DRAFT (B) 05/11/98 5:25 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 10, 1998 1,665,875 shares of the registrant's Class A Common
Stock and 5,351,166 shares of the Registrant's Class B Common Stock were
outstanding.
<PAGE>
DOCTORS HEALTH, INC.
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S><C>
FORWARD LOOKING STATEMENTS 1
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
FORWARD LOOKING STATEMENTS
AND FACTORS THAT MAY AFFECT FUTURE RESULTS
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 captions "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Overview;" --
"Comparison of the three months ended March 31, 1998 to the three months ended
March 31, 1997"; -- "Comparison of the nine months ended March 31, 1998 to the
nine months ended March 31, 1997"; "--Liquidity and Capital Resources"; and
"Subsequent Events." 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."
FACTORS THAT MAY AFFECT FUTURE RESULTS. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
below:
1. The Company's dependence on a limited number of managed care
contracts which compensate the Company on a capitated basis.
2. The Company's ability to control the costs of medical care through
various wellness, preventive, and utilization management measures, as well as
factors that may be beyond the Company's control such as the frequency or
expense of medical care required by Enrollees covered by the Company's managed
care contracts.
3. The Company's ability to secure the capital and bear the related
cost of such capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4. Changes that have occurred and may occur in the United States
healthcare system, including changes in reimbursement levels under Medicare and
from commercial insurers and managed care organizations.
5. Changes in applicable government regulations that may affect the
profitability of the Company or cause the Company to reorganize its affiliations
with physician groups, including laws regulating compensation and referral
arrangements between health care providers.
6. The adoption of cost-containment measures by commercial insurers and
managed care organizations as well as efforts by governmental reimbursement
sources to impose cost containment measures.
1
<PAGE>
7. The Company's ability to identify suitable affiliation candidates,
to complete development projects or to profitably operate or successfully
integrate enterprises into the Company's operations.
8. Competition with other entities that contract with commercial
insurers and managed care organizations for the delivery of prepaid health
services (including physician organizations affiliated with hospitals, IPAs and
physician practice management companies) which may make it more difficult to
attract physician affiliation candidates or increase the cost of such
transactions.
In addition, the Company is subject to risks associated with its
dependence on key personnel, additional capital requirements, certain conflicts
of interest, the absence of a public market for the Company's securities,
potential exposure to professional liability, and the anti-takeover effect of
certain provisions of the Company's charter documents.
For a more detailed discussion of these factors and their potential
impact on future results, see the applicable discussions contained herein, in
the Company's Registration Statement on Form S-1, as amended, and in its
periodic reports filed with the SEC.
2
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
----------- ------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,737,828 $ 24,785,635
Restricted cash 680,000 680,000
Accounts receivable (net of allowance for doubtful accounts of $270,521
at June 30, 1997 and $193,706 at March 31, 1998, respectively) 2,722,891 2,664,321
Accounts receivable-affiliates 1,115,885 1,205,934
Other receivables 1,170,504 8,060,524
Prepaid expenses 190,987 389,751
Due from affiliates 925,658 950,671
----------- ------------
TOTAL CURRENT ASSETS 11,543,753 38,736,836
PROPERTY AND EQUIPMENT, NET 4,205,532 4,247,462
OTHER ASSETS
Intangibles (net of accumulated amortization of $445,148 at June 30, 1997 and
$1,025,350 at March 31, 1998, respectively) 6,475,925 7,435,312
Deferred charges (net of accumulated amortization of $304,537 at June 30, 1997 and
$548,171 at March 31, 1998, respectively) 924,334 117,963
Accrued interest receivable 374,970 453,941
Other receivable 200,000 131,277
Deposits 83,066 128,297
----------- ------------
TOTAL OTHER ASSETS 8,058,295 8,266,790
=========== ============
TOTAL ASSETS $23,807,580 $51,251,088
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of notes payable $ 6,007,589 $11,605,900
Accounts payable 1,108,499 246,701
Accrued medical services 5,301,384 26,799,845
Other accrued expenses 3,933,955 4,516,415
Due to affiliates 265,204 284,099
----------- -----------
TOTAL CURRENT LIABILITIES 16,616,631 43,452,960
LONG-TERM OBLIGATIONS
Note payable 5,462,621 73,660
Notes payable and purchase obligations-related parties 2,659,456 2,206,876
----------- -----------
TOTAL LONG-TERM OBLIGATIONS 8,122,077 2,280,536
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 5,911,722
Less subscription receivable (1,500,000) (1,500,000)
----------- -----------
4,151,472 4,411,722
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 March 31, 1998 (liquidation value $4,928,265
plus unpaid dividends) 4,548,945 4,698,468
8% cumulative, Series C, $17.50 par value, authorized 1,071,428 shares at June 30, 1997 and
1,500,000 at March 31, 1998; issued and outstanding 571,428
shares (liquidation value $10,000,000 plus unpaid dividends) 10,581,696 11,183,064
8% Series D, dividends payable in-kind, $10.00 par value, authorized 5,750,000 shares; issued
and outstanding 2,075,693 shares at March 31, 1998 (liquidation value $20,000,000
plus unpaid dividends) - 19,601,974
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock (Note 7)
Class A, $.01 par value; authorized 20,700,000 shares, issued and outstanding
810,000 and 1,665,875 shares at June 30, 1997 and March 31, 1998, respectively 8,100 16,659
Class B, $.01 par value; authorized 10,000,000; issued and outstanding 2,645,167
and 5,338,866 shares at June 30, 1997 and March 31, 1998, respectively 26,452 53,389
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 6,117,664
Deferred compensation (912,508) (756,412)
Accumulated deficit (25,215,762) (39,808,936)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (20,213,241) (34,377,636)
----------- -----------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) $23,807,580 $51,251,088
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
------------- ------------- -------------- --------------
1997 1998 1997 1998
------------- ------------- -------------- --------------
<S><C>
REVENUES
Capitation revenue $ 3,163,080 $ 28,096,653 $ 6,650,255 $ 49,612,951
Net revenue 3,599,391 3,675,429 8,499,743 10,935,037
------------- ------------- -------------- --------------
6,762,471 31,772,082 15,149,998 60,547,988
------------- ------------- -------------- --------------
EXPENSES
Medical services expense 3,096,363 27,223,678 6,842,259 49,088,587
Care center costs 3,463,540 3,562,581 8,263,302 10,597,218
General and administrative 3,184,840 4,428,664 9,039,310 11,321,564
Depreciation and amortization 480,473 521,048 993,550 1,547,868
------------- ------------- -------------- --------------
10,225,216 35,735,971 25,138,421 72,555,237
------------- ------------- -------------- --------------
Loss from operations (3,462,745) (3,963,889) (9,988,423) (12,007,249)
OTHER INCOME (EXPENSE)
Interest and other income 65,084 390,316 202,889 1,029,374
Interest expense (222,752) (327,703) (529,696) (961,719)
------------- ------------- -------------- --------------
(157,668) 62,613 (326,807) 67,655
------------- ------------- -------------- --------------
Loss before income taxes (3,620,413) (3,901,276) (10,315,230) (11,939,594)
Income taxes - - - -
------------- ------------- -------------- --------------
NET LOSS $ (3,620,413) $ (3,901,276) $ (10,315,230) $ (11,939,594)
============= ============= ============== ==============
Loss applicable to common stock
Net loss $ (3,620,413) $ (3,901,276) $ (10,315,230) $ (11,939,594)
Preferred stock dividends and
accretion 374,955 900,796 926,740 2,619,254
------------- ------------- -------------- --------------
Loss applicable to common stock $ (3,995,368) $ (4,802,072) $ (11,241,970) $ (14,558,848)
============= ============= ============== ==============
Net loss per share $ (0.58) $ (0.69) $ (1.70) $ (2.10)
============= ============= ============== ==============
Weighted average number of
common shares outstanding (Note 7) 6,823,602 6,976,519 6,626,338 6,909,915
============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998
------------ ------------ ------------- -------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,620,413) $(3,901,276) $(10,315,230) $(11,939,594)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 480,473 521,048 993,550 1,547,868
Deferred compensation - 52,032 - 156,096
Changes in operating assets and liabilities, net of effects of
medical practice receivables acquired
Accounts receivable (159,901) (368,762) 41,128 58,570
Accounts receivable -- affiliates 182,753 (157,147) 59,998 (90,049)
Prepaid expenses and other receivables (198,005) (5,787,888) (975,656) (7,167,755)
Due from/to affiliates (754,395) 360,208 (318,896) (6,118)
Accounts payable (389,231) (41,772) (80,909) (861,798)
Accrued and other liabilities 1,206,905 11,405,659 2,818,904 22,426,193
Organizational costs and deferred charges (16,650) 25,270 (783,573) -
---------- ----------- ---------- -----------
Net cash (used in) provided by operating activities (3,268,464) 2,107,372 (8,560,684) 4,123,413
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (271,972) (423,182) (979,895) (745,301)
Purchase of short-term investments - - - (3,000,000)
Redemption of short-term investments - 3,000,000 - 3,000,000
Payments for acquisitions (309,642) (228,300) (1,132,756) (1,359,885)
Deposits (14,939) (23,581) (51,196) (45,231)
---------- ----------- ---------- -----------
Net cash (used in) provided by investing activities (596,553) 2,324,937 (2,163,847) (2,150,417)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of redeemable
convertible preferred stock 2,500,000 - 9,989,200 18,711,361
Net proceeds from issuance of Class A common stock 250 250
Class B common stock direct registration costs (98,302) (98,302)
Borrowings under notes payable 2,800,000 - 3,983,017 4,000,000
Principal payments on capital lease obligations (25,182) - (75,905) -
Payments on notes payable (983,017) (122,964) (1,281,243) (4,538,498)
---------- ----------- ---------- -----------
Net cash provided by (used in) financing activities 4,291,801 (221,016) 12,615,069 18,074,811
Net increase in cash and cash equivalents 426,784 4,211,293 1,890,538 20,047,807
Cash and cash equivalents, at beginning of period 2,883,049 20,574,342 1,419,295 4,737,828
========== =========== ========== ===========
Cash and cash equivalents, at end of period $3,309,833 $24,785,635 $3,309,833 $24,785,635
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 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.
The consolidated financial statements for the three months and nine
months ended March 31, 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, 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 1998, 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 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 -- CAPITATION REVENUE AND MEDICAL SERVICES EXPENSE RECOGNITION
As of March 31, 1998, the Company has five Global Capitation Contracts
(four 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 March 31,
1997, approximately $2,796,098 and $366,982, were recorded as global capitation
and gatekeeper capitation revenue, respectively, in the Company's consolidated
financial statements. During the three months ended March 31, 1998,
approximately $27,674,967 and $421,686, were recorded as global capitation and
gatekeeper capitation revenue, respectively, in the Company's consolidated
financial statements. During the nine months ended March 31, 1997, approximately
$5,294,940 and $1,355,315, were recorded as global capitation and gatekeeper
capitation revenue, respectively, in the Company's consolidated financial
statements. During the nine months ended March 31, 1998, approximately
$48,631,744 and $981,207, 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 costs incurred by
assigned HMO enrollees, compared to the portion of the
6
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 March 31, 1998 is approximately
$180,000, and $220,000, respectively, of estimated amounts due to the HMO under
this arrangement.
Under the Company's four 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 March 31,
1998, approximately $4,975,000, and $26,589,845, respectively, were recorded as
accrued medical services for incurred but not reported services.
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 March 31, 1998, the Company has recorded
$7,435,312 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.
7
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following represents amounts included in the determination of net
revenue:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1998 1997 1998
----------- ----------- ----------- ------------
<S><C>
Gross physician revenue................................. $8,656,935 $8,452,071 $22,361,570 $27,502,491
Less: Provision for contractual and other adjustments (3,479,763) (3,659,767) (9,136,134) (12,148,795)
Gatekeeper capitated income............................. 829,381 1,414,589 2,221,885 3,675,839
----------- ----------- ----------- ------------
Net physician revenue................................... 6,006,553 6,206,893 15,447,321 19,029,535
Amount retained by affiliated core medical groups:
Physicians......................................... 2,106,193 2,281,057 6,431,159 7,242,969
Ancillary employees and expenses................... 300,969 250,407 516,419 851,529
----------- ----------- ----------- ------------
Net revenue............................................. $3,599,391 $3,675,429 $8,499,743 $10,935,037
=========== =========== =========== ============
</TABLE>
For the three months ended March 31, 1997 and 1998, one of these CMGs
comprised approximately 40% and 41%, respectively, of the Company's net revenue.
NOTE 5 -- NOTES PAYABLE
Notes Payable as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Date of
Description Maturity Amount
----------- -------- ------
<S><C>
HBO & Company Note Payable May 14, 1998 $ 2,000,000
Chase Manhattan Bank, N.A. Credit Facility November 1, 1998 4,000,000
Note Payable to Series C
Preferred Stockholder (including accrued interest) January 31, 1999 5,561,092
Other Notes Payable Various 2,325,344
-----------
Total Notes Payable 13,886,436
Less: Current Maturities of Notes Payable 11,605,900
-----------
Long-Term Notes Payable $ 2,280,536
===========
</TABLE>
The Company has 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 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 6.2%. As of May 14, 1998, the remaining amount available
under the Credit Facility is $1,750,000.
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 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 is being 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
8
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. Although there can be no assurance that
the Company will receive the additional $10,000,000 investment from Beacon,
the Company believes it has currently satisfied the applicable conditions to
such an investment.
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, were
automatically increased by a ratio of two to one on the effective date of the
Stock Split-up.
NOTE 8 - NEW CAPITATION AGREEMENTS
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 monthly capitation
fees. 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 and March 31, 1998, the
Company earned capitation revenue of approximately $11,905,000 and $15,267,000,
respectively 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 has increased the number of Medicare
enrollees covered by this contract from approximately 9,900 to 13,500. Actual
capitation revenue earned pursuant to the above arrangement may vary each
quarter due to fluctuations in the number of Medicare Enrollees and the
reimbursement rates 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 monthly
capitation fees. 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. During the three months
ended March 31, 1998, the Company earned capitation revenue of approximately
$7,318,000 under this contract. Actual capitation revenue earned pursuant to the
above arrangement may vary each quarter due to fluctuations in the number of
Medicare Enrollees and the reimbursement rates under the arrangement.
NOTE 9 - SUBSEQUENT EVENTS
On May 14, 1998, the Company repaid the $2,000,000 note payable to HBO
& Company. Pursuant to the Company's note payable to HBO & Company, the Company
agreed to pay interest on the note in the form of a warrant to purchase shares
of Class A Common Stock. As adjusted for the September 30, 1997 stock split-up,
on May 14, 1998, the Company issued HBO & Company a warrant to purchase 120,000
shares of Class A Common Stock at an exercise price of $7.50 per share.
The Company's Board of Directors is subject to a change in control due
to the Company's failure, as of March 31, 1998, to achieve certain profitability
and Medicare Medical Loss Ratio benchmarks set forth in the Company's
Certificate of Incorporation. In addition, management believes that the
stockholders, other than the holders of Series D Preferred Stock, may be subject
to substantial dilution after June 30, 1998 because the Company may not achieve
certain Medicare Medical Loss Ratio and Medicare Enrollee performance benchmarks
as of June 30, 1998. The Company's Medicare Medical Loss Ratio is obtained by
dividing
9
<PAGE>
DOCTORS HEALTH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Medicare Medical Services expenses (including direct medical expenses, stop loss
insurance and reserves for incurred but not reported expenses) by Medicare
Global Capitation revenue.
CHANGE IN CONTROL OF THE BOARD OF DIRECTORS
The Certificate of Incorporation provides that the Board of Directors
of the Company will be subject to a change in control if the Company (i) fails
to record positive net income for two consecutive fiscal quarters or three out
of five consecutive fiscal quarters and (ii) has a Medicare Medical Loss Ratio
of 90% or more. The Company did not earn positive net income for the quarters
ended December 31, 1997 and March 31, 1998 and the Medicare Medical Loss Ratio
was greater than 90% for those periods.
As a result, on May 14, 1998, the Secretary of the Corporation issued a
written notice to each director of the Company advising them that the Company
failed to meet certain net income and Medicare Medical Loss Ratio benchmarks for
the fiscal quarters ended December 31, 1997 and March 31, 1998. The notice
advised the directors that effective May 14, 1998 each Series D Preferred
Director shall have ten votes with respect to all matters requiring Board of
Directors or Executive Committee approval or action. As a result, the Series D
Preferred Stockholder is able to control a majority of the votes cast at any
meeting of the Board of Directors and Executive Committee and will have the
ability to control the business, policies and affairs of the Company.
The Series D Preferred Directors have not exercised these voting rights
to date, and although the Series D Preferred Directors have not waived these
rights and may exercise them in the future, on April 29, 1998, representatives
of the Series D Preferred Stockholder advised the Board of Directors that the
Series D Preferred Directors do not currently intend to exercise these voting
rights.
CONVERSION RATIO ADJUSTMENT FOR THE SERIES D PREFERRED STOCK
The Certificate of Incorporation provides that the conversion ratio for
converting shares of Series D Preferred Stock to Class C Common Stock will be
subject to downward adjustment in the event that the average Medical Loss Ratio
for the Company's Medicare enrollees is greater than 72.5%, for the year ending
June 30, 1998 and the Company has less than 28,000 Medicare enrollees at June
30, 1998. Management believes the Company will not achieve the Medicare Enrollee
and Medical Loss Ratio performance benchmarks. The adjustment in the conversion
ratio would have the effect of reducing the purchase price of the Series D
Preferred Stock.
As a result, management believes that the effective purchase price of
the Series D Preferred Stock will be subject to adjustment upon the filing of
the Annual Report on Form 10-K of the Company (to be filed with the Commission
in September 1998) and that the adjustment will reduce the purchase price for
the Series D Preferred Stock from $10.00 per share to as low as $5.50 per share.
The Series D Preferred Stockholder was issued 2,000,000 shares of Series D
Preferred Stock on July 15, 1997 based upon the investment of $20 million (to be
adjusted to 4,000,000 pursuant to the two-for-one stock split effected on
September 30, 1997). Based upon the current investment of $20 million (and
excluding stock dividends of 116,643 shares of Series D Preferred Stock issued
through April 1, 1998), the Series D Preferred Stockholder would own, after
taking into account the stock split and conversion ratio adjustment, 7,272,727
shares of Class C Common Stock, representing approximately 39% of the
outstanding capital stock of the Company.
The Series D Preferred Stockholder has agreed to purchase an additional
1,000,000 shares of Series D Preferred Stock (2,000,000 shares as a result of
the stock split) on or before June 30, 1998 at a price of $10.00 per share. If
the Series D Preferred Stockholder completes this purchase (representing a total
investment of $30 million, excluding stock dividends of 158,867 shares of Series
D Preferred Stock issuable through June 30, 1998), the Series D Preferred
Stockholder would own, after taking into account the stock split and conversion
ratio adjustments, 10,909,090 shares of Class C Common Stock. As a result, the
Series D Preferred Stockholder would own approximately 50% of the outstanding
capital stock of the Company.
The adjustments described above would be completed if and when the
holders of Series D Preferred Stock convert such shares to the Company's Class C
Common Stock.
10
<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 care 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 May 1, 1998, the Network, consisting of Doctors Health
Providers and Payor Providers (see definition below), included approximately
10,970 physicians in Maryland, Washington, D.C. and Virginia, including
approximately 2,570 PCPs and 8,400 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").
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.
The Company also 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
11
<PAGE>
DOCTORS HEALTH, INC.
number of PCPs in the Company's Network and increasing the number of networks
the Company manages; (ii) attracting patients to 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 has significantly increased Capitation Revenue, which
increase has been substantially offset by an increase in medical services
expense and general and administrative expenses. During the three months ended
December 31, 1997 and March 31, 1998, the Company earned capitation revenue of
approximately $11,905,000 and $15,267,000, respectively, 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
has increased the number of Medicare enrollees covered by this contract from
approximately 9,900 to 13,500 as of March 31, 1998. Actual capitation revenue
earned pursuant to the above arrangement may vary each quarter due to
fluctuations in the number of Medicare Enrollees and the reimbursement rates
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. During the three months ended March
31, 1998, the Company earned capitation revenue of approximately $7,318,000
under this contract. Actual capitation revenue earned pursuant to the above
arrangement may vary each quarter due to fluctuations in the number of Medicare
Enrollees and the reimbursement rates under the arrangement.
The Company expects to continue expanding the Network with Payor
Providers and Doctors Health 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.
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, the number of Enrollees in benefit plans under Global
Capitation Contracts with the Company and the Medical Services Expense incurred
by the Company. The following tables summarize the Company's history with
respect to PCPs, executed Global Capitation Contracts, enrollees in benefit
plans under Global Capitation Contracts with the Company and Medical Services
Expense:
12
<PAGE>
DOCTORS HEALTH, INC.
<TABLE>
<CAPTION>
June 30, June 30, September 30, December 31, March 31,
1996 1997 1997 1997 1998
------- ------- ------------ ----------- --------
<S><C>
Number of PCPs in the Network (a & b).............................. 59 197 258 323 361
Number of PCPs participating in Global Capitation Contracts (a & b) 45 110 109 219 268
Number of Global Capitation Contracts.............................. 3 3 3 4 5
Number of Global Capitation Contract Patients:
Commercial.....................................................2,039 4,943 5,561 6,097 6,069
Medicare (c)................................................... 491 3,256 3,509 14,264 24,316
</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 2,200
(c) Includes Payor Provider and Doctors Health Provider patients
The following table sets forth for the three months and nine months
ended March 31, 1997 and 1998, 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 Nine Months Nine Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1997 1998 1997 1998
------------ ------------ ----------- -----------
<S><C>
Capitation revenue 46.8% 88.4% 43.9% 81.9%
Net revenue 53.2% 11.6% 56.1% 18.1%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Medical services expense 45.8% 85.7% 45.1% 81.1%
Care center costs 51.2% 11.2% 54.5% 17.5%
General and administrative 47.1% 13.9% 59.7% 18.7%
Depreciation and amortization 7.1% 1.6% 6.6% 2.5%
Interest and other income (1.0)% (1.2)% (1.3)% (1.7)%
Interest expense 3.3% 1.0% 3.5% 1.6%
Income tax expense -- -- -- --
------- ------- ------ -------
Net loss (53.5)% (12.2)% (68.1)% (19.7)%
======= ======= ====== =======
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997.
Total Revenues. The Company's total revenues increased to $31,772,082
for the three months ended March 31, 1998 from $6,762,471 for the three months
ended March 31, 1997. Capitation Revenue increased to $28,096,653 (27,674,967
due to Global Capitation Contracts and $421,686 due to Gatekeeper Capitation
Contracts) or 88.4% of total revenues for the three months ended March 31, 1998,
compared to $3,163,080 ($2,796,098 due to Global Capitated Contracts and
$366,982 due to Gatekeeper Capitation Contracts) or 46.8% 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 6,546 at March 31, 1997 to 30,385 at March 31, 1998.
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.
Medical Services Expense. Medical services expense was $27,223,678 or
85.7% of total revenues for the three months ended March 31, 1998 compared to
$3,096,363 or 45.8% of total revenues for the three months ended March 31,
13
<PAGE>
DOCTORS HEALTH, INC.
1997. This increase resulted from the increase in the number of Enrollees
participating in the Company's Global Capitated Contracts from 6,546 at March
31, 1997 to 30,385 at March 31, 1998. The Company expects these expenses to
increase due to the increase in the number of Enrollees participating in the
Company's Global Capitation Contracts.
Care Center Costs. Care center costs increased to $3,562,581 or 11.2%
of total revenues for the three months ended March 31, 1998 from $3,463,540 or
51.2% of total revenues for the three months ended March 31, 1997. The increase
in the dollar amount of care center costs resulted from the increase in the
number of physicians in Core Medical Groups from 88 to 92. 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 $4,428,664 or 13.9% of total revenues for the three months
ended March 31, 1998 from $3,184,840 or 47.1% of total revenues for the three
months ended March 31, 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. 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 $521,048 or 1.6% of total revenues for the three months
ended March 31, 1998 from $480,473 or 7.1% of total revenues for the three
months ended March 31, 1997. 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
$390,316 or 1.2% of total revenues for the three months ended March 31, 1998
from $65,084 or 1.0% of total revenues for the three months ended March 31,
1997. 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 $327,703 or 1.0% of
total revenues for the three months ended March 31, 1998 from $222,752 or 3.3%
of total revenues for the three months ended March 31, 1997. 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 March
31, 1998 and 1997, the Company did not require a provision for income taxes.
Net Loss. The Company had a net loss of $3,901,276 for the three months
ended March 31, 1998 compared to $3,620,413 for the three months ended March 31,
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 $4,802,072 for the three months ended March 31,
1998 compared to $3,995,368 for the three months ended March 31, 1997.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1998 TO THE NINE MONTHS ENDED
MARCH 31, 1997.
Total Revenues. The Company's total revenues increased to $60,547,988
for the nine months ended March 31, 1998 from $15,149,998 for the nine months
ended March 31, 1997. Capitation Revenue increased to $49,612,951 ($48,631,744
due to Global Capitation Contracts and $981,207 due to Gatekeeper Capitation
Contracts) or 81.9% of total revenues for the nine months ended March 31, 1998,
compared to $6,650,255 ($5,294,940 due to Global Capitated Contracts and
$1,355,315 due to Gatekeeper Capitation Contracts) or 43.9% 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 6,546 at March 31, 1997 to 30,385 at March 31, 1998.
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 Global
Capitation Contracts discussed above.
Medical Services Expense. Medical services expense was $49,088,587 or
81.1% of total revenues for the nine months ended March 31, 1998 compared to
$6,842,259 or 45.1% of total revenues for the nine months ended March 31, 1997.
This increase resulted from the increase in the number of Enrollees
participating in the Company's Global Capitated Contracts from 6,546 at March
31, 1997 to 30,385 at March 31, 1998. 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 Contracts as
discussed above.
14
<PAGE>
DOCTORS HEALTH, INC.
Care Center Costs. Care center costs increased to $10,597,218 or 17.5%
of total revenues for the nine months ended March 31, 1998 from $8,263,302 or
54.5% of total revenues for the nine months ended March 31, 1997. The increase
in the dollar amount of care center costs resulted from the increase in the
number of physicians in Core Medical Groups from 88 to 92. 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 $11,321,564 or 18.7% of total revenue for the nine months
ended March 31, 1998 from $9,039,310 or 59.7% of total revenues for the nine
months ended March 31, 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. 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 $1,547,868 or 2.5% of total revenues for the nine months
ended March 31, 1998 from $993,550 or 6.6% of total revenues for the nine months
ended March 31, 1997. 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
$1,029,374 or 1.7% of total revenues for the nine months ended March 31, 1998
from $202,889 or 1.3% of total revenues for the nine months ended March 31,
1997. 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 $961,719 or 1.6% of
total revenues for the nine months ended March 31, 1998 from $529,696 or 3.5% of
total revenues for the nine months ended March 31, 1997. 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 nine months ended March 31,
1998 and 1997, the Company did not require a provision for income taxes.
Net Loss. The Company had a net loss of $11,939,594 for the nine months
ended March 31, 1998 compared to $10,315,230 for the nine months ended March 31,
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 $14,558,848 for the nine months ended March 31,
1998 compared to $11,241,970 for the nine months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. As of March 31, 1998, the Company had a working capital
deficit of $4,716,124. Until the Company attracts an adequate number of
capitated lives in Global Capitation Contracts and the Company achieves further
reductions in the cost of medical care, the Company expects to incur operating
losses and experience negative operating cash flows. The Company believes that
its cash and cash equivalents of $24,785,635 as of March 31, 1998 and
internally-generated cash will be sufficient to fund the Company's operations
through August 31, 1998. In the event Beacon invests an additional $10,000,000
on or before June 30, 1998, management believes the Company will have sufficient
cash to fund operations through June 30, 1999. In the event Beacon does not
invest an additional $10,000,000, the Company will require additional capital
after August 31, 1998 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 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.
15
<PAGE>
DOCTORS HEALTH, INC.
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 is being 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. Although there can be no assurance that the Company
will receive the additional $10,000,000 investment from Beacon, the Company
believes it has currently satisfied the applicable conditions to such an
investment.
Chase Credit Facility. The Company has established an $11,000,000
credit facility ("Credit Facility") with Chase Manhattan Bank, N.A. ("Chase").
The Credit Facility supports a $5,250,000 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 6.2%. As of May 14, 1998, the remaining amount
available under the Credit Facility is $1,750,000.
HBO & Company Note Payable. On May 14, 1998, the Company repaid the
$2,000,000 note payable to HBO & Company. Pursuant to the Company's note payable
to HBO & Company, the Company agreed to pay interest on the note in the form of
a warrant to purchase shares of Class A Common Stock. As adjusted for the
September 30, 1997 stock split-up, on May 14, 1998, the Company issued HBO &
Company a warrant to purchase 120,000 shares of Class A Common Stock at an
exercise price of $7.50 per share.
Cash Flow. Net cash provided by (used in) operating activities was
$2,107,372 for the three months ended March 31, 1998, compared to $(3,268,464)
in 1997. The cash provided by operating activities for the three months ended
March 31, 1998 resulted primarily from a $11,405,659 increase in accrued and
other liabilities offset by $3,901,276 in net losses and an increase in prepaid
expenses and other receivables of $5,787,888.
Net cash provided by (used in) investing activities was $2,324,937 for
the three months ended March 31, 1998, compared to ($596,553) in 1997. The cash
provided by (used in) investing activities for the three months ended March 31,
1998 was primarily due to the redemption of a $3,000,000 short-term investment
offset by $423,182 of property and equipment purchases and $228,300 of cash for
payments for acquisitions.
Net cash (used in) provided by financing activities was ($221,016) for
the three months ended March 31, 1998, compared to $4,291,801 in 1997.
Net cash (used in) provided by operating activities was $4,123,413 for
the nine months ended March 31, 1998, compared to ($8,560,684) in 1997. The cash
provided by operating activities for the nine months ended March 31, 1998
resulted primarily from (i) a $22,426,193 increase in accrued and other
liabilities and (ii) depreciation and amortization of $1,547,868 offset by (iii)
$11,939,594 in net losses and (iv) a $7,167,755 increase in prepaid expenses and
other receivables.
Net cash used in investing activities was $2,150,417 for the nine
months ended March 31, 1998, compared to $2,163,847 in 1997. The use of cash for
investing activities for the nine months ended March 31, 1998 was primarily from
(i) $1,359,885 of cash for payments for acquisitions and (ii) $745,301 of
property and equipment purchases.
Net cash provided by financing activities was $18,074,811 for the nine
months ended March 31, 1998, compared to $12,615,069 for the nine months ended
March 31, 1997. The cash provided by financing activities for the nine months
ended March 31, 1998 was primarily due to the net proceeds from the issuance of
the Series D Redeemable Convertible Preferred Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
DOCTORS HEALTH, INC.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
Between January 1, 1998 and March 31, 1998, the Registrant issued
19,102 shares of Class B Common Stock in connection with physician affiliation
transactions. The Registrant received assets and contractual services which have
been integrated into the Company's operations.
ITEM 5. OTHER INFORMATION
SUBSEQUENT EVENTS
The Company's Board of Directors is subject to a change in control due
to the Company's failure, as of March 31, 1998, to achieve certain profitability
and Medicare Medical Loss Ratio benchmarks set forth in the Company's
Certificate of Incorporation. In addition, management believes that the
stockholders, other than the holders of Series D Preferred Stock, may be subject
to substantial dilution after June 30, 1998 because the Company may not achieve
certain Medicare Medical Loss Ratio and Medicare Enrollee performance benchmarks
as of June 30, 1998. The Company's Medicare Medical Loss Ratio is obtained by
dividing Medicare Medical Services expenses (including direct medical expenses,
stop loss insurance and reserves for incurred but not reported expenses) by
Medicare Global Capitation revenue.
CHANGE IN CONTROL OF THE BOARD OF DIRECTORS
The Certificate of Incorporation provides that the Board of Directors
of the Company will be subject to a change in control if the Company (i) fails
to record positive net income for two consecutive fiscal quarters or three out
of five consecutive fiscal quarters and (ii) has a Medicare Medical Loss Ratio
of 90% or more. The Company did not earn positive net income for the quarters
ended December 31, 1997 and March 31, 1998 and the Medicare Medical Loss Ratio
was greater than 90% for those periods.
As a result, on May 14, 1998, the Secretary of the Corporation issued a
written notice to each director of the Company advising them that the Company
failed to meet certain net income and Medicare Medical Loss Ratio benchmarks for
the fiscal quarters ended December 31, 1997 and March 31, 1998. The notice
advised the directors that effective May 14, 1998 each Series D Preferred
Director shall have ten votes with respect to all matters requiring Board of
Directors or Executive Committee approval or action. As a result, the Series D
Preferred Stockholder is able to control a majority of the votes cast at any
meeting of the Board of Directors and Executive Committee and will have the
ability to control the business, policies and affairs of the Company.
The Series D Preferred Directors have not exercised these voting rights
to date, and although the Series D Preferred Directors have not waived these
rights and may exercise them in the future, on April 29, 1998, representatives
of the Series D Preferred Stockholder advised the Board of Directors that the
Series D Preferred Directors do not currently intend to exercise these voting
rights.
CONVERSION RATIO ADJUSTMENT FOR THE SERIES D PREFERRED STOCK
The Certificate of Incorporation provides that the conversion ratio for
converting shares of Series D Preferred Stock to Class C Common Stock will be
subject to downward adjustment in the event that the average Medical Loss Ratio
for the Company's Medicare enrollees is greater than 72.5%, for the year ending
June 30, 1998 and the Company has less than 28,000 Medicare enrollees at June
30, 1998. Management believes the Company will not achieve the Medicare Enrollee
and Medical Loss Ratio performance benchmarks. The adjustment in the conversion
ratio would have the effect of reducing the purchase price of the Series D
Preferred Stock.
17
<PAGE>
DOCTORS HEALTH, INC.
As a result, management believes that the effective purchase price of
the Series D Preferred Stock will be subject to adjustment upon the filing of
the Annual Report on Form 10-K of the Company (to be filed with the Commission
in September 1998) and that the adjustment will reduce the purchase price for
the Series D Preferred Stock from $10.00 per share to as low as $5.50 per share.
The Series D Preferred Stockholder was issued 2,000,000 shares of Series D
Preferred Stock on July 15, 1997 based upon the investment of $20 million (to be
adjusted to 4,000,000 pursuant to the two-for-one stock split effected on
September 30, 1997). Based upon the current investment of $20 million (and
excluding stock dividends of 116,643 shares of Series D Preferred Stock issued
through April 1, 1998), the Series D Preferred Stockholder would own, after
taking into account the stock split and conversion ratio adjustment, 7,272,727
shares of Class C Common Stock, representing approximately 39% of the
outstanding capital stock of the Company.
The Series D Preferred Stockholder has agreed to purchase an additional
1,000,000 shares of Series D Preferred Stock (2,000,000 shares as a result of
the stock split) on or before June 30, 1998 at a price of $10.00 per share. If
the Series D Preferred Stockholder completes this purchase (representing a total
investment of $30 million, excluding stock dividends of 158,867 shares of Series
D Preferred Stock issuable through June 30, 1998), the Series D Preferred
Stockholder would own, after taking into account the stock split and conversion
ratio adjustments, 10,909,090 shares of Class C Common Stock. As a result, the
Series D Preferred Stockholder would own approximately 50% of the outstanding
capital stock of the Company.
The adjustments described above would be completed if and when the
holders of Series D Preferred Sock convert such shares to the Company's Class C
Common Stock.
ELECTION OF BOARD MEMBER
Effective April 1, 1998, Paul A. Serini resigned from the Board of
Directors as a Class A Director. On April 29, 1998, the remaining Class A
Directors elected Norman A. Marcus, M.D., as a Class A Director.
CONSULTING AGREEMENT WITH DR. SCOTT RIFKIN
Dr. Scott Rifkin has resigned as the Company's Executive Vice President
of Development effective as of May 14, 1998 in order to pursue other business
opportunities. Dr. Rifkin has entered into a consulting agreement with the
Company dated May 14, 1998 pursuant to which he will assist the Company in
certain development and other activities until May 14, 2001. The Consulting
Agreement provides that the Company will pay Dr. Rifkin a consulting fee of
$120,000 per year during the first year of the Consulting Agreement $100,000 per
year during the second and third years of the Consulting Agreement. Dr. Rifkin
will continue to serve as Chairman of the Company's Board of Directors, and a
member of the Executive Committee and other committees of the Board until the
1998 Annual Meeting of the Stockholders and Board of Directors, at which time he
intends to stand for reelection to the Board but does not intend to stand for
reelection as Chairman of the Board. He will remain subject to the
non-competition and confidentiality provisions of his Employment Agreement, as
amended on July 15, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Consulting Agreement by and between the Company and Dr. Scott
Rifkin dated May 14, 1998.
11 - Statement regarding computation of per share earnings
27 - Financial Data Schedule
(b) Reports on Form 8-K.
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DOCTORS HEALTH, INC.
By: /s/ Stewart B. Gold
_____________________________________
Stewart B. Gold
President and Chief Executive Officer
19
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as
of the 14th day of May, 1998, by and between DOCTORS HEALTH, INC. (the
"Company") and SCOTT M. RIFKIN (the "Consultant").
W I T N E S S E T H:
WHEREAS, the Consultant was previously employed by the Company as its
Executive Vice President and Director of Development and serves as the Chairman
of its Board and the Consultant desires to pursue other interests as
President/CEO of Ask-A-Doctor, Inc., a Delaware corporation; and
WHEREAS, the Consultant desires to terminate his employment
relationship with the Company and to assume a consultant relationship; and
WHEREAS, the Company desires to obtain the benefits of the Consultant's
expertise and knowledge as a consultant and the Consultant desires to provide
consulting services to the Company on the terms provided herein; and
WHEREAS, the Consultant has had access to information considered to be
proprietary and confidential to the Company and the Company and the Consultant
contemplate that information considered to be proprietary and confidential to
the Company may be given to or discussed with the Consultant during the course
of this Agreement, and the Company and the Consultant agree that the
misappropriation of such information related to the Company would damage the
Company; and
WHEREAS, the Company and the Consultant desire to amend the restrictive
covenants set forth in paragraph 5 of the Amended and Restated Employment
Agreement between the Company and the Consultant last amended on July 15, 1997
(the "restrictive covenants"), to permit the Consultant to engage in employment
as President/CEO of Ask-A-Doctor, Inc., but to retain and expand said
Restrictive Covenants.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements contained herein, the parties hereto agree as follows:
1. Services and Fees. The Consultant agrees to provide assistance,
advice and consulting services to the Company on matters relevant to the
Company's business as reasonably agreed to by the Company and the Consultant
from time to time, including but not limited to, areas of public, government,
and community relations, and shall be available as requested to assist in
physician recruiting, mergers and acquisitions, and as provided for herein and
requested by the Company's Chief Executive Officer.
<PAGE>
Beginning with the first business day immediately following the
execution of this Agreement, and for a period to and including October 7, 1998,
the Consultant shall be paid at the annualized rate of $120,000 payable
bi-weekly. Beginning after October 7, 1998, the Consultant shall be compensated
at the annualized rate of $100,000 payable bi-weekly.
2. Relinquishment of Position. The Consultant shall retain his title as
Chairman of the Board to the Company until October 7, 1998, and, on that date,
the Consultant shall cease to hold that position. Following October 7, 1998, the
Consultant may seek election as Chairman of the Board but shall not otherwise be
entitled to hold such position. The Company shall have the right to use the
Consultant's name, in his capacity as Chairman of the Board, in connection with
its business through October, 1998; and in his capacity as a consultant to the
Company during the term of this Agreement.
3. Relinquishment of Claims By execution of this Agreement, the Company
hereby relinquishes any and all rights, claims, or title, whether known or
unknown and whether now in existence or arising in the future, to the
Consultant's ideas, Inventions and Works (as defined in Section 5 of that
certain Amended and Restated Employment Agreement dated July 15, 1997 [the
"Amended and Restated Employment Agreement"] in connection with Ask-A-Doctor,
Inc., as that business has been described to the Company.
The Company's approval of the Consultant's employment with Ask-A-Doc is based
upon the representations of the Consultant to the Executive Committee of the
Company on March 3, 1998 and the description of the business of Ask-A-Doc as set
forth in the Ask-A-Doc private placement memorandum dated March 6, 1998 (the
"Ask-A-Doc Memorandum"). Upon written notice to the Consultant, the approval
granted hereby shall be void and of no further force and effect whatsoever if
Ask-A-Doc engages in any business other than specifically identified and
described in the Ask-A-Doc Memorandum.
4. Office Use and Administrative Assistance. The Company shall provide
Consultant with continual use of his present office through October 7, 1998,
after which time the Company reserves the right to relocate the Consultant to
another appropriate office located within the Company's Corporate Offices for
the remaining term of this Agreement. The Company shall provide administrative
support for the Consultant through the term of this Agreement through the
Consultant's present Personal Assistant or her successor, but only when and to
the extent that the Consultant is conducting the Company's business. The
Consultant shall have the right to conduct non-Company business from his Company
office but may not use any Company resources while conducting such outside
business.
5. Term. The term of the Consultant's engagement under this Agreement
(the "term") shall commence on the first business day immediately following the
execution of this Agreement and shall continue for a period of three (3) years
at which point this Agreement shall fully expire, unless sooner terminated as
herein provided.
-2-
<PAGE>
6. Monthly Reports. The Consultant agrees to provide monthly reports no
later than the 10th of each month to the Company's President and Chief Executive
Officer concerning the work and the status of work which is being performed by
the Consultant for the Company.
7. Termination of Employment Agreement. The Consultant and the Company
agree that this Agreement replaces the Amended and Restated Employment Agreement
last dated July 15, 1997, between the parties, except as stated in Paragraphs 9
and 11 herein, and the parties agree that no payments are due to the Consultant
except as stated herein. The parties agree that the termination of employment of
the Consultant is not a constructive termination pursuant to Section 4.4 of the
Amended and Restated Employment Agreement dated July 15, 1997. The parties agree
that the provisions of the Shareholders Agreement and voting Trust between the
Company and the Consultant dated July 15, 1997 regarding termination of
employment (Sections 5(c)(i) or 5(c)(iii)) do not apply to the transactions
contemplated by this Agreement.
8. Other Employment. The parties agree that the Consultant may enter
into the employment of Ask-A-Doctor, Inc., a Delaware corporation, and may
conduct business on behalf of Ask-A-Doctor, Inc. except as inconsistent with the
terms of this Agreement, subject to the Company's review of any employment or
other agreement between Ask-A-Doc and the Consultant. The Consultant agrees that
any employment arrangement or agreement, formal or informal, written or
unwritten, between the Consultant and Ask-A-Doctor, Inc., or any other business
which is not the Company, shall provide specifically that the Consultant shall
be able to continue to provide consulting services to the Company. The
Consultant shall not enter into any other employment arrangement or agreement,
formal or informal, written or unwritten, with Ask-A-Doctor, Inc. or any other
business which is not the Company, so long as the Consultant continues to
consult for the Company in accordance with the terms of this Agreement without
the Company's prior written approval. Such prior written approval by the Company
shall not be unreasonably withheld.
9. Restrictive Covenants. The Consultant agrees that the terms
contained in Paragraph 5 of the aforementioned Amended and Restated Employment
Agreement, entitled Certain Covenants of the Physician Executive, including all
of its parts and subparts, shall continue in full force and effect during the
term of this Agreement and thereafter in accordance with said terms, except as
otherwise provided herein. In addition, the Consultant agrees that neither he
nor any person, corporation or business entity to which or with which he is
affiliated or is operating through or by him, shall provide the same services
that the Company provides in its marketplace. For purposes of this paragraph
"marketplace" shall include the States of Maryland, Delaware, Virginia, and the
District of Columbia. The Consultant agrees that he and any other person,
corporation or business entity to which or with which he is affiliated shall
make referrals, as contemplated in the Ask-A-Doctor Memorandum exclusively
through the Company and/or the Company's partners (including entities with which
the Company has contractual relationships to provide such referrals).
The Company represents that the Consultant's involvement and
participation as an officer, director and/or shareholder of Ask-A-Doctor, Inc.
in accordance with the terms of this Agreement and as presented in the Ask-A-Doc
Memorandum to the Executive Committee: (1) is
-3-
<PAGE>
and shall not be construed as a violation by the Consultant of Section 5 of the
Amended and Restated Employment Agreement; and (2) is not and shall not be
deemed as engaging in a business that competes or interferes with the business
of the Company.
10. Restrictions. The parties agree that the restrictions and
agreements contained herein are reasonable, are the product of an arms-length
negotiation and are necessary for the Company to protect its goodwill and other
interests.
11. Dispute Resolution. The provisions of Paragraph 6, Dispute
Resolution, contained in the Amended and Restated Employment Agreement last
dated July 15, 1997, shall be, and are, incorporated herein.
12. Termination.
12.01 Grounds of Termination. This Agreement shall terminate in the
event that at any time during such Initial Term or any Additional Term:
(a) Consultant shall die, or
(b) Consultant has become disabled, or
(c) Consultant has breached this Agreement in any material
respect, which breach is not cured by Consultant or is
not capable of being cured by Consultant within thirty
(30) days after written notice of such breach is given to
Consultant,
(d) Consultant engages in willful and material misconduct,
including willful and material failure to perform his
duties hereunder, or
(e) The representations of the Consultant to the Company, its
officers and directors have been untrue or incorrect on
and as of the effective date of this Agreement.
12.02 "Disability" Defined. Consultant shall be deemed disabled,
for the purpose of this Agreement, in the event that Consultant shall fail,
because of illness or incapacity, to render services of the character
contemplated by this Agreement over a period of three (3) consecutive months.
The existence or nonexistence of grounds for termination of this Agreement for
any reason under subparagraph 8.01(b) will be determined in good faith by the
Board of Directors after notice in writing given to Consultant at least thirty
(30) days prior to such determination. During such thirty (30) day period,
Consultant shall be permitted to make a presentation to the Board of Directors
for its consideration.
12.03 Surrender of Records and Property. Upon termination of this
Agreement, Consultant shall deliver promptly to the Company all records,
manuals, books, blank forms, documents, letters, memoranda, notes, notebooks,
reports, data, tables, calculations or copies
-4-
<PAGE>
thereof, which are the property of the Company or which relate to the business,
products, practices or techniques of the Company, and all other property, and
Confidential Information of the Company, including, but not limited to, all
documents which in whole or in part contain any Confidential Information of the
Company, which in any of these cases are in his possession or under his control.
Any and all personal property, inventions, data, written
materials, findings, records and documents, information and Confidential
Information made or obtained by the Consultant during his engagement by the
Company concerning the business or affairs of the Company are and will remain
property of the Company, and upon termination of this Agreement or upon request
of the Company during the term of this Agreement, shall be promptly delivered by
the Consultant to the Company.
13. Stock Ownership and Stock Options.
(A) The Consultant currently is the record owner of 200,000 shares of
Class A Common Stock of the Company, which in no way will be affected by this
Consulting Agreement. Based upon a stock option agreement between the Company
and the Consultant dated August 10, 1995, the Consultant has been issued an
option to purchase and additional 200,000 shares of Class A Common Stock of the
Company at the aggregate exercise price of Twelve Dollars and Fifty Cents
($12.50), which option has fully vested at the time of execution of this
Agreement. In addition to the above-mentioned stock ownership and option rights,
based upon various additional agreements between the Company and the Consultant
(which agreements are attached hereto and incorporated herein) dated November
17, 1996 and July 15, 1997, the Consultant has been issued options to purchase
additional shares of Class A Common Stock of the Company, which options are not
vested at the time of execution of this Agreement and vary in aggregate exercise
price.
(B) The parties agree that the stock ownership and options rights
possessed by the Consultant are not subject to any buy-back or other
restrictions by the Company other than the transfer restrictions and other
protection set forth in the Company's Charter, By-laws and Shareholder's
Agreement, or as required by law.
(C) The parties agree that the Consultant's options to purchase shares
of additional Class A Common Stock of the company and other rights contained in
the stock option agreements: (1) shall not terminate or otherwise be affected by
the termination of Consultant's employment with the Company and execution of
this Agreement; (2) shall continue to vest during the Term of this Agreement;
and (3) that options granted pursuant to the November 7, 1996 and July 15, 1997
stock option agreements may be exercised at any time, to the extent then vested,
during the Term of this Agreement. Amendments to the November 7, 1996 and July
15, 1997 stock option agreements which permit the Consultant to exercise the
options during the Term of this Agreement on the same terms and conditions as
set forth in the stock option agreements are attached hereto and incorporated
herein.
-5-
<PAGE>
(D) To the extent allowable under the Company's Charter and Bylaws, the
Consultant shall be eligible to receive stock or stock options of the Company
through employee stock/option program or bonus pool administered or funded by
the Company. Such participation shall be in the sole discretion of the Company's
management.
(E) To the extent that the number of shares, or the class or
designation of the stock, is changed as the result of a reclassification, stock
split, stock dividend or other similar event, the number and/or class of shares
issuable under the options shall be adjusted accordingly.
14. Assignability. This Agreement may not be assigned by the
Consultant.
15. Notices. Any notices, requests, demands or other communications
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Consultant at the last address that
Consultant has filed in writing with the Company or, in the case of the Company,
at its principle executive offices.
16. Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, written or oral, with respect thereto,
including the Prior Agreement.
17. Waivers and Amendments. This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the Consultant and a duly
authorized officer of the Company (each, in such capacity, a party) or, in the
case of a waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any right,
power or privilege hereunder, nor any single or partial exercise of any right,
power or privilege hereunder, preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
18. Governing Law. This Agreement has been negotiated and is to be
performed in the State of Maryland, and shall be governed and construed in
accordance with the laws of the State of Maryland applicable to agreements made
and to be performed entirely within such State.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
20. Confidentiality. Neither party shall disclose the contents of this
Agreement or of any other agreement they have simultaneously entered into to any
person, firm or entity, except the agents or representatives of the parties, or
except as required by law.
21. Word Forms. Whenever used herein, the singular shall include the
plural and the plural shall include the singular. The use of any gender, tense
or conjugation shall include all genders, tenses and conjugations.
-6-
<PAGE>
22. Headings. The Section headings have been included for convenience
only, are not part of this Agreement, and are not to be used to interpret any
provision hereof.
23. Binding Effect and Benefit. This Agreement shall be binding upon
and inure to the benefit of the parties, their successors, heirs, personal
representatives and other legal representatives. This Agreement may be assigned
by the Company to any entity which buys substantially all of the Company's
assets. However, the Physician Executive may not assign this Agreement without
the prior written consent of the Company.
24. Separability. The covenants contained in this Agreement are
separable, and if any court of competent jurisdiction declares any of them to be
invalid or unenforceable, that declaration of invalidity or unenforceability
shall not affect the validity or enforceability of any of the other covenants,
each of which shall remain in full force and effect.
25. Consent or Approval. Whenever under the terms of this Agreement the
approval or consent of the Company is required or the Company must make any
determination, the Company, unless this Agreement specifically requires
otherwise, may not unreasonably withhold or delay that consent or approval.
IN WITNESS WHEREOF, the parties, intending to be legally bound, have
executed this Agreement or caused it to be executed and attested by their duly
authorized officers as a document under seal on the day and year first above
written.
ATTEST/WITNESS: DOCTORS HEALTH, INC.
__________________________ By:_________________________________ (SEAL)
Stewart B. Gold, President
SCOTT M. RIFKIN
Consultant
__________________________ By:_________________________________ (SEAL)
Scott M. Rifkin
-7-
COMPUTATION OF (LOSS) EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
1997 1998 1997 1998
<S><C>
Weighted average of common shares outstanding during the period
(adjusted to reflect two-for-one stock split) 6,823,602 6,976,519 6,626,338 6,909,915
Net (loss) earnings $(3,620,413) $(3,901,276) $(10,315,230) $(11,939,594)
Dividends and accretion on Series A, B, C and D Redeemable
Convertible Preferred Stock 374,955 900,796 926,740 2,619,254
Net (loss) earnings as adjusted (3,995,368) (4,802,072) (11,241,970) (14,558,848)
Net (loss) earnings per common share $(0.58) $(0.69) $(1.70) $(2.10)
</TABLE>
All outstanding options and warrants as of March 31, 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.
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001010005
<NAME> Doctors Health, Inc. 10-Q
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,785,635
<SECURITIES> 0
<RECEIVABLES> 12,124,485
<ALLOWANCES> 193,706
<INVENTORY> 0
<CURRENT-ASSETS> 38,736,836
<PP&E> 5,943,086
<DEPRECIATION> 1,695,624
<TOTAL-ASSETS> 51,251,088
<CURRENT-LIABILITIES> 43,452,960
<BONDS> 0
39,895,228
0
<COMMON> 70,048
<OTHER-SE> (34,447,684)
<TOTAL-LIABILITY-AND-EQUITY> 51,251,088
<SALES> 60,547,988
<TOTAL-REVENUES> 61,577,362
<CGS> 0
<TOTAL-COSTS> 59,685,805
<OTHER-EXPENSES> 12,869,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 961,719
<INCOME-PRETAX> (11,939,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,939,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,939,594)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
