<PAGE>
FILED PURSUANT TO RULE 424(B)(3) and FILE NO. 333-01926
PROSPECTUS SUPPLEMENT NO. 62 Filed pursuant to Rule 424(b)(3)
To the Prospectus dated January 5, 1998 Registration No. 333-01926
As supplemented to Date
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
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 DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-1926
DOCTORS HEALTH, INC.
(FORMERLY DOCTORS HEALTH SYSTEM, INC.)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1907421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 February 10, 1998 1,670,000 shares of the registrant's Class A Common
Stock and 5,467,922 shares of the Registrant's Class B Common Stock were
outstanding.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
The date of this Prospectus Supplement is February 19, 1998.
<PAGE>
DOCTORS HEALTH, INC.
FORM 10-Q
DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
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....................................... 8
Item 3. Qualitative and Quantitative Disclosures about Market Risk.......................... 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................................... 14
SIGNATURES.................................................................................. 15
</TABLE>
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................................................... $ 4,737,828 $ 20,574,342
Restricted cash................................................................................ 680,000 680,000
Short-term investments......................................................................... -- 3,000,000
Accounts receivable (net of allowance for doubtful accounts of $270,521 at June 30, 1997 and
$193,706 at December 31, 1997, respectively)................................................. 2,722,891 2,295,559
Accounts receivable-affiliates................................................................. 1,115,885 1,048,787
Other receivables.............................................................................. 1,170,504 2,199,743
Prepaid expenses............................................................................... 190,987 493,888
Due from affiliates............................................................................ 925,658 1,141,331
------------ -------------
TOTAL CURRENT ASSETS......................................................................... 11,543,753 31,433,650
PROPERTY AND EQUIPMENT, NET...................................................................... 4,205,532 4,068,845
OTHER ASSETS
Intangibles (net of accumulated amortization of $445,148 at June 30, 1997 and $791,174
at December 31, 1997, respectively).......................................................... 6,475,925 7,327,492
Deferred charges (net of accumulated amortization of $304,537 at June 30, 1997 and $516,100
at December 31, 1997, respectively).......................................................... 924,334 185,541
Accrued interest receivable.................................................................... 374,970 422,697
Other receivable............................................................................... 200,000 142,456
Deposits....................................................................................... 83,066 104,716
------------ -------------
TOTAL OTHER ASSETS........................................................................... 8,058,295 8,182,902
------------ -------------
TOTAL ASSETS..................................................................................... $ 23,807,580 $ 43,685,397
------------ -------------
------------ -------------
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of notes payable............................................................ $ 6,007,589 $ 6,049,670
Accounts payable............................................................................... 1,108,499 288,473
Accrued medical services....................................................................... 5,301,384 16,210,383
Other accrued expenses......................................................................... 3,933,955 3,913,135
Due to affiliates.............................................................................. 265,204 114,551
------------ -------------
TOTAL CURRENT LIABILITIES.................................................................... 16,616,631 26,576,212
LONG-TERM OBLIGATIONS
Note payable................................................................................... 5,462,621 5,516,951
Notes payable and purchase obligations-related parties......................................... 2,659,456 2,279,862
------------ -------------
TOTAL LONG-TERM OBLIGATIONS.................................................................. 8,122,077 7,796,813
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK
6.5% cumulative, Series A, $5 par value, authorized and issued 1,000,000 shares
(liquidation value $3,500,000 plus unpaid dividends)......................................... 5,651,472 5,824,972
Less subscription receivable................................................................... (1,500,000) (1,500,000)
------------ -------------
4,151,472 4,324,972
9.75% cumulative, Series B, $11.25 par value, authorized and issued 355,556 shares at June 30,
1997 (liquidation value $4,000,000 plus unpaid dividends); 8% cumulative, Series B $11.25 par
value, authorized and issued 438,068 shares at December 31, 1997 (liquidation value
$4,928,265 plus unpaid dividends)............................................................ 4,548,945 4,573,716
8% cumulative, Series C, $17.50 par value, authorized 1,071,428 shares at June 30, 1997 and
1,500,000 at December 31, 1997; issued and outstanding 571,428 shares (liquidation value
$10,000,000 plus unpaid dividends)........................................................... 10,581,696 10,982,608
8% Series D, dividends payable in-kind, $10.00 par value, authorized 5,750,000 shares; issued
and outstanding 2,034,666 shares at December 31, 1997 (liquidation value $20,000,000 plus
unpaid dividends)............................................................................ -- 19,113,136
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock (Note 7)
Class A, $.01 par value; authorized 20,700,000 shares, issued and outstanding 810,000 and
1,620,000 shares at June 30 and December 31, 1997, respectively............................. 8,100 16,200
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 2,645,167 and
5,336,732 shares at June 30 and December 31, 1997, respectively............................. 26,452 53,367
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..................................................................... 5,880,477 6,064,095
Deferred compensation.......................................................................... (912,508) (808,444)
Accumulated deficit............................................................................ (25,215,762) (35,007,278)
------------ -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)....................................................... (20,213,241) (29,682,060)
------------ -------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)... $ 23,807,580 $ 43,685,397
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Capitation revenue............................................ $ 2,219,562 $16,947,591 $ 3,487,175 $21,516,298
Net revenue................................................... 2,705,841 3,861,914 4,900,352 7,259,608
------------- ------------- ------------- -------------
4,925,403 20,809,505 8,387,527 28,775,906
------------- ------------- ------------- -------------
EXPENSES
Medical services expense...................................... 2,550,395 17,956,899 3,745,896 21,864,909
Care center costs............................................. 2,696,243 3,740,894 4,799,762 7,034,637
General and administrative.................................... 3,184,390 3,726,381 5,854,470 6,892,900
Depreciation and amortization................................. 288,693 550,239 513,077 1,026,820
------------- ------------- ------------- -------------
8,719,721 25,974,413 14,913,205 36,819,266
------------- ------------- ------------- -------------
Loss from operations....................................... (3,794,318) (5,164,908) (6,525,678) (8,043,360)
OTHER INCOME (EXPENSE)
Interest and other income..................................... 68,767 342,618 137,805 639,058
Interest expense.............................................. (158,729) (305,947) (306,944) (634,016)
------------- ------------- ------------- -------------
(89,962) 36,671 (169,139) 5,042
------------- ------------- ------------- -------------
Loss before income taxes................................... (3,884,280) (5,128,237) (6,694,817) (8,038,318)
Income taxes.................................................. -- -- -- --
------------- ------------- ------------- -------------
NET LOSS................................................... $(3,884,280) $(5,128,237) $(6,694,817) $(8,038,318)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Loss applicable to common stock
Net loss................................................... $(3,884,280) $(5,128,237) $(6,694,817) $(8,038,318)
Preferred stock dividends and accretion.................... 328,761 913,376 551,785 1,718,458
------------- ------------- ------------- -------------
Loss applicable to common stock............................ $(4,213,041) $(6,041,613) $(7,246,602) $(9,756,776)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share.............................................. $ (0.63) $ (0.87) $ (1.11) $ (1.42)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted Average number of common shares outstanding (Note 7)... 6,646,608 6,908,362 6,529,522 6,877,527
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................... $(3,884,280) $(5,128,237) $(6,694,817) $(8,038,318)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 288,693 550,239 513,077 1,026,820
Deferred compensation...................................... -- 52,032 -- 104,064
Changes in operating assets and liabilities, net of effects
of medical practice receivables acquired
Accounts receivable...................................... 532,265 217,934 201,029 427,332
Accounts receivable -- affiliates........................ (222,362) 23,031 (122,755) 67,098
Prepaid expenses and other receivables................... (646,138) (619,577) (777,651) (1,379,867)
Due from/to affiliates................................... 296,156 (311,841) 435,499 (366,326)
Accounts payable......................................... 244,606 104,009 308,322 (820,026)
Accrued and other liabilities............................ 1,426,787 10,425,286 1,611,999 11,020,534
Organizational costs and deferred charges................ (540,801) (25,270) (766,923) (25,270)
------------- ------------- ------------- -------------
Net cash (used in) provided by
operating activities................................ (2,505,074) 5,287,606 (5,292,220) 2,016,041
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............................ (474,306) (110,216) (707,923) (322,119)
Purchase of short-term investments............................ -- -- (3,000,000)
Payments for acquisitions..................................... (592,373) (589,309) (823,114) (1,131,585)
Deposits...................................................... (9,589) (19,651) (36,257) (21,650)
------------- ------------- ------------- -------------
Net cash used in investing activities................. (1,076,268) (719,176) (1,567,294) (4,475,354)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible preferred
stock...................................................... -- -- 7,489,200 18,711,361
Borrowings under notes payable................................ -- 4,000,000 1,183,017 4,000,000
Principal payments on capital lease obligations............... (26,014) -- (50,723) --
Payments on notes payable..................................... (130,111) (4,294,298) (298,226) (4,415,534)
------------- ------------- ------------- -------------
Net cash (used in) provided by
financing activities................................ (156,125) (294,298) 8,323,268 18,295,827
Net increase (decrease) in cash and
cash equivalents.................................... (3,737,467) 4,274,132 1,463,754 15,836,514
Cash and cash equivalents, at beginning of period............... 6,620,516 16,300,210 1,419,295 4,737,828
------------- ------------- ------------- -------------
Cash and cash equivalents, at end of period..................... $ 2,883,049 $20,574,342 $ 2,883,049 $20,574,342
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</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 AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
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.
The consolidated financial statements for the three months and six months
ended December 31, 1996 and 1997 are unaudited and should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-K for the year ended June 30, 1997.
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 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("SFAS 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 affect 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 -- CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
As of December 31, 1997, the Company has four Global Capitation Contracts
(three Medicare and one commercial) and five gatekeeper capitation contracts
with eight health maintenance organizations (HMOs). (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 receives monthly capitation fees
based on the number of enrollees electing any one of the Company's affiliated
PCPs. The capitation revenue under these contracts is prepaid monthly based on
the number of enrollees and is recognized as capitation revenue during the month
services are provided to the enrollees. During the three months ended December
31, 1996, approximately $1,572,229 and $647,333, were recorded as global
capitation and gatekeeper capitation revenue, respectively, in the Company's
consolidated financial statements. During the three months ended December 31,
1997, approximately $16,681,783 and $265,808, were recorded as global capitation
and gatekeeper capitation revenue, respectively, in the Company's consolidated
financial statements. During the six months ended December 31, 1996,
approximately $2,498,842 and $988,333, were recorded as global capitation and
gatekeeper capitation revenue, respectively, in the Company's consolidated
financial statements. During the six months ended December 31, 1997,
approximately $20,956,777 and $559,521, were recorded as global capitation and
gatekeeper capitation revenue, respectively, in the Company's consolidated
financial statements.
The Company's commercial capitation contract also includes a provision
whereby the Company can earn incentive revenue or incur medical services
expenses based upon the enrollees' utilization of hospital services. Estimated
amounts receivable or payable from the HMO are recorded based upon actual
hospital and other institutional utilization and associated
4
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE
RECOGNITION -- Continued
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 are recorded in the year of settlement. Included in accrued
medical services as of June 30, 1997 and December 31, 1997 is approximately
$180,000, and $220,000, respectively, of estimated amounts due to the HMO under
this arrangement.
Under the Company's three Medicare Global Capitation Contracts, the Company
has assumed responsibility for managing and paying for substantially all of the
medical care for the respective payors' enrollees. Consequently, the Company
does not perform an institutional incentive settlement with the HMO's under the
three 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 refers patients who
are covered under global capitated contracts. The cost of medical services is
recognized in the period in which the care is provided and includes an estimate
of the cost of services which have been incurred but not yet reported. The
estimate for accrued medical services is 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, 1997, and December 31,
1997, approximately $4,975,000, and $15,885,000, respectively, was recorded as
accrued medical services for incurred but not reported services.
The Company purchases reinsurance from independent insurance companies
which limits the amount of risk it ultimately bears by providing reimbursement
payments once medical services provided to an individual enrollee exceed an
agreed-upon amount. Under the commercial capitation contract, the Company is
insured for 90% of all medical services expense over $7,500 per enrollee per
year. Under the Medicare global capitation contracts, the Company is insured for
90% of all physician and hospital medical services expense over $7,500 and
$75,000, respectively, per enrollee per year. Prior to July 1, 1997, the
non-hospital insurance attachment point was $5,000 per enrollee per year for the
commercial and Medicare contracts. During the six months ended December 31, 1996
and 1997, the Company recorded approximately $13,500 and $62,000, respectively,
as reinsurance recoveries. Estimates of reinsurance receivables as of June 30,
1997, and December 31, 1997 under these arrangements were approximately $102,000
and $116,000, respectively.
NOTE 3 -- INTANGIBLE ASSETS
As a result of the Company's acquisitions of certain practice assets and
affiliations with Core Medical Groups ("CMGs") and its managed care agreements
with independent practice associations ("IPAs"), the Company acquires and
reports intangible assets. These assets consist principally of long-term
management agreements between the Company and the CMGs and managed care
contracting agreements with IPAs. As of December 31, 1997, the company has
recorded $7,327,492 of net intangible assets.
NOTE 4 -- 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 the contractual management fees as defined
in the PSO Agreements. Contractual fees are accrued when collection is probable.
Revenue from all CMGs is recorded at established rates reduced by allowances for
doubtful accounts and contractual adjustments and amounts retained by physician
groups.
5
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- NET REVENUE -- Continued
The following represents amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross physician revenue.......................................... $ 7,820,725 $ 10,022,238 $ 13,704,635 $ 19,050,420
Less: Provision for contractual and other adjustments....... (3,348,485) (4,868,421) (5,656,371) (8,489,028)
Gatekeeper capitated income...................................... 775,063 1,058,837 1,392,504 2,261,250
------------ ------------ ------------ ------------
Net physician revenue............................................ 5,247,303 6,212,654 9,440,768 12,822,642
Amount retained by affiliated core medical groups:
Physicians.................................................. 2,490,249 2,054,651 4,324,966 4,961,912
Ancillary employees and expenses............................ 51,213 296,089 215,450 601,122
------------ ------------ ------------ ------------
Net revenue...................................................... $ 2,705,841 $ 3,861,914 $ 4,900,352 $ 7,259,608
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
For the three months ended December 31, 1996 and 1997, one of these CMGs
comprised approximately 69% and 40%, respectively, of the Company's net revenue.
NOTE 5 -- NOTES PAYABLE
Notes Payable as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DATE OF
DESCRIPTION MATURITY AMOUNT
- - - --------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Chase Manhattan Bank, N.A. Credit Facility November 1, 1998 $ 4,000,000
HBO & Company Note Payable May 14, 1998 2,000,000
Note Payable to Series C Preferred Stockholder January 31, 1999 5,423,592
Other Notes Payable Various 143,029
-----------
Total Notes Payable 11,566,621
Less: Current Maturities of Notes Payable 6,049,670
-----------
Long-Term Notes Payable $ 5,516,951
-----------
-----------
</TABLE>
The Company has established an $11,000,000 credit facility ("Credit
Facility") with Chase Manhattan Bank, N.A. ("Chase") for the purpose of
refinancing its NationsBank Credit Facility of $4,000,000, which was repaid in
November 1997. In addition, the Credit Facility supports a $4,400,000 standby
letter of credit which is required under the Company's Global Capitation
contract discussed in Note 8. The maturity date of the $11,000,000 Credit
Facility is November 1, 1998. The Credit Facility is collateralized by, among
other assets, the Company's cash assets under management with Chase Asset
Management, Inc. and charges interest at an annual rate of approximately 6.5%.
NOTE 6 -- 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 The Beacon Group III -- Focus Value Fund, L.P. ("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 of $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 will be used to fund the expansion of the
company and operating losses. Under the Series D Purchase Agreement, the Company
expects to complete a subsequent sale of 1,000,000 shares for $10,000,000 on or
before June 30, 1998, subject to certain
6
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- CAPITALIZATION -- Continued
conditions set forth in the Series D Purchase Agreement. Such conditions include
that no event or change shall have caused any material adverse effect on the
Company's business, assets, liabilities, properties, condition, prospects,
operations or results of operations of the Company.
NOTE 7 -- 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, exerciseable 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 8 -- NEW CAPITATION AGREEMENT
On September 10, 1997, the Company entered into an agreement with an HMO on
a new 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
approximately 9,900 enrollees in exchange for a capitation fee. The term of the
agreement is for three years with annual renewals after the initial term has
expired. During the three months ended December 31, 1997, the Company earned
capitation revenue of approximately $11,905,000 under this contract. Effective
February 1, 1998, the Company and the HMO expanded the agreement to add an
additional 2,500 Medicare Enrollees. The contract amendment and general growth,
increases the number of Medicare enrollees covered by this contract from
approximately 9,900 to 12,400. Based upon the estimated number of enrollees
participating in the contract as amended, and the terms and conditions of the
contract, the Company expects to realize total monthly capitation revenue of
between $4,500,000 and $5,000,000 from this new agreement. Actual capitation
revenue earned pursuant to the above arrangement may vary each month due to
fluctuations in the number of Medicare enrollees covered under the arrangement.
NOTE 9 -- SUBSEQUENT EVENT
On January 1, 1998, the Company assumed responsibility for managing all
physician and institutional care, subject to certain exclusions, delivered to
approximately 7,000 Medicare enrollees of an HMO in exchange for a capitation
fee. This arrangement is pursuant to an agreement with the Company's Series C
Preferred Stockholder. The term of the arrangement will be two years with annual
renewals after the initial term has expired. Based upon the estimated number of
enrollees participating under the arrangement and the terms and conditions of
the arrangement, the Company expects to realize total monthly capitation revenue
of approximately $2,500,000. Actual capitation revenue earned pursuant to the
above arrangement may vary each month due to fluctuations in the number of
Medicare enrollees covered under the arrangement.
7
<PAGE>
DOCTORS HEALTH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a physician-driven managed care and medical management
company which operates in conjunction with a comprehensive network of primary
care physicians ("PCPs"), specialists, hospitals and other health care providers
(the "Network"). As of February 1, 1998, the Network, consisting of Doctors
Health Providers and Payor Providers (see definition below), included
approximately 10,200 physicians in Maryland, Washington, D.C. and Virginia,
including approximately 2,300 PCPs and 7,900 specialists (including
obstetrician-gynecologists). Within the Company's Network are various smaller
networks of physicians and other health care providers with various levels of
affiliation with each other and with the Company.
The Company's overall strategy is to manage the delivery of quality health
care services to enrollees of health maintenance organizations and other prepaid
health insurance plans (collectively "Payors") at a cost which is less than the
revenues it receives under Global Capitation Contracts with Payors (the "Global
Capitation Contracts"). The Global Capitation Contracts obligate the Company to
provide primary care, specialist, hospital and other services to Enrollees
(persons entitled to health care services through their employers or, with
respect to elderly persons, through the federal government's Medicare program)
of Payors. Enrollees are sometimes referred to as capitated lives. The Company
seeks to ensure the delivery of high quality, cost-effective health care by (i)
delivering preventive medical care services to reduce high-cost, acute care
episodes; (ii) arranging for the cost-effective delivery of health care services
through managed care contracting arrangements with various health care
providers; and (iii) managing certain medical cases to seek favorable treatment
results for patients.
The Company manages the delivery of quality health care services through
the Company's Network. A portion of the Company's Network includes certain
medical groups, physician networks, independent practice associations ("IPAs")
and other health care providers that have affiliated with the Company through a
variety of contractual relationships whereby such providers have designated the
Company as their agent for the purpose of negotiating Global Capitation
Contracts and other managed care contracts ("Doctors Health Providers"). The
Company's Network is designed to provide Payors with a single-source of
well-managed health care providers and to give the Company access to, and
increase its bargaining power for, managed care contracts. The Company's Network
also includes networks of physicians affiliated with certain Payors with which
the Company has contracted to provide network management services on a capitated
basis ("Payor Providers").
As a managed care company, the Company negotiates and enters into Global
Capitation Contracts, pursuant to which (i) Payors pay the Company a fixed
amount per month based on the number of enrollees who have selected a PCP in the
Network and (ii) the Company pays the health care providers within the Network,
or those having other contractual arrangements with the Company for providing
the required medical care. The Company also receives a management fee derived
from revenues earned by certain physician medical groups it has organized (the
"Core Medical Groups") pursuant to certain long-term management agreements
between the Core Medical Groups and the Company ("PSO Agreements"). The PCPs who
have affiliated with the Company designate the Company as their agent for the
purpose of negotiating Global Capitation Contracts and other managed care
contracts.
As a medical management company, the Company coordinates the delivery of
medical care by the various health care providers in the Network. Through a care
management department consisting of physicians, nurses, social workers and other
staff, the Company seeks to promote the wellness of patients, control costs, and
encourage patient satisfaction through the delivery of medical management
services. Such medical management services include case and disease management,
utilization review and quality management services.
The Company derives substantially all of its revenue from (i) payments made
by Payors to the Company pursuant to Global Capitation Contracts and gatekeeper
capitation contracts ("Capitation Revenue") and (ii) the contractual management
and similar fees earned under its long-term PSO Agreements with Core Medical
Groups ("Net Revenues"). The Company's Net Revenues include the reimbursement of
all medical practice operating costs and the contractual management fees
pursuant to the PSO Agreements and other agreements. Net Revenue is recognized
when services are performed and collection of the related revenues is probable.
The Company expects that during fiscal 1998 the greatest contributor to
operating income will be Capitation Revenue. Raising the Company's level of
profitability associated with Capitation Revenue will depend on (i) increasing
the number of PCPs in the Company's Network and increasing the number of
networks the Company manages; (ii) attracting patients to
8
<PAGE>
DOCTORS HEALTH, INC.
enroll in benefit plans of Payors that enter into Global Capitation Contracts
with the Company (principally Medicare beneficiaries); (iii) securing
additional, Global Capitation Contracts and maintaining existing Global
Capitation Contracts with adequate reimbursement rates; and (iv) assisting
physicians in managing the delivery of high quality care at a cost less than the
payments received under the Global Capitation Contracts. In general, as the
number of new Enrollees has increased both the Company's revenues and expenses
have significantly increased; however, many but not all expense items have
decreased as a percentage of total revenues. Assuming that the number of
Enrollees in Payor plans which have contracted with the Company continues to
increase, the Company expects this trend to continue.
In October 1997, the Company entered into a Global Capitation Contract with
NYLCare Health Plans of the Mid-Atlantic ("NYLCare"). The NYLCare contract
increased the number of physicians in the Network by approximately 1,800 PCPs
and 6,500 specialists; and the number of the Company's Medicare Enrollees by
approximately 9,900 and is expected to significantly increase Capitation
Revenue, which increase is expected to be substantially offset by an increase in
medical services expense and general and administrative expenses. During the
three months ended December 31, 1997, the Company earned capitation revenue of
approximately $11,905,000 under this contract. On February 1, 1998 the Company
and the HMO expanded the agreement to add an additional 2,500 Medicare
Enrollees. The contract amendment and general growth, increases the number of
Medicare enrollees covered by this contract from approximately 9,900 to 12,400.
Based upon the estimated number of enrollees participating in the contract as
amended, and the terms and conditions of the contract, the Company expects to
realize total monthly capitation revenue of between $4,500,000 and $5,000,000
from this new agreement. Actual capitation revenue earned pursuant to the above
arrangement may vary each month due to fluctuations in the number of Medicare
enrollees covered under the arrangement.
On January 1, 1998, the Company assumed responsibility for managing all
physician and institutional care, subject to certain exclusions, delivered to
approximately 7,000 Medicare enrollees of an HMO in exchange for a capitation
fee. This arrangement is pursuant to an agreement with the Company's Series C
Preferred Stockholder. The term of the arrangement will be two years with annual
renewals after the initial term has expired. Based upon the estimated number of
enrollees participating under the arrangement and the terms and conditions of
the arrangement, the Company expects to realize total monthly capitation revenue
of approximately $2,500,000. Actual capitation revenue earned pursuant to the
above arrangement may vary each month due to fluctuations in the number of
Medicare enrollees covered under the arrangement.
The Company expects to continue expanding the Network with both Payor
Providers through additional Global Capitation Contracts and with Doctors Health
Providers through additional managed care contracting arrangements with PCPs in
individual and group physician practices, and, to a lesser extent than in the
past, with PCPs who sell their assets to the Company and become employed by a
Core Medical Group. Physicians who become Doctors Health Providers designate the
Company as their exclusive agent for managed care services to Enrollees under
the Company's Global Capitation contracts. Physicians who become part of the
network as Payor Providers have not designated the Company as their agent for
managed care contracting.
RESULTS OF OPERATIONS
The Company's operating results are significantly affected by the number of
PCPs in the Network, the number of PCPs participating in Global Capitation
Contracts, the number of Global Capitation Contracts in which the Company
participates, and the number of Enrollees in benefit plans under Global
Capitation Contracts with the Company. The following table summarizes the
Company's history with respect to PCPs, executed Global Capitation Contracts and
Enrollees in benefit plans under Global Capitation Contracts with the Company:
9
<PAGE>
DOCTORS HEALTH, INC.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997 1997
-------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Number of PCPs in the Network (a & b)........................... 24 59 197 258 323
Number of PCPs participating in Global Capitation
Contracts (a & b)............................................. 0 45 110 109 219
Number of Global Capitation Contracts........................... 0 3 3 3 4
Number of Global Capitation Contract Patients:
Commercial................................................. 0 2,039 4,943 5,561 6,097
Medicare (c)............................................... 0 491 3,256 3,509 14,264
</TABLE>
- - - ---------------
(a) There is a lag between when physicians join networks and when they become
eligible to participate in Global Capitated Contracts as a result of the
credentialing and enpaneling processes and other internal Company
procedures.
(b) Excludes Payor Providers of approximately 1,500
(c) Includes Payor Provider and Doctors Health Provider patients
The following table sets forth for the three months and six months ended
December 31, 1996 and 1997 selected financial data expressed as a percentage of
total revenues. Because of the Company's limited operating history, the limited
period in which it has been assisting and managing PCPs, its limited experience
with Global Capitation arrangements and the growth of the Company's revenues,
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.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Capitation revenue................................................ 45.1% 81.4% 41.6% 74.8%
Net revenue....................................................... 54.9% 18.6% 58.4% 25.2%
------------ ------------ ------------ ------------
Total revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Medical services expense.......................................... 51.8% 86.3% 44.7% 76.0%
Care center costs................................................. 54.8% 17.9% 57.2% 24.4%
General and administrative........................................ 64.7% 17.9% 69.7% 23.9%
Depreciation and amortization..................................... 5.9% 2.6% 6.1% 3.6%
Interest and other income......................................... (1.4)% (1.6)% (1.6)% (2.2)%
Interest expense.................................................. 3.2% 1.5% 3.7% 2.2%
Income tax expense................................................ -- -- -- --
------------ ------------ ------------ ------------
Net loss.......................................................... (79.0)% (24.6)% (79.8)% (27.9)%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 TO THE THREE MONTHS ENDED
DECEMBER 31, 1996.
TOTAL REVENUES. The Company's total revenues increased to $20,809,505 for
the three months ended December 31, 1997 from $4,925,403 for the three months
ended December 31, 1996. Capitation Revenue increased to $16,947,591
($16,681,783 due to Global Capitation Contracts and $265,808 due to Gatekeeper
Capitation Contracts) or 81.4% of total revenues for the three months ended
December 31, 1997, compared to $2,219,562 ($1,572,229 due to Global Capitated
Contracts and $647,333 due to Gatekeeper Capitation Contracts) or 45.1% 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 3,555 at December 31, 1996 to 20,361 at
December 31, 1997. The Company expects the Capitation Revenue to increase in
total and as a percentage of total revenues due to the increase in the number of
Enrollees participating in the Company's Global Capitation Contracts and the new
contract effective January 1, 1998 as discussed above.
MEDICAL SERVICES EXPENSE. Medical services expense was $17,956,899 or 86.3%
of total revenues for the three months ended December 31, 1997 compared to
$2,550,395 or 51.8% of total revenues for the three months ended December 31,
1996. This increase resulted from the increase in the number of Enrollees
participating in the Company's Global Capitated Contracts from 3,555 at December
31, 1996 to 20,361 at December 31, 1997. The Company expects these expenses to
10
<PAGE>
DOCTORS HEALTH, INC.
increase due to the increase in the number of Enrollees participating in the
Company's Global Capitation Contracts and the new global capitation contract
effective January 1, 1998 as discussed above.
CARE CENTER COSTS. Care center costs increased to $3,740,894 or 17.9% of
total revenues for the three months ended December 31, 1997 from $2,696,243 or
54.8% of total revenues for the three months ended December 31, 1996. The
increase in the dollar amount of care center costs resulted from the increase in
the number of physicians in Core Medical Groups from 70 to 98. The Company
expects that these expenses will continue to decline as a percentage of total
revenues because the Company anticipates that it will not add a significant
number of physicians to the Core Medical Groups in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3,726,381 or 17.9% of total revenues for the three months ended
December 31, 1997 from $3,184,390 or 64.7% of total revenues for the three
months ended December 31, 1996. This increase in dollar amount resulted
primarily from increased compensation expenses from expansion of the Company's
corporate management team, as well as its marketing, acquisitions, network
development and care management departments and additional operating costs
incurred in adding physicians to the Company's Network and attracting members
who enroll in benefit plans under Global Capitation Contracts. While these
expenses are expected to increase as the Company adds PCPs and HMO members, the
Company expects that these expenses will continue to decline as a percentage of
total revenues.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $550,239 or 2.6% of total revenues for the three months
ended December 31, 1997 from $288,693 or 5.9% of total revenues for the three
months ended December 31, 1996. The increase in dollar amount resulted primarily
from intangible assets acquired in connection with the purchase of certain
medical practice assets from PCPs, as well as the purchase of certain fixed
assets.
INTEREST AND OTHER INCOME. Interest and other income increased to $342,618
or 1.6% of total revenues for the three months ended December 31, 1997 from
$68,767 or 1.4% of total revenues for the three months ended December 31, 1996.
The increase in dollar amount resulted primarily from the increase in cash and
cash equivalents and short-term investments.
INTEREST EXPENSE. Interest expense increased to $305,947 or 1.5% of total
revenues for the three months ended December 31, 1997 from $158,729 or 3.2% of
total revenues for the three months ended December 31, 1996. These dollar
increases resulted primarily from the increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's loss and its full valuation
allowance for deferred tax assets, for the three months ended December 31, 1997
and 1996, the Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $5,128,237 for the three months
ended December 31, 1997 compared to $3,884,280 for the three months ended
December 31, 1996.
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 $6,041,613 for the three months ended December
31, 1997 compared to $4,213,041 for the three months ended December 31, 1996.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1997 TO THE SIX MONTHS ENDED
DECEMBER 31, 1996.
TOTAL REVENUES. The Company's total revenues increased to $28,775,906 for
the six months ended December 31, 1997 from $8,387,527 for the six months ended
December 31, 1996. Capitation Revenue increased to $21,516,298 ($20,956,777 due
to Global Capitation Contracts and $559,521 due to Gatekeeper Capitation
Contracts) or 74.8% of total revenues for the six months ended December 31,
1997, compared to $3,487,175 ($2,498,842 due to Global Capitated Contracts and
$559,521 due to Gatekeeper Capitation Contracts) or 41.6% 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 3,555 at December 31, 1996 to 20,361 at December 31,
1997. The Company expects the Capitation Revenue to increase in total and as a
percentage of total revenues due to the increase in the number of Enrollees
participating in the Company's Global Capitation Contracts and the new contract
effective January 1, 1998 as discussed above.
MEDICAL SERVICES EXPENSE. Medical services expense was $21,864,909 or 76.0%
of total revenues for the six months ended December 31, 1997 compared to
$3,745,896 or 44.7% of total revenues for the six months ended December 31,
1996.
11
<PAGE>
DOCTORS HEALTH, INC.
This increase resulted from the increase in the number of Enrollees
participating in the Company's Global Capitated Contracts from 3,555 at December
31, 1996 to 20,361 at December 31, 1997. The Company expects these expenses to
increase due to the increase in the number of Enrollees participating in the
Company's Global Capitation Contracts and the new global capitation contract
effective January 1, 1998 as discussed above.
CARE CENTER COSTS. Care center costs increased to $7,034,637 or 24.4% of
total revenues for the six months ended December 31, 1997 from $4,799,762 or
57.2% of total revenues for the six months ended December 31, 1996. The increase
in the dollar amount of care center costs resulted from the increase in the
number of physicians in Core Medical Groups from 70 to 98. The Company expects
that these expenses will continue to decline as a percentage of total revenues
because the Company anticipates that it will not add a significant number of
physicians to the Core Medical Groups in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $6,892,900 or 23.9% of total revenue for the six months ended
December 31, 1997 from $5,854,470 or 69.7% of total revenues for the six months
ended December 31, 1996. This increase in dollar amount resulted primarily from
increased compensation expenses from expansion of the Company's corporate
management team, as well as its marketing, acquisitions, network development and
care management departments and additional operating costs incurred in adding
physicians to the Company's Network and attracting members who enroll in benefit
plans under Global Capitation Contracts. While these expenses are expected to
increase as the Company adds PCPs and HMO members, the Company expects that
these expenses will continue to decline as a percentage of total revenues.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $1,026,820 or 3.6% of total revenues for the six months
ended December 31, 1997 from $513,077 or 6.1% of total revenues for the six
months ended December 31, 1996. The increase in dollar amount resulted primarily
from intangible assets acquired in connection with the purchase of certain
medical practice assets from PCPs, as well as the purchase of certain fixed
assets.
INTEREST AND OTHER INCOME. Interest and other income increased to $639,058
or 2.2% of total revenues for the six months ended December 31, 1997 from
$137,805 or 1.6% of total revenues for the six months ended December 31, 1996.
The increase in dollar amount resulted primarily from the increase in cash and
cash equivalents and short-term investments.
INTEREST EXPENSE. Interest expense increased to $634,016 or 2.2% of total
revenues for the six months ended December 31, 1997 from $306,944 or 3.7% of
total revenues for the six months ended December 31, 1996. These dollar
increases resulted primarily from the increase in the level of borrowings.
INCOME TAX EXPENSE. In light of the Company's loss and its full valuation
allowance for deferred tax assets, for the six months ended December 31, 1997
and 1996, the Company did not require a provision for income taxes.
NET LOSS. The Company had a net loss of $8,038,318 for the six months ended
December 31, 1997 compared to $6,694,817 for the six months ended December 31,
1996.
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 $9,756,776 for the six months ended December 31,
1997 compared to $7,246,602 for the six months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. As of December 31, 1997, the Company had working capital of
$4,857,438. Until the Company attracts an adequate number of capitated lives in
Global Capitation Contracts, the Company expects to incur operating losses and
experience negative operating cash flows. The Company believes that its cash and
cash equivalents (including short-term investments) of $23,574,342 as of
December 31, 1997 and internally-generated cash will be sufficient to fund the
Company's operations through June 30, 1998. Subsequent to June 30, 1998, the
Company will require additional capital to fund operations, potential
acquisitions, capital expenditures and other commitments. At that time, the
Company will seek additional capital through internally-generated funds or
outside sources, but there is no assurance that the Company will be able to
obtain such capital. Certain provisions of the Company's Certificate of
Incorporation may discourage potential investors from providing additional
capital to the Company due to certain anti-dilution protection provisions
affecting the conversion ratios
12
<PAGE>
DOCTORS HEALTH, INC.
of each series of Preferred Stock. Such anti-dilution provisions may be
triggered upon the issuance of additional capital stock on terms more favorable
than those on which the existing Preferred Stockholders obtained their stock.
BEACON FINANCING. 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 The Beacon Group III -- Focus Value Fund, L.P.
("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 will be used to fund the expansion of the
company and operating losses. Under the Series D Purchase Agreement, the Company
expects to complete a subsequent sale of 1,000,000 shares for $10,000,000 on or
before June 30, 1998, subject to certain conditions set forth in the Series D
Purchase Agreement. Such conditions include that no event or change shall have
caused any material adverse effect on the Company's business, assets,
liabilities, properties, condition, prospects, operations or results of
operations of the Company.
CHASE CREDIT FACILITY. The Company has established an $11,000,000 credit
facility ("Credit Facility") with Chase Manhattan Bank, N.A. ("Chase") for the
purpose of refinancing its NationsBank Credit Facility of $4,000,000, which was
repaid in November 1997. In addition, the Credit Facility supports a $4,400,000
standby letter of credit which is required under the Company's Global Capitation
contract with NYLCare. The maturity date of the $11,000,000 Credit Facility is
November 1, 1998. The Credit Facility is collateralized by, among other assets,
the Company's cash assets under management with Chase Asset Management, Inc. and
accrues interest at an annual rate of approximately 6.5%.
CASH FLOW. Net cash provided by (used in) operating activities was
$5,287,606 for the three months ended December 31, 1997, compared to
$(2,505,074) in 1996. The cash provided by operating activities for the three
months ended December 31, 1997 resulted primarily from a $10,425,286 increase in
accrued and other liabilities offset by $5,128,237 in net losses.
Net cash used in investing activities was $719,176 for the three months
ended December 31, 1997, compared to $1,076,268 in 1996. The cash used in
investing activities for the three months ended December 31, 1997 was primarily
due to $589,309 of cash for payments for acquisitions.
Net cash used in financing activities was $294,298 for the three months
ended December 31, 1997, compared to $156,125 in 1996.
Net cash provided by (used in) operating activities was $2,016,041 for the
six months ended December 31, 1997, compared to ($5,292,220) in 1996. The cash
provided by operating activities for the six months ended December 31, 1997
resulted primarily from (i) a $11,020,534 increase in accrued and other
liabilities and (ii) depreciation and amortization of $1,026,820 offset by (iii)
$8,038,318 in net losses and (iv) a $1,379,867 increase in prepaid expenses and
other receivables.
Net cash used in investing activities was $4,475,354 for the six months
ended December 31, 1997, compared to $1,567,294 in 1996. The use of cash for
investing activities for the six months ended December 31, 1997 was primarily
from (i) the purchase of a $3,000,000 short-term investment and (ii) $1,131,585
of cash for payments for acquisitions.
Net cash provided by financing activities was $18,295,827 for the six
months ended December 31, 1997, compared to $8,323,268 for the six months ended
December 31, 1996. The cash provided by financing activities for the six months
ended December 31, 1997 was primarily due to the net proceeds from the issuance
of the Series D Redeemable Convertible Preferred Stock.
13
<PAGE>
DOCTORS HEALTH, INC.
FORWARD LOOKING STATEMENTS AND FACTORS THAT
MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains statements which, to the extent
they are not recitations of historical fact, may constitute forward-looking
statements regarding future operating results and financial condition. All
forward-looking statements involve risks and uncertainties. Although the Company
believes that its expectations are based upon reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not materially differ from its expectations.
The future operating results and financial condition of the Company are
dependent upon the Company's ability to market its services profitably,
successfully increase market share and manage expense growth relative to revenue
growth. In addition, the future operating results and financial condition of the
Company may also be affected by several factors, including (i) the Company's
growth strategy and its ability to raise sufficient capital to support growth,
(ii) government regulation of the health care industry; (iii) integration risks,
(iv) dependence on managed care contracts and dependence on enrolled patients in
managed care contracts with HMOs, (v) health care cost-containment decisions of
Payors; (vi) controlling and estimating health care costs; and (vii) competition
for opportunities to expand the Company's networks of Doctors Health Providers
and Payor Providers. Changes in one or more of these factors could have a
material adverse effect on the future operating results and financial condition
of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
