining
Preferred Offered Stock shall be entitled to purchase up to that number of
shares of Remaining Preferred Offered Stock which is equal to the product
of his percentage interest of all of the shares of Convertible Preferred
Stock held by all such holders of Convertible Preferred Stock times the
number of shares of Remaining Preferred Offered Stock available for
purchase hereunder. The holders of Convertible Preferred Stock shall have
the right to exercise their respective options to purchase the Remaining
Preferred Offered Stock by notifying the selling holder of Convertible
Preferred Stock in writing of their respective intentions to purchase at
Closing (as defined in Section 7(e) hereof) all or any shares of the
Remaining Preferred Offered Stock.
(iii) TRANSFERS TO THIRD PARTIES. If (A) the holder of Convertible
Preferred Stock elects to transfer all of its shares of Convertible
Preferred Stock; (B) the holder of Convertible Preferred Stock strictly
complies with the provisions of Sections 5(e) (i) and (ii); (C) DHS does
not exercise its right to purchase all, but not less than all, of the
shares of Preferred Offered Stock and the holders of Convertible Preferred
Stock elect to purchase, in the aggregate, less than all of the shares of
the Remaining Preferred Offered Stock; and (D) the holder of Convertible
Preferred Stock complies with the terms of this Section 5(e)(iii), then
all, but not less than all, of the shares of the Remaining Preferred
Offered Stock may be sold by the holder of Convertible Preferred Stock to
the third party named in the Convertible Preferred Stockholder's Offer
within a period of thirty (30) days after the expiration of the fifteen
(15) day period provided in Section 5(e)(ii). Such Remaining Preferred
Offered Stock may be transferred to the third party named in the
Convertible
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Preferred Stockholder's Offer; provided that (X) such shares are sold at
the price and on the terms set forth in the Convertible Preferred
Stockholder's Offer; (Y) the shares so transferred shall remain subject to
all of the provisions of this Agreement; and (Z) the third party transferee
shall execute an instrument reasonably acceptable to counsel for DHS,
pursuant to which such third party becomes a party to this Agreement and
agrees to be bound by all of the provisions and terms or conditions hereof.
(f) The closing for any purchase by a Stockholder or DHS of shares proposed
to be voluntarily transferred by a Stockholder pursuant to a bona fide third
party offer under this Section 5 shall be held at 10:00 a.m. at the principal
offices of DHS in Owings Mills, Maryland, on the date set forth for the closing
in the bona fide offer. In the event that no such date is set forth in the bona
fide offer, the closing shall be held at the principal offices of DHS in Owings
Mills, Maryland, at 10:00 a.m., not later than the 30th day after the last to
expire of the time periods for giving of notice provided for under this Section
5 and applicable to such proposed voluntary transfer.
6. PURCHASE PRICE OF STOCK FOR PURPOSES OF INVOLUNTARY TRANSFERS AND
SECTIONS 4(e)(ii) AND 4(f)(ii).
(a) AGREEMENT OF THE PARTIES. With respect to purchases governed by the
provisions of Section 4(d), Section 4(e) (ii) and Section 4(f) (ii) hereof, if
the purchaser of Stock hereunder, on the one hand, and the transferring
Stockholder, on the other hand, agree in writing as to the purchase price for
the Stock to be sold pursuant to Section 4(d), 4(e) (ii) or Section 4(f) (ii)
hereof, as the case may be, such agreed price shall be the purchase price for
such Stock. If no agreement on the purchase price of such Stock can be reached
within thirty (30) days from the date of the occurrence of the applicable event
under the provisions of Section 4(d), or 4(e) (ii) or, with respect to the
occurrence of an event governed by Section 4(f)(ii), within thirty (30) days
after the receipt of the notice required to be determined thereunder, as the
case may be (provided that, with respect to the death of a Management
Stockholder other than Rifkin or Kimmel, such thirty (30) day period shall
commence upon the appointment and qualification of such deceased Management
Stockholder's personal representative), then the purchase price of said Stock
shall be determined pursuant to Section 6(b) hereof.
(b) APPRAISAL.
(i) If the purchase price of Stock to be sold pursuant to Section
4(d), 4(e) (ii) or 4(f) (ii) is not agreed upon as provided in Section 6(a)
within the time period stated therein, then within fourteen (14) days
thereafter an appraiser or appraisers shall be jointly selected by the
transferring Stockholder, on the one hand, and DHS on the other hand, and
such jointly selected appraiser or appraisers shall determine the "fair
market value of the Stock," which determination shall be binding and
conclusive upon all parties. For purposes of this Section 6(b), the "FAIR
MARKET VALUE OF THE STOCK" shall be an amount equal to the "Fair Market
Value Per Share" of the Class being sold and purchased hereunder,
multiplied by the number of shares of Stock of said Class of the
transferring Stockholder which are being sold and purchased hereunder.
"FAIR MARKET VALUE PER SHARE" shall be an amount as of the Disposition Date
as determined by appraisal using such methods as the appraisers appointed
hereunder determine, in the exercise of their sole discretion, is
appropriate pursuant to this Section 6(b), taking into account any
liquidation preferences or other rights attendant to such class, any
minority stockholder discount, majority stockholder premium or
marketability or other discount or premium, as the case may be.
"DISPOSITION DATE" shall be the last day of the calendar month immediately
preceding the event giving rise to the purchase of the Stock under Section
4 hereof.
(ii) If the transferring Stockholder, on the one hand, and DHS on the
other hand, do not agree upon the selection of an appraiser or appraisers,
as provided in Section 6(b)(i), within the period therein stated, then,
within seven (7) days after the expiration of the fourteen (14) day period
provided for in Section 6(b) (i) hereof, the transferring Stockholder shall
appoint an appraiser, and DHS shall appoint a second appraiser. The two (2)
appraisers so appointed shall appoint a third appraiser within seven (7)
days after both shall have been appointed. If either the transferring
Stockholder or DHS shall fail to so appoint an appraiser, the appraiser
duly appointed by the other shall serve as the sole appraiser and such
appraiser shall determine the fair market value of the Stock and such
determination shall be binding, final and conclusive on all parties. The
said appraisers so appointed (or the sole appraiser if any party fails to
select an appraiser as provided above), shall, within thirty (30) days
after the last appointment thereof determine the fair market value of the
Stock and the determination of such appraiser shall be determinative of the
fair market value of the Stock for the purposes of this Agreement and shall
be binding, final and conclusive on all parties. If the appraisers cannot
agree on the fair market value of the Stock, within the time allotted, then
such fair market value shall be the median of the two appraisals closest in
value to each other.
(iii) All expenses incurred in the appraisal process shall be borne
and paid equally by the transferring Stockholder, and DHS.
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7. PAYMENT OF PURCHASE PRICE. The payment of any purchase price for Stock
transferred pursuant to Section 4 hereof may be made on such terms as are agreed
upon by the parties but, absent such agreement shall be made as follows:
(a) CASH PORTION. Subject to the terms of Section 7(d) hereof and, with
respect to any Involuntary Transfer, subject to such other terms and conditions
as may be required by any court which has then exercised jurisdiction over any
Involuntary Transfer Stockholder with respect to its Stock, or to any assignee,
trustee in bankruptcy or successor in interest, as the case may be, (i) in the
event of any transfer pursuant to Section 4 (other than as a result of the death
of a Management Stockholder), (A) where DHS is the purchaser, ten percent (10%)
of the total purchase price of the Stock shall be paid in cash by DHS on the
Closing Date, as defined in Section 7(e) hereof, and (B) where any party other
than DHS is the purchaser, the entire amount of the purchase price of the Stock
shall be paid by check by such purchaser(s) on the Closing Date, and (ii) in the
event of any transfer as a result of the death of a Management Stockholder, DHS
shall pay by check on the Closing Date the greater of (A) the proceeds of any
life insurance policy or policies (but not in excess of the purchase price to be
paid by DHS hereunder) owned by DHS on which the deceased Management Stockholder
is the named insured and DHS is the applicant, owner and beneficiary, and which
policy or policies were purchased for the purpose of using the proceeds thereof
to purchase the shares of Stock of the deceased Management Stockholder upon his
death (rather than to reimburse DHS for the loss of the services to be provided
to DHS by the deceased Management Stockholder), or (B) ten percent (10%) of the
total purchase price of the Stock held by such deceased Management Stockholder.
Notwithstanding the foregoing, if DHS is a purchaser hereunder but is unable,
under applicable law, to make all or any portion of any payment otherwise due
hereunder on the Closing Date, DHS shall pay such portion, if any, as applicable
law permits, and the balance of such payment shall be payable pursuant to the
provisions of Section 7(b) hereof.
(b) PROMISSORY NOTE. The balance of the purchase price shall be represented
by a promissory note of DHS, payable in seven (7) equal annual installments of
principal and interest, the first of which shall be due and payable on the first
anniversary of delivery of such note. The note shall be substantially in the
form of the promissory note attached hereto and made a part hereof as EXHIBIT A,
and contain terms and conditions substantially similar to the terms and
conditions contained therein. Interest shall accrue on, and be payable with, the
unpaid balance of said note from the Closing Date at a rate equal to the
applicable federal rate for long-term debt instruments then existing on the date
of issuance under Code Section 1274(d)(1). As security for payment of the
amounts due under such promissory note, DHS shall pledge to the selling
Stockholder such shares of Stock being acquired until such time as all payments
due thereunder have been paid in full, provided that such selling Stockholder
shall not be entitled to exercise any voting or other rights with respect to
such shares of Stock so long as DHS is not in default of any payment due under
such note.
(c) DEBT DUE FROM STOCKHOLDER. Any debt due by the transferring Stockholder
to DHS shall be payable according to its terms, as shall any debt due by DHS to
the transferring Stockholder; except, however, that, regardless of the terms of
any such debt due by the Stockholder to DHS, any cash payment due under Section
7(a) hereof, as well as any insurance proceeds payable under Section 8 hereof,
with respect to the purchase of the transferring Stockholder's Stock shall,
instead of being paid to the transferring Stockholder, be first applied to the
discharge of any such indebtedness, until all such indebtedness is fully
discharged. The provisions of this Section 7(c) shall also apply to any
purchases of Stock by DHS pursuant to Section 5 hereof.
(d) INVOLUNTARY TRANSFERS. DHS shall settle with an assignee, trustee in
bankruptcy, attaching court or officer or successor in interest holding Stock
received in an Involuntary Transfer by taking any or all such Stock in execution
and paying to them the purchase price for each share of such Stock calculated
pursuant to Section 6, but not exceeding the Stockholder's indebtedness and
proper items of expense. The balance of the value of such Stock, if any, shall
be distributable to the Stockholder with such payments to be applied in the
order due in accordance with Section 7.
(e) CLOSING. Closing on the sale of any shares of Stock sold pursuant to
Section 4 of this Agreement shall, unless otherwise agreed to in writing by the
purchaser(s) and the transferring Stockholder, or otherwise provided in this
Agreement, be held at the principal place of business of DHS (i) thirty (30)
days from (A) the date that the last applicable period for exercising an
unexercised option to purchase has lapsed, (B) the date an option to purchase is
accepted or exercised, or (C) with respect to a sale as the result of the
disability of Rifkin or Kimmel pursuant to Section 4(f)(ii), the date of
delivery of the notice required thereunder, or (C) the occurrence of any event
set forth in Section 4(a) (other than death of a Management Stockholder), or
(ii) with respect to the death of a Management Stockholder, ninety (90) days
after the appointment and qualification of a deceased Management Stockholder's
personal representative (collectively, the "CLOSING DATE"); provided that, if an
appraiser or appraisers are appointed to determine the purchase price pursuant
to Section 6, then the Closing shall take place on a date no later than thirty
(30) days from the receipt by the selling Stockholder and the purchaser of the
determination of the fair market value of the Stock if such Closing Date would
occur later than the Closing Date otherwise
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<PAGE>
determined pursuant to this Section 7(e). At the Closing, upon payment of the
purchase price (including delivery of the notes), the certificates representing
the Stock to be purchased and sold hereunder shall be delivered by the selling
Stockholder (or his personal or legal representatives, as the case may be) to
the purchaser(s), appropriately endorsed in blank for transfer. If the
certificates representing any shares of Stock to be so transferred have not been
surrendered by the selling Stockholder, all rights of the holder thereof with
respect to said Stock (including voting rights) nonetheless shall cease and
terminate.
8. LIFE INSURANCE.
(a) PURCHASE AND OWNERSHIP OF POLICIES. As soon as practicable following
the execution of this Agreement, DHS shall use its commercially reasonable best
efforts to purchase a life insurance policy on the life of each Management
Stockholder in such amounts, if any, as DHS' Board of Directors deems reasonable
and appropriate. DHS shall be the owner and beneficiary of each such policy, and
any proceeds received thereunder shall be held by DHS in trust for the purposes
of satisfying DHS' purchase obligations hereunder. Each Management Stockholder
agrees to cooperate with DHS in obtaining, and in keeping in full force and
effect, all such policies. Once a policy has been purchased, DHS shall maintain
all such insurance policies in full force and effect and shall not, without the
prior written consent of the respective Management Stockholder, cancel any such
policy or take or omit to take any action which might give rise to the
termination or cancellation thereof. DHS shall pay premiums on all insurance
policies as they become due. DHS may, when it deems appropriate, apply any
dividends declared and paid on such policies to the payment of premiums. No
party hereto shall have any obligations hereunder to the extent a Management
Stockholder is either uninsurable or may not be insured as herein contemplated
at upon commercially reasonable terms. Notwithstanding the foregoing, DHS may,
in lieu of or in addition to policies of insurance acquired, owned and
administered as set forth above, in the discretion of its Board of Directors,
provide as benefits to its employees, including Management Stockholders, such
other and additional policies of insurance or other insurance benefit plans on
such other or additional terms and conditions, including ownership of policies
of insurance in whole or in part by employees, including Management
Stockholders, as it deems reasonable and appropriate.
(b) OPTION TO PURCHASE POLICIES. If a Management Stockholder transfers all
of his Stock during his lifetime pursuant to Sections 4 or 5, or if this
Agreement is terminated without being superseded by a similar agreement prior to
such Management Stockholder's death, such Management Stockholder, or any
designee of such Management Stockholder, shall have the right, during the sixty
(60) day period beginning with the date of transfer or termination of this
Agreement, to purchase any life insurance policy insuring his life owned by DHS
by paying DHS an amount equal to the cash surrender value of such policy
(determined after payment of all policy loans incurred to pay premiums due
thereunder and interest thereon) as of the date of purchase, plus the unearned
portion of any premiums which shall have been paid thereon.
9. VOTING BY STOCKHOLDERS.
(a) SALE OF STOCKHOLDER'S STOCK. If any vote, consent, determination or
other action is required or permitted to be made by the Stockholders and/or by
DHS pursuant to the terms of this Agreement in order to authorize and permit DHS
to exercise any of its rights hereunder, any Stockholder who would, upon
exercise of said rights by DHS, thereby become obligated to sell his Stock,
shall cast his vote and otherwise act, (i) as a Stockholder, by voting his stock
in the same manner as do the holders of a majority of shares of Stock other than
his own, and, (ii) as a director, by voting in the same manner as do a majority
of the directors other than himself. A Stockholder who becomes obligated to sell
his shares of Stock hereunder shall execute such instruments as may be necessary
or appropriate to effect any action required or permitted to be taken by the
Stockholders and the directors of DHS pursuant to the terms of this Agreement.
(b) CLASS A DIRECTORS. Each of the present and future holders of Class A
Common Stock hereby agrees (i) to vote his shares of Stock to elect Stewart
Gold, Alan Kimmel, and Scott Rifkin, as three of DHS' Class A Common Stock
Directors for as long as their respective Employment Agreements with DHS are in
full force and effect, and (ii) if then serving as a Class A Common Stock
Director, to offer to resign as a director immediately upon termination of his
employment with DHS.
(c) ISSUANCE OF ADDITIONAL SHARES OF STOCK. Subject to such rights of the
Series A Preferred Stock Directors pursuant to Article IV, Section B.1(c) of the
DHS Amended and Restated Articles, to such rights of the Series B Preferred
Stock Directors pursuant to Article IV, Section C.1(c) of the DHS Amended and
Restated Articles, to such rights of the Series C Preferred Stock Directors
pursuant to Article IV, Section D.1(c) of the DHS Amended and Restated Articles,
to such rights of the holders of Series A Preferred Stock pursuant to Article
IV, Section B.1(e) of the DHS Amended and Restated Articles, to such rights of
the holders of Series B Preferred Stock pursuant to Article IV, Section C.1(e)
of the DHS Amended and Restated Articles, and to such rights of the holders of
Series C Preferred Stock pursuant to Article IV, Section D.1(e) DHS
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<PAGE>
Amended and Restated Articles, to exercise their respective rights with respect
to the matters set forth therein, each Stockholder agrees (i) to vote his or its
shares of Stock, (ii) to use commercially reasonable best efforts to cause his
or its Affiliates to vote their shares of Stock, and (iii) if serving as a
Director of DHS, to vote as a Director, to cause DHS to issue additional shares
of stock to the Persons and in the amounts as are necessary:
(1) to comply with the provisions of a public offering of DHS Common
Stock pursuant to a registration statement filed with the Securities and
Exchange Commission;
(2) to fund or comply with the provisions of a stock option plan,
restricted option plan, employee stock purchase plan, stock bonus plan or
other employee stock plan or benefit approved and implemented by the Board
for the benefit of officers, directors or employees of DHS, provided that
the aggregate numbers of shares issued in respect of all such plans shall
not exceed ten percent (10%) of the fully diluted capital stock of DHS
calculated as of the time of the issuance and after giving effect thereto;
(3) upon conversion of any shares of Convertible Preferred Stock;
(4) for the acquisition of another corporation by DHS by merger,
purchase of substantially all of the assets of such corporation or other
reorganization resulting in the ownership by DHS of not less than fifty
percent (50%) of the voting power of such corporation;
(5) as a result of a stock split, stock dividend or reclassification
of shares of Common Stock distributable on a pro rata basis to all holders
of Common Stock, with respect to any shares of Stock which have been
repurchased by DHS and are being resold; and/or
(6) to permit BMGGP, Inc., as General Partner of the LP, to issue
Additional Limited Partner Interests upon acquisition of additional Medical
Practices from and after the time that there are sixty-six (66) physicians
who hold Limited Partner Interests in the LP (including options to purchase
Limited Partner Interests) directly or indirectly through their
professional corporations.
10. SPECIFIC PERFORMANCE. Because the shares of Stock cannot be readily
purchased or sold in the open market, irreparable damage would result in the
event this Agreement is not specifically enforced. Therefore, the rights to, or
obligations of, any party shall be enforceable in a court by a decree of
specific performance, and appropriate injunctive relief may be applied for and
granted in connection therewith. Such remedies, and all other remedies provided
for in this Agreement, shall, however, be cumulative and not exclusive and shall
be in addition to any other remedies which any party may have under this
Agreement or otherwise. Notwithstanding any other provision of this Agreement,
including, without limitation, the provisions of this Section 9, holders of
Convertible Preferred Stock shall have no obligation to vote for any matter
which requires the consent of such Stockholders or of the directors of DHS
elected by them under the Amended and Restated Articles of Incorporation of DHS.
11. GUARANTEE OF CERTAIN MANAGEMENT STOCKHOLDERS.
(a) Pursuant to the terms and conditions of Gold, Rifkin and Kimmel's
respective DHS Employment Agreements, such Management Stockholders are each
required to secure, or to assist the other officers and employees of DHS in
securing, financing for DHS to satisfy DHS' capital requirements as set forth in
its financial projections. The parties hereto have entered into the transactions
contemplated by the Practice Participation Agreement on the assumption that DHS
would receive cash as a result of equity financing in an amount of not less than
$5 million on or before February 28, 1998 (the "FINAL MATURITY DATE").
(b) If DHS does not receive at least $5 million of cash as a result of
equity financing proceeds by the Final Maturity Date, the amount of equity
financing proceeds actually received by DHS on or before such date shall be
subtracted from $5 million (such positive difference being the "remainder"), and
each of Gold, Rifkin and Kimmel shall present to DHS for cancellation, and DHS
shall immediately cancel that number of shares of Class A Common Stock held by
each such Management Stockholder equal to the product of the number of fully
diluted shares of Class A Common Stock held by such Management Stockholder on
the Closing Date, times a fraction, (i) the numerator of which shall be such
remainder, and (ii) the denominator of which shall be 5 million.
(c) Each of the parties hereto acknowledges and agrees that any transfer of
shares of Class A Common Stock pursuant to the provisions of this Section 11
shall not be subject to the limitations and restrictions on transfer, and the
rights granted to the other Stockholders and DHS with respect to transfers, as
otherwise provided in Section 5 hereof.
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<PAGE>
(d) Each of the Management Stockholders and DHS hereby agree that the
provisions of this Section 11 shall be deemed to be amendments to each
Management Stockholder's respective DHS Employment Agreement, and hereby becomes
a part thereof.
(e) For purposes of this Section 11, an equity financing shall include any
transaction in which Capital Stock of DHS is issued in return for cash.
12. SEVERABILITY. It is the express intention of the parties that the
agreements contained herein shall have the widest application possible. If any
agreement contained herein is found by a court having jurisdiction to be
unreasonable in scope or character, the agreement shall not be rendered
unenforceable thereby, but the parties shall in good faith negotiate a
modification to the agreement that preserves the essence of the agreement of the
parties contained herein with retroactive effect to render such agreement
reasonable and such agreement shall be enforced as thus modified. If the court
having jurisdiction will not review the agreement, then the parties shall
mutually agree to a revision having an effect as close as permitted by law to
the provision declared unenforceable. The parties further agree that in the
event a court having jurisdiction determines, despite the express intent of the
parties, that any portion of any covenant or agreement contained herein is not
enforceable, the remaining provisions of this Agreement shall nonetheless remain
valid and unenforceable.
13. ENDORSEMENT OF CERTIFICATE. Upon the execution of this Agreement, each
certificate of Stock of DHS now registered in the name of a Stockholder and
subject hereto shall be endorsed by the Secretary of Company as follows:
"This certificate is transferable only upon compliance with the
provisions of a restrictive agreement dated September 4, 1996, by and among
Doctors Health System, Inc. and certain of its stockholders, a copy of
which is on file in the office of the Secretary of DHS and is available
upon request of any stockholder without charge."
All certificates for any shares of Stock hereinafter issued to Stockholders
shall bear the same endorsement, and this Agreement shall cover all such stock.
14. TERM. Anything contained herein to the contrary notwithstanding, this
Agreement shall terminate, and all rights and obligations shall cease, except
for rights and obligations under any then extant promissory note pursuant to
Section 7 hereof, upon the occurrence of any of the following events:
(i) The written agreement of each of the then parties hereto; or
(ii) The cessation of DHS' business; or
(iii) The bankruptcy, liquidation, receivership, or dissolution of, or
assignment for the benefit of creditors by, DHS;
(iv) Any Change in Control of DHS; or
(v) The consummation of any public offering of DHS Capital Stock.
15. NOTICES. All notices, offers, acceptances, requests and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered or mailed by certified or registered mail to a
Stockholder, as may be required, at their addresses on DHS records, and to DHS
at DHS's principal place of business. Any party hereto may change his or its
address for notice by giving notice thereof in the manner hereinabove provided.
16. AMENDMENT. Any term or condition set forth in this Agreement may be
amended, modified or altered, and additional terms and conditions may be
incorporated into this Agreement only with the express written consent of all of
DHS and the Stockholders. All of such amendments, modifications, alterations or
additions shall be effective as of the date of such unanimous consent, shall be
in writing, and shall be provided to each of the parties hereto.
17. MISCELLANEOUS. This Agreement embodies the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof. This Agreement shall be binding upon, and inure to the benefit of, and
shall be enforceable by, the heirs, successors, assigns, and personal
representatives of the parties hereto. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Maryland, without regard
to principles of conflicts of law. In case any term of this Agreement shall be
held invalid, illegal or unenforceable in whole or in part, neither the validity
of the remaining part of such term nor the validity of the remaining terms of
this Agreement shall in any way be affected thereby. Each of the parties agrees
that he will consent to and approve any amendments of the DHS Amended and
Restated Articles or by-laws of DHS which may be necessary or advisable in order
to conform any of the provisions of this Agreement or any amendments hereto to
the applicable laws of the State of Maryland as now or hereafter enacted. Each
Stockholder agrees to vote his shares of Stock in DHS and to execute and deliver
such documents as may be necessary in order to implement the provisions of the
preceding sentence. Nothing set forth or referred to herein expressed or implied
is intended or shall be
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construed to convey upon or give to any person other than the parties and their
successors or permitted assigns, any rights or remedies under or by reasons of
this Agreement. Each of the Stockholders agrees that, if DHS is able to enter
into any arrangement with a Management Stockholder or another Stockholder,
regarding the repurchase of such Management Stockholder's or other Stockholder's
capital stock that is manifestly more favorable to DHS than the arrangements set
forth herein, to execute and deliver to an amendment to this Stockholders
Agreement reflecting such arrangement.
18. INTERPRETATION. The parties and their respective legal counsel and
accountants actively participated in the negotiation and drafting of this
Agreement, and in the event of any ambiguity or mistake herein, or any dispute
among the parties with respect to the provisions hereof, no provision in this
Agreement shall be construed unfavorable against any of the parties on the
ground that it or its counsel was the drafter thereof.
19. WILLS. Each Management Stockholder shall promptly execute a will or
codicil to his will authorizing and directing his personal representatives to
perform all of his obligations under this Agreement, but the failure to execute
such a will shall not affect the rights of the remaining Stockholders or the
obligations of their personal representatives, heirs, descendants, or estates,
as provided in this Agreement.
20. CANCELLATION OF PRIOR AGREEMENT. This Agreement supersedes and replaces
that certain Stockholders Agreement by and among DHS, the Management
Stockholders, the LP, the Series A Investor and the Series B Investor, dated
December 1, 1995 (the "OLD STOCKHOLDERS AGREEMENT") in its entirety. The Old
Stockholders Agreement is hereby cancelled, rescinded and abrogated.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as an instrument under seal as of the date first above written.
DOCTORS HEALTH SYSTEM, INC.
By: /s/ Stewart Gold
------------------------
Stewart Gold, President
MANAGEMENT STOCKHOLDERS:
/s/ Stewart Gold
----------------------------
Stewart Gold, individually
/s/ Scott M. Rifkin
----------------------------
Scott M. Rifkin, individually
/s/ Alan Kimmel
----------------------------
Alan Kimmel, individually
MEDICAL HOLDINGS LIMITED PARTNERSHIP
By: BMGP, Inc., its General Partner
By: /s/ Scott M. Rifkin
-------------------------
Scott M. Rifkin, President
ST. JOSEPH MEDICAL CENTER, INC.
By: /s/ John S. Prout
-------------------------
Name: John S. Prout
Title: President and CEO
MED-LANTIC MANAGEMENT SERVICES, INC.
By:
-------------------------
Name:
Title:
GENESIS HEALTH VENTURES, INC.
By: /s/ John F. DePodesta
--------------------------
Name: John F. DePodesta
Title: Senior Vice President
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