UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-1926
DOCTORS HEALTH, INC.
(FORMERLY DOCTORS HEALTH SYSTEM, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 52-1907421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10451 MILL RUN CIRCLE
10TH FLOOR
OWINGS MILLS, MARYLAND 21117
(Address of principal executive offices)
(Zip Code)
(410) 654-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of November 16, 1998, 1,653,375 shares of the registrant's Class A
Common Stock and 5,347,898 shares of the Registrant's Class B Common Stock were
outstanding.
<PAGE>
DOCTORS HEALTH, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
NO.
FORWARD LOOKING STATEMENTS i
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets 1
Unaudited Consolidated Statements of Operations 2
Unaudited Consolidated Statements of Cash Flows 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 3. Defaults Upon Senior Securities 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
<PAGE>
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements which, to the
extent they are not recitations of historical fact are hereby identified as
"forward looking statements." Doctors Health, Inc. cautions readers that such
"forward looking statements," including without limitation, those relating to
the Company's future business prospects, revenues, working capital, liquidity,
capital needs, and income, wherever they may appear in this document or in other
statements attributable to the Company, are necessarily estimates reflecting the
best judgment of the Company's senior management and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those suggested by the "forward looking statements." Such "forward looking
statements" should be considered in light of various important factors,
including those set forth below and others set forth from time to time in the
Company's reports and registration statements filed with the Securities and
Exchange Commission (the "SEC").
These "forward looking statements" are located at various places
throughout this document. In addition, the risks and uncertainties described
below are applicable to the Notes to the Unaudited Consolidated Financial
Statements and the discussions under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation --Liquidity and Capital
Resources" and the Notes to the Company's Consolidated Financial Statements. The
Company, through its senior management, may from time to time make "forward
looking statements" about the matters described herein or other matters
concerning the Company.
The Company disclaims any intent or obligation to update any
"forward looking statements."
i
<PAGE>
Doctors Health, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and September 30, 1998
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
-------------- --------------
<S><C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,192,506 $ 6,206,453
Restricted cash 680,000 50,000
Accounts receivable (net of allowance for doubtful accounts of $193,706 at
June 30,1998 and $500,000 at September 30, 1998) 2,243,387 2,289,125
Accounts receivable-affiliates 1,015,407 1,174,746
Other receivables (net of allowance for doubtful accounts of $153,341 at
June 30, 1998 and $3,916,566 at September 30, 1998) 7,394,046 8,234,876
Prepaid expenses 325,673 311,251
Due from affiliates 2,399,390 3,194,933
-------------- --------------
TOTAL CURRENT ASSETS 29,250,409 21,461,384
PROPERTY AND EQUIPMENT, NET 3,885,526 4,025,892
OTHER ASSETS
Accrued interest receivable (net of allowance for doubtful accounts of
$517,960 at September 30, 1998) 485,693 0
Other receivables 129,684 114,684
Deposits 93,775 82,034
-------------- --------------
TOTAL OTHER ASSETS 709,152 196,718
-------------- --------------
TOTAL ASSETS $ 33,845,087 $ 25,683,994
============== ==============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of notes payable and other obligations $ 9,757,883 $ 9,547,784
Current maturities of notes payable and purchase obligations - related parties 1,989,948 2,028,470
Accounts payable 442,502 908,092
Accrued medical services 36,419,749 43,874,250
Other accrued expenses 6,564,948 7,610,882
Due to affiliates 1,287,648 1,396,076
-------------- --------------
TOTAL CURRENT LIABILITIES 56,462,678 65,365,554
LONG-TERM OBLIGATIONS
Note payable 100,488 51,243
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5.00 par value, authorized and issued 1,000,000 shares
(liquidation value $3,500,000 plus unpaid dividends) 6,115,099 6,221,590
Less subscription receivable (1,500,000) (1,500,000)
-------------- --------------
4,615,099 4,721,590
8% cumulative, Series B, $11.25 par value, authorized and issued 438,068 shares
at June 30, 1998 and September 30, 1998 (liquidation value $4,928,265
plus unpaid dividends) 4,836,538 4,971,587
8% cumulative, Series C, $17.50 par value, authorized 1,500,000 shares;
issued and outstanding 571,428 shares (liquidation value $10,000,000
plus unpaid dividends) 11,470,122 11,700,372
8% Series D, dividends payable in-kind, $10.00 par value, authorized 5,750,000
shares; issued and outstanding 2,116,643 shares at June 30, 1998
and 2,034,666 at September 30, 1998, respectively, (liquidation value
$21,166,430 and $20,346,660, respectively, plus unpaid dividends) 20,104,948 20,621,826
STOCKHOLDERS' DEFICIT
Common Stock
Class A, $.01 par value; authorized 20,700,000 shares; issued and outstanding
1,653,375 shares at June 30, 1998 and September 30, 1998 16,534 16,534
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 5,347,898
shares at June 30, 1998 and September 30, 1998 53,479 53,479
Class C, $.01 par value; authorized 29,050,000; no shares issued - -
Preferred Stock, $.01 par value; authorized 1,000,000 shares; no shares issued - -
Additional paid in capital 6,114,985 6,114,985
Deferred compensation (704,380) (652,348)
Accumulated deficit (69,225,404) (87,280,828)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (63,744,786) (81,748,178)
-------------- --------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT $ 33,845,087 $ 25,683,994
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE>
Doctors Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 and 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1998
---------------- ----------------
<S><C>
REVENUES
Capitation revenue $ 4,568,707 $ 28,005,461
Net revenue 3,397,694 3,538,895
---------------- ----------------
7,966,401 31,544,356
---------------- ----------------
EXPENSES
Medical services expense 3,908,010 38,147,712
Care center costs 3,293,743 3,422,480
General and administrative 3,166,519 6,787,184
Depreciation and amortization 476,581 185,953
---------------- ----------------
10,844,853 48,543,329
---------------- ----------------
Loss from operations (2,878,452) (16,998,973)
OTHER INCOME (EXPENSE)
Interest and other income 296,440 191,242
Interest expense (328,069) (259,025)
---------------- ----------------
(31,629) (67,783)
---------------- ----------------
Loss before income taxes (2,910,081) (17,066,756)
Income taxes - -
---------------- ----------------
NET LOSS $ (2,910,081) $ (17,066,756)
================ ================
Loss applicable to common stock
Net loss $ (2,910,081) $ (17,066,756)
Preferred stock dividends and accretion 805,082 988,968
---------------- ----------------
Loss applicable to common stock $ (3,715,163) $ (18,055,724)
================ ================
Net loss per share, basic and diluted $ (0.54) $ (2.58)
================ ================
Weighted average number of shares outstanding 6,928,688 7,001,273
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1998
-------------- ---------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,910,081) $(17,066,756)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 476,581 185,953
Deferred compensation 52,032 52,032
Changes in operating assets and liabilities, net of effects of
medical practice receivables acquired
Restricted cash - 630,000
Accounts receivable 209,398 (45,738)
Accounts receivable -- affiliates 44,067 (159,339)
Prepaid expenses and other receivables (760,290) (325,715)
Due from/to affiliates (54,485) (687,115)
Accounts payable (924,035) 465,590
Accrued medical services 595,248 7,454,501
Other accrued expenses - 1,186,489
-------------- -------------
Net cash used in operating activities (3,271,565) (8,310,098)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (211,903) (326,319)
Purchase of short-term investments (3,000,000) -
Payments for acquisitions (542,276) -
Deposits (1,999) 11,741
-------------- -------------
Net cash used in investing activities (3,756,178) (314,578)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible preferred
stock 18,711,361 -
Borrowings under notes payable - 3,615,209
Payments on notes payable (121,236) (3,976,586)
-------------- -------------
Net cash provided by (used in) financing activities 18,590,125 (361,377)
Net increase (decrease) in cash and
cash equivalents 11,562,382 (8,986,053)
Cash and cash equivalents, at beginning of period 4,737,828 15,192,506
-------------- -------------
Cash and cash equivalents, at end of period $ 16,300,210 $ 6,206,453
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of normal recurring
accruals, which are necessary for a fair presentation of the financial position
and the results of operations for the interim periods presented. The results of
operations for any interim period are not necessarily indicative of results for
the full year. (See Note 2 below)
The consolidated financial statements for the three months ended September
30, 1997 and 1998 are unaudited and should be read in conjunction with the
financial statements and the notes thereto included in the Company's Form 10-K
for the year ended June 30, 1998. (See Note 2 below)
In preparing financial statements in accordance with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("SFAS No. 128"), which requires that entities with complex capital
structures, such as the Company, disclose both basic and diluted earnings per
share. The Company adopted this standard during the quarter ended December 31,
1997. Due to the Company's operating losses, implementation of the standard did
not have a material effect on the Company's earnings per share.
During January 1998, the Emerging Issues Task Force of the FASB issued
EITF 97-2 which addressed issues related to the consolidation of professional
corporation revenues and the accounting for business combinations. The Company
does not believe that EITF 97-2 is currently applicable to the Company.
NOTE 2 - BANKRUPTCY PETITION
On November 16, 1998, (the "Filing Date") the Company filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court for the District of Maryland, Baltimore Division (the "Bankruptcy Court")
(Case No. 98-6-6211-JS). No trustee has been appointed by the Bankruptcy Court,
and the Company is currently acting as a Chapter 11 debtor-in-possession in
accordance with the Bankruptcy Code. During the pendency of the Chapter 11 case,
the Bankruptcy Court has jurisdiction over the assets and affairs of the
Company, and its continued operations are subject to the Bankruptcy Court's
protection and supervision. The Company has not yet filed a plan of
reorganization or liquidation, but it has the exclusive right to do so on or
before March 16, 1999. For 120 days after the date of the filing of a voluntary
petition for relief under Chapter 11, only the debtor-in-possession has the
right to propose and file a plan of reorganization with the Bankruptcy Court.
Subject to the Bankruptcy Court's discretion, if a debtor-in-possession files a
plan of reorganization during the 120-day exclusivity period, no other party may
file a plan of reorganization until 180 days after the date of the filing of the
Chapter 11 petition, during which period the debtor-in-possession has the
exclusive right to solicit acceptances of the plan. If a debtor-in-possession
fails to file a plan during the 120-day exclusivity period, or such additional
period as may be ordered by the Bankruptcy Court, or fails to obtain acceptances
of such plan from impaired classes of creditors, a creditor may file a plan of
reorganization for such debtor. In addition, if the Bankruptcy Court appoints a
trustee, the exclusive period would terminate. The Company is considering all
available options with respect to formulation of a plan, including the
reorganization of its business or termination of operations and liquidation of
its assets.
On November 20, 1998, the Bankruptcy Court entered an interim Order
Authorizing Use of Cash Collateral, under the terms of which the Company is
permitted to use cash and proceeds of its accounts receivable to meet certain
budgeted operating expenses through December 18, 1998. The Beacon Group III
Focus Value Fund, L.P. ("Beacon") and Genesis Holdings, Inc. ("GHI"), an
affiliate of Genesis Health Ventures, Inc., ("Genesis") which is the Company's
Series C Preferred Stockholder, have security interests in the Company's
accounts receivable. The Bankruptcy Court has scheduled a final hearing on use
of cash collateral for December 3, 1998.
The Company filed a motion with the Bankruptcy Court on November 18, 1998
seeking approval for a 30-day $600,000 first-priority secured
debtor-in-possession financing facility to be provided by Beacon and GHI (the
"DIP Financing"). The Bankruptcy Court has scheduled a hearing on approval of
the DIP Financing for December 3, 1998.
As part of the Chapter 11 bankruptcy proceedings, the Company intends to
restructure its relationship with each of the five core medical groups ("CMGs").
The Company and each of the CMGs are party to long-term management agreements
("PSO Agreements"). The Company has begun or intends to hold discussions with
each of the CMGs regarding possible restructuring options with respect to the
PSO Agreements.
The accompanying financial statements as of September 30, 1998 have been
prepared on the basis of accounting principles applicable to a going concern
that presume the continuity of operations, realization of assets and the
settlement of liabilities in the ordinary course of business. However, due to
the Chapter 11 case and the circumstances relating thereto, such realization of
assets and satisfaction of liabilities is subject to uncertainty. Under the
protection of the Bankruptcy Court, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities for amounts different from those
reflected in the financial statements, which do not reflect any adjustments to
the carrying value of assets or amounts of liabilities that might be necessary
as a consequence of a plan of reorganization. Accordingly, realization of the
Company's assets and liquidation of its liabilities in the ordinary course of
business is dependent upon, among other things, the Company's ability to (i)
obtain approval of the creditors, shareholders, and other interested parties and
obtain confirmation by the Bankruptcy Court of the plan of reorganization; (ii)
obtain adequate debtor-in-possession financing; (iii) achieve satisfactory
levels of future operating profit and cash flow that will support a plan of
reorganization; and (iv) obtain any necessary post-confirmation financing.
Under section 365 of the Bankruptcy Code, the Company may reject executory
contracts. Upon rejection, a person's claim for damages resulting from the
rejection of such executory contract is a general unsecured prepetition claim.
In a case under Chapter 11 of the Bankruptcy Code, the Company may assume or
reject an executory contract at any time before the confirmation of a plan.
Pursuant to Section 362 of the Bankruptcy Code, the commencement of the
Chapter 11 case imposed an automatic stay, applicable generally to creditors and
other parties in interest, of: (i) the commencement or continuation of a
judicial, administrative or other action or proceeding against the Company that
was or could have been commenced prior to the Filing Date or any attempt to
recover for a claim that arose prior to the commencement of the Chapter 11 case;
(ii) the enforcement against the Company or its property of any judgment
obtained prior to the Filing Date; (iii) the taking of any action to obtain
possession of property of the Company or to exercise control over property of
the Company; (iv) the creation, perfection, or enforcement of any lien against
the property of the Company's bankruptcy estate; (v) any act to create, perfect
or enforce against property of the Company any lien that secures a claim that
arose prior to the Filing Date; (vi) the taking of any action to collect, assess
or recover claims against the Company that arose prior to the Filing Date; (vii)
the set off of any debt owing to the Company that arose prior to the Filing Date
against any claim against the Company; or (viii) the commencement or
continuation of a proceeding before the United States Tax Court concerning the
Company. Any entity may apply to the Bankruptcy Court, upon an appropriate
showing of cause, for relief from the automatic stay to exercise the foregoing
remedies.
5
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3 - CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
As of September 30, 1998, the Company had three global capitation
contracts (two Medicare and one commercial) and three gatekeeper capitation
contracts. (See Management's Discussion and Analysis of Operations for the
definition of global capitation contracts.) The gatekeeper capitation contracts
represent Primary Care Physician ("PCP") capitation and the Company records no
profit margin on these contracts. Under the global capitation contracts, the
Company received monthly capitation fees based on the number of enrollees
electing any one of the Company's affiliated PCPs. The capitation revenue under
these contracts was prepaid monthly based on the number of enrollees and
recognized as capitation revenue during the month services are provided to the
enrollees. During the three months ended September 30, 1997, approximately
$4,275,000 and $294,000, were recorded as global capitation and gatekeeper
capitation revenue, respectively, in the Company's consolidated financial
statements. During the three months ended September 30, 1998, approximately
$27,680,000 and $325,000, were recorded as global capitation and gatekeeper
capitation revenue, respectively, in the Company's consolidated financial
statements.
The Company's commercial capitation contract also included a provision
whereby the Company could earn incentive revenue or incur medical services
expenses based upon the enrollees' utilization of hospital services. Estimated
amounts receivable or payable from the HMO were recorded based upon actual
hospital and other institutional utilization and associated costs incurred by
assigned HMO enrollees, compared to the portion of the commercial capitation
fees allocated for institutional care. Differences between actual contract
settlements and estimated receivables or payables relating to the arrangement
were recorded in the year of settlement. Included in accrued medical services as
of June 30 and September 30, 1998 is approximately $220,000 of estimated amounts
due to the HMO under this arrangement. Also, as of June 30 and September 30,
1998, the Company has included in accrued medical services an accrual of
approximately $300,000 and $150,000, respectively, which represents an estimate
of the loss to be incurred over the remaining term of commercial capitation
contract.
Under the Company's two Medicare global capitation contracts, the Company
assumed responsibility for managing and paying for substantially all of the
medical care for the respective payors' enrollees. Consequently, the Company has
not performed an institutional incentive settlement with the HMO's under the two
Medicare contracts.
The Company is responsible for some or all of the medical services
provided by its affiliated physicians and other providers to which it referred
patients who were covered under Global Capitated Contracts. The cost of medical
services has been recognized in the period in which the care was provided and
includes an estimate of the cost of services which have been incurred but not
yet reported. The estimate for accrued medical services was calculated by
pricing the open authorizations for medical services from the Company's medical
management system as well as projecting the associated costs using historical
studies of claims paid and actuarial assistance. Estimates are continually
monitored and reviewed and, as settlements are made, estimates are adjusted, and
differences are reflected in current operating results. As of June 30 and
September 30, 1998, approximately $36,400,000, and $43,900,000 respectively,
were recorded as accrued medical services for incurred but not reported
services.
NOTE 4 - TERMINATION OF GLOBAL CAPITATION CONTRACTS
On August 31, 1998, Aetna U.S. Healthcare ("Aetna"), which recently
acquired NYLCare Health Plans of the Mid-Atlantic, Inc. ("NYLCare/Aetna"),
announced that, effective January 1, 1999, NYLCare/Aetna would discontinue its
Medicare risk HMO plan in certain states and other jurisdictions including
Maryland, Virginia and Washington, D.C. On October 1, 1997, the Company agreed
to provide medical management services to patients of NYLCare in Maryland,
Virginia and Washington, D.C. As of August 31, 1998, the Company's Network
provided medical care to approximately 13,500 NYLCare/Aetna participants in this
managed care plan. NYLCare/Aetna announced that it would make the following
options available to participants in the plan: (i) return to traditional
Medicare fee-for-service program; (ii) return to traditional Medicare and
purchase a Medicare supplement for an additional premium; or (iii) enroll in a
Medicare + Choice HMO or other plan that services their geographic area. The
Company's contract with NYLCare/Aetna was to terminate on September 30, 2000.
The Company attempted discussions with NYLCare/Aetna to enable the Company
to continue to serve the affected Medicare participants but NYLCare/Aetna has
not responded positively to these discussions. The Company derived approximately
56% ($43,000,000) of its global capitation revenue during the year ended June
30, 1998 from the NYLCare/Aetna agreement.
On September 24, 1998, the Company rescinded the NYLCare/Aetna contract
(the date of Aetna's announcement) and notified NYLCare/Aetna of such
rescission. However, the Company has recorded capitation revenues and
6
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
accrued medical services liabilities through September 24, 1998, the date that
the Company ceased the authorization of care for the NYLCare/Aetna subscribers.
On September 16, 1998, the Company received notification of NYLCare/Aetna's
desire to seek arbitration related to various disputes related to the contract.
The outcome of any legal proceedings, or any attempts by the Company to seek a
financial settlement is unknown at this time. It is possible, depending on the
very uncertain outcomes of the upcoming legal proceedings, that the Company's
remaining financial exposure under this contract may be greater than the reserve
recorded for this global capitation contract. This contract accounted for
approximately 59% of the Company's global capitation revenue for the three
months ended September 30, 1998.
Effective September 1, 1998, the Company terminated its Medicare global
capitation contract with Chesapeake Health Plan, a subsidiary of United Health
Care of the Mid-Atlantic. This contract accounted for approximately 7% of the
Company's global capitation revenue for the three months ended September 30,
1998.
Subsequent to September 30, 1998, the Company terminated the remaining two
Medicare global capitation contracts and its one commercial global capitation
contract. (See Note 16)
NOTE 5 -- NET REVENUE
The Company's net revenues represent the contractual management and
similar fees earned under its long-term management agreements ("PSO Agreements")
with CMGs. Under the PSO Agreements, the Company is contractually responsible
and at risk for the operating costs of the CMGs with the exception of amounts
retained by physicians. The Company's net revenues include the reimbursement of
all medical practice operating costs and contractual management fees as defined
in the PSO Agreements. Contractual fees are accrued when collection is probable.
Revenue from all CMGs is recorded at established rates reduced by allowances for
doubtful accounts and contractual adjustments and amounts retained by physician
groups.
The following represents amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1998
---- ----
<S><C>
Gross physician revenue $9,028,182 $8,958,293
Less: Provision for contractual and other adjustments (3,620,607) (3,734,896)
Gatekeeper capitated income 1,202,413 1,231,344
--------- ---------
Net physician revenue 6,609,988 6,454,741
Amounts retained by affiliated core medical groups:
Physicians 2,907,261 2,566,937
Ancillary employees and expenses 305,033 348,909
--------- ---------
Net revenue $ 3,397,694 $3,538,895
========== =========
</TABLE>
For the three months ended September 30, 1997 and 1998, one of these CMGs
comprised approximately 40% and 41%, respectively, of the Company's net revenue.
NOTE 6 - OTHER RECEIVABLES
As of September 30, 1998, Other Receivables consisted of:
7
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Global capitation receivable $10,331,229
Stop loss insurance receivable 1,756,969
Other Receivable 63,244
-----------
Total 12,151,442
Less: Allowance for Doubtful Accounts (3,916,566)
-----------
Other Receivable, net $ 8,234,876
==========
As a result of the termination of certain global capitation contracts
described in Note 4 above and the age of other HMO settlements included within
the other receivable balance, management established an allowance for doubtful
accounts during the three months ended September 30, 1998. This change is
included in the General and Administrative expense line in the accompanying
Consolidated Statement of Operations.
NOTE 7--OTHER ACCRUED EXPENSES
As of September 30, 1998, other accrued expenses consist of the following:
Payroll and benefits $ 768,717
Professional services 328,692
Reserve for net amounts due
from affiliates 1,798,857
Reserve for core medical group restructuring 2,500,000
Other 2,214,616
---------
Other Accrued Expenses $ 7,610,882
==========
NOTE 8 -- NOTES PAYABLE
Notes Payable as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Date of
Description Maturity Amount
----------- -------- ------
<S><C>
Letter of Credit Payable to Chase Manhattan Private Bank October 31, 1998 $ 2,615,209
Note Payable to Series D Preferred Stockholder November 15, 1998 1,000,000
Note Payable to Series C
Preferred Stockholder (including accrued interest) January 31, 1999 5,840,675
Other Notes Payable Various 2,171,613
-----------
Total Notes Payable 11,627,497
Less: Current Maturities of Notes Payable (11,576,254)
-----------
Long-Term Notes Payable $ 51,243
==========
</TABLE>
In November 1997, the Company established an $11,000,000 credit facility
("the Credit Facility") with Chase Manhattan Bank, N.A. ("Chase"). The Credit
Facility supports a $5,250,000 standby letter of credit (the "Standby Letter"),
which was required under one of the Company's global capitation contracts. On
September 17, one of the HMO's withdrew $2,619,209 under the Credit Facility to
support the payment of claims. This letter of credit accrued interest at the
rate of Libor plus .05%. As of September 30, 1998, there was no remaining amount
available under the Credit Facility as the Company did not have collateral to
cover additional borrowings. The Credit Facility was terminated on October 31,
1998 after the letter of credit balance was repaid.
8
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DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
On August 19, 1998, the Company borrowed $1,000,000 from Beacon, the
Company's Series D Preferred Stockholder, pursuant to a Demand Promissory Note,
which bears interest at the rate of 15% per annum, unless the Company defaulted
on the Demand Promissory Note, at which time interest would increase
incrementally by 1% every two weeks until the debt was repaid or the maximum
rate allowable by law was reached. This Demand Promissory Note matured on
November 15, 1998. The Company has defaulted on this Demand Promissory Note.
(See Note 16 "Subsequent Events".)
NOTE 9 - CAPITALIZATION
On July 7, 1997 the Company entered into a Preferred Stock Purchase
Agreement, which was amended on July 15, 1997 (the "Series D Purchase
Agreement"), with Beacon pursuant to which the Company agreed to sell to Beacon
3,000,000 shares of the Company's Series D Redeemable Convertible Preferred
Stock (the "Series D Preferred Stock") for an aggregate purchase price of
$30,000,000. The parties completed an initial purchase of 2,000,000 shares for
$20,000,000 on July 15, 1997. The Company incurred issuance costs of
approximately $1,289,000 in connection with the Series D financing including
financing and due diligence fees. The $18,711,000 in net proceeds was used to
fund the expansion of the Company and operating losses. Pursuant to the Series D
Purchase Agreement, the purchase of the additional shares of Series D Preferred
Stock by Beacon in exchange for an aggregate purchase price of $10,000,000 was
to be consummated on or prior to June 30, 1998 and was subject to various
conditions including, without limitation, the absence of any material adverse
change in the Company's financial condition. Because there had been a material
adverse change in the Company's financial condition prior to June 30, 1998,
Beacon declined at that time to purchase additional shares of Series D Preferred
Stock pursuant to the Series D Purchase Agreement.
NOTE 10 - STOCK SPLIT-UP
Effective September 30, 1997, the Company's outstanding common stock and
options were split-up 2 for 1 effected in the form of a dividend (the "Stock
Split-up"). The net loss per share and number of common shares outstanding for
all periods presented have been restated to reflect the Stock Split-up. As a
result of certain adjustment provisions in the Company's Restated Articles and
in applicable option and warrant agreements, the number of shares of common
stock into which each then outstanding share of Preferred Stock, option or
warrant is convertible, exercisable or exchangeable, as the case may be, was
automatically increased by a ratio of two to one on the effective date of the
Stock Split-up.
NOTE 11 -- CAPITATION AGREEMENTS
On September 10, 1997, the Company entered into the NYLCare/Aetna global
capitation contract for Medicare enrollees. Under the agreement, effective
October 1, 1997, the Company assumed responsibility for managing all physician
and institutional care, subject to certain exclusions, delivered to enrollees in
exchange for monthly capitation fees. During the three months ended September
30, 1998, the Company earned capitation revenue of approximately $16,500,000
under this contract. The Company rescinded this agreement on September 24, 1998,
effective retroactively to August 31, 1998. The Company is currently engaged in
legal proceedings with NYLCare/Aetna regarding the contract termination.
On January 1, 1998, the Company assumed responsibility for managing all
physician and institutional care, subject to certain exclusions, delivered to
Medicare enrollees located on the Eastern Shore of Maryland of an HMO in
exchange for monthly capitation fees pursuant to arrangements with Genesis.
These arrangements were terminated effective November 1, 1998. (See Note 4.)
During the three months ended September 30, 1998, the Company earned capitation
revenue of approximately $6,300,000 under this arrangement.
NOTE 12 - LOSS ON WRITE-DOWN OF IMPAIRED LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of", ("SFAS No. 121"),
the Company has recorded an impairment loss of $9,071,669 in fiscal year 1998
related to certain of its long-lived assets stemming from its PSO Agreements and
related transactions. Under SFAS No. 121, the Company has evaluated its
intangible and other long-lived assets at the lowest level for which there are
identifiable independent cash flows. Of the loss recorded, $7,471,000 is related
to the unamortized portion of the Company's intangible assets related to its PSO
Agreements and certain other
9
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DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
physician agreements. Due to the losses incurred under the global capitation
agreements in which these physicians participate as well as the direct costs
incurred by the Company to support the PSO Agreements, the Company has
determined that the anticipated cash flows resulting from its PSO Agreements and
other physician agreements will be insufficient to realize the intangible assets
recorded. The remainder of the impairment loss relates primarily to certain
computer hardware and software acquired to support the Company's physician
practices which the Company believes are impaired, given its current and future
cash flow under the PSO Agreements and its plans to restructure those agreements
as of June 30, 1998.
In each case, the impairment loss represents the excess of the carrying
amount of the impaired assets over the estimated fair value of the impaired
assets. Generally, fair value represents the expected future cash flows from the
use of the assets or group of assets, discounted at a rate commensurate with the
risks involved.
As a result of the bankruptcy proceeding, (see Note 2) the Company
believes there could be additional impairment writedowns in the future. Such
amounts, if any, can not be readily determined at this time.
NOTE 13 - RESIGNATIONS OF OFFICERS AND DIRECTORS
During the three months ended September 30, 1998, the following persons
resigned as officers and/or Board members of the Company:
o Effective July 29, 1998, Dr. Peter LoPresti resigned from the Company's Board
of Directors.
o Effective September 2, 1998, Dr. Scott Rifkin resigned as Chairman of the
Board of Directors. Dr. Rifkin resigned as a director of the Company and
member of the Executive Committee of the Board of Directors as of September
21, 1998.
o Effective September 20, 1998, Dr. J. David Nagel resigned from the Board
of Directors.
o Effective September 25, 1998, Dr. Norman Marcus resigned as a Director.
o Effective September 25, 1998, John R. Dwyer, Jr. resigned as Executive
Vice President, Chief Financial Officer of the Company and a Director of
the Company.
Subsequent to September 30, 1998, additional officers and members of the
Company's Board of Directors resigned (See Note 16).
NOTE 14 -CONVERSION PRICE ADJUSTMENT FOR THE SERIES D PREFERRED STOCK
The initial conversion ratio of the Series D Preferred Stock was one share
of preferred stock for one share of Class C Common Stock, which was adjusted to
one share of preferred stock for two shares of Class C Common Stock as a result
of the Company's two-for-one stock split in fiscal 1998. The Certificate of
Incorporation of the Company provides that the conversion price for converting
shares of Series D Preferred Stock to Class C Common Stock is subject to
downward adjustment because the average Medical Loss Ratio for the Company's
Medicare enrollees was greater than 72.5%, for the year ended June 30, 1998 and
the Company had less than 28,000 Medicare enrollees at June 30, 1998.
As a consequence of that adjustment, each share of Series D Preferred
Stock is convertible into 3.64 shares of Class C Common Stock. Based upon
Beacon's initial investment (and including stock dividends of 33,666 shares of
Series D Preferred Stock issued through September 30, 1998), the Series D
Preferred Stockholder would own, upon conversion, 7,858,276 shares of Class C
Common Stock, representing approximately 40% of the outstanding capital stock of
the Company.
NOTE 15 - RESCISION OF PREFERRED STOCK DIVIDENDS
On November 4, 1998, the Company rescinded the declaration and issuance of
three Series D Preferred Stock Dividends subsequent to the date of its
incorporation in the State of Delaware in October 1997. Corporate law in the
State of Delaware prohibits corporations from declaring dividends when the
corporation lacks capital surplus. The Series D Preferred Stockholder has
returned to the Company the applicable stock certificates with respect to the
rescinded dividends. The effect of this rescission has been made to the equity
balances as of September 30, 1998.
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DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 16 - SUBSEQUENT EVENTS
BRIDGE LOANS AND DEMAND PROMISSORY NOTES
On October 2, 1998, the Company borrowed $350,000 from Beacon and
$350,000 from GHI and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 22, 1998, the Company borrowed $100,000 from Beacon and
$100,000 from GHI and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 29, 1998, the Company borrowed $50,000 from Beacon and $50,000
from GHI and the Company issued Demand Promissory Notes to Beacon and GHI. The
proceeds of these loans were used to pay general and corporate expenses.
The borrowings completed in October 1998 accrue interest at the rate of
15% per annum. The Demand Promissory Notes matured on November 15, 1998 and are
in default. Upon default the interest rate increases 1% and continues to
increase incrementally by an additional 1% every two weeks thereafter, provided
the interest rate shall not exceed the maximum permitted by law, until the
principal has been repaid. Due to the default, the Company must also pay the
amount of interest, fee or other amount payable on each of the notes at a rate
per annum equal at all times to the higher of 20% per annum or the applicable
interest rate required by the preceding sentence.
BANKRUPTCY
On November 16, 1998, the Company filed a petition under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court (Baltimore Division) to
reorganize and seek protection from its creditors. See Note 2.
ADDITIONAL BEACON/GENESIS FINANCING
Management is negotiating debtor in possession financing with Beacon and
Genesis to fund operations and other Company commitments incurred prior and
subsequent to the Company's bankruptcy filing. See Note 2.
CASH POSITION
As of November 18, 1998, the Company had cash and cash equivalents of
approximately $217,000. Of this amount, approximately $50,000 was restricted in
order to secure payment of medical claims under the Company's global capitation
contract with an HMO.
RESIGNATIONS OF OFFICERS AND DIRECTORS
Subsequent to September 30, 1998, the following persons resigned as
officers and/or Board members of the Company:
o Directors - Albert Herrera, Robert Graw, Mark Eig, William Lamm, Stewart
B. Gold, Alan Kimmel and D. Alexander Rocha;
o Officers - Stewart B. Gold, President and CEO; James A. Gast, Senior Vice
President, Alan Kimmel, position as Executive Vice President and Chief Medical
Officer was terminated by the Company; and Cindy Gates-Belz, position as Vice
President of Care Management was terminated by the Company.
Effective October 15, 1998, Dr. Robert Barish resigned as a member of the
Board of Directors designated by the Series B Preferred Stockholder and the
Series B preferred Stockholder designated Dr. David Rorison as his replacement.
As a result of these resignations and those set forth in Note 13, there
are 15 vacancies on the full Board of Directors of the Company and four
vacancies on the Executive Committee thereof. These vacancies have not been
filled yet by the shareholders or directors entitled to designate replacements
for such vacancies.
TERMINATION OF GLOBAL CAPITATION CONTRACTS
Effective November 1, 1998, the Medicare network management arrangement
with respect to certain Medicare enrollees on the Eastern Shore of Maryland was
terminated.
Effective November 13, 1998, the Company ceased providing services to
HMO's associated with Blue Cross/Blue Shield of Maryland under a Medicare and
Commercial global capitation contract.
11
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DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of November 13, 1998, the Company had no global capitation contracts
from which revenues are derived.
12
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DOCTORS HEALTH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview. The Company's strategy has principally focused on acquiring
global capitation contracts under which the Company would generate operating
income. This strategy has not been successful to date. The Company sustained a
net loss of $18,055,724 for the three months ended September 30, 1998. This loss
for the three months ended September 30, 1998 is primarily due to the fact that
medical expenses incurred were significantly greater than expected and exceed
Capitation Revenue for the period. As a result of these operating developments
and the decision by NYLCare Health Plans of the Mid-Atlantic, Inc. ("NYLCare")
to terminate its Medicare contract with the HealthCare Finance Administration
("HCFA"). On November 16, 1998 the Company filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Maryland to reorganize and seek protection from creditors.
Management is developing a plan to reorganize the operations of the Company.
As a result of these developments subsequent to September 30, 1998,
management implemented a corporate expense reduction plan which has included a
substantial reduction in personnel.
During fiscal year 1998, the Company entered into a Global Capitation
Contract with NYLCare which increased the number of Medicare enrollees by
approximately 13,500. As a result of the NYLCare Global Capitation Contract, the
Company incurred substantial overhead expenses to hire new employees,
established a care management operations center and purchased new information
systems to handle the influx of new claims and cases. While the NYLCare contract
increased the Company's Capitation Revenue during fiscal 1998 by approximately
$43,000,000, Medical Services Expense attributable to medical care for the
NYLCare enrollees exceeded such Capitation Revenue by approximately $8,400,000.
NYLCare was acquired by Aetna US Healthcare (collectively,
"NYLCare/Aetna") in July 1998. On August 31, 1998, Aetna announced that,
effective December 31, 1998 it would terminate its Medicare contract with HCFA
for certain jurisdictions including Maryland, Virginia and Washington, D.C. It
is the Company's position such action by NYLCare/Aetna constitutes a breach of
the Global Capitation Contract with the Company. The Company and NYLCare/Aetna
have asserted a number of claims against each other in connection with various
terms under the contract. NYLCare/Aetna has requested arbitration of those
disputes. The Company has sought legal advice with respect to its claims and
remedies against NYLCare/Aetna, including the right to seek specific performance
of the Global Capitation Contract, monetary damages and rescission. There can be
no assurance as to the ultimate resolution of various claims by NYLCare/Aetna.
However, the Company is operating as if the contract was terminated as of August
31, 1998 and, as a result, has begun to implement the downsizing and other
measures described below. On September 24, 1998, the Company rescinded the
NYLCare/Aetna Global Capitation Contract because management believed
NYLCare/Aetna had breached the contract.
Negative margins were also generated during fiscal 1998 from operations
under the Company's Global Capitation Contract with Chesapeake Health Plan,
Inc., a subsidiary of United HealthCare of the Mid-Atlantic ("United
HealthCare"). These negative margins were caused by insufficient Capitation
Revenues and adverse medical expense experience caused by a relatively small
number of enrollees. As a result of these experiences, the Company terminated
this contract effective September 1, 1998.
Capitation Revenues from the United HealthCare contract terminated as of
September 1, 1998 and Capitation Revenues under the NYLCare/Aetna contract
retroactively terminated as of August 31, 1998. However, the Company has
recorded Capitation Revenues and accrued medical services liabilities through
September 24, 1998, the date that the Company ceased the authorization of care
for the NYLCare/Aetna subscribers. On September 16, 1998, the Company received
notification of NYLCare/Aetna's desire to seek arbitration related to various
disputes related to the contract. This arbitration proceeding has been stayed as
a result of the bankruptcy proceeding. The outcome of any legal proceedings, or
any attempts by the Company to seek a financial settlement is unknown at this
time. It is possible, depending on the very uncertain outcomes of any legal
proceedings, that the Company's remaining financial exposure under this contract
may be greater than the reserve recorded for this global capitation contract.
This contract accounted for approximately 59% of the Company's global capitation
revenue for the three months ended September 30, 1998. Capitation Revenues from
these contracts represented approximately 66% of the Company's Capitation
Revenue for three months ended September 30, 1998. Despite termination of these
contracts, the Company may remain liable for medical expenses incurred by such
enrollees even though claims for such medical expenses may not be presented to
the Company for a considerable period of time after the termination date. The
Company intends to contest any liability for claims with respect to the
NYLCare/Aetna contract.
Capitation Revenues from the Company's Medicare and Commercial global
capitation contracts with Blue Cross/Blue Shield ceased as of October 31, 1998
and active accounts were turned over to Blue Cross/Blue Shield on November 13,
1998. Effective November 1, 1998, Genesis and the Company terminated their
Medicare care network management arrangements with the Company, with respect to
certain Medicare enrollees on the Eastern Shore of Maryland. Capitation Revenues
with respect to the Eastern Shore Medicare care network management arrangement
ceased effective November 1, 1998. Despite termination of the Blue Cross/Blue
Shield Contracts, the Company may remain liable for medical expenses incurred by
such enrollees even though claims for such medical expenses may not be presented
to the Company for a considerable period of time after the termination date. As
of November 12, 1998, all of the Company's Global Capitation Contracts had been
terminated.
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DOCTORS HEALTH, INC.
The Company has recorded accrued medical services liabilities related to
the terminated contracts in the amount of approximately $31,000,000 on its
consolidated balance sheet at September 30, 1998, of which approximately
$26,000,000 is subject to the legal proceedings between the Company and
NYLCare/Aetna.
The Company's financial condition is also affected by changes in certain
of its credit facilities. During fiscal 1998, approximately $7,500,000 in debt
obligations were reclassified as current liabilities due to the maturity dates
and planned restructuring of the Company's relationships with the Core Medical
Groups.
The operating losses, contract terminations, debt reclassification and
other operating issues have resulted in a working capital deficit of $44,422,130
as of September 30, 1998. The Company does not have sufficient resources to fund
its short term and long term liquidity and cash flow requirements. In light of
the working capital deficit described above and uncertainty as to the outcome of
the legal proceedings with NYLCare/Aetna, the Company's internally generated
capital has not been sufficient to fund all of the Company's short term and long
term liquidity and cash flow requirements.
Sources of Revenue
Capitation Revenues. Under the global capitation contracts, the Company
received Capitation Revenue in the form of a fixed fee per enrollee per month or
a percentage of Enrollee premiums from a Payor in exchange for undertaking the
obligation to provide or arrange for the provision of substantially all of the
health care services required by the enrollees (the majority of expenses
associated with such activities are reported as "Medical Services Expense").
These services were provided by PCPs, specialists, hospitals and other health
care providers which are part of the Company's Network. The Company also
received revenues from Gatekeeper Capitation Contracts pursuant to which the
Payor compensates the Company only for primary care medical services. The
Company derived no earnings from the Gatekeeper Capitation Contracts and has
attempted to convert the enrollees in such commercial gatekeeper contracts to
global capitation contracts when possible.
Capitation Revenue was prepaid monthly based on the consolidated number of
enrollees and was recognized as Capitation Revenue during the month the Company
became responsible for the care of such enrollees. During the three months ended
September 30, 1998, approximately $27,680,000 and $325,000, were recorded as
global capitation and gatekeeper capitation revenue, respectively, in the
Company's consolidated financial statements. During the three months ended
September 30, 1997, approximately $4,275,000 and $294,000, were recorded as
global capitation and gatekeeper capitation revenue, respectively, in the
Company's consolidated financial statements.
In December 1997, the Company also executed a letter of intent with
Genesis whereby the Company assumed responsibility for managing physician and
institutional care, subject to certain exclusions, delivered to certain Medicare
enrollees of an HMO located on the Eastern Shore of Maryland in exchange for a
capitation fee. The arrangement commenced on January 1, 1998. The Company and
Genesis did not execute an actual contract and operated under the arrangements
based on the letter of intent. Genesis and the Company terminated the
arrangements on November 12, 1998, such termination to be effective on November
1, 1998. The Company generated approximately $6,300,000 of capitation revenue
for the three months ended September 30, 1998.
The Company is responsible for the expenses of some or all of the medical
services provided by its PCPs, specialists and other providers to which it
referred enrollees under global capitation contracts. The cost of medical
services was recognized in the period in which they were provided and includes
an estimate of the cost of services which have been incurred but not yet
reported. The estimate for accrued medical services is calculated by pricing the
open authorizations for medical services from the Company's medical management
system as well as projecting the associated costs using historical studies of
claims paid and actuarial assistance. Estimates are continually monitored and
reviewed and, as settlements are made estimates are adjusted, and differences
are reflected in current operating results. As of September 30, 1997 and 1998,
approximately $6,077,000 and $43,874,000, respectively, was recorded in Accrued
Medical Services for incurred but not reported services.
Net Revenue. The Company derives a portion of its total revenues from
contractual management and similar fees earned pursuant to the PSO Agreements
with Core Medical Groups which employ physicians who have transferred medical
practice assets to the Company. Net Revenue consists of the reimbursement of all
practice operating costs and contractional management fees as defined and
stipulated in the PSO Agreements. During the three months ended September 30,
1997 and 1998, the Company recorded
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DOCTORS HEALTH, INC.
contractual management fees of $103,951 and $116,415, respectively.
RESULTS OF OPERATIONS
The following table sets forth for the three months September 30, 1998,
selected financial data expressed as a percentage of total revenues. Because of
the Company's recent loss of its global capitation contracts and its major
restructuring, the Company does not believe that the period to period
comparisons, percentage relationships within periods and apparent trends set
forth below are necessarily indicative of future operations.
Three Months Three Months
Ended Ended
September 30, September 30,
1997 1998
---- ----
Capitation revenue 57.3% 88.8%
Net revenue 42.7% 11.2%
----- -----
Total revenues 100.0% 100.0%
Medical services expense 49.1% 120.9%
Care center costs 41.3% 10.8%
General and administrative 39.7% 21.5%
Depreciation and amortization 6.0% 1.0%
Interest and other income (3.7)% (1.0)%
Interest expense 4.1% 1.0%
Income tax expense -- --
----- -----
Net loss (36.5)% (54.1)%
======= =======
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997.
15
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DOCTORS HEALTH, INC.
Total Revenues. The Company's total revenues increased to $31,344,356 for
the three months ended September 30, 1998 from $7,966,401 for the three months
ended September 30, 1997. Capitation Revenue increased to $28,005,461
($27,035,354 due to global capitation contracts and $970,107 due to Gatekeeper
Capitation Contracts) or 88.8% of total revenues for the three months ended
September 30, 1998, compared to $4,568,707 ($4,274,995 due to Global Capitated
Contracts and $293,712 due to Gatekeeper Capitation Contracts) or 57.3% of total
revenues in the comparable prior period. This increase in Capitation Revenue is
primarily attributable to the increase in the number of Enrollees participating
in global capitation contracts from 9,070 at September 30, 1997 to 30,665 at
September 30, 1998. The Company has terminated all of its global capitation
contracts.
Medical Services Expense. Medical services expense was $38,147,712 or
120.9% of total revenues for the three months ended September 30, 1998 compared
to $3,908,010 or 49.1% of total revenues for the three months ended September
30, 1997. This increase resulted from the increase in the number of Enrollees
participating in the Company's Global Capitated Contracts from 9,070 at
September 30, 1997 to 30,665 at September 30, 1998 and the recording of
provisions for uncollectible accounts. The Company has terminated all of its
global capitation contracts.
Care Center Costs. Care center costs increased to $3,422,480 or 10.8% of
total revenues for the three months ended September 30, 1998 from $3,293,743 or
41.3% of total revenues for the three months ended September 30, 1997. The
increase in the dollar amount of care center costs resulted primarily from the
increase in physician draws.
General and Administrative Expenses. General and administrative expenses
increased to $6,787,184 or 21.5% of total revenues for the three months ended
September 30, 1998 from $3,166,519 or 39.7% of total revenues for the three
months ended September 30, 1997. This increase in dollar amount resulted
primarily from increased compensation expenses from expansion of the Company's
corporate management team, as well as its marketing, acquisitions, network
development and care management departments and additional operating costs
incurred in adding physicians to the Company's Network and attracting members
who enroll in benefit plans under global capitation contracts. The increase can
also be attributed to the recording of additional provision for uncollectible
accounts related to accounts receivable and other receivables and accrued
interest receivable. The increase to the provision was a result of management's
estimate of the collectibility of the receivables.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $185,953 or 1.0% of total revenues for the three months
ended September 30, 1998 from $476,581 or 6.0% of total revenues for the three
months ended September 30, 1997. The decrease in dollar amount resulted
primarily from the write down of impaired long-lived assets at June 30, 1998.
Interest and Other Income. Interest and other income decreased to $191,242
or 1.0% of total revenues for the three months ended September 30, 1998 from
$296,440 or 3.7% of total revenues for the three months ended September 30,
1997. The decrease in dollar amount resulted primarily from the decrease in cash
and cash equivalents and short-term investments.
Interest Expense. Interest expense decreased to $259,025 or 1.0% of total
revenues for the three months ended September 30, 1998 from $328,069 or 4.1% of
total revenues for the three months ended September 30, 1997. These dollar
decreases resulted primarily from the termination of the HBO & Company Note
Payable, paid in full on May 14, 1998.
Income Tax Expense. In light of the Company's loss and its full valuation
allowance for deferred tax assets, for the three months ended September 30, 1998
and 1997, the Company did not require a provision for income taxes.
Net Loss. The Company had a net loss of $17,066,756 for the three months
ended September 30, 1998 compared to $2,910,081 for the three months ended
September 30, 1997.
Loss Applicable To Common Stock. In arriving at loss applicable to common
stock, the Company's net loss is increased by dividends payable to the
Redeemable Convertible Preferred Stockholders and accretion. The net loss
applicable to common stock was $18,055,724 for the three months ended September
30, 1998 compared to $3,715,163 for the three months ended September 30, 1997
which consisted primarily of HMO and contract termination settlements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. As of September 30, 1998, the Company had a working capital deficit
of $44,422,130. The Company presently lacks sufficient financial resources to
meet its short and long-term liquidity needs as a result of the significant
accrued medical services liabilities with
16
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DOCTORS HEALTH, INC.
respect to terminated contracts, particularly the NYLCare/Aetna contract. The
Company expects to address these issues against NYLCare/Aetna in the appropriate
legal forum. The Company's liquidity is also affected in the short term by the
Company's credit facilities described in "--Capital Resources." The Company has
reduced its expenses and is seeking debtor-in-possession financing to assist in
funding certain of its short-term liquidity needs.
On October 2, 1998, the Company borrowed $350,000 from Beacon and
$350,000 from GHI, and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 22, 1998, the Company borrowed $100,000 from Beacon and
$100,000 from GHI and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 29, 1998, the Company borrowed $50,000 from Beacon and $50,000
from GHI and the Company issued Demand Promissory Notes to Beacon and GHI. The
proceeds of the loans were used to pay general and corporate expenses.
The loans completed in October 1998 accrue interest at the rate of 15%
per annum and are in default as of November 16, 1998. Upon default the interest
rate increased 1% and continues to increase incrementally by an additional 1%
every two weeks thereafter, provided the interest rate shall not exceed the
maximum permitted by law, until the principal has been repaid. While in default
the Company must also pay additional interest on outstanding principal and
interest fees or other amounts payable on each of the notes at a rate per annum
equal at all times to the higher of 20% per annum or the applicable interest
rate required by the preceding sentence.
On November 16, 1998, the Company filed a voluntary petition under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Maryland, Baltimore Division (Case No. 98-6-6211-JS). No trustee has been
appointed by the Bankruptcy Court, and the Company is currently acting as a
Chapter 11 debtor-in-possession in accordance with the Bankruptcy Code. The
Company has not yet filed a plan of reorganization or liquidation, but it has
the exclusive right to do so on or before March 16, 1999. The Company is
considering all available options with respect to formulation of a plan,
including the reorganization of its business or termination of operations and
liquidation of its assets.
On November 20, 1998, the Bankruptcy Court entered an interim Order
Authorizing Use of Cash Collateral, under the terms of which the Company is
permitted to use cash and proceeds of its accounts receivable, in which Beacon
and GHI have security interests, to meet certain budgeted operating expenses
through December 18, 1998. The Bankruptcy Court has scheduled a final hearing on
use of cash collateral for December 3, 1998.
The Company filed a motion with the Bankruptcy Court on November 18, 1998
seeking approval for the DIP Financing. The Bankruptcy Court has scheduled a
hearing on approval of the DIP Financing for December 3, 1998.
The Company has evaluated the impact of the year 2000 issue on its
reporting systems and operations. The year 2000 issue exists because many
computer systems and applications currently use two digit date fields to
designate a year. The Information Technology Department has completed an
assessment of the impact of the year 2000 issue on the Company. All hardware,
software and programs have been assessed with respect to the ability to provide
materially fault-free performance in the processing of date-related information.
The Company utilizes commercially developed software packages, several of which
were identified as non-year 2000 compliant. A workplan was created which
identifies "at risk" systems, as well as the anticipated cost and time frame for
upgrade or replacement of such systems. Due to the Company's financial condition
the Company has deferred completion of this process.
In addition to its internal systems, the Company relies upon outside
vendors, NYLCare/Aetna, CareFirst of Maryland, Inc. and Health Care Automation,
to process claims for the professional and institutional services rendered to
managed care members for whom the Company is at risk. Each party has provided a
letter to the Company attesting to the year 2000 compliance of their relevant
systems. The Company has not, however, independently verified these claims.
There can be no assurance that these systems will actually perform as required
at the millennium.
The Company has not yet developed a contingency plan in the event that its
work plan is unable to successfully address the year 2000 issue.
Cash Flow. Net cash used in operating activities was $8,310,097 for the
three months ended September 30, 1998, compared to $3,271,565 in 1997. The use
of cash for operating activities for the three months ended September 30, 1998
resulted primarily from (i) $17,066,756 in net losses, (ii) a $843,675 increase
in prepaid expenses and other receivables, offset by (iii) a $7,454,501 increase
in accrued medical service expense and, (iv) depreciation and amortization of
$185,953.
Net cash used in investing activities was $314,578 for the three months
ended September 30, 1998, compared to $3,756,178 in 1997.
Net cash provided by (used in) financing activities was $(361,376) for the
three months ended September 30, 1998, compared to 18,590,125 in 1997. Cash
flows from financing activities in 1997 primarily resulted from issuances of
Redeemable Convertible Preferred Stock and activity in the Company's note
payable balances.
As of November 18, 1998, the Company had total cash and cash equivalents
of approximately $617,000 of which approximately $50,000 is restricted.
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DOCTORS HEALTH, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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DRAFT 11/23/98 2:35 PM
DOCTORS HEALTH, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 16, 1998 NYLCare Health Plans of the Mid-Atlantic ("NYLCare")
notified the Company that it would seek arbitration related to various disputes
between the Company and NYLCare under a medical management agreement. Such
arbitration has been stayed as a result of the Company's filing of a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. See Note 4 of the Notes
to Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview, which are incorporated
herein by reference.
On November 16, 1998, the Company filed a voluntary petition (Case No.
98-66211-JS) under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court (Baltimore Division) (the "Bankruptcy Court") to reorganize and seek
protection for its creditors. As a debtor-in-possession under Chapter 11, the
Company is subject to the jurisdiction of the Bankruptcy Court and is
continually subject to various proceedings under the Bankruptcy Code. It is not
practicable for the Company to describe or refer to all such proceedings or to
predict the impact thereof on the Company or its efforts to formulate a plan of
reorganization.
On November 17, 1998, Cumberland Valley Medical Group, L.L.C. ("CVMG")
filed a complaint against the Company for declaratory judgment and breach of
contract in the Bankruptcy Court (adversary proceeding no. 98-06268). In its
request for declaratory judgment, CVMG alleges that $579,318 in accounts
receivable is owed to CVMG pursuant to the PSO agreement between CVMG and the
Company and requests the Bankruptcy Court to enter an order declaring that all
accounts receivable assigned to the Company under the PSO agreement be
determined to be the property of CVMG. In addition, CVMG is seeking damages in
connection with its alleged breach of contract claim. CVMG contemporaneously
filed a motion for a preliminary affirmative injunction to require the Company
to immediately release and assign to CVMG all accounts receivable generated by
CVMG and all records relating to the accounts receivable. A hearing has been
scheduled for December 8, 1998 to hear arguments in connection with the motion
for a preliminary affirmative injunction. The Company intends to oppose the
claims asserted by CVMG.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) See Notes 8, 15 and 16 of the Notes to the Consolidated Financial
Statements, which are incorporated herein by reference.
ITEM 5. OTHER INFORMATION
BRIDGE LOANS AND DEMAND PROMISSORY NOTES
On October 2, 1998, the Company borrowed $350,000 from Beacon and
$350,000 from GHI and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 22, 1998, the Company borrowed $100,000 from Beacon and
$100,000 from GHI and the Company issued to Beacon and GHI Demand Promissory
Notes. On October 29, 1998, the Company borrowed $50,000 from Beacon and $50,000
from GHI and the Company issued Demand Promissory Notes to Beacon and GHI. The
proceeds of these loans were used to pay general and corporate expenses.
The borrowings completed in October 1998 accrue interest at the rate of
15% per annum. The Demand Promissory Notes matured on November 15, 1998 and are
in default. Upon default the interest rate increases 1% and continues to
increase incrementally by an additional 1% every two weeks thereafter, provided
the interest rate shall not exceed the maximum permitted by law, until the
principal has been repaid. Due to the default, the Company must also pay the
amount of interest, fee or other amount payable on each of the notes at a rate
per annum equal at all times to the higher of 20% per annum or the applicable
interest rate required by the preceding sentence.
BANKRUPTCY
On November 16, 1998, the Company filed a petition under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court (Baltimore Division) to
reorganize and seek protection from its creditors. See Note 2.
ADDITIONAL BEACON/GENESIS FINANCING
Management is negotiating debtor in possession financing with Beacon and
Genesis to fund operations and other Company commitments incurred prior and
subsequent to the Company's bankruptcy filing. See Note 2.
CASH POSITION
As of November 18, 1998, the Company had cash and cash equivalents of
approximately $217,000. Of this amount, approximately $50,000 was restricted in
order to secure payment of medical claims under the Company's global capitation
contract with an HMO.
RESIGNATIONS OF OFFICERS AND DIRECTORS
Subsequent to September 30, 1998, the following persons resigned as
officers and/or Board members of the Company:
o Directors - Albert Herrera, Robert Graw, Mark Eig, William Lamm, Stewart
B. Gold, Alan Kimmel and D. Alexander Rocha;
o Officers - Stewart B. Gold, President and CEO; James A. Gast, Senior Vice
President, Alan Kimmel, position as Executive Vice President and Chief Medical
Officer was terminated by the Company; and Cindy Gates-Belz, position as Vice
President of Care Management was terminated by the Company.
Effective October 15, 1998, Dr. Robert Barish resigned as a member of the
Board of Directors designated by the Series B Preferred Stockholder and the
Series B preferred Stockholder designated Dr. David Rorison as his replacement.
As a result of these resignations and those set forth in Note 13, there
are 15 vacancies on the full Board of Directors of the Company and four
vacancies on the Executive Committee thereof. These vacancies have not been
filled yet by the shareholders or directors entitled to designate replacements
for such vacancies.
TERMINATION OF GLOBAL CAPITATION CONTRACTS
Effective November 1, 1998, the Medicare network management arrangement
with respect to certain Medicare enrollees on the Eastern Shore of Maryland was
terminated.
Effective November 13, 1998, the Company ceased providing services to
HMO's associated with Blue Cross/Blue Shield of Maryland under a Medicare and
Commercial global capitation contract.
As of November 13, 1998, the Company had no global capitation contracts
from which revenues are derived.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Demand Promissory Note dated August 19, 1998 issued to The Beacon Group
III-Focus Value Fund, L.P.
10.2 Demand Promissory Note dated October 2, 1998 issued to The Beacon Group
III- Focus Value Fund, L.P.
10.3 Demand Promissory Note dated October 2, 1998 issued to Genesis
Holdings, Inc.
10.4 Demand Promissory Note dated October 22, 1998 issued to The Beacon
Group III- Focus Value Fund, L.P.
10.5 Demand Promissory Note dated October 22, 1998 issued to Genesis
Holdings, Inc.
10.6 Demand Promissory Note dated October 29, 1998 issued to The Beacon
Group III- Focus Value Fund, L.P.
10.7 Demand Promissory Note dated October 29, 1998 issued to Genesis
Holdings, Inc.
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
99.1 Order Authorizing Use of Cash Collateral
99.2 Order Authorizing Payment Of Prepetition Accrued Waged, Payroll Taxes
and Other Employee Benefits
(b) Reports on Form 8-K.
None
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DOCTORS HEALTH, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DOCTORS HEALTH, INC.
By: /s/ Thomas F. Mapp
___________________________
Thomas F. Mapp
Vice President
20
EXHIBIT 10.1
DEMAND PROMISSORY NOTE
$1,000,000 Dated as of August 19, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of THE BEACON GROUP III - FOCUS VALUE FUND, L.P. (the "Lender") the
aggregate principal amount of ONE MILLION AND 00/100 DOLLARS ($1,000,000) (the
"Principal Amount") on the date of demand for payment of principal and interest
hereunder and outstanding on such date of demand, in lawful money of the United
States of America ("U.S. Dollars" or "$") and in same day funds; provided that
in the absence of any demand by the Lender for payment hereof on or prior to
November 15, 1998 (the "Maturity Date"), the Borrower hereby unconditionally
promises to pay to the Lender such principal amount, and interest thereon to the
date of payment, in such funds on the Maturity Date (or, if the Maturity Date
shall fall on a day that is not a Business Day (as hereinafter defined), the
next succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding, obligation or commitment of any kind on
the part of the Lender to make any equity or other
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investment in the Borrower of any kind and that any determination to make any
future equity investment in the Borrower shall be in the sole and absolute
discretion of Lender. This paragraph does not amend or modify any of the terms
of this Note, including, without limitation, any provisions regarding payment of
any amounts due hereunder, all of which terms shall remain in full force and
effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily
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for the purpose of enabling the debtor to make payment of such Debt or to assure
the holder of such Debt against loss, (iii) to supply funds to or in any other
manner invest in the debtor (including any agreement to pay for property or
services irrespective of whether such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss, and (h) all Debt
referred to in clauses (a) through (g) above of another person secured by (or
for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including, without
limitation, accounts and contract rights) owned by such person, even though such
person has not assumed or become liable for the payment of such Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in
which) more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such person, by such person and one or more of
its other Subsidiaries or by one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the proposed
date and principal amount of the prepayment, and if such notice is given the
Borrower shall, prepay this Note in whole with accrued interest to the date of
such prepayment on the amount prepaid, but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the
Borrower from (x) the sale, lease, transfer or other disposition
of any assets of the Borrower or any Subsidiary of the Borrower,
(y) the incurrence or issuance by the Borrower or any Subsidiary
of the Borrower of any Debt, (z) the sale or issuance by the
Borrower or any Subsidiary of the Borrower of any capital stock or
other ownership or profit interest, any securities convertible
into or exchangeable for capital stock or other ownership or
profit interest or any warrants, rights or options to acquire
capital stock or other ownership or profit interest, apply 100% of
such Net Cash Proceeds (or such lesser amount as may be required
to pay in full the Principal Amount of this Note and all interest
accrued thereon to the date of payment) to the prepayment of the
outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim or
set-off, not later than 2:00 P.M. (New York City time) on the day when due in
U.S. Dollars to the Lender by wire transfer in same day funds to the account
designated by Lender at least one Business Day prior to the date when payment
hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of
days (including the first day but excluding the last day)
occurring in the period for which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be
made on the next succeeding
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Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto (all such taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.03) the Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes, charges or
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, performing under, or otherwise with respect to,
this Note (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for the full
amount of taxes of any kind imposed by any jurisdiction on amounts payable under
this Section 2.03, imposed on or paid by the Lender and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the date
the Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to in
Section 5.02, the original or a certified copy of a receipt evidencing such
payment. In the case of any payment hereunder by or on behalf of the Borrower if
the Borrower determines that no Taxes or Other Taxes are payable in respect
thereof, upon request the Borrower shall furnish an opinion of counsel
acceptable to the Lender stating that such payment is exempt from Taxes or Other
Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and obligations
contained in this Section 2.03 shall survive the payment in full of any amounts
due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
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(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower
of this Note and the consummation of the transactions contemplated
hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate and stockholder action, and
do not (i) contravene the Borrower's charter or by-laws, (ii)
violate any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award, (iii) conflict with or
result in the breach of, or constitute a default under, any
material contract, loan agreement, indenture, mortgage, deed of
trust, lease or other instrument binding on or affecting the
Borrower or any of its Subsidiaries or any of their material
properties or (iv) result in or require the creation or imposition
of any Lien upon or with respect to any of the material properties
of the Borrower or any of its Subsidiaries. Neither the Borrower
nor any of its Subsidiaries is in violation of any such law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan
agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be
expected to have a material adverse effect on (x) the business,
condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower or any of its material
Subsidiaries, (y) the rights and remedies of the Lender under the
Borrower or (z) the ability of the Borrower to perform its
obligations hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or
regulatory body or other third party is required for the due
execution, delivery and performance by the Borrower of this Note
or any other transaction contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with
its terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter"
or "principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act of 1940, as
amended. Neither the borrowing of any funds hereunder nor the
application of the proceeds or repayment thereof by the Borrower,
nor the consummation of the other transactions contemplated
hereby, will violate any provision of such act or any rule,
regulation or order of the Securities and Exchange Commission
thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
7
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or
(ii) the Borrower shall fail to pay any interest on any portion
of the Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Borrower or any of its
Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, or other similar
official for it or for any substantial part of its property and,
in the case of any such proceeding instituted against it (but not
instituted by it) that is being diligently contested by it in good
faith, either such proceeding shall remain undismissed or unstayed
for a period of 30 days or any of the actions sought in such
proceeding (including, without limitation, the entry of an order
for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or any substantial
part of its property) shall occur; or the Borrower or any of its
Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
8
<PAGE>
communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, c/o The Beacon Group, 399 Park Avenue, 17th
Floor, New York, New York 10022, Attention: Eric R. Wilkinson, Facsimile (212)
339-9109, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, New York 10004, Attention: David Shine, Facsimile (212)
859-8587; or as to each such party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
9
<PAGE>
by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
10
<PAGE>
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
11
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/Stewart B. Gold
___________________
Title: President and Chief
Executive Officer
12
EXHIBIT 10.2
DEMAND PROMISSORY NOTE
$350,000 Dated as of October 2, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to the
order of THE BEACON GROUP III - FOCUS VALUE FUND, L.P. (the "Lender") the
aggregate principal amount of THREE HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS
($350,000) (the "Principal Amount") on the date of demand for payment of
principal and interest hereunder and outstanding on such date of demand, in
lawful money of the United States of America ("U.S. Dollars" or "$") and in same
day funds; provided that in the absence of any demand by the Lender for payment
hereof on or prior to November 15, 1998 (the "Maturity Date"), the Borrower
hereby unconditionally promises to pay to the Lender such principal amount, and
interest thereon to the date of payment, in such funds on the Maturity Date (or,
if the Maturity Date shall fall on a day that is not a Business Day (as
hereinafter defined), the next succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued by
the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any
<PAGE>
accrued but unpaid interest thereon, it is the Lenders present intent that this
Note shall be canceled simultaneously with the consummation of such purchase and
the then- outstanding Principal Amount and any accrued but unpaid interest
thereon shall be credited against (and subtracted from) the aggregate purchase
price payable by the Lender for such equity securities. The Borrower hereby
acknowledges and agrees that the foregoing sentence reflects the Lender's
present intention only and does not constitute any agreement, understanding,
obligation or commitment of any kind on the part of the Lender to make any
equity or other investment in the Borrower of any kind and that any
determination to make any future equity investment in the Borrower shall be in
the sole and absolute discretion of Lender. This paragraph does not amend or
modify any of the terms of this Note, including, without limitation, any
provisions regarding payment of any amounts due hereunder, all of which terms
shall remain in full force and effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and shall
in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower hereunder
at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person for
borrowed money, (b) all obligations of such person for the deferred purchase
price of property or services (other than trade or accounts payable not overdue
by more than 60 days incurred in the ordinary course of such person's business),
(c) all obligations of such person evidenced by notes, bonds, debentures or
other similar instruments, (d) all obligations of such person created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (e) all obligations of such person as
<PAGE>
lessee under leases that have been or should be, in accordance with GAAP,
recorded as capitalized leases, (f) all obligations, contingent or otherwise, of
such person under acceptance, letter of credit or similar facilities, (g) all
Debt of others referred to in clauses (a) through (f) above or clause (h) below
guaranteed directly or indirectly in any manner by such person, or in effect
guaranteed directly or indirectly by such person through an agreement (i) to pay
or purchase such Debt or to advance or supply funds for the payment or purchase
of such Debt, (ii) to purchase, sell or lease (as lessee or lessor) property, or
to purchase or sell services, primarily for the purpose of enabling the debtor
to make payment of such Debt or to assure the holder of such Debt against loss,
(iii) to supply funds to or in any other manner invest in the debtor (including
any agreement to pay for property or services irrespective of whether such
property is received or such services are rendered) or (iv) otherwise to assure
a creditor against loss, and (h) all Debt referred to in clauses (a) through (g)
above of another person secured by (or for which the holder of such Debt has an
existing right, contingent or otherwise, to be secured by) any Lien on property
(including, without limitation, accounts and contract rights) owned by such
person, even though such person has not assumed or become liable for the payment
of such Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time
<PAGE>
capital stock of any other class or classes of such corporation shall or might
have voting power upon the occurrence of any contingency), (b) the interest in
the capital or profits of such partnership, joint venture or limited liability
company or (c) the beneficial interest in such trust or estate is at the time
directly or indirectly owned or controlled by such person, by such person and
one or more of its other Subsidiaries or by one or more of such person's other
Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms
not specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may, upon at
least two Business Days' notice to the Lender stating the proposed date
and principal amount of the prepayment, and if such notice is given the
Borrower shall, prepay this Note in whole with accrued interest to the
date of such prepayment on the amount prepaid, but without premium or
penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the Borrower
from (x) the sale, lease, transfer or other disposition of any
assets of the Borrower or any Subsidiary of the Borrower, (y) the
incurrence or issuance by the Borrower or any Subsidiary of the
Borrower of any Debt, (z) the sale or issuance by the Borrower or
any Subsidiary of the Borrower of any capital stock or other
ownership or profit interest, any securities convertible into or
exchangeable for capital stock or other ownership or profit interest
or any warrants, rights or options to acquire capital stock or other
ownership or profit interest, apply 100% of such Net Cash Proceeds
(or such lesser amount as may be required to pay in full the
Principal Amount of this Note and all interest accrued thereon to
the date of payment) to the prepayment of the outstanding Principal
Amount of this Note and all interest accrued on the amount prepaid.
<PAGE>
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim or
set-off, not later than 2:00 P.M. (New York City time) on the day when due
in U.S. Dollars to the Lender by wire transfer in same day funds to the
account designated by Lender at least one Business Day prior to the date
when payment hereunder is due.
(b) All computations of interest shall be made by the Lender
on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto (all such taxes,
levies, imposts, deductions, charges, withholdings and liabilities in
respect of payments hereunder being hereinafter referred to as "Taxes").
If the Borrower shall be required by law to deduct any Taxes from or in
respect of any sum payable hereunder to the Lender, (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable
under this Section 2.03) the Lender receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Borrower
shall make such deductions and (iii) the Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes, charges or
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, performing under, or otherwise with respect
to, this Note (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for the
full amount of taxes of any kind imposed by any jurisdiction on amounts
payable under this Section 2.03, imposed on or paid by the Lender and any
liability (including penalties, additions to tax, interest and expenses)
arising therefrom or with respect thereto. This indemnification shall be
made within 30 days from the date the Lender makes written demand
therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to in
Section 5.02, the original or a certified copy of a receipt evidencing
such payment. In the case of any payment hereunder by or on behalf of the
Borrower if the Borrower
<PAGE>
determines that no Taxes or Other Taxes are payable in respect thereof,
upon request the Borrower shall furnish an opinion of counsel acceptable
to the Lender stating that such payment is exempt from Taxes or Other
Taxes.
(e) Without prejudice to the survival of any other agreement
with the Borrower hereunder, the agreements and obligations contained in
this Section 2.03 shall survive the payment in full of any amounts due
hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.
The Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower of
this Note and the consummation of the transactions contemplated hereby are
within the Borrower's corporate powers, have been duly authorized by all
necessary corporate and stockholder action, and do not (i) contravene the
Borrower's charter or by-laws, (ii) violate any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award, (iii)
conflict with or result in the breach of, or constitute a default under,
any material contract, loan agreement, indenture, mortgage, deed of trust,
lease or other instrument binding on or affecting the Borrower or any of
its Subsidiaries or any of their material properties or (iv) result in or
require the creation or imposition of any Lien upon or with respect to any
of the material properties of the Borrower or any of its Subsidiaries.
Neither the Borrower nor any of its Subsidiaries is in violation of any
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument, the
violation or breach of which could reasonably be expected to have a
material adverse effect on (x) the business, condition (financial or
otherwise), operations, performance, properties or prospects of the
Borrower or any of its material Subsidiaries, (y) the rights and remedies
of the Lender under the Borrower or (z) the ability of the Borrower to
perform its obligations hereunder.
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body or other
third party is required for the due execution, delivery and performance by
the Borrower of this Note or any other transaction contemplated hereby.
(d) This Note is the legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with its terms.
<PAGE>
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended. Neither the
borrowing of any funds hereunder nor the application of the proceeds or
repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby, will violate any provision of such act
or any rule, regulation or order of the Securities and Exchange Commission
thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed for
purposes of illustration only and shall not be construed to limit in any way the
absolute right of the Lender to demand payment in full of the outstanding
Principal Amount, together with interest accrued thereon, and all other amounts
due and payable by the Borrower hereunder at any time and for any reason
whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or (ii) the
Borrower shall fail to pay any interest on any portion of the Principal
Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally not
pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment
for the benefit of creditors; or any proceeding shall be instituted by or
against the Borrower or any of its Subsidiaries seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it) that is being
diligently contested by it in good faith, either such proceeding shall
remain undismissed or unstayed for a period of 30 days or any of the
actions sought in such proceeding (including, without limitation, the
entry of an order for relief against, or the appointment of a receiver,
trustee, custodian or other similar official for, it or any substantial
part of its property) shall occur; or the Borrower or any of its
Subsidiaries shall take any corporate action to authorize any of the
actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts
<PAGE>
payable hereunder to be forthwith due and payable, whereupon this Note, all such
interest and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower; provided, however, that if an Event
of Default described in Section 4.01(b) shall occur, this Note, all such
interest and all such amounts shall automatically become and be due and payable,
without presentment, demand, protest or any notice of any kind, all of which are
hereby expressly waived by the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower herefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable communication) and mailed, telecopied, telegraphed, telexed,
cabled or delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor,
Owings Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile
(410) 654-5806; and if to the Lender, c/o The Beacon Group, 399 Park Avenue,
17th Floor, New York, New York 10022, Attention: Eric R. Wilkinson, Facsimile
(212) 339-9109, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New
York Plaza, New York, New York 10004, Attention: David Shine, Facsimile (212)
859-8587; or as to each such party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith,
<PAGE>
including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Lender with respect thereto and with respect
to advising the Lender as to its rights and responsibilities under this
Note. The Borrower further agrees to pay on demand all losses, costs and
expenses, if any (including reasonable counsel fees and expenses), in
connection with the enforcement (whether through negotiations, legal
proceedings or otherwise) of this Note and any other instruments and
documents delivered in connection herewith. In addition, the Borrower
shall pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages, losses,
liabilities and expenses (including, without limitation, reasonable fees
and expenses of counsel) that may be incurred by or asserted or awarded
against any Indemnified Party, in each case arising out of or in
connection with or by reason of, or in connection with the preparation for
a defense of, any investigation, litigation or proceeding arising out of,
related to or in connection with this Note, any of the transactions
contemplated herein or the actual or proposed use of the proceeds of this
Note, in each case whether or not such investigation, litigation or
proceeding is brought by the Borrower, its directors, shareholders or
creditors or an Indemnified Party or any other person or any Indemnified
Party is otherwise a party thereto, except to the extent such claim,
damage, loss, liability or expense is found in a final, non-appealable
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 5.05 shall survive the payment in full of
principal, interest and all other amounts payable under this Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any amounts
due hereunder after demand therefor, the Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all indebtedness or other obligations at any time owing by the
Lender to or for the credit or the account of the Borrower against any and all
of the obligations of the Borrower now or hereafter existing under this Note.
The Lender agrees promptly to notify the Borrower after any such set-off and
application; provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Lender under this
Section 5.06 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) that the Lender may have.
<PAGE>
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon
and inure to the benefit of the Borrower and the Lender and their
respective successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by
the internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
U.S. federal court sitting in New York City, and any appellate court from
any thereof, in any action or proceeding arising out of or relating to
this Note, or for recognition or enforcement of any judgment, and the
Borrower hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in
any such New York State court or, to the extent permitted by law, in such
federal court. The Borrower agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Note shall affect any right that the Lender may
otherwise have to bring any action or proceeding relating to this Note in
the courts of any jurisdiction.
(b) The Borrower irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection
that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Note in any New
York State or U.S. federal court. The Borrower hereby irrevocably waives,
to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct or
indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/ Stewart B. Gold
___________________
Title: CEO
EXHIBIT 10.3
DEMAND PROMISSORY NOTE
$350,000 Dated as of October 2, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of GENESIS HOLDINGS, INC. (the "Lender") the aggregate principal
amount of THREE HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($350,000) (the
"Principal Amount") on the date of demand for payment of principal and interest
hereunder and outstanding on such date of demand, in lawful money of the United
States of America ("U.S. Dollars" or "$") and in same day funds; provided that
in the absence of any demand by the Lender for payment hereof on or prior to
November 15, 1998 (the "Maturity Date"), the Borrower hereby unconditionally
promises to pay to the Lender such principal amount, and interest thereon to the
date of payment, in such funds on the Maturity Date (or, if the Maturity Date
shall fall on a day that is not a Business Day (as hereinafter defined), the
next succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding, obligation or commitment of any kind on
the part of the Lender to make any equity or other investment in the Borrower of
any kind and that any determination to make any future equity
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investment in the Borrower shall be in the sole and absolute discretion of
Lender. This paragraph does not amend or modify any of the terms of this Note,
including, without limitation, any provisions regarding payment of any amounts
due hereunder, all of which terms shall remain in full force and effect as set
forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Debt or to assure the holder of
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such Debt against loss, (iii) to supply funds to or in any other manner invest
in the debtor (including any agreement to pay for property or services
irrespective of whether such property is received or such services are rendered)
or (iv) otherwise to assure a creditor against loss, and (h) all Debt referred
to in clauses (a) through (g) above of another person secured by (or for which
the holder of such Debt has an existing right, contingent or otherwise, to be
secured by) any Lien on property (including, without limitation, accounts and
contract rights) owned by such person, even though such person has not assumed
or become liable for the payment of such Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in
which) more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such person, by such person and one or more of
its other Subsidiaries or by one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the proposed
date and principal amount of the prepayment, and if such notice is given the
Borrower shall, prepay this Note in whole with accrued interest to the date of
such prepayment on the amount prepaid, but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the Borrower
from (x) the sale, lease, transfer or other disposition of any assets
of the Borrower or any Subsidiary of the Borrower, (y) the incurrence
or issuance by the Borrower or any Subsidiary of the Borrower of any
Debt, (z) the sale or issuance by the Borrower or any Subsidiary of the
Borrower of any capital stock or other ownership or profit interest,
any securities convertible into or exchangeable for capital stock or
other ownership or profit interest or any warrants, rights or options
to acquire capital stock or other ownership or profit interest, apply
100% of such Net Cash Proceeds (or such lesser amount as may be
required to pay in full the Principal Amount of this Note and all
interest accrued thereon to the date of payment) to the prepayment of
the outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim or
set-off, not later than 2:00 P.M. (New York City time) on the day when due in
U.S. Dollars to the Lender by wire transfer in same day funds to the account
designated by Lender at least one Business Day prior to the date when payment
hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made on the
next succeeding
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<PAGE>
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto (all such taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.03) the Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes, charges or
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, performing under, or otherwise with respect to,
this Note (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for the full
amount of taxes of any kind imposed by any jurisdiction on amounts payable under
this Section 2.03, imposed on or paid by the Lender and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the date
the Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to in
Section 5.02, the original or a certified copy of a receipt evidencing such
payment. In the case of any payment hereunder by or on behalf of the Borrower if
the Borrower determines that no Taxes or Other Taxes are payable in respect
thereof, upon request the Borrower shall furnish an opinion of counsel
acceptable to the Lender stating that such payment is exempt from Taxes or Other
Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and obligations
contained in this Section 2.03 shall survive the payment in full of any amounts
due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower of
this Note and the consummation of the transactions contemplated hereby are
within the Borrower's corporate powers, have been duly authorized by all
necessary corporate and stockholder action, and do not (i) contravene the
Borrower's charter or by-laws, (ii) violate any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award, (iii) conflict with
or result in the breach of, or constitute a default under, any material
contract, loan agreement, indenture, mortgage, deed of trust, lease or other
instrument binding on or affecting the Borrower or any of its Subsidiaries or
any of their material properties or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the material properties of
the Borrower or any of its Subsidiaries. Neither the Borrower nor any of its
Subsidiaries is in violation of any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or in breach of any such
contract, loan agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be expected to
have a material adverse effect on (x) the business, condition (financial or
otherwise), operations, performance, properties or prospects of the Borrower or
any of its material Subsidiaries, (y) the rights and remedies of the Lender
under the Borrower or (z) the ability of the Borrower to perform its obligations
hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body or
other third party is required for the due execution, delivery and performance
by the Borrower of this Note or any other transaction contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended. Neither the borrowing of any funds
hereunder nor the application of the proceeds or repayment thereof by the
Borrower, nor the consummation of the other transactions contemplated hereby,
will violate any provision of such act or any rule, regulation or order of the
Securities and Exchange Commission thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or (ii)
the Borrower shall fail to pay any interest on any portion of the
Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower or any of its Subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, or other similar official for it or for any
substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it) that is
being diligently contested by it in good faith, either such proceeding
shall remain undismissed or unstayed for a period of 30 days or any of
the actions sought in such proceeding (including, without limitation,
the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or the Borrower or any
of its Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
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communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, Genesis Holdings, Inc., 148 West State Street,
Kennett Square, Pennsylvania 19348, Attention: Rick Howard, Facsimile (610)
444-4483, with a copy to Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W.
Washington, D.C. 20004, Attention Michael C. Williams, Facsimile (202) 637-5910;
or as to each such party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
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by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
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ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
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IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/Stewart B. Gold
__________________
Title: CEO
23
Exhibit 10.4
DEMAND PROMISSORY NOTE
$100,000 Dated as of October 22, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of THE BEACON GROUP III - FOCUS VALUE FUND, L.P. (the "Lender") the
aggregate principal amount of ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($100,000)
(the "Principal Amount") on the date of demand for payment of principal and
interest hereunder and outstanding on such date of demand, in lawful money of
the United States of America ("U.S. Dollars" or "$") and in same day funds;
provided that in the absence of any demand by the Lender for payment hereof on
or prior to November 15, 1998 (the "Maturity Date"), the Borrower hereby
unconditionally promises to pay to the Lender such principal amount, and
interest thereon to the date of payment, in such funds on the Maturity Date (or,
if the Maturity Date shall fall on a day that is not a Business Day (as
hereinafter defined), the next succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding,
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obligation or commitment of any kind on the part of the Lender to make any
equity or other investment in the Borrower of any kind and that any
determination to make any future equity investment in the Borrower shall be in
the sole and absolute discretion of Lender. This paragraph does not amend or
modify any of the terms of this Note, including, without limitation, any
provisions regarding payment of any amounts due hereunder, all of which terms
shall remain in full force and effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii)
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to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Debt or to assure the holder of such Debt against loss, (iii) to supply
funds to or in any other manner invest in the debtor (including any agreement to
pay for property or services irrespective of whether such property is received
or such services are rendered) or (iv) otherwise to assure a creditor against
loss, and (h) all Debt referred to in clauses (a) through (g) above of another
person secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any Lien on property (including,
without limitation, accounts and contract rights) owned by such person, even
though such person has not assumed or become liable for the payment of such
Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in
which) more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such person, by such person and one or more of
its other Subsidiaries or by one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the
proposed date and principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay this Note in whole with
accrued interest to the date of such prepayment on the amount prepaid,
but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the Borrower
from (x) the sale, lease, transfer or other disposition of any assets
of the Borrower or any Subsidiary of the Borrower, (y) the incurrence
or issuance by the Borrower or any Subsidiary of the Borrower of any
Debt, (z) the sale or issuance by the Borrower or any Subsidiary of the
Borrower of any capital stock or other ownership or profit interest,
any securities convertible into or exchangeable for capital stock or
other ownership or profit interest or any warrants, rights or options
to acquire capital stock or other ownership or profit interest, apply
100% of such Net Cash Proceeds (or such lesser amount as may be
required to pay in full the Principal Amount of this Note and all
interest accrued thereon to the date of payment) to the prepayment of
the outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim or
set-off, not later than 2:00 P.M. (New York City time) on the day when due in
U.S. Dollars to the Lender by wire transfer in same day funds to the account
designated by Lender at least one Business Day prior to the date when payment
hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made on the
next succeeding
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Business Day, and such extension of time shall in such case be included in the
computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, deductions, charges or withholdings,
and all liabilities with respect thereto (all such taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Lender, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.03) the Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes, charges or
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, performing under, or otherwise with respect to,
this Note (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for the full
amount of taxes of any kind imposed by any jurisdiction on amounts payable under
this Section 2.03, imposed on or paid by the Lender and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the date
the Lender makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to in
Section 5.02, the original or a certified copy of a receipt evidencing such
payment. In the case of any payment hereunder by or on behalf of the Borrower if
the Borrower determines that no Taxes or Other Taxes are payable in respect
thereof, upon request the Borrower shall furnish an opinion of counsel
acceptable to the Lender stating that such payment is exempt from Taxes or Other
Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and obligations
contained in this Section 2.03 shall survive the payment in full of any amounts
due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
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(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower
of this Note and the consummation of the transactions contemplated
hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate and stockholder action, and do
not (i) contravene the Borrower's charter or by-laws, (ii) violate any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award, (iii) conflict with or result in the breach of,
or constitute a default under, any material contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting the Borrower or any of its Subsidiaries or any of their
material properties or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the material
properties of the Borrower or any of its Subsidiaries. Neither the
Borrower nor any of its Subsidiaries is in violation of any such law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan
agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be
expected to have a material adverse effect on (x) the business,
condition (financial or otherwise), operations, performance, properties
or prospects of the Borrower or any of its material Subsidiaries, (y)
the rights and remedies of the Lender under the Borrower or (z) the
ability of the Borrower to perform its obligations hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body or other third party is required for the due execution, delivery
and performance by the Borrower of this Note or any other transaction
contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its
terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended. Neither the
borrowing of any funds hereunder nor the application of the proceeds or
repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby, will violate any provision of such
act or any rule, regulation or order of the Securities and Exchange
Commission thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or (ii)
the Borrower shall fail to pay any interest on any portion of the
Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower or any of its Subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, or other similar official for it or for any
substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it) that is
being diligently contested by it in good faith, either such proceeding
shall remain undismissed or unstayed for a period of 30 days or any of
the actions sought in such proceeding (including, without limitation,
the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or the Borrower or any
of its Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
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communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, c/o The Beacon Group, 399 Park Avenue, 17th
Floor, New York, New York 10022, Attention: Eric R. Wilkinson, Facsimile (212)
339-9109, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, New York 10004, Attention: David Shine, Facsimile (212)
859-8587; or as to each such party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to
pay on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
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by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their
respective successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
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ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
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IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/ James A. Gast
_________________
James A. Gast,
Senior Vice President
34
Exhibit 10.5
DEMAND PROMISSORY NOTE
$100,000 Dated as of October 22, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of GENESIS HOLDINGS, INC. (the "Lender") the aggregate principal
amount of ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($100,000) (the "Principal
Amount") on the date of demand for payment of principal and interest hereunder
and outstanding on such date of demand, in lawful money of the United States of
America ("U.S. Dollars" or "$") and in same day funds; provided that in the
absence of any demand by the Lender for payment hereof on or prior to November
15, 1998 (the "Maturity Date"), the Borrower hereby unconditionally promises to
pay to the Lender such principal amount, and interest thereon to the date of
payment, in such funds on the Maturity Date (or, if the Maturity Date shall fall
on a day that is not a Business Day (as hereinafter defined), the next
succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding, obligation or commitment of any kind on
the part of the Lender to make any equity or other
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investment in the Borrower of any kind and that any determination to make any
future equity investment in the Borrower shall be in the sole and absolute
discretion of Lender. This paragraph does not amend or modify any of the terms
of this Note, including, without limitation, any provisions regarding payment of
any amounts due hereunder, all of which terms shall remain in full force and
effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily
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for the purpose of enabling the debtor to make payment of such Debt or to assure
the holder of such Debt against loss, (iii) to supply funds to or in any other
manner invest in the debtor (including any agreement to pay for property or
services irrespective of whether such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss, and (h) all Debt
referred to in clauses (a) through (g) above of another person secured by (or
for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including, without
limitation, accounts and contract rights) owned by such person, even though such
person has not assumed or become liable for the payment of such Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in
which) more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such person, by such person and one or more of
its other Subsidiaries or by one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the
proposed date and principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay this Note in whole with
accrued interest to the date of such prepayment on the amount prepaid,
but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the
Borrower from (x) the sale, lease, transfer or other disposition
of any assets of the Borrower or any Subsidiary of the Borrower,
(y) the incurrence or issuance by the Borrower or any Subsidiary
of the Borrower of any Debt, (z) the sale or issuance by the
Borrower or any Subsidiary of the Borrower of any capital stock or
other ownership or profit interest, any securities convertible
into or exchangeable for capital stock or other ownership or
profit interest or any warrants, rights or options to acquire
capital stock or other ownership or profit interest, apply 100% of
such Net Cash Proceeds (or such lesser amount as may be required
to pay in full the Principal Amount of this Note and all interest
accrued thereon to the date of payment) to the prepayment of the
outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim
or set-off, not later than 2:00 P.M. (New York City time) on the day
when due in U.S. Dollars to the Lender by wire transfer in same day
funds to the account designated by Lender at least one Business Day
prior to the date when payment hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made
on the next succeeding
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Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges
or withholdings, and all liabilities with respect thereto (all such
taxes, levies, imposts, deductions, charges, withholdings and
liabilities in respect of payments hereunder being hereinafter referred
to as "Taxes"). If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder to the Lender,
(i) the sum payable shall be increased as may be necessary so that
after making all required deductions (including deductions applicable
to additional sums payable under this Section 2.03) the Lender receives
an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable
law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes,
charges or levies that arise from any payment made hereunder or from
the execution, delivery or registration of, performing under, or
otherwise with respect to, this Note (hereinafter referred to as "Other
Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for
the full amount of taxes of any kind imposed by any jurisdiction on
amounts payable under this Section 2.03, imposed on or paid by the
Lender and any liability (including penalties, additions to tax,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be made within 30 days from the date the Lender
makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to
in Section 5.02, the original or a certified copy of a receipt
evidencing such payment. In the case of any payment hereunder by or on
behalf of the Borrower if the Borrower determines that no Taxes or
Other Taxes are payable in respect thereof, upon request the Borrower
shall furnish an opinion of counsel acceptable to the Lender stating
that such payment is exempt from Taxes or Other Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and
obligations contained in this Section 2.03 shall survive the payment
in full of any amounts due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
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(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower
of this Note and the consummation of the transactions contemplated
hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate and stockholder action, and do
not (i) contravene the Borrower's charter or by-laws, (ii) violate any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award, (iii) conflict with or result in the breach of,
or constitute a default under, any material contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting the Borrower or any of its Subsidiaries or any of their
material properties or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the material
properties of the Borrower or any of its Subsidiaries. Neither the
Borrower nor any of its Subsidiaries is in violation of any such law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan
agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be
expected to have a material adverse effect on (x) the business,
condition (financial or otherwise), operations, performance, properties
or prospects of the Borrower or any of its material Subsidiaries, (y)
the rights and remedies of the Lender under the Borrower or (z) the
ability of the Borrower to perform its obligations hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body or other third party is required for the due execution, delivery
and performance by the Borrower of this Note or any other transaction
contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its
terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended. Neither the
borrowing of any funds hereunder nor the application of the proceeds or
repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby, will violate any provision of such
act or any rule, regulation or order of the Securities and Exchange
Commission thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or (ii)
the Borrower shall fail to pay any interest on any portion of the
Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower or any of its Subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, or other similar official for it or for any
substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it) that is
being diligently contested by it in good faith, either such proceeding
shall remain undismissed or unstayed for a period of 30 days or any of
the actions sought in such proceeding (including, without limitation,
the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or the Borrower or any
of its Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
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communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, Genesis Holdings, Inc., 148 West State Street,
Kennett Square, Pennsylvania 19348, Attention: Rick Howard, Facsimile (610)
444-4483, with a copy to Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W.
Washington, D.C. 20004, Attention Michael C. Williams, Facsimile (202) 637-5910;
or as to each such party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
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by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
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ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
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IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/ James A. Gast
_________________
James A. Gast,
Senior Vice President
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Exhibit 10.6
DEMAND PROMISSORY NOTE
$50,000 Dated as of October 29, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of THE BEACON GROUP III - FOCUS VALUE FUND, L.P. (the "Lender") the
aggregate principal amount of FIFTY THOUSAND AND 00/100 DOLLARS ($50,000) (the
"Principal Amount") on the date of demand for payment of principal and interest
hereunder and outstanding on such date of demand, in lawful money of the United
States of America ("U.S. Dollars" or "$") and in same day funds; provided that
in the absence of any demand by the Lender for payment hereof on or prior to
November 15, 1998 (the "Maturity Date"), the Borrower hereby unconditionally
promises to pay to the Lender such principal amount, and interest thereon to the
date of payment, in such funds on the Maturity Date (or, if the Maturity Date
shall fall on a day that is not a Business Day (as hereinafter defined), the
next succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding,
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obligation or commitment of any kind on the part of the Lender to make any
equity or other investment in the Borrower of any kind and that any
determination to make any future equity investment in the Borrower shall be in
the sole and absolute discretion of Lender. This paragraph does not amend or
modify any of the terms of this Note, including, without limitation, any
provisions regarding payment of any amounts due hereunder, all of which terms
shall remain in full force and effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii)
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to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make payment
of such Debt or to assure the holder of such Debt against loss, (iii) to supply
funds to or in any other manner invest in the debtor (including any agreement to
pay for property or services irrespective of whether such property is received
or such services are rendered) or (iv) otherwise to assure a creditor against
loss, and (h) all Debt referred to in clauses (a) through (g) above of another
person secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any Lien on property (including,
without limitation, accounts and contract rights) owned by such person, even
though such person has not assumed or become liable for the payment of such
Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in
which) more than 50% of (a) the issued and outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon the
occurrence of any contingency), (b) the interest in the capital or profits of
such partnership, joint venture or limited liability company or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such person, by such person and one or more of
its other Subsidiaries or by one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the
proposed date and principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay this Note in whole with
accrued interest to the date of such prepayment on the amount prepaid,
but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the
Borrower from (x) the sale, lease, transfer or other disposition
of any assets of the Borrower or any Subsidiary of the Borrower,
(y) the incurrence or issuance by the Borrower or any Subsidiary
of the Borrower of any Debt, (z) the sale or issuance by the
Borrower or any Subsidiary of the Borrower of any capital stock or
other ownership or profit interest, any securities convertible
into or exchangeable for capital stock or other ownership or
profit interest or any warrants, rights or options to acquire
capital stock or other ownership or profit interest, apply 100% of
such Net Cash Proceeds (or such lesser amount as may be required
to pay in full the Principal Amount of this Note and all interest
accrued thereon to the date of payment) to the prepayment of the
outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim
or set-off, not later than 2:00 P.M. (New York City time) on the day
when due in U.S. Dollars to the Lender by wire transfer in same day
funds to the account designated by Lender at least one Business Day
prior to the date when payment hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made
on the next succeeding
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Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges
or withholdings, and all liabilities with respect thereto (all such
taxes, levies, imposts, deductions, charges, withholdings and
liabilities in respect of payments hereunder being hereinafter referred
to as "Taxes"). If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder to the Lender,
(i) the sum payable shall be increased as may be necessary so that
after making all required deductions (including deductions applicable
to additional sums payable under this Section 2.03) the Lender receives
an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable
law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes,
charges or levies that arise from any payment made hereunder or from
the execution, delivery or registration of, performing under, or
otherwise with respect to, this Note (hereinafter referred to as "Other
Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for
the full amount of taxes of any kind imposed by any jurisdiction on
amounts payable under this Section 2.03, imposed on or paid by the
Lender and any liability (including penalties, additions to tax,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be made within 30 days from the date the Lender
makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to
in Section 5.02, the original or a certified copy of a receipt
evidencing such payment. In the case of any payment hereunder by or on
behalf of the Borrower if the Borrower determines that no Taxes or
Other Taxes are payable in respect thereof, upon request the Borrower
shall furnish an opinion of counsel acceptable to the Lender stating
that such payment is exempt from Taxes or Other Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and
obligations contained in this Section 2.03 shall survive the payment
in full of any amounts due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
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(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower
of this Note and the consummation of the transactions contemplated
hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate and stockholder action, and do
not (i) contravene the Borrower's charter or by-laws, (ii) violate any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award, (iii) conflict with or result in the breach of,
or constitute a default under, any material contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting the Borrower or any of its Subsidiaries or any of their
material properties or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the material
properties of the Borrower or any of its Subsidiaries. Neither the
Borrower nor any of its Subsidiaries is in violation of any such law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan
agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be
expected to have a material adverse effect on (x) the business,
condition (financial or otherwise), operations, performance, properties
or prospects of the Borrower or any of its material Subsidiaries, (y)
the rights and remedies of the Lender under the Borrower or (z) the
ability of the Borrower to perform its obligations hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body or other third party is required for the due execution, delivery
and performance by the Borrower of this Note or any other transaction
contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its
terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended. Neither the
borrowing of any funds hereunder nor the application of the proceeds or
repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby, will violate any provision of such
act or any rule, regulation or order of the Securities and Exchange
Commission thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or (ii)
the Borrower shall fail to pay any interest on any portion of the
Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower or any of its Subsidiaries
seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, or other similar official for it or for any
substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it) that is
being diligently contested by it in good faith, either such proceeding
shall remain undismissed or unstayed for a period of 30 days or any of
the actions sought in such proceeding (including, without limitation,
the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or the Borrower or any
of its Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
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communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, c/o The Beacon Group, 399 Park Avenue, 17th
Floor, New York, New York 10022, Attention: Eric R. Wilkinson, Facsimile (212)
339-9109, with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, New York 10004, Attention: David Shine, Facsimile (212)
859-8587; or as to each such party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
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by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
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ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets.
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IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/ James A. Gast
_________________
James A. Gast,
Senior Vice President
56
Exhibit 10.7
DEMAND PROMISSORY NOTE
$50,000 Dated as of October 29, 1998
FOR VALUE RECEIVED, the undersigned, DOCTORS HEALTH, INC., a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY ON DEMAND to
the order of GENESIS HOLDINGS, INC. (the "Lender") the aggregate principal
amount of FIFTY THOUSAND AND 00/100 DOLLARS ($50,000) (the "Principal Amount")
on the date of demand for payment of principal and interest hereunder and
outstanding on such date of demand, in lawful money of the United States of
America ("U.S. Dollars" or "$") and in same day funds; provided that in the
absence of any demand by the Lender for payment hereof on or prior to November
15, 1998 (the "Maturity Date"), the Borrower hereby unconditionally promises to
pay to the Lender such principal amount, and interest thereon to the date of
payment, in such funds on the Maturity Date (or, if the Maturity Date shall fall
on a day that is not a Business Day (as hereinafter defined), the next
succeeding Business Day).
The Borrower promises to pay interest on the unpaid Principal
Amount from the date hereof until such principal amount is paid in full, at a
rate (the "Interest Rate") initially equal to fifteen percent (15%) per annum
payable in arrears on the date the Principal Amount shall be repaid in full;
provided, however, that if and to the extent that any principal remains
outstanding and unpaid hereunder after the Maturity Date, the Interest Rate
shall automatically increase incrementally by an additional one percent (1%)
commencing on the Maturity Date and every two weeks thereafter with respect to
any such outstanding and unpaid principal effective as of such date; provided;
further; that the Interest Rate shall not exceed the maximum rate permitted by
law. Upon the occurrence and during the continuance of a Default, the Borrower
shall pay interest on (i) the unpaid Principal Amount owing to the Lender and
(ii) to the fullest extent permitted by law, the amount of any interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full and on demand, at a
rate per annum equal at all times to the higher of twenty percent (20%) per
annum or the applicable Interest Rate required to be paid thereon pursuant to
the preceding sentence.
If, and only if, the Lender purchases equity securities issued
by the Borrower after the date of this Note for an aggregate purchase price in
excess of the outstanding Principal Amount and any accrued but unpaid interest
thereon, it is the Lenders present intent that this Note shall be canceled
simultaneously with the consummation of such purchase and the then- outstanding
Principal Amount and any accrued but unpaid interest thereon shall be credited
against (and subtracted from) the aggregate purchase price payable by the Lender
for such equity securities. The Borrower hereby acknowledges and agrees that the
foregoing sentence reflects the Lender's present intention only and does not
constitute any agreement, understanding, obligation or commitment of any kind on
the part of the Lender to make any equity or other investment in the Borrower of
any kind and that any determination to make any future equity investment in the
Borrower shall be in the sole and absolute discretion of Lender. This paragraph
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does not amend or modify any of the terms of this Note, including, without
limitation, any provisions regarding payment of any amounts due hereunder, all
of which terms shall remain in full force and effect as set forth herein.
The Events of Default contained in Article IV hereof are intended
only to establish an expected course of conduct of the parties hereto, and
shall in no event be construed as a limitation of the rights of the Lender with
respect to this Note, including the absolute right of the Lender to demand
payment in full of the outstanding Principal Amount, together with interest
accrued thereon, and all other amounts due and payable by the Borrower
hereunder at any time and for any reason whatsoever.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. CERTAIN DEFINED TERMS. As used herein, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Affiliate" means, as to any person, any other person that,
directly or indirectly, controls, is controlled by or is under common control
with such person or is a director or officer of such person. For purposes of
this definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") of a person means the
possession, direct or indirect, of the power to vote 5% or more of the voting
stock of such person or to direct or cause the direction of the management and
policies of such person, whether through the ownership of voting stock, by
contract or otherwise.
"Business Day" means any day other than Saturday, Sunday, or a day
that banks are closed in New York City.
"Debt" of any person means (a) all indebtedness of such person
for borrowed money, (b) all obligations of such person for the deferred
purchase price of property or services (other than trade or accounts payable not
overdue by more than 60 days incurred in the ordinary course of such person's
business), (c) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, (d) all obligations of such person
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (e) all obligations of
such person as lessee under leases that have been or should be, in accordance
with GAAP, recorded as capitalized leases, (f) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, (g) all Debt of others referred to in clauses (a) through (f) above
or clause (h) below guaranteed directly or indirectly in any manner by such
person, or in effect guaranteed directly or indirectly by such person through an
agreement (i) to pay or purchase such Debt or to advance or supply funds for the
payment or purchase of such Debt, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Debt or to assure the holder of such
Debt against loss, (iii) to supply funds to or in any other manner invest in the
debtor
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(including any agreement to pay for property or services irrespective of whether
such property is received or such services are rendered) or (iv) otherwise to
assure a creditor against loss, and (h) all Debt referred to in clauses (a)
through (g) above of another person secured by (or for which the holder of such
Debt has an existing right, contingent or otherwise, to be secured by) any Lien
on property (including, without limitation, accounts and contract rights) owned
by such person, even though such person has not assumed or become liable for the
payment of such Debt.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.
"GAAP" means generally accepted accounting principles as applied
in the preparation of the Borrower's financial statements.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance on title
to real property.
"Net Cash Proceeds" means, with respect to any sale, lease,
transfer or other disposition of any asset or the sale or issuance of any Debt
or capital stock or other ownership or profit interest, any securities
convertible into or exchangeable for capital stock or other ownership or profit
interest or any warrants, rights, options or other securities to acquire capital
stock or other ownership or profit interest by any person, the aggregate amount
of cash received from time to time (whether as initial consideration or through
payment or disposition of deferred consideration) by or on behalf of such person
in connection with such transaction after deducting therefrom only (without
duplication) (a) reasonable and customary brokerage commissions, underwriting
fees and discounts, legal fees, finder's fees and other similar fees and
commissions and (b) the amount of taxes payable in connection with or as a
result of such transaction, in each case to the extent, but only to the extent,
that the amounts so deducted are, at the time of receipt of such cash, actually
paid to a person that is not an Affiliate of such person and are properly
attributable to such transaction or to the asset that is the subject thereof.
"Subsidiary" of any person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or in which)
more than 50% of (a) the issued and outstanding capital stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency), (b) the interest in the capital or profits of such partnership,
joint venture or limited liability company or (c) the beneficial interest in
such trust or estate is at the time directly or indirectly owned or controlled
by such person, by such person and one or more of its other Subsidiaries or by
one or more of such person's other Subsidiaries.
"Termination Date" means the earliest of (i) the date the Lender
has made a demand for payment hereunder, (ii) the Maturity Date, (iii) the
occurrence of an Event of Default, and (iv) the date the Borrower closes a debt
or equity financing of an amount in excess of $5,000,000.
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SECTION 1.02. COMPUTATION OF TIME PERIODS. In this Note in the
computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding."
SECTION 1.03. ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP.
ARTICLE II
PAYMENT
SECTION 2.01. PREPAYMENTS. (a) Optional. The Borrower may,
upon at least two Business Days' notice to the Lender stating the
proposed date and principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay this Note in whole with
accrued interest to the date of such prepayment on the amount prepaid,
but without premium or penalty.
(b) Mandatory. (i) The Borrower shall repay to the Lender,
upon the Termination Date, the aggregate outstanding Principal
Amount plus accrued interest to the date of such repayment on the
amount repaid.
(ii) The Borrower shall, on the date of receipt of the
Net Cash Proceeds by the Borrower or any Subsidiary of the
Borrower from (x) the sale, lease, transfer or other disposition
of any assets of the Borrower or any Subsidiary of the Borrower,
(y) the incurrence or issuance by the Borrower or any Subsidiary
of the Borrower of any Debt, (z) the sale or issuance by the
Borrower or any Subsidiary of the Borrower of any capital stock or
other ownership or profit interest, any securities convertible
into or exchangeable for capital stock or other ownership or
profit interest or any warrants, rights or options to acquire
capital stock or other ownership or profit interest, apply 100% of
such Net Cash Proceeds (or such lesser amount as may be required
to pay in full the Principal Amount of this Note and all interest
accrued thereon to the date of payment) to the prepayment of the
outstanding Principal Amount of this Note and all interest accrued
on the amount prepaid.
SECTION 2.02. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall
make each payment hereunder, irrespective of any right of counterclaim
or set-off, not later than 2:00 P.M. (New York City time) on the day
when due in U.S. Dollars to the Lender by wire transfer in same day
funds to the account designated by Lender at least one Business Day
prior to the date when payment hereunder is due.
(b) All computations of interest shall be made by the
Lender on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(c) Whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made
on the next succeeding
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Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
SECTION 2.03. TAX. (a) Any and all payments by the Borrower
hereunder shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges
or withholdings, and all liabilities with respect thereto (all such
taxes, levies, imposts, deductions, charges, withholdings and
liabilities in respect of payments hereunder being hereinafter referred
to as "Taxes"). If the Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder to the Lender,
(i) the sum payable shall be increased as may be necessary so that
after making all required deductions (including deductions applicable
to additional sums payable under this Section 2.03) the Lender receives
an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable
law.
(b) In addition, the Borrower shall pay any present or
future stamp, documentary, excise, property or similar taxes,
charges or levies that arise from any payment made hereunder or from
the execution, delivery or registration of, performing under, or
otherwise with respect to, this Note (hereinafter referred to as "Other
Taxes").
(c) The Borrower shall indemnify the Lender for and hold it
harmless against the full amount of Taxes and Other Taxes, and for
the full amount of taxes of any kind imposed by any jurisdiction on
amounts payable under this Section 2.03, imposed on or paid by the
Lender and any liability (including penalties, additions to tax,
interest and expenses) arising therefrom or with respect thereto. This
indemnification shall be made within 30 days from the date the Lender
makes written demand therefor.
(d) Within 30 days after the date of any payment of Taxes,
the Borrower shall furnish to the Lender, at its address referred to
in Section 5.02, the original or a certified copy of a receipt
evidencing such payment. In the case of any payment hereunder by or on
behalf of the Borrower if the Borrower determines that no Taxes or
Other Taxes are payable in respect thereof, upon request the Borrower
shall furnish an opinion of counsel acceptable to the Lender stating
that such payment is exempt from Taxes or Other Taxes.
(e) Without prejudice to the survival of any other
agreement with the Borrower hereunder, the agreements and
obligations contained in this Section 2.03 shall survive the payment
in full of any amounts due hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTEES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
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(a) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware.
(b) The execution, delivery and performance by the Borrower
of this Note and the consummation of the transactions contemplated
hereby are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate and stockholder action, and
do not (i) contravene the Borrower's charter or by-laws, (ii)
violate any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award, (iii) conflict with or
result in the breach of, or constitute a default under, any
material contract, loan agreement, indenture, mortgage, deed of
trust, lease or other instrument binding on or affecting the
Borrower or any of its Subsidiaries or any of their material
properties or (iv) result in or require the creation or imposition
of any Lien upon or with respect to any of the material properties
of the Borrower or any of its Subsidiaries. Neither the Borrower
nor any of its Subsidiaries is in violation of any such law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award or in breach of any such contract, loan
agreement, indenture, mortgage, deed of trust, lease or other
instrument, the violation or breach of which could reasonably be
expected to have a material adverse effect on (x) the business,
condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower or any of its material
Subsidiaries, (y) the rights and remedies of the Lender under the
Borrower or (z) the ability of the Borrower to perform its
obligations hereunder.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or
regulatory body or other third party is required for the due
execution, delivery and performance by the Borrower of this Note
or any other transaction contemplated hereby.
(d) This Note is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with
its terms.
(e) Neither the Borrower nor any of its Subsidiaries is an
"investment company," or an "affiliated person" of, or "promoter"
or "principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act of 1940, as
amended. Neither the borrowing of any funds hereunder nor the
application of the proceeds or repayment thereof by the Borrower,
nor the consummation of the other transactions contemplated
hereby, will violate any provision of such act or any rule,
regulation or order of the Securities and Exchange Commission
thereunder.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing, which events are listed
for purposes of illustration only and shall not be construed to limit in any
way the absolute right of the Lender to demand payment in full of the
outstanding Principal Amount, together with interest accrued thereon, and
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all other amounts due and payable by the Borrower hereunder at any time and for
any reason whatsoever:
(a) (i) the Borrower shall fail to pay any portion of the
Principal Amount when the same shall become due and payable or
(ii) the Borrower shall fail to pay any interest on any portion
of the Principal Amount when the same becomes due and payable; or
(b) the Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors; or any proceeding
shall be instituted by or against the Borrower or any of its
Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, or other similar
official for it or for any substantial part of its property and,
in the case of any such proceeding instituted against it (but not
instituted by it) that is being diligently contested by it in good
faith, either such proceeding shall remain undismissed or unstayed
for a period of 30 days or any of the actions sought in such
proceeding (including, without limitation, the entry of an order
for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or any substantial
part of its property) shall occur; or the Borrower or any of its
Subsidiaries shall take any corporate action to authorize any of
the actions set forth above in this subsection (b);
then, and in any such event, without prejudice to the right of the Lender to
demand payment of the outstanding Principal Amount at any time for any reason,
the Lender may by notice to the Borrower, declare this Note, all interest
thereon and all other amounts payable hereunder to be forthwith due and payable,
whereupon this Note, all such interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
provided, however, that if an Event of Default described in Section 4.01(b)
shall occur, this Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. AMENDMENTS, ETC. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 5.02. NOTICES, ETC. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic,
telex or cable
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communication) and mailed, telecopied, telegraphed, telexed, cabled or
delivered, if to the Borrower, at 10451 Mill Run Circle, 10th Floor, Owings
Mills, Maryland 21117, Attention: Chief Financial Officer, Facsimile (410)
654-5806; and if to the Lender, Genesis Holdings, Inc., 148 West State Street,
Kennett Square, Pennsylvania 19348, Attention: Rick Howard, Facsimile (610)
444-4483, with a copy to Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W.
Washington, D.C. 20004, Attention Michael C. Williams, Facsimile (202) 637-5910;
or as to each such party, at such other address as shall be designated by such
party in a written notice to the other party. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively.
SECTION 5.03. ASSIGNMENTS. The Lender may assign to one or more
other entities all or a portion of its rights and obligations under this Note
with the prior written consent of the Borrower, which consent shall not be
unreasonably withheld.
SECTION 5.04. NO WAIVER; REMEDIES. No failure on the part of the
Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 5.05. COSTS AND EXPENSES. (a) The Borrower agrees to pay
on demand all reasonable costs and expenses in connection with the
preparation, execution, delivery, administration, modification and
amendment of this Note and any other instruments and documents to be
delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Lender
with respect thereto and with respect to advising the Lender as to its
rights and responsibilities under this Note. The Borrower further
agrees to pay on demand all losses, costs and expenses, if any
(including reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Note and any other instruments and documents
delivered in connection herewith. In addition, the Borrower shall pay
any and all stamp and other taxes payable or determined to be payable
in connection with the execution and delivery of this Note and any
other instruments and documents delivered in connection herewith, and
agrees to save the Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
(b) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors,
stockholders, members, employees, agents and advisors (each, an
"Indemnified Party") from and against any and all claims, damages,
losses, liabilities and expenses (including, without limitation,
reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of, or in connection with the
preparation for a defense of, any investigation, litigation or
proceeding arising out of, related to or in connection with this Note,
any of the transactions contemplated herein or the actual or proposed
use of the proceeds of this Note, in each case whether or not such
investigation, litigation or proceeding is brought
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by the Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other person or any Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's negligence or willful misconduct.
(c) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 5.05 shall survive the payment in
full of principal, interest and all other amounts payable under this
Note.
SECTI0N 5.06. RIGHT OF SET-OFF. Upon the nonpayment of any
amounts due hereunder after demand therefor, the Lender is hereby authorized
at any time and from time to time, to the fullest extent permitted by law, to
set off and apply any and all indebtedness or other obligations at any time
owing by the Lender to or for the credit or the account of the Borrower against
any and all of the obligations of the Borrower now or hereafter existing under
this Note. The Lender agrees promptly to notify the Borrower after any such
set-off and application; provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section 5.06 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 5.07. BINDING EFFECT. This Note shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns.
SECTION 5.08. GOVERNING LAW. This Note shall be governed by the
internal laws of the State of New York.
SECTION 5.09. JURISDICTION, ETC. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court
or U.S. federal court sitting in New York City, and any appellate court
from any thereof, in any action or proceeding arising out of or
relating to this Note, or for recognition or enforcement of any
judgment, and the Borrower hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may
be heard and determined in any such New York State court or, to the
extent permitted by law, in such federal court. The Borrower agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Note
shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Note in the courts of any
jurisdiction.
(b) The Borrower irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this
Note in any New York State or U.S. federal court. The Borrower
hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
SECTION 5.10. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
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ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS NOTE OR THE ACTIONS OF THE LENDER
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
SECTION 5.11. LIMITATION ON INTEREST. No provision of this Note
shall require the payment or permit the collection of interest in excess of the
maximum rate of interest which may be charged or collected by the Lender
permitted by applicable law.
SECTION 5.12. NON-RECOURSE. The Lender, by its acceptance of this
Note, hereby agrees that no officer, director, shareholder (whether direct
or indirect) or Affiliate of the Borrower shall have any obligation or liability
with respect to this Note or any other document executed in connection herewith,
and that the Lender's recourse shall be limited to the Borrower and its assets
IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed by its officer thereunto duly authorized, as of the date first above
written.
DOCTORS HEALTH, INC.
By /s/ James A. Gast
_________________
James A. Gast,
Senior Vice President
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DRAFT 11/23/98 2:35 PM
DOCTORS HEALTH, INC.
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
---- ----
<S><C>
Weighted average of common shares outstanding during the period
(adjusted to reflect two-for-one stock split) 7,001,273 6,928,688
Net loss $(17,066,756) $(2,910,081)
Dividends and accretion on Series A, B, C and D Redeemable
Convertible Preferred Stock 988,968 805,082
Net loss $(18,055,724) $(3,715,163)
Net loss $(2.58) $(0.54)
</TABLE>
All outstanding options and warrants as of September 30, 1998 and 1997
have been excluded as they are anti-dilutive. Diluted earnings per share was not
calculated as the options, warrants and Redeemable Convertible Preferred Stock
are anti-dilutive.
21
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010005
<NAME> Doctors Health, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 6,206,453
<SECURITIES> 0
<RECEIVABLES> 11,698,747
<ALLOWANCES> 500,000
<INVENTORY> 0
<CURRENT-ASSETS> 21,461,384
<PP&E> 5,669,405
<DEPRECIATION> 1,643,513
<TOTAL-ASSETS> 25,683,994
<CURRENT-LIABILITIES> 65,365,554
<BONDS> 0
42,015,375
0
<COMMON> 70,013
<OTHER-SE> (81,818,191)
<TOTAL-LIABILITY-AND-EQUITY> 25,683,994
<SALES> 31,544,356
<TOTAL-REVENUES> 31,735,598
<CGS> 0
<TOTAL-COSTS> 41,570,192
<OTHER-EXPENSES> 6,973,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (259,025)
<INCOME-PRETAX> (17,066,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,066,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,066,756)
<EPS-PRIMARY> (2.58)
<EPS-DILUTED> (2.58)
</TABLE>
Exhibit 99.1
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND
Northern Division
:
In re: :
DOCTORS HEALTH, INC. : Case No. 98-6-6211-JFS
: (Chapter 11)
Debtor. :
:
ORDER AUTHORIZING USE OF CASH COLLATERAL
Upon consideration of the Motion for Authority to Use Cash
Collateral filed herein by Doctors Health, Inc., debtor-in-possession
("Debtor"), and the Court finding as follows:
1. On November 16, 1998 Doctors Health, Inc. ("Debtor") filed a
Voluntary Petition for Relief under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code"). Since that date, Debtor has continued to operate
its business as Debtor-in- Possession.
2. Based upon the representation of counsel to the parties, as
of November 16, 1998, Debtor was indebted (a) to Genesis Holdings, Inc.
(together with its authorized agents, "GHI") in the principal amount of
$5,500,000, plus interest, attorneys' fees and other charges provided for in the
various loan documents executed and delivered by Doctors Health, Inc. and listed
on Exhibit A attached hereto (the "GHI Debt"), and (b) to the Beacon Group
III-Focus Value Fund, L.P. (together with its authorized agents, "Beacon") in
the principal amount of $1,500,000, plus interest, attorney's fees and other
charges provided for in the various loan documents executed and delivered by
Doctors Health, Inc. and listed on Exhibit A attached hereto (the
67
<PAGE>
"Beacon Debt", the Beacon Debt and the GHI Debt are hereafter referred to
collectively as the "Debt").
3. Debtor is in default with respect to the Debt.
4. Debtor is in the business of managing the delivery of medical
care to enrollees of various insurers and other payors under a variety of
contracts as well as providing management services to certain provider
organizations pursuant to physician services organization and similar
agreements. Debtor's property includes, among other things, Debtor's interests
in all of such contracts and agreements and the Debtor's interests in all
accounts, accounts receivable, contract rights, general intangibles and similar
rights, arising out of the provision of such services and the proceeds and
products of the foregoing (the "Accounts and General Intangibles").
5. The GHI Debt and the Beacon Debt are allegedly secured by,
among other things, duly recorded first priority liens and security interests
in certain personal property of Debtor including the Accounts and General
Intangibles (the "Cash Collateral" within the meaning of Section 363 (a) of the
Bankruptcy Code) perfected by Financing Statements filed with the Maryland State
Department of Assessments and Taxation.
6. Debtor requires the use of Cash Collateral to operate as
Debtor-in-Possession, and the relief requested in the Motion is necessary,
essential and appropriate for the continued operation of the Debtor's business
and the management and preservation of the Debtor's assets and properties, and
is in the best interests of the Debtor's estate.
68
<PAGE>
7. Debtor wishes to continue to use the Accounts and General
Intangibles, including the Cash Collateral, in which GHI and Beacon allegedly
hold a first priority security interest.
8. The use of Cash Collateral upon the terms and conditions of
this Order through December 18, 1998 and in accord with Bankruptcy Rule
4001(b)(2), is necessary to avoid immediate and irreparable harm to Debtor's
estate.
9. This Order is subject to notice and prospective objection by
all creditors.
IT IS, by the United States Bankruptcy Court for the District of
Maryland, ORDERED:
1. The Motion, as it relates to the use of Cash Collateral, is
granted. The relief granted by this Court is necessary to avoid immediate
and irreparable harm and injury to the Debtor's estate. Subject to the terms
and conditions of this Order, Debtor is authorized to use the income, accounts,
earnings and profits arising from or in any way related to the Collateral,
including the Cash Collateral, all of which are allegedly subject to GHI and
Beacon's, first priority security interests and are cash collateral within the
meaning of Section 363(a) of the Bankruptcy Code, until December 18, 1998.
2. Subject to the terms and conditions of this Order, the use
of Cash Collateral by Debtor shall be as needed for the reasonable and
necessary business operations of the Debtor, in the ordinary course and
solely and exclusively for post-petition operating expenses of the Debtor
strictly in accordance with the budget provisions described in paragraph 7
below, and in no event shall any Cash Collateral be used to pay any pre-petition
debts or obligations of Debtor except such obligations as
69
<PAGE>
may be authorized to be paid by Order of the Court. Notwithstanding anything to
the contrary in this Order, the Debtor is prohibited from using and shall not
use the "Lexington Account Receivable", as identified among the parties, or any
proceeds thereof for any expenditure listed under the title "Physician" on the
Budget attached hereto as Exhibit B absent the prior express, written agreement
of the Debtor, GHI and Beacon
3. Notwithstanding the provisions of Section 552(a) of the
Bankruptcy Code and in addition to any existing pre-petition liens and
security interests, which shall continue in full force and effect in the same
order of priority as existed prior to the filing of these bankruptcy
proceedings, GHI and Beacon are hereby granted, under Sections 361 and 364 of
the Bankruptcy Code, as adequate protection a valid, binding, enforceable,
fully-perfected, continuing first priority exclusive security interest in and
lien upon all property whether acquired, generated or received by Debtor or the
Debtor's bankruptcy estate after commencement of this case on November 16, 1998.
The security interests and liens granted hereunder do not secure any
pre-petition debt (other than as expressly set forth herein). The Debtor shall
not grant or premit to exist any other lien or encumbrance on the assets and
properties of the Debtor which are the subject of the liens and security
interests granted hereunder (other than the liens and encumbrances granted under
the Loan Documents and this Order).
4. In the event and to the extent that the value of the GHI and
Beacon collateral is diminished post-petition relative to the value of such
collateral as of November 16, 1998 as a result of the use of the Cash
Collateral, GHI and Beacon are hereby granted: (a) pursuant to Sections 361 and
364(c) (2) of the Bankruptcy Code, a valid, binding, enforceable,
fully-perfeced, continuing first priority, exclusive lien upon all of the now
existing and hereafter arising property of the Debtor and of Debtor's bankruptcy
estate not subject to the GHI and Beacon liens prior to November 16, 1998
70
<PAGE>
including, but not limited to, property, claims, rights and interests which are
created by or accrue to the benefit of the Debtor or its estate by reason of the
filing of the petition for relief herein or the opening of this bankruptcy case,
and (b) pursuant to Sections 361 and 364(c) (1) of the Bankruptcy Code, a
superpriority claim against the Debtor and Debtor's bankruptcy estate having
priority over any and all administrative expenses of the kind specified in
ss.ss. 503(b) and 507(b) of the Bankruptcy Code; limited, however, to the amount
of such diminished value.
5. The security interests and liens created herein and confirmed
hereby shall be valid, enforceable and perfected without any further action by
GHI, Beacon or the Debtor, or the necessity of any filing or execution of
documents which might otherwise be required under non-bankruptcy law and shall
follow the proceeds of the Cash Collateral through deposit into any of the
Debtor's or the Debtor's bankruptcy estate accounts. Upon request by GHI and
Beacon, Debtor shall execute and deliver to GHI and Beacon such financing
statements and other documents as shall be reasonably required by GHI and
Beacon. Debtor is hereby authorized to perform all acts and execute and comply
with the terms of the loan documents evidencing or relating to the Debt
including, but not limited to, payment of the secured Debt.
6. All of the terms and provisions of this Order, including but
not limited to the security interests and liens created and perfected hereby,
in the priority established hereby, shall be binding upon Debtor, any
subsequently appointed trustee or other fiduciary or legal representative of
the Debtor or with respect to any property of the Debtor's estate, either under
Chapter 7 or Chapter 11 of the Bankruptcy Code, and upon all creditors of
Debtor, including those who may have extended or may hereafter extend credit to
Debtor, and all other parties in interest.
71
<PAGE>
7. Attached hereto as Exhibit B is a budget through December
18, 1998 prepared by the Debtor. Debtor has requested, and each of GHI and
Beacon have agreed, that as long as Debtor is not in default under this Order,
Debtor shall be entitled to use Cash Collateral for the sole and exclusive
purpose of paying those items specifically authorized herein. In addition to the
items set forth on Exhibit B hereto, Cash Collateral can be used to pay (i) for
other matters specifically authorized herein, and (ii) other post-petition
operating expenses of Debtor mutually agreed to in writing by Debtor, GHI and
Beacon. It is understood and agreed that Debtor shall be in default under this
Order if, among other possible events of default: (a) Debtor writes any check
against any of its D.I.P. accounts that is for an expense or expenses not set
forth on Exhibit B hereto or otherwise authorized herein or approved in writing
by GHI and Beacon; or (b) the aggregate amount of checks written by Debtor
against any of its D.I.P. accounts for any of its expenses exceeds the
authorized amount for said expense or expenses as set forth above.
8. Debtor shall deposit all cash, checks or moneys that Debtor
now has on hand into one or more D.I.P. operating or other accounts following
pre-petition practice accounts maintained at a federally insured bank or
savings institution mutually acceptable to the parties including counsel for
Baltimore Medical Group LLC and said funds shall be subject to the provisions
for use of Cash Collateral stated herein. In addition, Debtor shall also deposit
any and all cash, checks or moneys Debtor collects, receives or derives from the
operation of its business, including but not limited to all cash, checks and
moneys received by any agent or others on behalf of Debtor, into the D.I.P.
operating or other account(s) maintained pursuant to the pre-petition practice,
and said funds shall also be subject to the provisions for use of Cash
Collateral stated herein. The Debtor's interest in all funds on deposit in any
Debtor or Debtor-in-Possession bank accounts, including but not limited to the
D.I.P. operating account(s),
72
<PAGE>
shall at all times be subject to the lien and security interest of GHI and
Beacon as provided herein.
9. Debtor agrees to deliver to counsel for each of GHI and Beacon
and each of and GHI and Beacon agrees to deliver to counsel for Debtor copies
of all pleadings or other papers filed with the Bankruptcy Court concurrently
with the filing thereof or immediately upon Debtor's receipt thereof.
10. Debtor agrees not to create, permit, assume or suffer to
exist any lien or security interest, in favor of any person or entity other
than GHI and Beacon on any property of Debtor, except any liens or security
interests that existed prior to the date of the filing of Debtor's Chapter 11
Petition herein or any liens or security interests expressly consented to in
advance in writing by each of GHI and Beacon.
11. In the event of the expiration of Debtor's right to use the
Cash Collateral hereunder, GHI and Beacon's consent to the use of the Cash
Collateral shall automatically be deemed withdrawn and revoked and Debtor shall
immediately cease and hereby is enjoined from using any Cash Collateral.
12. Debtor agrees that each of GHI and Beacon and Baltimore
Medical Group LLC, or any of their respective representatives, agents or
employees on their behalf (including any appraiser employed by GHI or Beacon or
Baltimore Medical Group LLC ("BMG")), shall be permitted to inspect, examine
and copy any and all books and records and operations of Debtor, whether at
Debtor's premises or elsewhere, upon reasonable notice and at reasonable
times.
13. Intentionally Omitted. /s/ JFS
14. Notwithstanding the expiration of Debtor's right to use Cash
Collateral hereunder or any default by Debtor causing an earlier cessation of
the use of
73
<PAGE>
Cash Collateral, the rights, security interests, liens, priorities and
adequate protection provided to each of GHI and Beacon, or any rights granted to
BMG pursuant to the terms of this Order shall in any and all events continue in
full force and effect. Each of GHI and Beacon shall be entitled to rely upon the
authority granted in this Order, and no priority, lien or security interest
granted hereby shall be affected by any objection to or appeal from this Order.
15. Debtor agrees that this Order is not intended nor shall it be
construed as a waiver or limitation in any way by either GHI or Beacon or BMG
of any rights or remedies under the Bankruptcy Code or other applicable law
which either may have, including but not limited to the right to request a
lifting of the automatic stay underss. 362 of the Bankruptcy Code or to seek
additional adequate protection, and nothing contained herein shall be, nor
shall be construed as, an indication that either GHI or Beacon regards itself as
being fully or adequately protected.
16. Debtor agrees to provide to both GHI and Beacon and to BMG,
directly or through their respective counsel, such information and documents
as either GHI or Beacon shall reasonably request. Neither GHI nor Beacon shall
not be deemed to have waived any rights or claims it may have by reason of
Debtor's improper use of Cash Collateral prior to the entry of this Order.
17. Debtor shall maintain and keep in full force and effect all
insurance provided for in the various pre-petition loan documents executed
by Debtor with respect to the Debt. Debtor shall provide each of GHI and Beacon
with satisfactory evidence that all such insurance coverage is in full force and
effect.
18. Debtor shall provide each of GHI and Beacon and BMG with: (i)
monthly collections and accounts payable ageings, in a form and containing
such information and detail as GHI and Beacon may reasonably require; and (ii)
monthly
74
<PAGE>
cash flow statements for Debtor, in a form and containing such information and
detail as GHI and Beacon may reasonably request. The financial and accounting
information called for in this paragraph, due monthly, shall be tendered to each
of GHI and Beacon and BMG on or before the twentieth (20th) day of each month,
setting forth the required information for the immediately preceding calendar
month. All financial statements and financial and accounting information
provided by Debtor pursuant to this paragraph shall have the signature of an
official of the Debtor-in-Possession thereon, and immediately above said
official's signature shall be a certification indicating that the information
contained in the financial statement and/or the financial and accounting
information provided is true, accurate and complete to the best of said
official's knowledge, information and belief.
19. Absent an unwaived default by the Debtor under the terms of
the this Order, Debtor's use of the Cash Collateral pursuant to this Order
shall remain in effect, subject to the terms and conditions of this Order,
until December 18, 1998, subject to earlier order of the Court; provided,
however, that Debtor's use of Cash Collateral may be extended by further Order
of this Court upon prior written consent of GHI and Beacon.
20. 11 U.S.C. Section 362 is hereby modified to the limited
extend required to accomplish the matters provided for in this Order. The
provisions of this Order shall remain in full force and effect unless modified
or vacated by subsequent order of this Court. If any or all of the provisions of
this Order are hereafter modified, vacated or stayed by subsequent order of this
or any other court, such stay, modification or vacation shall not affect the
validity and enforceability of any lien, priority, other benefit, or application
of payment authorized hereby with respect to any indebtedness of Debtor to each
of GHI and Beacon or the rights granted BMG hereunder.
75
<PAGE>
21. Notwithstanding anything to the contrary contained in this
Order, this Order shall not be deemed to be a determination that the Debt was
secured as of the Filing Date.
The subject of this Order is a "core" proceeding within the
meaning of 28 U.S.C. Section 157, and this Court has jurisdiction to enter this
Order pursuant to 28 U.S.C. Sections 157 (b)(2)(A), (D) and (M) and 28 U.S.C.
Section 1334. This Order is a final order of the Bankruptcy Court, immediately
applicable and valid and fully effective upon its entry.
This Order shall be effective as of November __, 1998, subject to
Debtor's giving notice pursuant to Rule 4001(d) and prospective objection only.
A final hearing, if necessary, shall be held on December 3, 1998, at : 9:30
a.m. (standby).
Dated: November 20, 1998.
/s/ James F. Schneider
______________________
United States Bankruptcy Judge
76
<PAGE>
CONSENTED TO:
/s/ David E. Rice
__________________________________
David E. Rice
Venable, Baetjer and Howard
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for
Doctors Health, Inc.
Debtor-in-Possession
/s/ Edward C. Dolan
__________________________________
Edward C. Dolan
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5677
Counsel for Genesis Holdings, Inc.
__(Consent placed on the record in open court by counsel)__
Mark Joachim
David C. Golay
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
(212) 859-8000
Counsel for The Beacon Group II -
Focus Value Fund, L.P.
cc: Office of the U.S. Trustee
77
<PAGE>
EXHIBIT A
GHI Loan Documents
(a) Note Purchase Agreement, dated as of January 31, 1997, by and
among GHI, Genesis Health Ventures, Inc., and Debtor, as amended.
(b) Security Agreement, dated as of January 31, 1997 by and
between GHI and Debtor, as amended.
(c) Collateral Assignment of Rights Under Physician Services
Organization Agreements, dated as of January 31, 1997, by and between GHI and
Debtor, as amended.
(d) Letter Agreement, dated as of October 2, 1998, by and among
GHI, Beacon and Debtor, as amended October 2, 1998, as further amended October
22, 1998, and as further amended October 29, 1998.
(e) Convertible Subordinated 11% Note, dated January 31, 1997,
made by Debtor and made payable to the order of GHI, in the maximum principal
amount of $5,000,000.
(f) Demand Promissory Note, dated as of October 2, 1998, made by
Borrower and made payable to the order of GHI, in the original principal amount
of $350,000.
(g) Demand Promissory Note, dated as of October 22, 1998, made by
Borrower and made payable to the order of GHI, in the original principal amount
of $100,000.
(h) Demand Promissory Note, dated as of October 29, 1998, made by
Borrower and made payable to the order of GHI, in the original principal amount
of $50,000.
Beacon Loan Documents
_____________________
(a) Demand Promissory Note, dated as of August 19, 1998, made by
Borrower, made payable to Beacon, in the original principal amount of
$1,000,000.
(b) Demand Promissory Note, dated as of October 2, 1998, made by
Debtor made payable to the order of Beacon, in the original principal amount of
$350,000.
78
<PAGE>
(c) Demand Promissory Note, dated as of October 22,1998, made by
Borrower and payable to the order of Beacon, in the original principal amount of
$100,000.
(d) Demand Promissory Note, dated as of October 29, 1998, made by
Borrower and made payable to the order Beacon, in the original principal amount
of $50,000.
79
<PAGE>
DOCTORS HEALTH, INC.
PROJECTION OF EXPENSES 1/
11/17/98 - 12/18/98
<TABLE>
<CAPTION>
Corporate Physician Combined
<S><C>
Payroll 514,000.00 984,500.00 1,498,500.00
401(k) 24,000.00 90,000.00 114,000.00
Employee Health Insurance - November and December 70,000.00 142,400.00 212,400.00
Life/LTD - September thru December 10,800.00 22,000.00 32,800.00
Flexible Spending Account/Medical & Dependent)
11/6/98 thru 12/14/98 4,500.00 6,000.00 10,500.00
Rent 10451 Mill Run Circle 40,500.00 40,500.00
Rent for Physician Offices 92,800.00 92,800.00
Telephone - Estimate for December 30,000.00 40,000.00 70,000.00
Utilities - Gas & Electric 20,000.00 20,000.00
Piper and Marbury - Fees incurred related to NYLCare
Litigation 72,000.00 72,000.00
Piper and Marbury - NYLCare Litigation - Retainer 75,000.00 75,000.00
Phoenix Healthcare Consulting - Per agreement to support
NYLCare Litigation 10,000.00 10,000.00
Arthur Andersen, LLP - 9/30/98 10Q Review 13,000.00 13,000.00
Willis Corroon - D&O Insurance (3 year Policy) 98,000.00
Employee Expense Reimbursement 5,000.00
Miscellaneous Expenses 50,000.00 25,000.00 75,000.00
TOTAL EXPENSES 1,016,800.00 1,422,700.00 2,336,500.00
</TABLE>
- ---------
1. Some budged items may be subject to dispute or are subject to contractual
rights of the Debtor that limit the Debtor's obligation to pay all or a
portion of such items. The Debtor expressly reserves the right to make
subsequent determinations as to the extent to which it will pay all or any part
of any budgeted item.
**Exhibit B**
_____________
80
Exhibit 99.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Baltimore Division)
In re: *
DOCTORS HEALTH, INC., * Case No. 98-6-6211-JFS
(Chapter 11)
Debtor. *
*
* * * * * * * * * * * * * * * * *
ORDER AUTHORIZING PAYMENT OF
PREPETITION ACCRUED WAGES,
PAYROLL TAXES, AND OTHER EMPLOYEE BENEFITS
__________________________________________
Upon consideration of the Motion for Order Authorizing Payment of
Prepetition Sales Taxes and Accrued Wages, Payroll Taxes and Other Employee
Benefits (the "Motion") filed by Doctors Health, Inc., the Debtor-in-Possession
herein (the "Debtor"), and it appearing that the relief requested in the Motion
is necessary and in the best interests of this estate, it is this 20th day of
November, 1998, by the United States Bankruptcy Court for the District of
Maryland, sitting at Baltimore,
ORDERED, that the Debtor be, and it hereby is, authorized to pay
its prepetition accrued wages, expense reimbursement, severance pay, payroll
taxes, and other employee benefits, and to pay such obligations on an ongoing
81
<PAGE>
basis, all as set forth in the Motion, and to use its various checking and other
bank accounts as set forth in the Motion.
/s/ James F. Schneider
______________________
JAMES F. SCHNEIDER
United States Bankruptcy Judge
cc: Richard L. Wasserman, Esquire
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
Karen H. Moore, Esquire
Assistant United States Trustee
Office of the United States Trustee
300 West Pratt Street, Suite 350
Baltimore, Maryland 21201
Edward C. Dolan, Esquire
Stephen Zempolich, Esquire
Hogan & Hartson, L.L.P.
Columbia Square, 555 13th Street, N.W.
Washington, D.C. 20004-1109
David Golay, Esquire
Mark Joachim, Esquire
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004-1980
82
