<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1996.
REGISTRATION NO. 333-13535
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
POST EFFECTIVE AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8049 33-0604264
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
2878 CAMINO DEL RIO SOUTH
SUITE 301
SAN DIEGO, CALIFORNIA 92108
(619) 295-7005
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DR. SOL LIZERBRAM
CHAIRMAN
2878 CAMINO DEL RIO SOUTH
SUITE 301
SAN DIEGO, CALIFORNIA 92108
(619) 295-7005
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C> <C>
JAMES A. LEBOVITZ, ESQ. JUSTIN P. KLEIN, ESQ. CHARLES J. RENNERT, ESQ.
SENIOR VICE PRESIDENT, BALLARD SPAHR ANDREWS & INGERSOLL BERMAN WOLFE & RENNERT
GENERAL COUNSEL AND SECRETARY 1735 MARKET STREET, 51ST FLOOR INTERNATIONAL PLACE, 35TH FLOOR
FPA MEDICAL MANAGEMENT, INC. PHILADELPHIA, PENNSYLVANIA 19103-7599 100 S.E. SECOND STREET
2878 CAMINO DEL RIO SOUTH (215) 665-8500 MIAMI, FLORIDA 33131-2130
SUITE 301 (305) 577-4177
SAN DIEGO, CALIFORNIA 92108
(619) 295-7005
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger (the "Merger") of Sterling Acquisition
Corporation, a wholly-owned subsidiary of FPA Medical Management, Inc. into
Sterling Healthcare Group, Inc. as described in the Agreement and Plan of
Merger, dated as of May 19, 1996 (the "Merger Agreement"), attached as
Appendix I to the Proxy Statement/Prospectus forming a part of this
Registration Statement.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and are in compliance with
General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
FPA MEDICAL MANAGEMENT, INC.
2878 CAMINO DEL RIO SOUTH
SUITE 301
SAN DIEGO, CALIFORNIA 92108
October 4, 1996
TO OUR STOCKHOLDERS:
You are cordially invited to attend the Special Meeting of Stockholders of
FPA Medical Management, Inc. ("FPA") to be held Thursday, October 31, 1996 at
9:00 a.m. local time at San Diego Marriott Mission Valley, 8757 Rio San Diego
Drive, San Diego, California 92105 (the "FPA Special Meeting").
At the FPA Special Meeting, stockholders will be asked to consider and vote
upon a proposal to adopt an Agreement and Plan of Merger (the "Merger
Agreement") between FPA, Sterling Acquisition Corporation ("Merger Sub"), a
wholly-owned subsidiary of FPA, and Sterling Healthcare Group, Inc.
("Sterling"). The Merger Agreement provides, among other things, for the
merger of Merger Sub with and into Sterling (the "Merger") pursuant to which
Sterling will become a wholly-owned subsidiary of FPA and each outstanding
share of Sterling common stock, par value $.0001 per share ("Sterling Common
Stock") will be converted into 1.4 (the "Exchange Ratio") shares of FPA common
stock, par value $.002 per share ("FPA Common Stock"), subject to certain
potential adjustments. Based upon the 8,515,017 shares of Sterling Common
Stock outstanding as of September 30, 1996, Sterling's shareholders will be
issued approximately 7,429,000 shares of FPA, representing approximately 37%
of the total issued and outstanding shares of FPA after the Merger. The
Exchange Ratio may be adjusted if the average trading price of FPA Common
Stock is above $16.43 or below $14.87 during a specified period prior to the
closing date of the Merger. Under certain circumstances, the Merger Agreement
may be terminated if the average trading price of FPA Common Stock is above
$18.00 or below $13.30 during a specified period prior to the closing date of
the Merger. The adjustment, if any, is described more fully in the
accompanying Proxy Statement/Prospectus.
As previously announced, FPA, FPA Medical Management of California, Inc., a
wholly-owned subsidiary of FPA ("FPA California"), FPA Independent Practice
Association ("FPA IPA"), Jonathan H. Scheff, M.D. and Foundation Health
Corporation ("Foundation") have entered into a Stock and Note Purchase
Agreement (the "Foundation Agreement"). The Foundation Agreement provides,
among other things, for FPA California to acquire all of the outstanding stock
of Foundation Health Medical Services ("FHMS") and for FPA IPA to acquire all
of the outstanding stock of FHMG/TDMC Medical Group, a professional
corporation ("Holding Company") (the "Foundation Transaction"). FHMS provides
facilities management, non-physician healthcare professionals and other
administrative and management services to Holding Company and its
subsidiaries. Holding Company holds all of the outstanding stock of Foundation
Health Medical Group, Inc. and Thomas-Davis Medical Centers, P.C. As
consideration for the acquisitions, FPA is expected to pay $2 million in cash,
and to issue $75 million of FPA Common Stock and approximately $126 million in
promissory notes. Under certain circumstances, the number of shares of FPA
Common Stock to be issued pursuant to the Foundation Agreement may be
adjusted, or the Foundation Agreement may be terminated by FPA if the average
trading price of FPA Common Stock during a specified period prior to the
closing date of the Foundation Transaction is below $13.60 per share. The
adjustment, if any, is described more fully in the accompanying Proxy
Statement/Prospectus. FPA is not seeking stockholder approval of the
Foundation Transaction at the FPA Special Meeting.
The Merger is not conditioned upon the consummation of the Foundation
Transaction and the Foundation Transaction is not conditioned upon the
consummation of the Merger.
At the FPA Special Meeting, stockholders will also be asked to approve
amendments to the FPA Medical Management, Inc. Omnibus Stock Option Plan (the
"FPA Plan"), which, if approved, will only become effective upon consummation
of the Merger or the Foundation Transaction. The amendments would, upon
becoming effective, (i) increase the total number of shares of FPA Common
Stock issuable upon exercise of options granted
<PAGE>
under such plan from 2,500,000 to 4,000,000 if only the Merger is consummated,
3,500,000 if only the Foundation Transaction is consummated, and 5,000,000 if
both the Merger and the Foundation Transaction are consummated and (ii) limit
the number of shares of FPA Common Stock for which options may be granted
under the FPA Plan to any person during any calendar year to 750,000.
Finally, FPA stockholders will be asked to approve the adjournment or
postponement of the FPA Special Meeting in the event that such adjournment or
postponement is necessary in order to solicit additional votes for the
foregoing proposals.
Details of the foregoing proposals (the "FPA Proposals") and FPA Special
Meeting are contained in the attached Notice of Special Meeting and Proxy
Statement/Prospectus. Your votes on the FPA Proposals are important to FPA, so
please read this information carefully.
The Board of Directors of FPA believes that the FPA Proposals are in the
best interests of FPA and its stockholders and, accordingly, has adopted such
proposals. The Board of Directors recommends that you vote FOR each of the FPA
Proposals.
All stockholders are invited to attend the FPA Special Meeting. To assure
your representation at the FPA Special Meeting, please complete, sign, date
and return the accompanying proxy in the enclosed postage prepaid envelope. If
you are able to attend the FPA Special Meeting, you may, if you wish, vote
your shares in person.
Sincerely yours,
Dr. Sol Lizerbram
Chairman
<PAGE>
STERLING HEALTHCARE GROUP, INC.
6855 SOUTH RED ROAD, SUITE 400
CORAL GABLES, FLORIDA 33143
October 4, 1996
TO OUR SHAREHOLDERS:
You are cordially invited to attend the Special Meeting of Shareholders of
Sterling Healthcare Group, Inc. ("Sterling") to be held Thursday, October 31,
1996 at 9:00 a.m. local time at the Miami Airport Hilton located at 5101 Blue
Lagoon Drive, Miami, Florida 33126 (the "Sterling Special Meeting").
At the Sterling Special Meeting, shareholders will be asked to consider and
vote upon a proposal to adopt an Agreement and Plan of Merger (the "Merger
Agreement") between FPA Medical Management, Inc. ("FPA"), Sterling Acquisition
Corporation ("Merger Sub"), a wholly-owned subsidiary of FPA, and Sterling.
The Merger Agreement provides, among other things, for the merger of Merger
Sub with and into Sterling (the "Merger") pursuant to which Sterling will
become a wholly-owned subsidiary of FPA and each outstanding share of Sterling
common stock par value $.001 per share ("Sterling Common Stock") will be
converted into 1.4 (the "Exchange Ratio") shares of FPA common stock par value
$.002 per share ("FPA Common Stock"), subject to certain potential
adjustments. Based upon the 8,515,017 shares of Sterling Common Stock
outstanding as of September 30, 1996, Sterling's shareholders will be issued
approximately 7,429,000 shares of FPA, representing approximately 37% of the
total issued and outstanding shares of FPA after the Merger. The Exchange
Ratio may be adjusted if the average trading price of FPA Common Stock is
above $16.43 or below $14.87 during a specified period prior to the closing
date of the Merger. Under certain circumstances, the Merger Agreement may be
terminated if the average trading price of FPA Common Stock is above $18.00 or
below $13.30 during a specified period prior to the closing date of the
Merger. The adjustment, if any, is described more fully in the accompanying
Proxy Statement/Prospectus.
Finally, Sterling shareholders will be asked to approve the adjournment or
postponement of the Sterling Special Meeting in the event that such
adjournment or postponement is necessary in order to solicit additional votes
for the foregoing proposal.
Details of the foregoing proposals and Sterling Special Meeting are
contained in the attached Notice of Special Meeting and Proxy
Statement/Prospectus. Your vote on the Merger Agreement is important to
Sterling, so please read this information carefully.
The Board of Directors of Sterling believes that the Merger is in the best
interests of Sterling and its shareholders and, accordingly, has unanimously
approved the Merger. The Board of Directors recommends that you vote FOR the
Merger. In addition, the Board of Directors of Sterling has obtained the
written opinion dated the date of the Proxy Statement/Prospectus of Smith
Barney Inc., Sterling's financial advisor, to the effect that, as of such date
and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair, from a financial point of view, to the holders of
Sterling Common Stock.
All shareholders are invited to attend the Sterling Special Meeting. To
assure your representation at the Sterling Special Meeting, please complete,
sign, date and return the accompanying proxy in the enclosed postage prepaid
envelope. If you are able to attend the Sterling Special Meeting, you may, if
you wish, vote your shares in person.
Sincerely yours,
Stephen J. Dresnick, M.D.
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
FPA MEDICAL MANAGEMENT, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 31, 1996
To the Stockholders of FPA Medical Management, Inc.:
A Special Meeting of FPA Medical Management, Inc. ("FPA") will be held
Thursday, October 31, 1996 at 9:00 a.m. local time at San Diego Marriott
Mission Valley, 8757 Rio San Diego Drive, San Diego, California 92108 (the
"FPA Special Meeting") for the following purposes:
1. To consider and vote upon a proposal to adopt an Agreement and Plan of
Merger (the "Merger Agreement") between FPA, Sterling Acquisition
Corporation ("Merger Sub"), a wholly-owned subsidiary of FPA, and Sterling
Healthcare Group, Inc. ("Sterling"). The Merger Agreement provides, among
other things, for the merger of Merger Sub with and into Sterling (the
"Merger") pursuant to which Sterling will become a wholly-owned subsidiary
of FPA and each outstanding share of Sterling common stock, par value
$.0001 per share ("Sterling Common Stock") will be converted into 1.4 (the
"Exchange Ratio") shares of FPA common stock, par value $.002 per share
("FPA Common Stock"), subject to certain potential adjustments. Based upon
the 8,515,017 shares of Sterling Common Stock outstanding as of
September 30, 1996, Sterling's shareholders will be issued approximately
7,429,000 shares of FPA, representing approximately 37% of the total issued
and outstanding shares of FPA Common Stock after the Merger. The Exchange
Ratio may be adjusted if the average trading price of FPA Common Stock is
above $16.43 or below $14.87 during a specified period prior to the closing
date of the Merger. Under certain circumstances, the Merger Agreement may
be terminated if the average trading price of FPA Common Stock is above
$18.00 or below $13.30 during a specified period prior to the closing date
of the Merger. The adjustment, if any, is described more fully in the
accompanying Proxy Statement/Prospectus.
The Merger is not conditioned upon the consummation of the transaction
(the "Foundation Transaction") set forth in the Stock and Note Purchase
Agreement between FPA, FPA Medical Management of California, Inc., a
wholly-owned subsidiary of FPA, FPA Independent Practice Association,
Jonathan H. Scheff, M.D. and Foundation Health Corporation and the
Foundation Transaction is not conditioned upon the consummation of the
Merger.
2. To approve amendments to the FPA Medical Management, Inc. Omnibus
Stock Option Plan (the "FPA Plan"), which, if approved, will only become
effective upon consummation of the Merger or the Foundation Transaction.
The amendment would, upon becoming effective, (i) increase the total number
of shares of FPA Common Stock issuable upon exercise of options granted
under such plan from 2,500,000 to 4,000,000 if only the Merger is
consummated, 3,500,000 if only the Foundation Transaction is consummated,
and 5,000,000 if both the Merger and the Foundation Transaction are
consummated, and (ii) limit the number of shares of FPA Common Stock for
which options may be granted under the FPA Plan to any person during any
calendar year to 750,000.
3. To approve the adjournment or postponement of the FPA Special Meeting
in the event that such adjournment or postponement is necessary in order to
solicit additional votes for the foregoing proposals.
4. To vote on such other business as may properly come before the FPA
Special Meeting.
The foregoing proposals are described in the Proxy Statement/Prospectus
accompanying this Notice.
UNLESS PROPOSAL 1 IS APPROVED BY THE REQUISITE VOTE OF FPA STOCKHOLDERS, AND
UNLESS PROPOSAL 2 IS APPROVED BY THE REQUISITE VOTE OF FPA STOCKHOLDERS OR
STERLING WAIVES CERTAIN REQUIREMENTS WITH RESPECT TO THE STOCK OPTIONS TO BE
GRANTED IN CONNECTION WITH THE MERGER, THE MERGER WILL NOT BE CONSUMMATED.
<PAGE>
Stockholders of record at the close of business on September 25, 1996 are
entitled to receive notice of, and to vote at, the FPA Special Meeting and any
adjournment thereof.
It is important that your shares be represented at the FPA Special Meeting.
Whether or not you plan to attend the FPA Special Meeting, please complete,
sign, date and promptly mail the enclosed proxy in the envelope provided.
THE BOARD OF DIRECTORS OF FPA RECOMMENDS THAT ITS STOCKHOLDERS VOTE FOR EACH
OF THE PROPOSALS DESCRIBED ABOVE. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY
RETURN YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE EVEN IF YOU ARE
PLANNING TO ATTEND THE SPECIAL MEETING.
By Order of the Board of Directors
James A. Lebovitz
Secretary
San Diego, California
October 4, 1996
<PAGE>
STERLING HEALTHCARE GROUP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 31, 1996
To the Shareholders of Sterling Healthcare Group, Inc.:
A Special Meeting of Shareholders of Sterling Healthcare Group, Inc.
("Sterling") will be held Thursday, October 31, 1996 at 9:00 a.m. local time
at the Miami Airport Hilton, located at 5101 Blue Lagoon Drive, Miami, Florida
33126 (the "Sterling Special Meeting") for the following purpose:
1. To consider and vote upon a proposal to adopt an Agreement and Plan of
Merger (the "Merger Agreement") between FPA Medical Management, Inc. ("FPA"),
Sterling Acquisition Corporation ("Merger Sub"), a wholly-owned subsidiary of
FPA, and Sterling. The Merger Agreement provides, among other things, for the
merger of Merger Sub with and into Sterling (the "Merger") pursuant to which
Sterling will become a wholly-owned subsidiary of FPA and each outstanding
share of Sterling common stock, par value $.0001 per share ("Sterling Common
Stock") will be converted into 1.4 (the "Exchange Ratio") shares of FPA common
stock par value $.002 ("FPA Common Stock"), subject to certain potential
adjustments. Based upon the 8,515,017 shares of Sterling Common Stock
outstanding as of September 30, 1996, Sterling's shareholders will be issued
approximately 7,429,000 shares of FPA, representing approximately 37% of the
total issued and outstanding shares of FPA Common Stock after the Merger. The
Exchange Ratio may be adjusted, if the average trading price of FPA Common
Stock is above $16.43 or below $14.87 during a specified period prior to the
closing date of the Merger. Under certain circumstances, the Merger Agreement
may be terminated if the average trading price of FPA Common Stock is above
$18.00 or below $13.30 during a specified period prior to the closing date of
the Merger. The adjustment, if any, is described more fully in the
accompanying Proxy Statement/Prospectus.
2. To approve the adjournment or postponement of the Sterling Special
Meeting in the event that such adjournment or postponement is necessary in
order to solicit additional votes for the foregoing proposal.
3. To transact such other business as may properly come before the Sterling
Special Meeting or any adjournment or postponement thereof.
The foregoing proposals are described in the Proxy Statement/Prospectus
accompanying this Notice.
UNLESS THIS PROPOSAL IS APPROVED BY THE REQUISITE VOTE OF STERLING
SHAREHOLDERS, THE MERGER WILL NOT BE CONSUMMATED.
Shareholders of record at the close of business on September 25, 1996 are
entitled to receive notice of, and to vote at, the Sterling Special Meeting
and any adjournment thereof.
It is important that your shares be represented at the Sterling Special
Meeting. Whether or not you plan to attend the Sterling Special Meeting,
please complete, sign, date and promptly mail the enclosed proxy in the
envelope provided.
THE BOARD OF DIRECTORS OF STERLING RECOMMENDS THAT ITS SHAREHOLDERS VOTE FOR
THE PROPOSAL DESCRIBED ABOVE. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE EVEN IF YOU ARE PLANNING TO
ATTEND THE SPECIAL MEETING.
By Order of the Board of Directors
Nancy K. Watkin
Secretary
Coral Gables, Florida
October 4, 1996
<PAGE>
FPA MEDICAL MANAGEMENT, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER LOCATION IN PROXY STATEMENT/PROSPECTUS
- ----------- --------------------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus.... Cover Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of
2. Inside Front and Outside Proxy Statement/Prospectus
Back Cover Pages of
Prospectus.................. Available Information
3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information....... Summary; Risk Factors
4. Terms of the Transaction.... Summary; The Merger; The Merger Agreement
5. Pro Forma Financial
Information................. Pro Forma Financial Information
6. Material Contacts with the
Company Being Acquired...... The Merger
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters.......... *
8. Interests of Named Experts
and Counsel................. The Merger; Legal Matters; Experts
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to
S-3 Registrants............. Incorporation of Certain Documents by
Reference; Selected Historical Consolidated
11. Incorporation of Certain Financial Information
Information by Reference.... Incorporation of Certain Information by
12. Information with Respect to Reference
S-2 or S-3 Registrants...... *
13. Incorporation of Certain
Information by Reference.... *
14. Information with Respect to
Registrants Other than S-3
or S-2 Registrants.......... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to
S-3 Companies............... *
16. Information with Respect to
S-2 or S-3 Companies........ Available Information; Incorporation of
Certain Documents by Reference; Summary; Risk
Factors; Selected Financial Data--Sterling
17. Information with Respect to
Companies Other Than S-2 or
S-3 Companies............... *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies,
Consents or Other
Authorizations Are to be
Solicited................... Outside Front Cover Page of Proxy
Statement/Prospectus; Available Information;
19. Information if Proxies, Incorporation of Certain Documents by
Consents or Authorizations Reference; Summary; The Meeting; The Merger
Are Not to be Solicited or
in an Exchange Offer........ *
</TABLE>
- --------
* Inapplicable
<PAGE>
FPA MEDICAL MANAGEMENT, INC. FPA MEDICAL MANAGEMENT, INC.
AND PROSPECTUS
STERLING HEALTHCARE GROUP, INC. 15,197,412 SHARES
PROXY STATEMENT COMMON STOCK
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") relates to
the proposed merger (the "Merger") of Sterling Acquisition Corporation, a
wholly-owned subsidiary ("Merger Sub") of FPA Medical Management, Inc. ("FPA")
into Sterling Healthcare Group, Inc. ("Sterling") pursuant to an Agreement and
Plan of Merger dated as of May 19, 1996 among FPA, Merger Sub and Sterling
(the "Merger Agreement"). As a result of the Merger, Sterling will become a
wholly-owned subsidiary of FPA and the shareholders of Sterling will receive
in the aggregate up to 15,197,412 shares of FPA common stock, $.002 par value
("FPA Common Stock"), in exchange for all of the issued and outstanding shares
of Sterling common stock, $.0001 par value ("Sterling Common Stock"). Pursuant
to the Merger Agreement, each outstanding share of Sterling Common Stock will
be converted into 1.4 (the "Exchange Ratio") shares of FPA Common Stock. The
Exchange Ratio is subject to adjustment based on the average price per share
of FPA Common Stock during a specified period prior to the closing date of the
Merger. See "THE MERGER--Adjustments to Merger Consideration." On September
30, 1996, the closing price of FPA Common Stock was $26.375. At such price,
the equivalent value of a share of Sterling Common Stock would be $23.01,
calculated based on the Exchange Ratio (the "Equivalent Value"), and the
aggregate merger consideration would be approximately $195,931,000. The
Exchange Ratio is subject to upward or downward adjustment based on the
average closing price of FPA Common Stock over a fifteen day trading period
ending five days prior to closing. The Exchange Ratio could range from 1.565
to 1.278 with resulting "values" to Sterling shareholders ranging from $20.81
to $23.01. Such a change in the Exchange Ratio will cause a corresponding
change in the Equivalent Value and the aggregate merger consideration. See
"THE MERGER--Adjustments to Merger Consideration." Additionally, the
Equivalent Value may differ from the actual market price of Sterling Common
Stock. Each FPA stockholder and Sterling shareholder is urged to obtain
updated market information.
This Proxy Statement/Prospectus serves as the proxy statement for both FPA
and Sterling for their respective special meetings of holders of their common
stock to be held October 31, 1996 (collectively, the "Special Meetings"). See
"THE MEETINGS."
This Proxy Statement/Prospectus also constitutes a prospectus of FPA with
respect up to 15,197,412 shares of FPA Common Stock to be issued to
shareholders of Sterling pursuant to the Merger Agreement. This Proxy
Statement/Prospectus and the accompanying forms of proxy are first being
mailed to stockholders of FPA and Sterling on or about October 4, 1996.
FPA previously announced the proposed acquisition (the "Foundation
Transaction") of all of the issued and outstanding shares of Foundation Health
Medical Services ("FHMS") by FPA Medical Management of California, Inc. ("FPA
California"), a wholly-owned subsidiary of FPA, and all of the issued and
outstanding shares of FHMG/TDMC Medical Group, a Professional Corporation
("Holding Company," together with FHMS, the "Foundation Companies") by FPA
Independent Practice Association ("FPA IPA") pursuant to a Stock and Note
Purchase Agreement dated as of June 28, 1996 and amended on October 1, 1996
and on October 3, 1996 among FPA, FPA California, FPA IPA, Jonathan H. Scheff,
M.D. ("Selling Shareholder") and Foundation Health Corporation ("Foundation")
(the "Foundation Agreement"). FPA is not seeking stockholder approval of the
Foundation Transaction at the FPA Special Meeting. FHMS provides facilities
management, non-physician healthcare professionals and other administrative
and management services to Holding Company and its subsidiaries. Holding
Company holds all of the outstanding stock of Foundation Health Medical Group,
Inc. ("FHMG") and Thomas-Davis Medical Centers, P.C. ("TDMC," together with
FHMG, the "Medical Groups"). As consideration for the Foundation Transaction,
FPA is expected to pay approximately $2 million in cash, and to issue $75
million of FPA Common Stock and approximately $126 million in promissory
notes. Under certain circumstances, the number of shares of FPA Common Stock
to be issued pursuant to the Foundation Agreement may be adjusted, or the
Foundation Agreement may be terminated by FPA if the average trading price of
FPA Common Stock during a specified period prior to the closing date of the
Foundation Transaction is below $13.60 per share. See "THE FOUNDATION
TRANSACTION--FHMS Acquisition."
SEE "RISK FACTORS" BEGINNING AT PAGE 30 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS IN EVALUATING FPA, STERLING AND, THE MERGER.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus
in connection with the solicitation of proxies or the offering of securities
made hereby and, if given or made, such information or representation should
not be relied upon as having been authorized by FPA or Sterling. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, any securities, or the solicitation of a proxy, in
any jurisdiction in which, or to any person to whom, it is unlawful to make
such offer or solicitation of an offer or proxy solicitation. Neither the
delivery of this Proxy Statement/Prospectus nor any distribution of the
securities offered hereby shall, under any circumstances, create any
implication that there has been no change in the affairs of FPA or Sterling
since the date hereof or that the information set forth or incorporated by
reference herein is correct as of any time subsequent to its date. All
information herein with respect to FPA and Merger Sub has been furnished by
FPA, and all information herein with respect to Sterling has been furnished by
Sterling.
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is October 4, 1996.
<PAGE>
AVAILABLE INFORMATION
FPA and Sterling are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
offices of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Regional Offices of the Commission: Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Shares of FPA and Sterling Common Stock are traded on the
Nasdaq National Market ("Nasdaq"). Such reports, proxy statements, and other
information can also be inspected and copied at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006.
FPA has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), on Form S-4 with respect to the securities offered hereby.
This Proxy Statement/Prospectus also constitutes the Prospectus of FPA filed
as part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules of the
Commission. Statements made in this Proxy Statement/Prospectus as to the
contents of any contract, agreement, or other document referred to are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be qualified in its entirety by such reference. The
Registration Statement and any amendments thereto, including exhibits filed as
part thereof, are available for inspection and copying at the Commission's
offices as described above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by FPA (File No. 0-24276) and
Sterling (File No. 1-13074) with the Commission pursuant to the Exchange Act,
are incorporated by reference in this Joint Proxy Statement/Prospectus:
1. FPA's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 filed with the Commission on March 28, 1996, as amended by Form
10-K/A, filed with the Commission on March 29, 1996, and as amended by Form
10-K/A, filed with the Commission on October 3, 1996.
2. FPA's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996 filed with the Commission on May 15, 1996, as amended on July 24,
1996.
3. FPA's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 filed with the Commission on August 14, 1996.
4. FPA's Current Report on Form 8-K dated April 12, 1996.
5. FPA's Current Report on Form 8-K dated May 19, 1996 filed with the
Commission on May 20, 1996.
6. FPA's Current Report on Form 8-K dated June 21, 1996 filed with the
Commission on July 5, 1996.
7. The description of the FPA Common Stock contained in FPA's
Registration Statement on Form 8-A dated October 20, 1994.
8. Sterling's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 filed with the Commission on March 29, 1996, as amended
by Form 10-K/A, filed with the Commission on October 4, 1996.
9. Sterling's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 filed with the Commission on May 14, 1996.
10. Sterling's Current Report on Form 8-K dated May 31, 1996 filed with
the Commission on June 5, 1996.
11. Sterling's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 filed with the Commission on August 13, 1996 .
12. Sterling's Current Report on Form 8-K dated August 30, 1996 filed
with the Commission on September 10, 1996.
All documents and reports subsequently filed by FPA and Sterling pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the date of the Special Meetings shall
be deemed to be incorporated by reference in this Proxy Statement/Prospectus
and to be a part hereof from the date of filing of such documents or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or with respect to FPA or Sterling in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded, except as so modified or superseded, shall not be deemed to
constitute a part of this Proxy Statement/Prospectus.
THE PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHICH THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL
REQUEST, WITHOUT CHARGE, IN THE CASE OF DOCUMENTS RELATING TO FPA OR MERGER
SUB, DIRECTED TO FPA MEDICAL MANAGEMENT, INC., 2878 CAMINO DEL RIO SOUTH,
SUITE 301, SAN DIEGO, CALIFORNIA 92108, ATTENTION: JAMES A. LEBOVITZ
(TELEPHONE NUMBER (619) 295-7005) OR, IN THE CASE OF DOCUMENTS RELATING TO
STERLING, DIRECTED TO STERLING HEALTHCARE GROUP, INC., 6855 SOUTH RED ROAD,
SUITE 400, CORAL GABLES, FLORIDA 33143,
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ATTENTION: NANCY K. WATKIN (TELEPHONE NUMBER (305) 665-1911). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY OCTOBER
24, 1996, THE DATE WHICH IS FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE
SPECIAL MEETINGS.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. When used in
this Proxy Statement/Prospectus, the words "estimate," "project," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward-looking statements. For a discussion of such risks, see "RISK
FACTORS." Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. Neither FPA nor
Sterling undertakes any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
GLOSSARY OF CERTAIN DEFINED TERMS.......................................... 8
SUMMARY.................................................................... 13
FPA Medical Management, Inc.............................................. 13
The Merger............................................................... 14
Sterling Healthcare Group, Inc........................................... 14
Reasons for the Merger................................................... 15
The Foundation Transaction............................................... 22
Reasons for the Foundation Transaction................................... 23
Amendments to FPA Medical Management, Inc. Omnibus Stock Option Plan..... 24
Approval of Adjournment or Postponement of Special Meetings ............. 24
The Meetings............................................................. 25
Comparative Historical and Pro Forma Per Share Data...................... 27
Comparative Market Data.................................................. 28
RISK FACTORS............................................................... 30
Risks Relating to FPA.................................................... 30
Risks Relating to Sterling............................................... 36
Risks Relating to the Merger............................................. 40
Risks Relating to the Foundation Transaction............................. 41
THE MEETINGS............................................................... 43
FPA Special Meeting...................................................... 43
Sterling Special Meeting................................................. 43
Quorum................................................................... 44
Vote Required............................................................ 44
Record Date; Stock Entitled to Vote...................................... 44
Voting of Proxies........................................................ 45
Revocation of Proxies.................................................... 45
Solicitation of Proxies.................................................. 45
THE MERGER................................................................. 46
Effects of the Merger.................................................... 46
Merger Consideration..................................................... 46
Adjustments to Merger Consideration...................................... 46
Conversion of Shares; Procedures for Exchange of Certificates; Fractional
Shares.................................................................. 48
Nasdaq Listing........................................................... 48
Background of the Merger................................................. 48
Recommendations of the Boards of Directors and Reasons for the Merger.... 51
Opinion of FPA's Financial Advisor....................................... 54
Oppenheimer Opinion...................................................... 55
Opinion Update........................................................... 60
Opinion of Sterling's Financial Advisor.................................. 63
Effective Time of the Merger............................................. 67
Interests of Certain Persons in the Merger............................... 68
Federal Income Tax Consequences.......................................... 69
Accounting Treatment..................................................... 70
Resale of FPA Common Stock by Affiliates................................. 71
Certain Regulatory Matters............................................... 71
Rights of Dissenting Shareholders........................................ 71
BOARD OF DIRECTORS AND MANAGEMENT OF FPA FOLLOWING THE MERGER.............. 72
Board of Directors of FPA Following the Merger........................... 72
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Executive Officers of FPA Following the Merger........................... 72
Employment Agreement..................................................... 72
COMPARISON OF RIGHTS OF HOLDERS OF STERLING AND FPA COMMON STOCK........... 72
Liability of Directors................................................... 73
Indemnification.......................................................... 73
Derivative Actions....................................................... 74
Distributions and Redemptions............................................ 74
Shareholder Inspection of Books and Records.............................. 74
Dissenters' Rights....................................................... 75
Quorum for Shareholders Meetings......................................... 75
Shareholder Voting Requirement; Action by Consent........................ 76
Amendments to Charter.................................................... 76
Affiliated Transactions.................................................. 76
Control Share Acquisition................................................ 77
Other Constituencies..................................................... 78
THE MERGER AGREEMENT....................................................... 79
Conditions to the Merger................................................. 79
Representations and Warranties........................................... 81
Conduct of Business Pending the Merger................................... 81
Acquisition Transactions................................................. 84
Additional Agreements.................................................... 85
Termination, Amendment and Waiver........................................ 89
THE FOUNDATION TRANSACTION................................................. 91
FHMS Acquisition......................................................... 91
Holding Company Acquisition.............................................. 92
Background of the Foundation Transaction................................. 92
Recommendation of the FPA Board of Directors and Reasons for the
Foundation Transaction.................................................. 93
Opinion of FPA's Financial Advisor....................................... 94
Anticipated Accounting Treatment......................................... 100
Certain Regulatory Matters............................................... 100
THE FOUNDATION COMPANIES................................................... 101
Business................................................................. 101
Facilities............................................................... 101
Payor and Provider Contracts and Physician Compensation.................. 102
Competition.............................................................. 102
Insurance................................................................ 102
Legal Proceedings........................................................ 102
Business and Financial Information Regarding FHMS, FHMG and TDMC......... 103
Selected Financial Data.................................................. 103
Management's Discussion and Analysis of Financial
Condition and Results of Operations of FHMS, FHMG and TDMC.............. 103
Results of Operations of the Combined Companies.......................... 103
Liquidity and Capital Resources.......................................... 105
THE FOUNDATION AGREEMENT................................................... 106
Conditions to the Foundation Transaction................................. 106
Representations and Warranties........................................... 107
Covenants................................................................ 107
Actions by Foundation and FPA After the Closing.......................... 108
Indemnification, Termination, Assignment and Expenses.................... 109
APPROVAL OF AMENDMENTS TO FPA MEDICAL MANAGEMENT, INC. OMNIBUS STOCK OPTION
PLAN...................................................................... 111
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................... 114
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SELECTED FINANCIAL DATA--FPA............................................. 126
SELECTED FINANCIAL DATA--STERLING........................................ 127
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA..................... 129
APPROVAL OF ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETINGS.............. 130
LEGAL MATTERS............................................................ 130
ADDITIONAL INFORMATION................................................... 130
EXPERTS.................................................................. 131
FINANCIAL STATEMENTS..................................................... F-1
APPENDIX I--AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 19, 1996 AMONG
FPA, MERGER SUB AND STERLING............................................ I-1
APPENDIX II--OPINION OF OPPENHEIMER & CO., INC........................... II-1
APPENDIX III--OPINION OF SMITH BARNEY INC................................ III-1
APPENDIX IV--STOCK AND NOTE PURCHASE AGREEMENT BETWEEN FOUNDATION,
SELLING SHAREHOLDER, FPA, FPA CALIFORNIA AND FPA IPA DATED AS OF
JUNE 28, 1996 AS AMENDED................................................ IV-1
APPENDIX V--OPINION OF OPPENHEIMER & CO., INC. .......................... V-1
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GLOSSARY OF CERTAIN DEFINED TERMS
AMEX............................. American Stock Exchange.
APB No. 16....................... Accounting Principles Board Opinion No. 16.
Acquired Foundation Entities..... Arizona IPA, Florida IPA and the Foundation
Companies.
Acquisition Consideration........ The consideration paid and to be paid in
the Foundation Transaction, the acquisition
of Arizona IPA and Florida IPA.
Arizona IPA...................... Intergroup IPA, P.C., an affiliate of
Foundation.
Arizona IPA Agreement............ Stock Purchase Agreement dated June 28,
1996 by and among FPA Arizona, Ross
Henderson, M.D. and Foundation.
Certificate of Incorporation..... The Certificate of Incorporation of FPA.
Certificates of Merger........... The Certificate of Merger to be filed with
the Secretary of State of Delaware and the
Articles of Merger to be filed with the
Secretary of State of Florida in connection
with the Merger.
Closing.......................... The closing of the Merger.
Code............................. Internal Revenue Code of 1986, as amended.
DOJ.............................. The United States Department of Justice.
Delaware Act..................... Delaware General Corporation Law.
Department....................... California Department of Corporations.
Dresnick Employment Agreement.... The Amended and Restated Terms of Stephen
J. Dresnick's M.D. Employment Agreement
with Sterling Healthcare Group, Inc.
EBIT............................. Earnings before interest and taxes.
EBITDA........................... Earnings before interest, taxes,
depreciation and amortization.
EDM Companies.................... Coastal Physician Group, Inc., EmCare
Holdings, Inc., InphyNet Medical
Management, Inc. and Sheridan Healthcare,
Inc.
EDM Transaction.................. One (1) transaction involving emergency
department management services: Pacific
Physicians Services, Inc./Team Health
Group.
EPS.............................. Earnings per share.
Effective Time................... The time at which the Merger will become
effective as provided for in the
Certificates of Merger or such other time
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as FPA, Sterling Healthcare Group, Inc. and
Sterling Acquisition Corporation shall
agree upon.
Election......................... An election made under Section 338(h)(10)
of the IRS Code.
Enrollees........................ Payor members.
Exchange Act..................... Securities Exchange Act of 1934, as
amended.
Exchange Agent................... American Stock Transfer & Trust Company or
another bank or trust company designated by
FPA acting as an exchange agent.
Exchange Ratio................... The conversion of each outstanding share of
Sterling Healthcare Group, Inc. Common
Stock into 1.4 shares of FPA Medical
Management, Inc. Common Stock, subject to
certain potential adjustments
FAC.............................. FPA Acquisition Corporation, an indirect
subsidiary of Foundation.
FHCA............................. Foundation
FHMG............................. Foundation Health Medical Group, Inc., an
indirect subsidiary of Foundation.
FHMS............................. Foundation Health Medical Services, an
indirect subisidiary of Foundation.
FPA.............................. FPA Medical Management, Inc.
FPA Arizona...................... FPA Medical Group of Arizona, P.C.
FPA California................... FPA Medical Management of California, Inc.
FPA Common Stock................. FPA Medical Management, Inc. Common Stock,
par value $.002 per share.
FPA Compensation Committee....... The Compensation Committee of the FPA Board
of Directors.
FPA/Foundation Price............. The average of the per share closing price
of FPA Common Stock during the ten trading
days ending on the second trading day prior
to the Foundation Closing.
FPA IPA.......................... FPA Independent Practice Association, an
indirect subsidiary of FPA.
FPA Network...................... Professional corporations, other providers
of medical service and Payors affiliated
with FPA.
FPA Option....................... An option to purchase a number of shares of
FPA Common Stock.
FPA Plan......................... The FPA Medical Management, Inc. Omnibus
Stock Option Plan.
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FPA Proposals.................... Proposals submitted to FPA stockholders to
adopt the Merger Agreement and to approve
amendments to the FPA Plan.
FPA Special Meeting.............. The Special Meeting of FPA stockholders to
be held at Thursday, October 31, 1996, at
9:00 a.m. local time.
FPA Stock Options................ Options to acquire FPA Common Stock.
FPA Stockholders' Approval....... The approval of the FPA stockholders at the
meeting of such stockholders.
FPA Value........................ The average of the closing price of FPA
Common Stock as reported on Nasdaq for the
fifteen (15) consecutive trading days
ending on the date that is five (5) trading
days prior to the Closing Date.
FTC.............................. The United States Federal Trade Commission.
Florida Act...................... Florida Business Corporation Act
Florida IPA...................... FHC IPA, Inc., an indirect subsidiary of
Foundation.
Florida IPA Agreement............ Stock Purchase Agreement dated June 28,
1996 by and among FAC Acquisition
Corporation, Care Florida Health Plan,
Inc., Foundation Health, a South Florida
Health Plan, Inc., and Foundation.
Foundation....................... Foundation Health Corporation.
Foundation Agreement............. The Stock and Note Purchase Agreement
between FPA California, FPA IPA, Jonathan
H. Scheff, M.D. and Foundation, as amended.
Foundation Closing............... The closing of the Foundation Transaction.
Foundation Companies............. FHMG and FHMS
Foundation Opinion............... The opinion rendered to the FPA Board of
Directors by Oppenheimer acting as FPA's
financial advisor as to the fairness to FPA
stockholders, from a financial point of
view, of the acquisition consideration.
Foundation Transaction........... The proposed acquisition of all the issued
and outstanding shares of Foundation Health
Medical Services by FPA Medical Management
of California, Inc. and all of the issued
and outstanding shares of FHMG/TDMC Medical
Group by FPA Independent Practice
Association.
GAAP............................. Generally accepted accounting principles.
Guaranteed Access Payments....... Payments to be received by Acquired
Foundation Entities as compensation for
insuring continued and uninterrupted access
to the professionals practicing within the
Acquired Foundation Entities.
HMOs............................. Health Maintenance Organizations.
HSR Act.......................... Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
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Health Plan...................... Foundation Health, a California Health
Plan.
Holding Company.................. FHMG/TDMC Medical Group, a Professional
Corporation, the parent entity of FHMG and
TDMC.
IPAs............................. Independent practice associations.
Intergroup....................... Intergroup Healthcare Corporation.
Medical Groups................... TDMC and FHMG.
Merger........................... The merger of Merger Sub and Sterling.
Merger Agreement................. The Agreement and Plan of Merger between
FPA, Merger Sub and Sterling.
Merger Sub....................... Sterling Acquisition Corporation.
NASD............................. National Association of Securities Dealers,
Inc.
Nasdaq........................... Nasdaq National Market.
Oppenheimer...................... Oppenheimer & Co., Inc., the financial
advisor to FPA with respect to the Merger
and the Foundation Transaction.
Option........................... Foundation's option to purchase all of the
issued and outstanding stock of FHMG/TDMC
Medical Group.
PCA.............................. Physician Corporation of America.
Payors........................... HMOs and other prepaid health insurance
plans which provide physician and related
health care services.
Professional Corporations........ Professional corporations affiliated with
FPA.
Proxy Statement/Prospectus....... This proxy statement/prospectus relating to
the Merger.
Registration Statement........... A registration statement filed under the
Securities Act of 1933.
Rule 145......................... Rule 145 of the Securities Act of 1933.
S-8.............................. Registration Statement on Form S-8.
Securities Act................... Securities Act of 1933, as amended.
Selling Shareholder.............. Jonathan H. Scheff, M.D.
Smith Barney..................... Smith Barney Inc., the financial advisor to
Sterling with respect to the Merger.
Special Meetings................. The FPA Special Meeting and the Sterling
Special Meeting, as the same may be
adjourned.
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Sterling......................... Sterling Healthcare Group, Inc.
Sterling Common Stock............ Sterling Healthcare Group, Inc. Common
Stock.
Sterling Shareholders' The approval of the Sterling Healthcare
Approval........................ Group, Inc. shareholders at the Sterling
Special Meeting.
Sterling Option.................. An option to purchase a share of Sterling
Common Stock.
Sterling Special Meeting......... The Special Meeting of shareholders of
Sterling to be held Thursday, October 31,
1996 at 9:00 a.m. local time.
Sterling Stock Options........... Options to purchase Sterling Common Stock.
Surviving Corporation............ Sterling Healthcare Group, Inc. after the
merger.
TDMC............................. Thomas-Davis Medical Centers, P.C.
TMA.............................. Tucson Medical Associates, Ltd.
The Commission................... The Securities and Exchange Commission.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. The information contained in this summary is
qualified in its entirety by, and should be read in conjunction with, the
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Proxy Statement/Prospectus and the documents
incorporated herein by reference.
FPA MEDICAL MANAGEMENT, INC.
FPA is a national healthcare management service organization which organizes
and manages primary care physician practices and networks that contract with
health maintenance organizations ("HMOs") and other prepaid health insurance
plans (collectively, "Payors") to provide physician and related healthcare
services to Payor members ("enrollees") who select FPA primary care physicians.
FPA's relationships with its affiliated professional corporations (the
"Professional Corporations"), other providers of medical service and Payors
(collectively, the "FPA Network") offer physicians the opportunity to
participate more effectively in managed care programs by organizing physicians
within geographic areas to contract with HMOs. FPA also assumes administrative
functions necessary in a managed care environment, related to claims
adjudication, utilization management of medical services, Payor contract
negotiations and the operation of management information systems. Under these
arrangements, FPA, on behalf of the Professional Corporations, is responsible
for the payment of the cost of medical services and is entitled to amounts
received from Payors in excess of such costs. These medical services include,
but are not limited to, professional, ancillary and medical management
services. FPA is generally responsible for all other operating costs under
these arrangements. To the extent that the cost of medical services exceeds
amounts received from Payors, FPA, on behalf of the Professional Corporations,
is responsible for such costs. FPA's and the Professional Corporations'
inability to control costs could negatively impact FPA's profitability. While
FPA, on behalf of one of its subsidiaries, has filed a restricted HMO license
application in California, there can be no assurance that regulators of the
other states in which FPA operates would not apply insurance and HMO laws to
FPA. FPA's operations representing substantially all of FPA's operating revenue
assigned from Professional Corporations would be subject to such regulation.
Management believes that FPA's management model is appealing to physicians
because it allows the physicians to retain control of their own practices while
participating in a managed care program.
The FPA Network currently consists of approximately 2,800 primary care
physicians and 4,600 specialty care physicians in nine states and 24 Payors
providing healthcare coverage to approximately 359,000 enrollees in seven
states. The majority of these enrollees are in California, where FPA began its
operations and where it currently manages healthcare services for approximately
132,000 enrollees of 11 Payors.
Following the consummation of the Merger and the Foundation Transaction, FPA
intends to operate Sterling as a separate operating subsidiary and to integrate
the operations acquired in the Foundation Transaction into its current
operations. As a result, following the consummation of the transactions, there
will be two operating divisions of FPA, one comprised of Sterling and the other
comprised of the current operations of FPA combined with those acquired in
connection with the Foundation Transaction.
On June 21, 1996, FPA acquired from Physician Corporation of America ("PCA")
all of the outstanding stock of Physicians First, Inc., a wholly-owned
subsidiary of PCA operating through its subsidiaries 40 primary care clinics in
Florida. The clinics have approximately 125 primary care physicians which
provide services to approximately 80,000 enrollees in PCA's health plans in
Florida.
On June 28, 1996, FPA acquired from affiliates of Foundation all of the
outstanding stock of two independent practice associations ("IPAs", and
together with the Foundation Companies, the "Acquired Foundation Entities") for
aggregate consideration of $20 million, consisting of cash and notes. The two
IPAs, located in Arizona and Florida, consist of 63 primary care physicians
which provide services to approximately 21,000 enrollees.
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Through the Professional Corporations, the FPA Network manages all covered
primary and specialty medical care for each enrollee in exchange for fixed
monthly capitation payments pursuant to Payor contracts. Specialty care
physician services, inpatient hospitalization and certain other services are
managed by primary care physicians, are subject to pre-authorization
guidelines, and are provided through contracts negotiated by FPA for the
Professional Corporations based on discount fee-for-service, per diem or
capitation rates. Contracts with Payors and primary care physicians generally
include shared risk arrangements and other incentives designed to encourage the
provision of high-quality, cost-effective healthcare. Under these arrangements,
the Professional Corporations are able to succeed in the managed care
environment when high-quality healthcare is provided and appropriate
utilization of certain specialty physician care and hospitalization is
achieved.
The Payor and provider contracts are approved and entered into by the
Professional Corporations. The capitation payment received from a Payor is
assigned by the Professional Corporation to FPA pursuant to an administrative
services agreement between the Professional Corporation and FPA. FPA in turn
remits a portion of the capitation payment on behalf of the Professional
Corporation to the primary care physicians in the FPA Network based on the
number of enrollees each physician covers, regardless of the amount of medical
care provided.
FPA's principal executive office is located at 2878 Camino del Rio South,
Suite 301, San Diego, California 92108, and its telephone number is (619) 295-
7005.
THE MERGER
STERLING HEALTHCARE GROUP, INC.
Sterling is a physician practice management company engaged in the business
of providing contract management and support services primarily to hospital-
based emergency departments. Sterling recruits physicians and contracts for
their services to provide staffing of emergency departments. In addition,
Sterling assists its hospital clients in such areas as physician scheduling,
operational support, quality assurance and departmental accreditation and
provides such administrative services as billing and record keeping with regard
to reimbursement. During 1994, Sterling began to expand its hospital-based
services to include the management of anesthesiology departments, correctional
institutional health facilities and rural healthcare clinics and began to
acquire and manage primary care and physical therapy practices. As of October
1, 1996, Sterling provided physician practice management services on a contract
basis to 101 hospital-based emergency departments, one anesthesiology
department and four correctional institutional health facilities in 20 states.
Sterling currently contracts with approximately 1,000 affiliated physicians who
provide medical care to approximately 1.3 million patients annually. In
addition, Sterling manages six primary care physician practices and two
physical therapy practices.
Since its inception in 1987, Sterling has experienced rapid internal and
external growth. Net operating revenue and expenses increased from $15.7
million and $15.7 million, respectively, in 1990 to $115.7 million and $109.2
million, respectively, in 1995. Of the increase in net operating results
approximately 55% resulted primarily from the addition of new emergency
department management contracts with the remaining increase resulting from
increases in net operating revenues from existing contracts. The remaining
growth has been due primarily to the acquisition of emergency department
management companies and the strategic acquisition of related businesses.
Sterling transacts business directly and indirectly through various wholly-
owned subsidiary corporations. References in this Proxy Statement/Prospectus to
Sterling include such subsidiary corporations.
Sterling's principal executive offices are located at 6855 South Red Road,
Suite 400, Coral Gables, Florida 33143 and its telephone number is (305) 665-
1911.
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REASONS FOR THE MERGER
FPA. The FPA Board of Directors has unanimously approved (with one
abstention) the Merger and recommends a vote FOR the Merger. FPA's Board of
Directors believes that the Merger is fair to and in the best interests of FPA
stockholders. See "THE MERGER--Recommendations of the Boards of Directors and
Reasons for the Merger--FPA."
In considering the advantages and disadvantages of the Merger, the Board of
Directors of FPA addressed numerous considerations. The reasons the Board of
Directors of FPA believes that the Merger is desirable to FPA include: the
Merger is expected to enable FPA to take advantage of Sterling's existing
relationships with hospitals and community physicians in order to expand the
FPA Network; the Merger is expected to result in significant financial and
operational synergies including, but not limited to, those relating to
executive salaries, investor relations and audit, legal and insurance fees; by
incorporating emergency department physicians into the FPA Network, the FPA
Network will cover the two major points of entry into the managed health care
system; the Merger is expected to substantially increase FPA's size in terms of
revenues, profits, physicians, and locations which is expected to enhance FPA's
national recognition; the Merger is expected to create a combined company with
a number of anticipated strengths including the opportunity for Sterling and
FPA to jointly develop new patient care programs; the recent acquisition by FPA
of 125 physicians operating out of 40 primary care clinics in Florida fits well
strategically with Sterling's geographic focus on the Florida market; and the
Merger is expected to be treated as a pooling of interests under generally
accepted accounting principles ("GAAP") and a tax-free reorganization under the
Internal Revenue Code of 1986, as amended (the "Code"). Disadvantages of the
Merger considered by the Board of Directors of FPA were pro forma operating and
net income losses resulting from the Merger, the potential costs and
difficulties that may be encountered in order to properly integrate the
respective businesses of FPA and Sterling and the ownership dilution to the FPA
stockholders resulting from the issuance to Sterling shareholders of shares of
FPA Common Stock in the Merger.
Sterling. The Board of Directors of Sterling has unanimously approved the
Merger and recommends a vote FOR the Merger. Sterling's Board of Directors
believes the Merger is fair to and in the best interests of the shareholders of
Sterling. For a more complete description of the primary factors considered and
relied upon by the Sterling Board of Directors in reaching its recommendation,
see "THE MERGER--Recommendations of the Boards of Directors and Reasons for the
Merger--Sterling." In considering the advantages and disadvantages of the
Merger, the Board of Directors of Sterling addressed a number of considerations
including, without limitation, the following advantages: alternatives for
growth available to Sterling as a result of the Merger, particularly in light
of intensified competition and increasing consolidation in the healthcare
industry, including the possible negative consequences of remaining an
independent company and the anticipated strength of a business combination with
FPA, including FPA's established position in markets which are new and
complementary to Sterling. The Sterling Board of Directors also considered the
following disadvantages: the historical financial performance of FPA relative
to the historical financial performance of Sterling; concern regarding FPA's
ability to manage its rapid growth, including recent material acquisitions; and
the fact that under the Merger Agreement, if the average trading price of FPA
Common Stock during a specified period prior to the closing date of the Merger
exceeds $16.43 per share, the Exchange Ratio would be reduced.
Effect of the Merger.......... Pursuant to the Merger, Merger Sub would merge
into Sterling, Sterling would continue as the
surviving corporation (sometimes referred to as
the "Surviving Corporation") and Sterling would
become a wholly-owned subsidiary of FPA. All of
the shares of Sterling Common Stock issued and
outstanding immediately prior to the
consummation of the Merger would be
automatically converted, at the Effective Time
(as defined below) into the right to receive in
the aggregate approximately 7,429,000 shares of
FPA Common Stock, representing approximately
37% of the FPA Common Stock outstanding after
the Merger. Pursuant to
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the Merger, each share of Sterling Common Stock
would be converted into 1.4 (the "Exchange
Ratio") shares of FPA Common Stock. The
Exchange Ratio shall be increased if the
average of the closing price of FPA Common
Stock as reported on Nasdaq for the fifteen
consecutive trading days ending on the date
that is five trading days prior to the Closing
Date (the "FPA Value") is less than $14.87 and
decreased if the FPA Value is greater than
$16.43. Under certain circumstances, the Merger
Agreement may be terminated if the FPA Value is
above $18.00 or below $13.30. If the FPA Value
is above $18.00, the Exchange Ratio will be
adjusted to equal $23.01 divided by the FPA
Value, with the result that Sterling
Shareholders would be entitled to receive fewer
shares of FPA Common Stock in the Merger. See
"THE MERGER--Adjustments to Merger
Consideration."
On September 30, 1996 the closing price of FPA
Common Stock was $26.375. At such price, the
Equivalent Value of a share of Sterling Common
Stock would be $23.01, calculated based on the
Exchange Ratio, and the aggregate merger
consideration would be approximately
$195,931,000. The actual market price of the
FPA Common Stock may vary, which will cause a
change in the Exchange Ratio and a
corresponding change in the Equivalent Value
and the aggregate merger consideration.
Additionally, the Equivalent Value may differ
from the actual market price of Sterling Common
Stock. Each FPA stockholder and Sterling
shareholder is urged to obtain updated market
information.
Recommendation of the Boards
of Directors and Reasons for
the Merger................... The Boards of Directors of FPA and Sterling
believe that the terms of the Merger are fair
to and in the best interests of the respective
holders of their common stock. The FPA Board of
Directors unanimously recommends (with one
director abstaining) that FPA stockholders
approve the Merger Agreement. The FPA Board of
Directors believes that the Merger will have no
material adverse effects on any FPA
stockholders, including non-affiliated
stockholders. The Sterling Board of Directors
unanimously recommends that Sterling
shareholders approve the Merger Agreement. The
Sterling Board of Directors believes that the
Merger will have no material adverse effects on
any Sterling shareholders, including non-
affiliated shareholders. See "THE MERGER--
Recommendations of the Boards of Directors and
Reasons for the Merger."
Opinion of FPA's Financial
Advisor...................... Oppenheimer & Co., Inc. ("Oppenheimer") has
acted as financial advisor to FPA in connection
with the Merger and has delivered its written
opinion to the FPA Board of Directors dated May
19, 1996 (the "Oppenheimer Opinion"), as
updated on August 6, 1996, to the effect that,
subject to the various considerations set forth
therein, the Merger Consideration was fair to
the stockholders of FPA, from a financial point
of view. The full text of the Oppenheimer
Opinion and the update thereto, each of which
sets forth the assumptions made,
considered and limitations to the review
undertaken, are attached
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as Appendix II to this Proxy
Statement/Prospectus, and should be carefully
read in their entirety. The Oppenheimer Opinion
and the update are directed only to the
fairness of the Merger Consideration to the FPA
stockholders, from a financial point of view,
do not address any other aspect of the Merger
and do not constitute a recommendation to any
FPA stockholder as to how such stockholder
should vote at the FPA Special Meeting. See
"THE MERGER--Opinion of FPA's Financial
Advisor."
Opinion of Sterling's
Financial Advisor............ Smith Barney Inc. ("Smith Barney") has acted as
financial advisor to Sterling in connection
with the Merger and has delivered to the Board
of Directors of Sterling a written opinion
dated the date of this Proxy
Statement/Prospectus to the effect that, as of
the date of such opinion and based upon and
subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point
of view, to the holders of Sterling Common
Stock. While Smith Barney expressed no opinion
as to the adjustment features of the Exchange
Ratio, Smith Barney's analyses took into
account, where appropriate, certain adjustments
to the Exchange Ratio as of the date of its
opinion. The full text of the written opinion
of Smith Barney dated the date of this Proxy
Statement/Prospectus, which sets forth the
assumptions made, matters considered and
limitations on the review undertaken, is
attached as Appendix III to this Proxy
Statement/Prospectus and should be read
carefully in its entirety. Smith Barney's
opinion is directed only to the fairness of the
Exchange Ratio from a financial point of view,
does not address any other aspect of the Merger
or related transactions and does not constitute
a recommendation to any shareholder as to how
such shareholder should vote at the Sterling
Special Meeting. See "THE MERGER--Opinion of
Sterling's Financial Advisor."
Effective Time of the
Merger....................... The Merger will become effective at the time
provided in Articles of Merger to be filed with
the Secretary of State of Florida and the
Certificate of Merger to be filed with the
Secretary of State of Delaware (collectively,
the "Certificates of Merger") or such other
time as FPA, Sterling and Merger Sub agree
should be specified in the Certificates of
Merger (the "Effective Time"). The filing will
be made as soon as practicable after the
closing of the Merger. The closing of the
Merger (the "Closing") will occur no later than
the second business day after all of the
conditions to the Merger contained in the
Merger Agreement have been satisfied or waived.
See "THE MERGER AGREEMENT--Conditions to the
Merger."
Conditions to the Merger...... The obligations of FPA and Sterling to
consummate the Merger are subject to certain
conditions including: (i) obtaining the
approval of the stockholders of FPA and
shareholders of Sterling; (ii) approval for
quotation on the Nasdaq National Market
("Nasdaq"), subject to official notice of
issuance, of the FPA
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<PAGE>
Common Stock to be issued in connection with
the Merger; (iii) the expiration or termination
of the relevant waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"); (iv) the
effectiveness of the Registration Statement of
which this Proxy Statement/Prospectus is a
part; (v) no order being entered in any action
or proceeding or other legal restraint or
prohibition preventing the consummation of the
Merger; (vi) the receipt by each party of
various legal opinions, comfort letters and
other certificates, consents, reports and
approvals from the other parties to the Merger
and from third parties; (vii) the accuracy in
all material respects of the representations
and warranties of each party and compliance
with all covenants and conditions by each
party; and (viii) the absence of any material
adverse change in the business or financial
condition of FPA or Sterling. Either FPA or
Sterling may extend the time for performance of
any of the obligations of the other party or
may waive compliance with those obligations. To
the extent material provisions or conditions
are waived, including, among others, the
condition that the Merger be treated as a
pooling of interests for accounting and
financial reporting purposes, FPA and Sterling
intend to amend this Proxy Statement/Prospectus
and resolicit stockholders to the extent
required by applicable law. See "THE MERGER--
Certain Regulatory Matters" and "THE MERGER
AGREEMENT--Conditions to the Merger."
Termination, Amendment and
Waiver....................... The Merger Agreement may be terminated at any
time prior to the Effective Time by mutual
consent of FPA and Sterling, or, generally, by
either party if, among other things, (i) the
Merger shall not have been completed by
December 31, 1996, (ii) if the Merger is
enjoined by court order or (iii) if either
party fails to perform in any material respect
any of its covenants under the Merger
Agreement. In addition, either FPA or Sterling
may extend the time for performance of any of
the obligations of the other party or may waive
conditions with respect to those obligations.
See "THE MERGER AGREEMENT--Termination,
Amendment and Waiver."
Rights of FPA Stockholders
and Sterling Shareholders.... Sterling is a Florida corporation and the
rights of its shareholders are governed by the
Florida Business Corporation Act (the "Florida
Act") and the Articles of Incorporation and
Bylaws of Sterling (the "Sterling Charter
Documents"). FPA is a Delaware corporation and
the rights of its stockholders are governed by
the Delaware General Corporation Law (the
"Delaware Act") and the Certificate of
Incorporation and Bylaws of FPA (the "FPA
Charter Documents"). If the Merger is
consummated, former Sterling shareholders will
become stockholders of FPA and the rights of
former Sterling shareholders will be governed
by the Delaware Act and the FPA Charter
Documents. There are certain material
differences between
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<PAGE>
shareholders' rights under the Florida Act and
Sterling's Charter Documents and the Delaware
Act and the FPA Charter Documents. The material
differences include the Delaware Act's greater
flexibility in bringing a stockholder
derivative action and the ability to inspect
and copy a corporation's books and records and
somewhat broader dissenter's rights. Further,
Sterling's Charter Documents contain a
provision eliminating the requirement of
supermajority shareholder approval with respect
to certain transactions between Sterling and
affiliates of Sterling. See "COMPARISON OF
RIGHTS OF HOLDERS OF STERLING AND FPA COMMON
STOCK."
Dissenters' Rights............ So long as the shares of FPA and Sterling
Common Stock remain quoted on Nasdaq on the
date of the Special Meetings, holders of
Sterling Common Stock will not be entitled to
appraisal or dissenters' rights in connection
with the Merger. See "THE MERGER--Rights of
Dissenting Stockholders."
Certain Regulatory Matters.... Consummation of the Merger is subject to
certain regulatory approvals, including
expiration of certain waiting periods imposed
under the HSR Act. Although no assurance can be
given, FPA and Sterling believe that the Merger
can be effected in compliance with all federal
and state regulations. See "THE MERGER--Certain
Regulatory Matters."
Certain Federal Income Tax
Consequences................. Sterling has received an opinion from Coopers &
Lybrand L.L.P. to the effect that the Merger
will constitute a reorganization within the
meaning of Section 368(a) of the Code, which
opinion is based upon reasonable
representations of fact provided by officers of
Sterling and FPA. The Coopers & Lybrand L.L.P.
opinion further provides that: (i) no gain or
loss will be recognized by Sterling
shareholders who exchange their Sterling Common
Stock solely for FPA Common Stock in the Merger
(except with respect to cash received in lieu
of a fractional share interest in FPA Common
Stock, if any); (ii) the tax basis of the FPA
Common Stock received by Sterling shareholders
will equal the tax basis of the Sterling Common
Stock surrendered in exchange therefor; (iii)
the holding period of FPA Common Stock received
by Sterling shareholders in the Merger will
include the period during which the shares of
Sterling Common Stock surrendered in exchange
therefor were held; (iv) the receipt of cash in
lieu of a fractional share of FPA Common Stock
will be treated as if the cash was received in
exchange for such fractional share and not as a
dividend, and any gain or loss recognized as a
result of the receipt of such cash will be
capital gain or loss equal to the difference
between the cash received and the portion of
the shareholder's basis in the Sterling Common
Stock allocable to such fractional share
interest. EACH
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<PAGE>
HOLDER OF STERLING COMMON STOCK IS URGED TO
CONSULT HIS OR HER OWN PERSONAL TAX AND
FINANCIAL ADVISORS CONCERNING THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER, AS WELL
AS ANY APPLICABLE STATE, LOCAL, FOREIGN OR
OTHER TAX CONSEQUENCES, BASED UPON SUCH
HOLDER'S OWN PARTICULAR FACTS AND
CIRCUMSTANCES. See "THE MERGER -- Federal
Income Tax Consequences."
Accounting Treatment.......... The Merger will be treated as a "pooling of
interests" for accounting and financial
reporting purposes. See "THE MERGER--Accounting
Treatment."
Interests of Certain Persons
in the Merger................ In considering the recommendation of the FPA
Board of Directors with respect to the Merger,
FPA stockholders should be aware that members
of the FPA Board of Directors have interests in
the Merger and will receive certain benefits in
connection therewith. See "THE MERGER--
Interests of Certain Persons in the Merger" for
a description of such arrangements.
In considering the recommendation of the
Sterling Board of Directors with respect to the
Merger, Sterling shareholders should be aware
that certain members of the Board of Directors
and management of Sterling have interests in
the Merger and will receive certain benefits in
connection therewith. As of the Record Date,
directors and executive officers of Sterling
and their affiliates beneficially owned an
aggregate of 2,284,083 shares of Sterling
Common Stock (excluding shares issuable upon
exercise of options) or approximately 26.86% of
the shares of Sterling Common Stock outstanding
on such date. Pursuant to the Merger Agreement,
a condition to closing the Merger is the
execution of an agreement providing for the
employment by FPA ofDr. Dresnick for a period
of three years from the closing of the Merger.
The material terms of Dr. Dresnick's employment
agreement were agreed upon subsequent to the
date of the execution of the Merger Agreement.
Pursuant to the terms of the employment
agreement, Dr. Dresnick will receive a cash
payment of $1,000,000 in consideration of the
extension of the term of his employment with
FPA for a period of three years from the date
of the closing of the Merger and the waiver by
Dr. Dresnick to receive (i) severance payments
upon termination of his employment with FPA and
(ii) payments from Sterling as a result of the
Merger constituting a "Change in Control" for
purposes of his employment agreement with
Sterling. See "THE MERGER--Interests of Certain
Persons in the Merger" and "BOARD OF DIRECTORS
AND MANAGEMENT OF FPA FOLLOWING THE MERGER" for
a description of such arrangements.
Risk Factors.................. Since the operations related to the Foundation
Transaction will be integrated into current
operations of FPA, the impact of the Foundation
Transaction on FPA following the consummation
of
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<PAGE>
the Merger and on the current Sterling
shareholders will be dependent on the ability
of FPA to integrate successfully the operations
related to the Foundation Transaction.
Certain factors to be considered in connection
with an investment in FPA Common Stock and
approval of the Merger Agreement are set forth
under "RISK FACTORS." These risk factors
include risks associated with the Merger and
risks associated with the businesses of FPA and
Sterling, including: difficulty in controlling
healthcare costs; possible negative effects of
governmental health care and insurance
regulation; capitated nature of revenue; growth
strategy; difficulty in managing growth; full
risk capitation; possible dilutive effect of
issuing additional common stock; impact on
financial statements; no assurance of
successful integration of certain operations;
exchange ratio may not fully reflect changes in
stock prices; and need for additional capital.
See "RISK FACTORS."
Surrender of Certificates..... Promptly after the Effective Date, FPA's
exchange agent will mail a transmittal form and
exchange instructions to each holder of record
of Sterling Common Stock. CERTIFICATES FOR
SHARES OF STERLING COMMON STOCK SHOULD NOT BE
SURRENDERED UNTIL SUCH TRANSMITTAL FORM AND
EXCHANGE INSTRUCTIONS ARE RECEIVED.
Resale Restrictions........... All shares of FPA Common Stock received by
Sterling shareholders will be freely tradeable
except the shares of FPA Common Stock received
by persons who are deemed to be "affiliates"
(as such term is defined in the Securities Act)
of Sterling or FPA at the time of the Special
Meetings may be resold by them only in certain
permitted circumstances under the Securities
Act, other applicable securities laws and rules
related to pooling of interests accounting
treatment. See "THE MERGER--Resale of FPA
Common Stock by Affiliates."
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<PAGE>
THE FOUNDATION TRANSACTION
FHMS
FHMS provides facilities management, non-physician healthcare professionals
and other administrative and management services to FHMG and TDMC (the "Medical
Groups"). These services include the lease of the care centers and other
facilities for the operation of the Medical Groups, the provision of all
building services reasonably necessary for the proper operation of the leased
facilities, the provision of equipment, furniture and furnishings, and repair
and maintenance of the facilities and, other than physicians and allied health
professionals, all personnel reasonably necessary for the proper and efficient
operation of the Medical Groups. The Medical Groups are responsible for the
operation of the medical practice at each of the facilities, appropriate
physician and allied health professionals staffing, physician compensation,
quality assurance and utilization management services, credentialing and peer
review and community medical education.
As consideration for the Foundation Transaction, FPA is expected to pay
approximately $2 million in cash, and to issue $75 million of FPA Common Stock
and approximately $126 million in promissory notes. Under certain
circumstances, the number of shares of FPA Common Stock to be issued pursuant
to the Foundation Agreement may be adjusted, or the Foundation Agreement may be
terminated by FPA, if the average trading price of FPA Common Stock during a
specified period prior to the closing date of the Foundation Transaction is
below $13.60 per share. The number of shares of FPA Common Stock and principal
amount of the notes to be issued will not be determined prior to the FPA
Special Meeting. If the consideration to be paid or the indebtedness to be
assumed by FPA differs materially from the amounts stated in this Proxy
Statement/Prospectus, the Proxy Statement/Prospectus will be amended and FPA
stockholders will be resolicited. See "RISK FACTORS--Risks Relating to the
Foundation Transaction--Adjustments to Consideration" and "THE FOUNDATION
TRANSACTION--FHMS Acquisition."
If Foundation and Selling Shareholder terminate the Foundation Agreement,
Foundation and Selling Shareholder can not sell FHMS, TDMC or FHMG or any
component thereof to any third party, unless FPA, FPA California and FPA IPA
have rejected a purchase offer on terms no less favorable than those set forth
in the Foundation Agreement; provided that, in no event, will the number of
shares of FPA Common Stock to be issued as part of the consideration for such
purchase exceed 19% of the then outstanding shares of FPA Common Stock.
HOLDING COMPANY
Holding Company is the parent of the Medical Groups.
FHMG. FHMG began operations in spring 1993 to increase the availability of
primary care physicians for Foundation's members and to enhance members' access
to such physicians at specific locations throughout California. FHMG was
created through the acquisition of multiple small physician practices primarily
in the Sacramento and Stockton areas of Northern California and in the Oxnard
and Ventura areas of Southern California. FHMG has developed a reputation as a
high quality primary care medical group in these areas. As of June 30, 1996,
FHMG's 83 physicians and 16 nurse practitioners, and physician assistants,
offer primary care. Most of the HMO's enrollees linked to FHMG physicians
receive specialists' services through discounted fee-for-service or capitated
arrangements with specialty providers. FHMG currently has capitated contracts
with ancillary care providers in the areas of laboratory, physical therapy and
radiology.
TDMC. Foundation acquired TDMC in November 1994 when it also acquired
Intergroup Healthcare Corporation, an Arizona based HMO that was originally
established by TDMC ("Intergroup"). Headquartered in Tucson, Arizona, TDMC
provides high quality primary and specialty health care services through a
multi-
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<PAGE>
specialty team approach primarily in Tucson (Pima County) and Phoenix (Maricopa
County), Arizona's two major metropolitan areas. TDMC currently employs 229
physicians and 7 physician assistants at 18 care centers throughout Arizona.
REASONS FOR THE FOUNDATION TRANSACTION
The FPA Board of Directors has unanimously approved the Foundation
Transaction. The FPA Board of Directors believes that the Foundation
Transaction is fair to and in the best interests of FPA Stockholders.
In considering the advantages and disadvantages of the Foundation
Transaction, the Board of Directors of FPA addressed numerous considerations.
The reasons the Board of Directors of FPA believes that the Foundation
Transaction is desirable include: (i) the Foundation Transaction is expected to
enable FPA to significantly expand the FPA Network in geographic areas in which
FPA currently operates; (ii) the Foundation Transaction is expected to
substantially increase FPA's size in terms of revenues, profits, physicians and
locations which is expected to enhance FPA's national recognition making it
easier for FPA to attract and retain new physicians and win Payor contracts;
(iii) the Foundation Transaction is expected to enable FPA to contract more
effectively with specialists and hospitals and to consolidate general and
administrative expenses; and (iv) the Foundation Transaction is expected to
provide additional revenue to FPA under the long-term provider agreements
between Foundation and the Medical Groups.
Disadvantages of the Foundation Transaction considered by the Board of
Directors of FPA were the potential costs and difficulties that may be
encountered in order to properly integrate the businesses being acquired in the
Foundation Transaction.
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<PAGE>
AMENDMENTS TO FPA MEDICAL MANAGEMENT, INC.
OMNIBUS STOCK OPTION PLAN
At the FPA Special Meeting, stockholders of FPA will be asked to approve
amendments to the FPA Medical Management, Inc. Omnibus Stock Option Plan (the
"FPA Plan") which, if approved, will become effective only upon consummation of
either the Merger or the Foundation Transaction. The amendments would, upon
becoming effective, (i) increase the total number of shares of FPA Common Stock
issuable upon exercise of options granted under such plan from 2,500,000 to
4,000,000 if only the Merger is consummated, 3,500,000 if only the Foundation
Transaction is consummated, and 5,000,000 if both the Merger and the Foundation
Transaction are consummated, and (ii) limit the number of shares of FPA Common
Stock for which options may be granted under the FPA Plan to any person during
any calendar year to 750,000. The FPA Plan was approved by the FPA stockholders
in October 1994 and amendments to the FPA Plan were approved by the FPA
stockholders in July 1995 and June 1996.
The proposal to approve the amendments to the FPA Plan will become effective
if it receives the affirmative vote of the holders of a majority of the shares
of FPA Common Stock present in person or by proxy at the Special Meeting. In
the event the amendment is not approved by FPA stockholders, or in the event
such plan is approved by FPA stockholders but if neither the Merger nor the
Foundation Transaction is consummated, the amendment will not become effective
and the FPA Plan will remain in full force and effect in its current form.
The FPA Plan currently provides for the issuance of up to 2,500,000 shares of
FPA Common Stock. As of September 30, 1996, options to purchase 2,874,954
shares of FPA Common Stock have been granted under the FPA Plan. If the Merger
is consummated, FPA has agreed, subject to stockholder approval of the proposed
amendment, to grant options under the FPA Plan to replace all outstanding
options to purchase Sterling Common Stock. The grants under the FPA Plan will
be for the number of shares subject to the Sterling Stock Options, multiplied
by the Exchange Ratio, and the exercise price of such options will be the
exercise price of the Sterling Stock Options, divided by the Exchange Ratio.
See "THE MERGER--Adjustments to Merger Consideration." Options to purchase up
to 1,033,499 additional shares of FPA Common Stock may be required for this
purpose. In addition to the shares required to make the grants to the holders
of Sterling Stock Options, the Board of Directors of FPA believes that it is
advisable and in the best interest of FPA to make additional shares available
for the granting of options in the future to officers and other key employees
of FPA because options provide a valuable incentive for such persons to remain
with FPA and motivate them to exert their best efforts on behalf of FPA.
Accordingly, FPA's Board of Directors recommends that the total number of
shares issuable pursuant to the FPA Plan be increased by 2,500,000 if both the
Merger and the Foundation Transaction are consummated.
The proposed amendments would also add a provision to the FPA Plan to limit
the number of shares of FPA Common Stock for which options may be granted to
any individual during any year. With this provision, options granted under the
FPA Plan will qualify as performance-based compensation for purposes of Section
162(m) of the Code and the regulations thereunder, and FPA will be entitled to
deduct the compensation paid to certain executives pursuant to the FPA Plan,
notwithstanding the deduction limit contained in Section 162(m).
FPA's Board of Directors recommends that you vote FOR the proposal to amend
the FPA Plan.
APPROVAL OF ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETINGS
At the FPA Special Meeting, FPA stockholders will be asked to approve the
adjournment or postponement of the FPA Special Meeting in the event that such
adjournment or postponement is necessary in order to solicit additional votes
for the FPA Proposals.
FPA's Board of Directors recommends that you vote FOR this proposal.
At the Sterling Special Meeting, Sterling shareholders will be asked to
approve the adjournment or postponement of the Special Meeting in the event
that such adjournment or postponement is necessary in order to solicit
additional votes for adoption of the Merger Agreement.
Sterling's Board of Directors recommends that you vote FOR this proposal.
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<PAGE>
THE MEETINGS
Meetings of Stockholders...... The Special Meeting of stockholders of FPA (the
"FPA Special Meeting") will be held on
Thursday, October 31, 1996 at 9:00 a.m. (local
time) at San Diego Marriot Mission Valley, 8757
Rio San Diego Drive, San Diego, California
92108.
The Special Meeting of shareholders of Sterling
(the "Sterling Special Meeting") will be held
on Thursday, October 31, 1996 at 9:00 a.m.
(local time) at the Miami Airport Hilton,
located at 5101 Blue Lagoon Drive, Miami,
Florida 33126.
Matters to be Considered at
the Special Meetings......... At the FPA Special Meeting, stockholders will
be asked to approve and adopt the Merger
Agreement and amendments to the FPA Medical
Management, Inc. Omnibus Stock Option Plan (the
"FPA Plan") and to approve the possible
adjournment or postponement of the FPA Special
Meeting. FPA is not seeking stockholder
approval of the Foundation Transaction at the
FPA Special Meeting.
At the Sterling Special Meeting, shareholders
will be asked to approve and adopt the Merger
Agreement and to approve the possible
adjournment or postponement of the Sterling
Special Meeting.
Pursuant to the terms of the Merger Agreement,
each share of Sterling Common Stock will be
converted into 1.4 shares of FPA Common Stock,
subject to adjustment. See "THE MERGER--Merger
Consideration."
For additional information relating to the
Special Meetings, see "THE MEETINGS."
Quorum; Vote Required......... The presence, in person or by proxy, of the
holders of a majority of the outstanding shares
of FPA Common Stock at the FPA Special Meeting
is necessary to constitute a quorum at the
meeting. Approval of the Merger Agreement
requires the affirmative vote of a majority of
the issued and outstanding shares of FPA Common
Stock. Abstentions and broker non-votes will
have the effect of a negative vote against
approval of the Merger Agreement. Approval of
the amendments to the FPA Plan and the possible
adjournment or postponement of the FPA Special
Meeting requires the affirmative vote of a
majority of the shares of FPA Common Stock
present either in person or by proxy at the FPA
Special Meeting. Because abstentions are
treated as shares present at the FPA Special
Meeting and entitled to vote, they will have
the same effect as a negative vote on the
proposals to amend the FPA Plan and to approve
the possible adjournment or postponement of the
FPA Special Meeting. Broker non-votes are not
allowed to vote at the FPA Special Meeting and
will have no effect on the outcome of the
proposals to amend the FPA Plan and to approve
the possible adjournment or postponement of the
FPA Special Meeting.
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The presence in person or by proxy, of the
holders of a majority of the outstanding shares
of Sterling Common Stock at the Sterling
Special Meeting is necessary to constitute a
quorum at the meeting. Approval of the Merger
Agreement requires the affirmative vote of a
majority of the issued and outstanding shares
of Sterling Common Stock. Approval of the
possible adjournment or postponement of the
Sterling meeting requires the affirmative vote
of a majority of the shares of Sterling Common
Stock present, either in person or by proxy, at
the Sterling Special Meeting.
Abstentions and broker non-votes will be
included in determining whether a quorum is
present at the Sterling Special Meeting.
Abstentions and broker non-votes will have the
effect of a vote against approval of the Merger
Agreement.
See "THE MEETINGS--Vote Required" and "THE
MERGER AGREEMENT--Conditions to the Merger."
Record Date................... Only stockholders of record of FPA Common Stock
at the close of business on September 25, 1996
are entitled to notice of and to vote at the
FPA Special Meeting. On that date, there were
12,540,656 shares of FPA Common Stock
outstanding, with each share of FPA Common
Stock entitled to cast one vote with respect to
the proposals presented at the FPA Special
Meeting.
Only shareholders of record of Sterling Common
Stock at the close of business on September 25,
1996 are entitled to notice of and to vote at
the Sterling Special Meeting. On that date,
there were 8,515,017 shares of Sterling Common
Stock outstanding, with each share of Sterling
Common Stock entitled to cast one vote with
respect to the proposals presented at the
Sterling Special Meeting.
Security Ownership of
Management................... As of the record date, the directors and
executive officers of FPA as a group had the
power to vote approximately 18% of the issued
and outstanding shares of FPA Common Stock
entitled to vote at the FPA Special Meeting.
Directors of FPA and certain stockholders with
the collective power to vote approximately 18%
of the outstanding shares of FPA Common Stock
have entered into Voting Agreements, and have
given their irrevocable proxies, providing that
their shares shall be voted in favor of the FPA
proposals presented at the FPA Special Meeting.
As of the record date, the directors and
executive officers of Sterling as a group had
the power to vote approximately 26.86% of the
issued and outstanding shares of Sterling
Common Stock entitled to vote at the Sterling
Special Meeting. Directors of Sterling and
certain shareholders, with the collective power
to vote approximately 26.86% of the outstanding
Sterling Common Stock have entered into Voting
Agreements and have given their irrevocable
proxies, providing that their shares shall be
voted in favor of the Merger Agreement.
26
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following summary presents selected comparative per share information for
(i) FPA on a historical basis in comparison with pro forma information giving
effect to the Merger, and (ii) Sterling on a historical basis in comparison
with its pro forma equivalent information after giving effect to the Merger,
including the receipt of the FPA Common Stock in exchange for the Sterling
Common Stock in accordance with the Merger. The pro forma financial information
should be read in conjunction with the historical financial statements of FPA
and Sterling and the related notes thereto incorporated herein by reference or
contained elsewhere herein, and in conjunction with the unaudited pro forma
financial information appearing elsewhere in this Proxy Statement/Prospectus.
Neither FPA nor Sterling has declared cash dividends since inception. It is
anticipated that FPA will not declare cash dividends in the foreseeable future.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1993 1994 1995 1996
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net income per common and common equiva-
lent share:
FPA:
Historical(1)........................ $ .27 $ .07 $ .13 $ .20
Pro forma(2)......................... (3.80) (1.63)
Pro forma historical combined mini-
mum(3)(5)........................... .11 .21 .23
Pro forma historical combined maxi-
mum(3)(5)........................... .10 .18 .20
Pro forma combined(4)................ (1.91) (.90)
Sterling:
Historical(6)........................ .28 .48 .45 .34
Pro forma minimum equivalent(5)...... .14 .27 .29
Pro forma maximum equivalent(5)...... .15 .29 .32
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Stockholders' equity per common share:
FPA historical.......................................... $3.97 $4.50
FPA pro forma historical combined minimum(3)(5)......... 4.26 4.98
FPA pro forma historical combined maximum(3)(5)......... 3.83 4.51
Sterling historical..................................... 6.26 7.07
Sterling pro forma minimum equivalent(5)................ 5.44 6.37
Sterling pro forma maximum equivalent(5)................ 6.00 7.05
</TABLE>
- --------
(1) Reflects the effects on the historical net income per share for 1993 as if
FPA (i) had paid to the executive officers annual compensation consistent
with the employment agreements entered into as of January 1, 1994 and (ii)
had been treated as a C corporation rather than a S corporation for income
tax purposes, with an assumed annual effective income tax rate of 40%. Pro
forma net income per share for 1994 assumes no tax benefit from termination
by FPA of its S corporation election and an assumed effective annual income
tax rate of 40%.
(2) Reflects the effects of the FPA acquisitions as reflected in the Pro Forma
Condensed Consolidated Financial Statements (unaudited) of FPA Medical
Management, Inc. and Subsidiaries appearing elsewhere in this Proxy
Statement/Prospectus. The FPA acquisitions include the acquisitions of
Gonzaba Management Organization, Arizona Managed Care Services and
affiliates, Grossmont Medical Clinic, Foundation Health IPA, Physicians
First, Inc., and Foundation Health Medical Services and affiliates for the
year ended December 31, 1995. The FPA acquisitions for the six months ended
June 30, 1996 include the acquisitions of Physicians First, Inc. and
Foundation Health Medical Services and Affiliates.
(3) Reflects the effects of the Merger between FPA and Sterling. These amounts
do not reflect the effects of the FPA acquisitions and the Sterling
acquisitions as reflected in the Pro Forma Condensed Consolidated Financial
Statements (unaudited) of FPA Medical Management, Inc. and Subsidiaries
appearing elsewhere in this Proxy Statement/Prospectus.
(4) Reflects the effects of the Merger between FPA and Sterling and the effects
of the FPA acquisitions and the Sterling acquisitions as reflected in the
Pro Forma Condensed Consolidated Financial Statements (unaudited) of FPA
Medical Management, Inc. and Subsidiaries appearing elsewhere in this Proxy
Statement/Prospectus. The FPA acquisitions include the acquisitions of
Gonzaba Management Organization, Arizona Managed Care Services and
affiliates, Grossmont Medical Clinic, Foundation Health IPA, Physicians
First, Inc., and Foundation Health Medical Services and affiliates for the
year ended December 31, 1995. The FPA acquisitions for the six months ended
June 30, 1996 include the acquisitions of Physicians First, Inc. and
Foundation Health Medical Services and Affiliates.
(5) The minimum per share data assumes an exchange ratio of 1.278 FPA common
shares for each Sterling common share. The maximum per share data assumes
an exchange ratio of 1.565 FPA common shares for each Sterling common
share. Such exchange ratios are defined in the Merger Agreement.
(6) Reflects the effects on the historical net income per share for 1993 and
1994 as if (i) the business combination with Frost Hanna Halpryn Capital
Group, Inc. had been completed on January 1, 1993 and therefore, reflects
the combined results of operations and (ii) Sterling had been subject to
federal and state income taxes based on tax laws in effect for such
periods.
27
<PAGE>
COMPARATIVE MARKET DATA
FPA Common Stock is traded on Nasdaq under the symbol "FPAM". The range of
high and low bid prices, as reported by Nasdaq, for FPA Common Stock for the
periods indicated below, is as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
October 20, 1994 through December 31, 1994...................... 13 1/8 10 1/4
1995
First Quarter................................................... 22 1/8 12
Second Quarter.................................................. 12 1/8 7 7/8
Third Quarter................................................... 11 7/8 8 7/8
Fourth Quarter.................................................. 7 1/2 5 7/8
1996
First Quarter................................................... 13 8 5/8
Second Quarter.................................................. 19 7/8 12 3/8
Third Quarter................................................... 27 1/8 18 1/4
</TABLE>
As of the Record Date, FPA Common Stock was held by approximately 212 holders
of record.
Sterling Common Stock is listed on Nasdaq and is traded under the symbol
"STER." From February 9, 1993, when the Common Stock commenced trading, through
May 31, 1994, the Common Stock was traded in the over-the-counter market under
the symbol "FHHA." From June 1, 1994 through August 3, 1995, the Common Stock
was traded on the American Stock Exchange ("AMEX") under the symbol "DRZ." On
August 4, 1995, the Common Stock commenced trading on Nasdaq. The following
table shows the (i) reported high and low sales prices on Nasdaq (for quotes
commencing on August 4, 1995), (ii) reported high and low sales prices on the
consolidated reporting system of AMEX (for quotes from June 1, 1994 through
August 3, 1995) and (iii) reported high and low bid quotations for the Common
Stock obtained from the OTC Bulletin Board (for quotes from February 9, 1993
through May 31, 1994). The high and low bid prices for the periods indicated
are interdealer prices, without retail mark-up, mark-down or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First Quarter................................................... 13 1/2 11
April 1 through May 31.......................................... 13 1/2 11 3/4
June 1 through September 30..................................... 13 3/4 9 3/4
Fourth Quarter.................................................. 11 1/8 9 1/8
1995
First Quarter................................................... 11 8 3/8
Second Quarter.................................................. 16 1/2 10 5/8
July 1 through August 3......................................... 15 1/8 13 5/8
August 4 through September 30................................... 15 1/2 13 3/4
Fourth Quarter.................................................. 15 1/4 10
1996
First Quarter................................................... 15 1/2 10 1/2
Second Quarter.................................................. 22 7/8 14 1/4
Third Quarter................................................... 21 5/8 15 7/8
</TABLE>
As of the Record Date, Sterling Common Stock was held by approximately 81
holders of record.
28
<PAGE>
The following table sets forth the closing price per share of FPA Common
Stock and Sterling Common Stock on Nasdaq, on (i) May 17, 1996, the business
day preceding public announcement of the Merger and (ii) September 30, 1996:
<TABLE>
<CAPTION>
MARKET PRICE FPA STERLING
PER SHARE AT: COMMON STOCK COMMON STOCK
------------- ------------ ------------
<S> <C> <C>
May 17, 1996.................................... $17 3/4 $19 1/4
September 30, 1996.............................. 26 3/8 21 5/8
</TABLE>
Stockholders are advised to obtain current market quotations for FPA Common
Stock and Sterling Common Stock. No assurance can be given as to the market
price of FPA Common Stock or Sterling Common Stock at, or in the case of FPA
Common Stock, after the Effective Time.
FHMS was formed by and is wholly-owned by Foundation, and as such, there has
been no trading in its stock. Holding Company is wholly-owned by a physician
affiliated with Foundation as a holding company for TDMC and FHMG, and there
has been no trading in its stock. The stock of TDMC and FHMG was contributed to
Holding Company in April, 1996. Neither FHMS nor Holding Company has paid any
dividends.
29
<PAGE>
RISK FACTORS
In addition to other information in this Proxy Statement/Prospectus, the
following factors should be considered carefully in evaluating the proposals
to be voted on at the Special Meetings. This Proxy Statement/Prospectus
contains forward-looking statements which involve risks and uncertainties.
FPA's actual results may differ significantly from the results discussed in
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below.
RISKS RELATING TO FPA
Difficulty in Controlling Healthcare Costs; Capitated Nature of
Revenue. Agreements with Payors typically provide for the Professional
Corporations to receive prepaid monthly fees per enrollee known as
"capitation" payments. FPA's profitability primarily depends upon its ability
to control costs and the ability of the Professional Corporations to incur
less in medical, hospital and administrative costs than the capitation revenue
received from Payors. Such profitability is achieved through effective
management of the provision of medical services by physicians in the FPA
Network including controlling utilization of specialty care physicians and
other ancillary providers, purchasing services from physicians outside the FPA
Network at competitive prices and negotiating favorable rates with hospitals.
Agreements with Payors may also contain shared risk arrangements under which
additional compensation can be earned based on the provision of high-quality,
cost-effective healthcare to enrollees but which may require that a portion of
any loss in connection with such shared risk arrangements be assumed by the
FPA Network, which would reduce FPA's net income. The amount of non-capitated
medical and hospital costs in any period could be affected by factors beyond
the control of the FPA Network such as changes in treatment protocols,
epidemics, disasters, new technologies and inflation. To the extent that
specialty care physicians' fees or hospital costs have not been capitated and
enrollees (i) require more specialty care than anticipated or (ii) have higher
than anticipated hospital utilization rates, revenue paid to the FPA Network
by Payors may not be sufficient to cover the costs the FPA Network is
obligated to pay. The FPA Network purchases stoploss protection which provides
thresholds or "attachment points," generally $100,000 for inpatient services
and $25,000 for outpatient services per year, at which the risk of financial
exposure for an enrollee beyond such thresholds is contractually shifted to
the insurer. FPA believes that it has negotiated favorable attachment points
on behalf of the Professional Corporations. The failure of FPA to negotiate
favorable attachment points in the future could have a material adverse effect
on FPA's financial condition, results of operations and/or liquidity. There
can be no assurance that FPA will be able to negotiate favorable attachment
points in the future.
Growth Strategy; Difficulty in Managing Growth. The future growth of FPA is
largely dependent on a continued increase in the number of new enrollees in
the FPA Network. This growth may come from (i) affiliations with, or
acquisitions of, individual or group physician practices serving enrollees of
Payors in the FPA Network or new Payors, (ii) increased membership in plans of
Payors with which the Professional Corporations have contracts and whose
members are patients of physicians in the FPA Network or (iii) agreements with
Payors and physicians in other geographic markets. The process of identifying
and consummating suitable acquisitions of, or affiliations with, physician
groups can be lengthy and complex. The marketplace for such acquisitions and
affiliations is subject to increasing competitive pressures. There can be no
assurance that FPA will be successful in identifying, acquiring or affiliating
with and integrating additional physician groups into the FPA Network or that
the Professional Corporations will be able to contract with new Payors or that
funds will be available to consummate such acquisitions or affiliations.
The success of the physician practice acquisitions in new geographic
locations is largely dependent on the ability to control medical and
administrative costs, negotiate and maintain Payor contracts on behalf of the
Professional Corporations with Payors whose enrollees are patients of primary
care physicians affiliated with or employed by the Professional Corporations
and to integrate their operations into the FPA Network. These acquisitions may
expose the FPA Network to new Payors and providers with which FPA has no
previous business experience. FPA cannot predict whether it will be able to
enroll into the FPA Network all members currently served by physicians
affiliated with newly acquired entities. The inability of FPA to control such
costs,
30
<PAGE>
negotiate favorable Payor contracts or successfully integrate the operations
of these new entities could have a material adverse effect on FPA's results of
operations.
In the past year, FPA experienced rapid growth in its business and staff.
Continued rapid growth may impair FPA's ability to provide efficiently its
management services to the FPA Network, to manage and supervise its employees
and to assure that the FPA Network retains its existing enrollees. No
assurance can be made that there is a sufficient number of employees to manage
such growth or that future additional hirings of employees will not have to be
made. The failure of FPA to so provide, manage and retain could have a
material adverse effect on FPA's future results of operations.
Significant Indebtedness. FPA's growth has resulted in a significant
increase in FPA's indebtedness. Following the consummation of the Merger and
the Foundation Transaction, FPA will have approximately $205 million in debt
obligations. As of the date hereof, FPA has a revolving credit facility of $45
million. FPA is currently in discussions with a bank to provide a revolving
credit facility of up to approximately $150 million. While FPA believes it
will be able to service the increased indebtedness, there can be no assurance
to that effect. Also, no assurance can be given that such additional financing
or any refinancing of indebtedness can be obtained or if available such
refinancing will be on terms acceptable to FPA.
Full Risk Capitation. Under capitation contracts generally, professional
corporations accept capitation payments and, as a result, accept the financial
risk for healthcare services not normally performed and provided by
professional corporations comprised of primary care physicians under payor
contracts (e.g., specialty care physician services). Under substantially all
Payor contracts, the Professional Corporations accept the financial risk for
the provision of outpatient medical services ("fully delegated" contracts).
Under certain Payor contracts, a Professional Corporation also accepts the
financial risk for hospital services. In the event that (i) FPA is unable to
negotiate favorable prices or rates in contracts with providers of these
services on behalf of the Professional Corporations, (ii) a significant number
of enrollees require services up to the stoploss insurance "attachment points"
or (iii) the Professional Corporations are unable to effectively control the
utilization of these services, FPA could experience material adverse effects
on its results of operations.
Possible Dilutive Effect of Issuing Additional Common Stock For Acquisitions
and Affiliations. Current FPA stockholders will own as little as 44.8% of the
outstanding FPA Common Stock if only the Merger is consummated, 68.7% if only
the Foundation Transaction is consummated and 37.1% if both the Merger and the
Foundation Transaction are consummated. In addition, FPA's expansion strategy
will continue to include acquisitions of, and affiliations with, individual
and group physician practices. Such acquisitions or affiliations may be
consummated using newly issued shares of Common Stock, or securities
convertible or exercisable into Common Stock, as consideration. The issuance
of additional shares of Common Stock, including, but not limited to, shares to
be issued in connection with the Merger and the Foundation Transaction, may
have a dilutive effect on the net tangible book value or earnings per share
following such issuance.
Limited History of Profitability. In 1993, 1994 and 1995, FPA's net income
was $178,321, $388,313 and $1,002,462, respectively. There can be no assurance
that FPA will continue to be profitable.
Fluctuations in Quarterly Results. FPA's financial statements (including
interim financial statements) contain accruals which are calculated quarterly
for estimates of amounts assigned by the Professional Corporations to FPA and
paid by Payors based upon hospital utilization. Quarterly results have in the
past and may in the future be affected by adjustments to such estimates for
actual costs incurred. Historically, the Professional Corporations and Payors
generally reconcile differences between actual and estimated amounts
receivable or payable relating to Payor shared risk arrangements in the second
or third quarter of each year. In the event that the Professional Corporations
and Payors are unable to reconcile such differences, extensive negotiation,
arbitration or litigation relating to the final settlement of these amounts
may occur. As the FPA Network expands to include additional Payors, the timing
of these adjustments may vary; this variation in timing may cause FPA's
results in quarters other than the second and third quarters not to be
directly comparable to corresponding quarters in other years. FPA's financial
statements also include estimates of costs for covered
31
<PAGE>
medical benefits incurred by enrollees, which costs have not yet been reported
by the providers. While these estimates are based on information available to
FPA at the time of calculation, actual costs may differ from FPA's estimates
of such amounts. If the actual costs differ significantly from the amounts
estimated by FPA, adjustments will be required and quarterly results may be
affected. Quarterly results may also be affected by movements of Payor members
from one Payor to another, particularly during periods of open enrollment for
HMOs (as hereinafter defined). Additionally, FPA, together with the
Professional Corporations, expects to make acquisitions of physician practices
in the future. Such acquisitions could cause fluctuations in FPA's quarterly
results.
High Concentration of Customers. In 1993, contracts with four Payors
accounted for approximately 71% of FPA's operating revenue. In 1994, three
Payors accounted for approximately 57% of FPA's operating revenue. In 1994,
PacifiCare Health Systems, Inc. ("PacifiCare") and Prudential Healthcare Plan
of California, Inc. represented 33% and 10%, respectively, of FPA's operating
revenue. In 1995, PacifiCare of California, Inc. (including the senior
programs) and Medigroup, Inc. each represented in excess of 10% of FPA's
operating revenue and collectively accounted for approximately 41% of FPA's
operating revenue. If the announced merger of PacifiCare and FHP had been
consummated as of January 1, 1996, the combined PacifiCare/FHP entity would
have represented approximately 15% of FPA's operating revenue for the six
months ended June 30, 1996.
Short-term Nature and Early Terminability of Payor Contracts. Contracts with
Payors generally provide for terms of one to three years, may be terminated
earlier upon notice and are subject to annual negotiation of capitation rates,
covered benefits and other terms and conditions. At times, Payor contracts may
be continued on a month-to-month basis while the parties renegotiate the terms
of the contracts. There can be no assurance that any of such contracts will
not be terminated early, will be renewed or, if renewed, that they will
contain favorable terms. Effective June 30, 1995, a Professional Corporation
and a Payor terminated their relationship in Pennsylvania after ten months.
FPA Network physicians provided healthcare services to approximately 3,700
members of the Payor at the time of termination. The loss of any Payor
contract and the failure to regain or retain such Payor's members or the
related revenues without entering into new Payor relationships could have a
material adverse effect on FPA.
Dependence on Primary Care Physicians. Primary care physicians are an
integral part of the FPA Network, as they provide and manage medical services
offered to enrollees. FPA's growth depends, in part, on its ability to retain
existing and attract additional primary care physicians to the FPA Network.
There can be no assurance that physicians presently in the FPA Network will
not leave the FPA Network, that FPA will be able to attract additional primary
care physicians into the FPA Network or that the amount of capitation payments
to physicians will not have to be increased. To the extent that primary care
physicians leave the FPA Network or capitation payments to physicians are
increased, FPA's results of operations may be materially adversely affected.
Dependence Upon Key Personnel. FPA is dependent upon the active
participation of its executive officers, particularly Dr. Sol Lizerbram,
President and Chairman of the Board, and Dr. Seth Flam, Chief Executive
Officer. The loss to FPA of the services of Drs. Lizerbram or Flam could have
a material adverse effect upon FPA's future operations. FPA has an employment
contract with each of its physician executive officers extending through
December 31, 1998. FPA has not purchased key-man life insurance on any of its
key personnel.
Possible Negative Effects of Prospective Healthcare Reform. Various plans
have been proposed and are being considered on federal, state and local levels
to reduce costs in healthcare spending. Although FPA believes its model
responds to the concerns addressed by such plans, it is not possible to assess
the likelihood any of these proposals will be enacted or to assess the impact
any of these proposals may have on reimbursement to healthcare providers. Any
plan to control healthcare costs, however, could result in lower rates of
reimbursement. Lower rates of reimbursement may reduce the amounts assigned to
FPA by the Professional Corporations and, accordingly, may have a material
adverse effect on FPA's business and results of operations.
32
<PAGE>
Legislation has been proposed in Congress to implement a "any willing
provider" law on a national level. These laws, which are in effect in some
states, require managed care organizations, such as HMOs, to contract with any
physician who is appropriately licensed and who meets any applicable
membership criteria. Such laws could limit the flexibility of managed care
organizations to achieve efficiency by controlling the size of their primary
care provider networks and the number of specialty care providers to whom
enrollees are referred. At present, no state in which FPA Network physicians
practice has such a law although "any willing provider" laws have been
proposed in states in which FPA operates. FPA cannot predict what effect such
laws would have on its operations.
In addition, a significant portion of FPA's revenue assigned from the
Professional Corporations is derived from reimbursements made under the
Medicare program to HMOs that participate in Medicare risk contracts. Medicare
is a federally funded health insurance program which provides health insurance
coverage for certain disabled persons, persons age 65 and older, and those
with chronic renal disease. There have been, and FPA expects that there will
continue to be, a number of proposals to limit Medicare reimbursements. If any
such proposal is adopted, any reduction in levels of government reimbursement
or change in government reimbursement policies, practices, interpretations,
regulations or legislation could have a material adverse effect on the
business and results of operations of FPA.
Possible Negative Effects of Governmental Regulation. The healthcare
industry is subject to extensive federal and state regulation. Changes in the
regulations or reinterpretations of existing regulations may significantly
affect the FPA Network. In the states in which FPA conducts or may conduct
business, general business corporations are not permitted to practice
medicine, exercise control over physicians who practice medicine or engage in
certain practices such as fee-splitting with physicians. The corporate
practice of medicine refers to the rendering directly, or through employment,
of medical services by a business corporation. As stated in the Notes to its
Consolidated Financial Statements, FPA believes that it has perpetual and
unilateral control over the assets and operations of the various affiliated
professional corporations. There can be no assurance that regulatory
authorities will not take the position that such control conflicts with state
laws regarding the practice of medicine or other federal restrictions.
Although FPA believes its operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that the
existing organization of FPA and its contractual arrangements with affiliated
physicians will not be successfully challenged as constituting the unlicensed
practice of medicine or that the enforceability of the provisions of such
arrangements, including non-competition agreements, will not be limited. There
can be no assurance that review of the business of FPA by courts or regulatory
authorities will not result in a determination that could adversely affect
FPA's operations or that the health care regulatory environment will not
change so as to restrict existing operations or expansion of FPA. In the event
of action by any regulatory authority limiting or prohibiting FPA from
carrying on its business or from expanding the operations of FPA to certain
jurisdictions, structural and organizational modifications of such
organization or arrangements may be required, which could have an adverse
effect on FPA.
Because certain state law prohibits general business corporations from
controlling professional corporations contractually or otherwise, FPA has
structured its contracts with the Professional Corporations so that such
corporations retain the right to enter into contracts for the provision of
medical services or make other financial commitments. Such contracts allow the
Professional Corporations to make commitments which could be on terms which
may not be advantageous to FPA. For example, a Professional Corporation could
decline to enter into Payor contracts which are negotiated for it by FPA or,
alternatively, could decide to enter into Payor contracts which FPA does not
believe are financially advantageous. Physicians who contract with these
corporations may also have the legal right to decline to use other physicians
in the FPA Network or specialists having a pre-existing, subcapitated or fixed
fee relationship with the FPA Network. These decisions, if entered into by a
Professional Corporation or a physician, could have a material adverse effect
on FPA's business and financial condition.
FPA and the Professional Corporations are subject to federal legislation
that prohibits activities and arrangements that provide kickbacks or other
economic inducements for the referral of business under Medicare and Medicaid
programs. Medicaid is a cooperative state-federal program for medical
assistance to the poor.
33
<PAGE>
Noncompliance with the federal anti-kickback legislation can result in
exclusion from Medicare and Medicaid programs and civil and criminal
penalties. The federal government has promulgated "safe harbor" regulations
that identify certain business and payment practices which are deemed not to
violate the federal anti-kickback statute. FPA believes that its operations
comply with all federal anti-kickback laws. In addition, federal legislation
currently restricts the ability of physicians to refer Medicare/Medicaid
patients to certain entities performing designated health services, including
clinical laboratory services. With respect to the self-referral prohibition,
the entity and the referring physician are prohibited from receiving Medicare
or Medicaid reimbursement for services rendered and civil penalties may be
assessed. FPA believes that its operations comply with all federal anti-
referral laws.
Many states, including states in which FPA does business, have similar anti-
kickback and anti-referral laws. Penalties similar to those imposed by federal
law are provided for violation of state anti-kickback and anti-referral laws.
FPA believes that its operations comply with all applicable state anti-
kickback and anti-referral laws.
In addition, healthcare reforms may expand existing anti-kickback and anti-
referral laws to apply to all healthcare payors, not just Medicare and
Medicaid. It is unclear how any reform legislation would affect healthcare
provider networks or other types of managed care arrangements. There can be no
assurance that FPA will be able to comply with any new laws.
Further, a number of states prohibit sharing professional fees (or fee
splitting) with anyone other than a member of the same profession. There can
be no assurance that such laws will ultimately be interpreted in a manner
consistent with the practices of FPA.
Federal and state laws regulate insurance companies, HMOs and other managed
care organizations. Many states also regulate the establishment and operation
of networks of healthcare providers. Generally, these laws do not apply to the
hiring and contracting of physicians by other healthcare providers. There can
be no assurance that regulators of the states in which FPA operates would not
apply these laws to require licensure of FPA's operations as an HMO, an
insurer or a provider network. FPA believes that it is in compliance with
these laws in the states in which it does business, but there can be no
assurance that interpretations of these laws by the regulatory authorities in
these states or in the states in which FPA may expand will not require
licensure or a restructuring of some or all of FPA's operations. In the event
that FPA is required to become licensed under these laws, the licensure
process can be lengthy and time consuming and, unless the regulatory authority
permits FPA to continue to operate while the licensure process is progressing,
FPA could experience a material adverse change in its business while the
licensure process is pending. In addition, many of the licensing requirements
mandate strict financial and other requirements which FPA may not immediately
be able to meet. Further, once licensed, FPA would be subject to continuing
oversight by and reporting to the respective regulatory agency.
In February 1996, following a dialogue with the California Department of
Corporations (the "Department") regarding whether FPA's operations classify it
as a healthcare service plan (i.e., HMO) within the meaning of California law,
FPA, on behalf of one of its subsidiaries, filed a restricted license
application with the Department. Based on discussions with the Department and
the advice of its California regulatory counsel, FPA believes that it will be
able to meet the requirements for licensure. FPA believes that its operations
will not have to be interrupted during the licensure process. Notwithstanding
the foregoing, there can be no assurance that FPA's license application will
be approved by the Department. In July 1996, in response to comments from the
Department, FPA filed an amendment to such application which application is
currently under review by the Department. The failure to receive such approval
would cause FPA to alter the way FPA conducts business in the State of
California and could have a material adverse effect on the future operations
of FPA in the State of California.
Competitive Market Forces. The managed care industry is highly competitive
and is subject to continuing changes in how services are provided and how
providers are selected and paid. Increased enrollment in prepaid healthcare
plans because of healthcare reform or for other reasons, increased
participation by physicians in group
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practices and other factors may attract new entrants into the management
services segment of the managed care industry and result in increased
competition for FPA. Certain of FPA's competitors are significantly larger and
better capitalized, provide a wider variety of services, may have greater
experience in providing healthcare management services and may have longer
established relationships with Payors. Accordingly, FPA may not be able to
increase the number of providers in the FPA Network, negotiate contracts with
new Payors on behalf of the Professional Corporations or renegotiate favorable
contracts with current Payors. The inability of FPA to increase the number of
providers in the FPA Network and negotiate favorable contracts with Payors
could have a material adverse effect on FPA.
In addition, as a result of consolidations among Payors, certain Payors are
able to negotiate or are in the process of negotiating significant reductions
in the capitation payments to providers. Further, certain Payors have deleted
shared risk arrangements from their contracts with providers thereby
decreasing the amount of compensation such Payors are paying providers. None
of the Payors have deleted shared risk arrangements from their contracts with
the Professional Corporations. If Payors negotiate cost reductions with the
Professional Corporations or eliminate shared risk arrangements in which the
Professional Corporations are currently participating, such actions could have
a material adverse effect on the results of operations of FPA.
Control by Management. The executive officers of FPA own or control
approximately 1,582,913, or 13%, of the outstanding shares of Common Stock (7%
following consummation of the Merger and the Foundation Transaction) and have
the ability to control the outcome of certain corporate actions requiring
stockholder approval. Such control could preclude any unsolicited acquisition
of FPA and could adversely affect the price of the Common Stock.
Potential Liability. In recent years, physicians, hospitals and other
participants in the managed healthcare industry have become subject to an
increasing number of lawsuits alleging medical malpractice and related claims
based on the withholding of approval for or reimbursement of necessary medical
services. Many of these lawsuits involve large claims and substantial defense
costs. There can be no assurance that FPA will not become involved in
litigation in the future. FPA maintains an errors and omissions policy
relating to its utilization review activities and is included as a named or
additional insured on the policies of certain of the Professional
Corporations. Insurance coverage for lawsuits brought or which may be brought
against FPA may not be sufficient to cover FPA's expenses or losses.
An increasing number of healthcare providers and other entities are being
faced with lawsuits alleging fraudulent billing practices under the federal
Civil False Claims Act. The Civil False Claims Act permits a person (generally
employees or former employees of the healthcare provider or other entity) to
assert the rights of the government by initiating a qui tam action against a
healthcare provider or other entity if such person has or purports to have
information that the healthcare provider or other entity submitted a claim to
the government for payment that could be false or fraudulent. Upon filing, the
government has the opportunity to intervene and assume control of the case.
Penalties of up to $10,000 for each false or fraudulent claim presented to the
government for payment may be awarded as well as treble damages. Defendants
also may be excluded permanently or for a period of time from participation in
the Medicare and Medicaid programs. Because of penalties and treble damages,
many of these lawsuits involve large monetary claims and substantial defense
costs. In the event that FPA or one of the Professional Corporations is named
as a defendant in a qui tam action and it is successfully prosecuted, no
assurance can be made that such event would not have a material adverse effect
on FPA and its operations.
Absence of Cash Dividends. FPA has paid no cash dividends on its Common
Stock since its inception and does not plan to pay cash dividends in the
foreseeable future.
Possible Volatility of Stock Price. Recently, there has been significant
volatility in the market prices of securities of companies in the healthcare
industry, including the price of FPA Common Stock. Many factors, including
announcements of new legislative proposals or laws relating to healthcare
reform, the performance of, and investor expectations for, FPA, analysts'
comments, the trading volume in FPA Common Stock and general
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economic and market conditions, may influence the trading price of FPA Common
Stock. Accordingly, there can be no assurance as to the price at which FPA
Common Stock will trade in the future.
Impact of Shares Eligible for Future Sale. Future sales by existing
stockholders could adversely affect the prevailing market price of FPA Common
Stock. As of September 30, 1996 there were 12,540,656 shares of FPA Common
Stock outstanding. Of these shares, approximately 9,198,720 shares are freely
transferrable without restrictions. As of September 30, 1996, 3,487,947 shares
were issuable upon the exercise of options.
Anti-Takeover Effect of Certain Charter Provisions. FPA's Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), and By-laws
contain certain provisions that could have the effect of making it more
difficult for a person to acquire, or of discouraging a third party from
attempting to acquire, control of FPA. FPA's Certificate of Incorporation
authorizes the Board of Directors to issue Preferred Stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of discouraging a person from acquiring a majority of the
outstanding Common Stock. There are no shares of Preferred Stock presently
outstanding and FPA has no present plans to issue any shares of Preferred
Stock.
RISKS RELATING TO STERLING
Risk Associated With Expansion Strategy. Sterling's strategy for expansion
includes the acquisition and integration of the operations of other physician
practice management firms. Sterling continually engages in evaluations of
potential acquisitions and is in various stages of discussion regarding
possible acquisitions, certain of which, if consummated, could be significant
to Sterling. There currently are no definitive agreements, letters of intent
or agreements in principle with respect to any material acquisition. The
financial performance of Sterling is and will continue to be subject to
various risks associated with the acquisition of businesses, including the
expenses associated with the integration of the acquired businesses,
difficulties in assimilating the operations of the acquired businesses and
diversion of management resources. Future acquisitions may result in potential
dilutive issuances of equity securities, increased interest and amortization
expense and decreased operating income, any or all of which could have a
material adverse effect on financial results. There can be no assurance that
suitable acquisition candidates will be identified in the future, that
acceptable financing for any acquisition can be obtained, that any acquisition
will occur or that Sterling will continue to be able to staff its expanded
operations adequately. There also can be no assurance that past or future
acquisitions will not have an adverse impact on the business operations or
potential profitability of Sterling. As it continues to expand its operations
and add new hospital clients, Sterling must recruit and retain increasing
numbers of physicians and management personnel to fulfill its service
contracts and to staff its medical facilities. Success in accomplishing these
tasks cannot be assured. Furthermore, to achieve growth Sterling often bids on
a competitive basis for management services contracts. There can be no
assurance that any contract obtained in this manner will be profitable, that
Sterling will be able to continue to implement its growth strategy or that
this strategy ultimately will be successful.
Fee-for-Service Contracts. Sterling provides physician practice management
services to hospitals under two contractual arrangements: fee-for-service
contracts and flat-rate contracts. In general, under fee-for-service
contracts, Sterling's revenue is derived from amounts billed to patients and
collected for the account of Sterling. In contrast, under flat-rate contracts
Sterling's revenue is derived from payments of negotiated amounts paid by the
hospital. In 1995 and 1994, respectively, 84.4% and 94.0% of Sterling's
hospital-based net operating revenue was derived from payments made on a fee-
for-service basis, and Sterling emphasizes fee-for-service contracts in its
marketing activities. Under fee-for-service contracts, Sterling accepts
responsibility for billing and collection, and consequently assumes the
financial risks related to changes in patient volume, payor mix and third
party reimbursement rates. There are increasing public and private sector
pressures to restrain healthcare costs and to restrict reimbursement rates for
medical services. See "Risks Relating to Sterling--Dependence on Third Party
Payors." Any change in reimbursement policies, practices, interpretations,
regulations or legislation which places limitations on reimbursement amounts
or practices, and any changes in payor mix, patient volume or covered
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services, could materially adversely affect the operations of Sterling,
particularly under fee-for-service contracts. See "Risks Relating to
Sterling--Healthcare Reform." Sterling's fee-for-service contractual
arrangements also involve a credit risk related to uncollectibility of
accounts. See Note 5 of Notes to Consolidated Financial Statements of
Sterling, incorporated by reference herein, for information concerning
historical allowances for uncollectibles related in large part to fee-for-
service business. In addition, fee-for-service contracts have less favorable
cash flow characteristics than flat-rate contracts due to longer collection
periods. Failure to manage adequately the collection risks and working capital
demands associated with fee-for-service contracts could have a material
adverse effect on Sterling.
Dependence on Third Party Payors. A substantial portion (30%) of Sterling's
1995 net operating revenue was derived from payments made by government-
sponsored healthcare programs (primarily Medicare and Medicaid), and
substantially all of Sterling's hospital-based net operating revenue is
derived from third party payors. The Medicare and Medicaid programs are
subject to substantial regulation by the federal and state governments, which
are continually revising and reviewing the programs and their regulations. In
addition, funds received under these programs are subject to audit with
respect to the proper billing for physician services and, accordingly,
retroactive adjustments of revenue from these programs may occur. While
Sterling seeks to comply with applicable Medicare and Medicaid reimbursement
regulations, there can be no assurance that Sterling would be found to be in
compliance with such regulations should Sterling be subject to audit. There
are increasing public and private sector pressures to contain healthcare costs
and to restrict reimbursement rates for medical services. Continuing budgetary
constraints at both the federal and state level and the rapidly escalating
costs of healthcare and reimbursement programs have led, and may continue to
lead, to significant reductions in government and other third party
reimbursements for certain medical charges and to the negotiation of reduced
contract rates or capitated or other financial risk-shifting payment systems
by third party payors with service providers. Both the federal government and
various states are considering imposing limitations on the amount of funding
available for various healthcare services. Various budget proposals under
consideration by Congress include provisions intended to reduce the rate of
increase in Medicare and Medicaid expenditures through cost savings and other
measures. The U.S. Congress has passed a fiscal year 1996 budget resolution
that calls for reductions in the rate of spending increases of $270 billion in
the Medicare program and $182 billion in the Medicaid program over the next
seven years. The House Ways and Means Committee and the Senate Finance
Committee each has adopted budget reconciliation legislation that provides for
achieving these savings in part through significant changes to Resource Based
Relative Value Scale ("RBRVS"). Sterling cannot predict whether or when any
such proposals will be adopted or, if adopted and implemented, what effect, if
any, such proposals would have on Sterling. Additionally, RBRVS, a new system
of reimbursement, which is intended to reallocate medical reimbursement among
medical specialties, took effect on January 1, 1992 and is expected to be
fully implemented by December 31, 1996. Under the regulations relating to the
RBRVS fee structure, the aggregate fee payments from Medicare for certain
emergency department procedures could be affected. If the result is a
reduction in such fees, especially if followed by reductions in reimbursement
by commercial third party payors, the RBRVS system could adversely affect
Sterling's operating results or financial condition. There can be no assurance
that the payments under governmental and private third party payor programs
will remain at levels comparable to present levels or will be sufficient to
cover the costs allocable to patients eligible for reimbursement pursuant to
such programs. Furthermore, changes in reimbursement regulations, policies,
practices, interpretations or statutes that place material limitations on
reimbursement amounts or practices could adversely affect the operations of
Sterling. See "Risks Relating to Sterling--Government Regulation."
Risks Related to Classification of Physicians as Independent
Contractors. Sterling generally contracts with physicians as independent
contractors to provide services to fulfill its contractual obligations to its
hospital clients. Sterling's independent contractor physicians are paid on an
hourly basis. Pursuant to such compensation arrangements, no independent
contractor physician shares in the profit derived by Sterling from Sterling's
operations. Since Sterling regards its contracted physicians as independent
contractors and not as employees, Sterling does not withhold federal or state
income taxes, make federal or state unemployment tax payments or provide
workers' compensation insurance for such physicians. There can be no assurance
that federal or state taxing authorities or other parties will not challenge
Sterling's classification of physicians and determine that
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such physicians should be classified as employees. From time to time, the U.S.
Congress considers proposals that would affect the ability of the Internal
Revenue Service to classify independent contractor physicians as employees. In
the event that the physicians under contract with Sterling are determined to
be employees, Sterling and its operations will be materially and adversely
affected and Sterling may be subject to retroactive taxes and penalties. See
"Risks Relating to Sterling--Corporate Exposure to Professional Liabilities"
and "--State Laws Regarding Prohibition of Corporate Practice of Medicine."
Corporate Exposure to Professional Liabilities. Due to the nature of its
business, Sterling is exposed to claims of malpractice and other professional
liability. While Sterling currently maintains professional liability insurance
on a claims-made basis (the coverage includes claims reported during the
period the insured was covered by the policy) in amounts it deems to be
appropriate, based upon historical claims and the nature and risks of its
business, there can be no assurance that a future claim for professional
liability against Sterling will not exceed the limits of Sterling's available
professional liability insurance coverage or that such coverage will continue
to be available at acceptable costs or at all. Furthermore, Sterling could be
held liable for the negligence of a contracted healthcare professional if such
healthcare professional were regarded as an employee or agent of Sterling in
the practice of medicine. In addition to any potential tort liability of
Sterling, Sterling's contracts with hospitals generally contain provisions
under which Sterling agrees to indemnify the hospital for losses resulting
from the malpractice of contracted physicians. See Note 2 of Notes to
Consolidated Financial Statements of Sterling, incorporated by reference
herein.
State Laws Regarding Prohibition of Corporate Practice of
Medicine. Corporations such as Sterling are generally not permitted under
state law to practice medicine, exercise control over the medical judgments or
decisions of physicians or engage in certain practices, such as fee splitting,
with physicians. Corporate practice of medicine laws and their interpretations
vary from state to state and are enforced by the courts and by regulatory
authorities with broad discretion. As stated in the Notes to its Consolidated
Financial Statements, Sterling's financial statements include the accounts of
Sterling and its wholly owned subsidiary companies. There can be no assurance
that regulatory authorities will not take the position that such control
conflicts with state laws regarding the practice of medicine or other federal
restrictions. Sterling believes that it performs only non-medical
administrative services, does not represent to the public or its clients that
it offers medical services and does not exercise influence or control over the
practice of medicine by the physicians with whom it contracts. Expansion of
the operations of Sterling to certain jurisdictions may require restructural
and organizational modifications of Sterling's form of relationship with
hospitals and physician groups in order to comply with corporate practice of
medicine laws, which could have an adverse effect on Sterling. Although
Sterling believes its operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that
Sterling's structure will not be challenged as constituting the unlicensed
practice of medicine or that the enforceability of the agreements underlying
this structure will not be limited. If such a challenge were made successfully
in any state, Sterling could be subject to civil and criminal penalties under
such state's law and could be required to restructure its contractual
arrangements in that state. Such rates or the inability to successfully
restructure its contractual arrangements could have a material adverse effect
upon Sterling.
Healthcare Reform. Political, economic and regulatory influences are
subjecting the healthcare industry in the United States to fundamental change.
Although Congress failed to pass comprehensive healthcare reform legislation
in 1995, Sterling anticipates that Congress and state legislatures will
continue to review and assess alternative healthcare delivery and payment
systems and may in the future propose and adopt legislation effecting
fundamental changes in the healthcare delivery system. Legislative debate is
expected to continue. Also, Congress is currently considering major reductions
in the rate of increase of Medicare and Medicaid spending as part of efforts
to balance the budget of the United States. Sterling cannot predict the
ultimate timing, scope or effect of any legislation concerning healthcare
reform, including legislation affecting the Medicare and Medicaid programs.
Any proposed federal legislation, if adopted, could result in significant
changes in the availability, delivery, pricing and payment for healthcare
services and products. Various state agencies also have undertaken or are
considering significant healthcare reform initiatives. Although it is not
possible to predict whether any healthcare reform legislation will be adopted
or, if adopted, the exact manner and the extent to which Sterling
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will be affected, it is likely that Sterling will be affected in some fashion,
and there can be no assurance that any healthcare reform legislation, if and
when adopted, will not have a material adverse effect on Sterling's business,
financial condition, cash flows or results of operations.
Government Regulation. The relationships among providers of healthcare
services, physicians and other clinicians are subject to extensive and
increasing regulation by governmental entities at the federal, state and local
levels. Laws regulating the provision of healthcare services include the fraud
and abuse provisions of the Medicare and Medicaid statutes, which prohibit the
solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for the
recommending, leasing, arranging, ordering or providing of Medicare or
Medicaid covered services, items or equipment and impose significant penalties
for false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to
entities with which they have financial relationships. Violations of these
laws may result in substantial civil or criminal penalties for individuals or
entities, including large civil money penalties and exclusion from
participation in the Medicare and Medicaid programs. Such exclusion, if
applied to Sterling's operations, could result in significant loss of
reimbursement. Several states have adopted similar laws that cover patients in
private programs as well as government programs. There can be no assurance
that review of Sterling's business by courts or regulatory authorities will
not result in a determination that could adversely affect the operations of
Sterling or that the healthcare regulatory environment will not change so as
to restrict Sterling's existing operations or their expansion. See "Risks
Relating to Sterling--Healthcare Reform."
Termination of Hospital Contracts. Sterling provides physician practice
management services to hospitals under contracts that generally have terms of
one or two years. The contracts are renewable automatically under the same
terms and conditions unless either party gives the other written notice of its
intent not to renew at least 90 days prior to the end of the then current
term. There can be no assurance that such contract terms will be renewed or
that failure to so renew will not have a material adverse effect on Sterling's
ability to maintain hospital client relationships, or on the levels of revenue
and financial performance of Sterling.
Possible Loss of Contracts. Since January 1994, 28 of Sterling's hospital
services agreements have been terminated as a result of non-renewal,
termination by the hospital, termination by Sterling, or hospital closure.
Sterling believes that future consolidation in the health care industry may
result in future hospital services agreements being terminated. Sterling's
management can not presently predict the number of hospital services
agreements that will terminate. However, such terminations may have a material
adverse effect on Sterling's operations.
Risk Associated with Managed Care Contracts. As an increasing percentage of
patients come under the control of managed care entities, Sterling believes
that its success will, in part, be dependent upon Sterling's ability to
negotiate, on behalf of its contracted physicians, managed care contracts with
health maintenance organizations and other private third party payors. Such
contracts often shift much of the financial risk of providing care
(particularly regarding patient utilization) from the payor to the provider.
There can be no assurance that Sterling will be able to negotiate satisfactory
arrangements on a capitated or other risk sharing basis or that any managed
care contracts it enters into will not adversely affect Sterling.
Competition. The provision of physician practice management services is a
highly competitive business. Sterling competes not only with other national
and regional physician practice management companies but also with local
physician groups and with hospitals themselves, many of which are also trying
to combine their own services with those of physicians into integrated
delivery networks. Sterling is also, in effect, competing against the
traditional structure of hospital management and practicing physician
management style, with regard to its emergency department business and primary
care facilities, respectively. Competition in the industry is based on the
scope, quality and cost of services provided. Certain of Sterling's
competitors are significantly larger and have substantially greater financial
and other resources available to them than Sterling.
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Dependence on Key Personnel and Independent Contractors. Sterling is
dependent on the services of its executive officers, particularly Sterling's
founder, President, Chief Executive Officer and Chairman, Stephen J. Dresnick,
M.D., for the management of Sterling. The loss by Sterling of Dr. Dresnick and
any inability to attract and retain a qualified replacement could adversely
affect Sterling's operations.
Sterling's business also depends to a significant degree on its ability to
recruit and retain sufficient numbers of qualified physicians. There is a
substantial shortage of board certified emergency medicine physicians, and
Sterling competes with many types of healthcare providers, as well as
teaching, research and governmental institutions, for the services of such
physicians. Any inability to recruit and retain physicians could adversely
affect Sterling's adding new and retaining existing clients.
Risks Related To Intangible Assets. As of June 30, 1996, Sterling had for
historical accounting purposes approximately $37.6 million of intangible
assets which were created by the excess of purchase price over the fair value
of the net assets of certain acquired businesses. These intangibles are being
amortized over a period which ranges from twenty-five to forty years. As
acquisitions are consummated, Sterling evaluates each acquisition considering
the acquired businesses' market position, reputation, profitability,
collective experience of its executives and employees, its relationships with
affiliated physicians and hospitals, and the specific agreements entered into
with various hospitals. All of these factors contribute to the purchase price
paid for the acquisition and to the intangible created in the purchase
transaction. Generally, Sterling's management believes that these intangibles
will have a life of indefinite length. At the time of each acquisition,
Sterling evaluates each acquisition and establishes an appropriate
amortization period based on the underlying facts and circumstances.
Subsequent to each acquisition, Sterling continuously reevaluates such facts
and circumstances to determine if the related intangible assets continue to be
realizable and if the amortization period continues to be appropriate. As
underlying facts and circumstances subsequent to the date of acquisition can
change, there can be no assurance that the value of such intangible assets
will be realized by Sterling. Although at June 30, 1996, the net unamortized
balance of intangible assets acquired was not considered to be impaired, any
future determination that a significant impairment has occurred would require
the write-off of the impaired portion of unamortized intangible assets, which
could have a material adverse effect on Sterling's results of operations.
RISKS RELATING TO THE MERGER
Impact on FPA's Financial Statements. The Merger will result in pro forma
operating income of $10,132,778 and pro forma net income of $4,878,517 for FPA
for the six months ended June 30, 1996. The Merger and the Foundation
Transaction will result in a pro forma operating loss of $33,722,786 and a pro
forma net loss of $24,768,032 for FPA for the six months ended June 30, 1996.
See the Pro Forma Financial Statements included elsewhere in this Proxy
Statement/Prospectus.
No Assurance of Successful Integration of Certain Operations. FPA and
Sterling have entered into the Merger Agreement with the expectation that the
Merger will result in certain benefits for the combined company. Achieving the
anticipated benefits of the Merger will depend in part upon whether the
integration of the two companies' business is achieved in an efficient and
effective manner, and there can be no assurance that this will occur. There
can be no assurance that integration will be accomplished on a timely basis,
or at all. The difficulties of such integration may be increased by the
necessity of coordinating geographically separated organizations. The
integration of certain operations following the Merger will require the
dedication of management resources which may distract attention from the day-
to-day business of the combined company. In particular, the management
services provided by FPA to physicians, hospitals and Payors in the FPA
Network, which include management information systems, claims administration
and billing services, utilization management of medical services, care
coordination and case management, quality and cost monitoring and physician
recruitment, will have to be extended to new members of the FPA Network.
Failure to effectively accomplish the integration of the two companies'
operations could have a material adverse effect on FPA results of operations
and financial condition.
Exchange Ratio May Not Fully Reflect Changes in Stock Prices. The relative
stock prices of FPA Common Stock and Sterling Common Stock at the Effective
Time may vary significantly from the prices as of
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the date of execution of the Merger Agreement, the date hereof or the date on
which stockholders vote on the Merger due to, among other factors, changes in
the business, operations and prospects of FPA or Sterling, market assessments
of the likelihood that the Merger will be consummated and the timing thereof
and general market and economic conditions. The Exchange Ratio is subject to
adjustment based on changes in the market value of FPA Common Stock. The FPA
Value will not be determined until five trading days prior to the Closing
Date. Therefore, the FPA Value may be higher than the value of FPA Common
Stock at the time of the Special Meetings which could result in a lower
Exchange Ratio and fewer shares of FPA Common Stock being issued to Sterling
shareholders. See "THE MERGER--Adjustments to Merger Consideration."
Deterrent Effect of Termination and Non-Solicitation Provisions. In the
event the Merger Agreement is terminated by FPA or Sterling, if either Board
of Directors determines, in the exercise of fiduciary duties, not to recommend
the Merger to the FPA or Sterling shareholders or withdraws such
recommendation, or approves, recommends or endorses certain acquisition
transactions other than the Merger, then the terminating party will be
required to pay the non-terminating party a $1.0 million break-up fee in
addition to other possible recoverable liabilities. Sterling and FPA have each
agreed not to encourage, solicit, participate in or initiate discussions or
negotiations with or provide any information to any third party concerning a
merger, sale of assets or similar transactions involving such party, except
that each of FPA and Sterling may furnish information to and negotiate with an
unsolicited third party consistent with the good faith exercise by the Board
of Directors of its fiduciary obligations. These provisions in the Merger
Agreement may have the effect of discouraging an attempt by a third party to
engage in certain acquisition transactions with FPA or Sterling. See "THE
MERGER AGREEMENT--Acquisition Transactions" and "--Termination, Amendment and
Waiver".
Need for Additional Capital. Upon consummation of the Merger, FPA will be a
larger company and will therefore require additional capital in order to
continue to expand its operations. Failure to secure additional financing
could have an adverse effect on FPA's operations. There can be no assurance
that FPA will be able to obtain such additional financing.
Possible Loss of Business. Despite the effort of both FPA and Sterling,
current key independent contractor physicians, employees or clients of
Sterling may not continue to contract with FPA subsequent to the Merger. The
loss of a material number of independent contractor physicians, employees or
clients could adversely affect Sterling's operations.
Significant Indebtedness. Effective August 1995 Sterling entered into a $50
million credit facility replacing its then existing $25 million credit
facility. As of June 30, 1996, approximately $10 million was outstanding under
the facility. Under the facility, Sterling is required to obtain bank consent
for the Merger. Based on informal discussions with the bank, Sterling believes
the bank will consent to the Merger. FPA's growth has resulted in a
significant increase in FPA's indebtedness. Following the consummation of the
Merger and the Foundation Transaction, FPA will have approximately $205
million in debt obligations. As of the date hereof, FPA has a revolving credit
facility of $45 million. FPA is currently in discussion with a bank to provide
a revolving credit facility of up to approximately $150 million. There can be
no assurance that FPA will be able to service such indebtedness or that such
financing will be obtained.
RISKS RELATING TO THE FOUNDATION TRANSACTION
Impact on FPA's Financial Statements. The Foundation Transaction, together
with the Merger, shall result in pro forma operating losses of $33,722,786 and
pro forma net income losses of $24,768,032 for FPA for the six months ended
June 30, 1996.
History of Losses. FHMS, FHMG and TDMC (collectively, the "Combined
Companies") have experienced net losses of $11,195,000, $45,341,000, and
$32,256,000 for the years ended June 30, 1994, 1995, and 1996. The losses of
the Combined Companies are attributable to the addition of salaried providers
within their respective networks, and a lack of anticipated patient volume.
The lack of sufficient patient volume is due
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to the Combined Companies' inability to receive significant contracts from
multiple payors, including competitors of Foundation and their subsidiaries,
because of their relationship with Foundation.
There can be no assurance that such operations will be profitable in the
future.
No Assurance of Successful Integration of Certain Operations. FPA has
entered into the Foundation Agreement with the expectation that the Foundation
Transaction will result in certain benefits for FPA. Achieving the anticipated
benefits of the Foundation Transaction will depend in part upon whether the
acquired businesses can be integrated with FPA in an efficient and effective
manner, and there can be no assurance that this will occur. There can be no
assurance that integration will be accomplished on a timely basis, or at all.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of
certain operations following the Foundation Transaction will require the
dedication of management resources which may distract attention from the day-
to-day business of the combined company. Failure to effectively accomplish the
integration of the acquired businesses could have a material adverse effect on
FPA's results of operations and financial condition.
Need for Additional Capital. Upon consummation of the Foundation
Transaction, FPA will be a larger company and will therefore require
additional capital in order to continue to expand its operations. Failure to
secure additional financing could have an adverse effect on FPA's operations.
There can be no assurance that FPA will be able to obtain such additional
financing. To date, the Medical Groups have operated at a loss, which losses
have been funded by secured revolving credit loans from FHMS. FHMS also has a
history of losses, which losses have been funded by Foundation. As part of the
Foundation Transaction, a subsidiary of FPA and an entity affiliated with FPA
will purchase and assume the outstanding indebtedness of FHMS and Holding
Company, respectively. FPA believes that with the provider arrangements it has
negotiated between Foundation and the Medical Groups and its ability to manage
physician groups and the cost reduction plan currently being implemented for
the Medical Groups and FHMS, it will be able to operate the Medical Groups
profitably. The cash consideration payable to Foundation will not be used to
repay the loans to be assumed by FPA. However, there can be no assurance that
FPA will operate these entities profitably and pay off its indebtedness to
Foundation. If there are continuing operating losses, FPA may need additional
capital to fund its business, and there can be no assurance that such
additional capital can be obtained.
Reliance on Payor. Upon consummation of the Foundation Transaction,
approximately 44% of FPA's members will be as a result of payor agreements
with Foundation. To the extent that such arrangements are terminated, there
could be an adverse affect on FPA's operations. There can be no assurance that
such arrangements will not be terminated. The term of the professional group
provider agreements with Foundation is ten years with automatic five-year
renewal periods. The agreements were entered into in 1995 and may be
terminated in a number of circumstances, including the event of a material
breach by the non-breaching party, or violation of applicable laws, rules or
regulations.
Dilutive Effect of Issuing Common Stock. Pursuant to the Foundation
Agreement, FPA will issue up to 5,514,705 shares of FPA Common Stock, which
would represent 21.0% of the outstanding shares of FPA Common Stock (31.3% if
the Merger is not consummated).
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Adjustments to Consideration. The number of shares of FPA Common Stock to be
received by Foundation will not be determined until two trading days prior to
the closing of the Foundation Transaction, which time will be after the FPA
Special Meeting. In addition, the amount of the promissory notes to be issued
by FPA to Foundation are subject to adjustment for liabilities incurred
between the date of the Foundation Agreement and the consummation of the
Foundation Transaction. See "THE FOUNDATION TRANSACTION--FHMS Acquisition".
Issuance of Promissory Notes. A significant portion of the consideration to
be paid by FPA to Foundation is represented by promissory notes. Such
promissory notes are secured by the assets and stock of the Purchasing
Shareholder, FPA California, Holding Company and its subsidiaries and FHMS, as
well as the stock of each of the above other than FPA California.
THE MEETINGS
FPA SPECIAL MEETING
The FPA Special Meeting will be held at San Diego Marriott Mission Valley,
8757 Rio San Diego Drive, San Diego, California 92108, on Thursday, October
31, 1996, at 9:00 a.m., local time and at any adjournment or postponement
thereof.
At the FPA Special Meeting, the stockholders of FPA will be asked to
consider and vote upon the adoption and approval of the Merger Agreement under
which, among other things, Merger Sub would be merged into Sterling with
Sterling surviving the Merger, Sterling would become a wholly owned subsidiary
of FPA, and all of the issued and outstanding shares of Sterling Common Stock
would be converted into the right to receive an aggregate of approximately
7,429,000 shares of FPA Common Stock. Pursuant to the Merger, each outstanding
share of Sterling Common Stock will be converted into 1.4 shares of FPA Common
Stock. The Exchange Ratio is subject to adjustment in certain circumstances
described herein. See "THE MERGER--Adjustments to the Merger Consideration."
The FPA Board of Directors has unanimously approved the Foundation
Agreement, but is not seeking stockholder approval of the Foundation
Transaction at the FPA Special Meeting.
At the FPA Special Meeting, stockholders will also be asked to approve
amendments to the FPA Plan which, if approved, will only become effective upon
consummation of the Merger or the Foundation Transaction. The amendments
would, upon becoming effective, (i) increase the total number of shares of FPA
Common Stock issuable upon exercise of options granted under such plan from
2,500,000 to 4,000,000 if only the Merger is consummated, 3,500,000 if only
the Foundation Transaction is consummated and 5,000,000 if both the Merger and
the Foundation Transaction are consummated and (ii) limit the number of shares
of FPA Common Stock for which options may be granted under the FPA Plan to any
person during the calendar year.
The FPA Board of Directors has unanimously approved (with one abstention)
the Merger Agreement and the amendments to the FPA Plan and recommends a vote
FOR approval of the Merger Agreement and the amendments to the FPA Plan.
STERLING SPECIAL MEETING
The Sterling Special Meeting will be held at the Miami Airport Hilton
located at 5101 Blue Lagoon Drive, Miami, Florida 33126, on Thursday, October
31, 1996, at 9:00 a.m. local time, and at any adjournment or postponement
thereof.
At the Sterling Special Meeting, the shareholders of Sterling will be asked
to consider and vote upon the adoption and approval of the Merger Agreement
under which, among other things, Merger Sub would be merged
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<PAGE>
into Sterling with Sterling surviving the Merger, Sterling would become a
wholly owned subsidiary of FPA, and all of the issued and outstanding shares
of Sterling Common Stock would be converted into the right to receive an
aggregate of approximately 7,429,000 shares of FPA Common Stock. Pursuant to
the Merger, each outstanding share of Sterling Common Stock will be converted
into 1.4 shares of FPA Common Stock. The Exchange Ratio is subject to
adjustment in certain circumstances described herein. See "THE MERGER--
Adjustments to the Merger Consideration."
The Sterling Board of Directors has unanimously approved the Merger
Agreement and recommends a vote FOR approval of the Merger Agreement.
QUORUM
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of FPA Common Stock is necessary to constitute a quorum at
the FPA Special Meeting. Abstentions and broker non-votes will be included in
determining the presence of a quorum.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Sterling Common Stock is necessary to constitute a
quorum at the Sterling Special Meeting. Abstentions and broker non-votes will
be included in determining the presence of a quorum.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of FPA Common Stock, either in person or by proxy, at the FPA Special Meeting
is required to approve the Merger Agreement. The affirmative vote of a
majority of shares of FPA Common Stock present, either in person or by proxy,
at the FPA Special Meeting is required to amend the FPA Plan and to approve
the possible adjournment or postponement of the FPA Special Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of Sterling Common Stock, either in person or by proxy, at the Sterling
Special Meeting is required to approve the Merger Agreement. Approval of the
possible adjournment or postponement of the Sterling Special Meeting requires
the affirmative vote of a majority of the shares of Sterling Common Stock
present, either in person or by proxy, at the Sterling Special Meeting.
RECORD DATE; STOCK ENTITLED TO VOTE
The FPA Board of Directors has established September 25, 1996 as the date to
determine those record holders of FPA Common Stock entitled to notice of and
to vote at the FPA Special Meeting. On that date, there were 12,540,656 shares
of FPA Common Stock outstanding, with each share entitled to one vote with
respect to each of the FPA Proposals.
The Sterling Board of Directors has established September 25, 1996 as the
date to determine those record holders of Sterling Common Stock entitled to
notice of and to vote at the Sterling Special Meeting. On that date, there
were 8,515,017 shares of Sterling Common Stock outstanding, with each share
entitled to one vote with respect to the Merger Agreement.
In the event the Merger is not approved and adopted by the stockholders of
FPA and the shareholders of Sterling, the Merger Agreement may be terminated
in accordance with its terms. See "THE MERGER--Termination."
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VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for the
Special Meetings will be voted at such meetings in the manner specified by the
holders thereof. Proxies that do not contain voting instructions will be voted
FOR approval of the FPA Proposals at the FPA Special Meeting and FOR approval
of the Merger Agreement at the Sterling Special Meeting. It is not expected
that any matter other than those referred to herein will be brought before
either of the Special Meetings.
If a holder of FPA Common Stock or Sterling Common Stock does not return a
signed proxy card, his or her shares will not be voted and thus will have the
effect of a vote against the Merger Agreement at the FPA Special Meeting and
the Sterling Special Meeting. Abstentions and broker non-votes will have the
effect of a vote against the Merger Agreement at the FPA Special Meeting and
against the Merger Agreement at the Sterling Special Meeting. Abstentions and
broker non-votes will have no effect on the vote at the FPA Special Meeting to
amend the FPA Plan.
REVOCATION OF PROXIES
Except for those who have executed irrevocable proxies, any holder of FPA
Common Stock has the unconditional right to revoke his or her proxy at any
time prior to the voting thereof at the FPA Special Meeting by (i) filing a
written revocation with the Secretary of FPA prior to the voting of such
proxy, (ii) giving a duly executed proxy bearing a later date, or (iii)
attending the FPA Special Meeting and voting in person. Attendance by a
stockholder at the FPA Special Meeting will not itself revoke his or her
proxy.
Except for those who have executed irrevocable proxies, any holder of
Sterling Common Stock has the unconditional right to revoke his or her proxy
at any time prior to the voting thereof at the Sterling Special Meeting by (i)
filing a written revocation with the Secretary of Sterling prior to the voting
of such proxy, (ii) giving a duly executed proxy bearing a later date, or
(iii) attending the Sterling Special Meeting and voting in person. Attendance
by a shareholder at the Sterling Special Meeting will not itself revoke his or
her proxy.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the FPA Special Meeting may be made in
person or by mail, telephone, telecopy or telegram. FPA will bear the cost of
the solicitation of proxies from its stockholders. In addition to solicitation
by mail, the directors, officers and employees of FPA may solicit proxies from
stockholders of such company by telephone or telegram or in person. Such
directors, officers and employees will not be compensated for such
solicitation. FPA has requested that banking institutions, brokerage firms,
custodians, trustees, nominees and fiduciaries forward solicitation materials
to the beneficial owners of FPA Common Stock held of record by such entities,
and FPA will, upon the request of such record holders, reimburse reasonable
forwarding expenses. FPA has also engaged Georgeson & Co., Inc. to assist it
in the solicitation of proxies for the FPA Special Meeting. The costs of
solicitation, which are not expected to exceed $10,000, will be borne by FPA.
FPA does not anticipate that it will incur any fees, except as set forth in
this paragraph.
Solicitation of proxies for use at the Sterling Special Meeting may be made
in person or by mail, telephone, telecopy or telegram. Sterling will bear the
cost of the solicitation of proxies from its shareholders. In addition to
solicitation by mail, the directors, officers and employees of Sterling may
solicit proxies from shareholders of such company by telephone or telegram or
in person. Such directors, officers and employees will not be compensated for
such solicitation. Sterling has requested that banking institutions, brokerage
firms, custodians, trustees, nominees and fiduciaries forward solicitation
materials to the beneficial owners of Sterling Common Stock held of record by
such entities, and Sterling will, upon the request of such record holders,
reimburse reasonable forwarding expenses. Sterling has also engaged D.F. King
& Co., Inc. to assist it in the solicitation of proxies for the Sterling
Special Meeting. The costs of solicitation, which are not expected to exceed
$3,500, will be borne by Sterling. Sterling does not anticipate that it will
incur any fees, except as set forth in this paragraph.
STERLING SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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THE MERGER
EFFECTS OF THE MERGER
The Merger will be consummated promptly following approval by the respective
holders of FPA Common Stock and Sterling Common Stock and the satisfaction or
waiver of all other conditions to consummation of the Merger. At the Effective
Time, Merger Sub will be merged with and into Sterling, with the result that
Sterling will be the surviving corporation in the Merger. After the Merger,
Sterling will operate as a wholly-owned subsidiary of FPA. Shareholders of
Sterling will become stockholders of FPA and their rights will be governed by
the Certificate of Incorporation and Bylaws of FPA.
At the Effective Time, Sterling Common Stock will cease trading on Nasdaq,
and there will no longer be any public trading of Sterling Common Stock. In
addition, FPA intends to take action, promptly following the Effective Time,
to terminate the registration of the Sterling Common Stock under the Exchange
Act. As a result, at prescribed dates thereafter reports, proxy statements and
other information required under the Exchange Act with respect to Sterling
will not be filed with the Commission, although FPA will continue to file
reports, proxy statements and other information with respect to FPA for so
long as FPA remains subject to Exchange Act requirements.
MERGER CONSIDERATION
Pursuant to the Merger Agreement, at the Effective Time, Merger Sub will
merge into Sterling and each share of Sterling Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of
Sterling Common Stock owned by Sterling as treasury stock and shares of
Sterling Common Stock owned by FPA, Merger Sub or any wholly owned subsidiary
of FPA or Sterling to be canceled in accordance with the Merger Agreement)
shall be converted into 1.4 shares of FPA Common Stock, subject to adjustment.
See "Adjustments to Merger Consideration". The aggregate number of shares of
FPA Common Stock to be issued to Sterling shareholders pursuant to the Merger
Agreement is referred to herein as the "Merger Consideration."
On September 30, 1996, the closing price of FPA Common Stock was $26.375. At
such price, the Equivalent Value of a share of Sterling Common Stock would be
$23.01, calculated based on the Exchange Ratio, and the aggregate merger
consideration would be approximately $195,931,000. The actual market price of
the FPA Common Stock may vary, which will cause a change in the Exchange Ratio
and a corresponding change in the Equivalent Value and the aggregate merger
consideration. Additionally, the Equivalent Value may differ from the actual
market price of Sterling Common Stock. Each FPA stockholder and Sterling
shareholder is urged to obtain updated market information.
Based upon the capitalization of FPA and Sterling as of September 30, 1996,
immediately after the Effective Time, the shareholders of Sterling will hold
approximately 37% of the outstanding FPA Common Stock.
ADJUSTMENTS TO MERGER CONSIDERATION
The consideration to be issued to each Sterling shareholder in the Merger
will be that number of shares of FPA Common Stock which is determined by
multiplying the Exchange Ratio by the number of shares of Sterling Common
Stock held by such Sterling shareholder on the Closing Date (as hereinafter
defined). The Exchange Ratio shall equal 1.4 shares of FPA Common Stock for
each share of Sterling Common Stock, which may be subject to adjustment upward
or downward, based on the average of the closing price of FPA Common Stock as
reported on Nasdaq for the fifteen consecutive trading days ending on the date
that is five trading days prior to the Closing Date (the "FPA Value").
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There will be no adjustment to the Exchange Ratio if the FPA Value is
greater than or equal to $14.87 but less than or equal to $16.43. However, if
at such time,
(a) the FPA Value is less than $14.87 but greater than or equal to
$13.30, then the Exchange Ratio shall be increased to the number (expressed
as a decimal fraction) which, when multiplied by the FPA Value, will equal
$20.81;
(b) the FPA Value is less than $13.30, the Exchange Ratio shall be 1.565,
provided, however, that in such event Sterling shall have the right to
either (x) accept an Exchange Ratio of 1.565 or (y) demand that the
Exchange Ratio be increased to the number (expressed as a decimal fraction)
which, when multiplied by the FPA Value, will not exceed $20.81. If
Sterling elects to demand the increased Exchange Ratio described in (y)
above, FPA shall have the right to either (a) accept such increased
Exchange Ratio or (b) terminate the Merger Agreement;
(c) the FPA Value is greater than $16.43 but less than or equal to
$18.00, then the Exchange Ratio shall be decreased to the number (expressed
as a decimal fraction) which, when multiplied by the FPA Value, will equal
$23.01; or
(d) the FPA Value is greater than $18.00, Sterling shall have the right
to either (x) accept an Exchange Ratio which, when multiplied by the FPA
Value is equal to $23.01 or (y) terminate the Merger Agreement.
The following table sets forth the Exchange Ratio to be applied in the
Merger assuming various FPA Values as set out in Column 1, with the resulting
"value" to be received for each share of Sterling Common Stock:
<TABLE>
<CAPTION>
"VALUE" TO BE
RECEIVED FOR EACH
EXCHANGE SHARE OF STERLING
FPA VALUE RATIO COMMON STOCK
(COL. 1) ($) (COL. 2) (COL. 1 X COL. 2)($)
------------ -------- --------------------
<S> <C> <C>
13.30 1.565 20.81
14.00 1.486 20.81
15.00 1.400 21.00
16.00 1.400 22.40
17.00 1.354 23.01
18.00 1.278 23.01
</TABLE>
Since the actual number of shares of FPA Common Stock issuable to Sterling
shareholders in the Merger depends on the FPA Value, there is no guarantee as
to the number of shares or value of the FPA Common Stock that Sterling
shareholders will receive. If the FPA Value is greater than $18.00, the
Exchange Ratio will be adjusted to equal $23.01 divided by the FPA Value.
Accordingly, if the FPA Value is greater than $18.00, the Exchange Ratio would
be reduced with the result that shareholders of Sterling would be entitled to
receive fewer shares of FPA Common Stock in the Merger. Sterling may, however,
elect to terminate the Merger Agreement if the FPA Value is greater than
$18.00. There can be no assurance that the Sterling Board of Directors will
exercise such right if it determines that it is not in the best interests of
the Sterling shareholders to do so. In addition, the FPA Value may differ from
the actual market price of FPA Common Stock reported by Nasdaq for the date of
the Special Meetings, the date of consummation of the Merger, or the date that
Sterling shareholders actually receive their shares of FPA Common Stock after
the Merger is completed.
Sterling may elect not to terminate the Merger Agreement even if the FPA
Value is greater than $18.00. In determining whether to elect to terminate the
Merger Agreement in such circumstances, the Sterling Board of Directors will
take into account, consistent with its fiduciary duties, all relevant facts
and circumstances existing at the time, including, without limitation, whether
FPA is prepared to increase the Exchange Ratio, the market for health care
stocks in general, the relative value of FPA Common Stock in the market, and
the advice of its legal and financial advisors. By approving the Merger
Agreement, Sterling shareholders would be permitting the Sterling Board of
Directors to determine, in the exercise of its fiduciary duties, to proceed
with the Merger even though the per share consideration determined in
accordance with the Merger Agreement, $23.01, was less than would be obtained
by multiplying the unadjusted Exchange Ratio (1.4) by an FPA Value in excess
of $18.00.
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In connection with the Merger, options to purchase Sterling Common Stock
("Sterling Stock Options") outstanding at the Effective Time will be exchanged
for options to acquire FPA Common Stock ("FPA Stock Options"). Each Sterling
Stock Option will be exchanged for an FPA Stock Option for that number of
shares equal to the number of shares of Sterling Common Stock subject to such
Sterling Stock Option multiplied by the Exchange Ratio and will have an
exercise price per share equal to the exercise price of such Sterling Stock
Option divided by the Exchange Ratio.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL
SHARES
The conversion of Sterling Common Stock into FPA Common Stock will occur
automatically at the Effective Time.
As soon as practicable after the Effective Time, American Stock Transfer &
Trust Company or another bank or trust company designated by FPA and
reasonably acceptable to Sterling, in its capacity as Exchange Agent (the
"Exchange Agent"), will send a transmittal form to each Sterling shareholder.
The transmittal form will contain instructions with respect to the surrender
of certificates representing Sterling Common Stock to be exchanged for FPA
Common Stock.
STERLING SHAREHOLDERS SHOULD NOT FORWARD STERLING STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. STERLING
SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Until the certificates representing Sterling Common Stock are surrendered
for exchange after the consummation of the Merger, holders of such
certificates will not be paid dividends on the FPA Common Stock into which
such shares have been converted. When such certificates are surrendered, any
unpaid dividends will be paid without interest. For all other purposes,
however, each certificate which represents shares of Sterling Common Stock at
the Effective Time will be deemed to evidence ownership of the shares of FPA
Common Stock into which those shares have been converted by virtue of the
Merger.
All shares of FPA Common Stock issued upon conversion of shares of Sterling
Common Stock shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Sterling Common Stock.
No fractional shares of FPA Common Stock will be issued to any Sterling
shareholder upon consummation of the Merger. For each fractional share that
would otherwise be issued, the Exchange Agent will pay by check an amount
equal to such fraction multiplied by the Exchange Ratio multiplied by the FPA
Value.
NASDAQ LISTING
It is a condition to the Merger that the shares of FPA Common Stock to be
issued in the Merger be authorized for listing on the Nasdaq, subject to
official notice of issuance.
BACKGROUND OF THE MERGER
FPA's strategy for enhancing long-term value for its stockholders has been
to increase the number of enrollees and primary care physicians in the FPA
Network and to negotiate favorable contracts with Payors to provide physician
and related healthcare services to enrollees who select FPA primary care
physicians. The FPA Board of Directors believes that by doing so, FPA can
enhance revenues and earnings. FPA has grown significantly by the acquisitions
of Gonzaba Management Services Organization, Inc. and Physicians First, Inc.
Revenues and operating expenses have increased from approximately $18 million
and $18 million, respectively, in fiscal 1994 to approximately $53 million and
$51 million, respectively, in fiscal 1995. Revenues and operating expenses for
the six months ended June 30, 1996 were approximately $99 million and $94
million, respectively, as compared to revenues and operating expenses of the
same period in 1995 of approximately $16 million and $16 million,
respectively.
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FPA's Board of Directors reviews periodically various strategic
opportunities to enhance profitability and increase stockholder value. In this
regard, the FPA Board of Directors continually evaluates the acquisition of
smaller entities and medical practices and has considered longer term
acquisition opportunities and other strategic alternatives.
In February 1996, Sterling contacted Smith Barney, the lead managing
underwriter of its public offering of securities in October 1995, to seek
general advice concerning strategic planning alternatives and, later that
month, retained Smith Barney to act as its exclusive financial advisor in
connection with one or more potential transactions, including the acquisition
or disposition of securities or other extraordinary transactions.
From February 27, 1996 through March 27, 1996, 18 prospective business
combination candidates, all of which were public companies in the physician
practice management and related health care services industry, were contacted
to determine such parties' interest in a potential transaction with Sterling.
Eight companies requested and received packages containing publicly available
information regarding Sterling (the "Public Packages"), and seven companies
subsequently entered into confidentiality agreements with Sterling (the
"Initial Seven Candidates"). Thereafter, each of the Initial Seven Candidates
received certain confidential business and financial information relating to
Sterling, and due diligence requests were made of and by Sterling, the Initial
Seven Candidates and their respective professional advisors. Of the Initial
Seven Candidates, five candidates subsequently submitted preliminary bids (the
"Five Candidates") ranging from a per share price range of approximately
$15.50 of value to a per share price range of approximately $18.875 of value,
subject to review of due diligence and other customary conditions. Four of the
Five Candidates are public companies in the physician practice management
business and one of the Five Candidates is a public company engaged in
providing emergency and non-emergency ambulance services. The preliminary bids
were not reviewed in detail by Sterling's Board because the preliminary bids
were solicited for the purpose of determining indications of interest only.
FPA submitted the highest preliminary bid of the Five Candidates. At a
regularly scheduled meeting of the Sterling Board of Directors on March 27,
1996, the Sterling Board of Directors reviewed with management and the
Company's legal and financial advisors the activities that had occurred to
date.
Following the March 27, 1996 Sterling Board of Directors meeting through
April 18, 1996, representatives of Sterling met or held discussions with
representatives of the Five Candidates, including FPA. Based on these
discussions, four of the Five Candidates (the "Four Candidates") submitted
revised bids ranging from a per share price range of approximately $15.50 of
value to the per share price associated with the Merger, subject to, among
other things, additional due diligence, and the execution of a definitive
agreement on mutually acceptable terms. During such period, representatives of
the management of Sterling also held discussions with research analysts from
Smith Barney, Oppenheimer and Needham & Co. all of whom Sterling believed had
knowledge and experience following public company stocks in the health care
industry, to review market perceptions of the Four Candidates, including the
earnings potential and growth strategy of each of the Four Candidates. No
reports or presentations were delivered by the research analysts to the
Sterling Board.
On April 18, 1996, at a special telephonic board meeting, which meeting was
continued on April 19, 1996, the Sterling Board of Directors, together with
management and Sterling's legal and financial advisors, discussed the
advantages and disadvantages of a transaction between Sterling and each of the
Four Candidates. In considering the Four Candidates, the Sterling Board of
Directors decided to limit its consideration to the three most competitive
offers (the "Three Candidates"). Among the matters discussed were the
consideration offered and transaction structure proposed by each candidate,
the views of research analysts as to, among other things, the earnings growth
potential of each of the Three Candidates, the trading characteristics of the
securities of each of the Three Candidates, the relative stock prices of
Sterling and each of the candidates, the extent to which the nature and
location of Sterling's business was anticipated to complement that of each of
the candidates, and the progress and timetable of each of the Three Candidates
with respect to the consummation of a transaction. The Sterling Board of
Directors determined not to proceed with the other two considered transactions
because it believed that a business combination with FPA would deliver better
and greater value to the Sterling shareholders. The Sterling Board of
Directors believed that a business combination with FPA not only afforded a
better long term strategy than the other candidates but also would afford the
Sterling shareholders more
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<PAGE>
immediate gain as the value offered by FPA for Sterling's shares was the
highest received by the Sterling Board of Directors. Further, the Sterling
Board of Directors considered it important to consummate a business
combination with a company not solely engaged in delivering practice
management services to emergency rooms and the Sterling Board of Directors
believed that of the Three Candidates, FPA would generate more complementary
business diversification, operationally and geographically, thereby producing
a stronger combined company. The Sterling Board perceived one of the Three
Candidates not to offer as much complementary business diversification,
operationally and geographically, as FPA might, due to the Sterling Board's
perception that this candidate is predominantly a provider of physician
practice management services to hospital based emergency rooms, many of which
hospitals are located in areas currently serviced by Sterling. Further, the
Sterling Board perceived FPA would be better able to operate profitably within
what the Board considered to be the increasing role managed care is playing in
the health care industry due to the Sterling Board's belief that FPA's
experience with regard to managed care contracting was greater that that of
this candidate. Finally, the Sterling Board rejected this candidate's bid
because it was lower in value than that of FPA.
The other of the Three Candidates was rejected because its bid was the
lowest of the Three Candidates; resulting in the Sterling's Board concluding
that the consideration to be received by the Sterling shareholders in the FPA
bid reflected a more appropriate percentage ownership of the combined company
immediately following the combination transaction. Further, this candidate's
bid offered Sterling no representation on the combined entity's board of
directors and the Sterling Board believed that board representation was
important to assist Sterling with an orderly corporate transition. After
discussion, the Sterling Board of Directors authorized management of Sterling
to negotiate the execution of an agreement with FPA, such agreement to be in
form and substance subject to the approval of the Board of Directors.
In March 1996, FPA contacted Oppenheimer, which had served as one of the co-
managing underwriters in its two public offerings, to seek its assistance in
connection with a transaction with Sterling. Oppenheimer assisted FPA with its
due diligence review of Sterling and presented its views on several issues,
including the due diligence and the proposed financial terms of the Merger.
In April 1996, representatives of Sterling and FPA met to discuss the
significant terms of an acquisition pursuant to which FPA would acquire
Sterling in a tax free merger in which shareholders of Sterling would receive
a certain number of shares of FPA Common Stock. The parties discussed a number
of issues, including Merger Consideration, particularly with respect to
changes in the exchange ratio and treatment of Sterling stock options, among
other matters. During the week of May 13, 1996, the draft Merger Agreement was
revised and several telephone conference calls took place between counsel for
FPA and counsel for Sterling.
On May 19, 1996, at a special telephonic meeting of the Sterling Board of
Directors in which Sterling's legal and financial advisors were present, legal
counsel reviewed with the Board of Directors the terms and conditions of the
proposed Merger Agreement and the Board's fiduciary obligations in connection
with the proposed transaction. Smith Barney then rendered to the Sterling
Board of Directors an oral opinion (subsequently confirmed by delivery of a
written opinion dated May 19, 1996) to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to the holders of Sterling
Common Stock, and reviewed with the Sterling Board of Directors certain
financial analyses performed by Smith Barney in connection with its opinion.
See "Opinion of Sterling's Financial Advisor." Following these discussions,
the Sterling Board of Directors unanimously approved the form, terms and
conditions of the proposed Merger Agreement.
On May 19, 1996, at a special telephonic meeting of the FPA Board of
Directors, in which FPA's legal and financial advisors were present and
participating, Oppenheimer rendered an oral opinion, subsequently confirmed in
writing, to the effect that, as of such date, subject to certain assumptions
and other matters, the Merger Consideration was fair, from a financial point
of view, to FPA's stockholders. The FPA Board of Directors also discussed the
most recent draft of the definitive Merger Agreement with FPA's legal counsel.
Following these
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discussions the FPA Board of Directors approved the form, terms and conditions
of the proposed Merger Agreement, in the definitive form submitted to the FPA
Board of Directors.
On May 19, 1996, Sterling and FPA executed the Merger Agreement, and on May
20, 1996, issued a joint press release regarding the Merger.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGER
FPA
For the reasons described below, the FPA Board of Directors has unanimously
(with one abstention) approved the Merger and recommends that FPA STOCKHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
FPA continuously analyzes potential acquisition candidates in the healthcare
field. The FPA Board of Directors believes that the Merger is fair to and in
the best interests of FPA and its stockholders for the reasons described
below. Accordingly, the FPA Board of Directors has approved the Merger
Agreement and the transactions contemplated thereby and has directed that the
Merger Agreement and Merger be submitted to a vote of FPA's stockholders at
the FPA Special Meeting.
The FPA Board of Directors believes the negotiated terms to be the most
favorable transaction terms available, considering an array of factors which
included those both favorable and adverse to the Merger. In evaluating the
Merger, the FPA Board of Directors consulted with FPA management, legal
counsel and Oppenheimer. It considered the following factors to be material to
and in support of its final determination:
(i) The Merger is expected to enable FPA to take advantage of Sterling's
existing relationships with hospitals in order to expand the FPA Network in
geographic areas in which FPA currently operates and to penetrate new
markets. Such expansion of the FPA Network is expected to enhance FPA's
ability to win new Payor contracts and to attract enrollees. In addition,
FPA is expected to enhance Sterling's growth opportunities by introducing
Sterling to the approximately 50 hospitals that serve FPA's enrollees;
(ii) The Merger is expected to result in significant financial and
operational synergies including, but not limited to, those relating to
executive salaries, investor relations, audit, legal and insurance fees and
rent costs. The Merger is expected to result in a lower overall cost of
capital to FPA by strengthening its balance sheet and thereby enhancing the
Company's ability to raise debt financing. FPA management performed
analyses which estimated such synergies and other financial benefits. In
addition, the increased float and market capitalization of FPA should
improve investor awareness of FPA and its ability to access the equity
markets;
(iii) by incorporating emergency department physicians into the FPA
Network, the FPA Network will cover the two major points of entry
("gatekeepers") into the managed health care system. This should enable FPA
to more fully manage patient care and hospital admissions regardless of how
the patient enters the healthcare system. FPA's enhanced ability to manage
patient treatment protocols and expanded service offerings should
facilitate improved medical loss ratios and make the FPA Network even more
attractive to new and existing Payors;
(iv) the Merger is expected to substantially increase FPA's size in terms
of revenues, profits, physicians and locations which is expected to enhance
FPA's national recognition, making it easier for FPA to attract and retain
new physicians and win new Payor contracts;
(v) the Merger is expected to create a combined company with a number of
anticipated strengths including the opportunity for Sterling and FPA to
jointly develop new patient care programs. The availability of an expanded
network and enhanced services is expected to permit more comprehensive
patient care services, promoting higher quality of healthcare and increased
patient satisfaction;
(vi) the recent acquisition by FPA of 125 physicians operating out of 40
primary care clinics in Florida fits well strategically with Sterling's
geographic focus on the Florida market. The combination forms a solid
foundation for expansion of the FPA Network in the high Medicare
concentration Florida markets; and
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(vii) the Merger is expected to be treated as a tax-free reorganization
under the Code.
In addition to the foregoing items, the FPA Board of Directors generally
considered those matters discussed under "RISK FACTORS," which included
potentially adverse consequences to FPA posed by the Merger and, in
particular, the assumption of Sterling's liabilities, uncertainties with
respect to the integration of the two entities, the need for additional
capital for the combined company together with the potential unavailability of
such financing, the potential loss of business and the fact that following the
Merger, current FPA stockholders will own as little as 44.8% of the
outstanding FPA Common Stock (37.1% if the Foundation Transaction is also
consummated). The FPA Board of Directors reviewed these adverse factors in
their totality, without focusing on any one individual factor. Moreover, the
Board considered the management of the combined entity to be capable of
addressing and managing the integration of the two businesses. Without giving
relative weights to the respective factors, favorable and adverse, and without
drawing a correlation among the factors, the FPA Board of Directors determined
that the factors adverse to the Merger were not sufficient to negate the
incentives for pursuing, and potential benefits of, the Merger. The FPA Board
of Directors believes that the Merger will have no material adverse effects on
any FPA stockholders, including non-affiliated stockholders.
The FPA Board of Directors also reviewed the size of the termination fee
payable in the event the Merger Agreement is terminated, in relation to the
size of Sterling and FPA and the potential benefits of the Merger. The Board
of Directors of FPA reviewed the circumstances under which such fee would be
payable by FPA or payable to FPA, as well as restrictions on FPA's ability to
solicit potential acquirees other than Sterling prior to the closing of the
Merger. The termination fee and the restrictions on solicitation of
alternative acquirees may have the effect of decreasing the chances of FPA
engaging in a business combination other than the Merger. See "THE MERGER
AGREEMENT--Termination, Amendment and Waiver."
Finally, the FPA Board of Directors's approval of the Merger was conditioned
upon the subsequent receipt of an opinion from Oppenheimer confirming its oral
opinion that as of such opinion's date and subject to certain assumptions and
other matters, the Merger Consideration was fair, from a financial point of
view, to FPA's stockholders. Oppenheimer's opinion dated May 19, 1996 is
attached as Appendix II to this Proxy Statement. In arriving at its
determination, the FPA Board of Directors took Oppenheimer's opinion into
consideration.
The Board accordingly concluded in its subjective collective judgment that,
in light of the foregoing, the terms of the Merger Agreement are fair to and,
therefore, in the best interests of FPA and its stockholders notwithstanding
the related risks. See "THE MERGER--Background," "THE MERGER--Opinion of FPA's
Financial Advisor," "RISK FACTORS" and "COMPARATIVE MARKET DATA."
In view of the wide variety of factors considered in connection with the
evaluation of the Merger, the FPA Board of Directors did not attempt to
quantify or otherwise assign relative weights to the specific factors it
considered in reaching its determination.
Mr. Harvey Wilson, a shareholder of Sterling, abstained from voting on the
Merger Agreement to avoid any potential conflict of interest even though he
disclosed his interest to the members of the FPA Board. Accordingly, he would
have been permitted to vote on the Merger Agreement under applicable
corporation law. Mr. Wilson did participate in the FPA Board's discussion and
evaluation of the Merger.
Sterling.
THE BOARD OF DIRECTORS OF STERLING HAS UNANIMOUSLY APPROVED THE MERGER, AND
RECOMMENDS A VOTE FOR THE MERGER. STERLING'S BOARD OF DIRECTORS BELIEVES THE
MERGER IS FAIR AND IN THE BEST INTERESTS OF THE STERLING SHAREHOLDERS:
The material factors considered by the Sterling Board of Directors in
reaching its conclusion to approve and recommend the Merger are as follows:
(i) The Sterling Board's observation of continued consolidation,
increasing competition and expansion of the prepaid segment of the health
care industry, resulting in entities similar in size and scope to Sterling
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being unable to achieve material rate increases, if any, from HMOs and
other third party payors who generally pay for medical care services on a
capitated basis. Additionally, the Sterling Board of Directors analyzed why
Sterling's management of primary care medical practices did not produce for
Sterling profit margins comparable to that experienced by Sterling in the
management of hospital emergency room departments. Based on this review,
the Sterling Board determined that the combined company that would result
from the Merger would be better positioned because of its size, geographic
scope and expertise to more effectively participate in managed care
programs and to more profitably operate within the rapidly changing
healthcare industry;
(ii) The Sterling Board's review of information concerning FPA's
business, prospects, historical and projected financial performance,
financial condition, including recent improvements in the results of
operations reported by FPA and the prospects for successfully combining the
Sterling and FPA businesses and operations. Based on these factors
Sterling's Board determined that the consideration to be received by the
shareholders of Sterling in the Merger reflected an appropriate percentage
ownership of the combined entity (between 47.9% and 52.1% based on the
Adjusted Exchange Ratio, immediately following consummation of the Merger)
and that the Merger presented an attractive growth opportunity for Sterling
that could not be achieved as quickly, if at all, if Sterling were to
remain an independent entity and continued to pursue its acquisition
strategy;
(iii) The Sterling Board's review of Sterling's and FPA's projected
contributions to revenues (for fiscal 1996 approximately 39.2% for Sterling
and 60.8% for FPA), and net income (for fiscal 1996 approximately 52.6% for
Sterling and 44.0% for FPA) in a combined company and the attendant
synergies expected to be realized by the combined company, including but
not limited to the elimination of duplicative salaries, investor relations
costs, audit, legal and insurance fees and rent costs (estimated to be
approximately $1.5 million annually for fiscal 1997 and 1998). In this
regard, the Sterling Board of Directors determined that not only would
duplicative costs be eliminated but Sterling's business would be enhanced
by FPA's business due to the availability of an expanded network of
physicians across a broader geographical base, and the opportunity for
Sterling and FPA to jointly develop new patient programs and services;
(iv) The opinion dated May 19, 1996 (which opinion has been updated to
the date of this Proxy Statement/Prospectus) of Smith Barney to the
Sterling Board of Directors to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to the holders of Sterling
Common Stock;
(v) The Sterling Board's analysis as to the potential immediate benefits
of the Merger in providing value to the Sterling shareholders. In this
regard, the Sterling Board of Directors determined that the Merger would
not be dilutive to the earnings of the combined company based on the
Adjusted Exchange Ratio;
(vi) The Sterling Board of Director's review of the terms of the Merger,
including, without limitation, the ability of the Sterling Board of
Directors to renegotiate the Exchange Ratio if the price of the FPA Common
Stock declines below $13.30 per share or increases above $18.00 per share,
and the ability of the Sterling Board of Directors to negotiate with third
parties to the extent that the Sterling Board of Directors determines, in
its good faith judgment in the exercise of its fiduciary duties, after
consultation with its financial advisors, that such action is in the best
interests of Sterling's shareholders. Based on this review, the Sterling
Board of Directors determined there to be sufficient flexibility to amend
the terms of the Merger if market conditions require such amendment; and
(vii) The expectation that the Merger will be treated as a pooling of
interests for financial and accounting reporting purposes under GAAP.
In addition to the factors described under "RISK FACTORS", the potentially
negative factors the Sterling Board of Directors considered in connection with
its deliberation of the Merger were as follows:
(i) The risk that FPA would not able to successfully integrate the
business of Sterling with that of Sterling and thus not realize the
expected synergies, including the fact than an unsuccessful integration
would interrupt normal business operations;
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(ii) The fact that the price of FPA Common Stock has experienced relative
and recent volatility over a short period of trading history. The Sterling
Board of Directors believed that the terms of the Exchange Ratio mitigated
this risk;
(iii) The loss of control over the operations of Sterling, including the
risk that, despite the effort of both FPA and Sterling, key independent
contractor physicians, employees or clients may not continue to contract
with FPA subsequent to the Merger. The Sterling Board of Directors believed
that this risk was mitigated by the expertise within FPA management, by the
condition to closing the Merger that Dr. Dresnick agree to continue to
serve as an officer and director of FPA's to-be-formed hospital services
division for a three year period on terms to be agreed upon and by the
Sterling Board's determination that the corporate cultures of Sterling and
FPA were compatible; and
(iv) The risk that FPA's experience with obtaining credit from
institutions has been relatively poor compared to that of Sterling. This
risk was mitigated by the Sterling Board of Director's belief that the
Merger will strengthen FPA's balance sheet and enhance FPA's ability to
raise debt financing. In addition, the Sterling Board believed that the
market capitalization of the combined company should improve investor
awareness of FPA which in turn may enhance FPA's ability to access the
equity markets.
In considering whether the Merger was in the best interests of the Sterling
shareholders, the Sterling Board concluded that any compensation to be paid to
officers and directors was of a nature that would not reduce overall
consideration to the Sterling shareholders. The Sterling Board of Directors
believed that the Merger would have no material adverse effects on any
Sterling shareholders, including non-affiliated shareholders. The Sterling
Board of Directors also considered the circumstances under which the
termination provisions and the break-up fee contained in the Merger Agreement
would be payable, as well as restrictions on Sterling's ability to solicit
other potential acquirors and the effect these provisions might have in
reducing the likelihood of engaging in a business combination with a party
other than FPA. For a discussion of the Sterling Board of Directors' analysis
of the interests of certain persons in the Merger, including Dr. Dresnick, see
"--Interests of Certain Persons in the Merger."
The foregoing discussion of the information and factors considered is not
intended to be exhaustive, but it does include all material factors considered
by the Sterling Board of Directors. In view of the wide variety of factors,
both positive and negative, considered by the Sterling Board, the Board did
not find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered, and individual directors may have
given differing weights to different factors. After taking into consideration
all of the factors set forth above, the Board of Directors of Sterling
determined that the Merger was fair and in the best interests of the Sterling
shareholders and that Sterling should proceed with the Merger at this time.
OPINION OF FPA'S FINANCIAL ADVISOR
FPA retained Oppenheimer to act as its financial advisor and to render an
opinion to the Board of Directors of FPA as to the fairness of the Merger,
from a financial point of view, to the stockholders of FPA (the "Oppenheimer
Opinion"). FPA selected Oppenheimer based on its qualifications, expertise and
familiarity with the physician practice management industry and with FPA and
Sterling in particular.
Oppenheimer has delivered its written Opinion, dated May 19, 1996, to the
FPA Board of Directors to the effect that, subject to the various
considerations set forth in such opinion, as of such date, the Merger
Consideration was fair, from a financial point of view, to the stockholders of
FPA. On August 6, 1996, pursuant to Section 8.3(g) of the Merger Agreement
that conditions FPA's obligation to consummate the Merger upon receipt of an
update to the Oppenheimer Opinion, Oppenheimer delivered an update to the
Oppenheimer Opinion (the "Opinion Update") to the effect that, subject to the
various considerations set forth in the Oppenheimer Opinion and the Opinion
Update, as of such date, the Merger Consideration was fair, from a financial
point of view, to the stockholders of FPA. FPA has agreed that the Opinion
Update, unless withdrawn by Oppenheimer, will satisfy the condition set forth
in Section 8.3(g) of the Merger Agreement.
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Oppenheimer did not recommend to FPA that any specific amount of
consideration constituted the appropriate consideration for the Merger. The
Merger Consideration was established by the parties to the Merger. No
limitations were imposed by the FPA Board of Directors on Oppenheimer with
respect to the investigations made or procedures followed by it in rendering
the Oppenheimer Opinion or the Opinion Update. The Oppenheimer Opinion and the
Opinion Update addresses only the fairness, from a financial point of view, of
the Merger Consideration to be paid by FPA, and does not constitute a
recommendation to any FPA stockholder as to how such stockholder should vote
at the FPA Special Meeting.
THE SUMMARY OF THE OPPENHEIMER OPINION AND THE OPINION UPDATE SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE OPPENHEIMER OPINION AND THE OPINION UPDATE ATTACHED
HERETO AS APPENDIX II. FPA'S STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
OPPENHEIMER OPINION AND THE OPINION UPDATE CAREFULLY IN THEIR ENTIRETY IN
CONJUNCTION WITH THIS PROXY STATEMENT/PROSPECTUS FOR THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
OPPENHEIMER.
OPPENHEIMER OPINION
As set forth in the Oppenheimer Opinion, Oppenheimer relied upon and assumed
the accuracy and completeness of all of the financial and other information
available to it from public sources and provided to it by the managements of
FPA and Sterling and their respective representatives. Each of FPA and
Sterling provided Oppenheimer with financial projections for their respective
companies, as well as projected cost savings and revenues synergies resulting
from the Merger. FPA management also prepared and provided Oppenheimer with an
adjusted version of the Sterling management projections that assumed slower
growth in revenues and earnings (the "Adjusted Sterling Projections").
Oppenheimer assumed that all such projections were reasonably prepared on
bases reflecting the best available information, estimates and judgment of the
respective managements of the two companies. The financial projections
provided by FPA and Sterling were primarily based on assumed revenue and
profit growth rates for their respective existing businesses, with the
majority of FPA's estimated growth derived through addition of physicians,
Payor contracts and enrollees to the FPA Network and the majority of
Sterling's growth derived through attaining or acquiring new emergency
department management contracts. In arriving at its opinion, Oppenheimer
neither made nor obtained any independent valuation or appraisal of the assets
or liabilities of FPA or Sterling. Oppenheimer also assumed the accuracy of
the advice and conclusions of FPA's legal counsel and accountants with respect
to tax and accounting matters as provided to Oppenheimer by FPA's management,
including, without limitation, the treatment of the Merger as a tax free
reorganization for federal income tax purposes and as a pooling of interests
for financial reporting purposes. The Oppenheimer Opinion is based upon
Oppenheimer's analyses of certain factors in light of its assessment of
general economic, financial and market conditions that could be evaluated by
it as of the date of the Oppenheimer Opinion. In all cases, historical results
were adjusted for extraordinary items and other non-recurring or non-operating
charges.
In rendering the Oppenheimer Opinion, Oppenheimer, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed FPA's annual reports to
stockholders and its annual reports on Form 10-K for fiscal years ended
December 31, 1994 and 1995 and its quarterly report on Form 10-Q for the three
months ended March 31, 1996; (iii) reviewed Sterling's annual reports to
shareholders and its annual reports on Form 10-K for fiscal years ended
December 31, 1994 and 1995 and its quarterly report on Form 10-Q for the three
months ended March 31, 1996; (iv) reviewed the Certificates of Incorporation
for both FPA and Sterling; (v) reviewed the financial projections for FPA
prepared by FPA's management for 1996 through 1998 (the "FPA Management
Projections"); (vi) reviewed the financial projections for Sterling prepared
by Sterling's management for 1996 through 1998 (the "Sterling Management
Projections"); (vii) held discussions with the senior management of each of
FPA and Sterling to review historical and current operations and financial
conditions as well as the financial projections and strategies of the
respective companies and visited certain of their respective facilities;
(viii) reviewed current and historical market prices and trading data of the
FPA Common Stock and the Sterling Common Stock; (ix) reviewed financial and
market data for certain public companies Oppenheimer deemed comparable to FPA
and Sterling; (x) reviewed and analyzed recent mergers and acquisitions of
companies in
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lines of business Oppenheimer deemed comparable to FPA and Sterling; (xi)
analyzed the financial impact of the Merger on the combined company, including
the pro forma earnings per share; (xii) prepared a discounted cash flow
valuation of FPA and Sterling; (xiii) reviewed the relative contributions of
FPA and Sterling to the combined company with respect to certain historical
and projected financial parameters; and (xiv) performed such other analyses
and reviewed such other documents and information as Oppenheimer deemed
appropriate.
Valuation of Sterling. Oppenheimer performed three primary valuation
analyses of Sterling: (i) a comparison of Sterling with certain publicly
traded companies in the physician practice management industry (the "PPM
Companies") which analysis consisted of reviewing and considering certain
financial and market data for the PPM Companies (the "Sterling Comparable
Companies Analysis"); (ii) a discounted cash flow analysis which consisted of
adding the discounted present value of the projected future cash flows of
Sterling from April 1, 1996 to December 31, 1998 and the discounted present
value of the terminal value of Sterling, based on a multiple of the net income
projected for the fiscal year ending December 31, 1998 (the "Sterling
Discounted Cash Flow Analysis"); and (iii) a comparison of consideration paid
in certain merger and acquisition transactions involving companies in the
physician practice management industry. In performing its valuation analyses
of Sterling, Oppenheimer assumed payment of an amount per share of Sterling
Common Stock of approximately $23.01, the maximum required value under the
terms of the Merger Agreement.
Sterling Comparable Companies Analysis. Oppenheimer analyzed 20 PPM
Companies to evaluate the market values at which these companies trade
relative to their respective historical and projected financial performance.
The PPM Companies in the Sterling Comparable Companies Analysis consisted of
the following companies that focus on the primary care, single-specialty,
multi- specialty and hospital services segments of the physician market: AHI
Healthcare Systems, Inc., American Oncology Resources, Inc., Apogee, Inc.,
Caremark International, Inc., EmCare Holdings, Inc., EquiMed, Inc., InPhyNet
Medical Management, Inc., MedCath Incorporated, MedPartners/Mullikin, Inc.,
OccuSystems, Inc., Orthodontic Centers of America, Inc., Pediatric Services of
America, Inc., Pediatrix Medical Group, Inc., PHP Healthcare Corporation,
PhyCor, Inc., PhyMatrix Corp., Physician Reliance Network, Inc., Physician
Resource Group, Inc., Sheridan Healthcare, Inc. and United Dental Care, Inc.
Oppenheimer analyzed, among other things, the market values and certain
financial criteria for the PPM Companies, including their revenue, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), earnings
before interest and taxes ("EBIT") and earnings per share, in each case, for
the most recent twelve-month periods for which financial data was available
and on an estimated basis for 1996 and 1997. Such estimates of revenues,
EBITDA and EBIT for the PPM Companies were derived from publicly available
research reports published by a variety of investment firms and research
analysts. Oppenheimer chose the research reports for each PPM Company based
upon the experience and reputation of the investment firms and research
analysts and the date of such reports. Oppenheimer utilized research reports
prepared by Smith Barney for AHI Healthcare Systems, Inc., Apogee, Inc., PHP
Healthcare Corporation, PhyMatrix Corp. and Sheridan Healthcare, Inc.
Oppenheimer utilized its own research reports for MedPartners/Mullikin, Inc.
and PhyCor, Inc. Such estimates for earnings per share for the PPM Companies
were based on information provided by FIRST CALL Research.
The low, high and mean values, respectively, for Aggregate Value (market
value of common equity on May 16, 1996 plus total debt and preferred stock
less cash) as a multiple of each of the indicated statistics for the PPM
Companies were as follows: (a) latest twelve months ("LTM") revenue: 0.5x,
17.1x and 4.9x; (b) LTM EBITDA: 10.4x, 73.4x and 29.0x; (c) LTM EBIT: 14.5x,
102.7x and 39.7x; (d) 1996 revenue: 0.2x, 10.5x and 3.0x; (e) 1996 EBITDA:
2.9x, 36.8x and 17.8x; (f) 1996 EBIT: 3.6x, 38.2x and 21.3x; (g) 1997 revenue;
0.7x, 7.6x and 2.3x; (h) 1997 EBITDA: 3.9x, 26.8x and 13.3x; and (i) 1997
EBIT: 4.9x, 51.1x and 15.8x. The low, high and mean market values,
respectively, of common equity on May 16, 1996 as a multiple of earnings per
share for the following periods for the PPM Companies were as follows: (a) LTM
earnings per share; 21.4x, 104.2x and 57.6x; (b) 1996 earnings per share:
18.1x, 102.4x and 44.8x; and (c) 1997 earnings per share: 4.9x, 51.1x and
28.6x.
Applying these results to Sterling's LTM results and the Sterling Management
Projections yielded implied market values for Sterling ranging from $230.3
million ($26.50 per share) to $597.5 million ($68.76 per share),
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with an average of $305.3 million ($35.13 per share). Applying these results
to the Adjusted Sterling Projections yielded implied market values for
Sterling ranging from $189.8 million ($21.85 per share) to $597.5 million
($68.76 per share), with an average of $288.1 million ($33.16 per share).
Oppenheimer compared these implied market values to $20.81 to $23.01, the
range of values for the Sterling Common Stock implied by exchange ratios
between 1.56x and 1.28x as provided in the Merger Agreement.
In addition, Oppenheimer considered the impact of applying a premium to the
intrinsic value of Sterling derived in the Sterling Comparable Companies
Analysis to incorporate typical premiums paid for the acquisition of non-
financial public companies with market values ranging from $100.0 million to
$300.0 million. As noted below under the caption "M&A Premium Analysis," the
premiums paid by acquirors have fallen in the range of 28% to 47% above the
trading prices of the stock of the acquired companies at various times prior
to the announcement of an acquisition. Applying an acquisition premium of
approximately 30% to the implied per share valuations described above based on
the Sterling Management Projections yielded a range of values for Sterling's
Common Stock of $32.12 to $96.89, with an average of $46.02. Applying an
acquisition premium of approximately 30% to the implied per share valuations
described above based upon the Adjusted Sterling Projections yielded a range
of values for Sterling's Common Stock of $26.53 to $96.89, with an average of
$43.46. Oppenheimer compared these values to $20.81 to $23.01, the range of
values for the Sterling Common Stock implied by exchange ratios between 1.56x
and 1.28x as provided in the Merger Agreement.
Sterling Discounted Cash Flow Analysis. Oppenheimer performed a discounted
cash flow analysis whereby an intrinsic value of Sterling's equity was
determined by calculating the present value of Sterling's estimated future
cash flows from April 1, 1996 to December 31, 1998, and adding to such amount
the present value of Sterling's terminal value obtained by capitalizing
Sterling's projected net income for the year ending December 31, 1998 at
multiples of 18.0x, 20.0x and 22.0x. The range of these terminal value
multiples was based on a range of net income multiples at which HMOs have
traded over the past three years, as Oppenheimer believed that physician
practice management companies would experience growth and consolidation trends
similar to those experienced by the HMO industry. Oppenheimer confirmed with
FPA management that this range of multiples was typically applied by FPA
management when evaluating acquisition opportunities in the physician practice
management industry. Oppenheimer also believed that the range for terminal
value multiples it used was conservative relative to the mean market values of
common equity for the PPM Companies on May 16, 1996 as a multiple of LTM
earnings per share (57.6x, as noted above).
Oppenheimer applied discount rates of 12.5%, 15.0% and 17.5% to calculate
the present value of Sterling's estimated future cash flows from April 1, 1996
to December 31, 1998 and the terminal value calculated based on a multiple of
Sterling's 1998 projected net income. This range of discount rates was derived
using certain assumptions as to Sterling's weighted average cash and capital
and was slightly below the range of discount rates used to calculate the value
of FPA based on FPA's discounted cash flows (described below) due to the lower
projected revenue and earnings growth assumptions used in the Sterling
Management Projections versus the FPA Management Projections, as well as
Oppenheimer's belief that Sterling could more accurately project future
operating margins on its emergency department contracts.
The range of present values derived for Sterling using this discounted cash
flow approach based upon the Sterling Management Projections was $178.1
million ($20.50 per share) to $243.0 million ($27.96 per share), with a
midpoint value of $208.8 million ($24.04 per share.) The range of present
values derived for Sterling using this discounted cash flow approach based
upon the Adjusted Sterling Projections was $140.3 million ($16.15 per share)
to $191.3 million ($22.02 per share), with a midpoint value of $164.5 million
($18.93 per share). Oppenheimer compared these present values to $20.81 to
$23.01, the range of values for the Sterling Common Stock implied by exchange
ratios between 1.56x and 1.28x as provided in the Merger Agreement.
Merger and Acquisition Transaction Analysis. Oppenheimer reviewed the
consideration paid in certain merger and acquisition transactions involving
physician practice management companies. The transactions which Oppenheimer
reviewed (in the order of size, with respect to completed transactions)
consisted of the following acquisitions: Mullikin Medical Enterprises, L.P. by
MedPartners, Inc.; Pacific Physicians Services, Inc. by
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MedPartners/Mullikin, Inc.; Colkitt Oncology Group, Inc. by EquiVision, Inc.;
Team Health Group Inc. by Pacific Physicians Services, Inc.; certain assets of
Coastal Physician Group, Inc. by Humana Inc.; Medical Networks, Inc. by
Sterling Healthcare Group, Inc.; Melbourne Internal Medicine Associates, P.A.
by MedPartners, Inc.; Capital Emergency Associates by EmCare Holdings; Med
Center, Inc. by MedPartners, Inc.; Neonatal Specialists Ltd. by Pediatrix
Medical Group Inc.; Professional Emergency Physicians by Sterling Pediatric;
Newborne Consultants by Pediatrix Medical Group; Regional Emergency Services
by Sterling Healthcare Group; and the announced merger agreement between
MedPartners/Mullikin, Inc. and Caremark International Inc. (collectively, the
"PPM M&A Transactions").
Oppenheimer calculated multiples for each transaction based on the ratio of
the offer price ("Purchase Equity Value") to such acquired companies'
respective pre-acquisition LTM net income and the ratio of Purchase Equity
Value plus total debt and preferred stock less cash ("Purchase Aggregate
Value") to such acquired companies' pre-acquisition LTM revenue, LTM EBITDA
and LTM EBIT. The high, low and adjusted average Purchase Equity Value
multiples of LTM net income for the PPM M&A Transactions were 146.7x, 10.8x
and 33.7x. The high, low and adjusted average values of the Purchase Aggregate
Value as a multiple of each of the indicated statistics for the PPM M&A
Transactions were as follows: LTM revenue: 5.0x, 0.2x and 1.0x; (b) LTM
EBITDA: 29.8x, 7.6x and 15.1x; and (c) LTM EBIT: 136.8x, 9.2 and 17.3x. In
computing the adjusted average Purchase Aggregate Value as a multiple of LTM
EBIT and the adjusted average Purchase Equity Value as a multiple of LTM net
income, Oppenheimer excluded the acquisition of Mullikin Medical Enterprises,
L.P. by MedPartners, Inc., and in computing the adjusted average Purchase
Aggregate Value as a multiple of LTM revenue Oppenheimer excluded the
acquisition of Colkitt Oncology Group, Inc. by EquiVision, Inc., since
Oppenheimer believed that these acquisitions represented multiples
significantly outside of the ranges reflected in the other acquisitions and
that inclusion would inappropriately alter the results.
Applying the high, low and adjusted average multiples to Sterling's LTM
results yielded derived values of Sterling equity of $1,209.9 million,
respectively, ($139.24 per share), $27.6 million ($3.17 per share) and a mean
value of $220.5 million ($25.37 per share), respectively, Oppenheimer compared
these derived values to $20.81 to $23.01, the range of values for the Sterling
Common Stock implied by exchange ratios between 1.56x and 1.28x as provided in
the Merger Agreement.
Valuation of FPA. In consideration of the fact that the Merger requires the
issuance of FPA's Common Stock, Oppenheimer conducted a variety of analyses to
determine that the range of potential market values of the FPA Common Stock to
be issued in connection with the Merger appropriately reflects the stock's
intrinsic value.
The FPA Stock Analysis. Oppenheimer reviewed current and historical market
closing prices and trading data of FPA's Common Stock since the initial public
offering of such stock in October 1994. Oppenheimer noted that during the
period from FPA's initial public offering to May 16, 1996, FPA's Common Stock
traded at prices as high as $18 1/4 and as low as $5 1/8 per share. During the
twelve months ended May 16, 1996, FPA's Common Stock traded at prices as high
as $18 1/4 and as low as $5 7/8. Oppenheimer compared these prices to $17.75,
the closing price of FPA Common Stock on May 17, 1996, and $13.30 to $18.00,
the range of prices for FPA Common Stock implied by exchange ratios between
1.56x and 1.28x as provided in the Merger Agreement. Oppenheimer also noted
the mechanics by which the Exchange Ratio would be adjusted (or the Merger
Agreement terminated) if the FPA Value was less than $13.30 or greater than
$18.00.
FPA Comparable Companies Analysis. Oppenheimer compared FPA to the same
group of PPM Companies as used in the valuation of Sterling.
Applying the multiples at which the PPM Companies trade to FPA's LTM results
and projections for FPA derived from publicly available research reports
published by a variety of investment firms and research analysts yielded
implied market values ranging from $126.2 million ($9.28 per share) to $758.0
million ($55.73 per share), with an average of $277.8 million ($20.43 per
share). Applying the multiples at which the PPM Companies trade to FPA's LTM
results and the FPA Management Projections yielded implied market values
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ranging from $126.2 million ($9.28 per share) to $960.8 million ($70.64 per
share) with an average of $346.5 million ($25.47 per share). Oppenheimer
compared these implied market values to $17.75, the closing price of FPA
Common Stock on May 17, 1996, and $13.30 to $18.00, the range of prices for
FPA Common Stock implied by exchange ratios between 1.56x and 1.28x as
provided in the Merger Agreement. Oppenheimer also noted the mechanics by
which the Exchange Ratio would be adjusted (or the Merger Agreement
terminated) if the FPA Value was less than $13.30 or greater than $18.00.
FPA Discounted Cash Flow Analysis. Oppenheimer derived an intrinsic
valuation of FPA's equity based on a discounted cash flow analysis similar to
the approach used to value Sterling's equity (the "FPA Discounted Cash Flow
Analysis"). In consideration of FPA's estimated weighted average cost of
capital, the higher growth estimates reflected in FPA's financial projections
and the need for FPA to improve its current operating margins to attain such
projections, Oppenheimer used a range of discount rates of 15% to 25% to
calculate the present value of FPA's projected cash flows from April 1, 1996
to December 31, 1998 and the terminal value calculated based on a multiple of
FPA's 1998 projected net income, slightly higher than the range used for
Sterling (12.5%, 15% and 17.5%). Oppenheimer used the same terminal value
multiples of 1998 estimated net income (18.0x, 20.0x and 22.0x). This
valuation methodology produced a per share value for FPA Common Stock ranging
from $200.0 million ($15.19 per share) to $323.4 million ($24.57 per share),
with midpoint of $255.9 million ($19.44 per share). Oppenheimer compared these
values to $17.75, the closing price of FPA Common Stock on May 17, 1996 and
$13.30 to $18.00, the range of prices for FPA Common Stock implied by exchange
ratios between 1.56x and 1.28x as provided in the Merger Agreement.
Oppenheimer also noted the mechanics by which the Exchange Ratio would be
adjusted (or the Merger Agreement terminated) if the FPA Value was less than
$13.30 or greater than $18.00.
Discounted Cash Flow Analysis of the Combined Company. Oppenheimer undertook
an analysis of the effect of combining the two companies. For this purpose,
Oppenheimer prepared a discounted cash flow valuation of Sterling and FPA as a
combined entity to determine if the Merger would result in a higher intrinsic
per share value for FPA than the price at which the FPA Common Stock traded at
May 16, 1996 ($17.75). Oppenheimer used discount rates ranging from 14% to
21.9% (the average of the discount rates used for each of FPA and Sterling
weighted by the relative EBIT contributions) for the combined company's
estimated future cash flows and the present value of its 1998 terminal value.
The terminal value was calculated using projected net income in 1998
multiplied by 18.0x, 20.0x and 22.0x. Using the Sterling Management
Projections, the discounted cash flow analysis of the combined company yielded
theoretical per share values ranging from $16.18 to $23.95, with a midpoint of
$19.79. Using the Adjusted Sterling Projections, the discounted cash flow
analysis for the combined company yielded theoretical per share values ranging
from $14.83 to $22.14, with a midpoint of $18.22. Oppenheimer compared these
theoretical values to the historical market prices of FPA Common Stock,
including a closing price of $17.75 on May 17, 1996.
Contribution Analysis. Oppenheimer compared the relative contributions (the
"Contribution Analysis") of both FPA and Sterling to revenues, EBITDA, EBIT
and net income. The Contribution Analysis based on projections for Sterling
and for FPA derived from publicly available research reports published by a
variety of investment firms and research analysts indicated that for the
fiscal year ended December 31, 1995, and the projected fiscal years ending
December 31, 1996 and 1997: (a) the contribution of Sterling to the pro forma
revenues of the combined company was 69%, 40% and 34%, respectively; (b) the
contribution of Sterling to the pro forma EBITDA of the combined company was
80%, 50% and 43%, respectively; (c) the contribution of Sterling to the pro
forma EBIT of the combined company was 83%, 54% and 48% respectively; and (d)
the contribution of Sterling to the pro forma net income of the combined
company was 79%, 55% and 49%, respectively.
The Contribution Analysis based upon the FPA Management Projections and the
Sterling Management Projections indicated that as projected for the fiscal
years ending December 31, 1996, 1997 and 1998: (a) the contribution of
Sterling to the pro forma revenues of the combined company was 37%, 30% and
28%, respectively; (b) the contribution of Sterling to the pro forma EBITDA of
the combined company was 46%, 38% and 31%, respectively; (c) the contribution
of Sterling to the pro forma EBIT of the combined company was
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50%, 42% and 37%, respectively; and (d) the contribution of Sterling to the
pro forma net income of the combined company was 55%, 42% and 35%,
respectively.
The Contribution Analysis based upon the FPA Management Projections and the
Adjusted Sterling Projections indicated that as projected for the fiscal years
ending December 31, 1996, 1997 and 1998: (a) the contribution of Sterling to
the pro forma revenues of the combined company was 36%, 29% and 28%,
respectively; (b) the contribution of Sterling to the pro forma EBITDA of the
combined company was 45%, 34% and 29%, respectively; (c) the contribution of
Sterling to the pro forma EBIT of the combined company was 49%, 37% and 32%,
respectively; and (d) the contribution of Sterling to the pro forma net income
of the combined company was 53%, 37% and 31%, respectively.
These percentages reflect the contributions provided by Sterling to the
combined company based on these parameters. Assuming the highest exchange rate
contemplated in the Merger Agreement (1.56 shares of FPA Common Stock for each
share of Sterling Common Stock), Sterling shareholders will own approximately
53% of FPA (51% on a fully diluted basis) following the Merger.
Accretion/Dilution Analysis. Oppenheimer reviewed the impact of the Merger
on FPA's financial projections. This analysis included the impact of revenue
synergies and cost savings projected to be realized by the managements of FPA
and Sterling, consisting of revenue synergies of $10.0 million and $30.5
million for the years ending December 31, 1997 and 1998, respectively, and
cost savings of $1.5 million for each of the years ending December 31, 1997
and 1998. Based upon the projections for FPA and Sterling derived from
publicly available research reports published by a variety of investment firms
and research analysts, Oppenheimer concluded that the transaction should be
accretive to the earnings per share in fiscal 1996 and fiscal 1997, for the
range of exchange ratios between 1.28x and 1.56x contemplated in the Merger
Agreement. Based upon the FPA Management Projections, Oppenheimer concluded
that (a) utilizing the Sterling Management Projections the transaction should
be accretive to the earnings per share in fiscal 1996 for the range of
exchange ratios between 1.28x and 1.56x contemplated in the Merger Agreement,
the transaction should be accretive to the earnings per share in fiscal 1997
at an exchange ratio of 1.28x and 1.40x (but dilutive at an exchange ratio of
1.56x) and the transaction should be accretive to the earnings per share in
fiscal 1998 at an exchange ratio of 1.28x (but dilutive at exchange ratios of
1.40x and 1.56x), and (b) utilizing the Adjusted Sterling Projections, the
transaction should be accretive to earnings per share in fiscal 1996, but
dilutive to earnings per share in fiscal 1997 and 1998 for the range of
exchange ratios between 1.28x and 1.56x contemplated in the Merger Agreement.
M&A Premium Analysis. Oppenheimer calculated percentage premiums of Purchase
Equity Value per share compared to the stock market closing price for the
previous day, and the closing prices one week, four weeks, 60 days and 90 days
prior to announcement date in all non-financial public company acquisitions
with transaction values between $100 and $300 million. The mean percentage
premiums determined by such calculations were 28%, 32%, 36%, 42% and 47%,
respectively. With FPA's stock price closing at $17.75 per share on the day
prior to the announcement of the Merger, the premiums to be paid by FPA for
Sterling's Common Stock would be 27.8% (one week), 39.5% (four weeks), 57.3%
(60 days) and 70.4% (90 days).
OPINION UPDATE
In rendering the Opinion Update, Oppenheimer reviewed the same information
and performed the same analyses as set forth in the Oppenheimer Opinion,
except: (i) Oppenheimer used only the Adjusted Sterling Projections prepared
by FPA management for 1996 through 1998 and used updated projections for FPA
for 1996 through 1998 provided by FPA management (the "Updated FPA
Projections); (ii) Oppenheimer did not include MedCath Incorporated in the PPM
Companies as a result of the adverse impact of recent public announcements by
MedCath Incorporated on its market valuation; (iii) Oppenheimer utilized
market price information as of August 1, 1996 for the PPM Companies; and (iv)
Oppenheimer evaluated the potential impact of the consummated and proposed
acquisition of certain affiliates of Foundation by FPA described elsewhere in
this Proxy Statement/Prospectus.
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Sterling Comparable Companies Analysis. The low, high and mean values,
respectively, for Aggregate Value on August 1, 1996 as a multiple of each of
the indicated statistics for the PPM Companies were as follows: (a) latest
twelve months ("LTM") revenue: 0.5x, 14.6x and 3.4x; (b) LTM EBITDA: 7.6x,
49.7x and 22.0x; (c) LTM EBIT: 8.8x, 71.5, and 30.5x; (d) 1996 revenue: 0.5x,
8.9x and 2.2x; (e) 1996 EBITDA: 5.0x, 28.4x and 13.8x; (f) 1996 EBIT: 3.9x,
32.5x and 16.3x; (g) 1997 revenue: 0.4x, 5.9x and 1.6x; (h) 1997 EBITDA: 3.3x,
18.7x and 10.1x; and (i) 1997 EBIT: 3.7x, 20.4x and 12.0x. The low, high and
mean market values, respectively, of common equity on August 1, 1996 as a
multiple of earnings per share for the following periods for the PPM Companies
were as follows: (a) LTM earnings per share: 15.0x, 81.5x and 41.9x; (b)1996
earnings per share: 11.8x, 101.1x and 37.0x; and (c) 1997 earnings per share:
9.7x, 39.9x and 22.0x.
Applying these results to Sterling's LTM results and the Adjusted Sterling
Projections yielded implied market values for Sterling ranging from $130.0
million ($14.96 per share) to $406.2 million ($46.75 per share), with an
average of $210.6 million ($24.24 per share). Applying an acquisition premium
of approximately 30% to the implied per share valuations so derived yielded a
range of values for Sterling's Common Stock of $156.0. ($17.96 per share) to
$568.7 ($ 65.45 per share), with an average of $273.8 ($31.51 per share).
Oppenheimer compared these implied market values to $20.81 to $23.01, the
range of values for the Sterling Common Stock implied by exchange ratios
between 1.56x and 1.28x as provided in the Merger Agreement.
Sterling Discounted Cash Flow Analysis. The range of present values derived
for Sterling using the discounted cash flow approach based upon the Adjusted
Sterling Projections was $141.4 million ($16.76 per share) to $192.5 million
($22.82 per share), with a midpoint value of $165.7 million ($19.65 per
share.) Oppenheimer compared these present values to $20.81 to $23.01, the
range of values for the Sterling Common Stock implied by exchange ratios
between 1.56x and 1.28x as provided in the Merger Agreement.
Merger and Acquisition Transaction Analysis. The PPM M&A Transactions and
Sterling LTM results remained unchanged from the Oppenheimer Opinion.
The FPA Stock Analysis. Oppenheimer noted that during the period from FPA's
initial public offering to August 1, 1996, FPA's Common Stock traded at prices
as high as $20 1/8 and as low as $5 1/8 per share. During the twelve months
ended August 1, 1996, FPA's Common Stock traded at prices as high as $20 1/8
and as low as $5 7/8. FPA's stock price reached its high of $20 1/8 on May
28,1996, eight days following the announcement of the Merger.
FPA Comparable Companies Analysis. Applying the multiples at which the PPM
Companies trade to FPA's LTM results and the Updated FPA Projections yielded
implied market values ranging from $70.3 million ($5.17 per share) to $533.5
million ($39.22 per share) with an average of $191.9 million ($14.11 per
share).
FPA Discounted Cash Flow Analysis. Using the Updated FPA Projections this
valuation methodology produced a value for FPA Common Stock ranging from
$129.0 million ($10.08 per share) to $210.9 million ($16.48 per share), with
midpoint of $166.4 million ($13.00 per share).
Discounted Cash Flow Analysis of the Combined Company. Oppenheimer undertook
an analysis of the effect of combining FPA and Sterling as well as combining
FPA, Sterling and the Acquired Foundation Entities. For this purpose,
Oppenheimer prepared a discounted cash flow valuation of all of the entities
on a combined basis to determine if the Merger would result in a higher
intrinsic per share value for FPA than the price at which the FPA Common Stock
closed on August 1, 1996 ($19.75). As in the Oppenheimer Opinion, Oppenheimer
used discount rates derived using weightings based on the relative EBIT
contributions of the individual companies and the same terminal value
multiples of projected net income in 1998. Using FPA's Adjusted Sterling
Projections, the Updated FPA Projections, a $19.75 stock price for FPA and the
budgeted synergies, the discounted cash flow analysis of the combined company
consisting of FPA and Sterling yielded theoretical per share values ranging
from $14.04 to $20.97, with a midpoint of $17.25. For the combined entity
consisting of FPA, Sterling and the Acquired Foundation Entities, the analysis
yielded theoretical per share values ranging from $12.47 to $20.09, with a
midpoint of $16.02. Oppenheimer compared these theoretical values to the
historical market prices for FPA Common Stock, including a closing price of
$19.75 on August 1, 1996.
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Contribution Analysis. Oppenheimer compared the relative contributions of
both FPA and Sterling to revenues, EBITDA, EBIT and net income. The
Contribution Analysis based on FPA's Adjusted Sterling Projections and the
Updated FPA Management Projections indicated that for the projected quarters
ending September 30 and December 31, 1996, and the projected fiscal years
ending December 31, 1997 and 1998: (a) the contribution of Sterling to the pro
forma revenues of the combined company was 42%, 37%, 36% and 28%,
respectively; (b) the contribution of Sterling to the pro forma EBITDA of the
combined company was 55%, 53%, 43% and 39%, respectively; (c) the contribution
of Sterling to the pro forma EBIT of the combined company was 58%, 59%, 50%
and 42%, respectively; and (d) the contribution of Sterling to the pro forma
net income of the combined company was 53%, 56%, 51% and 43%, respectively.
Accretion/Dilution Analysis. In updating the Accretion/Dilution Analysis
Oppenheimer reviewed the impact of the Merger on FPA's financial projections
for 1996, 1997 and 1998 utilizing the Updated FPA Projections and FPA's
Adjusted Sterling Projections. Revenue synergies and cost savings projected to
be realized by the managements of FPA and Sterling remained unchanged from the
Oppenheimer Opinion (revenue synergies of $10.0 million and $30.5 million for
the years ending December 31, 1997 and 1998, respectively, and cost savings of
$1.5 million for each of the years ending December 31, 1997 and 1998).
Oppenheimer concluded that the transaction should be accretive to the
projected earnings per share of FPA under all potential exchange ratio
scenarios and in all periods examined, with and without the projected revenue
synergies and cost savings, with the exception of fiscal 1998 assuming no
projected revenue synergies, which resulted in dilution under all exchange
ratios between 1.28x and 1.56x contemplated in the Merger Agreement. As an
ancillary analysis, Oppenheimer also compared the projected earnings per share
of FPA to the earnings per share of FPA, Sterling and Foundation on a combined
basis. The analysis demonstrated that the combined companies should have
higher earnings per share than FPA on a stand-alone basis. Finally,
Oppenheimer reviewed the impact of the Merger on the earnings per share of a
theoretical combined entity consisting of FPA and Foundation. Although the
impact was dilutive in all periods, Oppenheimer believed that such dilution
resulted from a number of operating and financial factors, including the
impact of the Guaranteed Access Payments (as described on page 91 below), and
that the theoretical dilutive effects of the Merger on the combined FPA and
Foundation Entities should not alter its analyses and conclusion.
The foregoing summary does not purport to be a complete description of the
analyses performed by Oppenheimer. A fairness opinion is the product of a
complex process and cannot necessarily be partially analyzed or readily
summarized. Examining portions of the analyses summarized above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the Oppenheimer Opinion and the Opinion Update. In
arriving at its opinion, Oppenheimer did not attribute any particular weight
to any analysis or fact considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
The analyses were prepared by Oppenheimer solely for purposes of providing its
opinion as to the fairness of the Merger Consideration, from a financial point
of view, to the stockholders of FPA. Analyses based upon projections of future
results are inherently subject to substantial uncertainties and are not
necessarily indicative of actual future results, which may be significantly
more or less favorable than suggested by any analysis. Additionally, analyses
relating to the values of business do not purport to be appraisals or to
reflect the prices at which businesses may actually be sold or combined.
Accordingly, Oppenheimer expressed no opinion as to what the value of FPA
Common Stock actually will be subsequent to the Merger. As described above,
Oppenheimer's Opinion and presentation to FPA's Board of Directors was one of
many factors taken into consideration by FPA's Board of Directors in making
its determination to approve the Merger.
Oppenheimer is a nationally recognized investment banking firm. As part of
its investment banking services, it is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions and for
other purposes.
Oppenheimer serves as a market maker for both FPA and Sterling Common Stock.
In the ordinary course of its business, Oppenheimer may actively trade the
securities of both FPA and Sterling for its own account or for the accounts of
its customers and, accordingly, may at any time hold a long or short position
in such
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securities. Oppenheimer has also provided investment banking services to each
of FPA and Sterling, including acting as underwriter in each company's public
offerings of common stock. In connection with public offerings of FPA and
Sterling, Oppenheimer has received approximately $693,000 and $290,000,
respectively. Oppenheimer also provides equity research coverage of both FPA
and Sterling.
FPA has agreed to pay Oppenheimer a fee of $400,000 for rendering its
opinion in connection with the Merger, payable at the time it delivered the
Oppenheimer Opinion to the Board of Directors. Further, Oppenheimer will be
paid a fee of approximately $3 million upon the closing of the Merger (based
upon an assumed consideration of $23.01 for each share of Sterling Common
Stock). The fee payable for the fairness opinion will be credited against the
fee payable upon the closing of the Merger. FPA has also agreed to reimburse
Oppenheimer for its reasonable out-of-pocket expenses (including fees of its
counsel), subject to certain adjustments, and to indemnify Oppenheimer and
certain related persons against certain potential liabilities in connection
with the engagement of Oppenheimer, including certain potential liabilities
under the federal securities laws.
OPINION OF STERLING'S FINANCIAL ADVISOR
Smith Barney was retained by Sterling to act as its financial advisor in
connection with the Merger. In connection with such engagement, Sterling
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of Sterling Common Stock of the consideration to be
received by such holders in the Merger. On May 19, 1996, at a meeting of the
Board of Directors of Sterling held to evaluate the proposed Merger, Smith
Barney delivered an oral opinion (subsequently confirmed by delivery of a
written opinion dated May 19, 1996) to the Board of Directors of Sterling to
the effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio was fair, from a financial
point of view, to the holders of Sterling Common Stock. While Smith Barney
expressed no opinion as to the adjustment features of the Exchange Ratio,
Smith Barney's analyses took into account, where appropriate, certain
adjustments to the Exchange Ratio as of the date of its opinion. Smith Barney
has confirmed its opinion dated May 19, 1996 by delivery of a written opinion
dated the date of this Proxy Statement/Prospectus. In connection with its
opinion dated the date of this Proxy Statement/Prospectus, Smith Barney
updated certain of the analyses performed in connection with its opinion
delivered on May 19, 1996 and reviewed the assumptions on which such analyses
were based and the factors considered in connection therewith.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and,
in connection with its opinion dated the date of this Proxy
Statement/Prospectus, reviewed this Proxy Statement/Prospectus, and held
discussions with certain senior officers, directors and other representatives
and advisors of Sterling and certain senior officers and other representatives
and advisors of FPA concerning the businesses, operations and prospects of
Sterling and FPA. Smith Barney examined certain publicly available business
and financial information relating to Sterling and FPA as well as certain
financial forecasts and other information and data for Sterling and FPA which
were provided to or otherwise discussed with Smith Barney by the respective
managements of Sterling and FPA, including information relating to certain
strategic implications and operational benefits anticipated to result from the
Merger. Smith Barney reviewed the financial terms of the Merger as set forth
in the Merger Agreement in relation to, among other things: current and
historical market prices and trading volumes of Sterling Common Stock and FPA
Common Stock; the respective companies' historical and projected earnings and
operating data; and the capitalization and financial condition of Sterling and
FPA. Smith Barney also considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which
Smith Barney considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to
the businesses of other companies whose operations Smith Barney considered
relevant in evaluating those of Sterling and FPA. Smith Barney also evaluated
the potential pro forma financial impact of the Merger on FPA. In connection
with its engagement, Smith Barney was requested to approach, and held
discussions with, certain third parties to solicit indications of interest in
a possible acquisition of Sterling. In addition to the foregoing, Smith Barney
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as Smith Barney deemed appropriate in
arriving at its opinion. Smith Barney noted that its opinion was necessarily
based upon information
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available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Smith Barney as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial
forecasts and other information and data furnished to or otherwise reviewed by
or discussed with Smith Barney, the managements of Sterling and FPA advised
Smith Barney that such forecasts and other information and data were prepared
on bases reflecting reasonable estimates and judgments as to the future
financial performance of Sterling and FPA and the strategic implications and
operational benefits anticipated to result from the Merger. Smith Barney
assumed, with the consent of the Board of Directors of Sterling, that the
Merger will be treated as a pooling of interests in accordance with generally
accepted accounting principles and as a tax-free reorganization for federal
income tax purposes. Smith Barney's opinion, as set forth therein, relates to
the relative values of Sterling and FPA. Smith Barney did not express any
opinion as to what the value of the FPA Common Stock actually will be when
issued to Sterling shareholders pursuant to the Merger or the price at which
the FPA Common stock will trade subsequent to the Merger. Smith Barney did not
make and was not provided with an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Sterling or FPA nor did
Smith Barney make any physical inspection of the properties or assets of
Sterling or FPA. Although Smith Barney evaluated the Exchange Ratio from a
financial point of view, Smith Barney was not asked to and did not recommend
the specific consideration payable in the Merger. No other limitations were
imposed by Sterling on Smith Barney with respect to the investigations made or
procedures followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS
APPENDIX III AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF STERLING
COMMON STOCK ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH
BARNEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR
RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE STERLING SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below performed by Smith
Barney in connection with its opinion dated May 19, 1996. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the process
underlying such analyses and its opinion. In its analyses, Smith Barney made
numerous assumptions with respect to Sterling, FPA, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Sterling and FPA. The estimates
contained in such analyses and the valuation ranges resulting from any
particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which business or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. Smith Barney's opinion and analyses were only one
of many factors considered by the Board of Directors of Sterling in its
evaluation of the Merger and should not be viewed as determinative of the
views of Sterling's Board of Directors or management with respect to the
Exchange Ratio or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples
of Sterling and 16 selected publicly traded companies in the
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healthcare industry, consisting of (i) four physician practice management
companies which focus primarily on the management of emergency departments:
Coastal Physician Group, Inc., EmCare Holdings, Inc., InphyNet Medical
Management, Inc., and Sheridan Healthcare, Inc. (the "EDM Companies"), and
(ii) 12 physician practice management companies: AHI Healthcare Systems, Inc.,
FPA, MedPartners/Mullikin, Inc., PHP Healthcare Corporation, PhyCor, Inc.,
American Oncology Resources, Inc., Apogee, Inc., OccuSystems, Inc. and
Orthodontic Centers of America, Inc. (the "Multi-Specialty PPM Companies"),
and Pediatrix Medical Group, Inc., PhyMatrix Corp., Physician Reliance
Network, Inc., and Physician Resource Group, Inc. (the "Single Specialty PPM
Companies") (collectively, the "PPM Companies" and, together with the EDM
Companies, the "Selected Companies"). Smith Barney compared market values as
multiples of, among other things, estimated calendar 1996 and 1997 net income,
and adjusted market values (equity market value, plus total debt and the book
value of preferred stock, less cash and cash equivalents) as multiples of,
among other things, latest 12 months revenue and earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Smith Barney also compared
the debt to capitalization ratios, profit margins, historical revenue growth
and projected earnings per share ("EPS") growth of Sterling, FPA and the
Selected Companies. Net income projections for the Selected Companies and FPA
were based on estimates of selected investment banking firms for fiscal year
1996 and net income projections for Sterling were based on estimates of
selected investment banking firms and internal estimates of the management of
Sterling for fiscal year 1997. Estimates of selected investment banking firms
for Sterling for fiscal 1996 and for FPA for fiscal year 1996 and fiscal year
1997 were based on the estimates of investment banking firms which publicly
provided the most current and detailed financial forecasts for Sterling and
FPA. All multiples were based on closing stock prices as of May 17, 1996. The
ranges of multiples of estimated calendar 1996 and 1997 net income and latest
12 months revenue and EBITDA of the EDM Companies (excluding outliers) were as
follows: (i) estimated calendar 1996 net income: 22.2x to 26.6x (with a mean
of 24.9x); (ii) estimated calendar 1997 net income: 18.2x to 20.1x (with a
mean of 19.2x); (iii) latest 12 months revenue: 0.9x to 1.3x (with a mean of
1.2x); and (iv) latest 12 months EBITDA: 11.0x to 13.4x. The ranges of
multiples of estimated calendar 1996 and 1997 net income and latest 12 months
revenue and EBITDA of the Multi-Specialty PPM Companies (excluding outliers)
were as follows: (i) estimated calendar 1996 net income: 42.3x to 57.4x (with
a mean of 49.4x); (ii) estimated calendar 1997 net income: 11.5x to 32.7x
(with a mean of 24.6x); (iii) latest 12 months revenue: 0.5x to 2.8x (with a
mean of 1.6x); and (iv) latest 12 months EBITDA: 13.1x to 29.2x (with a mean
of 21.2x). Applying multiples of the EDM Companies and the Multi-Specialty PPM
Companies to corresponding financial data for Sterling resulted in equity
reference ranges for Sterling of approximately $15.60 to $19.23 per share
(based on multiples of the EDM Companies) and $11.41 to $37.12 per share
(based on multiples of the Multi-Specialty PPM Companies), as compared to the
per share value of approximately $23.01 implied by an adjusted Exchange Ratio
of 1.296 pursuant to the terms of the Merger Agreement (the "Adjusted Exchange
Ratio") and based on a closing stock price of FPA Common Stock on May 17,
1996.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction multiples paid or proposed to be paid in eight selected
transactions in the healthcare industry (acquiror/target), consisting of: (i)
seven transactions involving physician practice management companies:
MedPartners/Mullikin, Inc./Caremark International, Inc., Physicians Resource
Group, Inc./EyeCorp., Inc., MedPartners/Mullikin, Inc./Pacific Physician
Services, Inc., MedPartners, Inc./Mullikin Medical Enterprises, L.P., Coastal
Physician Group, Inc./Health Enterprises, Inc., Caremark International
Inc./Friendly Hills HealthCare Network, and Foundation Health
Corporation/Thomas-Davis Medical Centers, P.C. (the "PPM Transactions"); and
(ii) one transaction involving emergency department management transactions:
Pacific Physician Services, Inc./Team Health Group (the "EDM Transaction" and,
together with the PPM Transactions, the "Selected Transactions"). Smith Barney
compared the purchase prices in such transactions as a multiple of, among
other things, latest 12 months net income and transaction values as a multiple
of, among other things, latest 12 months revenue, EBITDA and EBIT. All
multiples for the Selected Transactions were based on information available at
the time of announcement of the transaction. The ranges of multiples of latest
12 months net income, revenue, EBITDA and EBIT for the PPM Transactions were
25.9x to 39.1x (with a mean of 33.0x and a median of 31.4x), 0.8x to 1.2x
(with a mean of 1.0x and a median of 1.0x), 8.8x to 18.3x (with a mean of
13.2x and a median of 12.8x), and 15.8x to 22.9x (with a mean of 14.1x and a
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median of 17.6x), respectively. The multiples of latest 12 months net income,
revenue, EBITDA and EBIT for the EDM Transaction were 16.7x, 0.7x, 8.7x and
10.1x, respectively. Applying multiples of the Selected Transactions to
corresponding financial data for Sterling resulted in an equity reference
range for Sterling of approximately $12.76 to $21.16 per share (based on
multiples of the PPM Transactions) and $8.75 to $10.19 per share (based on
multiples of the EDM Transaction), as compared to the per share value of
approximately $23.01 implied by the Adjusted Exchange Ratio and based on a
closing stock price of FPA Common Stock on May 17, 1996.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to Sterling, FPA or the Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies, Selected
Transactions or the business segment, company or transaction to which they are
being compared.
Contribution Analysis. Smith Barney analyzed the respective contributions of
Sterling and FPA to the estimated revenue, EBITDA, EBIT and net income of the
combined company for fiscal years 1996 and 1997, based on, in the case of FPA,
estimates of selected investment banking firms and, in the case of Sterling,
on estimates of selected banking firms and internal estimates of the
management of Sterling, and taking into account potential cost savings and
other synergies anticipated by the management of Sterling to result from the
Merger. This analysis indicated that (i) in fiscal year 1996, Sterling would
contribute approximately 39.2% of revenue, 48.6% of EBITDA, 51.6% of EBIT and
52.6% of net income, and FPA would contribute approximately 60.8% of revenue,
49.2% of EBITDA, 45.3% of EBIT and 44.0% of net income of the combined
company, and (ii) in fiscal year 1997, Sterling would contribute approximately
36.0% of revenue, 43.3% of EBITDA, 46.2% of EBIT and 45.5% of net income, and
FPA would contribute approximately 64.0% of revenue, 50.9% of EBITDA, 46.1% of
EBIT and 45.9% of net income, of the combined company. The contribution
analysis assumed cost savings and other synergies of approximately $0.7
million in fiscal year 1996 and $2.9 million in fiscal year 1997
(approximately $0.4 million and $1.7 million after- tax, respectively). These
amounts were not allocated to either Sterling or FPA and represented
approximately 2.2%, 3.0% and 3.4% of EBITDA, EBIT and net income,
respectively, of the combined company in fiscal year 1996, and approximately
5.8%, 7.6% and 8.6%, respectively, of the combined company in fiscal year
1997. Based on the Adjusted Exchange Ratio, immediately following consummation
of the Merger, stockholders of Sterling and FPA would own approximately 47.9%
and 52.1%, respectively, of the combined company.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow
analysis of the projected free cash flow of Sterling for the fiscal years 1996
through 2000, based on estimates of selected investment banking firms for
fiscal year 1996, internal estimates of the management of Sterling for fiscal
year 1997 and extrapolated by Smith Barney for fiscal years 1998 through 2000
based on estimates of selected investment banking firms as to the five-year
earnings growth rate potential for Sterling. The stand-alone discounted cash
flow analysis of Sterling was determined by (i) adding (x) the present value
of projected free cash flows over the five-year period from 1996 to 2000 and
(y) the present value of Sterling's terminal value in year 2000 and
(ii) subtracting the current net debt of Sterling. The range of terminal
values for Sterling at the end of the five-year period was calculated by
applying a range of multiples (from 16.0x to 19.0x) to Sterling's projected
2001 unlevered net income, representing Sterling's estimated value beyond the
year 2000. The cash flows and terminal values of Sterling were discounted to
present value using different discount rates (ranging from 12.5% to 17.5%)
chosen to reflect various assumptions regarding Sterling's estimated cost of
capital, including among other things, then prevailing interest rates, the
capitalization and historical volatility of the market prices of Sterling and
the Selected Companies and the historical return of an investment in publicly-
traded securities as compared with an investment in relatively risk-free
investments such as U.S. government bonds. This analysis resulted in an equity
reference range for Sterling of approximately $16.85 to $24.61 per share.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of FPA for fiscal years 1996 and
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1997, based on, with respect to FPA, estimates of selected investment banking
firms and, with respect to Sterling, on estimates of selected investment
banking firms for fiscal 1996 and on internal estimates of the management of
Sterling for fiscal 1997. The results of the pro forma merger analysis
suggested that the Merger could be accretive to FPA's EPS in fiscal years 1996
and 1997 (assuming approximately $2.9 million of potential cost savings and
other synergies anticipated by the management of Sterling to result from the
Merger are achieved in each full fiscal year). The actual results achieved by
the combined company may vary from projected results and the variations may be
material.
Historical Exchange Ratio Analysis. Smith Barney compared the historical
ratio of the daily per share market prices of Sterling Common Stock with
corresponding market prices of FPA Common Stock during the period October 21,
1994 (the date of FPA's initial public offering) and May 17, 1996 and over the
12-month, six-month, three-month and 30-day periods ending May 17, 1996. The
average exchange ratios during such periods were 1.366, 1.400, 1.325, 1.136
and 1.091, respectively, as compared to the Exchange Ratio of 1.400 and an
Adjusted Exchange Ratio as of May 17, 1996 of 1.296.
Other Factors and Comparative Analysis. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of (i)
indications of interest received from third parties other than FPA, which
reflected lower implied per share equity values for Sterling than the per
share equity value implied by the Exchange Ratio; (ii) Sterling's and FPA's
historical and projected financial results; (iii) the history of trading
prices and volume for Sterling Common Stock and FPA Common Stock and the
relationship between movements of such Common Stock, movements of the common
stock of the Selected Companies and movements in the S&P 500 Index; (iv)
selected published analysts' reports on FPA, including analysts' estimates as
to the earnings growth potential of FPA; (v) premiums paid in selected stock-
for-stock transactions having transaction values of between $100 million and
$500 million; and (vi) the pro forma ownership of the combined company (see
"--Contribution Analysis"), including the pro forma ownership of certain
beneficial owners, directors and officers of Sterling and FPA.
Pursuant to the terms of Smith Barney's engagement, Sterling has agreed to
pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee equal to a percentage of the total consideration
(including liabilities assumed) payable in connection with the Merger. It is
currently estimated that such financial advisory fee will be approximately
$3.6 million. Sterling also has agreed to reimburse Smith Barney for
reasonable travel and other out-of-pocket expenses incurred by Smith Barney in
performing its services, including the reasonable fees and expenses of its
outside legal counsel, and to indemnify Smith Barney and related persons
against certain liabilities, including liabilities under the federal
securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised Sterling that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
Sterling and FPA for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided certain investment banking services to
Sterling unrelated to the proposed Merger, for which services Smith Barney has
received compensation. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with
Sterling and FPA.
Smith Barney is a nationally recognized investment banking firm and was
selected by Sterling based on Smith Barney's experience, expertise and
familiarity with Sterling and its business. Smith Barney regularly engages in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
EFFECTIVE TIME OF THE MERGER
Upon the terms and conditions of the Merger Agreement and in accordance with
the provisions of Florida and Delaware law, Merger Sub will be merged with and
into Sterling at the Effective Time. The Merger will
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become effective immediately when the Certificates of Merger prepared and
executed in accordance with the relevant provisions of Florida and Delaware
law, are filed with the Secretary of State of the State of Florida and the
Secretary of State of Delaware or at such time thereafter as is provided in
the Certificate of Merger. The filing of the Certificates of Merger will be
made as soon as practicable on or after the Closing.
The Closing shall take place at 10:00 a.m. on a date to be specified by the
parties, which shall be no later than the second business day after
satisfaction (or waiver in accordance with the Merger Agreement) of the latest
to occur of the conditions set forth in Article VIII of the Merger Agreement
(the "Closing Date"), at the offices of FPA, unless another date or place is
agreed to in writing by the parties. See "THE MERGER AGREEMENT--Conditions to
the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Boards of Directors of FPA and
Sterling with respect to the Merger Agreement, FPA stockholders and Sterling
shareholders should be aware that certain members of the Boards of Directors
of FPA and Sterling and management have interests in the Merger that are in
addition to or different from the interests of shareholders generally. Certain
of these persons may have participated in the negotiation and consideration of
the Merger Agreement. With respect to Sterling, the Sterling Board was aware
that the entering into of an employment agreement with Dr. Dresnick may have
given Dr. Dresnick an interest in the Merger that may have been in addition to
the interests of Sterling shareholders generally. The Sterling Board concluded
such additional interest, if any, did not affect the negotiation of the terms
of the Merger in a manner that conflicted with or was adverse to the interests
of the Sterling shareholders generally. The Sterling Board's belief was based
on its assessment that Sterling is dependent on the services of Dr. Dresnick
for the management of Sterling and the loss by Sterling of Dr. Dresnick could
adversely affect Sterling's operations as well as the knowledge that Dr.
Dresnick's, employment contract with Sterling provides for a payment to be
made to Dr. Dresnick in the event of a "Change in Control."
Beneficial Ownership of FPA Common Stock by Directors and Officers of
FPA. As of the Record Date, directors and executive officers of FPA and their
affiliates may be deemed to be beneficial owners of approximately 18% of the
outstanding FPA Common Stock.
Beneficial Ownership of Sterling Common Stock by Directors and Officers of
Sterling. As of the Record Date, Directors and executive officers of Sterling
and their affiliates may be deemed to be beneficial owners of approximately
29.46% of the outstanding Sterling Common Stock. Each of the directors and
executive officers of Sterling has entered into a Voting Agreement and has
given an irrevocable proxy providing that their shares shall be voted in favor
of approval of the Merger. Sterling's directors and executive officers will
not receive any benefit in their capacities as shareholders of Sterling Common
Stock that differ from or is an addition to the benefit received by all other
shareholders of Sterling Common Stock.
As of May 19, 1996, the date Sterling's Board approved the Merger Agreement
and recommended that Sterling shareholders approve the Merger Agreement,
Sterling's directors, in the aggregate owned 2,354,950 shares of Sterling
Common Stock and had currently exercisable options to acquire 448,500 shares
of Sterling Common Stock. Subsequent to May 19, 1996, Dr. Dresnick and Paul
Auerbach, M.D., Sterling's President, Chairman of the Board and Chief
Executive Officer and Sterling's Chief Operating Officer and a director,
respectively, acquired (pursuant to option exercises) and subsequently sold
50,000 and 153,000 shares of Sterling Common Stock, respectively, and Dr.
Dresnick gifted 5,000 shares. Additionally, subsequent to May 19, 1996,
Herbert A. Wertheim, O.D. and Glenn Halpryn, members of Sterling's Board sold
20,000 and 107,000 shares of Sterling Common Stock, respectively. Further,
subsequent to May 19, 1996, Jack Greenman, Chief Financial Officer of
Sterling, acquired (pursuant to option exercise) and subsequently sold 133,334
shares of Sterling Common Stock.
Employment Agreement. Pursuant to the Merger Agreement, the execution of an
agreement providing for the employment of Dr. Dresnick is a condition to
closing the Merger. Although as of May 19, 1996, the date
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Sterling's Board approved the Merger Agreement and recommended that the
Sterling shareholders approve the Merger Agreement, FPA and Dr. Dresnick had
not discussed the specific terms of the employment agreement, the Sterling
Board was aware that the entering into of a new employment contract with Dr.
Dresnick could give Dr. Dresnick an interest in the Merger that is in addition
to the interests of Sterling shareholders generally. Subsequent to May 19,
1996, FPA and Dr. Dresnick discussed the material terms of his employment and
have agreed in consideration for a cash payment of $1,000,000 payable within
30 days following the consummation of the Merger to amend Dr. Dresnick's
current employment agreement to extend the term of his employment from July
15, 1997 to the date which is three years from the closing of the Merger and
to eliminate Dr. Dresnick's entitlement to receive (i) severance payments upon
termination of his employment with FPA, and (ii) payments from Sterling as a
result of the Merger constituting a "Change in Control" for purposes of his
employment agreement with Sterling.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material federal income tax consequences of
the Merger and the exchange by the Sterling shareholders of shares of Sterling
Common Stock for shares of FPA Common Stock. This summary is not a complete
description of all the tax consequences of the Merger. Each shareholder's
individual circumstances may affect the tax consequences of the Merger to him
or her. In addition, no information is provided herein with respect to the tax
consequences of the Merger under applicable foreign, state or local laws.
Accordingly, each Sterling shareholder is advised to consult his or her own
tax advisor as to the specific tax consequences of the Merger to him or her.
Neither FPA nor Sterling has requested or will receive an advance ruling
from the Internal Revenue Service (the "Service") as to the federal income tax
consequences of the Merger. The respective obligations of Sterling and FPA to
consummate the Merger is conditioned upon receipt of an opinion relating to
the federal income tax consequences of the Merger, in form and substance
satisfactory to Sterling and FPA and their respective counsel. Such opinion is
based upon the facts that are described herein, upon certain customary
representations made by the management of Sterling and by the management of
FPA and upon certain assumptions, including an assumption on the continuity of
interest requirement. Such opinion is also based upon the Code, regulations
currently in effect thereunder, current administrative rulings and practice by
the Service, and judicial authority, all of which are subject to change. Any
such change could affect the continuing validity of such opinion and this
discussion. In addition, an opinion is not binding upon the Service, and there
can be no assurance, and none is hereby given, that the Service will not take
a position which is contrary to one or more positions reflected in the
opinion, or that such opinion will be upheld by the courts if challenged by
the Service. Furthermore, FPA and Sterling have agreed in the Merger Agreement
not to take any action which would disqualify the Merger as a reorganization
which is tax-free to the Sterling stockholders pursuant to Section 368(a) of
the Code. Each holder of Sterling Common Stock is urged to consult such
holder's personal tax and financial advisors as to the specific federal income
tax consequences to such holder, based on such holder's own particular status
and circumstances, and also as to any state, local, foreign or other tax
consequences arising out of the Merger.
The foregoing discussion is based on the assumption that the "continuity of
interest" requirement will be satisfied in the Merger. In order for this
requirement to be met, shareholders of Sterling must not, pursuant to a plan
or intent existing at or prior to the Merger, dispose of so much of (i) their
Sterling stock in anticipation of the Merger, plus (ii) the FPA Common Stock
received in the Merger (collectively, the "Planned Dispositions") such that
the Sterling shareholders, as a group, would no longer have a "significant
equity interest" in the Sterling business being conducted by FPA after the
Merger. Sterling shareholders will generally be regarded as having significant
equity interest as long as the FPA Common Stock received in the Merger (after
taking into account Planned Dispositions), in the aggregate, represents a
"substantial portion" of the entire consideration received by the Sterling
shareholders in the Merger. This requirement is frequently referred to as the
"continuity of interest" requirement. If the continuity of interest
requirement is not satisfied, the Merger would not be treated as a
reorganization. The law is unclear as to what constitutes a "significant
equity interest" or a "substantial portion." The Service ruling guidelines
require 50% continuity (although such guidelines do not purport to represent
the applicable substantive law). The case law appears to be more liberal,
however, and in one early
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case, the Supreme Court ruled that approximately 40% continuity was
sufficient. The Plan and the Continuity of Interest Certificates contemplate
that the 50% standard will be applied. No assurance, however, can be made that
the "continuity of interest" requirement will be satisfied, and if such
requirement is not satisfied, the Merger would not be treated as a
reorganization.
Sterling has received an opinion from Coopers & Lybrand L.L.P., its
independent accountants, concerning the material federal income tax
consequences of the Merger, providing that:
(i) The Merger will constitute a tax-free reorganization under Section
368(a) of the Code, and FPA, Merger Sub and Sterling will each be a party
to the reorganization within the meaning of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by Sterling as a result of the
Merger;
(iii) No gain or loss will be recognized by a Sterling shareholder who
receives solely shares of FPA Common Stock in exchange for Sterling Common
Stock;
(iv) The receipt of cash in lieu of fractional shares of FPA Common Stock
will be treated as if the cash received in exchange for such fractional
share and not as a dividend, and any gain or loss recognized as a result of
the receipt of such cash will be capital gain or loss equal to the
difference between the cash received and the portion of the shareholder's
basis in the Sterling Common Stock allocable to such fractional share
interest;
(v) The tax basis of the shares of FPA Common Stock received by a
Sterling shareholder will be equal to the aggregate tax basis of the
Sterling shares exchanged therefor, reduced by an amount allocable to a
fractional share of FPA Common Stock for which cash is received; and
(vi) The holding period of the shares of FPA Common Stock received by a
Sterling shareholder will include the holding period or periods of the
Sterling Common Stock exchanged therefor.
The foregoing discussion is intended only as a summary of the material
federal income tax consequences of the Merger and does not purport to be a
complete analysis or listing all potential tax effects relevant to a decision
whether to vote in favor of approval and adoption of the Merger Agreement. The
discussion does not address the tax consequences arising under the laws of any
state, locality or foreign jurisdiction. Holders of Sterling Common Stock are
urged to consult their own tax advisors concerning the federal, state, local
and foreign tax consequences of the Merger to them.
ACCOUNTING TREATMENT
The Merger will be accounted for using the "pooling of interests" method of
accounting pursuant to Accounting Principles Board Opinion No. 16 ("APB No.
16"). The "pooling of interests" method of accounting assumes that the
combining companies have been merged from inception, and the historical
financial statements for periods prior to consummation of the Merger are
restated as though the companies had been combined from inception. The
restated financial statements are adjusted to conform the accounting policies
of the separate companies. See "THE MERGER AGREEMENT--Conditions to the
Merger" and "PRO FORMA SELECTED FINANCIAL INFORMATION."
FPA, Merger Sub and Sterling have agreed that during the period from the
date of the Merger Agreement through the Effective Time, unless the parties
shall have otherwise agreed in writing, none of FPA, Merger Sub, any other
subsidiary of FPA, Sterling or any subsidiary of Sterling shall knowingly take
or fail to take any reasonable action which action or failure to act would
jeopardize the treatment of Merger Sub's combination with Sterling as a
pooling of interests for accounting purposes. Consummation of the Merger is
conditioned upon the receipt by FPA of a letter from Deloitte & Touche LLP to
the effect that the Merger may be accounted for as a pooling of interests. See
"THE MERGER AGREEMENT--Conditions to the Merger."
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RESALE OF FPA COMMON STOCK BY AFFILIATES
FPA Common Stock to be issued to shareholders of Sterling in connection with
the Merger has been registered under the Securities Act. FPA Common Stock
received by the shareholders of Sterling upon consummation of the Merger will
be freely transferable under the Securities Act, except for shares issued to
any person who may be deemed an "Affiliate" (as defined below) of Sterling or
FPA within the meaning of Rule 145 under the Securities Act ("Rule 145").
"Affiliates" are generally defined as persons who control, are controlled by,
or are under common control with Sterling or FPA at the time of the Special
Meetings (generally, directors, certain executive officers and major
stockholders). Affiliates of Sterling or FPA may not sell their shares of FPA
Common Stock acquired in connection with the Merger, except pursuant to an
effective registration statement under the Securities Act covering such shares
or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. In general, under Rule 145,
for two years following the Effective Time, an Affiliate (together with
certain related persons) would be entitled to sell shares of FPA Common Stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144 under the Securities Act. Additionally, the number of
shares to be sold by an Affiliate (together with certain related persons and
certain persons acting in concert) during such two-year period within any
three-month period for purposes of Rule 145 may not exceed the greater of 1%
of the outstanding shares of FPA Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. Rule
145 would remain available to Affiliates only if FPA remained current with its
information filings with the Commission under the Exchange Act. Two years
after the Effective Time, an Affiliate would be able to sell such FPA Common
Stock without such manner of sale or volume limitations, provided that FPA was
current with its Exchange Act information filings and such Affiliate was not
then an Affiliate of FPA. Three years after the Effective Time, an Affiliate
would be able to sell such shares of FPA Common Stock without any restrictions
provided such Affiliate has not been an Affiliate of FPA for at least three
months prior thereto. In addition, under rules relating to pooling of
interests accounting, shares of FPA Common Stock issued to affiliates of
Sterling may not be resold by them until combined results of operations of
Sterling and FPA covering at least thirty (30) days of operation are made
public.
CERTAIN REGULATORY MATTERS
No federal or state regulatory requirements remain to be complied with in
connection with the Merger, except for certain required notifications and
closing and post-closing filings.
RIGHTS OF DISSENTING SHAREHOLDERS
So long as the shares of FPA Common Stock and Sterling Common Stock remain
quoted on Nasdaq on the date of the Sterling Special Meeting, holders of
Sterling Common Stock shall have no appraisal or dissenters' rights in
connection with the Merger.
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BOARD OF DIRECTORS AND MANAGEMENT OF
FPA FOLLOWING THE MERGER
BOARD OF DIRECTORS OF FPA FOLLOWING THE MERGER
Upon consummation of the Merger, Drs. Kevin Ellis, Michael Feinstein, Seth
Flam, Howard Hassman and Sol Lizerbram and Sheldon Derezin and Harvey Wilson,
each of whom is currently a director of FPA, will continue as directors of FPA
and Stephen J. Dresnick, M.D. and Herbert A. Wertheim, O.D., each of whom is
currently a Sterling director, will be elected to serve as directors of FPA
until the date of the 1999 and 1998 annual meeting of stockholders,
respectively, and until their successors are elected and qualified.
EXECUTIVE OFFICERS OF FPA FOLLOWING THE MERGER
The following table sets forth certain information, including age and
positions, of each person who will serve as an executive officer of FPA upon
consummation of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sol Lizerbram........... 48 Chairman of the Board of Directors
Seth Flam............... 38 President and Chief Executive Officer
Stephen J. Dresnick, 45 Vice Chairman of the Board of Directors and
M.D.................... President, Sterling Healthcare Group, Inc.
Steven M. Lash.......... 43 Executive Vice President and Chief Financial
Officer and Treasurer
James A. Lebovitz....... 38 Senior Vice President, General Counsel and
Secretary
Cheryl A. Moore......... 30 Vice President--Finance, Chief Accounting Officer
</TABLE>
EMPLOYMENT AGREEMENT
Pursuant to the terms of the Merger Agreement, the execution of an agreement
providing for the employment by FPA of Dr. Dresnick for a period of three
years from the closing of the Merger is a condition to closing the Merger.
Subsequent to the execution of the Merger Agreement, FPA and Dr. Dresnick
renegotiated the terms of Dr. Dresnick's Amended and Restated Employment
Agreement with Sterling (the "Dresnick Employment Agreement") in order to
ensure the continuous involvement and participation of Dr. Dresnick in the
day-to-day operations of FPA following the Merger. The termination date of the
current term of the Dresnick Employment Agreement is July 15, 1997. In
consideration for a cash payment of $1,000,000 payable within 30 days
following the consummation of the Merger, Dr. Dresnick has agreed to extend
the term of his employment with FPA for a period of three years from the date
of the closing of the Merger on substantially the same terms as the Dresnick
Employment Agreement and to waive any entitlement to receive severance
payments upon termination of his employment with FPA.
COMPARISON OF RIGHTS OF HOLDERS OF STERLING
AND FPA COMMON STOCK
Sterling is a Florida corporation and the rights of its shareholders are
governed by the Florida Business Corporation Act (the "Florida Act") and the
Articles of Incorporation and Bylaws of Sterling. FPA is a Delaware
corporation and the rights of its stockholders are governed by the Delaware
General Corporation Law (the "Delaware Act") and the Certificate of
Incorporation and Bylaws of FPA (the "FPA Charter Documents"). If the Merger
is consummated, former Sterling shareholders will become stockholders of FPA.
The rights of such former Sterling shareholders as FPA stockholders will be
governed by the Delaware Act and the Certificate of Incorporation and Bylaws
of FPA. Although it is not practical to compare all differences between (i)
Florida law and the Articles of Incorporation and Bylaws of Sterling and (ii)
Delaware law and the Certificate of Incorporation and Bylaws of FPA, the
following is a summary of certain of those differences which may significantly
affect the rights of Sterling shareholders. There are material differences
between shareholders' rights
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as governed by (i) the Florida Act and the Sterling Charter Documents and (ii)
the Delaware Act and the FPA Charter Documents. Unlike the Florida Act, the
Delaware Act's less stringent requirements for bringing a derivative action
allow a stockholder to bring such an action without establishing that a demand
for action was made upon, and refused by, the board of directors, and without
subjecting the action to dismissal if independent directors determine the
action is not in the best interests of the corporation. The provisions of the
Delaware Act governing the inspection and copying of a corporation's books and
records are generally less restrictive than those of the Florida Act, allowing
shareholders greater access to corporate information with less need for prior
notice to the corporation. Under the Delaware Act a stockholder's dissenter's
rights are somewhat broader, resulting in increased ability to liquidate
shares in the event of specified transactions for which consent from
stockholders is solicited. Unlike the FPA Charter Documents, the Sterling
Charter Documents contain a shareholder provision electing not to be governed
by law requiring that certain transactions involving a corporation and an
affiliated shareholder be approved by the affirmative vote of the holders of
two-thirds of the voting shares other than those owned by the affiliated
shareholder. Additionally, unlike the Delaware Act, which contains no
statutory provision, the Florida Act allows a director, in discharging his
duties to consider (in addition to the best interests of the corporation), the
effects of corporate action on employees, suppliers, customers and the
community.
LIABILITY OF DIRECTORS
The Florida Act provides that a director is not personally liable for
monetary damages to the corporation or any other person for any act or
omission as a director unless the director breached or failed to perform his
statutory duties as a director and such breach or failure (1) constitutes a
violation of criminal law, unless the director had reasonable cause to believe
his conduct was lawful or had no reasonable cause to believe his conduct was
unlawful, (2) constitutes a transaction from which the director derived an
improper personal benefit, (3) results in an unlawful distribution, (4) in a
derivative action or an action by a shareholder, constitutes conscious
disregard for the best interests of the corporation or willful misconduct or
(5) in a proceeding other than a derivative action or an action by a
shareholder, constitutes recklessness or an act or omission which was
committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety or property.
The Delaware Act provides that a corporation's certificate of incorporation
may contain a provision which eliminates or limits the personal liability of a
director to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except for a breach which (1)
constitutes an act or omission not in good faith or which involves intentional
misconduct or a knowing violation of law, (2) constitutes a breach of the
director's duty of loyalty to the corporation or its stockholders, (3) results
in an unlawful distribution or (4) relates to a transaction from which the
director derived an improper personal benefit. FPA's Certificate of
Incorporation includes such a provision eliminating the personal liability of
its directors to the extent permitted by the Delaware Act. The Articles of
Incorporation of Sterling do not include a comparable provision because the
provisions of the Florida Act eliminating personal liability of directors
automatically apply to all Florida corporations.
INDEMNIFICATION
Under both the Florida Act and the Delaware Act, a corporation may generally
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
of any proceedings (other than derivative actions), if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in derivative actions, except that
indemnification may be made only for (1) expenses (including attorneys' fees)
and certain amounts paid in settlement and (2) in the event the person seeking
indemnification has been adjudicated liable, amounts deemed proper, fair and
reasonable by the appropriate court upon application thereto. The Delaware Act
and the Florida Act both provide that to the extent that such persons have
been successful in defense of any proceeding, they must be indemnified by the
corporation against expenses
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actually and reasonably incurred in connection therewith. The Florida Act also
provides that, unless a corporation's articles of incorporation provide
otherwise, if a corporation does not so indemnify such persons, they may seek,
and a court may order, indemnification under certain circumstances even if the
board of directors or shareholders of the corporation have determined that the
persons are not entitled to indemnification. The Articles and Bylaws of
Sterling provide that directors and officers and former directors and officers
will be indemnified to the fullest extent permitted by law.
FPA's Bylaws require FPA to indemnify its directors and officers, and
employees and agents who serve as fiduciaries of FPA, to the extent permitted
by the Delaware Act, and requires FPA to pay expenses incurred by directors
and officers in connection with matters in which they may be entitled to
indemnification in advance of the final disposition of such matter to the
extent permitted by the Delaware Act.
DERIVATIVE ACTIONS
Under both the Florida Act and the Delaware Act, a person may not bring a
derivative action unless the person was a shareholder of the corporation at
the time of the challenged transaction or unless the person acquired the
shares by operation of law from a person who was a shareholder at such time.
The Florida Act also provides that a complaint in a derivative proceeding must
be verified and must allege with particularity that a demand was made to
obtain action by the board of directors and that the demand was refused or
ignored. Under the Florida Act, a derivative proceeding may be settled or
discontinued only with court approval, and the court may dismiss a derivative
proceeding if the court finds that certain independent directors (or a
committee of independent persons appointed by such directors) have determined
in good faith after conducting a reasonable investigation that the maintenance
of the action is not in the best interests of the corporation. The Florida Act
also provides that if an action was brought without reasonable cause the court
may require the plaintiff to pay the corporation's reasonable expenses, and if
the plaintiff is successful the court may require the corporation to pay the
reasonable expenses of the plaintiff.
DISTRIBUTIONS AND REDEMPTIONS
A Florida corporation may make distributions to shareholders as long as,
after giving effect to such distribution (1) the corporation would be able to
pay its debts as they become due in the usual course of business and (2) the
corporation's total assets would not be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise, which
Sterling's Articles of Incorporation do not) the amount that would be needed
if the corporation were to be dissolved at the time of the distribution to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. Under
the Florida Act, a corporation's redemption of its own capital stock is deemed
to be a distribution.
A Delaware corporation may pay dividends out of surplus or, if there is no
surplus, out of its net profits for the fiscal year in which the dividend is
declared and the preceding fiscal year. A Delaware corporation is generally
prohibited from redeeming any of its capital stock if the redemption would
result in an impairment of the corporation's capital.
SHAREHOLDER INSPECTION OF BOOKS AND RECORDS
Under the Florida Act, a shareholder is entitled to inspect and copy the
articles of incorporation, bylaws, certain board and shareholder resolutions,
certain written communications to shareholders, a list of the names and
business addresses of the corporation's directors and officers, and the
corporation's most recent annual report, during regular business hours if the
shareholder gives at least five business days' prior written notice to the
corporation. In addition, a shareholder of a Florida corporation is entitled
to inspect and copy other books and records of the corporation during regular
business hours if the shareholder gives at least five business days' prior
written notice to the corporation and (1) the shareholder's demand is made in
good faith and for a proper purpose, (2) the demand describes with
particularity its purpose and the records to be inspected or copied and (3)
the requested records are directly connected with such purpose. The Florida
Act also provides that a
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corporation may deny any demand for inspection if the demand was made for an
improper purpose or if the demanding shareholder has, within two years
preceding such demand, sold or offered for sale any list of shareholders of
the corporation or any other corporation, has aided or abetted any person in
procuring a list of shareholders for such purpose or has improperly used any
information secured through any prior examination of the records of the
corporation or any other corporation.
The provisions of the Delaware Act governing the inspection and copying of a
corporation's books and records are generally less restrictive than those of
the Florida Act. Specifically, the Delaware Act permits any stockholder the
right, during usual business hours, to inspect and copy the corporation's
stock ledger, stockholders list and other books and records for any proper
purpose upon written demand under oath stating the purpose thereof.
DISSENTERS' RIGHTS
A shareholder of a Florida corporation, with certain exceptions, has the
right to dissent from, and obtain payment of the fair value of his shares in
the event of (1) a merger or consolidation to which the corporation is a
party, (2) a sale or exchange of all or substantially all of the corporation's
property other than in the usual and regular course of business, (3) the
approval of a control share acquisition, (4) a statutory share exchange to
which the corporation is a party as the corporation whose shares will be
acquired, (5) an amendment to the articles of incorporation if the shareholder
is entitled to vote on the amendment and the amendment would adversely affect
the shareholder and (6) any corporate action taken to the extent that the
articles of incorporation provide for dissenters' rights with respect to such
action. The Florida Act provides that unless a corporation's articles of
incorporation provide otherwise, which Sterling's Articles of Incorporation do
not, a shareholder does not have dissenters' rights with respect to a plan of
merger, share exchange or proposed sale or exchange of property if the shares
held by the shareholder are either registered on a national securities
exchange or an interdealer quotation system designated by the National
Association of Securities Dealers, Inc. (the "NASD") or held of record by
2,000 or more shareholders.
A stockholder of a Delaware corporation generally is entitled to dissenters'
rights in the event that the corporation is a party to certain mergers or
consolidations to which the stockholder did not consent. A Delaware
corporation's certificate of incorporation may also provide that dissenters'
rights are available with respect to any amendment to the certificate of
incorporation or any sale of all or substantially all of the corporation's
assets. Similar to the Florida Act, dissenters' rights do not apply to a
stockholder of a Delaware corporation if his shares are (1) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the NASD or (2) held of record
by more than 2,000 stockholders. Notwithstanding the foregoing, however, under
the Delaware Act a stockholder does have dissenters' rights with respect to
such shares if the stockholder is required by the terms of the agreement of
merger or consolidation to accept anything for his shares other than (1)
shares of stock of the corporation surviving or resulting from the merger or
consolidation, (2) shares of stock of any other corporation which is so listed
or designated or held of record by more than 2,000 stockholders, (3) cash in
lieu of fractional shares or (4) any combination of the foregoing.
QUORUM FOR SHAREHOLDER MEETINGS
Under the Florida Act, unless otherwise provided in a corporation's articles
of incorporation (but not its bylaws), a majority of shares entitled to vote
on a matter constitutes a quorum at a meeting of shareholders, but in no event
may a quorum consist of less than one-third of the shares entitled to vote on
such matter. Sterling's Articles of Incorporation do not include a provision
altering the shareholder quorum requirement.
The Delaware Act is similar to the Florida Act, except that under the
Delaware Act a corporation's certificate of incorporation or bylaws may
specify the percentage of votes which constitutes a quorum at a meeting of
stockholders, but in no event may a quorum consist of less than one-third of
the shares entitled to
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vote. FPA's Bylaws provide that a quorum exists if a majority of the voting
power entitled to vote is present in person or by proxy at a meeting.
SHAREHOLDER VOTING REQUIREMENT; ACTION BY CONSENT
Under both the Florida Act and the Delaware Act, directors are generally
elected by a plurality of the votes cast by the shareholders entitled to vote
at a shareholders' meeting at which a quorum is present. With respect to
matters other than the election of directors, unless a greater number of
affirmative votes is required by the Florida Act or a Florida corporation's
articles of incorporation (but not its bylaws), if a quorum exists, action on
any matter generally is approved by the shareholders if the votes cast by the
holders of the shares represented at the meeting and entitled to vote on the
matter favoring the action exceed the votes cast opposing the action. In the
case of a merger, consolidation, or a sale, lease or exchange of all or
substantially all of the assets of a Florida corporation, except in limited
circumstances in which no shareholder vote is required, the affirmative vote
of the holders of a majority of the issued and outstanding shares entitled to
vote is required under the Florida Act. Sterling's Articles of Incorporation
do not include a provision requiring a greater vote on any matter than
required by the Florida Act.
Under the Delaware Act, unless otherwise provided by the Delaware Act or a
Delaware corporation's certificate of incorporation or bylaws, if a quorum
exists, action on a matter is approved by the affirmative vote of a majority
of the shares represented at a meeting and entitled to vote on the matter. In
the case of a merger, the affirmative vote of the holders of a majority of the
issued and outstanding shares entitled to vote is required by the Delaware
Act. Accordingly, under the Delaware Act, abstentions have the same effect as
votes against a merger. Neither FPA's Certificate of Incorporation nor its
Bylaws contains a provision requiring a greater vote on any matter than
required by the Delaware Act.
In accordance with the Florida Act, Sterling's Bylaws permit shareholder
action to be taken without a meeting if written consents signed by the holders
of at least a majority of shares entitled to vote with respect to such action
are delivered to Sterling within 60 days after the date that the earliest
written consent was delivered by Sterling. Within 10 days after the
authorization of an action by written consent, written notice of such action
is required to be given to Sterling's shareholders entitled to vote with
respect to such action and not consenting to such action. FPA's bylaws permit
action to be taken by written consent.
AMENDMENTS TO CHARTER
An amendment to a Florida corporation's articles of incorporation must be
approved by the corporation's shareholders, except that certain immaterial
amendments specified in the Florida Act may be made by the board of directors.
Unless a specific section of the Florida Act or a Florida corporation's
articles of incorporation require a greater vote, an amendment to a Florida
corporation's articles of incorporation generally must be approved by a
majority of the votes entitled to be cast on the amendment. Sterling's
Articles of Incorporation do not include any provision requiring greater than
a majority of votes to amend its articles of incorporation.
A Delaware corporation's certificate of incorporation generally may be
amended only if approved by a majority of the outstanding stock entitled to
vote thereon.
AFFILIATED TRANSACTIONS
The Florida Act contains an affiliated transactions statute which provides
that certain transactions involving a corporation and a shareholder owning 10%
or more of the corporation's outstanding voting shares (an "affiliated
shareholder") must generally be approved by the affirmative vote of the
holders of two-thirds of the voting shares other than those owned by the
affiliated shareholder. The transactions covered by the statute include, with
certain exceptions, (1) mergers and consolidations to which the corporation
and the affiliated shareholder are parties, (2) sales or other dispositions of
substantial amounts of the corporation's assets to the affiliated shareholder,
(3) issuances by the corporation of substantial amounts of its securities to
the affiliated
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shareholder, (4) the adoption of any plan for the liquidation or dissolution
of the corporation proposed by or pursuant to an arrangement with the
affiliated shareholder, (5) any reclassification of the corporation's
securities which has the effect of substantially increasing the percentage of
the outstanding voting shares of the corporation beneficially owned by the
affiliated shareholder and (6) the receipt by the affiliated shareholder of
certain loans or other financial assistance from the corporation. These
special voting requirements do not apply in any of the following
circumstances: (1) if the transaction was approved by a majority of the
corporation's disinterested directors, (2) if the corporation did not have
more than 300 shareholders of record at any time during the preceding three
years, (3) if the affiliated shareholder has been the beneficial owner of at
least 80 percent of the corporation's outstanding voting shares for the past
five years, (4) if the affiliated shareholder is the beneficial owner of at
least 90 percent of the corporation's outstanding voting shares, exclusive of
those acquired in a transaction not approved by a majority of disinterested
directors or (5) if the consideration received by each shareholder in
connection with the transaction satisfies the "fair price" provisions of the
statute. This statute applies to any Florida corporation unless the original
articles of incorporation or an amendment to the articles of incorporation or
bylaws contain a provision expressly electing not to be governed by this
statute. Such an amendment to the articles of incorporation or bylaws must be
approved by the affirmative vote of a majority of disinterested shareholders
and is not effective until 18 months after approval. Sterling's Articles of
Incorporation contain a provision electing not to be governed by this statute.
The Delaware Act generally prohibits a stockholder owning 15 percent or more
of a Delaware corporation's outstanding voting stock (an "interested
stockholder") from engaging in certain business combinations involving the
corporation during the three years after the date the person became an
interested stockholder unless (1) prior to such date, the board of directors
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (2) upon the consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the stockholder owned at least 85 percent of the voting stock
outstanding at the time the transaction commenced, (3) on or subsequent to
such date, the transaction is approved by the board of directors and by the
stockholders by a vote of two-thirds of the disinterested outstanding voting
stock, (4) the corporation's original certificate of incorporation provides
that the corporation shall not be governed by the statute or (5) a majority of
shares entitled to vote approve an amendment to the corporation's certificate
of incorporation or bylaws expressly electing not to be governed by the
statute (but such amendment may not be effective until one year after it was
adopted and may not apply to any business combination between the corporation
and any person who became an interested stockholder on or prior to such
adoption). These business combinations include, with certain exceptions,
mergers, consolidations, sales of assets and transactions benefiting the
interested stockholder. FPA's Certificate of Incorporation and Bylaws do not
contain a provision electing not to be governed by this statute.
CONTROL SHARE ACQUISITION
The Florida Act also contains a control share acquisition statute which
provides that a person who acquires shares in an issuing public corporation in
excess of certain specified thresholds will generally not have any voting
rights with respect to such shares unless the voting rights are approved by a
majority of the shares entitled to vote, excluding interested shares. The
thresholds specified in the Florida Act are the acquisition of a number of
shares representing: (1) 20 percent or more, but less than 33.3 percent of all
voting power of the corporation; (2) 33.3 percent or more but less than a
majority of all voting power of the corporation or (3) a majority or more of
all voting power of the corporation. This statute does not apply to
acquisitions of shares of a corporation if, prior to the pertinent acquisition
of shares, the corporation's articles of incorporation or bylaws provide that
the corporation shall not be governed by the statute. This statute also
permits a corporation to adopt a provision in its articles of incorporation or
bylaws providing for the redemption by the corporation of such acquired shares
in certain circumstances. Unless otherwise provided in the corporation's
articles of incorporation or bylaws prior to the pertinent acquisition of
shares, in the event that such shares are accorded full voting rights by the
shareholders of the corporation and the acquiring shareholder acquires a
majority of the voting power of the corporation, all shareholders who did not
vote in favor of affording voting rights to such acquired shares are entitled
to
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dissenters' rights. Sterling's Articles of Incorporation contain a provision
electing not to be governed by this statute.
Delaware does not have any provision comparable to Florida's control share
acquisition statute.
OTHER CONSTITUENCIES
The Florida Act provides that directors of a Florida corporation, in
discharging their duties to the corporation and in determining what they
believe to be in the best interests of the corporation, may, in addition to
considering the effects of any corporate action on the shareholders and the
corporation, consider the effects of the corporate action on employees,
suppliers and customers of the corporation or its subsidiaries and the
communities in which the corporation and its subsidiaries operate.
Delaware does not have a comparable statutory provision.
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THE MERGER AGREEMENT
Set forth below is a summary of the material terms of the Merger Agreement.
The following description does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, a copy of which is attached
as Appendix I to this Proxy Statement/Prospectus and is incorporated by
reference herein.
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the Merger are subject to
the fulfillment at or prior to the Closing Date of the following conditions:
Stockholder Approval. The Merger Agreement and the transactions contemplated
therein shall have been approved and adopted by the majority vote of the
shareholders of Sterling and the stockholders of FPA under applicable law and
applicable Nasdaq listing requirements.
Nasdaq Listing. The shares of FPA Common Stock issuable in the Merger shall
have been authorized for listing on Nasdaq upon official notice of issuance.
Other Approvals. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
The Registration Statement. The Registration Statement on Form S-4 shall
have become effective in accordance with the provisions of the Securities Act
and state blue sky laws, if applicable, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding
for that purpose shall have been instituted by the Commission or any state
regulatory authorities.
No Injunctions or Restraints. No preliminary or permanent injunction or
other order or decree by any federal or state court which prevents the
consummation of the Merger shall have been issued and remain in effect (each
party agreeing to use its reasonable efforts to have any such injunction,
order or decree lifted).
No Litigation. No litigation shall be pending or threatened that in the
opinion of counsel to either FPA or Sterling has a significant likelihood of
preventing the consummation of the Merger or the transactions contemplated
thereby.
No Actions. No action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or federal government or
governmental agency in the United States which would prevent the consummation
of the Merger or make the consummation of the Merger illegal.
Other Consents. All governmental waivers, consents, orders and approvals
required for the consummation of the Merger and the transactions contemplated
thereby shall have been obtained and be in effect at the Effective Time.
Pooling of Interests. Each of FPA and Sterling shall receive assurances,
satisfactory to each of them, that the Merger will be treated as a pooling of
interests transaction under APB No. 16.
Unless waived by Sterling, the obligation of Sterling to effect the Merger
is subject to the fulfillment at or prior to the Closing Date of the following
additional conditions:
Performance of Obligations and Representations and Warranties of
Sterling. FPA and Merger Sub shall have performed in all material respects
their agreements contained in the Merger Agreement required to be performed on
or prior to the Closing Date and the representations and warranties of FPA and
Merger Sub contained in the Merger Agreement shall be true and correct in all
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date, and Sterling shall have received a certificate of
the
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Chairman of the Board and Chief Executive Officer, the President or a Vice
President of FPA and of the President and Chief Executive Officer or a Vice
President of Merger Sub to that effect.
Tax Opinion. Sterling shall have received an opinion of Coopers & Lybrand
LLP, in form and substance reasonably satisfactory to Sterling, dated the
Closing Date, to the effect that Sterling and holders of Sterling Common Stock
(except to the extent any shareholders receive cash in lieu of fractional
shares) will recognize no gain or loss for federal income tax purposes as a
result of consummation of the Merger.
Legal Opinion. Sterling shall have received an opinion from Ballard Spahr
Andrews & Ingersoll, special counsel to FPA and Merger Sub, dated the Closing
Date, reasonably satisfactory to Sterling and covering the due incorporation
of FPA and Merger Sub, the binding nature of the Merger Agreement, the
effectiveness of the Merger, the validity of the FPA Common Stock to be issued
in connection with the Merger and such other matters as may be reasonably
requested by Sterling.
Comfort Letters. Sterling shall have received "comfort" letters in customary
form from Deloitte & Touche LLP, certified public accountants for FPA and
Merger Sub, dated the date of this Joint Proxy Statement/Prospectus, the
effective date of the Registration Statement and the Closing Date (or such
other date reasonably acceptable to Sterling) with respect to certain
financial statements and other financial information included in the
Registration Statement and any subsequent changes in specified balance sheet
and income statement items, including total assets, working capital, total
stockholders' equity, total revenues and the total and per share amounts of
net income.
No Material Changes. After the date of the Merger Agreement, there shall
have been no changes that constitute, and no event or events shall have
occurred which have resulted in or constitute, a material adverse change in
the business, operations, properties, assets, condition (financial or other)
or results of operations of FPA and its subsidiaries.
Governmental Authority. No governmental authority shall have promulgated any
statute, rule or regulation which, when taken together with all such
promulgations, would materially impair the value to FPA of the Merger.
Fairness Opinion. Sterling shall have received from Smith Barney (or other
nationally recognized investment banking firm reasonably acceptable to FPA) an
opinion reasonably acceptable to Sterling to the effect that, as of the date
of the Merger Agreement and, if requested by Sterling, confirmed as of the
date of the Joint Proxy Statement/Prospectus, that the Exchange Ratio is fair,
from a financial point of view, to the holders of Sterling Common Stock, and
such opinion shall not have been withdrawn.
Employment Agreement. FPA, Merger Sub and Stephen J. Dresnick, M.D. shall
have executed an employment agreement providing for the employment of Stephen
J. Dresnick, M.D. to be Vice Chairman of FPA for a period of three (3) years
from the Closing Date, on terms and conditions acceptable to the Board of
Directors of FPA, Merger Sub and Stephen J. Dresnick, M.D.
Unless waived by FPA and Merger Sub, the obligations of FPA and Merger Sub
to effect the Merger are subject to the fulfillment at or prior to the
Effective Date of the following additional conditions:
Performance of Obligations and Representations and Warranties of FPA and
Merger Sub. Sterling shall have performed in all material respects its
agreements contained in the Merger Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of Sterling
contained in the Merger Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date and FPA shall have received a Certificate of the
President and Chief Executive Officer or of a Vice President of Sterling to
that effect.
Legal Opinions. FPA shall have received an opinion from Berman Wolfe &
Rennert, special counsel to Sterling, dated the Closing Date, reasonably
satisfactory to FPA, and covering the due incorporation of Sterling,
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the binding nature of the Merger Agreement, the effectiveness of the Merger
and the validity of Sterling Common Stock to be exchanged in the Merger and
such other matters as may be reasonably requested by FPA.
Comfort Letters. FPA shall have received "comfort" letters in customary form
and substance from Coopers & Lybrand LLP, independent accountants for
Sterling, dated the date of this Joint Proxy Statement/Prospectus, the
effective date of the Registration Statement and the Closing Date (or such
other date reasonably acceptable to FPA) with respect to certain financial
statements and other financial information included in the Registration
Statement and any subsequent changes in specified balance sheet and income
statement items, including total assets, working capital, total stockholders'
equity, total revenues and the total and per share amounts of net income.
No Material Changes. After the date of the Merger Agreement, there shall
have been no changes that constitute, and no event or events shall have
occurred which have resulted in or constitute, a material adverse change in
the business, operations, properties, assets, condition (financial or other)
or results in operations or prospects of Sterling and its subsidiaries, taken
as a whole.
Governmental Authority. No governmental authority shall have promulgated any
statute, rule or regulation which, when taken together with all such
promulgations, would materially impair the value to FPA of the Merger.
Fairness Opinion. FPA shall have received from Oppenheimer & Co., Inc. (or
other nationally recognized investment banking firm reasonably acceptable to
Sterling) an opinion, reasonably acceptable to Sterling, dated as of the date
on which the Joint Proxy Statement/Prospectus is first distributed to the
stockholders of FPA, to the effect that the Merger Consideration is fair, from
a financial point of view, to FPA's stockholders, and such opinion shall not
have been withdrawn.
Resignations. FPA shall have received from Sterling the resignations of all
individuals serving as directors of Sterling immediately prior to the
Effective Time, except each individual designated as a director on Schedule
2.3 attached to the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by each
of FPA, Merger Sub and Sterling relating to, among other things (i)
organization and qualification to do business, (ii) capitalization, (iii)
subsidiaries, (iv) authority to enter into the Merger, non-contravention of
laws or governing documents and regulatory approvals, (v) reports and
financial statements, (vi) absence of undisclosed liabilities, (vii) absence
of certain changes or events, (viii) litigation, (ix) the Registration
Statement and this Joint Proxy Statement/Prospectus, (x) violations of law,
(xi) compliance with agreements, (xii) taxes, (xiii) employee benefit plans
and ERISA matters, (xiv) labor controversies, (xv) environmental matters,
(xvi) title to assets, (xvii) stockholders' approval, (xvii) pooling of
interests and tax-free reorganization matters, (xviii) insurance and (xix)
brokers.
In addition, Sterling represents in the Merger Agreement that it is exempt
from Florida's statutory antitakeover provisions.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the date of the Merger Agreement and prior to the
Closing Date or earlier termination of the Merger Agreement, unless FPA shall
otherwise agree in writing, Sterling shall, and shall cause its subsidiaries
to:
Ordinary Course. Conduct their respective businesses in the ordinary and
usual course of business and consistent with past practice.
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Changes in Stock. Not (i) amend or propose to amend their respective charter
or by-laws, (ii) split, combine or reclassify their outstanding capital stock
or (iii) declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of dividends or
distributions by a wholly-owned subsidiary of Sterling.
Issuance of Securities. Not issue, sell, pledge or dispose of, any
additional shares of, or any options, warrants or rights of any kind to
acquire any shares of, their capital stock of any class or any debt or equity
securities convertible into or exchangeable for such capital stock, except
that Sterling (i) may grant options to the extent required to be granted
automatically under Sterling's employee benefit plans or pursuant to
employment agreements and (ii) may issue shares (A) upon conversion of
convertible securities and exercise of options outstanding on the date of the
Merger Agreement, or options granted pursuant to section (i), (B) in
connection with the potential acquisitions described in Schedule 6.1 attached
to the Merger Agreement and (C) in connection with transactions disclosed on
other Schedules attached to the Merger Agreement.
Other Conduct. Not (i) incur or become contingently liable with respect to
any indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock or any options, warrants or rights to acquire any of its capital
stock or any security convertible into or exchangeable for its capital stock,
(iii) take any action which would jeopardize the treatment of the Merger as a
pooling of interests under APB No. 16, (iv) take or fail to take any action
which action or failure would cause Sterling or its shareholders (except to
the extent that any shareholders receive cash in lieu of fractional shares) to
recognize gain or loss for federal income tax purposes as a result of the
consummation of the Merger, (v) make any acquisition of any assets or
businesses other than expenditures for fixed or capital assets in the ordinary
course of business and as described in Schedule 6.1 attached to the Merger
Agreement, (vi) sell, pledge, dispose of or encumber any assets or business
other than sales in the ordinary course of business or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing.
Preservation of Goodwill. Use all reasonable efforts to preserve intact its
business organization and goodwill, keep available the services of its present
officers and key employees, and preserve the goodwill and business
relationships with customers and others having business relationships with it
and not engage in any action, directly or indirectly, with the intent to
adversely impact the transactions contemplated by the Merger Agreement.
Communication with FPA. Confer on a regular and frequent basis with one or
more representatives of FPA to report operational matters of materiality and
the general status of ongoing operations.
No Changes in Employment Agreements. Not enter into or amend any employment,
severance, special pay arrangement with respect to termination of employment
or other similar arrangements or agreements with any directors, officers or
key employees, except as required by Section 7.12 of the Merger Agreement and
in the ordinary course and consistent with past practice.
No Changes in Compensation Arrangements. Not adopt, enter into or amend any
bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, healthcare, employment or other employee benefit plan,
agreement, trust, fund or arrangement for the benefit or welfare of any
employee or retiree, except as required by Section 7.12 of the Merger
Agreement or to comply with changes in applicable law.
Maintain Insurance. Maintain with financially responsible insurance
companies coverage on its assets and its business in such amounts and against
such risks and losses as are consistent with past practice.
Maintain Liability Insurance. Take all such reasonable action as may be
required to maintain its directors' and officers' liability insurance
coverage.
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After the date of the Merger Agreement and prior to the Closing Date or
earlier termination of the Agreement, unless Sterling shall otherwise agree in
writing, FPA and Merger Sub shall, and shall cause their subsidiaries to:
Ordinary Course. Conduct their respective businesses in the ordinary and
usual course of business and consistent with past practice.
Changes in Stock. Not (i) amend or propose to amend their respective
charters or bylaws, except as set forth in FPA's Proxy Statement dated April
19, 1996, (ii) split, combine or reclassify (whether by stock dividend or
otherwise) their outstanding capital stock or (iii) declare, set aside or pay
any dividend or distribution payable in cash, stock, property or otherwise,
except for the payment of dividends or distributions by a wholly owned
subsidiary of FPA.
Issuance of Securities. Not issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any shares of FPA Common Stock, or any
options, warrants or rights of any kind to acquire any shares of their capital
stock of any class or any debt or equity securities convertible into or
exchangeable for such capital stock, except that FPA (A) may issue shares (i)
upon conversion of convertible securities and exercise of options outstanding
on the date of the Merger Agreement, (ii) in connection with the potential
acquisitions described in Schedule 6.2 attached to the Merger Agreement and
(iii) in connection with the possible issuance and sale of certain notes as
described in Schedule 6.2 attached to the Merger Agreement (the "Notes") and
(B) may issue rights or warrants to purchase shares of its common or preferred
stock in accordance with a proposed shareholder rights plan.
Other Conduct. Not (i) incur or become contingently liable with respect to
any indebtedness for borrowed money, other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness,
including the possible issuance of the Notes, (ii) redeem, purchase, acquire
or offer to purchase or acquire any shares of its capital stock or any
options, warrants or rights to acquire any of its capital stock or any
security convertible into or exchangeable for its capital stock, (iii) take
any action which would jeopardize the treatment of the Merger as a pooling of
interests under APB No. 16, (iv) take or fail to take any action which action
or failure to take action would cause Sterling or its shareholders (except to
the extent that any shareholders receive cash in lieu of fractional shares) to
recognize gain or loss for federal income tax purposes as a result of the
consummation of the Merger, (v) make any acquisition of any assets or
businesses other than expenditures for fixed or capital assets in the ordinary
course of business and as described in Schedule 6.2 attached to the Merger
Agreement, (vi) sell, pledge, dispose of or encumber any assets or businesses
other than sales in the ordinary course of business or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing.
Preservation of Goodwill. Use all reasonable efforts to preserve intact
their respective business organizations and goodwill, keep available the
services of their respective present officers and key employees, and preserve
the goodwill and business relationships with customers and others having
business relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions contemplated
by the Merger Agreement.
Communications with Sterling. Confer on a regular and frequent basis with
one or more representatives of Sterling to report operational matters of
materiality and the general status of ongoing operations.
No Changes in Employment Agreements. Not enter into or amend any employment,
severance, special pay arrangement with respect to termination of employment
or other similar arrangements or agreements with any directors, officers or
key employees, except in the ordinary course and consistent with past
practice.
No Changes in Compensation Agreements. Not adopt, enter into or amend any
bonus, profit sharing, compensation, stock option, pension, retirement,
deferred compensation, healthcare, employment or other employee benefit plan,
agreement, trust, fund or arrangement for the benefit or welfare of any
employee or
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retiree, except as contemplated by the Merger Agreement or as required to
comply with changes in applicable law.
Maintain Insurance. Maintain with financially responsible insurance
companies insurance coverage on its tangible assets and its businesses in such
amounts and against such risks and losses as are consistent with past
practice.
Maintain Liability Insurance. Take all such reasonable actions as may be
required to maintain its directors' and officers' liability insurance
coverage.
ACQUISITION TRANSACTIONS
After the date of the Merger Agreement and prior to the Effective Time or
earlier termination of the Agreement, neither FPA nor Sterling shall, and
neither shall permit any of its subsidiaries to, initiate, solicit, negotiate,
encourage or provide non-public or confidential information to facilitate, and
each shall use its best efforts to cause each of its subsidiaries and cause
any officer, director or employee of it or its subsidiaries, or any attorney,
accountant, investment banker, financial advisor or other agent retained by it
or its subsidiaries, not to initiate, solicit, negotiate, encourage or provide
non-public or confidential information to facilitate, any proposal or offer to
acquire all or any substantial part of the business and properties of FPA or
Sterling or any capital stock of FPA or Sterling, whether by merger, purchase
of assets, tender offer or otherwise, whether for cash, securities or any
other consideration or combination thereof (any such transactions being
referred to herein as "Acquisition Transactions").
Notwithstanding the provisions of the above paragraph, either FPA or
Sterling (either a "Target" or a "non-Target," as the case may be for purposes
of this paragraph and the paragraph below) may, as a Target, in response to an
unsolicited written proposal with respect to an Acquisition Transaction, (i)
furnish confidential or non-public information concerning its business,
properties or assets to a financially capable corporation, partnership,
individual or other entity, group or other person (a "Potential Acquiror") if
the non-Target shall have been given not less than one (1) business day
advance written notice of the Target's intention to do so, or negotiate with
such Potential Acquirer if the non-Target shall have been given not less than
three (3) business days' advance written notice of the Target's intention to
do so, and (ii) if such proposed Acquisition Transaction constitutes a tender
offer subject to Section 14(d) of the Exchange Act, the Board of Directors of
Target may take and disclose to Target stockholders a position contemplated by
Rule 14e-2(a) under the Exchange Act.
In the event the Target shall receive any offer of the type referred to in
the paragraph above, it shall immediately inform the non-Target that an offer
has been received and shall immediately furnish to the non-Target the identity
of the proponent of such offer, a copy of any information provided to such
Potential Acquiror and, a description of the material terms of such offer,
unless the Board of Directors of the Target concludes that such disclosure to
the non-Target would be inconsistent with its fiduciary duties to its
stockholders under applicable law.
Sterling may enter into a definitive agreement for an Acquisition
Transaction which meets the requirements set forth above with a Potential
Acquiror with which it is permitted to negotiate but only if (i) the
independent financial advisors of Sterling shall have determined that such
Acquisition Transaction would be more favorable to Sterling's shareholders
from a financial point of view than the Merger, (ii) Sterling's Board of
Directors shall have concluded, in good faith and after consultation with its
legal counsel, that such action is necessary in order for the Board of
Directors to act in a manner that is consistent with its fiduciary obligations
under applicable law, (iii) at least three (3) business days prior to the
execution of a definitive agreement with a Potential Acquiror, Sterling shall
have furnished FPA with a copy of such definitive agreement and (iv) FPA shall
have failed within such three-day period to offer to amend the terms of the
Merger Agreement in order that the Merger would yield a value to shareholders
of Sterling at least equal to the Acquisition Transaction.
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Each party (i) acknowledges that a breach of any of its covenants contained
in this section will result in irreparable harm to the other party which will
not be compensable in money damages and (ii) agrees that such covenant shall
be specifically enforceable and that specific performance and injunctive
relief shall be a remedy properly available to the other party for a breach of
such covenant.
Effect of Acquisition Transaction. If the Merger is not consummated as a
result of Sterling electing to enter into an Acquisition Transaction
(including, but not limited to, an Acquisition Transaction permitted pursuant
to this section) with any party other than FPA or one of its subsidiaries or
affiliates prior to December 31, 1996, Sterling shall pay to FPA upon
consummation of such Acquisition Transaction an amount equal to the value of
three percent (3%) of the Aggregate Value paid to Sterling or its shareholders
in such Acquisition Transaction. "Aggregate Value" shall mean the total value
paid for Sterling Common Stock plus the total indebtedness assumed by the
acquiring party as a result of the Acquisition Transaction.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, Sterling, FPA and Merger Sub have made the
following additional agreements.
Access to Information. Sterling and its subsidiaries shall afford to FPA and
Merger Sub and their respective accountants, counsel, financial advisors and
other representatives (the "FPA Representatives") and FPA and its subsidiaries
shall afford to Sterling and its accountants, counsel, financial advisors and
other representatives (the "Sterling Representatives") reasonable access
during normal business hours throughout the period prior to the earlier of the
termination of the Merger Agreement or the Effective Time to all of their
respective properties, books, contracts, commitments and records (including,
but not limited to, tax returns) and, during such period, shall furnish
promptly to one another (i) a copy of each report, schedule and other document
filed or received by any of them pursuant to the requirements of federal or
state securities laws or filed by any of them with the Commission in
connection with the transactions contemplated by the Merger Agreement or which
may have a material effect on their respective businesses, properties or
personnel and (ii) such other information concerning their respective
businesses, properties and personnel as FPA, Merger Sub or Sterling, as the
case may be, shall reasonably request; provided that no investigation pursuant
to this section shall amend or modify any representations or warranties made
herein or the conditions to the obligations of the respective parties to
consummate the Merger. FPA and its subsidiaries shall hold and shall use their
reasonable best efforts to cause the FPA Representatives to hold, and Sterling
and its subsidiaries shall hold and shall use their reasonable best efforts to
cause Sterling Representatives to hold, in strict confidence all Confidential
Information, as hereinafter defined, furnished to FPA, Merger Sub or to
Sterling, as the case may be, in connection with the transactions contemplated
by the Merger Agreement, except that (i) FPA, Merger Sub and Sterling may
disclose such information as may be necessary in connection with seeking
required statutory and stockholders' approval and (ii) each of FPA, Merger Sub
and Sterling may disclose any information that it is required by law or
judicial or administrative order to disclose. For purposes of this section,
"Confidential Information" regarding a party to the Merger Agreement means (i)
the existence of the discussions which are the subject of the Merger Agreement
and (ii) any information about the subject party; provided that it does not
include information which the disclosing party can demonstrate (A) is
generally available to or known by the public other than as a result of
improper disclosure by the disclosing party or (B) obtained by the disclosing
party from a source other than the subject party, provided that such source
was not bound by a duty of confidentiality to the subject party or another
party with respect to such information.
In the event that the Merger Agreement is terminated in accordance with its
terms, each party shall promptly return to the other all non-public written
material provided pursuant to this section or the Confidentiality Agreement
and shall not retain any copies, extracts or other reproductions in whole or
in part of such written material. In such event, all documents, memoranda,
notes and other writings prepared by FPA or Sterling based on the information
in such material shall be destroyed (and FPA and Sterling shall use their
respective reasonable best efforts to cause their advisors and representatives
to similarly destroy their documents, memoranda and
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notes), and such destruction (and reasonable best efforts) shall be certified
in writing by an authorized officer supervising such destruction.
Sterling shall promptly advise FPA and FPA shall promptly advise Sterling in
writing of any change or the occurrence of any event after the date of the
Merger Agreement having, or which would have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of Sterling and its subsidiaries or FPA and its
subsidiaries, as the case may be, taken as a whole.
Registration Statement and Proxy Statement. FPA and Sterling shall use all
reasonable efforts to have the Registration Statement declared effective by
the Commission as promptly as practicable. FPA shall also take any action
required to be taken under applicable state blue sky, securities laws or rules
or regulations of any national securities exchange or Nasdaq in connection
with the issuance of FPA Common Stock pursuant to the Merger Agreement. FPA
and Sterling shall promptly furnish to each other all information, and take
such other actions, as may reasonably be requested in connection with any
action by any of them in connection with the preceding sentence.
Stockholders' Approvals. Sterling shall, as promptly as practicable, submit
the Merger Agreement and the transactions contemplated thereby for the
approval of its shareholders at a meeting of shareholders and, subject to the
fiduciary duties of the Board of Directors of Sterling under applicable law,
shall use its reasonable best efforts to obtain shareholder approval and
adoption (the "Sterling Shareholders' Approval") of the Merger Agreement and
the transactions contemplated thereby. Such meeting of shareholders shall be
held as soon as practicable following the date upon which the Registration
Statement becomes effective. Subject to the fiduciary duties of the Board of
Directors of Sterling under applicable law, Sterling shall, through its Board
of Directors, recommend to its shareholders approval of the transactions
contemplated by the Merger Agreement. Subject to the foregoing, failure by
Sterling to convene a meeting of its shareholders and call for a vote thereat
with respect to the approval of the Merger Agreement and the Merger will
result in irreparable harm to FPA which will not be compensable in money
damages and agrees that such covenant shall be specifically enforceable and
that specific performance and injunctive relief shall be a remedy properly
available to FPA for a breach of such covenant.
FPA shall, as promptly as practicable, submit the Merger Agreement and the
transactions contemplated thereby for the approval of its stockholders at a
meeting of stockholders and, subject to the fiduciary duties of the board of
directors of FPA under applicable law, shall use its reasonable best efforts
to obtain stockholder approval and adoption (the "FPA Stockholders' Approval")
of the Merger Agreement and the transactions contemplated thereby. Such
meeting of stockholders shall be held as soon as practicable following the
date on which the Registration Statement becomes effective. FPA shall, through
its board of directors, but subject to the fiduciary duties of the members
thereof, (i) recommend to its stockholders approval of the transactions
contemplated by the Merger Agreement and (ii) authorize and cause an officer
of FPA to vote FPA's shares of Merger Sub common stock for adoption and
approval of the Merger Agreement and the transactions contemplated thereby and
shall take all additional actions as the sole stockholder of Merger Sub
necessary to adopt and approve the Merger Agreement and the transactions
contemplated thereby. Subject to the foregoing, FPA (i) acknowledges that a
breach of its covenant contained in this section to convene a meeting of its
stockholders and call for a vote thereat with respect to the approval of the
Merger Agreement and the Merger will result in irreparable harm to Sterling
which will not be compensable in money damages and (ii) agrees that such
covenant shall be specifically enforceable and that specific performance and
injunctive relief shall be a remedy properly available to Sterling for a
breach of such covenant.
Affiliates of Sterling. On or prior to the date that is thirty (30) days
prior to the Closing Date, Sterling shall deliver to FPA a letter (the "APB
No. 16 Affiliate Letter") identifying all persons who may be deemed affiliates
of Sterling for the purposes of APB No. 16, including, without limitation, all
directors and executive officers of Sterling as of the date of the APB No. 16
Affiliate Letter. On or prior to the date that is five (5) days prior to the
Closing Date, (i) Sterling shall deliver to FPA another letter (the "Rule 145
Letter") identifying all persons who may be affiliates of Sterling, as defined
under Rule 145, as of the date of the Rule 145 Letter, and
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(ii) Sterling shall advise the persons identified in the Rule 145 Letter of
the resale restrictions imposed by applicable securities laws. Sterling shall
use its best efforts to obtain as soon as practicable from each person listed
on the APB No. 16 Affiliate Letter and from any person who may be deemed to
have become an affiliate of Sterling for the purposes of APB No. 16 after
Sterling's delivery of the APB No. 16 Affiliate Letter and prior to the
Closing Date, an agreement not to sell shares of FPA Common Stock obtained in
the Merger until combined results of operations of Sterling and FPA covering
at least thirty (30) days of operations are made public.
Exchange Listing. FPA shall use its reasonable best efforts to effect, at or
before the Effective Time, authorization for listing on the Nasdaq, upon
official notice of issuance, of the shares of FPA Common Stock to be issued
pursuant to the Merger.
Expenses and Fees. All costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby shall be paid by
the party incurring such expenses, except that those expenses incurred in
connection with printing the Joint Proxy Statement/Prospectus shall be shared
equally by FPA and Sterling. The fees required pursuant to Sections 6.6 and
9.2 of the Merger Agreement shall be paid in accordance with those provisions.
Agreement to Cooperate. Subject to the terms and conditions provided in the
Merger Agreement, each of the parties thereto shall use its best efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement, including using its best efforts to obtain all necessary or
appropriate waivers, consents and approvals and Commission "no-action" letters
to effect all necessary registrations, filings and submissions and to lift any
injunction or other legal bar to the Merger (and, in such case, to proceed
with the Merger as expeditiously as possible), subject, however, to FPA
Stockholders' Approval and Sterling Shareholders' Approval.
Without limitation of the foregoing, each of FPA and Sterling undertakes and
agrees to (i) take all actions necessary to cause the Merger to (a) qualify as
a tax-free merger under Section 368(a)(1)(A), (a)(2)(D) or (a)(2)(E) of the
Code, and (b) be treated as a pooling of interests under APB No. 16 for
accounting and financial statement purposes, (ii) file as soon as practicable
after the date of the Merger Agreement a Notification and Report Form under
the HSR Act with the FTC and the Antitrust Division of the Department of
Justice (the "DOJ"). Each of FPA and Sterling shall (i) use its reasonable
efforts to comply as expeditiously as possible with all lawful requests of the
FTC or the DOJ for additional information and documents and (ii) not extend
any waiting period under the HSR Act or enter into any agreement with the FTC
or the DOJ not to consummate the transactions contemplated by the Merger
Agreement, except with the prior written consent of such parties.
Sterling shall use its best efforts to obtain from Sterling's executive
officers and directors, and shall deliver to FPA, irrevocable proxies
(together with a voting agreement) only with respect to the meeting of
Sterling shareholders related to the Merger (in a form furnished to Sterling
by FPA) representing all shares of Sterling Common Stock that such executive
officers and directors beneficially own as contemplated by the rules under the
Exchange Act with their vote in favor of the Merger.
FPA shall use its best efforts to obtain from FPA's executive officers and
directors, and shall deliver to Sterling, (i) irrevocable proxies (together
with a voting agreement) only with respect to the meeting of FPA stockholders
related to the Merger (in a form reasonably acceptable to Sterling)
representing all shares of FPA Common Stock that such executive officers and
directors and officers own with their votes in favor of the Merger, and (ii)
irrevocable proxies (together with a voting agreement, and in a form
acceptable to Stephen J. Dresnick, M.D.) representing all shares of FPA Common
Stock that such executive officers and directors beneficially own as
contemplated by the rules under the Exchange Act with their votes for election
of directors in accordance with Section 7.13 of the Merger Agreement.
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Public Statements. The parties shall consult with each other prior to
issuing any press release or any written public statement with respect to the
Merger Agreement or the transactions contemplated thereby and shall not issue
any such press release or written public statement prior to such consultation
unless required by law.
Option Plans. At the Effective Time, FPA shall take such action as may be
necessary to replace each unexpired and unexercised option to purchase a share
of Sterling Common Stock, regardless of whether exercisable at the Effective
Time (each a "Sterling Option") with an option (each an "FPA Option") to
purchase a number of shares of FPA Common Stock equal to the number of shares
of Sterling Common Stock that could have been purchased under the Sterling
Option multiplied by the Exchange Ratio, at a price per share of FPA Common
Stock equal to the option exercise price determined pursuant to the Sterling
Option divided by the Exchange Ratio and subject to substantially the same
terms and conditions as the Sterling Option. Shares of FPA Common Stock
underlying each FPA Option shall promptly after the Effective Date be
registered on a Registration Statement on Form S-8 (the "S-8").
Notwithstanding the foregoing, following the Effective Time, no additional
options shall be granted to the directors of Sterling under the automatic
grant provisions set forth in paragraph 17 of Sterling's 1994 Stock Option
Plan.
Notification of Certain Matters. Each of Sterling, FPA and Merger Sub agrees
to give prompt notice to each other of, and to use their respective reasonable
best efforts to prevent or promptly remedy, (i) the occurrence or failure to
occur or the impending or threatened occurrence or failure to occur, of any
event which occurrence or failure to occur would be likely to cause any of its
representations or warranties in the Merger Agreement to be untrue or
inaccurate in any material respect at any time from the date of the Merger
Agreement to the Effective Time and (ii) any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it under the Merger Agreement; provided, however, that
the delivery of any notice pursuant to this section shall not limit or
otherwise affect the remedies available under the Merger Agreement to the
party receiving such notice.
Corrections to the Joint Proxy Statement/Prospectus and Registration
Statement. Prior to the date of approval of the Merger by their respective
stockholders, each of Sterling, FPA and Merger Sub shall correct promptly any
information provided by it to be used specifically in the Joint Proxy
Statement/Prospectus and Registration Statement that shall have become false
or misleading in any material respect and shall take all reasonable steps
necessary to file with the Commission and have declared effective or cleared
by the Commission any amendment or supplement to the Joint Proxy
Statement/Prospectus or the Registration Statement so as to correct the same
and to cause the Joint Proxy Statement/Prospectus as so corrected to be
disseminated to the shareholders of Sterling and the stockholders of FPA, in
each case to the extent required by applicable law.
Change of Control Issues. Sterling shall secure appropriate amendments to or
waivers of any employment agreements to which it is a party that presently
provide for changes in the material terms or conditions of such employment
agreements upon a change of control of Sterling, including without limitation
changes in the compensation payable or the terms of a covenant not to compete.
Board of Directors. At the Effective Time, the Board of Directors of FPA
shall appoint Stephen J. Dresnick, M.D. and Herbert Wertheim, O.D. (an
individual selected by the Board of Directors of Sterling and acceptable to
FPA) to the Board of Directors of FPA to serve until the next annual meeting
of stockholders of FPA. Commencing with the election at that annual meeting,
the Board of Directors of FPA will nominate and recommend to its stockholders
the election to the Board of Directors of FPA of Dr. Dresnick for a period of
two (2) additional years and the election to the Board of Directors of FPA of
Dr. Wertheim for a period of one (1) additional year. If during Dr. Dresnick's
term as a director, FPA decides to increase the size of its Board of
Directors, the Board of Directors of FPA will nominate one individual selected
by Dr. Dresnick and acceptable to the Board of Directors of FPA, and recommend
to the FPA stockholders his or her election to the Board of Directors of FPA
for a period of no less than one (1) year.
Insurance; Indemnity. For a period of six (6) years after the Effective
Time, FPA shall indemnify, defend and hold harmless to the fullest extent
permitted under applicable law each person who is now or has been an
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officer, director, employee, trustee or agent of Sterling (or any subsidiary
or division thereof), including, without limitation, each person controlling
any of the foregoing persons (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses, claims, damages,
liabilities, costs or expenses (including reasonable attorneys' fees),
judgments, fines, penalties and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or
after the Effective Time. In the event of any such claim, action, suit,
proceeding or investigation (an "Action"), (i) FPA shall pay the reasonable
fees and expenses of counsel selected by the Indemnified Party, which counsel
shall be reasonably acceptable to FPA, in advance of the final disposition of
any such Action to the full extent and under all circumstances permitted by
Florida law as in effect on the date hereof, upon receipt of any undertaking
required by applicable law, and (ii) FPA will cooperate in the defense of any
such matter; provided, however, that FPA shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld) and provided, further, that FPA shall not be obligated
to pay the fees and disbursements of more than one counsel for all Indemnified
Parties in any single Action, except to the extent that, in the opinion of
counsel for the Indemnified Parties, two or more of such Indemnified Parties
have conflicting interests in the outcome of such action. FPA may obtain
directors' and officers' liability insurance covering its obligations under
this section.
TERMINATION, AMENDMENT AND WAIVER
Termination. The Merger Agreement may be terminated at any time prior to the
Closing Date whether before or after approval by the shareholders of Sterling
or FPA (a) by Sterling: (i) if the Merger is not completed by December 31,
1996, otherwise than on account of delay or default on the part of Sterling;
(ii) if the Merger is enjoined by a final, unappealable court order not
entered at the request or with the support of Sterling or any of its 5%
shareholders or any of their affiliates or associates; (iii) if (A) Sterling
receives an offer from any third party (excluding any affiliate of Sterling or
any group of which any affiliate of Sterling is a member) with respect to an
Acquisition Transaction, (B) Sterling's independent financial advisors
determine that such offer would be more favorable to Sterling's shareholders
from a financial point of view than the Merger and (C) FPA fails, within three
(3) business days after FPA is notified of such determination and of the terms
and conditions of such offer, to offer to amend the Merger Agreement to make
the Merger yield a value to shareholders of Sterling at least equal to such
offer as contemplated by Section 6.5(d) of the Merger Agreement; (iv) if (A) a
tender/exchange offer is commenced by a third party (excluding any affiliate
of Sterling or any group of which any affiliate of Sterling is a member) for
all outstanding shares of Sterling Common Stock, (B) Sterling's independent
financial advisors determine that such offer would be more favorable to
Sterling's shareholders from a financial point of view than the Merger and (C)
FPA fails, within three (3) business days after FPA is notified of such
determination, to offer to amend the Merger Agreement to make the Merger yield
a value to shareholders at least equal to such tender/exchange offer as
contemplated by Section 6.5(d) of the Merger Agreement; (v) if FPA (A) fails
to perform in any material respect any of its material covenants in the Merger
Agreement and (B) does not cure such default in all material respects within
thirty (30) days after written notice of such default is given to FPA by
Sterling; or (vi) if any condition set forth in Section 8.1 or Section 8.2 of
the Merger Agreement is not satisfied, other than as a result of the conduct
of Sterling; and (b) by FPA: (i) if the Merger is not completed by December
31, 1996 otherwise than on account of delay or default on the part of FPA;
(ii) if the Merger is enjoined by a final, unappealable court order not
entered at the request or with the support of FPA or any of its 5%
stockholders or any of their affiliates or associates; (iii) if Sterling (A)
fails to perform in any material respect any of its material covenants in the
Merger Agreement and (B) does not cure such default in all material respects
within thirty (30) days after written notice of such default is given to
Sterling by FPA; or (iv) if any condition set forth in Section 8.1 or Section
8.3 of the Merger Agreement is not satisfied, other than as a result of the
conduct of FPA.
Effect of Termination. In the event of termination of the Merger Agreement
by either FPA or Sterling, as provided above, the Merger Agreement shall
forthwith become void and there shall be no further obligation on the part of
Sterling, FPA, Merger Sub or their respective officers or directors (except as
set forth in parts of the
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Merger Agreement which shall survive the termination) with respect to
obligations existing thereunder prior to the termination. If the Merger
Agreement is not consummated because either Sterling or FPA breaches a
material representation or warranty or fails to perform a material covenant
contained herein, and the other party has not breached any material
representation or warranty or failed to perform a material covenant, and the
non-breaching party chooses to terminate the Merger Agreement as a direct
result of such breach or failure, the breaching party shall promptly pay the
non-breaching party the sum of one million dollars ($1,000,000). Nothing in
this section shall relieve any party from liability for any breach of the
Merger Agreement.
Amendment. The Merger Agreement may not be amended except by action taken by
the parties' respective Boards of Directors or duly authorized committees
thereof and then only by an instrument in writing signed on behalf of each of
the parties hereto and in compliance with applicable law.
Waiver. At any time prior to the Effective Time, the parties to the Merger
Agreement may (a) extend the time for the performance of any of the
obligations or other acts of the other parties to the Merger Agreement, (b)
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant thereto and (c) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement except that, after the Sterling Special Meeting, the Exchange Ratio
shall not be changed from that provided herein. Any agreement on the part of a
party to the Merger Agreement to any such extension or waiver shall be valid
if set forth in an instrument in writing signed on behalf of such party. To
the extent material provisions or conditions are waived, including, among
others, the condition that the Merger be treated as a pooling of interests for
accounting and financial reporting purposes, FPA and Sterling intend to amend
this Proxy Statement/Prospectus and resolicit stockholders to the extent
required by applicable law.
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THE FOUNDATION TRANSACTION
FPA is not seeking stockholder approval of the Foundation Transaction at the
FPA Special Meeting.
FHMS ACQUISITION
Pursuant to the Foundation Agreement, FPA California will acquire from
Foundation all of the issued and outstanding capital stock of FHMS in
consideration of:
(i) cash in the amount of $2 million;
(ii) a number of shares of FPA Common Stock to be issued to Foundation
equal to (A) $75 million minus the amount of any cash paid by FPA in
lieu of FPA Common Stock to Foundation, divided by (B) the average of
the per share closing price of FPA Common Stock during the ten trading
days ending on the second trading day prior to the closing of the
Foundation Transaction (the "Foundation Closing") as reported on
Nasdaq (the "FPA/Foundation Price"). In the event the FPA/Foundation
Price is less than $13.60, then FPA may in its sole discretion
terminate the Foundation Agreement; provided that Foundation may cause
the Foundation Closing to occur if it agrees to accept a number of
shares of FPA Common Stock equal to $75 million divided by $13.60;
(iii) promissory notes in the principal amount of $34 million; and
(iv) assumption of the indebtedness of FHMS to Foundation and certain non-
affiliated third parties. The repayment of this indebtedness will be
guaranteed by FPA.
FPA California will also acquire certain indebtedness of FHMS and Holding
Company to Foundation in exchange for promissory notes issued by FPA
California. As of June 30, 1996, the aggregate amount of such indebtedness and
the indebtedness of FHMS to Foundation was approximately $80 million. The
aggregate amount of indebtedness to be assumed by FPA California shall be
increased by liabilities incurred by FHMS and Holding Company between June 30,
1996 and the closing (subject to a maximum limit of $12 million between July
1, 1996 and September 30, 1996). The aggregate principal amount of the
promissory notes to be issued in exchange for such indebtedness therefore will
be equal to the amount of such indebtedness as of the date of the consummation
of the Foundation Transaction, which is estimated to be $92 million. In
addition, Foundation will enter into 30 year professional group provider
agreements with the Medical Groups in connection with the Foundation
Transaction and in connection with the acquisition of the Florida and Arizona
IPAs. The material terms of the 30 year provider agreements as they relate to
the Guaranteed Access Payments are as follows: (i) the providers agree to
contract with Foundation for all benefit programs; (ii) the Medical Groups and
IPAs agree to maintain sufficient medical personnel to provide reasonable and
adequate access to professional services for Foundation beneficiaries for all
benefit programs offered by Foundation; (iii) from the closing through
December 31, 1998, there is an agreed average patient load per physician
provider to ensure adequate access and after December 31, 1998, the Medical
Groups and IPAs will accept Foundation patients if they accept members of any
other third party payors; (iv) the Medical Groups will keep care centers open
given specified levels of patients; (v) the Medical Groups and IPAs will
coordinate with Foundation's disease state management programs; and (vi) the
Medical Groups and IPAs will agree to certain pricing and contracting
parameters with Foundation. In consideration of such services, Foundation has
agreed to pay in the aggregate $55 million in Guaranteed Access Fund payments
to the Medical Groups and IPAs. The Guaranteed Access Payments will be
recognized as revenue by FPA at such time as the conditions to receive such
payments are satisfied and are therefore earned by FPA.
The maximum number of shares of FPA Common Stock issuable to Foundation
under the Foundation Agreement is 5,514,705, which would represent 21.0% of
the outstanding shares of FPA Common Stock (31.3% if the Merger is not
consummated); provided, however, that pursuant to the Foundation Agreement, it
is possible that as few as zero shares of FPA Common Stock may be issued to
Foundation.
The shares of FPA Common Stock to be received by Foundation will not be
registered as of the Foundation Closing, and absent registration can be sold
only in transactions exempt from registration. A condition to the Foundation
Closing of the Foundation Agreement is the execution of a Registration Rights
Agreement pursuant
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to which FPA is required to file (i) on or before March 15, 1997, a
registration statement for a firm commitment underwritten public offering of
up to 2,000,000 shares of FPA Common Stock held by Foundation, and (ii)
following such a sale, a shelf registration statement for the remaining shares
of FPA Common Stock. If requested by Foundation the shelf registration may
take the place of the firm commitment underwritten public offering. Sales
under the shelf registration will be limited in any three month period to that
number of shares of FPA Common Stock that Foundation would be entitled to sell
pursuant to Rule 144 under the Securities Act of 1933. Foundation will also
have unlimited "piggyback" registration rights.
The Foundation Agreement provides that Foundation and Selling Shareholder
may elect, at their sole discretion, to sell FPA, FPA California and FPA IPA
components of FHMS and TDMC selected by Foundation and Selling Shareholder on
terms no less favorable to FPA than those set forth above.
HOLDING COMPANY ACQUISITION
Pursuant to the Foundation Agreement, Foundation shall assign to a designee
of FPA IPA its option (the "Option") to purchase all of the issued and
outstanding stock of Holding Company from Jonathan Scheff, M.D. Upon the
exercise of the Option, FPA IPA's designee will transfer all of the issued and
outstanding stock of Holding Company to FPA IPA. In consideration of the
Option, FPA IPA shall pay to Foundation the sum of $15,000 and FPA California
will purchase the indebtedness of Holding Company to Foundation as described
above, which indebtedness, together with the indebtedness of FHMS to
Foundation, was approximately $80 million as of June 30, 1996. The repayment
of this indebtedness will be guaranteed by FPA.
Following the consummation of the Foundation Transaction, the operations of
FHMS will be integrated with existing California operations of FPA and FHMG
and TDMC will be provided services by FPA. In addition, pursuant to the 30
year professional group provider agreements, FHMG and TDMC physicians will
continue to provide services to enrollees in Foundation's health plans.
If Seller and Selling Shareholder elect to sell only selected components of
FHMS and TDMC, then Foundation and Selling Shareholder shall pay to FPA $6
million on or prior to June 30, 1997 if less than 15,000 additional Foundation
enrollees shall have selected primary care physicians who contract with FPA's
Professional Corporations in Sacramento, Placer and El Dorado counties,
provided that such payment shall not be made if at least 35,000 additional
Foundation enrollees shall have selected such primary care physicians and
provided further that such $6 million shall be payable pro rata based upon the
number of Foundation enrollees who have selected such primary care physicians
between 15,000 and 35,000 as of June 30, 1997.
BACKGROUND OF THE FOUNDATION TRANSACTION
During April and May 1996, Foundation engaged in non-public, preliminary
discussions with potential buyers other than FPA concerning the proposed sale
of FHMS and the Medical Groups. On May 24, 1996, Foundation made a public
announcement concerning those preliminary discussions. After having read this
announcement in a newspaper article, Dr. Seth Flam, Chief Executive Officer of
FPA, contacted Kirk A. Benson, Senior Vice President--Corporate Development of
Foundation, during the week of May 27, 1996, to indicate FPA's possible
interest in pursuing a transaction with Foundation. FPA and Foundation entered
into a Confidentiality Agreement on June 4, 1996, and Foundation provided FPA
with certain financial and business materials concerning FHMS and the Medical
Groups. On June 4, 1996, Dr. Flam, and Steven Lash, Chief Financial Officer of
FPA, met with Mr. Benson, Patricia A. Burgess, Vice President and Counsel,
Larry Innocent, Director of Finance for Specialty Services Companies, Jerry
Newman, President--FHMS and Michael White, Vice President and Assistant
Treasurer, of Foundation to discuss on a preliminary basis the terms of a
potential transaction. During that week and several following weeks,
Foundation provided for the review of FPA and its legal, accounting and
financial representatives, additional documents and financial information
related to the operations of FHMS, the Medical Groups and the related care
centers. On June 6, 1996, the FPA Board of Directors at a regularly scheduled
board meeting was informed of the possible transaction with Foundation. On
June 12 and 13, 1996, Dr. Flam, Mr. Lash and James Lebovitz, Senior Vice
President and General Counsel of FPA, and Messrs. Benson, Newman and White of
Foundation, together with Foundation's in-house and outside
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legal advisors and representatives of the investment banking firm of Bear
Stearns & Co., Inc. (which was representing Foundation in the sale) met to
discuss a draft of the purchase agreement, further negotiate terms and review
additional financial data. These discussions included price, the allocation of
purchase price between cash and FPA Common Stock and the terms of registration
rights, the assumption of indebtedness and related guarantees and security
agreements, real estate terms, and the terms of provider agreements with
Foundation's HMOs in California and Arizona, including price and duration. The
parties continued to negotiate terms, conduct due diligence and exchange draft
agreements on a continuing basis. These meetings included the persons
described above, together with each party's legal, accounting and financial
advisors. On June 27, 1996, at a special telephonic meeting of the FPA Board
of Directors, FPA management reviewed and discussed the terms and conditions
of the proposed Foundation transaction. Following these discussions, the FPA
Board of Directors approved the Foundation Transaction and authorized the
officers of FPA to enter into the Foundation Agreement.
On June 28, 1996, Foundation and FPA executed the Foundation Agreement. For
a description of the terms and conditions of the Foundation Agreement, see
"THE FOUNDATION AGREEMENT."
RECOMMENDATION OF THE FPA BOARD OF DIRECTORS AND REASONS FOR THE FOUNDATION
TRANSACTION
For the reasons described below, the FPA Board of Directors has unanimously
approved the Foundation Transaction.
FPA continuously analyzes potential acquisition candidates in the healthcare
field. The FPA Board of Directors believes that the Foundation Transaction is
fair to and in the best interests of FPA and its stockholders for the reasons
described below. Accordingly, the FPA Board of Directors has approved the
Foundation Agreement and the transactions contemplated thereby and has
directed that the Foundation Agreement and the Foundation Transaction be
submitted to a vote of FPA's stockholders at the FPA Special Meeting.
The FPA Board of Directors believes the negotiated terms of the Foundation
Transaction to be the most favorable transaction terms available, considering
an array of factors which included those both favorable and adverse to the
Foundation Transaction. In evaluating the Foundation Transaction, the FPA
Board of Directors consulted with FPA management and legal counsel. It
considered the following factors to be material to and in support of its final
determination:
(i) the Foundation Transaction is expected to enable FPA to significantly
expand the FPA Network in geographic areas in which FPA currently
operates;
(ii) the Foundation Transaction is expected to substantially increase FPA's
size in terms of revenues, profits, physicians and locations which is
expected to enhance FPA's national recognition making it easier for
FPA to attract and retain new physicians and win Payor contracts;
(iii) the Foundation Transaction is expected to enable FPA to contract more
effectively with specialists and hospitals and to consolidate general
and administrative expenses; and
(iv) the Foundation Transaction is expected to provide additional revenue
to FPA under the long-term provider agreements between Foundation and
the Medical Groups.
In addition to the foregoing items, the FPA Board of Directors generally
considered those matters discussed under "RISK FACTORS," which included
potentially adverse consequences to FPA posed by the Foundation Transaction
and, in particular, that the Foundation Transaction would result in a pro
forma operating loss of approximately $36.8 million and a pro forma net loss
of approximately $39.0 million for the six months ended June 30, 1996.
However, the FPA Board of Directors determined that operating efficiencies and
the impact of FPA's medical management policies outweighed these pro forma
losses. The FPA Board of Directors also noted the fact that following the
Foundation Transaction, current FPA stockholders will own as little as 68.7%
of the outstanding FPA Common Stock (37.1% if the Merger is also consummated)
and uncertainties with respect to the integration of the acquired entities.
The FPA Board of Directors reviewed these adverse factors in their totality,
without focusing on any one individual factor. Moreover, the FPA Board of
Directors considered the management of the combined entity to be capable of
addressing and managing the integration of the businesses.
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Without giving relative weights to the respective factors, favorable and
adverse, and without drawing a correlation among the factors, the FPA Board of
Directors determined that the factors adverse to the Foundation Transaction
were not sufficiently so to negate the incentives for pursuing, and potential
benefits of, the Foundation Transaction.
Finally, the FPA Board of Directors' approval of the Foundation Transaction
was conditioned upon the subsequent receipt of an opinion from Oppenheimer
confirming its oral opinion that as of such opinion's date and subject to
certain assumptions and other matters, the Foundation Transaction was fair,
from a financial point of view, to FPA's stockholders. Oppenheimer's opinion
dated August 1, 1996 is attached as Appendix V to this Proxy
Statement/Prospectus. In arriving at its determination, the FPA Board of
Directors took Oppenheimer's opinion into consideration.
The FPA Board of Directors accordingly concluded in its subjective
collective judgment that, in light of the foregoing, the terms of the
Foundation Agreement are fair to and, therefore, in the best interests of FPA
and its stockholders notwithstanding the related risks. See "Background of the
Foundation Transaction" and "RISK FACTORS."
In view of the wide variety of factors considered in connection with the
evaluation of the Foundation Transaction, the FPA Board of Directors did not
attempt to quantify or otherwise assign relative weights to the specific
factors it considered in reaching its determination.
OPINION OF FPA'S FINANCIAL ADVISOR
FPA retained Oppenheimer to act as its financial advisor and to render an
opinion to the Board of Directors of FPA (the "Foundation Opinion") as to the
fairness, from a financial point of view, to the stockholders of FPA of the
consideration paid and to be paid (the "Acquisition Consideration") in (i) the
Foundation Transaction, consisting of the acquisition of all of the issued and
outstanding shares of FHMS by FPA California and all of the issued and
outstanding shares of Holding Company by FPA IPA or its designee pursuant to
the Foundation Agreement, (ii) the recently completed acquisition of all of
the issued and outstanding shares of Intergroup IPA, P.C. ("Arizona IPA") by
FPA Medical Group of Arizona, P.C. ("FPA Arizona"), an affiliated professional
corporation of FPA, pursuant to a Stock Purchase Agreement dated June 28, 1996
by and among FPA Arizona, Ross Henderson, M.D. and Foundation (the "Arizona
IPA Agreement") and (iii) the recently completed acquisition of all of the
issued and outstanding shares of FHC IPA, Inc. ("Florida IPA") by FPA
Acquisition Corporation ("FAC"), a wholly-owned subsidiary of FPA, pursuant to
a Stock Purchase Agreement dated June 28, 1996 by and among FAC, CareFlorida
Health Plan, Inc., Foundation Health, a South Florida Health Plan, Inc. and
Foundation (the "Florida IPA Agreement"). FPA selected Oppenheimer based on
its qualifications, expertise and familiarity with FPA.
The Foundation Transaction and the acquisitions of Arizona IPA and Florida
IPA are referred to collectively herein as the "Acquisitions." The Foundation
Companies, Arizona IPA and Florida IPA are referred to collectively herein as
the "Acquired Foundation Entities." The Foundation Agreement, the Arizona IPA
Agreement and the Florida IPA Agreement are referred to collectively herein as
the "Agreements."
In rendering the Foundation Opinion Oppenheimer treated the Acquisitions as
a single transaction.
Pursuant to the Agreements, as more fully described therein, the Acquisition
Consideration is expected to be comprised of: (1) $5 million in cash; (ii) $75
million in FPA Common Stock; (iii) $39 million in short term notes; (iv) up to
$92 million in seven year notes, (depending on liabilities incurred between
June 30, 1996 and the closing of the Foundation Transaction); and (v) $11
million in assumed liabilities. The number of shares of FPA Common Stock to be
issued to Foundation will be equal to (A) $75 million minus the amount of any
cash paid by FPA in lieu of FPA Common Stock to Foundation, divided by (B) the
average of the per share closing price of FPA Common Stock during the ten
trading days ending on the second trading day prior to the closing of the
Foundation Transaction (the "Foundation Closing") as reported on Nasdaq (the
"FPA/Foundation Price").
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In the event the FPA/Foundation Price is less than $13.60, FPA may in its sole
discretion terminate the Foundation Agreement; provided that Foundation may
cause the transaction to proceed by accepting a number of shares of FPA Common
Stock equal to $75 million divided by $13.60.
The purchase price will be adjusted at closing to include the pre-tax losses
incurred in the third quarter of 1996 by FHMS and the Medical Groups (which
will be funded by increased indebtedness to Foundation and assumed by FPA
under the Agreement). Such amounts have been estimated to be $9 million and
will be added to the purchase price and funded through an increase in the
seven year note described in (iv) above. As part of the Agreement, the
Acquired Foundation Entities will receive from Foundation and its affiliates
$55 million as compensation for insuring continued and uninterrupted access to
the professionals practicing within the Acquired Foundation Entities,
commencing in the third quarter of 1996 and ending in the fourth quarter of
1998 (the "Guaranteed Access Payments").
In performing its valuation analyses of the Acquired Foundation Entities,
Oppenheimer made adjustments to the Acquisition Consideration that is deemed
appropriate in the context of its valuation analyses. Such adjustments were
performed solely for the purposes of Oppenheimer's analyses and not for any
other purpose. These adjustments, aggregating to a $15.0 million reduction in
the Acquisition Consideration, included: (i) a reduction of $6.0 million to
reflect the cash expected to be held by the Acquired Foundation Entities at
closing; (ii) an increase of $9.0 million to reflect the estimated September
quarter pre-tax loss of the Acquired Foundation Entities (excluding the
Arizona IPA and the Florida IPA) to be assumed by FPA; and (iii) reductions
based upon the terms of the Acquisition relative to FPA's current borrowing
opportunities and the issuance by other public companies of non-registered
common stock. Oppenheimer noted that the interest rate to be paid by FPA on
the seven year notes is LIBOR plus 0.45%, significantly below the rate of
LIBOR plus 2.50% historically paid by FPA on its bank debt which will be
senior to the seven year notes, and concluded that the market rate of interest
FPA would pay on comparable debt would be approximately LIBOR plus 2.75%. In
addition, Oppenheimer reviewed the discounts from market values at which
selected health care industry private placement in public equity ("PIPEs")
were completed between January 1, 1993 and December 31, 1995, since stock
issued in PIPEs is usually unregistered but accorded registration rights
exercisable within 180 days of the sale. Discounts of the offering prices
ranged between 2.1% and 54.4%, with an average of 19.7%, as compared to the
price one day prior to the sale, and between -0.1% and 44.1%, with an average
of 16.7%, as compared to the average trading price ten days prior to the sale.
The average placement size of the PIPEs analyzed was $11.8 million.
Oppenheimer concluded, based on this information and the significantly greater
amount of unregistered FPA Common Stock being issued in the Foundation
Transaction, that a discount of 15% from the fair market value was appropriate
in performing its valuation analyses.
Oppenheimer has delivered the Foundation Opinion, dated August 1, 1996, to
the FPA Board of Directors to the effect that, subject to the various
considerations set forth in such opinion, as of such date, the Acquisition
Consideration was fair, from a financial point of view, to the stockholders of
FPA. Oppenheimer did not recommend to FPA that any specific amount of
consideration constituted the appropriate consideration for the Acquisitions.
The Acquisition Consideration was established by the parties to the
Acquisitions. No limitations were imposed by the FPA Board of Directors on
Oppenheimer with respect to the investigations made or procedures followed by
it in rendering the Foundation Opinion. The Foundation Opinion addresses only
the fairness, from a financial point of view, of the Acquisition Consideration
to be paid by FPA, and does not constitute a recommendation to any FPA
stockholder as to how such stockholder should vote at the FPA Special Meeting.
THE SUMMARY OF THE FOUNDATION OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE FOUNDATION OPINION ATTACHED HERETO AS APPENDIX V. FPA'S
STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE FOUNDATION OPINION CAREFULLY
IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT/PROSPECTUS FOR THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS OF THE
REVIEW BY OPPENHEIMER.
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As set forth in the Foundation Opinion, Oppenheimer relied upon and assumed
the accuracy and completeness of all of the financial and other information
available to it from public sources and provided to it by the managements of
FPA, Foundation and the Acquired Foundation Entities and their respective
representatives. FPA provided Oppenheimer with financial projections for FPA
and for the Acquired Foundation Entities, as well as projected cost savings to
be achieved at the Acquired Foundation Entities from the implementation of
previously identified cost reduction plans and increased revenues resulting
from negotiated agreements with Foundation and the increased likelihood of
negotiating new Payor contracts as a result of being unaffiliated with any
particular HMO. Oppenheimer assumed that all such projections, including and
without limitation the projected cost savings and increased revenues, were
reasonably prepared on bases reflecting the best available information,
estimates and judgment of the management of FPA. The financial projections
provided by FPA were primarily based on assumed revenue and profit growth
rates for its existing business, with the majority of FPA's estimated growth
derived through addition of physicians, Payor contracts and enrollees to the
FPA Network. The projections provided by FPA management for the Acquired
Foundation Entities assume the successful implementation of ongoing cost
reduction plans, the addition of members to the Medical Groups through
Foundation and through new Payor contracts, and the receipt of the Guaranteed
Access Payments. In arriving at its opinion, Oppenheimer neither made nor
obtained any independent valuation or appraisal of the assets or liabilities
of FPA or the Acquired Foundation Entities.
Oppenheimer also assumed the accuracy of the advice and conclusions of FPA's
legal counsel and accountants with respect to tax and accounting matters as
provided to Oppenheimer by FPA's management, including, without limitation,
that: (i) valid elections will be made with respect to the acquisition of each
of the Acquired Foundation Entities under (S)338(h)(10) of the Code; (ii) for
financial accounting purposes, FPA will be treated as a lessee of all real
estate leased by the Acquired Foundation Entities; and (iii) for financial
accounting purposes, Guaranteed Access Payments will be recognized as revenue
when earned by FPA. The Foundation Opinion is based upon Oppenheimer's
analyses of certain factors in light of its assessment of general economic,
financial and market conditions that could be evaluated by it as of the date
of the Foundation Opinion. In all cases, historical results were adjusted for
extraordinary items and other non-recurring or non-operating charges.
In rendering the Foundation Opinion, Oppenheimer, among other things: (i)
reviewed the Agreements; (ii) reviewed FPA's annual reports to stockholders
and its annual reports on Form 10-K for fiscal years ended December 31, 1994
and 1995 and its quarterly report on Form 10-Q for the three months ended
March 31, 1996; (iii) reviewed the unaudited financial statements of FHMG,
TDMC and FHMS for the fiscal year ended June 30, 1996 and the month ended June
30, 1996; (iv) reviewed the Certificate of Incorporation of FPA; (v) reviewed
the financial projections for FPA prepared by FPA's management for the six
months ending December 31, 1996 and the years ending December 31, 1997 and
1998; (vi) reviewed the financial projections for the Acquired Foundation
Entities prepared by FPA's management based, in part, upon projections
previously prepared by Foundation management (other than for purposes of the
Acquisitions) for the six months ending December 31, 1996 and the years ending
December 31, 1997 through December 31, 2000; (vii) held discussions with the
senior managements of FPA and Foundation to review historical and current
operations and financial conditions, with the senior management of FPA to
review projections and strategies of FPA and the Acquired Foundation Entities
and with the senior management of Foundation to review the assumptions
utilized by FPA management in the preparation of financial projections for the
Acquired Foundation Entities; (viii) reviewed current and historical market
prices and trading data of the FPA Common Stock; (ix) reviewed financial and
market data for certain public companies Oppenheimer deemed comparable to FPA
and the Acquired Foundation Entities; (x) reviewed and analyzed recent mergers
and acquisitions of companies in lines of business Oppenheimer deemed
comparable to the Acquired Foundation Entities; (xi) analyzed the financial
impact of the Acquisitions on the combined company, including the pro forma
earnings per share; (xii) prepared a discounted cash flow valuation of FPA and
the Acquired Foundation Entities; (xiii) reviewed the impact of the Sterling
Merger on the Acquisitions; and (xiv) performed such other analyses and
reviewed such other documents and information as Oppenheimer deemed
appropriate.
Valuation of the Acquired Foundation Entities. Oppenheimer performed three
primary valuation analyses of the Acquired Foundation Entities: (i) a
comparison of the Acquired Foundation Entities with certain publicly
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traded companies in the physician practice management industry (the "PPM
Companies") which analysis consisted of reviewing and considering certain
financial and market data for the PPM Companies (the "Foundation Comparable
Companies Analysis"); (ii) a discounted cash flow analysis which consisted of
adding the discounted present value of the projected future cash flows of the
Acquired Foundation Entities from July 1, 1996 to December 31, 2000 and the
discounted present value of the terminal value of the Acquired Foundation
Entities, based on a multiple of the net income projected for the fiscal year
ending December 31, 2000 (the "Foundation Discounted Cash Flow Analysis"); and
(iii) a comparison of consideration paid in certain merger and acquisition
transactions involving companies in the physician practice management
industry.
Foundation Comparable Companies Analysis. Oppenheimer analyzed 17 PPM
Companies to evaluate the market values at which these companies trade
relative to their respective historical and projected financial performance.
The PPM Companies in the Foundation Comparable Companies Analysis consisted of
the following companies that focus on the primary care, single-specialty and
multi-specialty segments of the physician market: AHI Healthcare Systems,
Inc., American Oncology Resources, Inc., Apogee, Inc., Caremark International,
Inc., EquiMed, Inc., MedPartners/Mullikin, Inc., OccuSystems, Inc.,
Orthodontic Centers of America, Inc., Pediatric Services of America, Inc.,
Pediatrix Medical Group, Inc., PHP Healthcare Corporation, PhyCor, Inc.,
PhyMatrix Corp., Physician Reliance Network, Inc., Physician Resource Group,
Inc., Sheridan Healthcare, Inc. and United Dental Care, Inc. Oppenheimer
analyzed, among other things, the market values and certain financial criteria
for the PPM Companies, including their revenue, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), earnings before interest and
taxes ("EBIT") and earnings per share, in each case, for the most recent
twelve-month periods for which financial data was available ("LTM") and on an
estimated basis for 1996 and 1997. Such estimates for revenues, EBITDA and
EBIT for the PPM Companies were derived from publicly available research
reports published by a variety of investment firms and research analysts.
Oppenheimer chose the research reports for each PPM Company based upon the
experience and reputation of the investment firms and research analysts and
the date of such reports. Oppenheimer utilized its own research reports for
MedPartners/Mullikin, Inc. and PhyCor, Inc. Such estimates for earnings per
share for the PPM Companies were based on information provided by FIRST CALL
Research.
Because the operations of FHMS and the Medical Groups have historically
experienced operating losses, and significant cost reductions and revenue
synergies are expected to be realized in the future, Oppenheimer based the
derived valuations on projected 1997 results. The low, high and mean values,
respectively, for Aggregate Value (market value of common equity on August 1,
1996 plus total debt and preferred stock less cash) as a multiple of each of
the indicated statistics for the PPM Companies were as follows: (a) 1997
revenue: 0.5x, 5.9x and 1.7x; (b) 1997 EBITDA: 3.3x, 18.7x and 11.0x; and (c)
1997 EBIT: 3.7x, 20.4x and 13.1x. The low, high and mean market values of
common equity on August 1, 1996 as a multiple of 1997 earnings per share for
the PPM Companies were 11.5x, 39.9x and 24.2x, respectively.
Applying these results to the Foundation Projections yielded implied market
values for the Acquired Foundation Entities ranging from $221.0 million to
$470.4 million, with an average of $341.2 million. As with its Opinion issued
in connection with the Sterling Merger described on page 54 above, Oppenheimer
considered the impact of applying a 30% premium to the intrinsic value of the
Acquired Foundation Entities derived in the Foundation Comparable Companies
Analysis to incorporate typical premiums paid for the acquisition of non-
financial public companies with market values ranging from $100.0 million to
$300.0 million. Applying an acquisition premium of approximately 30% to the
implied per share valuations described above based on the Foundation
Projections yielded a range of values for the Acquired Foundation Entities of
$287.3 million to $611.5 million, with an average of $443.5 million.
Oppenheimer compared these implied market values to $193.0 million, the
adjusted Acquisition Consideration for the Acquired Foundation Entities.
The Foundation Discounted Cash Flow Analysis. Oppenheimer performed a
discounted cash flow analysis whereby an intrinsic value of the Acquired
Foundation Entities was determined by calculating the present value as of
October 1, 1996 of the Acquired Foundation Entities' estimated future cash
flows from July 1, 1996 to December 31, 2000, and adding to such amount the
present value as of October 1, 1996 of the Acquired
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Foundation Entities' terminal value obtained by capitalizing the Acquired
Foundation Entities' projected net income for the year ending December 31,
2000 at multiples of 18.0x, 20.0x and 22.0x. As with its Opinion issued in
connection with the Sterling Merger, the range of these terminal value
multiples was based on a range of net income multiples at which HMOs have
traded over the past three years, as Oppenheimer believed that physician
practice management companies would experience growth and consolidation trends
similar to those experienced by the HMO industry. Oppenheimer confirmed with
FPA management that this range of multiples was typically applied by FPA
management when evaluating acquisition opportunities in the physician practice
management industry. Oppenheimer also believed that the range for terminal
value multiples it used was conservative relative to the mean market values of
common equity for the PPM Companies on August 1, 1996 as a multiple of LTM
earnings per share (41.9x).
Oppenheimer applied discount rates of 11.5%, 14.5% and 17.5% to calculate
the intrinsic value of the Acquired Foundation Entities' estimated future cash
flows from July 1, 1996 to December 31, 2000 and the terminal value calculated
based on a multiple of the Acquired Foundation Entities' 2000 projected net
income. This range of discount rates reflects the weighted average cost of
capital assumed to be used by FPA to acquire the Acquired Foundation Entities:
$89 million of long-term debt at 6.25% and $130 million at 15%, 20% and 25%,
which reflects the equity cost of capital assumed in valuing FPA (as noted
under the caption, "FPA Discounted Cash Flow Valuation" below).
The range of intrinsic values derived for the Acquired Foundation Entities
using this discounted cash flow was $202.1 million to $281.7 million, with a
midpoint value of $238.5 million. Oppenheimer compared these intrinsic values
to $193.0 million, the adjusted Acquisition Consideration for the Acquired
Foundation Entities.
Merger and Acquisition Transaction Analysis. Oppenheimer reviewed the
consideration paid in certain merger and acquisition transactions involving
physician practice management companies. Because significant premiums are
placed on opportunities to acquire significant market share in a single
transaction, Oppenheimer included only transactions that were comparable in
size to the Acquisitions and for which meaningful financial and membership
data were publicly available. The comparable transactions consisted of the
following acquisitions: Mullikin Medical Enterprises, L.P. by MedPartners,
Inc.; Pacific Physicians Services, Inc. by MedPartners/Mullikin, Inc. and
certain assets of Coastal Physician Group, Inc. by Humana Inc.
Since the Acquired Foundation Entities have historically experienced
operating losses, Oppenheimer considered only multiples of managed care
members acquired and of revenues in the comparable transactions. In applying
the multiples derived from this analysis, Oppenheimer adjusted the trailing
twelve month ("TTM") revenues of the Acquired Foundation Entities to reflect
the following contractual adjustments: (i) $16 million of shared risk revenues
which were not reflected in the Acquired Foundation Entities' historical
income statements; and (ii) the $1.4 million annual payment that Foundation is
obligated to pay FPA for as long as FPA services Foundation's HMO members. In
addition, Oppenheimer increased TTM revenues by the pro forma revenues of the
Florida and Arizona IPAs which were not included in the historical income
statements provided by Foundation.
Oppenheimer calculated multiples for each transaction based on the ratio of
the offer price including total debt and preferred stock less cash ("Purchase
Aggregate Value") to such acquired companies' pre-acquisition managed care
members and TTM revenue. The average and median Purchase Aggregate Value
multiples of each of the indicated statistics for the comparable transactions
were as follows: (a) per managed care member acquired: $945 and $1,059,
respectively; and (b) TTM revenue: 0.7x and 0.8x, respectively. Applying the
average and median multiples to the Acquired Foundation Entities' TTM revenues
and managed care members acquired yielded derived values of the Acquired
Foundation Entities of $143.1 million to $286.9 million, with an average of
$212.9 million. Increasing these values to reflect the net present value of
the Guaranteed Access Payments, discounted at 20% per annum, yielded values
from $170.6 million to $314.4 million with an average of $240.4 million.
Oppenheimer compared these derived values to $193.0 million, the adjusted
Acquisition Consideration for the Acquired Foundation Entities.
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Valuation of FPA. In consideration of the fact that the Acquisitions require
the issuance of FPA's Common Stock, Oppenheimer conducted a variety of
analyses to determine that the range of potential market values of the FPA
Common Stock to be issued in connection with the Acquisitions appropriately
reflects the stock's intrinsic value.
The FPA Stock Analysis. Oppenheimer reviewed current and historical market
closing prices and trading data of FPA's Common Stock since the initial public
offering of such stock in October 1994. Oppenheimer noted that during the
period from FPA's initial public offering to August 1, 1996, FPA's Common
Stock traded at prices as high as $20 1/8 and as low as $5 1/8 per share.
During the twelve months ended August 1, 1996, FPA's Common Stock traded at
prices as high as $20 1/8 and as low as $5 7/8. Oppenheimer compared these
prices to $19.75, the closing price of FPA Common Stock on August 1, 1996, and
$13.60, the minimum price for the FPA Common Stock implied by the Agreements.
FPA Comparable Companies Analysis. Oppenheimer compared FPA to the PPM
Companies used in the Foundation Comparable Companies Analysis noted above.
Applying the multiples at which the PPM Companies trade to the FPA projections
for the fiscal year ending December 31, 1997, yielded implied market values
ranging from $183.3 million ($13.48 per share) to $565.9 million ($41.61 per
share), with an average of $273.3 million ($20.10 per share). Oppenheimer
compared these implied market values to $19.75, the closing price of FPA
Common Stock on August 1, 1996, and $13.60, the minimum price for the FPA
Common Stock implied by the Agreements.
FPA Discounted Cash Flow Analysis. Oppenheimer derived an intrinsic
valuation of FPA's equity based on a discounted cash flow analysis similar to
the approach used to value the Acquired Foundation Entities. In consideration
of FPA's estimated weighted average cost of capital, high growth estimates
reflected in FPA's financial projections and the need for FPA to improve its
current operating margins to attain such projections, Oppenheimer used a range
of discount rates of 15% to 25% to calculate the present value of FPA's
projected cash flows from July 1, 1996 to December 31, 1998 and the terminal
value calculated based on a multiple of FPA's 1998 projected net income.
Oppenheimer used terminal value multiples of 18.0x, 20.0x and 22.0x estimated
1998 net income. This valuation methodology produced a per share value for FPA
Common Stock ranging from $129.0 million ($10.08 per share) to $210.9 million
($16.48 per share), with midpoint of $166.4 million ($13.00 per share).
Oppenheimer compared these intrinsic values to $19.75, the closing price of
FPA Common Stock on August 1, 1996, and $13.60, the minimum price for the FPA
Common Stock implied by the Agreements.
Accretion/Dilution Analysis. Oppenheimer reviewed the impact of the
Acquisitions on FPA's financial projections, assuming the cost savings and
revenue synergies noted above. Based upon the projections for FPA and the
Acquired Foundation Entities provided by FPA management, Oppenheimer concluded
that the transaction should be accretive to the earnings per share in the
quarters ending September 30, 1996 and December 31, 1996 and in fiscal 1997
and 1998, for the range of FPA Common Stock prices between $13.30 and $20.00.
As an ancillary analysis, Oppenheimer compared the projected earnings per
share of FPA to the earnings per share of the combined company comprised of
FPA, Sterling and the Acquired Foundation Entities. This analysis included the
impact of revenue synergies and cost savings projected by the managements of
FPA and Sterling, consisting of revenue synergies of $10.0 million and $30.5
million for the years ending December 31, 1997 and 1998, respectively, and
cost savings of $1.5 million for each of the years ending December 31, 1997
and 1998. Based on the projections for FPA, Sterling and the Acquired
Foundation Entities provided by FPA management, Oppenheimer concluded that the
combination of the Sterling Merger and Acquisitions should be accretive to the
earnings per share of FPA in the quarters ending September 30, 1996 and
December 31, 1996 and in fiscal 1997 and 1998, for the range of FPA Common
Stock prices between $13.30 and $20.00. In addition, Oppenheimer compared the
projected earnings per share of FPA and Sterling (assuming the Sterling Merger
had already closed) to the earnings per share of the combined company
comprised of FPA, Sterling and the Acquired
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Foundation Entities. As in the other analyses, Oppenheimer concluded that the
combination of the Sterling Merger and Acquisitions should be accretive to pro
forma combined earnings per share of FPA and Sterling in the quarters ending
September 30, 1996 and December 31, 1996 and in fiscal 1997 and 1998, for the
range of FPA Common Stock prices between $13.30 and $20.00.
The foregoing summary does not purport to be a complete description of the
analyses performed by Oppenheimer. A fairness opinion is the product of a
complex process and cannot necessarily be partially analyzed or readily
summarized. Examining portions of the analyses summarized above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the Foundation Opinion. In arriving at its opinion,
Oppenheimer did not attribute any particular weight to any analysis or fact
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. The analyses were prepared by
Oppenheimer solely for purposes of providing its opinion as to the fairness of
theAcquisition Consideration, from a financial point of view, to the
stockholders of FPA. Analyses based upon projections of future results are
inherently subject to substantial uncertainties and are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by any analysis. Additionally, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
prices at which businesses may actually be sold or combined. Accordingly,
Oppenheimer expressed no opinion as to what the value of FPA Common Stock
actually will be subsequent to the Acquisitions. As described above,
Oppenheimer's Opinion and presentation to FPA's Board of Directors was one of
many factors taken into consideration by FPA's Board of Directors in making
its determination to approve the Acquisitions.
Oppenheimer is a nationally recognized investment banking firm. As part of
its investment banking services, it is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions and for
other purposes.
Oppenheimer serves as a market maker for the FPA Common Stock. In the
ordinary course of its business, Oppenheimer may actively trade the securities
of FPA for its own account or for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Oppenheimer has also provided investment banking services to FPA, including
acting as underwriter in the Company's public offerings of common stock. In
connection with the public offerings of FPA, Oppenheimer has received
approximately $693,000. Oppenheimer also provides equity research coverage of
FPA.
FPA has agreed to pay Oppenheimer a fee of $325,000 for rendering its
opinion in connection with the Acquisitions, payable at the time it delivered
its fairness opinion to the Board of Directors. FPA has also agreed to
reimburse Oppenheimer for its reasonable out-of-pocket expenses (including
fees of its counsel), subject to certain adjustments, and to indemnify
Oppenheimer and certain related persons against certain potential liabilities
in connection with the engagement of Oppenheimer, including certain potential
liabilities under the federal securities laws.
ANTICIPATED ACCOUNTING TREATMENT
The Foundation Transaction will be accounted for using the purchase method
of accounting.
CERTAIN REGULATORY MATTERS
No federal or state regulatory requirements remain to be complied with in
connection with the Foundation Transaction, except for certain required
notifications and closing and post-closing filings.
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THE FOUNDATION COMPANIES
BUSINESS
FHMS. FHMS provides facilities management, non-physician healthcare
professionals and other administrative and management services to the Medical
Groups. These services include the lease of the care centers and other
facilities for the operation of the Medical Groups, the provision of all
building services reasonably necessary for the proper operation of the leased
facilities, the provision of equipment, furniture and furnishings, repair and
maintenance of the facilities and, other than physicians and allied health
professionals, all personnel reasonably necessary for the proper and efficient
operation of the Medical Groups. The personnel services include clerical and
administrative support, payroll, bookkeeping and accounting services, pension
plan and employee benefits administration, financial and management reports,
marketing and public relations services, management information services and
review of managed care agreements. The Medical Groups are responsible for the
operation of the medical practice at each of the facilities, appropriate
physician and allied health professionals staffing, physician compensation,
quality assurance and utilization management services, credentialing and peer
review and community medical education. FHMS and the Medical Groups have
created a Joint Policy Committee which is responsible for developing
management and administrative policies for the Medical Groups.
Holding Company. Holding Company is the parent of FHMG and TDMC.
FHMG. FHMG began operations in spring 1993 to increase the availability of
primary care physicians for Foundation's members and to enhance members'
access to such physicians at specific locations throughout California.
Foundation was interested in establishing care centers where Foundation had
concentrated membership, particularly in the Sacramento area of Northern
California. FHMG was created through acquisition of multiple small physician
practices primarily in the Sacramento and Stockton areas of Northern
California and in the Oxnard and Ventura areas of Southern California. FHMG
has developed a reputation as a high quality primary care medical group in
these areas.
As of June 30, 1996, FHMG's 94 physicians and 16 nurse practitioners,
paraprofessionals and physician assistants offer primary care. Most of the
HMO's enrollees linked to FHMG providers receive specialist services through
discounted fee-for-service or capitated arrangements with specialty providers.
FHMG currently has capitated contracts with ancillary care providers in the
areas of laboratory, physical therapy, and radiology.
TDMC. TDMC was established in November 1994 concurrent with Foundation's
acquisition of Intergroup Healthcare Corporation, an Arizona based HMO
("Intergroup"). Headquartered in Tucson, Arizona TDMC provides high quality
primary and specialist health care services through a multi-specialty team
approach primarily in Tucson (Pima County) and Phoenix (Maricopa County),
Arizona's two major metropolitan areas. TDMC currently employs 217 providers
and seven paraprofessionals at 18 care centers throughout Arizona.
Of TDMC's 217 providers, approximately 60% offer primary care and 40%
provide specialty care. Patients are referred to specialists in areas such as
allergy, anesthesiology, dermatology, ear/nose/throat, hematology, oncology,
neurology, ophthalmology, orthopedics, pulmonology, radiology, and urology.
Fully-capitated members accounted for approximately 80% of TDMC's revenues for
the year ended June 30, 1996. All TDMC facilities provide both fee-for-service
medical care and pre-paid health care services.
TDMC has implemented a system of medical utilization review headed by a
full-time Medical Director, who is supported by on-site Medical Directors,
Utilization Management Nurses and a computerized system for referral
authorization. In addition, in-hospital Nurse Case Managers work with the
regional Medical Directors on discharge planning.
FACILITIES
FHMS provides to FHMG and TDMC an aggregate of 35 medical facilities, one
surgical center and one administrative office building. Of these, 13 in
California and five in Arizona are owned by FHMS or its affiliates
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or a grantor trust related to Foundation's tax retention operating lease
financing which trust leases certain care centers to FHMS. The remaining
properties are leased from non-affiliated third parties. All of the facilities
in California are new or recently remodeled. The medical centers are equipped
with the appropriate medical equipment to provide required health care
services to patients.
PAYOR AND PROVIDER CONTRACTS AND PHYSICIAN COMPENSATION
Payor Contracts. The Medical Groups provide primary care, specialty care and
pharmaceutical services to members of various health plans including
Foundation's HMOs, PPOs and indemnity patients. They derive most of their
revenues through capitated contracts with affiliated HMOs which obligate them
to provide primary, specialty and ancillary care services to the HMO's
members. The Medical Groups also generate revenues from hospital and other
risk sharing pools and from fee-for-service patients. The Medical Groups
provide certain of these services themselves and contract for the remainder
with various other providers. Payors generally provide claims processing,
product marketing and advertising, and other administrative services.
Provider Contracts. The Medical Groups' payor contracts typically require
the Medical Groups to provide all of the physician and ancillary health care
services. If a Medical Group does not have the expertise among its employed
physicians, it contracts with providers outside the group to provide the
required medical services to the Medical Groups' patients. Typically, these
services are rendered on a discounted fee-for-service basis. However, some
providers have capitation agreements that pay a fixed monthly payment for each
HMO member linked to that provider. Existing capitation arrangements exist for
laboratory, physical therapy and radiology services.
Physician Compensation. The employed physicians of the Medical Groups
generally are paid a salary plus an incentive bonus pursuant to standard
employment agreements. The amount of the bonus is based on factors related to
patient satisfaction, productivity, medical management, utilization management
and number of linked lives to Foundation or other payor plans.
COMPETITION
The health care industry is highly competitive and is subject to continuing
changes in how services are provided and how providers are selected and paid.
Generally, the Medical Groups compete with entities that contract with payors
for the provision of prepaid health services (including, but not limited to
medical groups, independent physician associations, independent private
physicians and physician-hospital organizations) and with hospitals and payors
which own or operate health care delivery systems. FHMS competes with other
companies including entities such as management service organizations which
provide management services to health care providers. Such competitors may
include local, regional and national entities.
INSURANCE
The Medical Groups and all physicians employed by the Medical Groups have
medical/legal insurance coverage through a Foundation-affiliated insurance
company and various excess insurers through the Farmers/Lloyds Excess Program.
Current policy limits are $2,000,000 per claim with no aggregate and no
deductibles. The policies are claims made. In connection with the Foundation
Transaction, Foundation's affiliated insurance company will continue to
provide professional liability insurance coverage to the physicians employed
by the Medical Groups for periods prior to the Foundation Closing.
LEGAL PROCEEDINGS
FHMS and the Medical Groups are party to certain legal actions arising in
the ordinary course of business, generally related to professional liability
issues or employment related issues. In the opinion of the management of these
companies, based in part on consultation with legal counsel, the liability, if
any, under these claims is either adequately covered by insurance or will not
have a material adverse effect on the companies' financial position.
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BUSINESS AND FINANCIAL INFORMATION REGARDING FHMS, FHMG AND TDMC
SELECTED FINANCIAL DATA
The following selected financial data of FHMS, FHMG and TDMC (collectively
the "Combined Companies") has been derived from the Combined Companies'
unaudited balance sheet as of June 30, 1994 and the audited financial
statements as of June 30, 1995 and 1996 and for the years ended June 30, 1994,
1995 and 1996. The following data should be read in conjunction with the
Combined Financial Statements of the Combined Companies, the related notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Combined Companies included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Capitated revenue-related party.... $ 82,777,000 $ 80,281,000 $119,639,000
Patient service revenue, net....... 24,992,000 34,782,000 24,639,000
Other income....................... 2,934,000 3,233,000 9,484,000
------------ ------------ ------------
Total revenues................... 110,703,000 118,296,000 153,762,000
------------ ------------ ------------
Expenses:
Salaries and benefits.............. 72,800,000 97,147,000 114,076,000
Health care services............... 22,770,000 22,793,000 54,249,000
Selling, general and administra-
tive.............................. 22,925,000 32,564,000 46,492,000
Depreciation and amortization...... 3,373,000 6,393,000 9,179,000
Interest expense................... 2,895,000 7,426,000 10,379,000
Other expense...................... 921,000 1,680,000 --
------------ ------------ ------------
Total expenses................... 125,684,000 168,003,000 234,375,000
------------ ------------ ------------
Loss from operations................. (14,981,000) (49,707,000) (80,613,000)
Benefit for income taxes............. 3,786,000 4,366,000 48,357,000
------------ ------------ ------------
Net loss............................. $(11,195,000) $(45,341,000) $(32,256,000)
============ ============ ============
BALANCE SHEET DATA: (unaudited)
Current assets....................... $ 27,347,000 $ 14,192,000 $ 8,937,000
Current liabilities.................. 64,918,000 169,001,000 190,362,000
Total assets......................... 94,624,000 136,122,000 118,579,000
Long-term obligations................ 32,846,000 16,460,000 9,812,000
Shareholder's deficit................ (3,140,000) (49,339,000) (81,595,000)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FHMS, FHMG AND TDMC
The following discussion of the results of operations and financial
condition of the Combined Companies should be read in conjunction with the
Combined Financial Statements and notes thereto included elsewhere in this
Proxy Statement/Prospectus.
RESULTS OF OPERATIONS OF THE COMBINED COMPANIES
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995.
Total revenues increased 30.0% or $35,466,000 to $153,762,000 for the year
ended June 30, 1996 from $118,296,000 for the year ended June 30, 1995. This
increase is due primarily to the acquisition of Tucson Medical Associates in
August 1995 and as a result of renegotiation of the provider agreement with
Foundation
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Health, a California Health Plan ("Health Plan") and an increase in patients
served. This new agreement provides for a fixed payment per member per month
for all primary and specialty professional medical services rendered for HMO
members linked to FHMG. Previously, FHMG received reimbursement for primary
care services under a fee for service agreement. Patient fee-for-service
revenue decreased by 29.2%% or $10,143,000 as a result of the conversion of
the Health Plan members from fee-for-service to capitation based contracts.
Other income increased by $6,251,000 to $9,484,000 for the year ended June 30,
1996 primarily as a result of selling the laboratory and physical therapy
departments of TDMC to an unrelated third party.
Salaries and employee benefits increased 17.4% to $114,076,000 for the year
ended June 30, 1996 compared to $97,147,000 in the prior year, due to the
addition of salaried providers and related support staff. These additions
included the acquisition of Tucson Medical Associates which had 25 salaried
providers and approximately 100 support staff.
Health care services are costs incurred to provide care to HMO members under
its capitated contract. These services are in the form of referral fees to
providers outside of the Combined Companies. Health care services increased
138.0% to $54,249,000 for the year ended June 30, 1996 from $22,793,000 in the
prior year. The increase is due to patient volume growth and a new FHMG
capitation contract. Prior to 1996 FHMG did not have a capitation contract and
therefore was not responsible for specialist costs referred outside of the
Medical Group.
Selling, general and administrative expenses, including administrative--
related party expenses, represent various operating costs incurred to provide
medical care to patients. These costs include occupancy, medical supplies,
insurance, telephone service, and other operating expenses. Selling, general
and administrative expenses increased 42.8% to $46,492,000 for the year ended
June 30, 1996 from $32,564,000 for the prior year. This increase was the
result of expanded operations of the Combined Companies.
Depreciation and amortization expense increased 43.6% or $2,786,000 to
$9,179,000 for the year ended June 30, 1996 as compared with the year ended
June 30, 1995 primarily as a result of the addition of several new care
centers in California.
Interest expense, including related party interest expense, increased 39.8%
to $10,379,000 for the year ended June 30, 1996 from $7,426,000 for the
previous year due to the increased borrowings to fund the development of new
care centers and to fund the operating needs of the Combined Companies.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
The combined statement of operations for the year ended June 30, 1994
includes the financial results of the predecessor company of TDMC for the year
ended December 31, 1993 as discussed in Note 2 to the combined financial
statements elsewhere in this Proxy Statement/Prospectus. Total revenue
increased 6.9% to $118,296,000 for the year ended June 30, 1995 from
$110,703,000 in the prior year. The increase is primarily a result of an
increase in the overall patient volume. FHMG increased the number of care
centers it operates to 16 in 1995 from 4 in 1994. Capitation revenue decreased
3.0% or $2,496,000 as a result of Intergroup Prepaid Health Services of
Arizona, Inc. requiring all of its contracting physician groups to reduce
capitation rates by 30% beginning January 1995. Patient service revenue
increased 39.2% or $9,790,000 due to increased patient volume.
Salaries and benefits increased 33.4% to $97,147,000 for the year ended June
30, 1995 compared to $72,800,000 in the prior year as a result of adding
provider employees and the related support staff.
Health care services did not change significantly from the prior year. This
is consistent with changes in capitated revenue. Health Care Services were
$22,793,000 at June 30, 1995 and $22,770,000 for the prior year.
Selling, general and administrative costs increased 42.0% to $32,564,000 for
the year ended June 30, 1995 compared to $22,925,000 the prior year due to
expansion of the Care Centers in California. During 1995 FHMG increased the
number of Care Centers it operates by 300% over 1994.
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Depreciation and amortization expense increased 89.5% to $6,393,000 for the
year ended June 30, 1995 from $3,373,000 in the previous year. This increase
reflects the accompanying increase in property and equipment and intangible
assets related to the Combined Companies' expansion. Such balances increased
to $109,985,000 and $9,135,000 respectively at June 30, 1995.
Interest expense increased to $7,426,000 for the year ended June 30, 1995
from $2,895,000 in the previous year. This relates to the funds that were
borrowed to fund the development of the care centers and the operating costs
of the Combined Companies.
LIQUIDITY AND CAPITAL RESOURCES
The Combined Companies have experienced net losses since their inception.
Their growth and expansion have been financed from borrowings under a line of
credit with FHC. Outstanding borrowings under the revolving line of credit
were $129,251,000 and $133,036,000 as of June 30, 1995 and 1996. Borrowings
were reduced by $48,357,000 during the year ended June 30, 1996 as a result of
the recognition of the tax benefits generated by the Medical Groups and
otherwise would have been $181,393,000.
Net cash flows during the year ended June 30, 1996 resulted in a decrease in
cash and cash equivalents to $-0- at June 30, 1996 from $1,566,000 at June 30,
1995. Cash used for operating activities during the year ended June 30, 1996
totaled $56,825,000, resulting primarily from net losses and partially offset
by an increase in accounts payable and reserves for claims payable. Cash
provided for financing activities during the year ended June 30, 1996 totaled
$76,641,000 resulting primarily from an increase in notes payable of
$80,984,000. Cash used by investing activities for the year ended June 30,
1996 was $21,382,000 comprised primarily of $5,384,000 in proceeds from the
sale of property and equipment offset by an increase of $3,108,000 in
intangible assets and $27,734,000 for the acquisition of property and
equipment.
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THE FOUNDATION AGREEMENT
Set forth below is a summary of the material terms of the Foundation
Agreement. The following description does not purport to be complete and is
qualified in its entirety by reference to the Foundation Agreement, a copy of
which is attached as Appendix IV to this Proxy Statement/Prospectus and is
incorporated by reference herein.
CONDITIONS TO THE FOUNDATION TRANSACTION
The respective obligations of each party to effect the Foundation
Transaction are subject to the fulfillment at or prior to the Foundation
Closing of customary conditions to closing such as the truth of
representations and warranties; the absence of litigation or any material
adverse change; delivery of certificates, corporate documents and legal
opinions; and the receipt of necessary consents and approvals; as well as the
following additional conditions:
Registration Rights Agreement. FPA and Foundation shall have entered into a
Registration Rights Agreement regarding the shares of FPA Common Stock issued
to Foundation in the Foundation Transaction.
Master Lease Assignment. FPA, FPA California and the designated "Assignors"
thereunder shall have entered into a Master Lease Agreement.
Transition Agreement. FPA, FPA California and Foundation shall have entered
into a Transition Agreement.
Other Agreements. Certain other agreements shall have been executed,
including Professional Group Provider Agreements, Releases, Pledge Agreements
and Security Agreements relating to the arrangements described under "THE
FOUNDATION TRANSACTION--FHMS Acquisition" and "--Holding Company Acquisition."
Unless waived by Foundation or Selling Shareholder, the obligation of
Foundation and Selling Shareholder to consummate the Foundation Transaction is
subject to the satisfaction of the following conditions:
Guaranties. FPA shall have executed and delivered guaranties guaranteeing
certain obligations of FPA California and FPA IPA arising pursuant to the
Foundation Agreement.
Purchase Price. FPA, FPA California and FPA IPA shall have delivered the
appropriate cash payments to Foundation.
Unless waived by FPA, FPA California or FPA IPA, the obligation of FPA, FPA
California and FPA IPA to consummate the Foundation Transaction is subject to
the satisfaction of the following conditions:
Transfer of Real Property. Foundation shall have caused FHMS to transfer all
real property owned by it in fee (together with all indebtedness encumbering
such real property) to an affiliate of Foundation.
Transfer of CPR Stock. Foundation shall have caused the stock of Catalina
Professional Recruiters, Inc. to have been transferred from FHMS to Foundation
or an affiliate of Foundation.
Notice of Designee. Foundation shall have appointed a representative of FPA
IPA as "Designee" in accordance with the Share Ownership Agreement so that FPA
IPA may, through such person, exercise the Option.
Stockholder Approval. The Foundation Transaction shall have been approved by
the stockholders of FPA. (FPA intends to waive this condition.)
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Voting Agreement. Foundation shall have executed and delivered to FPA a
Voting Agreement.
Physicians. The number of physicians employed by Holding Company and its
subsidiaries as of the Foundation Closing shall not be less than seventy-five
percent (75%) of the number of physicians employed by Holding Company and its
subsidiaries as of the date of the Foundation Agreement.
Real Estate Matters. FPA California shall, in its good faith business
judgment, have approved certain real estate matters with respect to care
centers to be leased or acquired in the Foundation Transaction.
REPRESENTATIONS AND WARRANTIES
The Foundation Agreement contains various representations and warranties by
each of the parties thereto relating to, among other things, organization and
qualification to do business; authorization; real property; contracts and
commitments; permits and governmental filings and approvals; no conflicts or
violations; financial statements; litigation; compensation; compliance with
laws; employee benefit matters; insurance; liabilities; capital structure;
taxes; proprietary rights; subsidiaries; accounts receivable; and legal
matters.
COVENANTS
The parties to the Foundation Agreement have covenanted with each other
that:
Further Assurances. Each party shall use all reasonable efforts to
consummate and effectuate the Foundation Transaction.
No Solicitation. Until the earlier of the Foundation Closing or the
termination of the Foundation Agreement, neither Foundation nor Selling
Shareholder will directly or indirectly make, entertain, solicit or encourage
inquiries or proposals, enter into or conduct discussions or negotiate or
enter into an agreement with any party other than FPA, FPA California or FPA
IPA for the divestiture of FHMS or Holding Company.
Inspections. FPA and Foundation shall give each other and their
representatives access to certain books and records for the purpose of
evaluating the Foundation Transaction.
Conduct of Business. Foundation and Selling Shareholder shall cause FHMS and
Holding Company to operate their respective businesses in the ordinary course;
and shall not permit either to issue, deliver or sell any shares of its
capital stock or amend its respective charter documents or Bylaws except as
necessary to consummate the Foundation Transaction.
Employee Matters. FPA shall provide each employee of FHMS, Holding Company
or the Medical Groups retained by FPA or a subsidiary or affiliate of FPA (the
"Retained Employees") benefits substantially similar to those provided under
the employee benefit plans applicable to similarly situated employees of FPA.
Foundation shall not retain any liabilities or responsibilities with respect
to employees or former employees of FHMS or Holding Company.
FPA's Covenant Not to Compete. Neither FPA nor any of its affiliates shall
seek to operate as a comprehensive health care service plan or hold, acquire
or make any commitment to hold or acquire a controlling interest in a
comprehensive health plan until the termination of the Professional Group
Provider Agreements.
Foundation's Prohibited Conduct. Until the earlier of three years from the
date of the Foundation Agreement or the termination of a Professional Group
Provider Agreement, Foundation shall not purchase any medical group if the
Foundation Affiliates ("FHCA") linked lives to FHMG or TDMC which are provided
services by the medical groups acquired during such period in a given area
exceed five percent of the number of FHCA linked lives to FHMG or TDMC within
such area, or purchase any independent practice association or medical group
within a five mile radius of any care center purchased pursuant to the
Foundation Agreement.
Purchase of Indebtedness; Post-Closing Adjustment. The parties agree to
adjust the amount of the promissory note issued to Foundation in consideration
of indebtedness purchased from FHMS and Holding
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Company pursuant to the Foundation Agreement in accordance with a closing date
audit of FHMS and Holding Company performed after the Foundation Closing.
Agreement to Vote Shares. Each officer of FPA will agree to vote his or her
shares of FPA Common Stock in favor of the Foundation Transaction and FPA
shall use its best efforts to have each non-officer director and beneficial
owner of more than five percent of the outstanding FPA Common Stock to vote
his, her or its shares in favor of the Foundation Agreement.
Surgery Center Referrals. Foundation and FPA shall use their reasonable best
efforts to enter into an agreement prior to the Foundation Closing providing
for referrals from FHMG, TDMC and Intergroup IPA, P.C. to certain surgery
centers such that the referral pattern to such surgery centers from such
groups shall be substantially similar to that prior to the Foundation Closing.
Disease State Management. Foundation and FPA will cause their appropriate
affiliates to enter into an agreement prior to the Foundation Closing which
would promote Foundation's Disease State Management programs.
Real Estate Matters. Foundation shall deliver certain real estate documents
and materials to FPA no later than 45 days after the date of the Foundation
Agreement.
Guaranty Payments. In the event Foundation advances any funds pursuant to
its guaranty of certain bank indebtedness of FPA, FPA agrees to immediately
pay Foundation the amount of any funds so advanced.
ACTIONS BY FOUNDATION AND FPA AFTER THE CLOSING
Taxes. Foundation shall pay the taxes due for which FHMS, Selling
Shareholder, Holding Company and its subsidiaries is or may be liable for all
periods ending on or prior to the Closing and FPA shall pay the taxes due for
which FHMS, Holding Company or any of its subsidiaries is or may be liable for
all periods ending subsequent to the Closing.
338(h)(10) Election. Foundation, FPA, FPA California and FPA IPA shall
jointly make an election (the "Election") under Section 338(h)(10) of the Code
and agree to cooperate with each other to use their best efforts to effect
such election. If FPA, FPA California and FPA IPA each complies with its
obligations with respect to the Election, but a basis in the assets of Holding
Company and its subsidiaries equal to the "adjusted grossed-up basis" of the
assets of such companies as of the date of Closing is not obtained thereby
(for reasons other than any action or inaction by FPA or any of its
affiliates), then Foundation shall pay to FPA the amount of the foregone tax
benefit resulting from the failure to obtain such an "adjusted grossed-up
basis" plus applicable penalties and interest (the "Tax Indemnity"). In the
event Foundation is obligated to pay the Tax Indemnity and if FPA, FPA
California, FHMS or Holding Company or its subsidiaries realizes any tax
benefits attributable to pre-acquisition losses of FHMS, Holding Company or
its subsidiaries, FPA will pay to Foundation fifty percent of the amount of
such tax benefit. Foundation and FPA shall promptly give written notice to
each other of any inquiry, discussions with a tax authority, proposed
adjustment, assertion of a claim, or commencement of any suit, action or
proceeding against such party (the party receiving the notice, the "Noticed
Party") that challenges or questions the availability of the Election (each, a
"Proposed Adjustment"). The failure to notify the Noticed Party within the
required time frame shall relieve the Noticed Party from its obligations to
indemnify if such failure results in the loss or material impairment of the
Noticed Party's rights. In all matters related to the defense of a Proposed
Adjustment, the Noticed Party and its counsel shall have the right to
participate in defending against the Proposed Adjustment. A settlement of the
Proposed Adjustment shall be binding upon the Noticed Party only if the
Noticed Party consents to such settlement or unreasonably withholds consent to
such settlement.
Future Contractual Alliances. Foundation and FPA intend to expand their
contractual relationships and agree to negotiate in good faith the terms of a
provider contract relating to all service areas of FPA and any Foundation
affiliate engaged in the business of offering a benefit program.
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Employee Matters. Foundation agrees to continue to perform its obligations
relating to the grant of options to TDMC and FHMG employees.
Claims Management and Insurance. Foundation shall manage all claims alleging
medical malpractice by any Practitioner that fall within certain "tail
coverage" to be purchased by Holding Company immediately prior to Closing
covering medical malpractice claims existing as of Closing provided Foundation
receives prompt notice of such potential claim.
Foundation Name. Neither FPA nor its affiliates shall gain any right, title
or interest in the names "Foundation," "Foundation Health," "Foundation Health
Medical Group," "Foundation Health Medical Services" (the "Foundation Name")
or any similar name or derivation thereof except that for a period of six
months following the date of the Foundation Agreement, Foundation grants FPA a
non-exclusive, non-transferable license to use the names "Foundation Health
Medical Group" and "Foundation Health Medical Services" in California only.
Foundation and its affiliates shall retain all right, title and interest in
the Foundation Name and each of FHMS, Holding Company and Holding Company's
subsidiaries shall forfeit any interest it may have in the Foundation Name.
Covenant. For a period of three years from the date of the Closing,
Foundation and FPA shall use their best efforts to encourage commercial
members of FHCA and its affiliated health plans who, as of the Closing Date,
have primary care physicians who are employees of FHMG or TDMC to continue to
select primary care physicians who are employees of FHMG or TDMC. If such
commercial members become unassigned due to the fact that their primary care
physician is no longer employed by FHMG or TDMC and such members do not select
another FHCA contracting physician, Foundation and FHCA will assign such non-
assigned members to physicians who are employed by FHMG or TMDC subject to
availability, accessibility and other regulatory requirement of the parties.
Solicitation of Employees. For a period from the date of the Foundation
Agreement until six months after the Closing Date, neither Foundation or its
affiliates nor FPA or its affiliates shall initiate or maintain contact with
any officer, director or employee of the other regarding the employment of
such individual except in certain delineated circumstances.
INDEMNIFICATION, TERMINATION, ASSIGNMENT AND EXPENSES
Indemnification. Each of Foundation and FPA shall defend, indemnify and hold
harmless the other against each and every demand, claim, loss, liability,
judgement, damage, cost and expense (including reasonable attorney's fees),
("Losses") imposed on or incurred by either party, relating to, resulting from
or arising out of (i) any inaccuracy in any representation or warranty made by
Foundation or FPA in the Foundation Agreement which is not disclosed in the
schedules thereto or the Financial Statements, (ii) any breach of a covenant
in the Foundation Agreement required to be performed by Foundation or Selling
Shareholder or FPA or the FPA IPA, and (iii) any taxes of FHMS, Holding
Company or any of Holding Company's subsidiaries relating to any pre-Closing
period, in the case of Foundation, and any post-Closing period, in the case of
FPA. No amounts of indemnity shall be payable by either party as a result of
any claim with respect to a Loss unless and only to the extent that the party
seeking the indemnification (the "Indemnitee") has suffered, incurred,
sustained or become subject to Losses exceeding $200,000 in the aggregate, the
Indemnitee has given the other party timely notice of the claim prior to one
year following the date of the Closing, the Indemnitee had a reasonable
opportunity but failed in good faith to mitigate the Loss, or such Loss arises
from or was caused by actions taken or failed to be taken by the Indemnitee or
any of its affiliates after the Closing. The maximum amount for which
Foundation or FPA may be liable pursuant to the indemnification provisions is
$20,000,000, provided, however, that Foundation shall indemnify FPA for all
Losses arising from a breach of the representations and warranties related to
taxes for any pre-Closing period and FPA shall indemnify Foundation for all
Losses arising from taxes for any post-Closing period.
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Termination. The Foundation Agreement may be terminated at any time prior to
the Closing: (i) by mutual consent of FPA and Foundation or Selling
Shareholder; (ii) by FPA if there is a material breach of a representation or
warranty by Foundation or Selling Shareholder or of any covenant or agreement
to be complied with or performed by Foundation of Selling Shareholder which
would render impossible the satisfaction of a condition to the Foundation
Agreement; (iii) by Foundation or Selling Shareholder if there is a material
breach of a representation or warranty by FPA, FPA California or FPA IPA or of
any covenant or agreement to be complied with or performed by FPA, FPA
California or FPA IPA which would render impossible the satisfaction of a
condition to the Foundation Agreement; or (iv) by any party to the Foundation
Agreement if the Closing has not occurred by January 1, 1997. In the event of
termination of the Foundation Agreement, the confidentiality provisions will
continue in full force and effect and no party shall have any liability or
further obligation under the Foundation Agreement or Related Agreements except
as set forth in those agreements. If the Foundation Agreement is terminated
because either FPA or Foundation breaches a material representation or
warranty or fails to preform a material covenant, the other party has not
breached any material representation or warranty or failed to preform a
material covenant, and the non-breaching party chooses to terminate the
Foundation Agreement as a direct result of such breach or failure, the
breaching party shall pay the non-breaching party up to $500,000 to reimburse
the non-breaching party for expenses and a fee of $1,000,000 as liquidated
damages. If the Foundation Agreement is not consummated because Foundation or
FPA does not obtain necessary board or stockholder approval, then such party
failing to obtain such approval shall pay the other party up to $500,000 in
expenses. If the Foundation Agreement is not consummated for any reason,
Foundation shall pay FPA $3,000,000 in addition to any other payments owed,
and such payment may be paid as a reduction of principal of any existing
indebtedness owed by Foundation and its affiliates to FPA and its affiliates.
If Foundation and Selling Shareholder terminate the Foundation Agreement,
Foundation and Selling Shareholder shall not sell FHMS, TDMC or FHMG or any
component thereof to any third party other than FPA, FPA California and FPA
IPA, unless FPA, FPA California and FPA IPA have rejected a purchase offer on
terms no less favorable than those set forth in the Agreement; provided that
in no event shall the number of shares of FPA Common Stock to be issued as
part of the consideration for such purchase exceed 19% of the then outstanding
shares of FPA Common Stock.
Assignment. No party to the Foundation Agreement may assign such agreement
or the rights and obligations thereunder without the prior written consent of
the other parties. The Foundation Agreement is binding upon and shall inure to
the benefit of the parties to the Foundation Agreement and their respective
successors and permitted assignees.
Expenses. Except as otherwise specified in the Foundation Agreement, each
party shall pay its own expenses incident to the Foundation Agreement and to
any action taken by such party in preparation for carrying the Foundation
Agreement into effect.
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APPROVAL OF AMENDMENTS TO FPA MEDICAL MANAGEMENT, INC.
OMNIBUS STOCK OPTION PLAN
At the FPA Special Meeting, stockholders of FPA will be asked to approve
amendments to the FPA Medical Management, Inc. Omnibus Stock Option Plan (the
"FPA Plan") which, if approved, will become effective only upon consummation
of the Merger or the Foundation Transaction. The amendments would, upon
becoming effective, (i) increase the total number of shares of FPA Common
Stock issuable upon exercise of options granted under such plan from 2,500,000
to 4,000,000 if only the Merger is consummated, 3,500,000 if only the
Foundation Transaction is consummated, and 5,000,000 if the Merger and the
Foundation Transaction are consummated, and (ii) limit the number of shares of
FPA Common Stock for which options may be granted under the FPA Plan to any
person during any calendar year to 750,000. The FPA Plan was approved by the
FPA stockholders in October 1994 and amendments to the FPA Plan were approved
by the FPA stockholders in July 1995 and June 1996.
The proposal to approve the amendments to the FPA Plan will become effective
if it receives the affirmative vote of the holders of a majority of the shares
of FPA Common Stock present in person or by proxy at the Special Meeting. In
the event the amendment is not approved by FPA stockholders, or in the event
such plan is approved by FPA stockholders but neither the Merger nor the
Foundation Transaction is not consummated, the amendment will not become
effective and the FPA Plan will remain in full force and effect in its current
form.
The FPA Plan currently provides for the issuance of up to 2,500,000 shares
of FPA Common Stock. As of August 28, 1996, options to purchase 2,377,989
shares of FPA Common Stock have been granted under the FPA Plan. If the Merger
is consummated, FPA has agreed, subject to stockholder approval of the
proposed amendment, to grant options under the FPA Plan to replace all
outstanding options to purchase Sterling Common Stock. The grants under the
FPA Plan will be for the number of shares subject to the Sterling Stock
Options, multiplied by the Exchange Ratio, and the exercise price of such
options will be the exercise price of the Sterling Stock Options, divided by
the Exchange Ratio. See "THE MERGER--Adjustments to Merger Consideration."
Options to purchase up to 1,033,499 additional shares of FPA Common Stock may
be required for this purpose. In addition to the shares required to make the
grants to the holders of Sterling Stock Options, the Board of Directors of FPA
believes that it is advisable and in the best interest of FPA to make
additional shares available for the granting of options in the future to
officers and other key employees of FPA because options provide a valuable
incentive for such persons to remain with FPA and motivate them to exert their
best efforts on behalf of FPA. Accordingly, FPA's Board of Directors
recommends that the total number of shares issuable pursuant to the FPA Plan
be increased by 2,500,000.
The proposed amendments would also add a provision to the FPA Plan to limit
the number of shares of FPA Common Stock for which options may be granted to
any individual during any year. With this provision, options granted under the
FPA Plan will qualify as performance-based compensation for purposes of
Section 162(m) of the Code and the regulations thereunder, and FPA will be
entitled to deduct the compensation paid to certain executives pursuant to the
FPA Plan, notwithstanding the deduction limit contained in Section 162(m).
FPA's Board of Directors recommends that you vote FOR the proposal to amend
the FPA Plan.
Set forth below is a summary of the FPA Plan, as proposed to be amended.
The purpose of the FPA Plan is to enable FPA to attract, retain and reward
employees and directors of, and consultants to, FPA and to strengthen the
mutuality of interests between such persons and FPA's stockholders. The FPA
Plan is administered by the Compensation Committee of the Board of Directors
(the "FPA Compensation Committee").
Under the FPA Plan, options to purchase shares of FPA Common Stock may be
granted to employees of, and consultants to, FPA and certain of its
subsidiaries. The FPA Plan provides for the grant of both incentive stock
options (options that satisfy the requirements of Section 422 of the Internal
Revenue Code) and non-
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qualified options. Under the terms of the FPA Plan, the option exercise price
for incentive stock options may not be less than the fair market value of the
underlying stock at the time the option is granted. Both incentive stock
options and nonqualified options granted under the FPA Plan expire upon the
earlier of one month after the employee's termination, an expiration date
fixed by the FPA Compensation Committee and set forth in each individual
option agreement, or ten years from the date of grant. Options granted
pursuant to the FPA Plan will be exercisable at such times as the FPA
Compensation Committee shall determine. On September 30, 1996, the closing
price of FPA Common Stock on Nasdaq was $26.375. On September 30, 1996, FPA
had approximately 1,600 employees, all of whom were eligible to receive
options under the FPA Plan. After consummation of the Merger and the
Foundation Transaction, FPA is expected to have approximately 3,500 employees,
all of whom will be eligible to receive options under the FPA Plan.
Under the FPA Plan, the price payable upon exercise of options may be paid
in cash or check acceptable to FPA, or by any other consideration that the FPA
Compensation Committee deems acceptable. The exercise price may also be paid
in shares of FPA Common Stock duly owned by the optionee having a fair market
value equal to the option price on the date of exercise.
At September 30, 1996, options to purchase 2,814,954 shares of FPA Common
Stock under the FPA Plan were outstanding. The individuals who receive options
and the number of shares of FPA Common Stock included in each grant are within
the discretion of the FPA Compensation Committee. The grants that were made
under the FPA Plan since January 1, 1995 are shown below.
<TABLE>
<CAPTION>
OPTIONS GRANTED
NAME OR GROUP SINCE JANUARY 1, 1995
------------- ---------------------
<S> <C>
Seth Flam.......................................... 331,000
Sol Lizerbram...................................... 331,000
Steven M. Lash..................................... 207,250
Howard Hassman..................................... 213,000
Kevin Ellis........................................ 213,000
Executive Officer Group............................ 1,609,750
Non-Executive Officer Director Group............... 0
Associates of Directors, Executive Officers or Nom-
inees............................................. 0
Persons Who Received or Are to Receive 5% of Op-
tions............................................. 1,752,250
Non-Executive Officer and Employee Group........... 471,103
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. It is intended that certain options granted under
the FPA Plan will qualify as "incentive stock options" to the degree possible
under the Code. This means that the optionee will not realize taxable income
upon the grant or exercise of the option. However, any excess of the fair
market value of the option stock on the date of exercise over the option price
will constitute an item of tax preference for purposes of the alternative
minimum tax and may cause the optionee to incur a liability for such tax in
the year of exercise.
If the optionee holds the stock purchased on exercise of the option until at
least (a) one year after it is purchased and (b) two years after the option is
granted, any profit or loss recognized on disposition of the stock will be
treated as a long-term capital gain or loss. If, however, the optionee
disposes of the stock within either the one or two-year period, the optionee
generally will be required to include in ordinary taxable income upon
disposition of the stock an amount equal to the lesser of (a) the amount, if
any, by which the fair market value of such stock on the date the option was
exercised exceeded the option price, or (b) the amount, if any, by which the
amount realized from such disposition exceeds the option price; any additional
gain would be long-term or short-term capital gain, depending upon how long
the stock was held. But, for certain dispositions of stock made within either
the one or two-year period by way of gift or by way of sale to a person or
entity related to the optionee, the optionee may be required to include in
ordinary taxable income the full amount described in (a), regardless of the
amount realized from such disposition.
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The one and two-year requirements do not apply to the disposition of stock
after an optionee's death by (a) the optionee's estate or (b) a person who
acquires the right to exercise the option by reason of the optionee's death.
In such cases, the stock may be disposed of any time after receipt and receive
preferential tax treatment subject to the general holding period rules for
capital gains.
Options granted under the FPA Plan may be exercised by the transfer to FPA
of shares of FPA's Common Stock with a fair market value equal to the option's
exercise price. If the optionee transfers incentive stock option shares to FPA
before both the one and two-year holding periods have expired, the transfer
will be treated as a disposition of such shares with the tax consequences
described above. If the shares so transferred are not incentive stock option
shares or, if they are such shares and both the one and two-year periods have
expired, such transfer to FPA will not be a taxable event.
Generally, FPA will not be entitled to any tax deduction in connection with
the grant or exercise of an incentive stock option. If, however, the optionee
disposes of stock acquired upon exercise of an option before the one and two-
year periods have expired, FPA will be entitled to deduct, when the optionee
disposes of the stock, any amount the optionee is required to include in
ordinary taxable income.
Non-Qualified Stock Options. The grant by FPA of non-qualified stock options
is not a taxable event to the optionee. Generally, an optionee recognizes
ordinary income on the date option shares are issued to him pursuant to the
exercise of the option in an amount equal to the "spread" or the excess of the
fair market value of the shares on that date over the exercise price. Any
further gain or loss on disposition of the shares will be capital gain or loss
if the shares are held by the optionee for investment.
FPA will be entitled to deduct for federal income tax purposes any amount
the optionee is required to include in ordinary income at the time such amount
is so includable, provided that such amount is not deemed to be an "excess
parachute payment" (i.e., payment payable upon a change of control of FPA that
is in excess of reasonable compensation).
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PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) OF
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
The following pro forma condensed consolidated balance sheet as of June 30,
1996 and the pro forma condensed consolidated statements of operations for the
three years in the period ended December 31, 1995 and the six months ended
June 30, 1996 give effect to (1) the acquisitions of Gonzaba Management
Organization, Arizona Managed Care Services and Affiliates, and Grossmont
Medical Clinic (collectively the "1995 FPA Acquisitions"), (2) the
acquisitions of Foundation Health IPA and Physicians First, Inc. (collectively
the "1996 FPA Acquisitions"); (3) the acquisition of Foundation Health Medical
Services and Affiliates ("FHMS") and (4) the proposed merger between FPA
Medical Management, Inc. and Subsidiaries ("FPA") and Sterling Healthcare
Group, Inc. ("Sterling") (the "Merger"). Additionally, the pro forma condensed
consolidated financial statements give effect to Sterling's 1995 acquisition
of Medical Networks, Inc. and Professional Emergency Physicians, P.A.
(collectively the "1995 Sterling Acquisitions"). The FHMS acquisition is
reflected as of June 30, 1996 for the pro forma condensed consolidated balance
sheet and the 1995 FPA Acquisitions, 1996 FPA Acquisitions, FHMS acquisition,
and 1995 Sterling Acquisitions are reflected as of January 1, 1995 for the pro
forma condensed consolidated statements of operations. The Merger is reflected
as of June 30, 1996 for the pro forma condensed consolidated balance sheet and
as of January 1, 1994 for the pro forma condensed consolidated statements of
operations as there were no operations of Sterling during 1993. The pro forma
information is based on the respective historical financial statements of FPA,
1995 FPA Acquisitions, 1996 FPA Acquisitions, FHMS, 1995 Sterling Acquisitions
and Sterling, giving effect to the 1995 FPA Acquisitions, 1996 FPA
Acquisitions, FHMS, and 1995 Sterling Acquisitions under the purchase method
of accounting, the Merger under the pooling of interests method of accounting,
and the assumptions and adjustments described in the accompanying notes to the
pro forma condensed consolidated financial statements.
The pro forma condensed consolidated financial statements have been prepared
by the management of FPA based upon the unaudited financial statements of FPA,
FHMS and Sterling as of June 30, 1996 and for the six months then ended, the
audited financial statements of FPA, FHMS, the 1996 FPA Acquisitions and
Sterling as of December 31, 1995 and the year then ended, and the unaudited
results of operations for Physician First, Inc., 1995 FPA Acquisitions and
1995 Sterling Acquisitions up to their respective acquisition dates.
Management of FPA cannot be sure that the estimated fair values related to
FHMS represent fair values that would ultimately be determined at the
acquisition date. Consequently, such estimates are subject to revision when
the transaction is completed. Additionally, the Management of FPA believes
that the acquisition of the FHMS entities is probable.
Management of FPA does not believe that the pro forma condensed consolidated
financial statements are indicative of the results that actually would have
occurred if the combinations had been in effect on the dates indicated or
which may be obtained in the future. The pro forma condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes of FPA, 1995 FPA Acquisitions, 1996 FPA Acquisitions,
FHMS, 1995 Sterling Acquisitions and Sterling incorporated by reference or
contained elsewhere herein.
114
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND STERLING
HEALTHCARE GROUP, INC. AND THE ACQUISITION OF FOUNDATION HEALTH MEDICAL
SERVICES, INC.
(UNAUDITED)
JUNE 30, 1996
<TABLE>
<CAPTION>
FOUNDATION FPA MEDICAL
HEALTH MEDICAL MANAGEMENT, INC. STERLING POOLING-OF-
FPA MEDICAL SERVICES PRO FORMA PRO FORMA HEALTHCARE INTERESTS PRO FORMA
MANAGEMENT, INC. AND AFFILIATES ADJUSTMENTS CONSOLIDATED GROUP, INC. ADJUSTMENTS CONSOLIDATED
---------------- -------------- ------------ ---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents..... $ 1,530,975 $ $ (2,000,000)[A] $ (616,025) $ 3,144,180 $ 2,528,155
(147,000)[O]
Marketable
securities...... 1,716,530 1,716,530 1,716,530
Accounts
receivable--
net............. 41,715,080 5,215,000 46,930,080 37,374,515 84,304,595
Current portion
of notes
receivable...... 611,054 611,054 611,054
Prepaid expenses
and other
assets.......... 1,170,902 3,722,000 (1,070,852)[O] 3,822,050 1,179,265 5,001,315
Deferred income
tax asset....... 1,146,311 1,146,311 2,453,103 3,599,414
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total current
assets.......... 47,890,852 8,937,000 (3,217,852) 53,610,000 44,151,063 97,761,063
Property and
equipment--net.. 16,277,659 93,367,000 (71,978,367)[O] 37,666,292 3,022,663 40,688,955
Restricted cash
and deposits.... 200,000 200,000 200,000
Goodwill and
intangibles--
net............. 74,206,379 12,755,000 192,673,800 [B] 275,382,179 37,604,054 312,986,233
(4,253,000)[O]
Investments in
GLHP............ 4,994,900 4,994,900 4,994,900
Deposits and
other assets.... 4,239,289 3,520,000 (1,708,000)[O] 6,051,289 111,820 6,163,109
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total........... $147,809,079 $118,579,000 $111,516,581 $377,904,660 $84,889,600 $462,794,260
============ ============ ============ ============ =========== =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current
liabilities:
Accounts payable
and accrued
expenses........ $ 14,461,346 $ 40,572,000 $ (277,000)[O] $ 54,756,346 $ 9,080,837 $13,000,000 [D] $ 76,837,183
Claims payable,
including
incurred but not
reported
claims.......... 30,575,983 15,900,000 46,475,983 46,475,983
Income tax
payable......... 1,343,169 1,343,169 1,343,169
Long-term debt--
current
portion......... 28,457,948 133,890,000 (78,801,419)[O] 37,457,948 1,480,221 38,938,169
(46,088,581)[P]
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total current
liabilities..... 74,838,446 190,362,000 (125,167,000) 140,033,446 10,561,058 13,000,000 163,594,504
------------ ------------ ------------ ------------ ----------- ----------- ------------
Long-term debt-- 103,435,122
net of current
portion......... 16,131,541 7,215,000 34,000,000 [A] 11,077,387 114,512,509
46,088,581 [P]
Deferred income
tax liability... 1,492,703 1,492,703 635,490 2,128,193
Other long term
liabilities..... 1,155,189 2,597,000 3,752,189 2,975,546 6,727,735
Minority
interest........
Stockholders'
equity
(deficit):
Common stock.... 24,097 20,000 (20,000) 32,430 844 20,735 [C] 54,009
8,333 [A]
Additional paid
in capital...... 50,610,846 4,722,000 (4,722,000) 125,602,513 52,883,107 (20,735)[C] 178,464,885
74,991,667 [A]
Stock payable... 147,000 147,000 147,000
Accumulated
earnings
(deficit)....... 3,409,257 (86,337,000) 86,337,000 3,409,257 7,009,543 (13,000,000)[D] (2,581,200)
Less: deferred
compensation--
stock options (253,375) (253,375)
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total
stockholders'
equity
(deficit)....... 54,191,200 (81,595,000) 156,595,000 129,191,200 59,640,119 (13,000,000) 175,831,319
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total........... $147,809,079 $118,579,000 $111,516,581 $377,904,660 $84,889,600 $ 0 $462,794,260
============ ============ ============ ============ =========== =========== ============
</TABLE>
115
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC.
AND STERLING HEALTHCARE GROUP, INC. AND THE ACQUISITION OF FOUNDATION HEALTH
MEDICAL SERVICES, INC.
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
FOUNDATION
HEALTH FPA MEDICAL
MEDICAL MANAGEMENT STERLING
FPA MEDICAL PHYSICIANS SERVICES PRO FORMA PRO FORMA HEALTHCARE PRO FORMA
MANAGEMENT, INC. FIRST, INC.[E] AND AFFILIATES ADJUSTMENTS CONSOLIDATED GROUP, INC. CONSOLIDATED
---------------- -------------- -------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Managed care
revenue........... $92,959,140 $14,870,833 $ 72,852,000 $180,681,973 $180,681,973
Fee-for-service
revenue........... 5,881,951 4,176,018 10,539,000 20,596,969 $66,396,237 86,993,206
----------- ----------- ------------ ----------- ------------ ----------- ------------
Total operating
revenue.......... 98,841,091 19,046,851 83,391,000 201,278,942 66,396,237 267,675,179
----------- ----------- ------------ ----------- ------------ ----------- ------------
Expenses:
Medical services.. 72,493,036 16,128,269 71,810,000 160,431,305 45,176,914 205,608,219
General and
administrative... 21,185,818 2,811,904 51,902,000 3,681,752 [F] 79,581,474 16,208,272 95,789,746
----------- ----------- ------------ ----------- ------------ ----------- ------------
Total expenses.... 93,678,854 18,940,173 123,712,000 3,681,752 240,012,779 61,385,186 301,397,965
----------- ----------- ------------ ----------- ------------ ----------- ------------
Income from
operations........ 5,162,237 106,678 (40,321,000) (3,681,752) (38,733,837) 5,011,051 (33,722,786)
Other income
(expense)
Interest and other
income........... 188,986 83,940 272,926 53,665 326,591
Interest expense.. (1,078,179) (15,382) (3,567,000) (1,543,530)[G] (6,204,091) (509,889) (6,713,980)
----------- ----------- ------------ ----------- ------------ ----------- ------------
Total other income
(expense)........ (889,193) 68,558 (3,567,000) (1,543,530) (5,931,165) (456,224) (6,387,389)
----------- ----------- ------------ ----------- ------------ ----------- ------------
Income (loss)
before income
taxes............. 4,273,044 175,236 (43,888,000) (5,225,282) (44,665,002) 4,554,827 (40,110,175)
Income tax
(expense)
benefit........... (1,884,734) (73,922) 16,989,000 2,090,113 [I] 17,120,457 (1,778,314) 15,342,143
----------- ----------- ------------ ----------- ------------ ----------- ------------
Net income (loss).. $ 2,388,310 $ 101,314 $(26,899,000) $(3,135,169) $(27,544,545) $ 2,776,513 $(24,768,032)
=========== =========== ============ =========== ============ =========== ============
Net income (loss)
per share......... $ 0.20 $ (1.63) $ (0.90)
Weighted average
shares
outstanding[R].... 12,162,197 16,853,864 27,643,530
</TABLE>
116
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND
STERLING HEALTHCARE GROUP, INC. AND THE ACQUISITION OF FOUNDATION HEALTH
MEDICAL SERVICES, INC.
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FOUNDATION
HEALTH FPA MEDICAL
MEDICAL MANAGEMENT, INC.
FPA MEDICAL 1995 FPA FOUNDATION PHYSICIANS SERVICES, INC. PRO FORMA PRO FORMA
MANAGEMENT, INC. ACQUISITIONS HEALTH IPA FIRST, INC.[E] AND AFFILIATES[Q] ADJUSTMENTS CONSOLIDATED
---------------- ------------ ----------- -------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Managed care
revenue.......... $49,880,875 $25,090,938 $ 9,275,866 $34,313,695 $105,174,000 $ 627,179 [H] $224,362,553
Fee-for-service
revenue.......... 2,811,080 1,289,937 18,789 7,347,642 41,374,000 52,841,448
----------- ----------- ----------- ----------- ------------ ----------- ------------
Total operating
revenue......... 52,691,955 26,380,875 9,294,655 41,661,337 146,548,000 627,179 277,204,001
----------- ----------- ----------- ----------- ------------ ----------- ------------
Expenses:
Medical
services........ 37,757,244 20,826,529 10,831,198 37,252,931 104,723,000 (768,331) [F] 210,622,571
General and
administrative.. 13,310,386 6,581,161 871,015 3,873,015 101,907,000 8,801,133 [F] 135,343,710
----------- ----------- ----------- ----------- ------------ ----------- ------------
Total expenses.. 51,067,630 27,407,690 11,702,213 41,125,946 206,630,000 8,032,802 345,966,281
----------- ----------- ----------- ----------- ------------ ----------- ------------
Income (loss)
from operations.. 1,624,325 (1,026,815) (2,407,558) 535,391 (60,082,000) (7,405,623) (68,762,280)
Other income
(expense):
Interest and
other income.... 543,973 41,125 28,893 119,166 733,157
Interest
expense......... (354,248) (414,655) (21,649) (11,210,000) (3,835,266) [G] (15,835,818)
----------- ----------- ----------- ----------- ------------ ----------- ------------
Total other
income
(expense)....... 189,725 (373,530) 28,893 97,517 (11,210,000) (3,835,266) (15,102,661)
----------- ----------- ----------- ----------- ------------ ----------- ------------
Income (loss)
before income
taxes............ 1,814,050 (1,400,345) (2,378,665) 632,908 (71,292,000) (11,240,889) (83,864,941)
Income tax
(expense)
benefit.......... (811,588) (62,503) 927,680 (267,562) 31,368,000 5,118,997 [I] 36,273,024
----------- ----------- ----------- ----------- ------------ ----------- ------------
Net income
(loss)........... $ 1,002,462 $(1,462,848) $(1,450,985) $ 365,346 $(39,924,000) $(6,121,892) $(47,591,917)
=========== =========== =========== =========== ============ =========== ============
Net income (loss)
per share........ $ 0.13 $ (3.80)
Weighted average
shares
outstanding[R]... 7,676,402 12,539,172
<CAPTION>
STERLING STERLING STERLING
HEALTHCARE 1995 STERLING PRO FORMA PRO FORMA PRO FORMA
GROUP, INC. ACQUISITIONS ADJUSTMENTS CONSOLIDATED CONSOLIDATED
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Managed care
revenue.......... $224,362,553
Fee-for-service
revenue.......... $115,659,527 $9,629,087 $125,288,614 178,130,062
------------- ------------- -------------- ------------- -------------
Total operating
revenue......... 115,659,527 9,629,087 125,288,614 402,492,615
------------- ------------- -------------- ------------- -------------
Expenses:
Medical
services........ 75,985,634 7,296,001 83,281,635 293,904,206
General and
administrative.. 33,172,287 2,589,077 $(641,004)[L] 35,120,360 170,464,070
------------- ------------- -------------- ------------- -------------
Total expenses.. 109,157,921 9,885,078 (641,004) 118,401,995 464,368,276
------------- ------------- -------------- ------------- -------------
Income (loss)
from operations.. 6,501,606 (255,991) 641,004 6,886,619 (61,875,661)
Other income
(expense):
Interest and
other income.... 65,324 13,980 79,304 812,461
Interest
expense......... (1,823,695) (245,416)[L] (2,069,111) (17,904,929)
------------- ------------- -------------- ------------- -------------
Total other
income
(expense)....... (1,758,371) 13,980 (245,416) (1,989,807) (17,092,468)
------------- ------------- -------------- ------------- -------------
Income (loss)
before income
taxes............ 4,743,235 (242,011) 395,588 4,896,812 (78,968,129)
Income tax
(expense)
benefit.......... (1,911,732) 61,431 [M] (1,850,301) 34,422,723
------------- ------------- -------------- ------------- -------------
Net income
(loss)........... $ 2,831,503 $ (242,011) $ 457,019 $ 3,046,511 $(44,545,406)
============= ============= ============== ============= =============
Net income (loss)
per share........ $ (1.91)
Weighted average
shares
outstanding[R]... 23,328,839
</TABLE>
117
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND STERLING
HEALTHCARE GROUP, INC.
(UNAUDITED)
JUNE 30, 1996
<TABLE>
<CAPTION>
STERLING POOLING-OF-
FPA MEDICAL HEALTHCARE INTERESTS PRO FORMA
MANAGEMENT, INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED
---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 1,530,975 $ 3,144,180 $ 4,675,155
Marketable securities... 1,716,530 1,716,530
Accounts receivable--
net.................... 41,715,080 37,374,515 79,089,595
Current portion of notes
receivable............. 611,054 611,054
Prepaid expenses and
other assets........... 1,170,902 1,179,265 2,350,167
Deferred income tax
asset.................. 1,146,311 2,453,103 3,599,414
------------ ----------- ------------ ------------
Total current assets.... 47,890,852 44,151,063 92,041,915
Property and equipment--
net.................... 16,277,659 3,022,663 19,300,322
Restricted cash and
deposits............... 200,000 200,000
Goodwill and
Intangibles--net....... 74,206,379 37,604,054 111,810,433
Investments in GLHP..... 4,994,900 4,994,900
Deposits and other as-
sets................... 4,239,289 111,820 4,351,109
------------ ----------- ------------ ------------
Total................... $147,809,079 $84,889,600 $232,698,679
============ =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses....... $ 14,461,346 $ 9,080,837 $ 13,000,000 [D] $ 36,542,183
Claims payable,
including incurred but
not reported claims.... 30,575,983 30,575,983
Income tax payable...... 1,343,169 1,343,169
Long-term debt--current
portion................ 28,457,948 1,480,221 29,938,169
------------ ----------- ------------ ------------
Total current
liabilities............ 74,838,446 10,561,058 13,000,000 98,399,504
------------ ----------- ------------ ------------
Long-term debt--net of
current portion........ 16,131,541 11,077,387 27,208,928
Deferred income tax
liability.............. 1,492,703 635,490 2,128,193
Other long term
liabilities............ 1,155,189 2,975,546 4,130,735
Minority interest....... -- --
Stockholders' equity
Common stock............ 24,097 844 20,735 [C] 45,676
Additional paid in
capital................ 50,610,846 52,883,107 (20,735)[C] 103,473,218
Stock payable........... 147,000 147,000
Accumulated earnings.... 3,409,257 7,009,543 (13,000,000)[D] (2,581,200)
Less: deferred
compensation--stock
options................ (253,375) (253,375)
------------ ----------- ------------ ------------
Total stockholders'
equity................. 54,191,200 59,640,119 (13,000,000) 100,831,319
------------ ----------- ------------ ------------
Total................... $147,809,079 $84,889,600 $ 0 $232,698,679
============ =========== ============ ============
</TABLE>
118
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND STERLING
HEALTHCARE GROUP, INC.
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
FPA MEDICAL
MANAGEMENT, INC. STERLING
FPA MEDICAL PHYSICIANS PRO FORMA PRO FORMA HEALTHCARE PRO FORMA
MANAGEMENT, INC. FIRST, INC.[E] ADJUSTMENTS CONSOLIDATED GROUP, INC. CONSOLIDATED
---------------- -------------- ----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Managed care revenues... $92,959,140 $14,870,833 $107,829,973 $107,829,973
Fee-for-service
revenue................ 5,881,951 4,176,018 10,057,969 66,396,237 76,454,206
----------- ----------- --------- ------------ ---------- ------------
Total operating
revenue............... 98,841,091 19,046,851 117,887,942 66,396,237 184,284,179
----------- ----------- --------- ------------ ---------- ------------
Expenses:
Medical services....... 72,493,036 16,128,269 88,621,305 45,176,914 133,798,219
General and
administrative........ 21,185,818 2,811,904 147,188 [F] 24,144,910 16,208,272 40,353,182
----------- ----------- --------- ------------ ---------- ------------
Total expenses......... 93,678,854 18,940,173 147,188 112,766,215 61,385,186 174,151,401
----------- ----------- --------- ------------ ---------- ------------
Income from operations.. 5,162,237 106,678 (147,188) 5,121,727 5,011,051 10,132,778
Other income (expense)
Interest and other
income................ 188,986 83,940 272,926 53,665 326,591
Interest expense....... (1,078,179) (15,382) (500,000)[G] (1,593,561) (509,889) (2,103,450)
----------- ----------- --------- ------------ ---------- ------------
Total other income
(expense)............. (889,193) 68,558 (500,000) (1,320,635) (456,224) (1,776,859)
----------- ----------- --------- ------------ ---------- ------------
Income (loss) before
income taxes........... 4,273,044 175,236 (647,188) 3,801,092 4,554,827 8,355,919
Income tax (expense)
benefit................ (1,884,734) (73,922) 259,568 [I] (1,699,088) (1,778,314) (3,477,402)
----------- ----------- --------- ------------ ---------- ------------
Net income (loss)....... $ 2,388,310 $ 101,314 $(387,620) $ 2,102,004 $2,776,513 $ 4,878,517
=========== =========== ========= ============ ========== ============
Net income per share.... $ 0.20 $ 0.17 $ 0.21
Common stock
outstanding[R]......... 12,162,197 12,687,197 23,476,863
</TABLE>
119
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND STERLING
HEALTHCARE GROUP, INC.
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FPA MEDICAL
PHYSICIANS MANAGEMENT, INC. STERLING
FPA MEDICAL 1995 FPA FOUNDATION FIRST, PRO FORMA PRO FORMA HEALTHCARE
MANAGEMENT, INC. ACQUISITIONS HEALTH IPA INC.[E] ADJUSTMENTS CONSOLIDATED GROUP, INC.
---------------- ------------ ----------- ----------- ----------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Managed care
revenues......... $49,880,875 $25,090,938 $ 9,275,866 $34,313,695 $ 627,179 [H] $119,188,553
Fee-for-service
revenue.......... 2,811,080 1,289,937 18,789 7,347,642 11,467,448 $115,659,527
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total operating
revenue......... 52,691,955 26,380,875 9,294,655 41,661,337 627,179 130,656,001 115,659,527
----------- ----------- ----------- ----------- ---------- ------------ ------------
Expenses:
Medical servic-
es.............. 37,757,244 20,826,529 10,831,198 37,252,931 (768,331)[F] 105,899,571 75,985,634
General and
administrative.. 13,310,386 6,581,161 871,015 3,873,015 1,732,007 [F] 26,367,584 33,172,287
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total expenses.. 51,067,630 27,407,690 11,702,213 41,125,946 963,676 132,267,155 109,157,921
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss)
from operations.. 1,624,325 (1,026,815) (2,407,558) 535,391 (336,497) (1,611,154) 6,501,606
Other income
(expense)
Interest and
other income.... 543,973 41,125 28,893 119,166 733,157 65,324
Interest ex-
pense........... (354,248) (414,655) (21,649) (1,724,394)[G] (2,514,946) (1,823,695)
Other...........
----------- ----------- ----------- ----------- ---------- ------------ ------------
Total other
income
(expense)....... 189,725 (373,530) 28,893 97,517 (1,724,394) (1,781,789) (1,758,371)
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss)
before income
taxes............ 1,814,050 (1,400,345) (2,378,665) 632,908 (2,060,891) (3,392,943) 4,743,235
Income tax
(expense)
benefit.......... (811,588) (62,503) 927,680 (267,562) 1,730,619 [I] 1,516,646 (1,911,732)
----------- ----------- ----------- ----------- ---------- ------------ ------------
Net income
(loss)........... $ 1,002,462 $(1,462,848) $(1,450,985) $ 365,346 $ (330,272) $ (1,876,297) $ 2,831,503
=========== =========== =========== =========== ========== ============ ============
Net income (loss)
per share........ $ 0.13 $ (0.22)
Common stock
outstanding[R]... 7,676,402 8,372,505
<CAPTION>
1995 STERLING STERLING
STERLING PRO FORMA PRO FORMA PRO FORMA
ACQUISITIONS ADJUSTMENTS CONSOLIDATED CONSOLIDATED
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Managed care
revenues......... $119,188,553
Fee-for-service
revenue.......... $9,629,087 $125,288,614 136,756,062
------------ -------------- ------------- -------------
Total operating
revenue......... 9,629,087 125,288,614 255,944,615
------------ -------------- ------------- -------------
Expenses:
Medical servic-
es.............. 7,296,001 83,281,635 189,181,206
General and
administrative.. 2,589,077 (641,004)[L] 35,120,360 61,487,944
------------ -------------- ------------- -------------
Total expenses.. 9,885,078 (641,004) 118,401,995 250,669,150
------------ -------------- ------------- -------------
Income (loss)
from operations.. (255,991) 641,004 6,886,619 5,275,465
Other income
(expense)
Interest and
other income.... 13,980 79,304 812,461
Interest ex-
pense........... (245,416)[L] (2,069,111) (4,584,057)
Other...........
------------ -------------- ------------- -------------
Total other
income
(expense)....... 13,980 (245,416) (1,989,807) (3,771,596)
------------ -------------- ------------- -------------
Income (loss)
before income
taxes............ (242,011) 395,588 4,896,812 1,503,869
Income tax
(expense)
benefit.......... 61,431 [M] (1,850,301) (333,655)
------------ -------------- ------------- -------------
Net income
(loss)........... $ (242,011) $457,019 $ 3,046,511 $ 1,170,214
============ ============== ============= =============
Net income (loss)
per share........ $ 0.06
Common stock
outstanding[R]... 19,162,172
</TABLE>
120
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
GIVING EFFECT TO THE MERGER OF FPA MEDICAL MANAGEMENT, INC. AND STERLING
HEALTHCARE GROUP, INC.
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
STERLING
FPA MEDICAL HEALTHCARE PRO FORMA PRO FORMA
MANAGEMENT, INC. GROUP, INC. ADJUSTMENTS CONSOLIDATED
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Managed care revenue.... $18,193,286 $18,193,286
Fee-for-service
revenue................ 242,591 $39,255,573 39,498,164
----------- ----------- ---------- -----------
Total operating
revenue................ 18,435,877 39,255,573 57,691,450
----------- ----------- ---------- -----------
Expenses:
Medical services...... 13,628,430 27,723,675 41,352,105
General and
administrative....... 4,423,842 9,183,231 13,607,073
----------- ----------- ---------- -----------
Total expenses...... 18,052,272 36,906,906 54,959,178
----------- ----------- ---------- -----------
Income from operations.. 383,605 2,348,667 2,732,272
Other income (expense)
Interest and other
income............... 115,191 71,764 186,955
Interest expense...... (35,299) (152,065) (187,364)
----------- ----------- ---------- -----------
Total other income
(expense).......... 79,892 (80,301) (409)
----------- ----------- ---------- -----------
Income before income
taxes.................. 463,497 2,268,366 2,731,863
Income tax expense...... (75,184) (866,841) $(150,720)[J] (1,092,745)
----------- ----------- ---------- -----------
Net income.............. $ 388,313 $ 1,401,525 $(150,720) $ 1,639,118
=========== =========== ========== ===========
Pro forma net income per
share.................. $ 0.07 $ 0.11
Weighted average shares
outstanding[R]......... 3,981,613 14,771,279
</TABLE>
121
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FPA Medical Management, Inc. and Subsidiaries ("FPA") has consummated the
following transactions: purchased the business of Grossmont Medical Clinic
("Grossmont") effective May 18, 1995 for $2,385,000 in cash and debt;
purchased Arizona Managed Care Services and Affiliates ("AMCS") effective July
1, 1995 for $1,850,000 in cash, FPA common stock and debt; purchased Gonzaba
Management Organization ("Gonzaba") effective November 1, 1995 for $21,512,824
in cash, FPA common stock, and debt; purchased Foundation Health IPA ("FHIPA")
effective January 31, 1996 for $10,063,654 in cash and debt; purchased
Physicians First, Inc. ("PFI") effective June 1, 1996 for $21,591,541 in debt,
FPA common stock and cash; entered into an agreement to purchase Foundation
Health Medical Services and Affiliates ("FHMS") for $111,000,000 in debt, FPA
common stock and cash. (Grossmont, AMCS and Gonzaba are collectively referred
to as the "1995 FPA Acquisitions"). Also, during 1995, Sterling Healthcare
Group, Inc. ("Sterling") acquired Medical Networks, Inc. and Professional
Emergency Physicians, P.A. (collectively, the "1995 Sterling Acquisitions").
These completed and proposed acquisitions by FPA and Sterling were accounted
for under the purchase method. Additionally, FPA proposes to merge with
Sterling by issuing FPA common stock in exchange for substantially all of the
outstanding common stock of Sterling (the "Merger"). It is contemplated that
the Merger will be accounted for as a pooling of interests. The following
adjustments are necessary to reflect the pro forma effects of the executed and
proposed transactions.
Certain of the entities included in the pro forma financial statements are
professional corporations which FPA is unable to own a majority interest in
states which prohibit the corporate practice of medicine. Such entities are
included in the pro forma financial statements due to the fact FPA
consolidates, or will consolidate upon acquisition, these professional
corporations in the consolidated financial statements of FPA. These
professional corporations are, or will be, consolidated by FPA because FPA
has, or will have, direct or indirect unilateral and perpetual control over
the assets and operations of the professional corporations, other than by
means of owning the majority of the voting stock of the professional
corporations. Also, FPA will have unilateral and perpetual control over the
FHMS entities upon acquisition. The shareholder/director of these professional
corporations will enter into a succession agreement which requires such
shareholder/director to sell to a designee of FPA such shareholder/director's
shares of stock if such shareholder director is terminated from FPA. This
ensures unilateral and perpetual control over these professional corporations
by FPA. As such, due to the parent-subsidiary relationship under generally
accepted accounting principles, FPA will consolidate the financial statements
of these professional corporations. FPA believes that consolidation of the
financial statements of the professional corporations is necessary to present
fairly the financial position and results of operations of the Company.
[A] Reflects the estimated purchase price to be paid by FPA for FHMS in the
amount of $111,000,000 consisting of FPA common stock, debt and cash.
[B] Under purchase accounting, the assets and liabilities of the acquired
entity are required to be adjusted to their estimated fair values. For
the purposes of determining the pro forma effects of the FHMS acquisition
on the balance sheet of FPA, the estimated fair values of the assets and
liabilities of this acquisition have been preliminarily determined by the
management of FPA to be equal to the historically recorded amounts. A
valuation analysis will be performed by independent consultants and
consequently, such estimates are subject to revision when the transaction
is completed. However, the management of FPA does not expect the final
classification and amortization to materially differ from these
estimates. Accordingly, the estimated excess purchase price to be paid by
FPA over the net assets of FHMS acquired in the amount of $192,673,800
has been reflected as a pro forma adjustment to goodwill and intangibles.
The management of FPA has preliminarily determined that substantially all
of the excess purchase price in this transaction will be allocated to the
value of the managed care contract acquired which has a term of 30 years.
[C] Reflects the issuance of 10,789,666 shares of FPA common stock in
exchange for 100% of the shares of outstanding Sterling common stock
based on applying the exchange ratio, which when multiplied by the market
value per share of FPA Common Stock (assumed to be $18.00 per share), as
defined in the Agreement and Plan of Merger, is equal to $23.01.
122
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[D] Nonrecurring costs estimated to be $13,000,000 will be recorded in
connection with the Merger. These costs consist primarily of professional
fees and certain employee termination costs. Because such costs are
nonrecurring, they have not been recorded in the accompanying unaudited
pro forma condensed consolidated statements of operations. However, such
costs will be charged to income in the first period following the
consummation of the Merger.
[E] As a result of FPA's acquisition, PFI will receive fully delegated
capitation revenue from Physicians Corporation of America, the seller,
based on the acquisition agreement with FPA, rather than primary care
capitation only as is reflected in the historical income statements of
PFI. The incremental revenue which PFI would have received under this
fully delegated contract was approximately $31 million for the six months
ended June 30, 1996 and approximately $67 million for the year ended
December 31, 1995. Additionally, there would have been a corresponding
increase in medical services expense and general and administrative
expense for the provision of hospital and specialty care services under
this fully delegated contract.
[F] For the purpose of determining the pro forma effects of the acquisitions
of the 1995 FPA Acquisitions, FHIPA, PFI and FHMS on FPA's statement of
operations, the following adjustments to increase (decrease) income have
been made:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
1995 FPA
ACQUISITIONS FHIPA PFI FHMS TOTAL
------------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Amortization over 4-15
years of intangible
assets(1)(2)........... $(120,555) (820,000) $ (940,555)
Amortization over 25 to
30 years of cost in
excess of net assets
acquired
(goodwill)(2)(3)....... (728,123) $(402,546) $(353,253) $(6,249,127) (7,733,049)
Depreciation of
additional purchase
cost assigned to
property and
equipment.............. (127,530) (127,530)
Compensation under
employment agreements.. 768,331 768,331
--------- --------- --------- ----------- -----------
$(207,877) $(402,546) $(353,253) $(7,069,127) $(8,032,803)
========= ========= ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------
PFI FHMS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Amortization over 30 years of costs in
excess of net assets
acquired (goodwill)(2)(3)............... $(147,188) $(3,124,564) $(3,271,752)
Amortization over 4-10 years of intangi-
ble assets(1)(2)........................ (410,000) (410,000)
--------- ----------- -----------
$(147,188) $(3,534,564) $(3,681,752)
========= =========== ===========
</TABLE>
- --------
(1) The amortization period of the identifiable intangible assets is based on
the period of estimated future economic benefit as determined by FPA in
conjunction with independent valuation analysis.
(2) The total balance of the goodwill and intangibles would have been
approximately $231,218,844 and $7,400,000, respectively, related to the
1995 FPA Acquisitions, FHIPA, PFI and FHMS at January 1, 1995. The total
balance of the goodwill and intangibles would have been approximately
$191,468,991 and 4,380,000, respectively, related to PFI and FHMS at
January 1, 1996.
(3) It is expected that substantially all of the excess purchase price over
the net assets acquired in connection with the acquisition of the FHMS
entities will be allocated to the managed care contract which
123
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
has a life of 30 years. As the value of the managed care contract will be
amortized over 30 years, the same amortization period as goodwill, and
there would be no difference in the amortization expense, no amount has
been allocated between the goodwill and the managed care contract for the
purposes of the pro forma financial statements.
[G] Reflects the increase in interest expense as a result of the notes issued
in connection with the FPA acquisitions. The estimated debt in the amount
of approximately $89,000,000 to be issued or assumed in connection with
the FHMS acquisition bears interest at LIBOR plus .45%. A one-eighth
percent change in the interest rate would have an impact to interest
expense of approximately $69,000 and $139,000 for the six months ended
June 30, 1996 and the year ended December 31, 1995, respectively.
[H] Reflects the increase in revenues for FHIPA as a result of the new
provider agreement with Foundation, affiliates, the seller, based on the
acquisition agreement between FPA and the seller of FHIPA, an affiliate of
Foundation.
[I] Reflects the estimated income tax effects of the pro forma adjustments.
Additionally, for the year ended December 31, 1995, reflects income taxes
as if Gonzaba was a C Corporation and had accounted for taxes in
accordance with the provisions of SFAS No. 109. No valuation allowance has
been recognized related to the pro forma tax benefits based on FPA
Management's belief that it is more likely than not, based on the
assessment of future taxable income and available tax planning strategies,
that such benefit would be realized in future periods. If FPA had incurred
the losses before income taxes of $44,665,002 and $83,864,941 for the six
months ended June 30, 1996 and the year ended December 31, 1995,
respectively, included in the pro forma income statements, FPA would need
to generate a comparable amount of future taxable income over the next 15
years (net operating loss carryforward period) in order to fully realize
the benefit of these net operating losses.
[J] Reflects income taxes as if FPA and Sterling had been a C Corporation for
the periods presented.
[K] Not Used
[L] Reflects the reduction in shareholder compensation, bonuses and other
benefits that will not be paid in the future as a result of the 1995
Sterling Acquisitions and the employment contracts that Sterling entered
into, in conjunction with the 1995 Sterling Acquisitions. Additionally,
reflects the amortization of the excess of cost over net assets of
businesses acquired of $216,723, and the incremental interest of $245,416
in conjunction with the 1995 Sterling Acquisitions. Interest is calculated
based on Sterling's 1995 effective borrowing rate of 8.0%. The excess of
the purchase price over the cost of the net assets of the 1995 Sterling
Acquisitions is being amortized on a straight-line basis over periods
ranging from 25 to 40 years. The 1995 Sterling Acquisitions resulted in
additional borrowings on Sterling's bank line of credit in the amount of
$15,100,000 during 1995.
[M] Reflects the income tax effect of the pro forma adjustments at an assumed
income tax rate of 40% and the incremental income taxes on the operations
of 1995 Sterling Acquisitions that were S corporations prior to their
acquisition.
[N] Not Used
[O] Reflects an adjustment for certain assets and liabilities, as defined in
the Stock Purchase Agreement, to be distributed from FHMS to Foundation,
the seller, prior to the acquisition of FHMS by FPA. Such assets consist
primarily of property and equipment which FPA is not acquiring in the
transaction and is being transferred to Foundation with a corresponding
decrease in the debt due to Foundation.
124
<PAGE>
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[P] Reflects the reclassification of debt owed to Foundation to long-term as
defined in the Stock Purchase Agreement. The debt due to Foundation in
connection with this acquisition will consist of a note for approximately
$67 million as of June 30, 1996 (to be adjusted for liabilities incurred
between June 30, 1996 and the closing of the FHMS transaction, subject to
a maximum of $12 million) bearing interest at LIBOR plus .45% with
principal and interest due monthly over 84 months, such principal
payments are based on a 15 year amortization schedule. In addition, there
will be a $22 million note issued due to Foundation Health Corporation
bearing interest at LIBOR plus .45% maturing in 5 months from the closing
date.
[Q] The FHMS amounts included in the pro forma condensed consolidated
statement of operations for the year ended December 31, 1995 represent
the unaudited results of operations of FHMS for the year ended March 31,
1996. Accordingly, the FHMS income statement amounts for the three months
ended March 31, 1996 are included in the pro forma condensed consolidated
income statements for the year ended December 31, 1995 and the six months
ended June 30, 1996.
[R] The weighted average shares outstanding was calculated based on the
historical weighted average shares outstanding of FPA giving effect to
the estimated shares of FPA Common Stock to be issued in connection with
the merger with Sterling (at an assumed exchange ratio of 1.278). In
addition, for the six months ended June 30, 1996 and the year ended
December 31, 1995, the weighted average shares outstanding give effect to
the estimated 4,166,667 shares of FPA Common Stock to be issued in
connection with the FHMS Acquisition, 525,000 shares of FPA Common Stock
issued in connection with the PFI Acquisition, and 225,475 shares of FPA
Common Stock issued in connection with the 1995 FPA Acquisitions.
125
<PAGE>
SELECTED FINANCIAL DATA--FPA
The following statement of operations data and balance sheet data have been
derived from the consolidated financial statements of FPA. The consolidated
balance sheets of FPA as of December 31, 1994 and 1995 and the related
consolidated statements of operations for each of the three years in the
period ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, whose report is contained in FPA's Annual Report on Form
10-K, as amended, for the year ended December 31, 1995 which is incorporated
herein by reference. The consolidated balance sheets as of December 31, 1991,
1992 and 1993 and the related consolidated statements of operations for the
years then ended have also been audited. The selected financial data below
should be read in conjunction with the consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in FPA's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1995 which is incorporated herein by
reference.
The financial statements of the Company for the six months ended June 30,
1995 and June 30, 1996 are unaudited, but in the opinion of management, have
been prepared on the same basis as the audited financial statements and
reflect all adjustments consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for
such periods. The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the operating results to be expected for the
full year or any other period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- -------------------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations:
Operating revenue,
assigned from Pro-
fessional Corpora-
tions............... $1,321,682 $8,275,229 $13,987,914 $18,435,877 $52,691,955 $15,744,806 $98,841,091
Medical services ex-
pense............... 995,405 6,423,021 10,347,804 13,628,430 37,757,244 11,929,382 72,493,036
---------- ---------- ----------- ----------- ----------- ----------- -----------
326,277 1,852,208 3,640,110 4,807,447 14,934,711 3,815,424 26,348,055
General and adminis-
trative expense..... 862,205 1,893,206 3,471,056 4,423,842 13,310,386 3,999,450 21,185,818
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.......... (535,528) (40,998) 169,054 383,605 1,624,325 (184,026) 5,162,237
Other income (ex-
pense), net......... -- 10,053 9,267 79,892 189,725 192,095 (889,193)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........ (535,928) (30,945) 178,321 463,497 1,814,050 8,069 4,273,044
Income tax expense
(benefit)........... -- -- -- 75,184 811,588 4,160 1,884,734
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ (535,928) $ (30,945) $ 178,321 $ 388,313 $ 1,002,462 $ 3,909 $ 2,388,310
========== ========== =========== =========== =========== =========== ===========
Net income (loss) per
share............... $ 0.13 $ * $ 0.20
Common shares out-
standing............ 3,163,000 3,981,613 7,676,402 7,046,313 12,162,197
Pro Forma (1):
Net Income........... $ 843,795 $ 278,078
Net income per
share............... $ 0.27 $ 0.07
</TABLE>
- --------
* Less than $.01 per share.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------------
1991 1992 1993 1994 1995 1996
--------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data :
Cash and marketable se-
curities............... -- $ 423,430 $ 609,958 $12,197,911 $ 9,329,840 $ 3,247,505
Working capital (defi-
cit)................... $(535,528) (634,408) (599,785) 12,622,158 1,525,822 (26,978,598)
Total assets............ 107,614 1,026,595 1,632,707 18,309,401 73,798,284 147,809,079
Long-term debt, net of
current portion........ -- -- 20,959 1,218,986 7,486,239 16,131,540
Stockholders' equity
(deficit).............. (515,204) (546,149) (357,828) 14,702,968 44,093,691 54,160,196
</TABLE>
- --------
(1) Reflects the effects on the historical statement of operations data for
1993 as if FPA (i) had paid to the executive officers annual compensation
consistent with the employment agreements entered into as of January 1,
1994 and (ii) had been treated as a C Corporation rather than an S
Corporation for income tax purposes, with an assumed annual effective
income tax rate of 40%. Pro forma net income and net income per share for
1994 assumes no tax benefit from termination by FPA of its S Corporation
election and an assumed effective annual income tax rate of 40%.
126
<PAGE>
SELECTED FINANCIAL DATA--STERLING
The selected consolidated financial data set forth below as of and for each
of the five years in the period ended December 31, 1995 have been derived from
Sterling's and predecessor entities' financial statements, which have been
audited by Coopers & Lybrand L.L.P., independent accountants. The selected
consolidated financial data of Sterling as of and for the six months ended
June 30, 1995 and 1996 have been derived from the unaudited consolidated
financial statements of Sterling which, in the opinion of management, include
all adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation of the information set forth herein. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of the results of the full year. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Sterling's Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data(1):
Operating revenue, net.. $27,697 $37,945 $46,826 $60,426 $115,660 $ 51,278 $ 66,396
------- ------- ------- ------- -------- -------- --------
Costs and expenses:
Cost of affiliated
physician services... 18,755 25,138 31,140 40,762 69,735 30,419 42,116
Medical support
services............. 1,450 1,827 2,046 2,327 6,251 2,712 3,061
Selling, general and
administrative....... 5,759 9,687 10,904 12,937 29,322 13,364 14,699
Depreciation and
amortization......... 652 788 331 598 2,260 986 1,509
Unusual items(2)...... -- -- -- -- 1,590 -- --
------- ------- ------- ------- -------- -------- --------
Total operating
expenses........... 26,616 37,440 44,421 56,624 109,158 47,481 61,385
------- ------- ------- ------- -------- -------- --------
Operating income........ 1,081 505 2,405 3,802 6,502 3,797 5,011
Other expenses.......... 99 163 429 242 1,759 810 456
------- ------- ------- ------- -------- -------- --------
Income before income
taxes.................. 982 342 1,976 3,560 4,743 2,987 4,555
Provision for income
taxes.................. -- -- -- 3,265(4) 1,911 1,195 1,778
------- ------- ------- ------- -------- -------- --------
Net income(3)........... $ 982 $ 342 $ 1,976 $ 295 $ 2,832 $ 1,792 $ 2,777
======= ======= ======= ======= ======== ======== ========
Net income per share:
Primary............... $ 0.45 $ 0.32 $ 0.34
======== ======== ========
Assuming full dilution.. $ 0.45 $ 0.31 $ 0.33
======== ======== ========
Pro forma provision for
income taxes........... $ 581 $ 360 $ 714 $ 1,356
Pro forma net income
(loss)(5).............. 401 (18) 1,261 2,204
Net income (loss) per
common share........... $ 0.17 $ (0.01) $ 0.28 $ 0.48
======= ======= ======= =======
Weighted average number
of common and common
equivalent shares out-
standing(6):
Primary............... 2,322 2,322 4,442 4,628 6,271 5,593 8,221
Assuming full
dilution............. 2,322 2,322 4,442 4,628 6,327 5,700 8,318
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Working capital......... $ 1,918 $ 2,674 $ 3,190 $ 9,541 $ 24,448 $ 16,820 $ 33,590
Total assets............ 8,094 10,629 13,215 26,742 78,608 61,686 84,890
Long-term liabilities... 1,397 2,060 4,074 8,334 15,356 29,571 14,688
Stockholders' equity.... 1,818 2,125 817 9,623 49,133 19,764 59,640
</TABLE>
127
<PAGE>
- --------
(1) The financial data for the periods ended on or before December 31, 1994
include the pro forma combined results of operations of the constituents
of the business combination with Frost Hanna Halpryn Capital Group Inc.,
which was completed on May 31, 1994 ("FHH Merger"). The FHH Merger has
been accounted for as a capital transaction which is equivalent to the
issuance of stock by Sterling for the net monetary assets of FHH
accompanied by a recapitalization of Sterling.
(2) Represents unusual charges of $1.6 million including a $434,000 charge for
impairment of goodwill and a $773,000 charge for the loss on disposition
of businesses as a result of Sterling's sale of six and closing of two
primary care clinics and $375,000 relating to the bankruptcy of one of its
hospital clients. See Note 4 of Notes to Consolidated Financial Statements
of Sterling.
(3) Prior to the FHH Merger, Sterling was an S corporation and not subject to
federal and state income taxes. Accordingly, net income (loss) for the pro
forma combined results of operations of Sterling prior to the FHH Merger
does not include a provision for income taxes.
(4) Includes a one-time, non-recurring charge of $2.4 million as a result of
the termination of Sterling's S corporation status and the adoption of
Financial Accounting Standards Board No. 109, "Accounting for Income
Taxes." See Note 12 of Notes to Consolidated Financial Statements of
Sterling.
(5) Pro forma net income (loss) includes a pro forma income tax provision
(benefit) based on the tax laws in effect, as if Sterling had been subject
to federal and state income taxes for all such periods.
(6) Reflects (i) in 1991 and 1992, the 2,321,500 shares of Sterling Common
Stock issued to the former shareholders of Sterling in connection with the
FHH Merger, (ii) in 1993, the shares of Sterling Common Stock issued to
the former shareholders of Sterling in connection with the FHH Merger,
117,550 shares of Sterling Common Stock underlying certain warrants and
369,000 shares of Sterling Common Stock underlying employee stock options
granted in connection with the FHH Merger, and (iii) in 1994, the weighted
average number of common and common equivalent shares outstanding during
the period, assuming the shares issued to the former shareholders of
Sterling were issued on January 1, 1994. Common equivalent shares consist
of the dilutive effect of outstanding options and warrants, calculated
using the treasury stock method.
128
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following is unaudited pro forma combined statements of operations data
and combined balance sheet data of FPA and Sterling, which give effect to the
Merger as a pooling of interests and should be read in conjunction with such
pro forma condensed consolidated financial statements (unaudited) and the
notes thereto included elsewhere in this registration statement. For purposes
of the pro forma operating data, FPA's consolidated financial statements for
the three fiscal years ended December 31, 1995, 1994 and 1993, and for the
three months ended June 30, 1996 and 1995, have been combined with Sterling's
(and predecessor entities') consolidated financial statements for the three
fiscal years ended December 31, 1995, 1994 and 1993, and for the six months
ended June 30, 1996 and 1995. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of future operating results or financial position.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Combined Statements of
Operations:
Operating revenue....... $60,813,753 $78,861,827 $168,351,482 $ 67,022,806 $ 165,237,328
Medical services ex-
pense.................. 43,533,422 56,717,751 113,742,878 45,060,382 117,669,950
----------- ----------- ------------ ------------ -------------
17,280,331 22,144,076 54,608,604 21,962,424 47,567,378
General and administra-
tive expense........... 14,706,579 17,958,432 46,482,673 18,349,450 37,394,090
----------- ----------- ------------ ------------ -------------
Income from operations.. 2,573,752 4,185,644 8,125,931 3,612,974 10,173,288
Other expense, net...... (419,603) (161,755) (1,568,646) (617,905) (1,345,417)
----------- ----------- ------------ ------------ -------------
Income before income
taxes.................. 2,154,149 4,023,889 6,557,285 2,995,069 8,827,871
Income tax expense...... (785,728) (1,541,490) (2,723,320) (1,199,160) (3,663,048)
----------- ----------- ------------ ------------ -------------
Net income.............. $ 1,368,421 $ 2,482,399 $ 3,833,965 $ 1,795,909 $ 5,164,823
=========== =========== ============ ============ =============
Pro Forma Per Share Da-
ta:
Net income per share.... $ 0.10 $ 0.17 $ 0.22 $ 0.10 $ 0.23
Weighted average shares
outstanding............ 13,952,666 14,771,279 18,466,068 17,835,979 22,951,863
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ JUNE 30,
1993 1994 1995 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Combined Balance Sheet Data:
Cash and marketable securi-
ties....................... $ 751,010 $12,216,681 $ 11,401,013 $ 6,391,685
Working capital surplus..... 2,590,609 22,163,583 25,973,843 6,642,411
Total assets................ 14,847,654 45,051,506 152,406,536 232,698,679
Long-term debt, net of cur-
rent portion............... 4,094,673 9,553,261 22,841,849 27,208,928
Stockholders' equity........ 459,635 24,326,420 93,226,965 113,831,319
</TABLE>
129
<PAGE>
APPROVAL OF ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETINGS
At the FPA Special Meeting, FPA stockholders will be asked to approve the
adjournment or postponement of the FPA Special Meeting in the event that such
adjournment or postponement is necessary in order to solicit additional votes
for the FPA Proposals.
FPA's Board of Directors recommends that you vote FOR this proposal.
At the Sterling Special Meeting, Sterling shareholders will be asked to
approve the adjournment or postponement of the Special Meeting in the event
that such adjournment or postponement is necessary in order to solicit
additional votes for adoption of the Merger Agreement.
Sterling's Board of Directors recommends that you vote FOR this proposal.
LEGAL MATTERS
The validity of the FPA Common Stock offered hereby will be passed upon for
FPA by Ballard Spahr Andrews & Ingersoll, Philadelphia, Pennsylvania. Coopers
& Lybrand L.L.P. has rendered an opinion (which is included as an exhibit to
the Registration Statement of which this Proxy Statement/Prospectus forms a
part) to the effect that other than with respect to the payment of cash in
lieu of fractional FPA shares, no gain or loss will be recognized by the
Sterling shareholders upon the conversion of their Sterling shares solely into
FPA shares by virtue of the Merger.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
Sterling Shareholders. If the Merger is not consummated, in order to be
eligible for inclusion in Sterling's proxy solicitation materials for its 1997
annual meeting of shareholders, any stockholder proposal to be considered at
such meeting must have been received by Sterling not later than March 1, 1997.
Sterling will not be required to include in its proxy solicitation material a
shareholder proposal which is received after that date or which otherwise
fails to meet the requirements for shareholder proposals established by
regulations of the SEC. If the Merger is consummated, there will be no 1997
annual meeting of Sterling shareholders.
FPA Stockholders. In order to be eligible for inclusion in FPA's proxy
solicitation materials for its 1997 annual meeting of stockholders, any
stockholder proposal to be considered at such meeting must be received by FPA
not later than December 21, 1996. FPA will not be required to include in its
proxy solicitation material a stockholder proposal received after that date or
which otherwise fails to meet the requirements for stockholder proposals
established by regulations of the SEC.
OTHER BUSINESS
Neither the Board of Directors of Sterling nor the Board of Directors of FPA
is aware of any business to be acted upon at the Special Meetings other than
as described herein. If, however, other matters are properly brought before
either of the Special Meetings, or any adjournments or postponements thereof,
the persons appointed as proxies will have discretion to vote or act thereon
according to their best judgment and applicable Commission rules.
130
<PAGE>
EXPERTS
The consolidated financial statements of FPA as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in the Form 10-K, as amended by Form 10-K/A, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing therein, and have been incorporated herein by reference in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated balance sheets as of December 31, 1995 and 1994 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1995 and the period June 1, 1994 to December 31,
1994 of Sterling and the statement of operations, stockholders' equity and
cash flows for the five months ended May 31, 1994 and the year ended December
31, 1993 of Sterling Health Care Group, Inc. and Sterling Healthcare, Inc.,
included in this Joint Proxy Statement/Prospectus, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing, which is included in the Annual Report on Form 10-K, as amended by
Form 10-K/A, for the year ended December 31, 1995.
The combined financial statements of Foundation Health Medical Services (a
wholly-owned subsidiary of Foundation Health Corporation) and affiliates as of
June 30, 1995 and 1996 and for each of the three years in the period ended
June 30, 1996, included in the Proxy Statement/Prospectus have been audited by
Deloitte & Touche LLP (except for the December 31, 1993 financial statements
of Thomas-Davis Medical Centers, P.C.) as stated in their report appearing
herein (such report expresses an unqualified opinion and includes an
explanatory paragraph referring to significant related party transactions).
The financial statements of Thomas-Davis Medical Centers, P.C. for the year
ended December 31, 1993 (combined with those of Foundation Health Medical
Services (a wholly-owned subsidiary of Foundation Health Corporation) and
affiliates) have been audited by Stevenson, Jones, Imig, Holmaas & Kleinhans,
P.C., as stated in their report included herein. Such financial statements of
Foundation Health Medical Services (a wholly-owned subsidiary of Foundation
Health Corporation) and affiliates are included herein in reliance upon the
respective reports of such firms given upon their authority as experts in
accounting and auditing. All of the foregoing firms are independent auditors.
The financial statements of Foundation Health IPA as of December 31, 1995
and 1994 and for the year ended December 31, 1995 and for the period from June
7, 1994 (date of inception) to December 31, 1994, included in the Proxy
Statement/Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (such report expresses an
unqualified opinion and includes an explanatory paragraph referring to
significant related party transactions), and has been so included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
131
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Physicians First, Inc.
(a wholly-owned subsidiary of
Physician Corporation of America):
We have audited the accompanying consolidated balance sheets of Physicians
First, Inc. and Subsidiaries (a wholly-owned subsidiary of Physician
Corporation of America) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholder's equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physicians
First, Inc. and subsidiaries (a wholly-owned subsidiary of Physician
Corporation of America) as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick
Fort Lauderdale, Florida
March 29, 1996
F-1
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MAY 31,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 4,458,804 $ 1,915,764 $ 3,840,406
Accounts receivable, net of allowance for
uncollectible accounts of approximately
$1,138,000 and $1,040,000 at December
31, 1995 and 1994, respectively......... 917,820 317,319 2,123,944
Due from affiliates...................... 665,251 298,605 25,273
Inventories.............................. 447,978 455,255 317,686
Deferred income taxes.................... 582,635 460,000 571,466
Prepaid expenses and other current as-
sets.................................... 688,686 855,205 519,423
----------- ----------- -----------
Total current assets................... 7,761,174 4,302,148 7,398,198
----------- ----------- -----------
Property, equipment and leasehold improve-
ments, net................................ 7,772,201 7,042,209 7,284,773
Other assets............................... 576,990 538,342 579,210
----------- ----------- -----------
8,349,191 7,580,551 7,863,983
----------- ----------- -----------
Intangible assets:
Goodwill, net of accumulated amortization
of approximately $72,000 and $40,000 at
December 31, 1995 and 1994, respective-
ly...................................... 728,000 760,000 715,000
Other intangible assets, net of accumu-
lated amortization of approximately
$423,000 and $188,000 at December 31,
1995 and 1994, respectively............. 1,091,710 276,085 970,600
----------- ----------- -----------
Total intangible assets................ 1,819,710 1,036,085 1,685,600
----------- ----------- -----------
Total assets........................... $17,930,075 $12,918,784 $16,947,781
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MAY 31,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, accrued expenses and
other current liabilities............ $ 3,266,061 $ 2,850,589 $ 3,902,743
Current portion of obligations under
capital leases....................... 12,334 22,930 8,297
Current portion of notes payable...... 82,115 126,042 43,313
Due to affiliates..................... 1,699,138 203,029 90,215
----------- ----------- -----------
Total current liabilities........... 5,059,648 3,202,590 4,044,568
----------- ----------- -----------
Obligations under capital leases, less
current portion........................ 10,351 23,795 10,351
Notes payable, less current portion..... 60,151 142,266 60,151
Deferred income taxes................... 146,323 203,500 77,795
----------- ----------- -----------
Total liabilities................... 5,276,473 3,572,151 4,192,865
----------- ----------- -----------
Stockholder's equity:
Series A preferred stock, $.10 par
value. Authorized 100,000 shares; is-
sued and outstanding 77,500 shares at
December 31, 1994.................... -- 7,750 --
Common stock, $.01 par value. Autho-
rized 100,000 shares; issued and out-
standing 100,000 shares.............. 1,000 -- 1,000
Common stock of PCA Family Medical
Centers, Inc., Century Vision Opti-
cal, Inc., and PCA Family Pharmacy,
Inc. par value $.01, $10 and $10 per
share, respectively. Authorized
100,000, 60 and 60 shares; issued and
outstanding 24,400, 40 and 60 shares
of PCA Family Medical Centers, Inc.,
Century Vision Optical, Inc., and PCA
Family Pharmacy, Inc., respectively.. -- 1,244 --
Additional paid-in capital.............. 19,493,156 16,543,539 19,493,156
Accumulated deficit..................... (6,840,554) (7,205,900) (6,739,240)
----------- ----------- -----------
Total stockholder's equity.......... 12,653,602 9,346,633 12,754,916
----------- ----------- -----------
Commitments and contingencies:
Total liabilities and stockholder's
equity............................. $17,930,075 $12,918,784 $16,947,781
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
DECEMBER 31, MAY 31,
------------------------ ------------------------
1995 1994 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue:
Capitation revenue....... $34,313,695 $34,915,499 $14,870,833 $14,190,729
Other operating revenue.. 7,347,642 3,324,981 4,176,018 1,545,247
----------- ----------- ----------- -----------
Total operating reve-
nue................... 41,661,337 38,240,480 19,046,851 15,735,976
----------- ----------- ----------- -----------
Operating expenses:
Medical center costs..... 37,252,931 33,705,041 16,128,269 14,528,373
Depreciation and amorti-
zation.................. 1,689,966 1,281,328 741,409 594,495
Administrative costs..... 1,299,803 -- 1,995,495 --
Management contracts..... 883,246 1,125,852 75,000 465,680
----------- ----------- ----------- -----------
Total operating ex-
penses................ 41,125,946 36,112,221 18,940,173 15,588,548
----------- ----------- ----------- -----------
Income from opera-
tions................. 535,391 2,128,259 106,678 147,428
----------- ----------- ----------- -----------
Other income (expenses):
Interest income.......... 119,166 52,124 83,940 47,840
Interest expense......... (21,649) (22,697) (15,382) (11,372)
----------- ----------- ----------- -----------
Total other income..... 97,517 29,427 68,558 36,468
----------- ----------- ----------- -----------
Income before income
taxes................. 632,908 2,157,686 175,236 183,896
Income tax expense......... (267,562) (819,920) (73,922) (81,656)
----------- ----------- ----------- -----------
Net income............. $ 365,346 $ 1,337,766 $ 101,314 $ 102,240
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE FIVE MONTHS ENDED MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL (DEFICIT) EQUITY
--------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... $ 7,750 $ 1,244 $16,543,539 $(8,543,666) $ 8,008,867
Net income............ -- -- -- 1,337,766 1,337,766
------- ------- ----------- ----------- -----------
Balance, December 31,
1994................... 7,750 1,244 16,543,539 (7,205,900) 9,346,633
Issuance of common
stock................ -- 1,000 2,299,000 -- 2,300,000
Recapitalization (note
1a).................. (7,750) (1,244) 650,617 -- 641,623
Net income............ -- -- -- 365,346 365,346
------- ------- ----------- ----------- -----------
Balance, December 31,
1995................... -- 1,000 19,493,156 (6,840,554) 12,653,602
Net income............ -- -- -- 101,314 101,314
------- ------- ----------- ----------- -----------
Balance, May 31, 1996... -- $ 1,000 $19,493,156 $(6,739,240) $12,754,916
======= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MAY 31,
------------------------ ----------------------
1995 1994 1996 1995
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Reconciliation of net income
to net cash provided by
operating activities:
Net income................ $ 365,346 $ 1,337,766 $ 101,314 $ 102,240
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 1,689,966 1,281,328 741,409 594,495
Deferred income taxes... (119,940) (46,471) -- --
Changes in assets and
liabilities:
Decrease (increase) in
accounts
receivables.......... 99,499 (206,757) (1,206,124) (566,013)
Decrease in
inventories.......... 7,277 132,360 169,263 (29,400)
Decrease in deferred
income taxes, net.... (59,872) (210,029) (57,359) (23,020)
Decrease in prepaid
expenses and other
current assets....... 166,519 410,288 169,263 357,774
(Increase) decrease in
other assets......... (38,648) 6,566 (2,220) (6,625)
Increase (decrease)
increase in due to
affiliates........... 1,129,463 (617,066) (968,945) (4,608)
Increase in accounts
payable, accrued
expenses and other
current liabilities.. 415,472 292,169 636,682 114,624
----------- ----------- ---------- ----------
Net cash provided by
operating
activities......... 3,655,082 2,380,154 (416,717) 539,467
----------- ----------- ---------- ----------
Cash flow from investing
activities:
Capital expenditures...... (1,061,960) (2,768,162) (158,842) (858,883)
Acquisitions, net of cash
acquired................. (2,200,000) -- -- --
----------- ----------- ---------- ----------
Net cash used in
investing
activities......... (3,261,960) (2,768,162) (158,842) (858,883)
----------- ----------- ---------- ----------
Cash flow financing
activities:
Issuance of common stock.. 2,300,000 -- -- --
Payments on other notes
and capital lease
obligations.............. (150,082) (152,301) (42,839) (21,325)
----------- ----------- ---------- ----------
Net cash provided by
(used in) financing
activities......... 2,149,918 (152,301) (42,839) (21,325)
----------- ----------- ---------- ----------
Net increase
(decrease) in cash
and cash
equivalents........ 2,543,040 (540,309) (618,398) (340,741)
Cash and cash equivalents,
beginning of year.......... 1,915,764 2,456,073 4,458,804 1,915,764
----------- ----------- ---------- ----------
Cash and cash equivalents,
end of year................ $ 4,458,804 $ 1,915,764 $3,840,406 $1,575,023
=========== =========== ========== ==========
Cash paid for interest...... $ 22,122 $ -- $ 8,928 $ --
=========== =========== ========== ==========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
In July 1995, PFI acquired certain assets of a physician practice which
included accounts receivable of approximately $700,000, equipment of
approximately $450,000 and a covenant not-to-compete of approximately
$1,050,000.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR
THE THREE MONTH PERIODS ENDED MAY 31, 1995 AND 1996 IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies of Physicians First, Inc.
and Subsidiaries (a wholly-owned subsidiary of Physician Corporation of
America (PCA)) are as follows:
(a)Organization
The accompanying financial statements reflect PCA's continuing
interest in the following entities: PCA Family Medical Center's, Inc., PCA
Family Pharmacy, Inc., and Century Vision Optical, Inc. The 1995
consolidated financial statements include the accounts of Physicians
First, Inc. and its wholly-owned subsidiaries; PCA Family Medical Centers,
Inc., PCA Family Pharmacy, Inc., Century Vision Optical, Inc., and
Physician Medical Group of Florida, Inc. (collectively "PFI" or the
"Company"). All significant intercompany accounts and transactions have
been eliminated.
The 1994 amounts represent the combined accounts of PCA Family
Medical Centers, Inc., PCA Family Pharmacy, Inc. and Century Vision
Optical, Inc. On April 1, 1995, Physician Corporation of America (the
Parent) and its wholly-owned subsidiary, PCA Family Health Plan, Inc.
transferred ownership of PCA Family Medical Centers, Inc., PCA Family
Pharmacy, Inc. and Century Vision Optical, Inc. to PFI, a wholly-owned
subsidiary of the Parent.
(b)Capitation Revenue
The Company is party to an agreement with PCA Health Plans of
Florida, Inc. and PCA Family Health Plans, Inc., two affiliated Health
Maintenance Organizations (HMO's) to provide health services to certain
of the HMO's members. The Company receives a fixed monthly fee for each
HMO member covered by this agreement. Capitation revenue is recognized
as income during the coverage period.
(c)Medical Center Costs
Medical center costs are comprised of the expenses incurred to
operate the Company's medical centers. These costs include those
associated with the direct delivery of medical services as well as the
overall operations of the medical centers.
(d)Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
The Company files a consolidated income tax return with the Parent.
(e)Inventories
Inventories, which consist of medical and optical supplies and
pharmaceuticals, held for resale are stated at the lower of cost or
market based upon the first-in, first-out method.
F-7
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are recorded at cost.
Equipment under capital leases are stated at the present value of
minimum lease payments at the inception of the lease.
Depreciation on equipment is calculated on the straight-line method
over the estimated useful lives of the assets. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease
terms or estimated lives of the assets.
(g) Intangible Assets
The goodwill is amortized on the straight-line method over a period
of 25 years.
Other intangible assets consist of organization costs and the costs
of identifiable intangible assets and covenants not to compete.
Organization costs are being amortized using the straight-line method
over five years. The costs of identifiable intangible assets and
covenants not to compete are amortized using the straight-line method
over the term of the estimated benefit or agreements which range from
three to twenty-five years.
(h) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents consist of cash and short-term investments with an
original maturity of less than 90 days.
(i) Use of Estimates
Management of the company has made certain estimates and assumptions
relating to the reporting of the assets and liabilities, revenues and
expenses to prepare these financial statements in conformity with
generally accepted accounting principles.
(j) Unaudited Financial Information
The consolidated financial information for the five months ended May
31, 1996 and 1995 included in the consolidated financial statements and
notes thereto are unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of such
information. Information for the five months ended May 31, 1996 is not
necessarily indicative of the results to be expected for the entire year.
(2) ACQUISITIONS
In July 1995, the Company acquired certain assets of a physician practice
which operates a medical center in Jacksonville, Florida. The purchase price
of $2,200,000 included $1,050,000 relating to a five year non-compete
agreement with the former owners. The Company used the purchase method of
accounting to record this acquisition.
F-8
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, including those under capital
lease agreements at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
ESTIMATED
1995 1994 USEFUL LIVES
----------- ----------- -------------------
<S> <C> <C> <C>
Buildings.................. $ 279,130 $ 60,083 30 years
Land....................... 55,460 55,460 --
Furniture and equipment.... 5,585,777 5,191,587 The lesser of 5-7
years or lease term
Leasehold improvements..... 5,910,704 4,981,040 The lesser of 5
years or lease term
----------- -----------
11,831,071 10,288,170
Less accumulated
depreciation and
amortization.............. (4,058,870) (3,245,961)
----------- -----------
$ 7,772,201 $ 7,042,209
=========== ===========
</TABLE>
(4) NOTES PAYABLE
Notes payable at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Obligations to former owner of business acquired for
covenant not to compete, imputed interest of approxi-
mately 5.5%, payable in monthly installments in vary-
ing amounts through September 1998.................... $142,266 $268,308
Less current maturities of notes payable............... 82,115 126,042
-------- --------
Notes payable less current maturities................ $ 60,151 $142,266
======== ========
</TABLE>
The aggregate principal maturities of long term debt due in the next five
years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER
31,
--------
<S> <C>
1996................................ $ 82,115
1997................................ 41,745
1998................................ 18,406
--------
$142,266
========
</TABLE>
On March 29, 1996, the Parent amended its credit agreement with its primary
lenders. Such amendments modified certain covenants and required the Parent to
pledge the stock of the Company and required the Company to guarantee payment.
F-9
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LEASES
PFI leases certain office space under long-term lease agreements.
Future minimum lease payments under capital leases for office equipment and
noncancelable operating leases for office space and vehicles at December 31,
1995, are as follows:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER CAPITAL OPERATING
31, LEASES LEASES
-------- -------- -----------
<S> <C> <C>
1996............................................... $ 12,584 $ 3,045,683
1997............................................... 10,395 2,402,870
1998............................................... -- 1,916,107
1999............................................... -- 1,558,097
2000............................................... -- 692,288
Thereafter.......................................... -- 517,541
-------- -----------
22,979 10,132,586
Less amount representing interest................... (294) --
-------- -----------
Total minimum lease payments........................ 22,685 $10,132,586
===========
Less current portion under capital lease obliga-
tions.............................................. (12,334)
--------
Capital lease obligation less current portion....... $ 10,351
========
</TABLE>
Total rent expense for the years ended December 31, 1995 and 1994, amounted
to approximately $3,049,000 and $2,574,000, respectively.
(6) INCOME TAXES
For the years ended at December 31, 1995 and 1994, income tax expense
consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal............ $332,252 $(102,839) $229,413 $742,874 $(39,857) $703,017
State.............. 55,250 (16,831) 38,149 123,517 (6,614) 116,903
-------- --------- -------- -------- -------- --------
$387,502 $(119,940) $267,562 $866,391 $(46,471) $819,920
======== ========= ======== ======== ======== ========
</TABLE>
Income tax expense attributable to income from operations was $267,562 and
$819,920 for the years ending December 31, 1995 and 1994, respectively and
differs from the amounts computed by applying the U.S. federal income tax rate
of 35 percent to pretax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Income tax expense at the statutory
rate................................. $221,518 35.0% $755,190 35.0%
State income taxes--net of benefit.... 37,539 5.9 69,193 3.2
Municipal interest.................... (12,732) (2.0) -- --
Other................................. 21,237 3.3 (4,463) (0.2)
-------- ---- -------- ----
$267,562 42.2% $819,920 38.0%
======== ==== ======== ====
</TABLE>
F-10
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
at December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax assets:
Malpractice claims reserves............................. $206,715 $232,240
Compensated absences.................................... 304,731 182,478
Covenants not to compete................................ 71,189 45,282
-------- --------
Total gross deferred income tax assets................ 582,635 460,000
Less valuation allowance.............................. -- --
-------- --------
Net deferred income tax assets........................ 582,635 460,000
-------- --------
Deferred income tax liabilities:
Property and equipment.................................. 137,306 195,143
Other................................................... 9,017 8,107
-------- --------
Total gross deferred income tax liability............. 146,323 203,250
-------- --------
Net deferred income tax benefit tax asset............. $436,312 $256,750
======== ========
</TABLE>
(7) MALPRACTICE CLAIMS
Malpractice claims have been asserted against PFI by various claimants.
These claims are at various stages of processing, and some may ultimately be
brought to trial. In the opinion of management, the outcome of these actions
will not have a significant effect on the financial position of PFI. Incidents
occurring through December 31, 1995, may result in the assertion of additional
claims. No accrual has been made for possible losses attributable to incidents
that may have occurred but have not been identified because the amount cannot
be reasonably estimated. PFI has professional liability insurance for
potential claims incurred in connection with its operations, which covers
claims made during the policy period. PFI intends to keep such insurance in
force during the foreseeable future.
(8) EMPLOYEE BENEFIT PLAN
The Parent sponsors a 401(k) Profit Sharing Plan (the "Plan"). Employees who
have completed one year of service, during which a minimum of 1,000 hours are
worked, may participate in the Plan on semiannual enrollment dates: January 1
and July 1 of each year. Employees may contribute up to 15 percent of their
annual compensation, not to exceed $9,500, to the Plan. Physicians First, Inc.
will match up to 50 percent of an employee's elected contribution to a maximum
of 7 percent of the employee's compensation. Physicians First, Inc.'s matching
contribution vests to the employee at 25 percent per year of service. For the
years ended December 31, 1995 and 1994, respectively, Physicians First, Inc.
made matching contributions to the Plan totaling approximately $186,000 and
$112,000.
(9) RELATED PARTY TRANSACTIONS
PFI conducts business with its Parent and certain other companies which are
related through common ownership.
PFI purchases certain computer equipment through the Parent. In addition,
the Parent provides computer support to PFI. Amounts paid to the Parent for
computer support amounted to approximately $185,000 and $180,000 for 1995 and
1994, respectively.
F-11
<PAGE>
PHYSICIANS FIRST, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF PHYSICIAN
CORPORATION OF AMERICA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Parent provides PFI with certain management advisory and consulting
services based on a monthly charge and a percentage of complete revenue.
Amounts charged by the Parent for such services amounted to approximately
$703,000 and $946,000 for the years ended December 31, 1995 and 1994,
respectively. Effective October 1, 1995, the parent provides these services
for a monthly fee of $15,000.
(10) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are stated at their estimated fair value
as follows:
(a)Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
(b)Notes payable
The carrying amount approximates fair value because the interest rate
is adjustable on the significant portion of such debt.
(11) CONTINGENCIES
PFI is subject to various legal proceedings and claims which arise in the
normal course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions, if any, will not materially
affect the financial position of the Company.
F-12
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED
JUNE 30, 1994, 1995 AND 1996 AND INDEPENDENT AUDITORS' REPORT
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Foundation Health Medical Services and Affiliates
We have audited the accompanying combined balance sheets of Foundation
Health Medical Services (a wholly-owned subsidiary of Foundation Health
Corporation) and its affiliates Foundation Health Medical Group, Inc. and
Thomas-Davis Medical Centers, P.C. (collectively the "Combined Companies"), as
of June 30, 1995 and 1996, and the related combined statements of operations,
shareholders' deficit, and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements are the responsibility
of the Combined Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit
the financial statements of Thomas-Davis Medical Centers, P.C., for the year
ended December 31, 1993, which statements reflect total revenues from
operations of $100,625,000 (which revenues have been included in the
accompanying combined statement of operations for the year ended June 30,
1994, as discussed in Note 2 to the combined financial statements). Those
financial statements of Thomas-Davis Medical Centers, P.C. were audited by
other auditors whose report has been furnished to us, and our opinion insofar
as it relates to the amounts included for Thomas-Davis Medical Centers, P.C.,
for the year ended June 30, 1994, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such financial statements present fairly, in all material respects, the
combined financial position of the Combined Companies as of June 30, 1995 and
1996, and the combined results of their operations and their combined cash
flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 11 to the combined financial statements, the Combined
Companies receive a significant portion of their operating revenues from, and
have significant related party transactions with, two affiliated health
maintenance organizations and their Parent.
Deloitte & Touche llp
Sacramento, California
September 30, 1996
F-14
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED BALANCE SHEETS
JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........................ $ 1,566,000 $ --
Patient receivables, net of allowance for
uncollectible accounts of $3,988,000 and
$3,654,000...................................... 6,778,000 4,828,000
Accounts receivable from related parties......... 2,869,000 387,000
Other current assets............................. 2,979,000 3,722,000
------------ ------------
Total current assets........................... 14,192,000 8,937,000
------------ ------------
Property and equipment, net........................ 109,985,000 93,367,000
Goodwill and other intangible assets, net.......... 9,135,000 12,755,000
Other assets....................................... 2,810,000 3,520,000
------------ ------------
Total assets................................... $136,122,000 $118,579,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
Reserves for claims payable...................... 7,701,000 15,900,000
Accounts payable and accrued expenses............ 10,708,000 14,128,000
Accounts payable to related party................ -- 625,000
Intercompany payables............................ 6,154,000 10,396,000
Intercompany accrued interest.................... 2,326,000 2,303,000
Intercompany notes payable....................... 129,251,000 133,036,000
Current portion of bonus payable................. 1,983,000 2,813,000
Deferred compensation............................ 8,315,000 9,333,000
Current portion of intercompany lease
obligations..................................... 701,000 595,000
Current portion of other liabilities............. 1,530,000 974,000
Current portion of other notes payable........... 332,000 259,000
------------ ------------
Total current liabilities...................... 169,001,000 190,362,000
------------ ------------
Noncurrent portion of bonus payable................ 9,269,000 6,229,000
Noncurrent portion of other notes payable.......... 258,000 124,000
Intercompany lease obligations..................... 1,465,000 862,000
Other liabilities.................................. 5,468,000 2,597,000
------------ ------------
Total liabilities.............................. 185,461,000 200,174,000
------------ ------------
Shareholders' deficit:
Common stock..................................... 20,000 20,000
Contributed capital.............................. 4,722,000 4,722,000
Accumulated deficit.............................. (54,081,000) (86,337,000)
------------ ------------
Total shareholders' deficit.................... (49,339,000) (81,595,000)
------------ ------------
Total liabilities and shareholders' deficit.... $136,122,000 $118,579,000
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Capitation revenue--related party.. $ 82,777,000 $ 80,281,000 $119,639,000
Patient service revenue, net....... 21,777,000 29,222,000 19,001,000
Patient service revenue, net--
related party..................... 3,215,000 5,560,000 5,638,000
Gain on sale of specialty
practices......................... 2,338,000 -- 3,577,000
Other income....................... 596,000 3,233,000 5,907,000
------------ ------------ ------------
Total revenue.................... 110,703,000 118,296,000 153,762,000
------------ ------------ ------------
Expenses:
Salaries and benefits.............. 72,800,000 97,147,000 114,076,000
Health care services............... 22,770,000 22,793,000 54,249,000
Selling, general and
administrative.................... 22,925,000 31,578,000 42,349,000
General and administrative--related
party............................. -- 986,000 4,143,000
Depreciation and amortization...... 3,373,000 6,393,000 9,179,000
Interest expense--intercompany..... 830,000 5,758,000 9,963,000
Interest expense................... 2,065,000 1,668,000 416,000
Other.............................. 921,000 1,680,000 --
------------ ------------ ------------
Total expenses................... 125,684,0000 168,003,000 234,375,000
------------ ------------ ------------
Loss before income taxes............. (14,981,000) (49,707,000) (80,613,000)
Benefit for income taxes............. 3,786,000 4,366,000 48,357,000
------------ ------------ ------------
Net loss............................. $(11,195,000) $(45,341,000) $(32,256,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------- CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at July 1,
1993................... 10,200 $20,000 $2,064,000 $ 7,988,000 $ 10,072,000
Net loss................ (11,195,000) (11,195,000)
TDMC net loss for six
months ended June 30,
1994 (Note 2).......... (5,533,000) (5,533,000)
------ ------- ---------- ------------ ------------
Balance at June 30,
1994................... 10,200 20,000 2,064,000 (8,740,000) (6,656,000)
Net assets transferred
from parent
(Note 1)............... 2,658,000 2,658,000
Net loss................ (45,341,000) (45,341,000)
------ ------- ---------- ------------ ------------
Balance at June 30,
1995................... 10,200 20,000 4,722,000 (54,081,000) (49,339,000)
Net loss................ (32,256,000) (32,256,000)
------ ------- ---------- ------------ ------------
Balance at June 30,
1996................... 10,200 $20,000 $4,722,000 $(86,337,000) $(81,595,000)
====== ======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-17
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................ $(11,195,000) $(45,341,000) $(32,256,000)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Depreciation....................... 2,768,000 3,911,000 6,893,000
Amortization....................... 605,000 2,482,000 2,286,000
Equity in income of unconsolidated
subsidiary........................ -- (248,000) (289,000)
Gain on sale of specialty
practices......................... (2,338,000) -- (3,577,000)
Provision for uncollectible patient
receivables....................... 393,000 666,000 (334,000)
Credit for income taxes applied
against intercompany debt......... -- -- (48,357,000)
Changes in assets and liabilities:
Patient receivables................ 828,000 108,000 2,284,000
Account receivable from related
parties........................... (1,496,000) 2,320,000 2,482,000
Other current assets............... (1,459,000) 7,017,000 (743,000)
Accounts payable and accrued
expenses.......................... 3,676,000 (11,924,000) 2,935,000
Accounts payable to related party.. -- -- 625,000
Reserve for claims payable......... -- 7,701,000 8,199,000
Other current liabilities.......... 21,000 11,252,000 (2,210,000)
Interest payable to related party.. (4,000) -- --
Intercompany payables and accrued
interest.......................... (4,251,000) 7,479,000 4,219,000
Deferred compensation.............. 5,107,000 7,719,000 1,018,000
------------ ------------ ------------
Net cash used for operating
activities......................... (7,345,000) (6,858,000) (56,825,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in cash overdraft.......... -- -- 485,000
Acquisition of property and
equipment.......................... (29,812,000) (48,926,000) (27,734,000)
Proceeds from disposition of
property and equipment............. -- -- 5,384,000
Increase in intangible assets....... (2,952,000) (1,972,000) (3,108,000)
Proceeds from sale of specialty
practices.......................... 3,012,000 -- 4,012,000
Purchase of interest in
unconsolidated subsidiary.......... -- (5,980,000) --
Decrease (increase) in other
assets............................. (1,833,000) 1,394,000 (525,000)
Decrease in notes receivable from
related parties.................... 278,000 -- --
Proceeds from interest in
unconsolidated subsidiary.......... -- 257,000 104,000
------------ ------------ ------------
Net cash used for investing
activities......................... (31,307,000) (55,227,000) (21,382,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Paydown of notes payable to related
parties............................ (391,000) -- --
Use of restricted funds for
construction....................... 970,000 -- --
Paydown of other long-term
obligations........................ (38,000) (15,280,000) --
Paydown of other notes payable...... (893,000) (10,679,000) (325,000)
Proceeds from intercompany notes
payable............................ 32,675,000 106,357,000 80,984,000
Paydown of intercompany notes
payable............................ -- (14,401,000) --
Paydown of other liabilities........ (1,058,000) (3,427,000) (4,136,000)
Proceeds from other notes payable... 3,204,000 -- 118,000
Proceeds from issuance of common
stock.............................. -- -- --
------------ ------------ ------------
Net cash flows provided by financing
activities......................... 34,469,000 62,570,000 76,641,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... (4,183,000) 485,000 (1,566,000)
CASH AND CASH EQUIVALENTS:
Beginning of period................. 5,264,000 1,081,000 1,566,000
------------ ------------ ------------
End of period....................... $ 1,081,000 $ 1,566,000 $ --
============ ============ ============
Supplemental disclosure:
Cash paid during the year for:
Interest........................... $ 2,913,000 $ 5,321,000 $ 9,986,000
============ ============ ============
Effect of intercompany transfers
(Note 1):
Assets, net of cash................ $ -- $ 48,225,000 --
============ ============ ============
Liabilities........................ $ -- $ 45,567,000 --
============ ============ ============
Noncash investing and financing
transactions:
Issuance of notes payable to
acquire intangible assets......... $ 521,000 $ 316,000 $ --
============
============ ============
Property and equipment acquired
through trade payables............ $ 4,083,000 $ 2,584,000 $ --
============ ============ ============
Transfer of property and equipment
for reduction of intercompany
debt.............................. $ $ $ 28,842,000
============ ============ ============
Transfer of receivables for
reduction of intercompany debt.... $ $ $ 48,357,000
============ ============ ============
Assumption of liabilities in
conjunction with acquisition of
physician practice................ $ -- $ -- $ 3,045,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-18
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
NOTE 1--NATURE OF OPERATIONS
Foundation Health Medical Services ("FHMS") is a wholly-owned subsidiary of
Foundation Health Corporation ("FHC"), and was incorporated on September 2,
1992. FHMS, headquartered in Sacramento, California, is a healthcare
management service organization which provides facilities, administrative and
operational services, including claims processing, accounting and financial
reporting (collectively "services") to two affiliated professional medical
corporations (the "Medical Groups"), one each located in California
(Foundation Health Medical Group, Inc. ("FHMG")) and Arizona (Thomas-Davis
Medical Centers, P.C. ("TDMC")). FHMS' subsidiary, Catalina Professional
Recruiters, Inc. ("CPR"), provides temporary and permanent physician placement
services.
On April 2, 1996, the Shareholder of FHMG and TDMC transferred his interests
in FHMG and TDMC to a holding company, FHMG/TDMC Medical Group (the "Holding
Company"), a professional corporation in exchange for 100% of the Holding
Company's common stock.
FHMG, a California professional corporation, was incorporated on August 14,
1992. FHMG provides primary health care services and employs 110 providers at
17 health care centers in California as of June 30, 1996. FHMG is wholly-owned
through the Holding Company by a physician (the "Shareholder"), who is an
employee of an FHC subsidiary. FHC has the right to cause ownership of the
Holding Company to be transferred to another shareholder of its designation
who would be qualified to own the stock of a California medical corporation.
TDMC, an Arizona professional corporation, was incorporated on October 13,
1994. TDMC provides primary and specialty health care services and employs 217
providers at 18 health care centers in Arizona as of June 30, 1996. In
November 1994, TDMC entered into physician employment contracts with a
majority of the physicians of a professional medical corporation which merged
with FHC effective November 1, 1994 and is deemed for financial reporting
purposes to be a predecessor company of TDMC. Concurrently, TDMC entered into
provider contracts with several of the payors formerly served by the
predecessor company of TDMC. TDMC is wholly-owned by the Holding Company. FHC
has the right to cause ownership of the Holding Company to be transferred to
another shareholder of its designation who would be qualified to own the stock
of an Arizona professional medical corporation.
During the year ended June 30, 1995, the net assets of Foundation Health
Real Estate Services, a wholly-owned subsidiary of FHC, amounting to
$2,141,000 and a portion of the net assets of the predecessor company of TDMC
amounting to $517,000 were transferred to FHMS at their recorded book value.
On June 28, 1996 the Shareholder of the Holding Company and FHC entered into
an agreement with FPA Medical Management, Inc., FPA Medical Management of
California, Inc. and FPA Independent Practice Association, an Osteopathic
Medical Corporation ("FPA IPA") to sell all of the outstanding stock of the
Holding Company to FPA IPA and all of the outstanding stock of FHMS to FPA
subject to regulatory approval and customary closing conditions.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination and basis of presentation
The combined financial statements include the accounts of FHMS, FHMG and
TDMC (collectively the "Combined Companies"). The combined statement of
operations for the year ended June 30, 1994 includes the
F-19
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
financial results of the predecessor company of TDMC for the year ended
December 31, 1993. All significant intercompany transactions have been
eliminated in combination. The net loss of the predecessor company of TDMC for
the six months ended June 30, 1994 has been reflected as an addition to the
accumulated deficit as of June 30, 1994.
Cash and cash equivalents
Cash and cash equivalents consist of cash and cash equivalents with original
maturities of three months or less when acquired.
Goodwill and other intangible assets
Goodwill and other intangible assets consist primarily of goodwill and other
intangibles related to the Combined Companies acquisition of various medical
practices and deferred direct and incremental preoperating costs related to
the opening of health care centers. Preoperating costs are deferred prior to
the commencement of significant operations at which time the Combined
Companies begin amortizing such costs. Fully amortized intangible assets and
related accumulated amortization are removed from the accounts. The Combined
Companies evaluate the carrying value of their intangible assets at each
balance sheet date.
Goodwill and other intangible assets are amortized as follows:
<TABLE>
<CAPTION>
LIFE METHOD
---- -------------
<S> <C> <C>
Goodwill........................... 40 years Straight line
Organization and preoperating
costs............................. 3 years Straight line
Noncompetition and employment
agreements........................ Term of related agreement Straight line
</TABLE>
Goodwill of $6,737,000 and $10,368,000 at June 30, 1995 and 1996, net of
accumulated amortization of $163,000 and $375,000, is included in goodwill and
other intangible assets.
Revenue recognition
Capitation revenue from payors is recognized in the month in which the
related enrollees are entitled to services. Agreements with payors may also
contain provisions for incentive payments if the Medical Groups achieve or
exceed certain utilization levels.
Patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. Revenue under
certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
are adjusted in future periods as final settlements are determined.
FHMG has contracts with various managed care organizations and indemnity
insurers to provide physician services based on negotiated fee schedules. In
May 1995, FHMG entered into a primary care capitation contract with Foundation
Health, a California Health Plan (the "Health Plan"). Under the contract FHMG
is at risk for primary care services provided by its physician employees.
Capitation payments are received to cover all primary care services provided
to the Health Plan members linked to FHMG physicians. In November 1995 FHMG
renegotiated its capitation contract with the Health Plan. This new agreement
provides for a fixed payment per member per month for all primary and
specialty professional medical services rendered for Health Plan members
linked to FHMG physicians.
TDMC has contracts with various managed care organizations and indemnity
insurers to provide physician services based on negotiated fee schedules. TDMC
has contracted with Intergroup Prepaid Health Services of Arizona, Inc.
("Intergroup"). Under the contract TDMC is at risk for primary and specialty
health care services.
F-20
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
Reserves for claims payable
Reserves for claims and health care expenses are based upon the accumulation
of cost estimates for unpaid claims reported prior to the close of the
accounting period, together with a provision for the current estimate of the
probable cost of claims that have occurred but have not yet been reported.
Such estimates are based on many variables including individual cases for
reported claims, estimates of unreported claims using historical and
statistical information and other factors. The methods for making the
estimates and for establishing the resulting reserves are continually reviewed
and updated, and any adjustments resulting therefrom are reflected in current
operations. Given the inherent variability of such estimates, the actual
liability could differ significantly from the amounts provided. While the
ultimate amount of claims and the related expenses paid are dependent on
future developments, management is of the opinion that the reserves for claims
is adequate to cover such claims. These liabilities are reduced by estimated
amounts receivable from third-parties for subrogation.
Property and equipment
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method for all assets over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Buildings and improvements........................................ 5-40 years
Furniture and equipment........................................... 3-10 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred. Major
improvements which increase the estimated useful life of an asset are
capitalized. Upon the sale or retirement of assets, recorded cost and related
accumulated depreciation are removed from the accounts, and any gain or loss
on disposal is reflected in operations.
Income taxes
The Combined Companies account for income taxes using the liability method.
Deferred income tax assets and liabilities result from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the combined financial statements that will result in taxable or deductible
amounts in future years. Pursuant to a tax allocation agreement with FHC, the
Combined Companies reflect a provision/benefit for income taxes under the
liability method as if they were to file separate federal and state tax
returns (Note 8).
Fair Value of Financial Instruments
The carrying amount of financial instruments reported in the combined
balance sheets for cash and cash equivalents, accounts receivable, accounts
payable and short-term debt approximates fair value because of the short-term
maturity of these financial instruments. The carrying amount for intercompany
revolving credit approximates fair value.
The fair values of fixed rate notes payable and other long-term liabilities
are estimated by discounting future cash flows using current discount rates
that reflect the risks associated with similar types of loans. At June 30,
1996 the estimated fair values of the Combined Companies' notes payable and
other long-term liabilities approximate the carrying value.
F-21
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently issued accounting pronouncements
The Combined Companies intend to adopt Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of ("SFAS No. 121") during the year ending
June 30, 1997. Adoption of SFAS No. 121 is not expected to have a significant
effect on the Combined Companies' financial statements.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment comprised the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Land............................................. $ 14,700,000 $ 10,624,000
Construction in progress......................... 8,192,000 2,722,000
Buildings and improvements....................... 69,972,000 65,484,000
Furniture and equipment.......................... 32,848,000 35,816,000
------------ ------------
125,712,000 114,646,000
Less: Accumulated depreciation................... (15,727,000) (21,279,000)
------------ ------------
$109,985,000 $ 93,367,000
============ ============
</TABLE>
Included in property and equipment at June 30, 1995 and 1996 is $1,662,000
and $1,861,000 of capitalized interest. During the years ended June 30, 1994,
1995 and 1996, the Combined Companies capitalized $628,000, $1,034,000, and
$199,000 of its interest expense.
Depreciation expense on property and equipment was $2,768,000, $3,911,000,
and $6,893,000 for the years ended June 30, 1994, 1995 and 1996.
NOTE 4--INTERCOMPANY NOTES PAYABLE
Intercompany notes payable comprised the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1996
------------ ------------
<S> <C> <C>
Notes payable, secured by land and building...... $ 42,526,000 $ 19,994,000
Unsecured revolving line of credit............... 86,725,000 113,042,000
------------ ------------
$129,251,000 $133,036,000
============ ============
</TABLE>
F-22
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The secured notes payable to the Health Plan bears interest at 7.75% and are
payable on demand with interest payable quarterly. The revolving credit
agreement is with FHC and restricts the ability of the Combined Companies to
pay dividends and bonuses, acquire assets, enter into liens, incur additional
indebtedness or to otherwise merge, sell or dispose of assets. The credit
agreement bears interest at 7.75%, payable quarterly. Principal and interest
is due June 30, 1997 subject to automatic one-year extensions of the maturity
date unless FHC provides written notice of intent to terminate the agreement.
The amount outstanding under the unsecured revolving line of credit was
reduced by $48,357,000 for net income tax benefits generated by the Combined
Companies.
NOTE 5--BONUS PAYABLE
Certain physician retention bonus obligations are payable to selected TDMC
physicians over a period of four to six years, subject to the physician's
continued employment. Amounts forfeited by participating physicians remain in
the bonus pool and are distributed to the remaining participants. The
estimated present value of future bonus payments was $11,252,000 and
$9,042,000 at June 30, 1995 and 1996.
NOTE 6--OTHER LIABILITIES
Other liabilities at June 30, 1995 and 1996 comprised the following:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Stock Redemption Notes bearing an average interest
rate of 5.87% with maturity dates through December
2020.............................................. $ 655,000 $ 423,000
Notes payable, secured by building, bearing an in-
terest rate of 9% due April 1997.................. 400,000 400,000
Notes payable, secured by land and building, bear-
ing an interest rate of 6.08%, due on dates
through December 2004............................. 2,878,000 2,647,000
Capital lease obligations.......................... 3,065,000 101,000
----------- ----------
6,998,000 3,571,000
Current portion.................................... (1,530,000) (974,000)
----------- ----------
$ 5,468,000 $2,597,000
=========== ==========
Intercompany lease obligations..................... $ 2,166,000 1,457,000
Current portion.................................... (701,000) (595,000)
----------- ----------
$ 1,465,000 $ 862,000
=========== ==========
</TABLE>
F-23
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The Combined Companies lease certain of their equipment under capital leases
that provide for purchase options. Property and equipment under capital leases
was $9,286,000 and the related accumulated depreciation was $4,897,000 at June
30, 1995. The amount of equipment leased under capital leases at June 30, 1996
was not material.
Future minimum payments under capital leases at June 30, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................. $ 716,000
1998............................................................. 459,000
1999............................................................. 389,000
2000............................................................. 176,000
2001............................................................. --
----------
1,740,000
Less: Amount representing interest............................... 182,000
----------
$1,558,000
==========
</TABLE>
NOTE 7--COMMON STOCK
Common stock at June 30, 1995 and 1996 is comprised of the common stock of
FHMS, FHMG and TDMC as follows:
<TABLE>
<S> <C>
FHMS, no par value, 100 shares authorized, issued and outstanding.. $ 5,000
FHMG, no par value, 100 shares authorized, issued and outstanding.. 5,000
TDMC, $1 par value, 10,000 shares authorized, issued and outstand-
ing............................................................... 10,000
-------
$20,000
=======
</TABLE>
NOTE 8--INCOME TAXES
For income tax purposes, the operating results of FHMS have been included in
FHC's consolidated tax return for all years. In December 1995, TDMC and FHMG
entered into a similar tax sharing agreement with FHC. As a result, the losses
of TDMC and FHMG will be included in FHC's consolidated tax return as filed,
or as amended, for all years. The tax benefit of the net operating losses of
TDMC since inception in November 1994 and the net operating losses of FHMG for
all years is provided in the tax provision for the year ended June 30, 1996,
the period in which the tax sharing agreement was signed.
F-24
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The Combined Companies' benefit for income taxes for the years ended June
30, 1994, 1995 and 1996 were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $3,837,000 $6,088,000 $43,189,000
State 848,000 1,477,000 7,570,000
---------- ---------- -----------
Total current 4,685,000 7,565,000 50,759,000
---------- ---------- -----------
Deferred:
Federal (731,000) (2,610,000) (2,128,000)
State (168,000) (589,000) (274,000)
---------- ---------- -----------
Total deferred (899,000) (3,199,000) (2,402,000)
---------- ---------- -----------
Total benefit for income taxes $3,786,000 $4,366,000 $48,357,000
========== ========== ===========
</TABLE>
At June 30, 1994, 1995 and 1996 the Combined Companies had no income taxes
currently payable. All deferred taxes are held at FHC and settled through the
intercompany payable account.
NOTE 9--EMPLOYEE BENEFIT PLANS
Substantially all of FHMS' employees are eligible to participate in the
Foundation Health Corporation Profit sharing and 401(k) Plan ("FHC Plan").
Generally, employees may contribute up to 10% of their annual compensation to
the FHC Plan on a pre-tax basis and up to 10% on an after-tax basis. Under the
FHC Plan, FHMS makes matching contributions of up to a maximum of 50% of the
first 6% of each participating employee's base salary. FHMS' contributions, to
the FHC Plan totaled $15,000, $332,000 and $236,000 for the years ended June
30, 1994, 1995 and 1996.
FHMG and TDMC physician employees may participate in the FHMG 401(k) Plan.
Generally, participating employees may contribute up to 10% of their annual
compensation to the plan on a pre-tax basis and up to an additional 10% on an
after-tax basis. Under the plan, FHMG and TDMC make matching contributions of
up to 6% of each participating employee's base salary. FHMG and TDMC
contributions to the plan totaled $223,000, $1,204,000 and $2,160,000 for the
years ended June 30, 1994, 1995 and 1996.
Deferred compensation plan
Certain FHMS employees are eligible to participate in the FHC deferred
compensation plan. Under the FHC deferred compensation plan, certain members
of management and highly compensated employees may defer payment of up to 90%
of their compensation. FHMS makes matching contributions subject to a vesting
schedule, of up to 10% of an employee participant's compensation if the
participant's base salary is at least $100,000. The deferred compensation,
together with FHMS matching amounts and accumulated interest which is accrued
but unfunded, is distributable in cash by lump sum or in monthly quarterly or
annual installments (not exceeding 20 years) upon the earlier of the date of
distribution elected by the participant or termination of employment. FHMS'
expense under the plan totaled $32,000, $89,000 and $205,000 for the years
ended June 30, 1994, 1995 and 1996. The Combined Companies' liability under
the plan amounted to $23,000 and $207,000 at June 30, 1995 and 1996. Such
amount has been included in accounts payable and accrued expenses.
During 1995, FHC amended the FHC deferred compensation plan by increasing
the interest rate paid to participants to 140% of Moody's corporate bond rate
and by allowing participants to receive 90% of vested funds before scheduled
distributions by irrevocably forfeiting the remaining 10%.
F-25
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
During the year ended June 30, 1995, the Combined Companies recorded a
liability relating to the deferred compensation plan of the predecessor
company of TDMC. Under the terms of the plan, interest accrues at the Citibank
base rate plus .25%. At June 30, 1995 and 1996, the liability recorded by the
Combined Companies related to this plan was $6,784,000 and $5,703,000. The
Combined Companies' expense under the plan totaled $394,000 and $516,000 for
the years ended June 30, 1995 and 1996.
Certain FHMG and TDMC employees may participate in FHMG's deferred
compensation plan and defer payment of up to 90% of their compensation. The
deferred compensation, together with the accumulated interest which is accrued
but unfunded, is distributable in cash by lump sum or in monthly, quarterly,
or annual installments (not exceeding 20 years) upon the earlier of the date
of distribution elected by the participant or termination of employment. Under
the terms of the plan, interest accrues at the Citibank's base rate plus .25%.
The liability under this plan amounted to $1,531,000 and $3,423,000 as of June
30, 1995 and 1996. The Combined Companies' expense under the plan totaled
$23,000, $75,000 and $229,000 for the years ended June 30, 1994, 1995 and
1996.
NOTE 10--ACQUISITIONS
During 1994, the Combined Companies acquired 16 physician practices. The
aggregate purchase price, including direct costs, of these practices was
$1,210,000 of which $650,000 was classified as goodwill, which is being
amortized over 40 years and $560,000 was recorded as the value of covenants
not to compete, which is being amortized over the contractual obligation of
the physicians not to compete of three years.
During 1995, the Combined Companies acquired 24 physician practices. The
aggregate purchase price, including direct costs of these practices was
$571,000 which was classified as goodwill and is being amortized over 40
years.
In August 1995, FHMS and TDMC purchased Tucson Medical Associates, Ltd., a
medical group of 25 primary care physicians, for consideration of
approximately $6,145,000. Goodwill of $5,038,000 was recorded in connection
with the transaction. This acquisition and the acquisitions described above
were accounted for under the purchase method of accounting.
NOTE 11--INTERCOMPANY RELATED PARTY TRANSACTIONS
The Combined Companies are involved in the following transactions with their
affiliates:
--FHMS received certain oversight and administrative services under the
terms of administrative service agreements with FHC and affiliates. Fees
for these services were waived by FHC and its affiliates for the years
ended June 30, 1994, 1995 and 1996.
--The administration and payment of certain general and administrative
expenses are provided by FHC and various affiliates and such costs are
charged back to the appropriate affiliates. These transactions arise in
the normal course of business and are payable on the same terms as
equivalent transactions with nonaffiliates. At June 30, 1995 and 1996,
FHMS had amounts due of $6,154,000 and $10,396,000 related to these
transactions.
--FHMS has a revolving credit agreement to obtain financing from FHC and an
affiliate (Note 4). At June 30, 1995 and 1996 the Combined Companies owed
$2,326,000 and $2,303,000 in accrued interest related to borrowings under
these agreements. The Medical Groups have incurred operating losses since
their inception and are dependent upon borrowings from FHC and their
affiliates to finance their operations.
F-26
<PAGE>
FOUNDATION HEALTH MEDICAL SERVICES
(A WHOLLY-OWNED SUBSIDIARY OF FOUNDATION HEALTH CORPORATION)
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
FHC intends to continue to finance the Combined Companies' operations
subject to the transfer of ownership discussed in Note 1.
--The Combined Companies have a tax allocation agreement with FHC (Note 8).
--During 1994, 1995, and 1996, FHMG contracted with the Health Plan to
provide health care services to its members at FHMS' health care centers
in California. During the years ended June 30, 1994, 1995, and 1996
revenues for medical services provided by the Combined Companies to
Health Plan's members totaled approximately $3,215,000, $6,839,000, and
$35,142,000. As of June 30, 1995 and 1996 the Combined Companies have a
receivable from the Health Plan for such services of $1,380,000, and
$387,000.
--The Combined Companies contract with Intergroup to provide health care
services to Intergroup's members at FHMS' care centers in Arizona.
Intergroup is a wholly-owned subsidiary of FHC. During the period ended
June 30, 1994, 1995, and 1996 revenues for medical services provided by
the Combined Companies to Intergroup's enrollees totaled $82,777,000,
$79,002,000 and $90,135,000. As of June 30, 1995 and 1996, the Combined
Companies have a receivable from (payable to) Intergroup for such
services of $1,489,000 and $(625,000).
--Certain of the physician employees of the Medical Groups have been
granted options to purchase FHC common stock under the FHC 1993
Nonstatutory Stock Option Plan. The options are granted at the discretion
of the Compensation and Organizational Committee of the Board of
Directors of FHC; however, options to purchase 600,000 shares of FHC
common stock were reserved for issuance to TDMC's physicians in
conjunction with the merger of the predecessor company of TDMC with FHC.
Options are granted at an exercise price equal to the fair market value
of the stock at the date of grant. Under the Plan, options to purchase
424,149 and 384,075 shares of FHC common stock were granted to physician
employees of the Medical Groups during the years ended June 30, 1995 and
1996.
NOTE 12--COMMITMENTS AND CONTINGENCIES
During the year ended June 30, 1995, FHMS entered into a $60 million tax
retention operating lease (the "TROL agreement") for the construction of health
care centers and corporate facilities.
Under the TROL agreement, rental payments commence with the completion of
construction of facilities. Rental payments are based on the outstanding
property cost multiplied by the 30-day London Interbank Offering Rate (LIBOR)
plus .445%. At June 30, 1995 and 1996, the outstanding property cost was
$5,400,000 and $22,500,000 and LIBOR was 6.125% and 5.844%. FHC, as guarantor,
of FHMS' obligations under the TROL agreement has provided the lessor with a
guarantee of 87% of the residual value of the properties leased at the end of
the lease term. After the initial five-year noncancelable lease term, the lease
may be extended by agreement of the parties or FHC must purchase or arrange for
the sale of the leased properties.
FHMG and TDMC have certain insurance with respect to general liability and
medical malpractice risks on a claims made basis. Management is not aware of
any claims against the Medical Groups in excess of their policy limits. It is
the opinion of management that the ultimate resolution of any unasserted claims
will not have a material adverse effect on the financial position or operating
results of the Combined Companies.
TDMC and FHC have been named as defendants in several lawsuits relating to
FHC's acquisition of the predecessor company of TDMC. FHC has agreed to
indemnify the Combined Companies for their share of losses, if any, related to
these lawsuits; accordingly, no provision for any loss has been recorded in the
accompanying financial statements.
F-27
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 19, 1996
BY AND AMONG
FPA MEDICAL MANAGEMENT, INC.,
STERLING ACQUISITION CORPORATION
AND
STERLING HEALTHCARE GROUP, INC.
I-1
<PAGE>
TABLE OF CONTENTS
ARTICLE I
The Merger
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 1.1. The Merger............................................... 1
Section 1.2. Effective Time of the Merger............................. 1
ARTICLE II
The Surviving Corporation and FPA
Section 2.1. Articles of Incorporation................................ 1
Section 2.2. Bylaws................................................... 1
Directors and Executive Officers of the Surviving
Section 2.3. Corporation.............................................. 2
ARTICLE III
Conversion of Shares
Section 3.1. Conversion of Company Shares in the Merger............... 2
Section 3.2. Equitable Adjustment..................................... 2
Section 3.3. Exchange of Certificates................................. 2
Section 3.4. No Fractional Securities................................. 3
Section 3.5. Options to Purchase Company Stock........................ 4
Section 3.6. Closing.................................................. 4
Section 3.7. Closing of the Company's Transfer Books.................. 4
ARTICLE IV
Representations and Warranties
of FPA and Acquisition
Section 4.1. Organization and Qualification........................... 4
Section 4.2. Capitalization........................................... 4
Section 4.3. Subsidiaries............................................. 5
Section 4.4. Authority; Non-Contravention; Approvals.................. 5
Section 4.5. Reports and Financial Statements......................... 6
Section 4.6. Absence of Undisclosed Liabilities....................... 7
Section 4.7. Absence of Certain Changes or Events..................... 7
Section 4.8. Litigation............................................... 7
Section 4.9. Registration Statement and Proxy Statement............... 7
Section 4.10. No Violation of Law...................................... 8
Section 4.11. Compliance............................................... 8
Section 4.12. Taxes.................................................... 8
Section 4.13. Employee Benefit Plans; ERISA............................ 9
Section 4.14. Labor Controversies...................................... 10
Section 4.15. Environmental Matters.................................... 10
Section 4.16. Title to Assets.......................................... 11
Section 4.17. FPA Stockholders' Approval............................... 12
Section 4.18. Pooling and Tax-Free Reorganization Matters.............. 12
Section 4.19. Insurance................................................ 12
Section 4.20. Brokers.................................................. 12
</TABLE>
I-2
<PAGE>
ARTICLE V
Representations and Warranties of the Company
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 5.1. Organization and Qualification........................... 12
Section 5.2. Capitalization........................................... 12
Section 5.3. Subsidiaries............................................. 13
Section 5.4. Authority; Non-Contravention; Approvals.................. 13
Section 5.5. Reports and Financial Statements......................... 14
Section 5.6. Absence of Undisclosed Liabilities....................... 15
Section 5.7. Absence of Certain Changes or Events..................... 15
Section 5.8. Litigation............................................... 15
Section 5.9. Registration Statement and Proxy Statement............... 15
Section 5.10. No Violation of Law...................................... 16
Section 5.11. Compliance............................................... 16
Section 5.12. Taxes.................................................... 16
Section 5.13. Employee Benefit Plans; ERISA............................ 17
Section 5.14. Labor Controversies...................................... 17
Section 5.15. Environmental Matters.................................... 18
Section 5.16. Title to Assets.......................................... 18
Section 5.17. Company Stockholders' Approval........................... 19
Section 5.18. Pooling and Tax-Free Reorganization Matters.............. 19
Section 5.19. Insurance................................................ 19
Section 5.20. Brokers.................................................. 19
Section 5.21. Statutory Antitakeover Provisions........................ 19
ARTICLE VI
Conduct of Business Pending the Merger
Section 6.1. Conduct of Business by the Company Pending the Merger.... 19
Conduct of Business by FPA and Acquisition Pending the
Section 6.2. Merger................................................... 20
Section 6.3. Control of the Company's Operations...................... 21
Section 6.4. Control of FPA's Operations.............................. 21
Section 6.5. Acquisition Transactions................................. 22
Section 6.6. Effect of Acquisition Transaction........................ 22
ARTICLE VII
Additional Agreements
Section 7.1. Access to Information.................................... 23
Section 7.2. Registration Statement and Proxy Statement............... 24
Section 7.3. Stockholders' Approvals.................................. 24
Section 7.4. Affiliates of the Company................................ 24
Section 7.5. Exchange Listing......................................... 25
Section 7.6. Expenses and Fees........................................ 25
Section 7.7. Agreement to Cooperate................................... 25
Section 7.8. Public Statements........................................ 26
Section 7.9. Option Plans............................................. 26
Section 7.10. Notification of Certain Matters.......................... 26
Corrections to the Joint Proxy Statement/Prospectus and
Section 7.11. Registration Statement................................... 26
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 7.12. Change of Control Issues................................. 26
Section 7.13. Board of Directors....................................... 26
Section 7.14. Insurance; Indemnity..................................... 27
ARTICLE VIII
Conditions
Conditions to Each Party's Obligation to Effect the
Section 8.1. Merger................................................... 27
Conditions to Obligation of the Company to Effect the
Section 8.2. Merger................................................... 28
Conditions to Obligations of FPA and Acquisition to
Section 8.3. Effect the Merger........................................ 29
ARTICLE IX
Termination, Amendment and Waiver
Section 9.1. Termination.............................................. 30
Section 9.2. Effect of Termination.................................... 31
Section 9.3. Amendment................................................ 31
Section 9.4. Waiver................................................... 31
ARTICLE X
General Provisions
Section 10.1. Non-Survival of Representations and Warranties........... 31
Section 10.2. Notices.................................................. 31
Section 10.3. Interpretation........................................... 32
Section 10.4. Miscellaneous............................................ 32
Section 10.5. Counterparts............................................. 32
Section 10.6. Parties In Interest...................................... 32
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
---------
<C> <S>
Directors and Executive Officers of the Surviving
Schedule 2.3 Corporation
Schedule 4.2(c) Outstanding Subscriptions, Options, Calls, etc. of FPA
Schedule 4.3 Liens, Claims, Encumbrances, etc. of FPA
Schedule 4.4(b) FPA Contravention
Schedule 4.6 Undisclosed Liabilities of FPA
Schedule 4.11 FPA Non-Compliance with Agreements
Schedule 4.13(a) Employee Benefit Plans of FPA
Prohibited ERISA or Internal Revenue Code Transactions of
Schedule 4.13(b) FPA
Schedule 4.16 Exceptions to Title to Assets of FPA
Outstanding Subscriptions, Options, Calls, etc. of the
Schedule 5.2(b)(1) Company
Schedule 5.2(b)(2) Agreements as to Voting of Company Common Stock
Schedule 5.3 Liens, Claims, Encumbrances, etc. of the Company
Schedule 5.4(b) Company Contravention
Schedule 5.6 Undisclosed Liabilities of the Company
Schedule 5.10 Violations of Laws by the Company
Schedule 5.11 Company Non-Compliance with Agreements
Schedule 5.13(a) Employee Benefit Plans of the Company
Prohibited ERISA or Internal Revenue Code Transactions of
Schedule 5.13(b) the Company
Schedule 5.16 Exceptions to Title to Assets of the Company
Schedule 6.1 Potential Transactions by the Company
Schedule 6.2 Potential Transactions by FPA and Description of Notes
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is made this 19th day of May, 1996 (the
"Agreement"), by and among FPA Medical Management, Inc., a Delaware
corporation ("FPA"), Sterling Acquisition Corporation, a Delaware corporation
and a wholly-owned subsidiary of FPA ("Acquisition"), and Sterling Healthcare
Group, Inc., a Florida corporation (the "Company").
W I T N E S S E T H :
Whereas, the boards of directors of FPA, Acquisition and the Company believe
it to be advisable and in the best interests of their respective stockholders
that Acquisition merge with and into the Company on the terms set forth in the
Agreement (the "Merger");
Whereas, the Merger is intended to qualify as a plan of merger under the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code"); and
Whereas, the Merger also is intended to qualify for treatment as a pooling
of interests under Accounting Principles Board Opinion No. 16 ("APB No. 16").
Now, Therefore, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
The Merger
Section 1.1. The Merger. Upon the terms and subject to the conditions of the
Agreement, at the Effective Time (as defined in Section 1.2) in accordance
with the Delaware General Corporation Law and the Florida Business Corporation
Act ("BCA"), Acquisition shall be merged with and into the Company and the
separate existence of Acquisition shall thereupon cease. The Company shall be
the surviving corporation in the Merger and is hereinafter sometimes referred
to as the "Surviving Corporation."
Section 1.2. Effective Time of the Merger. The Merger shall become effective
at such time (the "Effective Time") as shall be stated in Certificates of
Merger or comparable documents required by law, in forms mutually acceptable
to FPA and the Company, to be filed with the Secretaries of the States of
Delaware and Florida (the "Merger Filings"), but not later than December 31,
1996, time being of the essence. The Merger Filings shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by the Agreement in accordance with Section 3.6.
ARTICLE II
The Surviving Corporation and FPA
Section 2.1. Articles of Incorporation. The Articles of Incorporation of the
Company as in effect immediately prior to the Effective Time shall be the
Articles of Incorporation of the Surviving Corporation after the Effective
Time, and thereafter may be amended in accordance with their terms and as
provided in the BCA.
Section 2.2. Bylaws. The bylaws of the Company as in effect immediately
prior to the Effective Time shall be the bylaws of the Surviving Corporation
after the Effective Time, and thereafter may be amended in accordance with
their terms and as provided by the Articles of Incorporation of the Surviving
Corporation and the BCA.
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Section 2.3. Directors and Executive Officers of the Surviving
Corporation. Subject to Section 8.2(h), the directors and executive officers
of the Surviving Corporation shall be as designated on Schedule 2.3 attached
hereto, and such directors and executive officers shall serve in accordance
with the bylaws of the Surviving Corporation until their respective successors
are duly elected or appointed and qualified.
ARTICLE III
Conversion of Shares
Section 3.1. Conversion of Company Shares in the Merger. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of the Company, each share of the Company's Common Stock,
par value $.0001 per share (the "Company Common Stock"), shall, subject to the
terms of this Article III, be converted into the right to receive 1.4 (the
"Exchange Ratio") shares of the common stock, par value $.002 per share, of
FPA ("FPA Common Stock"). There shall be no adjustment to the Exchange Ratio,
and the Exchange Ratio shall remain 1.4 shares of FPA Common Stock for each
share of Company Common Stock, if the average of the closing prices of FPA
Common Stock as reported on the Nasdaq National Market ("NASDAQ") for the
fifteen (15) consecutive trading days ending on the date that is five (5)
trading days prior to the Closing Date (as defined in Section 3.6) (the "FPA
Value") is greater than or equal to $14.87 but less than or equal to $16.43.
If at such time:
(a) the FPA Value is less than $14.87 but greater than or equal to
$13.30, then the Exchange Ratio shall be increased to the number (expressed
as a decimal fraction) which, when multiplied by the FPA Value, will equal
$20.81;
(b) the FPA Value is less than $13.30, the Exchange Ratio shall be 1.565;
provided, however, that in such event the Company shall have the right to
either (x) accept an Exchange Ratio of 1.565 or (y) demand that the
Exchange Ratio be increased to the number (expressed as a decimal fraction)
which, when multiplied by the FPA Value, will not exceed $20.81. If the
Company elects to demand the increased Exchange Ratio described in (y)
above, FPA shall have the right to either (a) accept such increased
Exchange Ratio or (b) terminate the Agreement;
(c) the FPA Value is greater than $16.43 but less than or equal to
$18.00, then the Exchange Ratio shall be decreased to the number (expressed
as a decimal fraction) which, when multiplied by the FPA Value, will equal
$23.01; or
(d) the FPA Value is greater than $18.00, then the Company shall have the
right to either (x) accept an Exchange Ratio which when multiplied by the
FPA Value is equal to $23.01 or (y) terminate the Agreement.
Section 3.2. Equitable Adjustment. The calculations set forth in Section 3.1
shall be subject to equitable adjustment in the event of any stock split,
stock dividend, reverse stock split, recapitalization, reclassification,
combination or other change in the number of shares of Company Common Stock or
FPA Common Stock outstanding prior to the Closing (as defined in Section 3.6)
other than issuances of shares pursuant to the exercise of outstanding stock
options.
Section 3.3. Exchange of Certificates. (a) From and after the Effective
Time, each holder of an outstanding certificate which immediately prior to the
Effective Time represented shares of Company Common Stock shall be entitled to
receive in exchange therefor, upon surrender thereof to American Stock
Transfer & Trust Company (the "Exchange Agent"), a certificate or certificates
representing the number of whole shares of FPA Common Stock to which such
holder is entitled pursuant to Section 3.1. Notwithstanding any other
provision of the Agreement, (i) until holders or transferees of certificates
theretofore representing shares of Company Common Stock have surrendered them
for exchange as provided herein, no dividends shall be paid with respect to
any shares represented by such certificates and no payment for fractional
shares shall be made and (ii) without regard to when such certificates
representing shares of Company Common Stock are surrendered
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for exchange as provided herein, no interest shall be paid on any dividends or
any payment for fractional shares. Upon surrender of a certificate which
immediately prior to the Effective Time represented shares of Company Common
Stock, there shall be paid to the holder of such certificate the amount of any
dividends which theretofore became payable, but which were not paid by reason
of the foregoing, with respect to the number of whole shares of FPA Common
Stock represented by the certificate or certificates issued upon such
surrender.
(b) If any certificate for shares of FPA Common Stock is to be issued in a
name other than that in which the certificate for shares of Company Common
Stock surrendered in exchange therefor is registered, it shall be a condition
of such exchange that the person requesting such exchange shall pay any
applicable transfer or other taxes required by reason of such issuance.
(c) Promptly after the Effective Time, FPA shall make available to the
Exchange Agent the certificates representing shares of FPA Common Stock
required to effect the exchanges referred to in paragraph (a) above and cash
for payment of any fractional shares referred to in Section 3.4.
(d) Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates that immediately prior to
the Effective Time represented outstanding shares of Company Common Stock (the
"Company Certificates") (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon actual delivery of the Company Certificates
to the Exchange Agent) and (ii) instructions for use in effecting the
surrender of the Company Certificates in exchange for certificates
representing shares of FPA Common Stock. Upon surrender of Company
Certificates for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as the Exchange Agent
shall reasonably require, the holder of such Company Certificates shall be
entitled to receive in exchange therefor a certificate representing that
number of whole shares of FPA Common Stock into which the shares of Company
Common Stock theretofore represented by the Company Certificates so
surrendered shall have been converted pursuant to the provisions of Section
3.1, and the Company Certificates so surrendered shall be cancelled.
Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto
shall be liable to a holder of shares of Company Common Stock for any shares
of FPA Common Stock or dividends or distributions thereon delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(e) Promptly following the date which is nine (9) months after the Effective
Date, the Exchange Agent shall deliver to FPA all cash, certificates
(including any FPA Common Stock) and other documents in its possession
relating to the transactions described in the Agreement, and the Exchange
Agent's duties shall terminate. Thereafter, each holder of a Company
Certificate may surrender such Company Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat and similar
laws) receive in exchange therefor the FPA Common Stock, without any interest
thereon. Notwithstanding the foregoing, none of the Exchange Agent, FPA, the
Company or the Surviving Corporation shall be liable to a holder of Company
Common Stock for any FPA Common Stock delivered to a public official pursuant
to applicable abandoned property, escheat and similar laws.
(f) In the event any Company Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Company Certificate to be lost, stolen or destroyed, the Surviving
Corporation shall issue in exchange for such lost, stolen or destroyed Company
Certificate the FPA Common Stock deliverable in respect thereof determined in
accordance with Section 3.1. When authorizing such payment in exchange
therefor, the board of directors of the Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Company Certificate to give the
Surviving Corporation such indemnity as it may reasonably direct as protection
against any claim that may be made against the Surviving Corporation with
respect to the Company Certificate alleged to have been lost, stolen or
destroyed.
Section 3.4. No Fractional Securities. Notwithstanding any other provision
of the Agreement, no certificates or scrip for fractional shares of FPA Common
Stock shall be issued in the Merger and no FPA
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Common Stock dividend, stock split or interest shall relate to any fractional
security, and such fractional interests shall not entitle the owner thereof to
vote or to any other rights of a security holder. In lieu of any such
fractional shares, each holder of Company Common Stock who would otherwise
have been entitled to receive a fraction of a share of FPA Common Stock upon
surrender of Company Certificates for exchange pursuant to Section 3.3 shall
be entitled to receive from the Exchange Agent a cash payment equal to such
fraction multiplied by the Exchange Ratio.
Section 3.5. Options to Purchase Company Stock. The obligations of FPA with
respect to options to purchase Company Common Stock are set forth in Section
7.9.
Section 3.6. Closing. The closing (the "Closing") of the transactions
contemplated by the Agreement shall take place at a location mutually
agreeable to FPA and the Company on the second business day immediately
following the date on which the last of the conditions set forth in Article
VIII is fulfilled or waived, or at such other time and place as FPA and the
Company shall agree (the date on which the Closing occurs is referred to in
the Agreement as the "Closing Date"), but not later than December 31, 1996,
time being of the essence.
Section 3.7. Closing of the Company's Transfer Books. At and after the
Effective Time, holders of Company Certificates shall cease to have any rights
as stockholders of the Company, except for the right to receive shares of FPA
Common Stock pursuant to Section 3.3 and the right to receive cash for payment
of fractional shares pursuant to Section 3.4. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock which were outstanding immediately prior to the Effective
Time shall thereafter be made. If, after the Effective Time, subject to the
terms and conditions of the Agreement, Company Certificates formerly
representing Company Common Stock are presented to the Surviving Corporation,
they shall be cancelled and exchanged for FPA Common Stock in accordance with
this Article III.
ARTICLE IV
Representations and Warranties of FPA and Acquisition
FPA and Acquisition each represent and warrant to the Company as follows:
Section 4.1. Organization and Qualification. Each of FPA and Acquisition is
a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Each of FPA and Acquisition is
qualified to do business and is in good standing in each jurisdiction in which
the properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure
to be so qualified and in good standing would not, when taken together with
all other such failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of FPA and its subsidiaries (as defined in Section 4.3), taken as a
whole. True, accurate and complete copies of each of FPA's and Acquisition's
Certificates of Incorporation and bylaws, in each case as in effect on the
date hereof, including all amendments thereto, have heretofore been (or, in
the case of Acquisition, will promptly be) delivered to the Company.
Section 4.2. Capitalization.
(a) The authorized capital stock of FPA consists of (i) 18,000,000 shares of
FPA Common Stock, par value $.002, of which 11,314,008 shares were outstanding
as of the date of the Agreement, and (ii) 2,000,000 shares of preferred stock,
par value $.001 per share, of which no shares were issued and outstanding as
of the date of the Agreement. All of the issued and outstanding shares of FPA
Common Stock are validly issued and are fully paid, nonassessable and free of
preemptive rights.
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(b) The authorized capital stock of Acquisition consists of 100 shares of
Acquisition Common Stock, par value $.01, of which 100 shares are issued and
outstanding, which shares are owned beneficially and of record by FPA.
(c) Except as disclosed in the FPA SEC Reports (as defined in Section 4.5)
or as set forth on Schedule 4.2(c) attached hereto, as of the date hereof,
there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, obligating FPA or any subsidiary of FPA to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of the capital stock of FPA or obligating FPA or any subsidiary of FPA to
grant, extend or enter into any such agreement or commitment. There are no
voting trusts, proxies or other agreements or understandings to which FPA or
any subsidiary of FPA is a party or by which FPA or any subsidiary of FPA is
bound with respect to the voting of any shares of capital stock of FPA, other
than FPA's obligations under Section 7.7(d). The shares of FPA Common Stock
issued to stockholders of the Company in the Merger will be at the Effective
Time duly authorized, validly issued, fully paid, nonassessable, and free of
preemptive rights.
Section 4.3. Subsidiaries. Each direct and indirect corporate subsidiary of
FPA is duly organized, validly existing and in good standing under the laws of
its jurisdiction of incorporation and has the requisite power and authority to
own, lease and operate its assets and properties and to carry on its business
as it is now being conducted. Each subsidiary of FPA is qualified to do
business, and is in good standing, in each jurisdiction in which the
properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure
to be so qualified and in good standing would not, when taken together with
all such other failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of FPA and its subsidiaries, taken as a whole. All of the
outstanding shares of capital stock of each corporate subsidiary of FPA are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights, and are owned directly or indirectly by FPA, free and clear
of any liens, claims, encumbrances, security interests, equities, charges and
options of any nature whatsoever except as disclosed in the FPA SEC Reports or
set forth on Schedule 4.3 attached hereto. There are no subscriptions,
options, warrants, rights, calls, contracts, voting trusts, proxies or other
commitments, understandings, restrictions or arrangements relating to the
issuance, sale, voting, transfer, ownership or other rights with respect to
any shares of capital stock of any corporate subsidiary of FPA, including any
right of conversion or exchange under any outstanding security, instrument or
agreement. As used in the Agreement, the term "subsidiary" shall mean, when
used with reference to any person or entity, any corporation, partnership,
joint venture or other entity which such person or entity, directly or
indirectly, controls or of which such person or entity (either acting alone or
together with its other subsidiaries) owns, directly or indirectly, 50% or
more of the stock or other voting interests, the holders of which are entitled
to vote for the election of a majority of the board of directors or any
similar governing body of such corporation, partnership, joint venture or
other entity.
Section 4.4. Authority; Non-Contravention; Approvals.
(a) FPA and Acquisition each have full corporate power and authority to
enter into the Agreement and, subject to the FPA Stockholders' Approval (as
defined in Section 7.3(b)) and the FPA Required Statutory Approvals (as
defined in Section 4.4(c)), to consummate the transactions contemplated
hereby. The Agreement has been approved by the boards of directors of FPA and
Acquisition, and no other corporate proceedings on the part of FPA or
Acquisition are necessary to authorize the execution and delivery of the
Agreement or, except for the FPA Stockholders' Approval, the consummation by
FPA and Acquisition of the transactions contemplated hereby. The Agreement has
been duly executed and delivered by each of FPA and Acquisition, and, assuming
the due authorization, execution and delivery hereof by the Company,
constitutes a valid and legally binding agreement of each of FPA and
Acquisition enforceable against each of them in accordance with its terms,
except that such enforcement may be subject to (i) bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and
(ii) general equitable principles, and except that the availability of
equitable remedies, including specific
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performance and injunctive relief, is subject to the discretion of the court
before which any proceedings may be brought. Without limitation of the
foregoing, each of the covenants and obligations of FPA set forth in Sections
6.2, 6.5, 7.3(b), 7.6, 7.7, 7.8 and 7.10 is valid, legally binding and
enforceable notwithstanding the absence of the FPA Stockholders' Approval.
(b) Except as set forth on Schedule 4.4(b) attached hereto, the execution
and delivery of the Agreement by each of FPA and Acquisition do not violate,
conflict with or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate
the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of FPA or any of
its subsidiaries under any of the terms, conditions or provisions of (i) the
respective charters or bylaws of FPA or any of its subsidiaries, (ii) any
statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority
applicable to FPA or any of its subsidiaries or any of their respective
properties or assets or (iii) any note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which FPA or any of its
subsidiaries is now a party or by which FPA or any of its subsidiaries or any
of their respective properties or assets may be bound or affected. The
consummation by FPA and Acquisition of the transactions contemplated hereby
will not result in any violation, conflict, breach, termination, acceleration
or creation of liens under any of the terms, conditions or provisions
described in clauses (i) through (iii) of the preceding sentence, subject (x)
in the case of the terms, conditions or provisions described in clause (ii)
above, to obtaining (prior to the Effective Time) the FPA Required Statutory
Approvals (as defined in Section 4.4(c)) and the FPA Stockholders' Approval
and (y) in the case of the terms, conditions or provisions described in clause
(iii) above, to obtaining (prior to the Effective Time) consents required from
commercial lenders, lessors or other third parties. Excluded from the
foregoing sentences of this paragraph (b), insofar as they apply to the terms,
conditions or provisions described in clauses (ii) and (iii) of the first
sentence of this paragraph (b), are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of FPA and its
subsidiaries, taken as a whole.
(c) Except for (i) the filings by FPA and the Company required by the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
(ii) the filing of the Joint Proxy Statement/Prospectus (as defined in Section
4.9) with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Securities Act of 1933, as amended (the "Securities Act"), and the declaration
of the effectiveness thereof by the SEC and filings with various state blue
sky authorities, (iii) the making of the Merger Filings with the Secretaries
of State of the States of Delaware and Florida in connection with the Merger
and (iv) any other required filings with or approvals from applicable federal
and state governmental authorities (the filings and approvals referred to in
clauses (i) through (iv) are collectively referred to as the "FPA Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of the Agreement
by FPA or Acquisition or the consummation by FPA or Acquisition of the
transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not
made or obtained, as the case may be, would not, in the aggregate, have a
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of FPA and its
subsidiaries, taken as a whole.
Section 4.5. Reports and Financial Statements. Since October 20, 1994, FPA
has filed with the SEC all material forms, statements, reports and documents
(including all exhibits, amendments and supplements thereto) required to be
filed by it under each of the Securities Act, the Exchange Act and the
respective rules and regulations thereunder, all of which, as amended if
applicable, complied in all material respects with all applicable requirements
of the appropriate act and the rules and regulations thereunder. FPA has
previously delivered or made available to the Company a copy of its (a) Annual
Report on Form 10-K, as amended, for the
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fiscal year ended December 31, 1995, as filed with the SEC, (b) proxy and
information statements relating to (i) all meetings of its stockholders
(whether annual or special) and (ii) actions by written consent in lieu of a
stockholders' meeting from October 20, 1994, until the date hereof, (c) all
other reports, including quarterly and current reports, or registration
statements filed by FPA with the SEC and (d) all press releases issued since
October 20, 1994 (the documents referred to in clauses (a), (b), (c) and (d)
are collectively referred to as the "FPA SEC Reports"). As of their respective
dates, the FPA SEC Reports did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited consolidated financial
statements and unaudited interim consolidated financial statements of FPA
included in such reports, including the notes and schedules thereto
(collectively, the "FPA Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present the financial position of FPA and its subsidiaries as of
the dates thereof and the results of their operations and changes in financial
position for the periods then ended, subject, in the case of the unaudited
interim financial statements, to normal year-end and audit adjustments and any
other adjustments described therein.
Section 4.6. Absence of Undisclosed Liabilities. Except as disclosed in the
FPA SEC Reports or with respect to acquisitions or potential transactions or
commitments heretofore disclosed to the Company in writing or as set forth on
Schedule 4.6 attached hereto, neither FPA nor any of its subsidiaries had at
December 31, 1995, or has incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any
nature, except: (a) liabilities, obligations or contingencies (i) which are
accrued or reserved against in the FPA Financial Statements or reflected in
the notes thereto or (ii) which were incurred after December 31, 1995 and were
incurred in the ordinary course of business and consistent with past
practices; (b) liabilities, obligations or contingencies which (i) would not,
in the aggregate, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations of
FPA and its subsidiaries, taken as a whole, or (ii) have been discharged or
paid in full prior to the date hereof; and (c) liabilities and obligations
which are of a nature not required to be reflected in the consolidated
financial statements of FPA and its subsidiaries prepared in accordance with
generally accepted accounting principles consistently applied and which were
incurred in the normal course of business.
Section 4.7. Absence of Certain Changes or Events. Since the date of the
most recent FPA SEC Report, there has not been any material adverse change in
the business, operations, properties, assets, liabilities, condition
(financial or other) or results of operations of FPA and its subsidiaries,
taken as a whole, other than the proposed acquisition by FPA of certain
securities from Physician Corporation of America as previously disclosed to
the Company.
Section 4.8. Litigation. Except as disclosed in the FPA SEC Reports, there
are no claims, suits, actions or proceedings pending or, to the knowledge of
FPA, threatened against, relating to or affecting FPA or any of its
subsidiaries, before any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that seek to restrain or
enjoin the consummation of the Merger or which, either alone or in the
aggregate with all such claims, actions or proceedings, would materially and
adversely affect the business, operations, properties, assets, condition
(financial or other) or results of operations of FPA and its subsidiaries,
taken as a whole. Except as set forth in the FPA SEC Reports, neither FPA nor
any of its subsidiaries is subject to any judgment, decree, injunction, rule
or order of any court, governmental department, commission, agency,
instrumentality or authority or any arbitrator which prohibits or restricts
the consummation of the transactions contemplated hereby or would have any
material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of FPA and its
subsidiaries, taken as a whole.
Section 4.9. Registration Statement and Proxy Statement. None of the
information to be supplied by FPA or its subsidiaries for inclusion in (a) the
Registration Statement on Form S-4 to be filed under the Securities Act with
the SEC by FPA in connection with the Merger for the purpose of registering
the shares of FPA Common Stock to be issued in the Merger (the "Registration
Statement") or (b) the proxy statement to be
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distributed in connection with the Company's and FPA's meetings of their
respective stockholders to vote upon the Agreement and the transactions
contemplated hereby (the "Proxy Statement" and, together with the prospectus
included in the Registration Statement, the "Joint Proxy
Statement/Prospectus") will, in the case of the Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement and any amendments or supplements thereto, and at the time of
the meetings of stockholders of the Company and FPA to be held in connection
with the transactions contemplated by the Agreement, or, in the case of the
Registration Statement, as amended or supplemented, at the time it becomes
effective and at the time of such meetings of the stockholders of the Company
and FPA, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Joint Proxy Statement/Prospectus, as of its effective
date, will comply as to form in all material respects with all applicable
laws, including the provisions of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder, except that no
representation is made by FPA or Acquisition with respect to information
supplied by the Company for inclusion therein.
Section 4.10. No Violation of Law. Except as disclosed in the FPA SEC
Reports, neither FPA nor any of its subsidiaries is in violation of, or has
been given notice or been charged with any violation of, any law, statute,
order, rule, regulation, ordinance, or judgment (including, without
limitation, any applicable Environmental Law, as defined in Section 4.15(b))
of any governmental or regulatory body or authority, except for violations
which, in the aggregate, would not have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of FPA and its subsidiaries, taken as a whole. Except as
disclosed in the FPA SEC Reports, as of the date of the Agreement, to the
knowledge of FPA, no investigation or review by any governmental or regulatory
body or authority is pending or threatened, nor has any governmental or
regulatory body or authority indicated an intention to conduct the same, other
than, in each case, those the outcome of which, as far as reasonably can be
foreseen, would not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of FPA and its subsidiaries, taken as a whole. FPA and its
subsidiaries have all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct their businesses as presently conducted (collectively, the "FPA
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which, alone or
in the aggregate, would not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of FPA and its subsidiaries, taken as a whole. FPA and its
subsidiaries are not in violation of the terms of any FPA Permit, except for
delays in filing reports or violations which, alone or in the aggregate, would
not have a material adverse effect on the business, operations, properties,
assets, condition (financial or other) or results of operations of FPA and its
subsidiaries, taken as a whole.
Section 4.11. Compliance. Except as disclosed in the FPA SEC Reports or on
Schedule 4.11 attached hereto, FPA and each of its subsidiaries are not in
breach or violation of or in default in the performance or observance of any
term or provision of, and no event has occurred which, with lapse of time or
action by a third party, would result in a default under (a) the respective
charters, bylaws or other similar organizational instruments of FPA or any of
its subsidiaries or (b) any contract, commitment, agreement, indenture,
mortgage, loan agreement, note, lease, bond, license, approval or other
instrument to which FPA or any of its subsidiaries is a party or by which any
of them is bound or to which any of their property is subject, which breaches,
violations and defaults, in the case of clause (b) of this Section 4.11, would
have, in the aggregate, a material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations of
FPA and its subsidiaries, taken as a whole.
Section 4.12. Taxes.
(a) FPA and its subsidiaries have (i) duly filed (or timely requested and
received an extension to file) with the appropriate governmental authorities
all Tax Returns (as defined in Section 4.12(c)) required to be filed by them
for all periods ending on or prior to the Effective Time, other than those Tax
Returns the failure of which to file would not have a material adverse effect
on the business, operations, properties, assets, condition (financial
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or other) or results of operations of FPA and its subsidiaries, taken as a
whole, and such Tax Returns are true, correct and complete in all material
respects and (ii) duly paid in full or made adequate provision for the payment
of all Taxes (as defined in Section 4.12(b)) for all periods ending at or
prior to the Effective Time. The liabilities and reserves for Taxes reflected
in the FPA balance sheet included in the latest FPA SEC Report are adequate to
cover all Taxes for all periods ending at or prior to the Effective Time and
there are no material liens for Taxes upon any property or assets of FPA or
any subsidiary thereof, except for liens for Taxes not yet due. There are no
unresolved issues of law or fact arising out of a notice of deficiency,
proposed deficiency or assessment from the Internal Revenue Service (the
"IRS") or any other governmental taxing authority with respect to Taxes of FPA
or any of its subsidiaries which, if decided adversely, singly or in the
aggregate, would have a material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations of
FPA and its subsidiaries, taken as a whole. Neither FPA nor any of its
subsidiaries is a party to any agreement providing for the allocation or
sharing of Taxes with any entity that is not, directly or indirectly, a
wholly-owned corporate subsidiary of FPA other than agreements the
consequences of which are adequately reserved for in the FPA Financial
Statements. Neither FPA nor any of its corporate subsidiaries has, with regard
to any assets or property held, acquired or to be acquired by any of them,
filed a consent to the application of Section 341(f) of the Code.
(b) For purposes of the Agreement, the term "Taxes" shall mean all taxes,
including, without limitation, income, gross receipts, excise, property,
sales, withholding, social security, occupation, use, service, service use,
license, payroll, franchise, transfer and recording taxes, fees and charges,
windfall profits, severance, customs, import, export, employment or similar
taxes, charges, fees, levies or other assessments imposed by the United
States, or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or
any other basis, and such term shall include any interest, fines, penalties or
additional amounts and any interest in respect of any additions, fines or
penalties attributable or imposed or with respect to any such taxes, charges,
fees, levies or other assessments.
(c) For purposes of the Agreement, the term "Tax Return" shall mean any
return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes.
Section 4.13. Employee Benefit Plans; ERISA. (a) Except as set forth in the
FPA SEC Reports or on Schedule 4.13(a) attached hereto, at the date hereof,
FPA and its subsidiaries do not maintain or contribute to any material
employee benefit plans, programs, arrangements or practices (such plans,
programs, arrangements or practices of FPA and its subsidiaries being referred
to as the "FPA Plans"), including employee benefit plans within the meaning
set forth in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or other similar material arrangements for the
provision of benefits (excluding any "Multi-employer Plan" within the meaning
of Section 3(37) of ERISA or a "Multiple Employer Plan" within the meaning of
Section 413(c) of the Code). Neither FPA nor its subsidiaries has any
obligation to create any additional such plan or to amend any such plan so as
to increase benefits thereunder, except as required under the terms of the FPA
Plans, under existing collective bargaining agreements or to comply with
applicable law.
(b) Except as disclosed in the FPA SEC Reports or on Schedule 4.13(b)
attached hereto, (i) there have been no prohibited transactions within the
meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with
respect to any of the FPA Plans that would result in penalties, taxes or
liabilities which, singly or in the aggregate, would have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other) or results of operations of FPA and its subsidiaries, taken as a
whole, (ii) except for premiums due, there is no outstanding material
liability, whether measured alone or in the aggregate, under Title IV of ERISA
with respect to any of the FPA Plans, (iii) neither the Pension Benefit
Guaranty Corporation nor any plan administrator has instituted proceedings to
terminate any of the FPA Plans subject to Title IV of ERISA other than in a
"standard termination" described in Section 4041(b) of ERISA, (iv) none of the
FPA Plans has incurred any "accumulated funding deficiency" (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived, as
of the last day of the most recent fiscal year of each of the FPA Plans ended
prior to the date of the Agreement, (v) the current present value of all
projected benefit obligations under each of the FPA Plans which is subject to
Title IV of ERISA did not, as of its latest valuation date, exceed the then
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current value of the assets of such plan allocable to such benefit liabilities
by more than the amount, if any, disclosed in the FPA SEC Reports as of
December 31, 1995, based upon reasonable actuarial assumptions currently
utilized for such FPA Plan, (vi) each of the FPA Plans has been operated and
administered in all material respects in accordance with applicable laws
during the period of time covered by the applicable statute of limitations,
(vii) each of the FPA Plans which is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the IRS to be so
qualified and such determination has not been modified, revoked or limited by
failure to satisfy any condition thereof or by a subsequent amendment thereto
or a failure to amend, except that it may be necessary to make additional
amendments retroactively to maintain the "qualified" status of such FPA Plans,
and the period for making any such necessary retroactive amendments has not
expired, (viii) with respect to Multi-employer Plans, neither FPA nor any of
its subsidiaries has made or suffered a "complete withdrawal" or a "partial
withdrawal," as such terms are respectively defined in Sections 4203, 4204 and
4205 of ERISA and, to the knowledge of FPA and its subsidiaries, no event has
occurred or is expected to occur which presents a material risk of a complete
withdrawal or partial withdrawal under said Sections 4203, 4204 and 4205, (ix)
to the knowledge of FPA and its subsidiaries, there are no material pending,
threatened or anticipated claims involving any of the FPA Plans other than
claims for benefits in the ordinary course, and (x) FPA and its subsidiaries
have no current material liability, whether measured alone or in the
aggregate, for plan termination or complete withdrawal or partial withdrawal
under Title IV of ERISA based on any plan to which any entity that would be
deemed one employer with FPA and its subsidiaries under Section 4001 of ERISA
or Section 414 of the Code contributed during the period of time covered by
the applicable statute of limitations (a "FPA Controlled Group Plan"), and FPA
and its subsidiaries do not reasonably anticipate that any such liability will
be asserted against FPA or any of its subsidiaries. None of the FPA Controlled
Group Plans has an "accumulated funding deficiency" (as defined in Section 302
of ERISA and Section 412 of the Code).
Section 4.14. Labor Controversies. (a) There are no significant
controversies pending or, to the knowledge of FPA, threatened between FPA or
its subsidiaries and any representatives of any of their employees, (b) to the
knowledge of FPA, there are no material organizational efforts presently being
made involving any of the presently unorganized employees of FPA and its
subsidiaries, (c) FPA and its subsidiaries have, to the knowledge of FPA,
complied in all material respects with all laws relating to the employment of
labor, including, without limitation, any provisions thereof relating to
wages, hours, collective bargaining, and the payment of social security and
similar taxes, and (d) no person has, to the knowledge of FPA, asserted that
FPA or any of its subsidiaries is liable in any amount for any arrears of
wages or any taxes or penalties for failure to comply with any of the
foregoing, except for such controversies, organizational efforts, non-
compliance and liabilities which, singly or in the aggregate, would not
materially and adversely affect the business, operations, properties, assets,
condition (financial or other) or results of operations of FPA and its
subsidiaries, taken as a whole.
Section 4.15. Environmental Matters. (a) (i) FPA and its subsidiaries have
conducted their respective businesses in compliance with all applicable
Environmental Laws, including, without limitation, having all permits,
licenses and other approvals and authorizations necessary for the operation of
their respective businesses as presently conducted, (ii) none of the
properties owned by FPA or any of its subsidiaries contain any Hazardous
Substance (as defined in Section 4.15(c)) as a result of any activity of FPA
or any of its subsidiaries in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) neither FPA nor any of its subsidiaries
has received any notices, demand letters or requests for information from any
federal, state, local or foreign governmental entity or third party indicating
that FPA or any of its subsidiaries may be in violation of, or liable under,
any Environmental Law in connection with the ownership or operation of their
businesses, (iv) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings pending or
threatened against FPA or any of its subsidiaries relating to any violation,
or alleged violation, of any Environmental Law, (v) no reports have been
filed, or are required to be filed, by FPA or any of its subsidiaries
concerning the release of any Hazardous Substance or the threatened or actual
violation of any Environmental Law, (vi) no Hazardous Substance has been
disposed of, released or transported in violation of any applicable
Environmental Law from any properties owned by FPA or any of its subsidiaries
as a result of any activity of FPA or any of its subsidiaries during the time
such properties were owned, leased or operated by FPA or any of
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its subsidiaries, (vii) there have been no environmental investigations,
studies, audits, tests, reviews or other analyses regarding compliance or
noncompliance with any applicable Environmental Law conducted by or which are
in the possession of FPA or its subsidiaries relating to the activities of FPA
or its subsidiaries which have not been delivered to the Company prior to the
date hereof, (viii) there are no underground storage tanks on, in or under any
properties owned by FPA and any of its subsidiaries and no underground storage
tanks have been closed or removed from any of such properties during the time
such properties were owned, leased or operated by FPA or any of its
subsidiaries, (ix) there is no asbestos or asbestos containing material
present in any of the properties owned by FPA and its subsidiaries, and no
asbestos has been removed from any of such properties during the time such
properties were owned, leased or operated by FPA or any of its subsidiaries,
and (x) neither FPA, its subsidiaries nor any of their respective properties
are subject to any material liabilities or expenditures (fixed or contingent)
relating to any suit, settlement, court order, administrative order,
regulatory requirement, judgment or claim asserted or arising under any
Environmental Law, except for violations of the foregoing clauses (i) through
(x) that, singly or in the aggregate, would not reasonably be expected to have
a material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of FPA and its
subsidiaries considered as one enterprise.
(b) As used herein, "Environmental Law" means any Federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity relating to
(x) the protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any
other natural resource) or to human health or safety or (y) the exposure to,
or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of Hazardous
Substances, in each case as amended and as in effect on the Closing Date. The
term Environmental Law includes, without limitation, (i) the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act,
the Federal Resource Conservation and Recovery Act of 1976 (including the
Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste
Disposal and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety
and Health Act of 1970, each as amended and as in effect on the Closing Date,
and (ii) any common law or equitable doctrine (including, without limitation,
injunctive relief and tort doctrines such as negligence, nuisance, trespass
and strict liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of, effects of or
exposure to any Hazardous Substance.
(c) As used herein, "Hazardous Substance" means any substance presently or
hereafter listed, defined, designated or classified as hazardous, toxic,
radioactive, or dangerous, or otherwise regulated, under any Environmental
Law. Hazardous Substance includes any substance to which exposure is regulated
by any government authority or any Environmental Law including, without
limitation, any toxic waste, pollutant, contaminant, hazardous substance,
toxic substance, hazardous waste, special waste, industrial substance or
petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos or asbestos containing material, urea formaldehyde foam
insulation, lead or polychlorinated biphenyls.
Section 4.16. Title to Assets. Except as set forth on Schedule 4.16 attached
hereto, FPA and each of its subsidiaries has good and marketable title in fee
simple to all its real property and good title to all its leasehold interests
and other properties as reflected in the most recent balance sheet included in
the FPA Financial Statements, except for such properties and assets that have
been disposed of in the ordinary course of business since the date of such
balance sheet, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (i) the lien for current taxes,
payments of which are not yet delinquent, (ii) such imperfections in title and
easements and encumbrances, if any, as are not substantial in character,
amount or extent and do not materially detract from the value or interfere
with the present use of the property subject thereto or affected thereby, or
otherwise materially impair FPA's business operations (in the manner presently
carried on by FPA), or (iii) as disclosed in the FPA SEC Reports, and except
for such matters which, singly or in the
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aggregate, would not materially and adversely affect the business, operations,
properties, assets, condition (financial or other) or results of operations of
FPA and its subsidiaries, taken as a whole. All leases under which FPA leases
any real or personal property have been made available to the Company and are
in good standing, valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or
event which with notice or lapse of time or both would become a default other
than defaults under such leases which in the aggregate would not materially
and adversely affect FPA and its subsidiaries, taken as a whole.
Section 4.17. FPA Stockholders' Approval. The affirmative vote of
stockholders of FPA required for approval and adoption of the Agreement and
the Merger is a majority of the outstanding shares of FPA Common Stock.
Section 4.18. Pooling and Tax-Free Reorganization Matters. To the knowledge
of FPA and based upon consultation with its independent accountants, neither
FPA nor Acquisition nor any of their affiliates has taken or agreed to take
any action that would interfere with the ability of FPA to (i) account for the
business combination to be effected by the Merger as a pooling of interests
under APB No. 16 for accounting and financial statement purposes or (ii) treat
the Merger as a tax-free reorganization pursuant to Sections 368(a)(1)(A) and
368(a)(2)(E) of the Code.
Section 4.19. Insurance. FPA maintains insurance with financially
responsible insurance companies (i) in amounts customary in its industry to
insure it against risks and losses associated with the operation of its
business and its properties and (ii) to insure its directors and officers
against certain losses. Copies of such policies have been made available to
the Company.
Section 4.20. Brokers. FPA and Acquisition represent and warrant that no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by the Agreement based upon arrangements made by or on behalf of
FPA or Acquisition (except for fees payable to the investment banking firm
named in Section 8.3(g)).
ARTICLE V
Representations and Warranties of the Company
The Company represents and warrants to FPA and Acquisition as follows:
Section 5.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida and has the requisite corporate power and authority to own,
lease and operate its assets and properties and to carry on its business as it
is now being conducted. The Company is qualified to do business and is in good
standing in each jurisdiction in which the properties owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified and in
good standing would not, when taken together with all other such failures,
have a material adverse effect on the business, operations, properties,
assets, condition (financial or other) or results of operations of the Company
and its subsidiaries, taken as a whole. True, accurate and complete copies of
the Company's Articles of Incorporation and bylaws, in each case as in effect
on the date hereof, including all amendments thereto, have heretofore been
delivered to FPA.
Section 5.2. Capitalization.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Company Common Stock, par value $.0001 per share, and 100,000,000
shares of preferred stock, par value $.0001 per share. As of the date of the
Agreement, 7,964,977 shares of Company Common Stock and no shares of preferred
stock were
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issued and outstanding. All of such issued and outstanding shares are validly
issued and are fully paid, nonassessable and free of preemptive rights. No
subsidiary of the Company holds any shares of the capital stock of the
Company.
(b) Except as set forth on Schedule 5.2(b)(1) attached hereto, as of the
date hereof there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, obligating the Company or any subsidiary of the
Company to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of the capital stock of the Company or obligating the
Company or any subsidiary of the Company to grant, extend or enter into any
such agreement or commitment. Except as set forth on Schedule 5.2(b)(2) and
other than the Company's obligations under Section 7.7(c), there are no voting
trusts, proxies or other agreements or understandings to which the Company or
any subsidiary of the Company is a party or by which the Company or any
subsidiary of the Company is bound with respect to the voting of any shares of
capital stock of the Company.
Section 5.3. Subsidiaries. Each direct and indirect corporate subsidiary of
the Company is duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has the requisite power and
authority to own, lease and operate its assets and properties and to carry on
its business as it is now being conducted. Each subsidiary of the Company is
qualified to do business, and is in good standing, in each jurisdiction in
which the properties owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing would not, when taken together
with all such other failures, have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole. All of the
outstanding shares of capital stock of each corporate subsidiary of the
Company are duly authorized, validly issued, fully paid, nonassessable and
free of preemptive rights and are owned directly or indirectly by the Company,
free and clear of any liens, claims, encumbrances, security interests,
equities, charges and options of any nature whatsoever except as set forth on
Schedule 5.3 attached hereto. There are no subscriptions, options, warrants,
rights, calls, contracts, voting trusts, proxies or other commitments,
understandings, restrictions or arrangements relating to the issuance, sale,
voting, transfer, ownership or other rights with respect to any shares of
capital stock of any corporate subsidiary of the Company, including any right
of conversion or exchange under any outstanding security, instrument or
agreement.
Section 5.4. Authority; Non-Contravention; Approvals.
(a) The Company has full corporate power and authority to enter into the
Agreement and, subject to the Company Stockholders' Approval (as defined in
Section 7.3(a)) and the Company Required Statutory Approvals (as defined in
Section 5.4(c)), to consummate the transactions contemplated hereby. The
Agreement has been approved by the board of directors of the Company, and no
other corporate proceedings on the part of the Company are necessary to
authorize the execution and delivery of the Agreement or, except for the
Company Stockholders' Approval, the consummation by the Company of the
transactions contemplated hereby. The Agreement has been duly executed and
delivered by the Company, and, assuming the due authorization, execution and
delivery hereof by FPA and Acquisition, constitutes a valid and legally
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or
other similar laws affecting or relating to enforcement of creditors' rights
generally and (ii) general equitable principles, and except that the
availability of equitable remedies, including specific performance and
injunctive relief, is subject to the discretion of the court before which any
proceedings may be brought. Without limitation of the foregoing, each of the
covenants and obligations of the Company set forth in Sections 6.1, 6.5, 6.6,
7.3(a), 7.6, 7.7, 7.8 and 7.10 is valid, legally binding and enforceable
notwithstanding the absence of the Company Stockholders' Approval.
(b) Except as set forth on Schedule 5.4(b) attached hereto, the execution
and delivery of the Agreement by the Company do not violate, conflict with or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination
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of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets
of the Company or any of its subsidiaries under any of the terms, conditions
or provisions of (i) the respective charters or bylaws of the Company or any
of its subsidiaries, (ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
governmental authority applicable to the Company or any of its subsidiaries or
any of their respective properties or assets, or (iii) any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind to
which the Company or any of its subsidiaries is now a party or by which the
Company or any of its subsidiaries or any of their respective properties or
assets may be bound or affected. The consummation by the Company of the
transactions contemplated hereby will not result in any violation, conflict,
breach, termination, acceleration or creation of liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the
preceding sentence, subject (x) in the case of the terms, conditions or
provisions described in clause (ii) above, to obtaining (prior to the
Effective Time) the Company Required Statutory Approvals and the Company
Stockholders' Approval and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the
Effective Time) consents required from commercial lenders, lessors or other
third parties. Set forth on Schedule 5.4(b) attached hereto is a list of
hospital contracts with respect to which the consent of any party other than
the Company is required in order that consummation by the Company of the
transactions contemplated hereby will not result in a breach or termination of
the respective contracts. Excluded from the foregoing sentences of this
paragraph (b), insofar as they apply to the terms, conditions or provisions
described in clauses (ii) and (iii) of the first sentence of this paragraph
(b), are such violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges or
encumbrances that would not, in the aggregate, have a material adverse effect
on the business, operations, properties, assets, condition (financial or
other) or results of operations of the Company and its subsidiaries, taken as
a whole.
(c) Except for (i) the filings by FPA and the Company required by the HSR
Act, (ii) the filing of the Joint Proxy Statement/Prospectus with the SEC
pursuant to the Exchange Act and the Securities Act and the declaration of the
effectiveness thereof by the SEC and filings with various state blue sky
authorities, (iii) the making of the Merger Filings with the Secretaries of
the States of Delaware and Florida in connection with the Merger and (iv) any
other required filings with or approvals from applicable federal and state
governmental authorities (the filings and approvals referred to in clauses (i)
through (iv) are collectively referred to as the "Company Required Statutory
Approvals"), no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any governmental or regulatory body or
authority is necessary for the execution and delivery of the Agreement by the
Company or the consummation by the Company of the transactions contemplated
hereby, other than such declarations, filings, registrations, notices,
authorizations, consents or approvals which, if not made or obtained, as the
case may be, would not, in the aggregate, have a material adverse effect on
the business, operations, properties, assets, condition (financial or other)
or results of operations of the Company and its subsidiaries, taken as a
whole.
Section 5.5. Reports and Financial Statements. Since December 24, 1992, the
Company has filed with the SEC all material forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto)
required to be filed by it under each of the Securities Act, the Exchange Act
and the respective rules and regulations thereunder, all of which, as amended
if applicable, complied in all material respects with all applicable
requirements of the appropriate act and the rules and regulations thereunder.
The Company has previously delivered or made available to FPA a copy of its
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
filed with the SEC, (b) proxy and information statements relating to (i) all
meetings of its stockholders (whether annual or special) and (ii) actions by
written consent in lieu of a stockholders' meeting from December 24, 1992
until the date hereof, (c) all other reports, including quarterly and current
reports, or registration statements filed by the Company with the SEC, and (d)
all press releases issued since December 24, 1992 (the documents referred to
in clauses (a), (b), (c) and (d) are collectively referred to as the "Company
SEC Reports"). As of their respective dates, the Company SEC Reports did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary
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to make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited interim consolidated financial statements of the Company included in
such reports, including the notes and schedules thereto (collectively, the
"Company Financial Statements"), have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto) and fairly present the
financial position of the Company and its subsidiaries as of the dates thereof
and the results of their operations and changes in financial position for the
periods then ended, subject, in the case of the unaudited interim financial
statements, to normal year-end and audit adjustments and any other adjustments
described therein.
Section 5.6. Absence of Undisclosed Liabilities. Except as disclosed in the
Company SEC Reports or with respect to acquisitions or potential transactions
or commitments heretofore disclosed to FPA in writing or on Schedule 5.6
attached hereto, neither the Company nor any of its subsidiaries had at
December 31, 1995, or has incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of any
nature, except (a) liabilities, obligations or contingencies (i) which are
accrued or reserved against in the Company Financial Statements or reflected
in the notes thereto or (ii) which were incurred after December 31, 1995 and
were incurred in the ordinary course of business and consistent with past
practices, (b) liabilities, obligations or contingencies which (i) would not,
in the aggregate, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations of
the Company and its subsidiaries, taken as a whole, or (ii) have been
discharged or paid in full prior to the date hereof, and (c) liabilities and
obligations which are of a nature not required to be reflected in the
consolidated financial statements of the Company and its subsidiaries prepared
in accordance with generally accepted accounting principles consistently
applied and which were incurred in the normal course of business.
Section 5.7. Absence of Certain Changes or Events. Since the date of the
most recent Company SEC Report, there has not been any material adverse change
in the business, operations, properties, assets, liabilities, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole.
Section 5.8. Litigation. Except as disclosed in the Company SEC Reports,
there are no claims, suits, actions or proceedings pending or, to the
knowledge of the Company, threatened against, relating to or affecting the
Company or any of its subsidiaries, before any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator that seek
to restrain the consummation of the Merger or which, either alone or in the
aggregate with all such claims, actions or proceedings, would materially and
adversely affect the business, operations, properties, assets, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole. Except as referred to in the Company SEC
Reports, neither the Company nor any of its subsidiaries is subject to any
judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or authority or any arbitrator
which prohibits or restricts the consummation of the transactions contemplated
hereby or would have any material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations of
the Company and its subsidiaries, taken as a whole.
Section 5.9. Registration Statement and Proxy Statement. None of the
information to be supplied by the Company or its subsidiaries for inclusion in
(a) the Registration Statement or (b) the Proxy Statement will, in the case of
the Proxy Statement or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement and any amendments or supplements
thereto, and at the time of the meetings of stockholders of the Company and
FPA to be held in connection with the transactions contemplated by the
Agreement or, in the case of the Registration Statement, as amended or
supplemented, at the time it becomes effective and at the time of such
meetings of the stockholders of the Company and FPA, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The Joint
Proxy Statement/Prospectus, as of its effective date, will comply as to form
in all material respects with all applicable laws, including the provisions of
the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation is made by the Company
with respect to information supplied by FPA or Acquisition for inclusion
therein.
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Section 5.10. No Violation of Law. Except as disclosed in the Company SEC
Reports or on Schedule 5.10 attached hereto, neither the Company nor any of
its subsidiaries is in violation of or has been given notice or been charged
with any violation of, any law, statute, order, rule, regulation, ordinance or
judgment (including, without limitation, any applicable environmental law,
ordinance or regulation) of any governmental or regulatory body or authority,
except for violations which, in the aggregate, would not have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole. Except as disclosed in the Company SEC
Reports, as of the date of the Agreement, to the knowledge of the Company, no
investigation or review by any governmental or regulatory body or authority is
pending or threatened, nor has any governmental or regulatory body or
authority indicated an intention to conduct the same, other than, in each
case, those the outcome of which, as far as reasonably can be foreseen, would
not have a material adverse effect on the business, operations, properties,
assets, condition (financial or other) or results of operations of the Company
and its subsidiaries taken as a whole. The Company and its subsidiaries have
all permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals necessary to conduct their
businesses as presently conducted (collectively, the "Company Permits"),
except for permits, licenses, franchises, variances, exemptions, orders,
authorizations, consents and approvals the absence of which, alone or in the
aggregate, would not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole. The Company
and its subsidiaries are not in violation of the terms of any Company Permit,
except for delays in filing reports or violations which, alone or in the
aggregate, would not have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole.
Section 5.11. Compliance. Except as disclosed in the Company SEC Reports or
on Schedule 5.11 attached hereto, the Company and each of its subsidiaries are
not in breach or violation of or in default in the performance or observance
of any term or provision of, and no event has occurred which, with lapse of
time or action by a third party, would result in a default under, (a) the
respective charters, bylaws or similar organizational instruments of the
Company or any of its subsidiaries or (b) any contract, commitment, agreement,
indenture, mortgage, loan agreement, note, lease, bond, license, approval or
other instrument to which the Company or any of its subsidiaries is a party or
by which any of them is bound or to which any of their property is subject,
which breaches, violations and defaults, in the case of clause (b) of this
Section 5.11, would have, in the aggregate, a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of the Company and its subsidiaries, taken as a whole.
Section 5.12. Taxes. The Company and its subsidiaries have (i) duly filed
(or timely requested and received an extension to file) with the appropriate
governmental authorities all Tax Returns required to be filed by them for all
periods ending on or prior to the Effective Time, other than those Tax Returns
the failure of which to file would not have a material adverse effect on the
business, operations, properties, assets, condition (financial or other) or
results of operations of the Company and its subsidiaries, taken as a whole,
and such Tax Returns are true, correct and complete in all material respects,
and (ii) duly paid in full or made adequate provision for the payment of all
Taxes for all periods ending at or prior to the Effective Time. The
liabilities and reserves for Taxes reflected in the Company balance sheet
included in the latest Company SEC Report are adequate to cover all Taxes for
all periods ending at or prior to the Effective Time and there are no material
liens for Taxes upon any property or assets of the Company or any subsidiary
thereof, except for liens for Taxes not yet due. There are no unresolved
issues of law or fact arising out of a notice of deficiency, proposed
deficiency or assessment from the IRS or any other governmental taxing
authority with respect to Taxes of the Company or any of its subsidiaries
which, if decided adversely, singly or in the aggregate, would have a material
adverse effect on the business, operations, properties, assets, condition
(financial or other) or results of operations of the Company and its
subsidiaries, taken as a whole. Neither the Company nor any of its
subsidiaries is a party to any agreement providing for the allocation or
sharing of Taxes with any entity that is not, directly or indirectly, a
wholly-owned corporate subsidiary of Company other than agreements the
consequences of which are adequately reserved for in the Company Financial
Statements. Neither the Company nor any of its corporate subsidiaries has,
with regard to any assets or property held, acquired or to be acquired by any
of them, filed a consent to the application of Section 341(f) of the Code.
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Section 5.13. Employee Benefit Plans; ERISA.
(a) Except as set forth in the Company SEC Reports or on Schedule 5.13(a)
attached hereto, at the date hereof, the Company and its subsidiaries do not
maintain or contribute to any material employee benefit plans, programs,
arrangements and practices (such plans, programs, arrangements and practices
of the Company and its subsidiaries being referred to as the "Company Plans"),
including employee benefit plans within the meaning set forth in Section 3(3)
of ERISA, or other similar material arrangements for the provision of benefits
(excluding any "Multi-employer Plan" within the meaning of Section 3(37) of
ERISA or a "Multiple Employer Plan" within the meaning of Section 413(c) of
the Code). Neither the Company nor its subsidiaries has any obligation to
create any additional such plan or to amend any such plan so as to increase
benefits thereunder, except as required under the terms of the Company Plans,
under existing collective bargaining agreements or to comply with applicable
law.
(b) Except as disclosed in the Company SEC Reports or on Schedule 5.13(b)
attached hereto, (i) there have been no prohibited transactions within the
meaning of Section 406 or 407 of ERISA or Section 4975 of the Code with
respect to any of the Company Plans that would result in penalties, taxes or
liabilities which, singly or in the aggregate, would have a material adverse
effect on the business, operations, properties, assets, condition (financial
or other) results of operations of the Company and its subsidiaries, taken as
a whole, (ii) except for premiums due, there is no outstanding material
liability, whether measured alone or in the aggregate, under Title IV of ERISA
with respect to any of the Company Plans, (iii) neither the Pension Benefit
Guaranty Corporation nor any plan administrator has instituted proceedings to
terminate any of the Company Plans subject to Title IV of ERISA other than in
a "standard termination" described in Section 4041(b) of ERISA, (iv) none of
the Company Plans has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, as of the last day of the most recent fiscal year of each of the
Company Plans ended prior to the date of the Agreement, (v) the current
present value of all projected benefit obligations under each of the Company
Plans which is subject to Title IV of ERISA did not, as of its latest
valuation date, exceed the then current value of the assets of such plan
allocable to such benefit liabilities by more than the amount, if any,
disclosed in the Company SEC Reports as of December 31, 1995, based upon
reasonable actuarial assumptions currently utilized for such Company Plan,
(vi) each of the Company Plans has been operated and administered in all
material respects in accordance with applicable laws during the period of time
covered by the applicable statute of limitations, (vii) each of the Company
Plans which is intended to be "qualified" within the meaning of Section 401(a)
of the Code has been determined by the IRS to be so qualified and such
determination has not been modified, revoked or limited by failure to satisfy
any condition thereof or by a subsequent amendment thereto or a failure to
amend, except that it may be necessary to make additional amendments
retroactively to maintain the "qualified" status of such Company Plans, and
the period for making any such necessary retroactive amendments has not
expired, (viii) with respect to Multi-employer Plans, neither the Company nor
any of its subsidiaries has, made or suffered a "complete withdrawal" or a
"partial withdrawal," as such terms are respectively defined in Sections 4203,
4204 and 4205 of ERISA and, to the knowledge of the Company and its
subsidiaries, no event has occurred or is expected to occur which presents a
material risk of a complete or partial withdrawal under said Sections 4203,
4204 and 4205, (ix) to the knowledge of the Company and its subsidiaries,
there are no material pending, threatened or anticipated claims involving any
of the Company Plans other than claims for benefits in the ordinary course,
and (x) the Company and its subsidiaries have no current material liability,
whether measured alone or in the aggregate, for plan termination or complete
withdrawal or partial withdrawal under Title IV of ERISA based on any plan to
which any entity that would be deemed one employer with the Company and its
subsidiaries under Section 4001 of ERISA or Section 414 of the Code
contributed during the period of time covered by the applicable statute of
limitations (a "Company Controlled Group Plan"), and the Company and its
subsidiaries do not reasonably anticipate that any such liability will be
asserted against the Company or any of its subsidiaries. None of the Company
Controlled Group Plans has an "accumulated funding deficiency" (as defined in
Section 302 of ERISA and 412 of the Code).
Section 5.14. Labor Controversies. Except as set forth in the Company SEC
Reports, (a) there are no significant controversies pending or, to the
knowledge of the Company, threatened between the Company or its
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subsidiaries and any representatives of any of their employees, (b) to the
knowledge of the Company, there are no material organizational efforts
presently being made involving any of the presently unorganized employees of
the Company or its subsidiaries, (c) the Company and its subsidiaries have, to
the knowledge of the Company, complied in all material respects with all laws
relating to the employment of labor, including, without limitation, any
provisions thereof relating to wages, hours, collective bargaining, and the
payment of social security and similar taxes, and (d) no person has, to the
knowledge of the Company, asserted that the Company or any of its subsidiaries
is liable in any amount for any arrears of wages or any taxes or penalties for
failure to comply with any of the foregoing, except for such controversies,
organizational efforts, non-compliance and liabilities which, singly or in the
aggregate, would not materially and adversely affect the business, operations,
properties, assets, condition (financial or other) or results of operations of
the Company and its subsidiaries, taken as a whole.
Section 5.15. Environmental Matters. Except as set forth in the Company SEC
Reports, (i) the Company and its subsidiaries have conducted their respective
businesses in compliance with all applicable Environmental Laws, including,
without limitation, having all permits, licenses and other approvals and
authorizations necessary for the operation of their respective businesses as
presently conducted, (ii) none of the properties owned by the Company or any
of its subsidiaries contain any Hazardous Substance as a result of any
activity of the Company or any of its subsidiaries in amounts exceeding the
levels permitted by applicable Environmental Laws, (iii) neither the Company
nor any of its subsidiaries has received any notices, demand letters or
requests for information from any federal, state, local or foreign
governmental entity or third party indicating that the Company or any of its
subsidiaries may be in violation of, or liable under, any Environmental Law in
connection with the ownership or operation of their businesses, (iv) there are
no civil, criminal or administrative actions, suits, demands, claims,
hearings, investigations or proceedings pending or threatened against the
Company or any of its subsidiaries relating to any violation, or alleged
violation, of any Environmental Law, (v) no reports have been filed, or are
required to be filed, by the Company or any of its subsidiaries concerning the
release of any Hazardous Substance or the threatened or actual violation of
any Environmental Law, (vi) no Hazardous Substance has been disposed of,
released or transported in violation of any applicable Environmental Law from
any properties owned by the Company or any of its subsidiaries as a result of
any activity of the Company or any of its subsidiaries during the time such
properties were owned, leased or operated by the Company or any of its
subsidiaries, (vii) there have been no environmental investigations, studies,
audits, tests, reviews or other analyses regarding compliance or noncompliance
with any applicable Environmental Law conducted by or which are in the
possession of the Company or its subsidiaries relating to the activities of
the Company or its subsidiaries which have not been delivered to FPA prior to
the date hereof, (viii) there are no underground storage tanks on, in or under
any properties owned by the Company or any of its subsidiaries and no
underground storage tanks have been closed or removed from any of such
properties during the time such properties were owned, leased or operated by
the Company or any of its subsidiaries, (ix) there is no asbestos or asbestos
containing material present in any of the properties owned by the Company and
its subsidiaries, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by the Company
or any of its subsidiaries, and (x) neither the Company, its subsidiaries nor
any of their respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim
asserted or arising under any Environmental Law, except for violations of the
foregoing clauses (i) through (x) that, singly or in the aggregate, would not
reasonably be expected to have a material adverse effect on the business,
operations, properties, assets, condition (financial or other) or results of
operations of the Company and its subsidiaries considered as one enterprise.
Section 5.16. Title to Assets. Except as set forth on Schedule 5.16 attached
hereto, the Company and each of its subsidiaries has good and marketable title
in fee simple to all its real property and good title to all its leasehold
interests and other properties, as reflected in the most recent balance sheet
included in the Company Financial Statements, except for properties and assets
that have been disposed of in the ordinary course of business since the date
of such balance sheet, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except (i) the lien for
current taxes, payments of which are not yet delinquent, (ii) such
imperfections in title and easements and encumbrances, if any, as are not
substantial in
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character, amount or extent and do not materially detract from the value or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the Company's business operations (in
the manner presently carried on by the Company) or (iii) as disclosed in the
Company SEC Reports, and except for such matters which, singly or in the
aggregate, would not materially and adversely affect the business, operations,
properties, assets, condition (financial or other) or results of operations of
the Company and its subsidiaries, taken as a whole. All leases under which the
Company leases any substantial amount of real or personal property have been
made available to FPA and are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event which with notice or lapse of time or
both would become a default other than defaults under such leases which in the
aggregate would not materially and adversely affect the condition of the
Company and its subsidiaries, taken as a whole.
Section 5.17. Company Stockholders' Approval. The affirmative vote of
stockholders of the Company required for approval and adoption of the
Agreement and the Merger is a majority of the outstanding shares of Company
Common Stock.
Section 5.18. Pooling and Tax-Free Reorganization Matters. To the knowledge
of the Company and based upon consultation with its independent accountants,
neither the Company nor any of its affiliates has taken or agreed to take any
action that would interfere with the ability of FPA to (i) account for the
business combination to be effected by the Merger as a pooling of interests,
(ii) continue to account for as a pooling of interests any past business
combination transaction currently accounted for as a pooling of interests
under APB No. 16 for accounting and financial statement purposes or (iii)
treat the Merger as a tax-free reorganization pursuant to Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code.
Section 5.19. Insurance. The Company maintains insurance with financially
responsible insurance companies (i) in amounts customary in its industry to
insure it against risks and losses associated with the operation of its
business and its properties and (ii) to insure its directors and officers
against certain losses. Copies of such policies have been made available to
FPA.
Section 5.20. Brokers. The Company represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other
fee or commission in connection with the Merger or the transactions
contemplated by the Agreement based upon arrangements made by or on behalf of
the Company (except for fees payable to the investment banking firm named in
Section 8.2(g)).
Section 5.21. Statutory Antitakeover Provisions. The Company's Articles of
Incorporation provide that it is exempt from Sections 607.0901 and 607.0902 of
the Florida Statutes.
ARTICLE VI
Conduct of Business Pending the Merger
Section 6.1. Conduct of Business by the Company Pending the Merger. Except
as otherwise contemplated by the Agreement, after the date hereof and prior to
the Closing Date or earlier termination of the Agreement, unless FPA shall
otherwise agree in writing, the Company shall, and shall cause its
subsidiaries, to:
(a) conduct their respective businesses in the ordinary and usual course
of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters or
bylaws, (ii) split, combine or reclassify their outstanding capital stock
or (iii) declare, set aside or pay any dividend or distribution payable in
cash, stock, property or otherwise, except for the payment of dividends or
distributions by a wholly-owned subsidiary of the Company;
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(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of, their capital stock of any
class or any debt or equity securities convertible into or exchangeable for
such capital stock, except that the Company (i) may grant options to the
extent required to be granted automatically under the Company's Plans or
pursuant to employment agreements and (ii) may issue shares (A) upon
conversion of convertible securities and exercise of options outstanding on
the date hereof, or options granted pursuant to subsection (c)(i) of this
Section 6.1, (B) in connection with the potential acquisitions described on
Schedule 6.1 attached hereto and (C) in connection with transactions
disclosed on other Schedules attached hereto;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness,
(ii) redeem, purchase, acquire or offer to purchase or acquire any shares
of its capital stock or any options, warrants or rights to acquire any of
its capital stock or any security convertible into or exchangeable for its
capital stock, (iii) take any action which would jeopardize the treatment
of the Merger as a pooling of interests under APB No. 16, (iv) take or fail
to take any action which action or failure would cause the Company or its
stockholders (except to the extent that any stockholders receive cash in
lieu of fractional shares) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger, (v) make any
acquisition of any assets or businesses other than expenditures for fixed
or capital assets in the ordinary course of business and as described on
Schedule 6.1 attached hereto, (vi) sell, pledge, dispose of or encumber any
assets or businesses other than sales in the ordinary course of business or
(vii) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by the Agreement;
(f) confer on a regular and frequent basis with one or more
representatives of FPA to report operational matters of materiality and the
general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except as required by Section 7.12 hereof and in the ordinary course and
consistent with past practice;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as required by Section 7.12 or to comply with changes in applicable
law;
(i) maintain with financially responsible insurance companies insurance
on its tangible assets and its businesses in such amounts and against such
risks and losses as are consistent with past practice; and
(j) take all such reasonable action as may be required to maintain its
directors' and officers' liability insurance coverage.
Section 6.2. Conduct of Business by FPA and Acquisition Pending the
Merger. Except as otherwise contemplated by the Agreement, after the date
hereof and prior to the Closing Date or earlier termination of the Agreement,
unless the Company shall otherwise agree in writing, FPA and Acquisition
shall, and shall cause their subsidiaries, to:
(a) conduct their respective businesses in the ordinary and usual course
of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters or bylaws
except as set forth in FPA's Proxy Statement dated April 19, 1996, and as
may be amended from time to time, (ii) split, combine or reclassify
(whether by stock dividend or otherwise) their outstanding capital stock,
or (iii) declare, set aside
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or pay any dividend or distribution payable in cash, stock, property or
otherwise, except for the payment of dividends or distributions by a
wholly-owned subsidiary of FPA;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any shares of FPA Common Stock, or any options,
warrants or rights of any kind to acquire any shares of their capital stock
of any class or any debt or equity securities convertible into or
exchangeable for such capital stock, except that FPA (A) may issue shares
(i) upon conversion of convertible securities and exercise of options
outstanding on the date hereof (ii) in connection with the potential
acquisitions described on Schedule 6.2 attached hereto and (iii) in
connection with the possible issuance and sale of certain notes as
described on Schedule 6.2 attached hereto (the "Notes") and (B) may issue
rights or warrants to purchase shares of its common or preferred stock in
accordance with a proposed shareholder rights plan;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money, other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness,
including the possible issuance of the Notes, (ii) redeem, purchase,
acquire or offer to purchase or acquire any shares of its capital stock or
any options, warrants or rights to acquire any of its capital stock or any
security convertible into or exchangeable for its capital stock, (iii) take
any action which would jeopardize the treatment of the Merger as a pooling
of interests under APB No. 16, (iv) take or fail to take any action which
action or failure to take action would cause the Company or its
stockholders (except to the extent that any stockholders receive cash in
lieu of fractional shares) to recognize gain or loss for federal income tax
purposes as a result of the consummation of the Merger, (v) make any
acquisition of any assets or businesses other than expenditures for fixed
or capital assets in the ordinary course of business and as described on
Schedule 6.2 attached hereto, (vi) sell, pledge, dispose of or encumber any
assets or businesses other than sales in the ordinary course of business or
(vii) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective present officers and key employees, and preserve the goodwill
and business relationships with customers and others having business
relationships with them and not engage in any action, directly or
indirectly, with the intent to adversely impact the transactions
contemplated by the Agreement;
(f) confer on a regular and frequent basis with one or more
representatives of the Company to report operational matters of materiality
and the general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except in the ordinary course and consistent with past practice;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as required to comply with changes in applicable law;
(i) maintain with financially responsible insurance companies insurance
on its tangible assets and its businesses in such amounts and against such
risks and losses as are consistent with past practice; and
(j) take all such reasonable action as may be required to maintain its
directors' and officers' liability insurance coverage.
Section 6.3. Control of the Company's Operations. Nothing contained in the
Agreement shall give to FPA, directly or indirectly, rights to control or
direct the Company's operations prior to the Effective Time. Prior to the
Effective Time, the Company shall exercise, consistent with the terms and
conditions of the Agreement, complete control and supervision of its
operations.
Section 6.4. Control of FPA's Operations. Nothing contained in the Agreement
shall give to the Company, directly or indirectly, rights to control or direct
FPA's or Acquisition's operations prior to the
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Effective Time. Prior to the Effective Time, FPA and Acquisition shall
exercise, consistent with the terms and conditions of the Agreement, complete
control and supervision of their respective operations.
Section 6.5. Acquisition Transactions.
(a) Except as hereinafter provided, after the date hereof and prior to the
Effective Time or earlier termination of the Agreement, neither FPA nor the
Company shall, and neither shall permit any of its subsidiaries to, initiate,
solicit, negotiate, encourage or provide non-public or confidential
information to facilitate, and each shall use its best efforts to cause each
of its subsidiaries and cause any officer, director or employee of it or its
subsidiaries, or any attorney, accountant, investment banker, financial
advisor or other agent retained by it or its subsidiaries, not to initiate,
solicit, negotiate, encourage or provide non-public or confidential
information to facilitate, any proposal or offer to acquire all or any
substantial part of the business and properties of FPA or the Company or any
capital stock of FPA or the Company, whether by merger, purchase of assets,
tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof (any such transactions being referred to
herein as "Acquisition Transactions").
(b) Notwithstanding the provisions of paragraph (a) above, either FPA or the
Company (either a "Target" or a "non-Target," as the case may be for purposes
of Section 6.5(b) and Section 6.5(c)) may, as a Target, in response to an
unsolicited written proposal with respect to an Acquisition Transaction, (i)
furnish confidential or non-public information concerning its business,
properties or assets to a financially capable corporation, partnership,
individual or other entity, group or other person (a "Potential Acquirer") if
the non-Target shall have been given not less than one (1) business day
advance written notice of the Target's intention to do so, or negotiate with
such Potential Acquirer if the non-Target shall have been given not less than
three (3) business days' advance written notice of the Target's intention to
do so, and (ii) if such proposed Acquisition Transaction constitutes a tender
offer subject to Section 14(d) of the Exchange Act, the board of directors of
Target may take and disclose to Target stockholders a position contemplated by
Rule 14e-2(a) under the Exchange Act.
(c) In the event the Target shall receive any offer of the type referred to
in Section 6.5(b) above, it shall immediately inform the non-Target that an
offer has been received and shall immediately furnish to the non-Target the
identity of the proponent of such offer, a copy of any information provided to
such Potential Acquirer and, a description of the material terms of such
offer, unless the board of directors of the Target concludes that such
disclosure to the non-Target would be inconsistent with its fiduciary duties
to its stockholders under applicable law.
(d) The Company may enter into a definitive agreement for an Acquisition
Transaction which meets the requirements set forth above with a Potential
Acquirer with which it is permitted to negotiate pursuant to paragraph (b)
above, but only if (i) the independent financial advisors of the Company shall
have determined that such Acquisition Transaction would be more favorable to
the Company's stockholders from a financial point of view than the Merger,
(ii) the Company's board of directors shall have concluded, in good faith and
after consultation with its legal counsel, that such action is necessary in
order for the board of directors to act in a manner that is consistent with
its fiduciary obligations under applicable law, (iii) at least three (3)
business days prior to the execution of a definitive agreement with a
Potential Acquirer, the Company shall have furnished FPA with a copy of such
definitive agreement and (iv) FPA shall have failed within such three-day
period to offer to amend the terms of the Agreement in order that the Merger
would yield a value to stockholders of the Company at least equal to the
Acquisition Transaction.
(e) Each party (i) acknowledges that a breach of any of its covenants
contained in this Section 6.5 will result in irreparable harm to the other
party which will not be compensable in money damages and (ii) agrees that such
covenant shall be specifically enforceable and that specific performance and
injunctive relief shall be a remedy properly available to the other party for
a breach of such covenant.
Section 6.6. Effect of Acquisition Transaction. If the Merger is not
consummated as a result of the Company electing to enter into an Acquisition
Transaction (including, but not limited to, an Acquisition Transaction
permitted pursuant to this Article VI) with any party other than FPA or one of
its subsidiaries or affiliates prior to December 31, 1996, the Company shall
pay to FPA upon consummation of such Acquisition
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Transaction an amount equal to the value of three percent (3%) of the
Aggregate Value paid to the Company or its stockholders in such Acquisition
Transaction. "Aggregate Value" shall mean the total value paid for Company
Common Stock plus the total indebtedness assumed by the acquiring party as a
result of the Acquisition Transaction.
ARTICLE VII
Additional Agreements
Section 7.1. Access to Information. (a) The Company and its subsidiaries
shall afford to FPA and Acquisition and their respective accountants, counsel,
financial advisors and other representatives (the "FPA Representatives") and
FPA and its subsidiaries shall afford to the Company and its accountants,
counsel, financial advisors and other representatives (the "Company
Representatives") reasonable access during normal business hours throughout
the period prior to the earlier of the termination of the Agreement or the
Effective Time to all of their respective properties, books, contracts,
commitments and records (including, but not limited to, Tax Returns) and,
during such period, shall furnish promptly to one another (i) a copy of each
report, schedule and other document filed or received by any of them pursuant
to the requirements of federal or state securities laws or filed by any of
them with the SEC in connection with the transactions contemplated by the
Agreement or which may have a material effect on their respective businesses,
properties or personnel and (ii) such other information concerning their
respective businesses, properties and personnel as FPA, Acquisition or the
Company, as the case may be, shall reasonably request; provided that no
investigation pursuant to this Section 7.1 shall amend or modify any
representations or warranties made herein or the conditions to the obligations
of the respective parties to consummate the Merger. FPA and its subsidiaries
shall hold and shall use their reasonable best efforts to cause the FPA
Representatives to hold, and the Company and its subsidiaries shall hold and
shall use their reasonable best efforts to cause the Company Representatives
to hold, in strict confidence all Confidential Information, as hereinafter
defined, furnished to FPA, Acquisition or to the Company, as the case may be,
in connection with the transactions contemplated by the Agreement, except that
(i) FPA, Acquisition and the Company may disclose such information as may be
necessary in connection with seeking FPA Required Statutory Approvals and FPA
Stockholders' Approval, the Company Required Statutory Approvals and the
Company Stockholders' Approval and (ii) each of FPA, Acquisition and the
Company may disclose any information that it is required by law or judicial or
administrative order to disclose. For purposes of this Section 7.1(a),
"Confidential Information" regarding a party to the Agreement means (i) the
existence of the discussions which are the subject of the Agreement and (ii)
any information about the subject party; provided that it does not include
information which the disclosing party can demonstrate (A) is generally
available to or known by the public other than as a result of improper
disclosure by the disclosing party or (B) obtained by the disclosing party
from a source other than the subject party, provided that such source was not
bound by a duty of confidentiality to the subject party or another party with
respect to such information. The provisions of the Confidentiality/Standstill
Agreement recently entered into (the "Confidentiality Agreement") between FPA
and the Company shall survive the execution and delivery of the Agreement and,
to the extent of any inconsistency between the provisions of the
Confidentiality Agreement and this Section 7.1, the provisions of the
Confidentiality Agreement shall govern the obligations of the parties.
(b) In the event that the Agreement is terminated in accordance with its
terms, each party shall promptly return to the other all non-public written
material provided pursuant to this Section 7.1 or the Confidentiality
Agreement and shall not retain any copies, extracts or other reproductions in
whole or in part of such written material. In such event, all documents,
memoranda, notes and other writings prepared by FPA or the Company based on
the information in such material shall be destroyed (and FPA and the Company
shall use their respective reasonable best efforts to cause their advisors and
representatives to similarly destroy their documents, memoranda and notes),
and such destruction (and reasonable best efforts) shall be certified in
writing by an authorized officer supervising such destruction.
(c) The Company shall promptly advise FPA and FPA shall promptly advise the
Company in writing of any change or the occurrence of any event after the date
of the Agreement having, or which would have any
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material adverse effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of the Company and its
subsidiaries or FPA and its subsidiaries, as the case may be, taken as a
whole.
Section 7.2. Registration Statement and Proxy Statement. FPA and the Company
shall file with the SEC as soon as is reasonably practicable after the date
hereof (but in no event prior to the consummation of the proposed acquisition
by FPA of certain securities from Physician Corporation of America previously
disclosed to the Company unless such acquisition is otherwise terminated) the
Joint Proxy Statement/Prospectus and shall use all reasonable efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable. FPA shall also take any action required to be taken under
applicable state blue sky, securities laws or rules or regulations of any
national securities exchange or NASDAQ in connection with the issuance of FPA
Common Stock pursuant hereto. FPA and the Company shall promptly furnish to
each other all information, and take such other actions, as may reasonably be
requested in connection with any action by any of them in connection with the
preceding sentence.
Section 7.3. Stockholders' Approvals.
(a) The Company shall, as promptly as practicable, submit the Agreement and
the transactions contemplated hereby for the approval of its stockholders at a
meeting of stockholders and, subject to the fiduciary duties of the board of
directors of the Company under applicable law, shall use its reasonable best
efforts to obtain stockholder approval and adoption (the "Company
Stockholders' Approval") of the Agreement and the transactions contemplated
hereby. Such meeting of stockholders shall be held as soon as practicable
following the date upon which the Registration Statement becomes effective.
Subject to the fiduciary duties of the board of directors of the Company under
applicable law, the Company shall, through its board of directors, recommend
to its stockholders approval of the transactions contemplated by the
Agreement. Subject to the foregoing, the Company (i) acknowledges that a
breach of its covenant contained in this Section 7.3(a) to convene a meeting
of its stockholders and call for a vote thereat with respect to the approval
of the Agreement and the Merger will result in irreparable harm to FPA which
will not be compensable in money damages and (ii) agrees that such covenant
shall be specifically enforceable and that specific performance and injunctive
relief shall be a remedy properly available to FPA for a breach of such
covenant.
(b) FPA shall, as promptly as practicable, submit the Agreement and the
transactions contemplated hereby for the approval of its stockholders at a
meeting of stockholders and, subject to the fiduciary duties of the board of
directors of FPA under applicable law, shall use its reasonable best efforts
to obtain stockholder approval and adoption (the "FPA Stockholders' Approval")
of the Agreement and the transactions contemplated hereby. Such meeting of
stockholders shall be held as soon as practicable following the date on which
the Registration Statement becomes effective. FPA shall, through its board of
directors, but subject to the fiduciary duties of the members thereof, (i)
recommend to its stockholders approval of the transactions contemplated by the
Agreement and (ii) authorize and cause an officer of FPA to vote FPA's shares
of Acquisition Common Stock for adoption and approval of the Agreement and the
transactions contemplated hereby and shall take all additional actions as the
sole stockholder of Acquisition necessary to adopt and approve the Agreement
and the transactions contemplated hereby. Subject to the foregoing, FPA (i)
acknowledges that a breach of its covenant contained in this Section 7.3(b) to
convene a meeting of its stockholders and call for a vote thereat with respect
to the approval of the Agreement and the Merger will result in irreparable
harm to the Company which will not be compensable in money damages and (ii)
agrees that such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to the
Company for a breach of such covenant.
Section 7.4. Affiliates of the Company. On or prior to the date that is
thirty (30) days prior to the Closing Date, the Company shall deliver to FPA a
letter (the "APB No. 16 Affiliate Letter") identifying all persons who may be
deemed affiliates of the Company for the purposes of APB No. 16, including,
without limitation, all directors and executive officers of the Company as of
the date of the APB No. 16 Affiliate Letter. On or prior to the date that is
five (5) days prior to the Closing Date, (i) the Company shall deliver to FPA
another letter (the "Rule 145 Letter") identifying all persons who may be
affiliates of the Company, as defined
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under Rule 145 under the Securities Act ("Rule 145"), as of the date of the
Rule 145 Letter, and (ii) the Company shall advise the persons identified in
the Rule 145 Letter of the resale restrictions imposed by applicable
securities laws. The Company shall use its best efforts to obtain as soon as
practicable from each person listed on the APB No. 16 Affiliate Letter and
from any person who may be deemed to have become an affiliate of the Company
for the purposes of APB No. 16 after the Company's delivery of the APB No. 16
Affiliate Letter and prior to the Closing Date, an agreement not to sell
shares of FPA Common Stock obtained in the Merger until combined results of
operations of the Company and FPA covering at least thirty (30) days of
operations are made public.
Section 7.5. Exchange Listing. FPA shall use its reasonable best efforts to
effect, at or before the Effective Time, authorization for listing on the
NASDAQ, upon official notice of issuance, of the shares of FPA Common Stock to
be issued pursuant to the Merger.
Section 7.6. Expenses and Fees. All costs and expenses incurred in
connection with the Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, except that those expenses
incurred in connection with printing the Joint Proxy Statement/Prospectus
shall be shared equally by FPA and the Company. The fees required pursuant to
Sections 6.6 and 9.2 hereof shall be paid in accordance with those provisions.
Section 7.7. Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided, each of the parties
hereto shall use its best efforts to take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by the Agreement, including using its best efforts
to obtain all necessary or appropriate waivers, consents and approvals and SEC
"no-action" letters to effect all necessary registrations, filings and
submissions and to lift any injunction or other legal bar to the Merger (and,
in such case, to proceed with the Merger as expeditiously as possible),
subject, however, to FPA Stockholders' Approval and Company Stockholders'
Approval.
(b) Without limitation of the foregoing, each of FPA and the Company
undertakes and agrees to (i) take all actions necessary to cause the Merger to
(a) qualify as a tax-free merger under Section 368(a)(1)(A), (a)(2)(D) or
(a)(2)(E) of the Code, and (b) be treated as a pooling of interests under APB
No. 16 for accounting and financial statement purposes, (ii) file as soon as
practicable after the date hereof a Notification and Report Form under the HSR
Act with the Federal Trade Commission (the "FTC") and the Antitrust Division
of the Department of Justice (the "Antitrust Division"). Each of FPA and the
Company shall (i) use its reasonable efforts to comply as expeditiously as
possible with all lawful requests of the FTC or the Antitrust Division for
additional information and documents and (ii) not extend any waiting period
under the HSR Act or enter into any agreement with the FTC or the Antitrust
Division not to consummate the transactions contemplated by the Agreement,
except with the prior written consent of such parties.
(c) The Company shall use its best efforts to obtain from the Company's
executive officers and directors, and shall deliver to FPA, irrevocable
proxies (together with a voting agreement) only with respect to the meeting of
Company stockholders related to the Merger (in a form furnished to the Company
by FPA) representing all shares of Company Common Stock that such executive
officers and directors beneficially own as contemplated by the rules under the
Exchange Act with their vote in favor of the Merger.
(d) FPA shall use its best efforts to obtain from FPA's executive officers
and directors, and shall deliver to the Company, (i) irrevocable proxies
(together with a voting agreement) only with respect to the meeting of FPA
stockholders related to the Merger (in a form reasonably acceptable to the
Company) representing all shares of FPA Common Stock that such executive
officers and directors and officers own with their votes in favor of the
Merger, and (ii) irrevocable proxies (together with a voting agreement, and in
a form acceptable to Stephen J. Dresnick, M.D.) representing all shares of FPA
Common Stock that such executive officers and directors beneficially own as
contemplated by the rules under the Exchange Act with their votes for election
of directors in accordance with Section 7.13 hereof.
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Section 7.8. Public Statements. The parties shall consult with each other
prior to issuing any press release or any written public statement with
respect to the Agreement or the transactions contemplated hereby and shall not
issue any such press release or written public statement prior to such
consultation unless required by law.
Section 7.9. Option Plans. At the Effective Time, FPA shall take such action
as may be necessary to assume each unexpired and unexercised option to
purchase a share of Company Common Stock, regardless of whether exercisable at
the Effective Time (each a "Company Option"), so that each such option becomes
an option (each an "FPA Option") to purchase a number of shares of FPA Common
Stock equal to the number of shares of Company Common Stock that could have
been purchased under the Company Option multiplied by the Exchange Ratio, at a
price per share of FPA Common Stock equal to the option exercise price
determined pursuant to the Company Option divided by the Exchange Ratio and
subject to substantially the same terms and conditions as the Company Option.
FPA shall assume all of the Company's obligations with respect to Company
Options as amended and shall, from and after the Effective Time, make
available for issuance upon exercise of the FPA Options all shares of FPA
Common Stock covered thereby and promptly after the Effective Date amend its
Registration Statement on Form S-8 or file a new Form S-8 (in either case, the
"S-8"), to cover such additional shares of FPA Common Stock. Notwithstanding
the foregoing, following the Effective Time, no additional options shall be
granted to the directors of the Company under the automatic grant provisions
set forth in paragraph 17 of the Company's 1994 Stock Option Plan.
Section 7.10. Notification of Certain Matters. Each of the Company, FPA and
Acquisition agrees to give prompt notice to each other of, and to use their
respective reasonable best efforts to prevent or promptly remedy, (i) the
occurrence or failure to occur or the impending or threatened occurrence or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause any of its representations or warranties in the Agreement to
be untrue or inaccurate in any material respect at any time from the date
hereof to the Effective Time and (ii) any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 7.10 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section 7.11. Corrections to the Joint Proxy Statement/Prospectus and
Registration Statement. Prior to the date of approval of the Merger by their
respective stockholders, each of the Company, FPA and Acquisition shall
correct promptly any information provided by it to be used specifically in the
Joint Proxy Statement/Prospectus and Registration Statement that shall have
become false or misleading in any material respect and shall take all
reasonable steps necessary to file with the SEC and have declared effective or
cleared by the SEC any amendment or supplement to the Joint Proxy
Statement/Prospectus or the Registration Statement so as to correct the same
and to cause the Joint Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of the Company and FPA, in each case to the
extent required by applicable law.
Section 7.12. Change of Control Issues. The Company shall secure appropriate
amendments to or waivers of any employment agreements to which it is a party
that presently provide for changes in the material terms or conditions of such
employment agreements upon a change of control of the Company, including
without limitation changes in the compensation payable or the terms of a
covenant not to compete.
Section 7.13. Board of Directors. At the Effective Time, the board of
directors of FPA shall appoint Stephen J. Dresnick, M.D. and another
individual selected by the board of directors of the Company and acceptable to
FPA to the board of directors of FPA to serve until the next annual meeting of
stockholders of FPA. Commencing with the election at that annual meeting, the
board of directors of FPA will nominate and recommend to its stockholders the
election to the board of directors of FPA of Dr. Dresnick for a period of two
(2) additional years and the election to the board of directors of FPA of such
other individual for a period of one (1) additional year. If during Dr.
Dresnick's term as a director, FPA decides to increase the size of its board
of directors, the board of directors of FPA will nominate one individual
selected by Dr. Dresnick and acceptable to
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the board of directors of FPA, and recommend to the FPA stockholders his or
her election to the board of directors of FPA for a period of no less than one
(1) year.
Section 7.14. Insurance; Indemnity. For a period of six (6) years after the
Effective Time, FPA shall indemnify, defend and hold harmless to the fullest
extent permitted under applicable law each person who is now or has been an
officer, director, employee, trustee or agent of Company (or any subsidiary or
division thereof), including, without limitation, each person controlling any
of the foregoing persons (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses, claims, damages,
liabilities, costs or expenses (including reasonable attorneys' fees),
judgments, fines, penalties and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or
after the Effective Time. In the event of any such claim, action, suit,
proceeding or investigation (an "Action"), (i) FPA shall pay the reasonable
fees and expenses of counsel selected by the Indemnified Party, which counsel
shall be reasonably acceptable to FPA, in advance of the final disposition of
any such Action to the full extent and under all circumstances permitted by
Florida law as in effect on the date hereof, upon receipt of any undertaking
required by applicable law, and (ii) FPA will cooperate in the defense of any
such matter; provided, however, that FPA shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld) and provided, further, that FPA shall not be obligated
pursuant to this Section to pay the fees and disbursements of more than one
counsel for all Indemnified Parties in any single Action, except to the extent
that, in the opinion of counsel for the Indemnified Parties, two or more of
such Indemnified Parties have conflicting interests in the outcome of such
action. FPA may obtain directors' and officers' liability insurance covering
its obligations under this Section 7.14.
ARTICLE VIII
Conditions
Section 8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) the Agreement and the transactions contemplated hereby shall have
been approved and adopted, by the majority vote of the stockholders of the
Company and FPA under applicable law and applicable NASDAQ listing
requirements;
(b) the shares of FPA Common Stock issuable in the Merger shall have been
authorized for listing on the NASDAQ upon official notice of issuance;
(c) the waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated;
(d) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act and state blue sky laws, if
applicable, and no stop order suspending such effectiveness shall have been
issued and remain in effect and no proceeding for that purpose shall have
been instituted by the SEC or any state regulatory authorities;
(e) no preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order or decree lifted);
(f) no litigation shall be pending or threatened that in the opinion of
counsel to either FPA or the Company has a significant likelihood of
preventing the consummation of the Merger or the transactions contemplated
thereby;
(g) no action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the
Merger or make the consummation of the Merger illegal;
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(h) all governmental or third party waivers, consents, orders and
approvals required for the consummation of the Merger and the transactions
contemplated hereby, shall have been obtained and be in effect at the
Effective Time; and
(i) Coopers & Lybrand LLP, certified public accountants for the Company,
shall have delivered a letter, dated the Closing Date, addressed to FPA and
to the stockholders of the Company, in form and substance reasonably
satisfactory to FPA, stating that the Merger will qualify as a tax-free
merger under Section 368(a)(1)(A) and (a)(2)(E) of the Code and will be
treated as a pooling-of-interests transaction under APB No. 16.
Section 8.2. Conditions to Obligation of the Company to Effect the
Merger. Unless waived by the Company, the obligation of the Company to effect
the Merger shall be subject to the fulfillment at or prior to the Closing Date
of the following additional conditions:
(a) FPA and Acquisition shall have performed in all material respects
their agreements contained in the Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of FPA and
Acquisition contained in the Agreement shall be true and correct in all
material respects on and as of the date made and on and as of the Closing
Date as if made at and as of such date, and the Company shall have received
a certificate of the Chairman of the Board and Chief Executive Officer, the
President or a Vice President of FPA and of the President and Chief
Executive Officer or a Vice President of Acquisition to that effect;
(b) the Company shall have received an opinion of Coopers & Lybrand LLP,
in form and substance reasonably satisfactory to the Company, dated the
Closing Date, to the effect that the Company and holders of Company Common
Stock (except to the extent any stockholders receive cash in lieu of
fractional shares) will recognize no gain or loss for federal income tax
purposes as a result of consummation of the Merger;
(c) the Company shall have received an opinion or opinions from Ballard
Spahr Andrews & Ingersoll, special counsel to FPA and Acquisition, dated
the Closing Date, reasonably satisfactory to the Company and covering the
due incorporation of FPA and Acquisition, the binding nature of the
Agreement, the effectiveness of the Merger, the validity of the FPA Common
Stock to be issued in connection with the Merger and such other matters as
may be reasonably requested by the Company;
(d) the Company shall have received "comfort" letters in customary form
from Deloitte & Touche LLP, certified public accountants for FPA and
Acquisition, dated the date of the Proxy Statement, the effective date of
the Registration Statement and the Closing Date (or such other date
reasonably acceptable to the Company) with respect to certain financial
statements and other financial information included in the Registration
Statement and any subsequent changes in specified balance sheet and income
statement items, including total assets, working capital, total
stockholders' equity, total revenues and the total and per share amounts of
net income;
(e) since the date hereof, there shall have been no changes that
constitute, and no event or events shall have occurred which have resulted
in or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other) or results of operations
of FPA and its subsidiaries, taken as a whole; for purposes of this Section
8.2(e), "material adverse change" means, with respect to any person, any
change or effect which is materially adverse to the business, financial
condition or results of operations of such person and its subsidiaries,
taken as a whole, excluding in all cases: (i) events or conditions
generally affecting the industry in which such person and its subsidiaries
operate or arising from changes in general business or economic conditions,
(ii) all out-of-pocket fees and expenses (including without limitation
legal, accounting, investigatory, and other fees and expenses) incurred in
connection with the transactions contemplated by the Agreement; (iii) in
the case of the Company, the payment by the Company and/or its subsidiaries
of all amounts due to any officers or employees of the Company or any of
its subsidiaries under employment contracts or other employee benefit plans
in effect as of the date hereof; (iv) any effect resulting from any change
in law or generally accepted accounting principles, which affect generally
entities such as such person; and (v) any effect resulting from compliance
by such person with the terms of the Agreement;
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(f) no governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value to the Company of the Merger;
(g) the Company shall have received from Smith Barney Inc. (or other
nationally recognized investment banking firm reasonably acceptable to FPA)
an opinion reasonably acceptable to the Company to the effect that, as of
the date of the Agreement and, if requested by the Company, confirmed as of
the date of the Joint Proxy Statement/Prospectus, that the Exchange Ratio
is fair, from a financial point of view, to the holders of Company Common
Stock, and such opinion shall not have been withdrawn; and
(h) FPA, Acquisition and Stephen J. Dresnick, M.D. shall have executed an
employment agreement providing for the employment of Stephen J. Dresnick,
M.D. to be Vice Chairman of FPA and President and Chief Executive Officer
of Surviving Corporation for a period of three (3) years from the Closing
Date, on terms and conditions acceptable to the board of directors of FPA,
Acquisition and Stephen J. Dresnick, M.D.
Section 8.3. Conditions to Obligations of FPA and Acquisition to Effect the
Merger. Unless waived by FPA and Acquisition, the obligations of FPA and
Acquisition to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Time of the additional following conditions:
(a) the Company shall have performed in all material respects its
agreements contained in the Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of the Company
contained in the Agreement shall be true and correct in all material
respects on and as of the date made and on and as of the Closing Date as if
made at and as of such date, and FPA shall have received a Certificate of
the President and Chief Executive Officer or of a Vice President of the
Company to that effect;
(b) FPA shall have received an opinion from Berman Wolfe & Rennert,
special counsel to the Company, dated the Closing Date, reasonably
satisfactory to FPA and covering the due incorporation of the Company, the
binding nature of the Agreement, the effectiveness of the Merger and the
validity of the Company Common Stock to be exchanged in the Merger and such
other matters as may be reasonably requested by FPA;
(c) FPA shall have received "comfort" letters in customary form from
Coopers & Lybrand LLP, independent accountants for the Company, dated the
date of the Proxy Statement, the effective date of the Registration
Statement and the Closing Date (or such other date reasonably acceptable to
FPA) with respect to certain financial statements and other financial
information included in the Registration Statement and any subsequent
changes in specified balance sheet and income statement items, including
total assets, working capital, total stockholders' equity, total revenues
and the total and per share amounts of net income;
(d) stockholders holding in the aggregate more than five percent (5%) of
the Company's Common Stock have not given notice of their intent to
exercise dissenters' rights under Florida law, if applicable;
(e) since the date hereof, there shall have been no changes that
constitute, and no event or events shall have occurred which have resulted
in or constitute, a material adverse change in the business, operations,
properties, assets, condition (financial or other) or results of operations
of the Company and its subsidiaries, taken as a whole; for purposes of this
Section 8.3(e), "material adverse change" means, with respect to any
person, any change or effect which is materially adverse to the business,
financial condition or results of operations of such person and its
subsidiaries, taken as a whole, excluding in all cases: (i) events or
conditions generally affecting the industry in which such person and its
subsidiaries operate or arising from changes in general business or
economic conditions, (ii) all out-of-pocket fees and expenses (including
without limitation legal, accounting, investigatory, and other fees and
expenses) incurred in connection with the transactions contemplated by this
Agreement; (iii) in the case of the Company, the payment by the Company
and/or its subsidiaries of all amounts due to any officers or employees of
the Company or any of its subsidiaries under employment contracts or other
employee benefit plans in effect as of the date hereof; (iv) any effect
resulting from any change in law or generally accepted accounting
principles, which affect generally entities such as such person; and (v)
any effect resulting from compliance by such person with the terms of the
Agreement;
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(f) no governmental authority shall have promulgated any statute, rule or
regulation which, when taken together with all such promulgations, would
materially impair the value to FPA of the Merger;
(g) FPA shall have received from Oppenheimer & Co., Inc. (or other
nationally recognized investment banking firm reasonably acceptable to the
Company) an opinion reasonably acceptable to FPA, dated as of the date on
which the Joint Proxy Statement/Prospectus is first distributed to the
stockholders of FPA, to the effect that the Exchange Ratio is fair, from a
financial point of view, to FPA's stockholders, and such opinion shall not
have been withdrawn; and
(h) FPA shall have received from the Company the resignations of all
individuals serving as directors of the Company immediately prior to the
Effective Time, except each individual designated as a director on Schedule
2.3 attached hereto.
ARTICLE IX
Termination, Amendment and Waiver
Section 9.1. Termination. The Agreement may be terminated at any time prior
to the Closing Date, whether before or after approval by the stockholders of
the Company or FPA, as follows:
(a) The Company shall have the right to terminate the Agreement:
(i) if the Merger is not completed by December 31, 1996 otherwise
than account of delay or default on the part of the Company;
(ii) if the Merger is enjoined by a final, unappealable court order
not entered at the request or with the support of the Company or any of
its 5% stockholders or any of their affiliates or associates;
(iii) if (A) the Company receives an offer from any third party
(excluding any affiliate of the Company or any group of which any
affiliate of the Company is a member) with respect to a an Acquisition
Transaction, (B) the Company's independent financial advisors determine
that such offer would be more favorable to the Company's stockholders
from a financial point of view than the Merger and (C) FPA fails,
within three (3) business days after FPA is notified of such
determination and of the terms and conditions of such offer, to offer
to amend the Agreement to make the Merger yield a value to stockholders
of the Company at least equal to such offer as contemplated by Section
6.5(d) hereof;
(iv) if (A) a tender/exchange offer is commenced by a third party
(excluding any affiliate of the Company or any group of which any
affiliate of the Company is a member) for all outstanding shares of
Company Common Stock, (B) the Company's independent financial advisors
determine that such offer would be more favorable to the Company's
stockholders from a financial point of view than the Merger and (C) FPA
fails, within three (3) business days after FPA is notified of such
determination, to offer to amend the Agreement to make the Merger yield
a value to stockholders at least equal to such tender/exchange offer as
contemplated by Section 6.5(d) hereof;
(v) if FPA (A) fails to perform in any material respect any of its
material covenants in the Agreement and (B) does not cure such default
in all material respects within thirty (30) days after written notice
of such default is given to FPA by the Company; or
(vi) if any condition set forth in Section 8.1 or Section 8.2 is not
satisfied, other than as a result of the conduct of the Company.
(b) FPA shall have the right to terminate the Agreement:
(i) if the Merger is not completed by December 31, 1996 otherwise
than account of delay or default on the part of FPA;
(ii) if the Merger is enjoined by a final, unappealable court order
not entered at the request or with the support of FPA or any of its 5%
stockholders or any of their affiliates or associates;
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(iii) if the Company (A) fails to perform in any material respect any
of its material covenants in the Agreement and (B) does not cure such
default in all material respects within thirty (30) days after written
notice of such default is given to the Company by FPA; or
(iv) if any condition set forth in Section 8.1 or Section 8.3 is not
satisfied, other than as a result of the conduct of FPA.
(c) As used in this Section 9.1, (i) "affiliate" has the meaning assigned
to it in the federal securities laws and (ii) "group" has the meaning set
forth in Section 13(d) of the Exchange Act and the rules and regulations
thereunder.
Section 9.2. Effect of Termination. In the event of termination of the
Agreement by either FPA or the Company, as provided in Section 9.1, the
Agreement shall forthwith become void and there shall be no further obligation
on the part of the Company, FPA, Acquisition or their respective officers or
directors (except as set forth in this Section 9.2 and in Sections 6.6, 7.1,
7.6 and 7.8, all of which shall survive the termination) with respect to
obligations existing thereunder prior to the termination. If the Agreement is
not consummated because either the Company or FPA breaches a material
representation or warranty or fails to perform a material covenant contained
herein, and the other party has not breached any material representation or
warranty or failed to perform a material covenant, and the non-breaching party
chooses to terminate the Agreement as a direct result of such breach or
failure, the breaching party shall promptly pay the non-breaching party the
sum of one million dollars ($1,000,000). Nothing in this Section 9.2 shall
relieve any party from liability for any breach of the Agreement.
Section 9.3. Amendment. The Agreement may not be amended except by action
taken by the parties' respective Boards of Directors or duly authorized
committees thereof and then only by an instrument in writing signed on behalf
of each of the parties hereto and in compliance with applicable law.
Section 9.4. Waiver. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions contained herein except that, after the vote of the Company's
stockholders with respect to the Agreement, the Exchange Ratio shall not be
changed from that provided herein. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE X
General Provisions
Section 10.1. Non-Survival of Representations and Warranties. All
representations and warranties in the Agreement shall not survive the Merger,
and after effectiveness of the Merger neither the Company, FPA, the Surviving
Corporation or their respective officers or directors shall have any further
obligation with respect thereto.
Section 10.2. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, mailed by
nationally recognized overnight mail service or sent via facsimile to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to FPA or Acquisition to:
FPA Medical Management, Inc.
2878 Camino del Rio South, Suite 301
San Diego, California 92108
Attention: Chief Financial Officer
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with copies to:
James A. Lebovitz, Esquire
Senior Vice President, General Counsel
and Secretary
FPA Medical Management, Inc.
2878 Camino del Rio South, Suite 301
San Diego, California 92108
and
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
Attention: Justin P. Klein, Esquire
(b) If to the Company, to:
Sterling Healthcare Group, Inc.
6855 South Red Road, Suite 400
Coral Gables, FL 33143-3632
Attention: Stephen J. Dresnick, M.D.
with a copy to:
Charles Rennert, Esquire
Berman Wolfe & Rennert
Suite 3500, International Place
100 S.E. Second Street
Miami, FL 33131-2130
Section 10.3. Interpretation. The headings contained in the Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of the Agreement. In the Agreement, unless a contrary intention
appears, (i) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to the Agreement as a whole and not to any particular
Article, Section or other subdivision and (ii) reference to any Article or
Section means such Article or Section hereof. No provision of the Agreement
shall be interpreted or construed against any party hereto solely because such
party or its legal representative drafted such provision.
Section 10.4. Miscellaneous. The Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof, (b) is not intended to confer upon any other person any rights or
remedies hereunder, and (c) shall not be assigned by operation of law or
otherwise, except that Acquisition may assign the Agreement to any other
wholly-owned subsidiary of FPA. THE AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
Section 10.5. Counterparts. The Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement. Each party agrees (i) to
accept the facsimile signature of the other party's representatives hereto and
(ii) to be bound by its own representative's facsimile signature hereon.
Section 10.6. Parties In Interest. The Agreement shall be binding upon and
inure solely to the benefit of each party hereto and nothing in the Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of the Agreement.
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In Witness Whereof, FPA, Acquisition and the Company have caused the
Agreement to be signed by their respective officers as of the date first
written above.
FPA Medical Management, Inc.
By: /s/ Steven M. Lash
---------------------------------
Print Name: Steven M. Lash
-------------------------
Title: Executive Vice President &
Chief Financial Officer
Acquisition
By: /s/ Steven M. Lash
---------------------------------
Print Name: Steven M. Lash
-------------------------
Title: Executive Vice President &
Chief Financial Officer
Sterling Healthcare Group, Inc.
By: /s/ Stephen J. Dresnick, M.D.
---------------------------------
Print Name: Stephen J. Dresnick, M.D.
-------------------------
Title: Chief Executive Officer
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APPENDIX II
May 19, 1996
The Board of Directors
FPA Medical Management, Inc.
2878 Camino Del Rio South, Suite 301
San Diego, CA 92108-3846
Gentlemen:
You have asked Oppenheimer & Co., Inc. ("Oppenheimer") to render an opinion
(the "Opinion") as to the fairness, from a financial point of view, to the
stockholders of FPA Medical Management, Inc. ("FPA") of the Merger
Consideration (as defined below) to be issued in connection with the proposed
merger (the "Merger") of Sterling Healthcare Group, Inc. ("Sterling") and FPA
pursuant to the terms and conditions set forth in the Agreement and Plan of
Merger by and among FPA and Sterling dated May 19, 1996 (the "Merger
Agreement").
Pursuant to the Merger Agreement, as more fully described therein, each
share of Sterling Common Stock shall be converted into the right to receive
1.4 shares of FPA Common Stock (the "Exchange Ratio"), subject to adjustment
as described below. The Exchange Ratio will be adjusted if the average of the
per share closing prices of FPA's Common Stock on the Nasdaq National Market
for the 15 consecutive trading days ending on the date that is five trading
days prior to the closing of the Merger (the "FPA Value") is less than $14.87
or greater than $16.43. If the FPA Value is less than $14.87 but greater than
or equal to $13.30, the Exchange Ratio shall equal the quotient obtained by
dividing $20.81 by the FPA Value. If the FPA Value is less than $13.30, then
the Exchange Ratio shall be 1.565 unless Sterling elects to demand an
increased Exchange Ratio equal to the quotient obtained by dividing $20.81 by
the FPA Value, in which case FPA may accept the increased Exchange Ratio or
terminate the Merger Agreement. If the FPA Value is greater than $16.43 but
less than or equal to $18.00, then the Exchange Ratio shall equal the quotient
obtained by dividing $23.01 by the FPA Value. If the FPA Value is greater than
$18.00, then Sterling may elect to either accept an Exchange Ratio equal to
the quotient obtained by dividing $23.01 by the FPA Value or terminate the
Agreement. For purposes of this Opinion, the aggregate number of shares of FPA
Common Stock to be issued in the Merger, as determined pursuant to the
Exchange Ratio calculated on the basis set forth in this paragraph and based
on the existing capitalization of Sterling, is referred to herein as the
"Merger Consideration."
In arriving at our Opinion we:
(i) reviewed the Merger Agreement;
(ii) reviewed FPA's annual reports to stockholders and its annual reports
on Form 10-K for fiscal years ended December 31, 1994 and 1995 and
its quarterly report on Form 10-Q for the three months ended March
31, 1996;
(iii) reviewed Sterling's annual reports to shareholders and its annual
reports on Form 10-K for fiscal years ended December 31, 1994 and
1995 and its quarterly report on Form 10-Q for the three months ended
March 31, 1996;
(iv) reviewed the Certificates of Incorporation for both FPA and Sterling;
(v) reviewed the financial projections for FPA prepared by FPA's
management for 1996 through 1998;
(vi) reviewed the financial projections for Sterling prepared by
Sterling's management for 1996 through 1998;
(vii) held discussions with the senior management of each of FPA and
Sterling to review historical and current operations and financial
conditions as well as projections and strategies of the respective
companies and visited certain of their respective facilities;
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(viii) reviewed current and historical market prices and trading data of the
FPA Common Stock and the Sterling Common Stock;
(ix) reviewed financial and market data for certain public companies we
deemed comparable to FPA and Sterling;
(x) reviewed and analyzed recent mergers and acquisitions of companies in
lines of business we deemed comparable to Sterling;
(xi) analyzed the financial impact of the Merger on the combined company,
including the pro forma earnings per share;
(xii) prepared a discounted cash flow valuation of FPA and Sterling;
(xiii) reviewed the relative contributions to the combined company of FPA
and Sterling with respect to certain historical and projected
financial parameters; and
(xiv) performed such other analyses and reviewed such other documents and
information as were deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information available to us from public sources and
provided to us by FPA and Sterling and their respective representatives. We
have also relied upon the managements of FPA and Sterling as to the
reasonableness and achievability of the financial and operating projections
and the assumptions and bases therefor provided to us and, with your consent,
we have assumed, without independent verification or investigation, that such
projections, including and without limitation projected cost savings and
operating synergies from the Merger, were reasonably prepared on bases
reflecting the best available information, estimates and judgment of such
respective managements of FPA and Sterling and that such projections will be
realized in the amounts and time periods currently estimated by the
managements of FPA and Sterling. We have not been engaged to assess the
achievability of such projections or the assumptions on which they were based
and express no view as to the projections or assumptions. We have neither
made, obtained nor reviewed any independent valuation or appraisal of the
assets or liabilities of FPA or Sterling.
Our Opinion is based upon our analyses of the foregoing factors and
information in light of our assessment of general economic, financial and
market conditions as of the date hereof that could be evaluated by us as of
such date.
Our Opinion is limited to a determination of the fairness, from a financial
point of view, of the Merger Consideration being issued in connection with the
Merger. We have not examined the merits or fairness of the Merger in any other
respect or on the merits or fairness of any other transactions contemplated by
FPA including, without limitation, the Merger as compared to any other
transaction or business strategy of FPA. We are not expressing any opinion as
to what the value of the FPA Common Stock actually will be when issued
pursuant to the Merger or the prices at which such FPA Common Stock will trade
subsequent to the Merger. In addition, we assume that the factual
circumstances and terms, as they exist as of the date of our Opinion, will
remain substantially unchanged through the time the Merger is completed. We
have assumed, without independent verification, the accuracy of the advice and
conclusions of FPA's legal counsel and accountants with respect to the tax and
accounting matters as provided to Oppenheimer by FPA's management, including,
without limitation, the treatment of the Merger as a tax free reorganization
for federal income tax purposes and a pooling of interests for financial
reporting purposes. We assume that the Merger will be consummated in
accordance with the terms of the Merger Agreement, that all conditions to the
closing of the Merger will be satisfied without waiver or modification and
that the Merger would be consummated on a timely basis in the manner
contemplated in the Merger Agreement.
Oppenheimer, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities and private placements. Oppenheimer has been engaged by
the Board of Directors of FPA to
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render financial advisory services to FPA in connection with the Merger and
will receive a fee for its services, including a fee upon the delivery of this
Opinion. In the ordinary course of business, Oppenheimer serves as a market
maker in the Common Stock of both FPA and Sterling and may actively trade the
securities of the companies for its own account or for the account of its
customers and accordingly may at any time hold a long or short position in
each company's Common Stock. Oppenheimer also has provided certain investment
banking services to FPA and Sterling from time to time, including acting as
underwriter in each company's public offerings of shares of Common Stock.
Oppenheimer also provides equity research coverage of both FPA and Sterling.
It is understood that our Opinion is intended for the benefit and use of the
Board of Directors of FPA in its evaluation of the Merger, and our Opinion is
not intended to be and does not constitute a recommendation to the Board of
Directors or any stockholder with respect to whether to vote in favor of the
Merger. We understand that this Opinion will be included in the registration
statement filed with the Securities and Exchange Commission and joint proxy
statement/prospectus therein distributed to FPA and Sterling stockholders in
connection with the approval of the Merger. We hereby consent to the foregoing
use of the Opinion in its entirety. Otherwise, our Opinion may not be
published or otherwise used or referred to without our written consent.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the Merger Consideration to be issued in connection with the
Merger is fair, from a financial point of view, to the stockholders of FPA.
Very truly yours,
Oppenheimer & Co., Inc.
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<PAGE>
August 1, 1996
The Board of Directors
FPA Medical Management, Inc.
2878 Camino Del Rio South, Suite 301
San Diego, California 92108-2846
Gentlemen:
You have asked Oppenheimer & Co., Inc. ("Oppenheimer") to update its opinion
dated May 19, 1996 (the "Opinion") as to the fairness, from a financial point
of view, to the stockholders of FPA Medical Management, Inc. ("FPA") of the
Merger Consideration to be issued in connection with the Merger of Sterling
Healthcare Group, Inc. ("Sterling") and FPA pursuant to the terms and
conditions set forth in the Agreement and Plan of Merger by and among FPA and
Sterling dated May 19, 1996 (the "Merger Agreement"). Capitalized terms used
but not otherwise defined herein shall have the respective meanings assigned
to them in the Opinion.
In arriving at this update to our Opinion, we reviewed the same information
and performed the same analyses as set forth in our Opinion, except we:
(i) reviewed and utilized revised financial projections for FPA and
Sterling prepared by FPA's management for 1996 through 1998;
(ii) did not include MedCath Incorporated in the PPM Companies as a
result of the adverse impact of recent public announcements by MedCath
Incorporated on its market valuation;
(iii) utilized market price information as of August 1, 1996 for the PPM
Companies; and
(iv) evaluated the potential impact of the consummated and proposed
acquisition of certain affiliates of Foundation Health Corporation by FPA.
This update is subject to each of the assumptions, conditions and limitations
set forth in our Opinion, including without limitation the reliance upon
management of FPA as to the reasonableness and achievability of the revised
financial and operating projections and the assumptions and basis therefor.
This update is based upon our assessment of general economic, financial and
market conditions as of the date hereof that could be evaluated by us as of
such date.
It is understood that our update is intended for the benefit and use of the
Board of Directors of FPA in its evaluation of the Merger, and our update is
not intended to be and does not constitute a recommendation to the Board of
Directors or any stockholder with respect to whether to vote in favor of the
Merger. We understand that this update, along with the Opinion, will be
included in the registration statement filed with the Securities and Exchange
Commission and joint proxy statement/prospectus therein distributed to FPA and
Sterling stockholders in connection with the approval of the Merger. We hereby
consent to the foregoing use of this update and the Opinion in their entirety.
Otherwise, our update and Opinion may not be published or otherwise used or
referred to without our written consent.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the Merger Consideration to be issued in connection with the
Merger is fair, from a financial point of view, to the stockholders of FPA.
Very truly yours,
Oppenheimer & Co., Inc.
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APPENDIX III
[SMITH BARNEY LETTERHEAD]
October 4, 1996
The Board of Directors
Sterling Healthcare Group, Inc.
6855 South Red Road
Coral Gables, Florida 33143
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Sterling Healthcare Group, Inc.
("Sterling") of the consideration to be received by such holders pursuant to
the terms and subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of May 19, 1996 (the "Merger Agreement"), by and among FPA
Medical Management, Inc. ("FPA"), Sterling Acquisition Corporation, a wholly
owned subsidiary of FPA ("Acquisition"), and Sterling. As more fully described
in the Agreement, (i) Acquisition will be merged with and into Sterling (the
"Merger") and (ii) each outstanding share of the common stock, par value
$0.0001 per share, of Sterling (the "Sterling Common Stock") will be converted
into the right to receive 1.4 shares (the "Exchange Ratio") of the common
stock, par value $0.002 per share, of FPA (the "FPA Common Stock"); provided,
that, if the average of the closing prices of FPA Common Stock as reported on
the NASDAQ National Market for the 15 consecutive trading days ending on the
date that is five trading days prior to the closing date of the Merger (the
"FPA Value") is less than $14.87 or greater than $16.43, then the Exchange
Ratio will be adjusted as follows: (a) if the FPA Value is less than $14.87
but greater than or equal to $13.30, then the Exchange Ratio will be increased
to a number which, when multiplied by the FPA Value, will equal $20.81; (b) if
the FPA Value is less than $13.30, then the Exchange Ratio will be (i) 1.565
or (ii) upon demand of Sterling, increased to a number which, when multiplied
by the FPA Value, will not exceed $20.81 (subject, in the event of such
demand, to the right of FPA to terminate the Merger Agreement); (c) if the FPA
Value is greater than $16.43 but less than or equal to $18.00, then the
Exchange Ratio will be decreased to a number which, when multiplied by the FPA
Value, will equal $23.01; and (d) if the FPA Value is greater than $18.00,
then the Exchange Ratio will be a number which, when multiplied by the FPA
Value, is equal to $23.01 (subject, in such event, to the right of Sterling to
terminate the Merger Agreement).
In arriving at our opinion, we reviewed the Merger Agreement and the Proxy
Statement/Prospectus dated the date hereof of Sterling and FPA relating to the
proposed Merger (the "Proxy Statement/Prospectus"), and held discussions with
certain senior officers, directors and other representatives and advisors of
Sterling and certain senior officers and other representatives and advisors of
FPA concerning the businesses, operations and prospects of Sterling and FPA.
We examined certain publicly available business and financial information
relating to Sterling and FPA as well as certain financial forecasts and other
information and data for Sterling and FPA which were provided to or otherwise
discussed with us by the respective managements of Sterling and FPA, including
information relating to certain strategic implications and operational
benefits anticipated to result from the Merger. We reviewed the financial
terms of the Merger as set forth in the Merger Agreement in relation to, among
other things: current and historical market prices and trading volumes of
Sterling Common Stock and FPA Common Stock; the respective companies'
historical and projected earnings and operating data; and the capitalization
and financial condition of Sterling and FPA.
We also considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which we considered
relevant in evaluating the Merger and analyzed certain financial, stock market
and other publicly available information relating to the businesses of other
companies whose operations we considered relevant in evaluating those of
Sterling and FPA. We also evaluated the potential pro forma financial impact
of the Merger on FPA. In connection with our engagement, we were requested to
approach, and held discussions with, certain third parties to solicit
indications of interest in a possible acquisition of Sterling. In addition to
the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
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In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data furnished to or otherwise reviewed by or discussed with
us, we have been advised by the managements of Sterling and FPA that such
forecasts and other information and data were prepared on bases reflecting
reasonable estimates and judgments as to the future financial performance of
Sterling and FPA and the strategic implications and operational benefits
anticipated to result from the Merger. We have assumed, with your consent,
that the Merger will be treated as a pooling of interests in accordance with
generally accepted accounting principles and as a tax-free reorganization for
federal income tax purposes. Our opinion, as set forth herein, relates to the
relative values of Sterling and FPA. We are not expressing any opinion as to
what the value of the FPA Common Stock actually will be when issued to
Sterling stockholders pursuant to the Merger or the price at which the FPA
Common Stock will trade subsequent to the Merger. We have not made or been
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Sterling or FPA nor have we made any
physical inspection of the properties or assets of Sterling or FPA. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to
Sterling in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon the consummation
of the Merger. We also will receive a fee upon the delivery of this opinion.
In the ordinary course of our business, we and our affiliates may actively
trade or hold the securities of Sterling and FPA for our own account or for
the account of our customers and, accordingly, may at any time hold a long or
short position in such securities. We have in the past provided certain
investment banking services to Sterling unrelated to the proposed Merger, for
which services we have received compensation. In addition, Smith Barney and
its affiliates (including Travelers Group Inc. and its affiliates) may
maintain relationships with Sterling and FPA.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Sterling in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
the proposed Merger. Our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent; provided, that our opinion may be included in its
entirety in the Proxy Statement/Prospectus.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of
the opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of Sterling Common Stock.
Very truly yours,
Smith Barney Inc.
III-2
<PAGE>
APPENDIX IV
STOCK AND NOTE PURCHASE AGREEMENT
BY AND BETWEEN
FOUNDATION HEALTH CORPORATION, A DELAWARE CORPORATION
AS "SELLER"
JONATHAN H. SCHEFF, M.D.
AS "SELLING SHAREHOLDER"
ON THE ONE HAND,
AND
FPA MEDICAL MANAGEMENT, INC., A DELAWARE CORPORATION
AS "FPA"
FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC.,
A DELAWARE CORPORATION
AS "PURCHASING SUBSIDIARY"
AND
FPA INDEPENDENT PRACTICE ASSOCIATION,
AN OSTEOPATHIC CORPORATION
AS "PURCHASING SHAREHOLDER"
ON THE OTHER HAND
DATED AS OF JUNE 28, 1996
IV-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 DEFINITIONS.................................................. A- 2
1.1 Defined Terms................................................ A- 2
1.2 Other Defined Terms.......................................... A- 3
ARTICLE 2 PURCHASE AND SALE OF FHMS SHARES AND NOTES................... A- 5
2.1 Description of FHMS Shares and Notes......................... A- 5
2.2 Sale of FHMS Shares by Seller................................ A- 6
2.3 FHMS Share Purchase Price.................................... A- 6
2.4 Sale of FHMS Indebtedness by Seller.......................... A- 6
2.5 FHMS Indebtedness Purchase Price............................. A- 6
2.6 Transfer Taxes and Fees...................................... A- 6
ARTICLE 3 APPOINTMENT OF DESIGNEE--SALE AND PURCHASE OF HOLDING COMPANY
SHARES AND NOTES............................................. A- 7
3.1 Appointment of Purchasing Shareholder as Designee............ A- 7
3.2 Description of Shares and Notes.............................. A- 7
3.3 Exercise of Option........................................... A- 7
3.4 Sale of Holding Company Indebtedness by Seller............... A- 7
3.5 Holding Company Indebtedness Purchase Price.................. A- 7
ARTICLE 4 CLOSING...................................................... A- 7
4.1 Closing...................................................... A- 7
4.2 Conveyances at Closing....................................... A- 8
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER..................... A- 8
5.1 Organization................................................. A- 8
5.2 Authorization................................................ A- 9
5.3 No Material Adverse Change................................... A- 9
5.4 Leased Real Property......................................... A- 9
5.5 Contracts and Commitments.................................... A- 9
5.6 Permits and Governmental Filings............................. A-10
5.7 No Conflict or Violation..................................... A-10
5.8 Financial Statements......................................... A-10
5.9 Litigation................................................... A-10
5.10 Compensation................................................. A-11
5.11 Compliance with Laws......................................... A-11
5.12 Employee Benefits Matters.................................... A-11
5.13 Insurance.................................................... A-12
5.14 No Undisclosed Liabilities................................... A-12
5.15 Capital Structure............................................ A-12
5.16 Real Property................................................ A-13
5.17 Taxes........................................................ A-13
5.18 Proprietary Rights........................................... A-13
5.19 Subsidiaries................................................. A-13
5.20 Accounts Receivable.......................................... A-13
5.21 Brokers...................................................... A-14
5.22 Certain Real Estate and Legal Matters........................ A-14
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF FPA AND PURCHASING
SUBSIDIARY................................................... A-17
6.1 Organization of FPA and Purchasing Subsidiary................ A-17
</TABLE>
IV-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.2 Authorization.................................................. A-17
6.3 No Conflict or Violation....................................... A-17
6.4 Permits and Governmental Filings............................... A-17
6.5 Financial Statements........................................... A-18
6.6 SEC Documents.................................................. A-18
6.7 No Material Adverse Change..................................... A-18
6.8 Compliance with Laws........................................... A-18
6.9 Litigation..................................................... A-18
6.10 No Undisclosed Liabilities..................................... A-18
6.11 Capital Structure.............................................. A-18
ARTICLE 7 COVENANTS OF PARTIES HERETO.................................... A-19
7.1 Further Assurances............................................. A-19
7.2 No Solicitation................................................ A-19
7.3 Inspections.................................................... A-19
7.4 Conduct of Business............................................ A-19
7.5 Employee Matters............................................... A-20
7.6 FPA's Covenant Not to Compete.................................. A-21
7.7 Purchase of Indebtedness;Post-Closing Adjustment............... A-22
7.8 Preparation of the Proxy Statement............................. A-23
7.9 Stockholders Meeting........................................... A-23
7.10 Agreement to Vote Shares....................................... A-23
7.11 Surgery Center Referrals....................................... A-23
7.12 Disease State Management....................................... A-24
7.13 Real Estate Matters............................................ A-24
7.14 Software Licenses.............................................. A-24
7.15 Guaranty Payments.............................................. A-24
ARTICLE 8 CONDITIONS TO SELLER'S AND SELLING SHAREHOLDER'S OBLIGATIONS... A-25
8.1 Representations, Warranties and Covenants...................... A-25
8.2 No Proceedings, Litigation or Laws............................. A-25
8.3 Opinion of Counsel............................................. A-25
8.4 Certificates and Corporate Documents........................... A-25
8.5 Registration Rights Agreement.................................. A-25
8.6 Guaranties..................................................... A-25
8.7 Intentionally Deleted.......................................... A-25
8.8 Intentionally Deleted.......................................... A-25
8.9 Master Lease Assignment........................................ A-26
8.10 Professional Group Provider Agreements......................... A-26
8.11 Purchase Price................................................. A-26
8.12 HSR Act........................................................ A-26
8.13 Governmental Approvals......................................... A-26
8.14 Related Agreements............................................. A-26
8.15 Consents....................................................... A-26
8.16 No Material Adverse Changes.................................... A-26
8.17 Transition Agreement........................................... A-26
8.18 Releases....................................................... A-26
8.19 Pledge Agreements.............................................. A-26
8.20 Security Agreement............................................. A-27
8.21 Board Approval................................................. A-27
8.22 Tax Opinion.................................................... A-27
</TABLE>
IV-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 9 CONDITIONS TO FPA'S OBLIGATIONS............................... A-27
9.1 Representations, Warranties and Covenants..................... A-27
9.2 No Proceedings, Litigation or Laws............................ A-27
9.3 Opinion of Counsel............................................ A-27
9.4 Certificates and Corporate Documents.......................... A-27
9.5 Other Documents............................................... A-28
9.6 HSR Act....................................................... A-28
9.7 Governmental Approvals........................................ A-28
9.8 Intentionally deleted......................................... A-28
9.9 Master Lease Assignment....................................... A-28
9.10 Professional Group Provider Agreements........................ A-28
9.11 Related Agreements............................................ A-28
9.12 Consents...................................................... A-28
9.13 Material Adverse Changes...................................... A-28
9.14 Pre-Closing Transactions...................................... A-28
9.15 Transition Agreement.......................................... A-28
9.16 Registration Rights Agreement................................. A-29
9.17 Notice of Designee............................................ A-29
9.18 Board Approval................................................ A-29
9.19 Stockholder Approval.......................................... A-29
9.20 Voting Agreement.............................................. A-29
9.21 Physicians.................................................... A-29
9.22 Real Estate Matters........................................... A-29
ARTICLE 10 ACTIONS BY SELLER AND FPA AFTER THE CLOSING................... A-29
10.1 Books and Records............................................. A-29
10.2 Taxes......................................................... A-29
10.3 338(h)(10) Election........................................... A-30
10.4 Future Contractual Alliances.................................. A-30
10.5 Certain Obligations Regarding Employees....................... A-30
10.6 Foundation Name............................................... A-30
10.7 Reimbursement For Certain Tax Matters......................... A-31
10.8 Covenant...................................................... A-32
10.9 Solicitation of Employees..................................... A-32
ARTICLE 11 SURVIVAL AND INDEMNIFICATION.................................. A-32
11.1 Survival...................................................... A-32
11.2 No Other Representations...................................... A-33
11.3 Indemnification by Seller..................................... A-33
11.4 Limitations on Indemnity...................................... A-33
11.5 Indemnification by FPA........................................ A-34
11.6 Notice and Defense of Third-Party Claims...................... A-34
11.7 Limitation.................................................... A-34
11.8 Exclusivity................................................... A-34
11.9 Right of Set-off.............................................. A-34
ARTICLE 12 MISCELLANEOUS................................................. A-35
12.1 Termination................................................... A-35
12.2 Assignment and No Third Party Beneficiaries................... A-36
12.3 Notices....................................................... A-36
12.4 Choice of Law................................................. A-36
12.5 Entire Agreement; Amendments and Waivers...................... A-37
12.6 Counterparts.................................................. A-37
12.7 Expenses...................................................... A-37
12.8 Invalidity.................................................... A-37
12.9 Publicity..................................................... A-37
12.10 Schedules..................................................... A-37
</TABLE>
IV-4
<PAGE>
DISCLOSURE SCHEDULE
<TABLE>
<C> <S>
1.1(a) Care Centers
1.1(b) Holding Company and FHMS Financial Statements/Pro Forma
Consolidated Balance Sheet
2.1 FHMS Share Ownership
3.2 Holding Company Share Ownership
5.3 Material Adverse Changes
5.4 Leased Real Property
5.5 Material Contracts
5.6(a) Seller/Holding Company Permits
5.6(b) Seller/Holding Company Filings
5.9 Litigation
5.10 Compensation
5.12 Employee Benefit Matters
5.13 Insurance Policies
5.14 Liabilities
5.15 Certain Rights Relating to Shares
5.19 Subsidiaries
5.22(e) Pending Transfers
6.3 No Conflicts
6.4(a) FPA Permits
6.4(b) FPA Filings
6.7 Material Adverse Changes
6.9 Litigation
6.10 Liabilities
6.11 Capital Structure
7.4 Conduct of Business
7.5(b) Employee Liabilities
7.14 License and Maintenance Agreements
8.14 Related Agreements
10.5 Retained Employee Obligations
10.7 Depreciation Deduction
</TABLE>
IV-5
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit A Letter Agreement Regarding Matching Contributions
Exhibit B Form of Professional Group Provider Agreement (CA)
Exhibit C Form of Professional Group Provider Agreement (AZ)
Exhibit D Term Sheet Regarding Bridge Note
Exhibit E Term Sheet Regarding Consolidated Note
Exhibit F Term Sheet Regarding Registration Rights
Exhibit G Term Sheet Regarding Guaranty
Exhibit H Reserved
Exhibit I Form of Master Lease Assignment
Exhibit J Term Sheet Regarding General Release
Exhibit K Term Sheet Regarding Pledge Agreements
Exhibit L Term Sheet Regarding Security Agreements
Exhibit M Term Sheet Regarding Voting Agreement
</TABLE>
IV-6
<PAGE>
This Stock and Note Purchase Agreement, dated as of June 28, 1996 (the
"Agreement") is made by and between FPA MEDICAL MANAGEMENT, INC., a Delaware
corporation ("FPA"), FPA MEDICAL MANAGEMENT OF CALIFORNIA, INC., a Delaware
corporation and a wholly-owned subsidiary of FPA ("Purchasing Subsidiary"),
FPA INDEPENDENT PRACTICE ASSOCIATION, An Osteopathic Corporation ("Purchasing
Shareholder"), JONATHAN H. SCHEFF, M.D., an individual ("Selling Shareholder")
and FOUNDATION HEALTH CORPORATION, a Delaware corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller owns all of the issued and outstanding shares of capital
stock of Foundation Health Medical Services, a California corporation, doing
business in Arizona as TDMC Medical Services Corporation ("FHMS");
WHEREAS, FHMS is engaged in the business of providing facilities management,
non-physician healthcare professionals and other administrative and management
services to Holding Company (as defined below) and its subsidiaries ("FHMS's
Business");
WHEREAS, FPA desires to buy from Seller and Seller desires to sell to FPA,
all of the outstanding capital stock of FHMS, on the terms and conditions set
forth in this Agreement;
WHEREAS, Selling Shareholder owns all of the issued and outstanding shares
of capital stock of FHMG/TDMC Medical Group, a California Professional
Corporation ("Holding Company");
WHEREAS, Holding Company is engaged in the business of holding the stock of
Foundation Health Medical Group, Inc., a California Professional Corporation
("FHMG") and Thomas Davis Medical Centers, P.C., an Arizona Professional
Corporation ("TDMC"), its professional corporation subsidiaries and providing
medical services through such subsidiaries' respective Practitioners (as
defined below) ("Holding Company's Business");
WHEREAS, Seller has the right, pursuant to that certain Share Ownership
Agreement (the "Share Ownership Agreement"), dated as of June 27, 1996, to
name a designee (the "Designee") who will have the option (the "Option") to
purchase all of the outstanding shares of capital stock of Holding Company;
WHEREAS, Purchasing Shareholder desires to be named the Designee by Seller
and Seller desires to name Purchasing Shareholder the Designee;
WHEREAS, Purchasing Shareholder desires to buy from Selling Shareholder
pursuant to the Option and Selling Shareholder desires to sell to Purchasing
Shareholder pursuant to the Option, all of the outstanding capital stock of
Holding Company, on the terms and conditions set forth in this Agreement and
the Share Ownership Agreement;
WHEREAS, Seller owns the FHMS Indebtedness and the Holding Company
Indebtedness (both as defined below);
WHEREAS, Purchasing Subsidiary desires to purchase the FHMS Indebtedness and
the Holding Company Indebtedness; and
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
IV-7
<PAGE>
ARTICLE 1
Definitions
1.1 Defined Terms. As used herein, the terms below shall have the following
meanings.
"Affiliate" shall have the meaning set forth in the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder. When used in
relation to FPA or Purchasing Subsidiary, "Affiliate" shall include Purchasing
Shareholder.
"Businesses" shall mean FHMS's Business and Holding Company's Business,
collectively.
"FPA Financial Statements" shall mean (i) the audited consolidated balance
sheet of FPA dated as of December 31, 1995 and the related consolidated
statement of operations, stockholders' equity and cash flow for the fiscal
year then ended and (ii) the unaudited consolidated balance sheet of FPA dated
as of March 31, 1996, and the related consolidated statement of operations,
stockholders' equity and cash flow for the three-month period then ended.
"Care Centers" shall mean the health care centers and other facilities
operated by Seller prior to the Closing which are listed on Schedule 1.1(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder.
"Confidentiality Agreement" shall mean the letter agreement regarding
confidentiality dated June 4, 1996 between Seller and FPA.
"Contract" shall mean any agreement, contract, lease, note, purchase order,
mortgage, indenture, security agreement, license, instrument or other contract
or commitment, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
hereto which set forth the exceptions to the representations and warranties
contained in Articles 5 and 6 hereof and certain other information called for
by this Agreement. The Disclosure Schedule shall be prepared so as to make
clear the party hereto or the Affiliate of a party hereto to which the matters
or items listed thereon relate.
"Encumbrance" shall mean any claim, lien, pledge, option, charge, easement,
security interest, deed of trust, mortgage, right-of-way, encroachment,
building or use restriction, encumbrance or other right of third parties,
whether voluntarily incurred or arising by operation of law, and includes any
existing agreement to give any of the foregoing in the future, and any
contingent sale or other title retention agreement or lease in the nature
thereof.
"Expiring Contract" shall mean any Contract which will expire, by its terms,
on or before the Closing Date.
"Family and Senior Care, Inc." shall mean FPA's affiliate which has filed an
application for licensure as a limited licensed health care service plan under
the Knox-Keene Health Care Services Plan Act of 1975, as amended.
"FHCA" shall mean those Affiliates of Seller which offer benefit programs to
commercial groups, Governmental Authorities, individual members or other
sponsors of health care benefit plans and which are a party to a Professional
Group Provider Agreement.
"FHMS Financial Statements" shall mean the unaudited balance sheet of FHMS
dated as of March 31, 1996, attached as Schedule 1.1(b) hereto.
IV-8
<PAGE>
"Financial Statements" shall mean the Holding Company Financial Statements
and the FHMS Financial Statements, collectively.
"Financial Statement Date" shall mean March 31, 1996.
"GAAP" shall mean U.S. generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Authority" shall mean any court, governmental agency,
administrative authority or body, arbitrator or arbitration panel of the
United States or any state, county, city or other political subdivision
thereof.
"Holding Company Financial Statements" shall mean the respective unaudited
balance sheets of FHMG and TDMC dated as of March 31, 1996, attached as
Schedule 1.1(b) hereto.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"including" or to "include" any item shall mean containing or to contain
such item as part of a whole, without any implied exclusion of other items.
"Intergroup of Arizona" shall mean Intergroup Prepaid Health Services of
Arizona, Inc., doing business as Intergroup of Arizona, an Arizona
corporation.
"knowledge" of a Person shall mean the actual knowledge of the Person if
such Person is an individual, or if such Person is a corporation, shall mean
the actual knowledge of the member or members of senior management of such
Person (in the case of Seller, Daniel D. Crowley, Kirk A. Benson, Michael P.
White, and Jerry Newman and with respect to Section 5.22 only, Joe Erway and,
in the case of FPA, Seth M. Flam, Steven Lash, James A. Lebovitz, and Sol
Lizerbram) with primary responsibility for the matters referred to, in both
cases after reasonable inquiry.
"Laws" shall mean all laws, statutes, ordinances, regulations, rules, codes,
orders, consent decrees, settlement agreements, and governmental requirements
(including any ruling or requirement having the effect of law) of any federal,
state or local government and any other governmental department or agency, and
any judgment, decision, decree, writ, injunction, award, ruling or order of
any Governmental Authority with jurisdiction.
"Leased Real Property" shall mean all real property leased or subleased by
Seller, Holding Company or any of Holding Company's subsidiaries and used in
the Businesses.
"Liability" means any liability, including any indebtedness, any guaranty of
indebtedness or obligations of any other Person, and any liability for Taxes.
"Management Agreement" shall mean, collectively (i) that certain Sublease
and Management Agreement between FHMS and FHMG, dated as of May 12, 1993, as
amended and (ii) that certain Sublease and Management Agreement between FHMS
and TDMC, dated as of November 1, 1994, as amended.
"Material Adverse Effect" or "Material Adverse Change" shall mean, with
respect to either FHMS's Business, Holding Company's Business, FPA or
Purchasing Subsidiary, respectively, any material adverse effect on or change
in their respective condition (financial or other), business or results of
operations, or on the ability of FPA, Purchasing Subsidiary, Purchasing
Shareholder, Seller or Selling Shareholder to consummate the transactions
contemplated hereby and by the Related Agreements.
IV-9
<PAGE>
"Ordinary Course" shall mean the ordinary course of business consistent with
prior practice.
"Permits" shall mean all licenses, permits, franchises, approvals,
authorizations, accreditations, provider numbers, consents or orders of, or
filings with, any Governmental Authority, necessary for the conduct of, or
relating to the operation of, either of the Businesses.
"Person" shall mean an individual, a partnership, a corporation, a trust, a
limited liability company or partnership, an unincorporated organization, a
Governmental Authority or any other entity.
"Professional Group Provider Agreements" shall mean, collectively, the
Professional Group Provider Agreement, in substantially the form of Exhibit B
hereto, to be entered into by and between FHCA and FHMG at the Closing and the
Professional Group Provider Agreement, in substantially the form of Exhibit C
hereto, to be entered into by and between FHCA and TDMC at the Closing.
"Practitioner" shall mean any licensed physician and surgeon, dentist,
clinical psychologist, podiatrist, optometrist or paraprofessional employed by
Holding Company or any of its subsidiaries, who provides professional or
paraprofessional services in connection with Holding Company's Business.
"Related Agreements" shall mean all agreements set forth on Schedule 8.14.
"Representative" shall mean any officer, director, principal, attorney,
agent, employee or other representative.
"Tax" shall mean any federal, state, local, foreign or other tax, levy,
impost, fee, assessment or other government charge, including income,
estimated income, business occupation, property, payroll, personal property,
sales, transfer, use, employment, commercial rent, occupancy, franchise or
withholding taxes, and any premium, including interest, penalties and
additions in connection therewith.
1.2 Other Defined Terms. The following terms shall have the meanings given
in the Sections set forth below:
<TABLE>
<CAPTION>
TERM SECTION
---- -----------
<S> <C>
Accounts......................................................... 7.5(c)(ii)
Actions.......................................................... 5.9
Agent............................................................ 3.1
Bridge Note...................................................... 2.3(a)(iii)
Cash Payment..................................................... 2.3(a)(i)
Closing.......................................................... 4.1
Closing Date..................................................... 4.1
Closing Price.................................................... 2.3(a)(ii)
Designee......................................................... Recitals
Designee Consideration........................................... 3.1
Employee......................................................... 5.10
Employee Benefit Plans........................................... 5.12(b)
Environmental Laws............................................... 5.22
ERISA............................................................ 5.12(a)(i)
Exclusivity Period............................................... 7.2
FHMG............................................................. Recitals
FHMG Agreement................................................... 5.6(c)
FHMS............................................................. Recitals
FHMS Indebtedness................................................ 2.1
FHMS Indebtedness Purchase Price................................. 2.5
FHMS Share Purchase Price........................................ 2.3(a)
FHMS Shares...................................................... 2.1
</TABLE>
IV-10
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
---- ----------
<S> <C>
FHMS's Business................................................... Recitals
FPA Common........................................................ 2.3(a)(ii)
FPA SEC Documents................................................. 6.6
FPA's Savings Plans............................................... 7.5(c)(ii)
Foundation Name................................................... 10.6
Frozen 401(k) Plan................................................ 7.5(d)
Hazardous Materials............................................... 5.22
Holding Company................................................... Recitals
Holding Company Indebtedness...................................... 3.2
Holding Company Indebtedness Purchase Price....................... 3.5
Holding Company Shares............................................ 3.2
Holding Company's Business........................................ Recitals
Indemnitee........................................................ 11.4
Indemnified Person................................................ 11.6
Indemnifying Person............................................... 11.6
Insurance Policies................................................ 5.13
Leases............................................................ 5.22
Losses............................................................ 11.3
Master Lease Assignment........................................... 8.9
Material Contracts................................................ 5.5
Nasdaq NMS........................................................ 2.3(a)(ii)
Non-Compete Period................................................ 7.6(a)
Note Consideration................................................ 2.3(a)(iv)
Option............................................................ Recitals
Owner............................................................. 5.22
Pledge Agreement.................................................. 8.19
Proxy Statement................................................... 7.8
Registration Rights Agreement..................................... 8.5
Rent Roll......................................................... 5.22
Retained Employees................................................ 7.5(a)
SEC............................................................... 6.6
Secured Obligations............................................... 8.19
Seller's 401(k) Plan.............................................. 7.5(c)(i)
Share Consideration............................................... 2.3(a)(ii)
Share Ownership Agreement......................................... Recitals
Stockholder's Meeting............................................. 7.9
Transition Agreement.............................................. 8.17
Transition Period................................................. 10.6
TDMC.............................................................. Recitals
</TABLE>
ARTICLE 2
Purchase and Sale of FHMS Shares and Notes
2.1 Description of FHMS Shares and Notes. The shares of FHMS to be sold
pursuant hereto (the "FHMS Shares") shall consist of all of the issued and
outstanding capital stock of FHMS and are described in Schedule 2.1. The
promissory notes and other indebtedness of FHMS to be sold pursuant hereto
shall consist of the line items "Inter-Company Payable," "Notes Payable, FHC"
and "Claims Payable" (the "FHMS Indebtedness") in the amounts shown on FHMS's
balance sheet as of the Closing Date. For reference purposes only, the
aggregate amount of such items, when combined with the aggregate amount of the
Holding Company Indebtedness is estimated to be Seventy Nine Million Five
Hundred Thousand Dollars ($79,500,000) as of June 30, 1996.
IV-11
<PAGE>
2.2 Sale of FHMS Shares by Seller. On the basis of the representations and
warranties of the parties and subject to the terms and conditions hereinafter
set forth, at the Closing, Seller shall sell, assign, transfer and deliver the
FHMS Shares to Purchasing Subsidiary and Purchasing Subsidiary shall purchase,
make payment for and accept the FHMS Shares from Seller at the price and in
the manner set forth in this Article 2.
2.3 FHMS Share Purchase Price.
(a) Components of FHMS Share Purchase Price. Upon the terms and subject to
the conditions set forth herein, FPA shall deliver to Seller at the Closing in
exchange for the sale, transfer, assignment, conveyance and delivery of the
FHMS Shares to Purchasing Subsidiary, the following (collectively, the "FHMS
Share Purchase Price"):
(i) by wire transfer of immediately available funds to an account
designated by Seller, cash in the amount of Two Million U.S. Dollars
($2,000,000) (the "Cash Payment");
(ii) a number of shares (the "Share Consideration") of FPA's Common Stock
("FPA Common") equal to (A) (x) Seventy Five Million U.S. Dollars
($75,000,000) minus (y) the amount of any cash paid in lieu of FPA Common
by FPA to Seller and in the same manner as the Cash Payment divided by (B)
the Closing Price. The Closing Price shall be the average of the per share
closing prices of FPA Common during the ten (10) trading days ending on the
second trading day prior to Closing as reported on the National Market
System on Nasdaq (the "Nasdaq NMS"). In the event that the Closing Price is
less than $13.60 (the "Walk-Away Price"), then FPA may in its sole
discretion terminate this Agreement by giving notice of termination to
Seller no later than one day prior to Closing, provided, however, that
notwithstanding any such notice, Seller may cause the Closing to occur if
it gives notice to FPA no later than the day prior to Closing that it will
accept a number of shares of FPA Common equal to (A) $75,000,000 divided by
(B) the Walk-Away Price, as the Share Consideration.
(iii) a Promissory Note (the "Bridge Note"), issued by FPA, in the
principal amount of Twenty Two Million Dollars, ($22,000,000) containing
the terms set forth in Exhibit D hereto and otherwise in form and substance
reasonably satisfactory to the parties hereto;
(iv) a Promissory Note (the "Note Consideration"), issued by Purchasing
Subsidiary, in the principal amount of Twelve Million U.S. Dollars
($12,000,000), which note will be consolidated, at the Closing, into the
Consolidated Note.
(b) No fractional shares of FPA Common shall be issued, but in lieu thereof
Seller shall receive from Purchasing Subsidiary an amount of cash (rounded up
to the nearest whole cent) equal to the product of (i) the fraction of a share
of FPA Common to which Seller would otherwise have been entitled times (ii)
Closing Price.
2.4 Sale of FHMS Indebtedness by Seller. On the basis of the representations
and warranties of the parties and subject to the terms and conditions
hereinafter set forth, at the Closing, Seller shall sell, assign, transfer and
deliver the FHMS Indebtedness to Purchasing Subsidiary, without recourse, and
Purchasing Subsidiary shall purchase, make payment for and accept the FHMS
Indebtedness from Seller at the price and in the manner set forth in this
Article 2. Neither FPA nor Purchasing Subsidiary shall have any recourse
against Seller as a result of any default by FHMS under the FHMS Indebtedness,
including any default resulting from FHMS's failure to make any payment of
principal or interest or any other payment under the FHMS Indebtedness when
due.
2.5 FHMS Indebtedness Purchase Price. Upon the terms and subject to the
conditions set forth herein, Purchasing Subsidiary shall deliver to Seller at
the Closing in exchange for the sale, transfer, assignment, conveyance and
delivery of the FHMS Indebtedness, without recourse, a promissory note (the
"FHMS Indebtedness Purchase Price") in a principal amount equal to the amount
of FHMS Indebtedness shown on FHMS's pro forma balance sheet as of the Closing
Date (subject to adjustment following the Closing Audit), which promissory
note will be consolidated, at the Closing, into the Consolidated Note.
2.6 Transfer Taxes and Fees. Seller shall be responsible for any applicable
documentary, use, filing, sales, transfer and other taxes or fees due or
payable as a result of the conveyance, assignment, transfer or delivery of the
FHMS Shares by Seller.
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ARTICLE 3
Appointment of Designee--Sale and Purchase of Holding Company Shares and Notes
3.1 Appointment of Purchasing Shareholder as Designee. On the basis of the
representations and warranties of the parties and subject to the terms and
conditions hereinafter set forth and in consideration for the sum of $15,000
(the "Designee Consideration") payable to Seller by or on behalf of Purchasing
Shareholder by wire transfer at the Closing, at the Closing, Seller shall
appoint Purchasing Shareholder Designee under the Share Ownership Agreement
and shall so notify Selling Shareholder and the agent (the "Agent") under the
Share Ownership Agreement.
3.2 Description of Shares and Notes. The shares of Holding Company to be
sold pursuant to the Option (the "Holding Company Shares") shall consist of
all of the issued and outstanding capital stock of Holding Company and are
described in Schedule 3.2. The promissory notes and other indebtedness of
Holding Company and its subsidiaries to be sold pursuant hereto shall consist
of the line items "Inter-Company Payable," "Notes Payable, FHC" and "Claims
Payable" (the "Holding Company Indebtedness") in the amounts shown on Holding
Company's consolidated balance sheet as of the Closing Date. For reference
purposes only, the aggregate amount of such items, when combined with the
aggregate amount of the FHMS Indebtedness is estimated to be Seventy Nine
Million Five Hundred Thousand Dollars ($79,500,000) as of June 30, 1996.
3.3 Exercise of Option. On the basis of the representations and warranties
of the parties and subject to the terms and conditions hereinafter set forth,
at the Closing, Purchasing Shareholder shall exercise the Option and Selling
Shareholder shall sell, assign, transfer and deliver the Holding Company
Shares to Purchasing Shareholder and Purchasing Shareholder shall purchase,
make payment for and accept the Holding Company Shares from Selling
Shareholder at the price and in the manner set forth in the Share Ownership
Agreement.
3.4 Sale of Holding Company Indebtedness by Seller. On the basis of the
representations and warranties of the parties and subject to the terms and
conditions hereinafter set forth, at the Closing, Seller shall sell, assign,
transfer and deliver the Holding Company Indebtedness to Purchasing
Subsidiary, without recourse, and Purchasing Subsidiary shall purchase, make
payment for and accept the Holding Company Indebtedness from Seller at the
price and in the manner set forth in this Article 3. Neither FPA nor
Purchasing Subsidiary shall have any recourse against Seller as a result of
any default by Holding Company or any of its subsidiaries under the Holding
Company Indebtedness, including any default resulting from a failure to make
any payment of principal or interest under the Holding Company Indebtedness
when due.
3.5 Holding Company Indebtedness Purchase Price. Upon the terms and subject
to the conditions set forth herein, Purchasing Subsidiary shall deliver to
Seller at the Closing in exchange for the sale, transfer, assignment,
conveyance and delivery of the Holding Company Indebtedness, without recourse,
a promissory note (the "Holding Company Indebtedness Purchase Price") in a
principal amount equal to the amount of the Holding Company Indebtedness shown
on Holding Company's pro forma consolidated balance sheet as of the Closing
Date (subject to adjustment following the Closing Audit), which promissory
note will be consolidated, at the Closing, into the Consolidated Note.
ARTICLE 4
Closing
4.1 Closing. The Closing of the transactions contemplated herein (the
"Closing") shall be held at 9:00 a.m. local time at the San Francisco office
of Pillsbury Madison & Sutro on the third business day after the conditions to
closing set forth in Articles 8 and 9 hereof are satisfied or waived (the
"Closing Date"), unless the parties hereto otherwise agree.
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4.2 Conveyances at Closing.
(a) Cash Payment. At the Closing, FPA shall deliver the Cash Payment to
Seller in accordance with Section 2.3(a)(i).
(b) Share Consideration. At the Closing, FPA shall issue to Seller a stock
certificate representing the Share Consideration, in accordance with Section
2.3(a)(ii) together with any cash payable in lieu of fractional shares
pursuant to Section 2.3(b).
(c) Bridge Note. At the Closing, FPA shall execute and deliver to Seller the
Bridge Note.
(d) Consolidated Note. At the Closing, Purchasing Subsidiary shall execute
and deliver to Seller a promissory note (the "Consolidated Note") in aggregate
principal amount equal to the sum of the FHMS Indebtedness Purchase Price, the
Holding Company Indebtedness Purchase Price (both of which amounts are subject
to adjustment following the Closing Audit) and the Note Consideration,
containing the terms set forth in the term sheet attached as Exhibit E hereto
and otherwise in form and substance reasonably satisfactory to the parties
hereto.
(e) Option Exercise. At the Closing, Purchasing Shareholder shall exercise
the Option and deliver or cause to be delivered to the Agent under the Share
Ownership Agreement, the price of such Option as set forth therein.
(f) Holding Company Share Certificate. At the Closing and upon the exercise
of the Option, the Agent under the Share Ownership Agreement shall deliver to
Purchasing Shareholder a stock certificate representing the Holding Company
Shares, accompanied by an appropriate stock assignment, which stock
certificate shall be immediately delivered to Seller, together with an
appropriate stock assignment, by Purchasing Shareholder pursuant to the Pledge
Agreement. The Holding Company Shares shall be delivered free and clear of all
Encumbrances, other than (i) Encumbrances created by the registration
requirements of the Securities Act of 1933, as amended and (ii) Encumbrances
contemplated hereby or by the Related Agreements.
(g) FHMS Share Certificate. At the Closing, Seller shall deliver to
Purchasing Subsidiary, a stock certificate representing the FHMS Shares,
accompanied by an appropriate stock assignment, which stock certificate shall
be immediately redelivered to Seller, together with an appropriate stock
assignment, by Purchasing Subsidiary pursuant to the Pledge Agreement. The
FHMS Shares shall be delivered free and clear of all Encumbrances, other than
(i) Encumbrances created by the registration requirements of the Securities
Act of 1933, as amended and (ii) Encumbrances contemplated hereby or by the
Related Agreements.
(h) Certificates; Opinions; Closing Conditions. FPA, Purchasing Shareholder,
Seller and Selling Shareholder shall deliver the agreements, certificates,
opinions of counsel and other items described in Articles 8 and 9.
ARTICLE 5
Representations and Warranties of Seller
Seller hereby represents and warrants to FPA as follows:
5.1 Organization. FHMS is a corporation and each of Holding Company and each
of its subsidiaries is a professional corporation, duly organized, validly
existing and in good standing under the laws of its respective state of
incorporation and is duly qualified and in good standing as a foreign
corporation in any state other than its state of incorporation where its
business requires that it be so qualified, with all requisite power and
authority to own, lease and operate its respective properties and to carry on
its respective Business as now being conducted.
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5.2 Authorization. Each of Seller and Selling Shareholder has full power and
authority to enter into and perform this Agreement, the Related Agreements and
the other agreements and documents contemplated by this Agreement to which it
is a party and to carry out the transactions contemplated by this Agreement
and such other agreements. Each of this Agreement and the Share Ownership
Agreement has been duly and validly executed and delivered by each of Seller
and Selling Shareholder, and constitutes and upon the execution and delivery
by each of Seller and Selling Shareholder of the Related Agreements to which
it is a party such Related Agreements will constitute, the legally valid and
binding obligation of each of them, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and equitable principles
relating to or limiting creditors' rights generally and general principles of
equity.
5.3 No Material Adverse Change. Except as listed on Schedule 5.3, since the
Financial Statement Date, there has not been any Material Adverse Change in
either of the Businesses.
5.4 Leased Real Property. Schedule 5.4 contains a complete and accurate list
of all Leased Real Property. With respect to such Leased Real Property, each
of FHMS, Holding Company and Holding Company's subsidiaries has in all
material respects performed all the respective obligations required to be
performed by it with respect to the Leased Real Property as lessee under the
leases of such property. Notwithstanding the foregoing, this representation
shall not be deemed to be untrue in any material respect as of the Closing
Date solely because any Expiring Contract has expired in accordance with its
terms or has been renegotiated by FHMS, Holding Company or any of Holding
Company's subsidiaries in consultation with FPA or in accordance with Section
9.14 (Pre-Closing Transactions).
5.5 Contracts and Commitments. (a) Schedule 5.5 contains a true and complete
list of each of the following Contracts (the "Material Contracts") to which
FHMS, Holding Company, or any of Holding Company's subsidiaries is a party:
(i) all Contracts (excluding Employee Benefit Plans and Contracts which
can be terminated at will without subjecting FHMS, Holding Company or any
of Holding Company's Subsidiaries to cost or penalty) providing for a
commitment for employment or consultation services for a specified or
unspecified term to, or otherwise relating to employment or the termination
of employment of, any Employee;
(ii) all Contracts with any Person containing any provision or covenant
prohibiting or materially limiting the ability of FHMS, Holding Company or
any of Holding Company's subsidiaries to engage in any business activity or
compete with any Person in connection with their respective Businesses or
prohibiting or materially limiting the ability of any Person to compete
with FHMS, Holding Company or any of Holding Company's subsidiaries in
connection with either of the Businesses;
(iii) all material partnership, joint venture, shareholders' or other
similar Contracts with any Person in connection with either of the
Businesses;
(iv) all Contracts relating to the future disposition or acquisition of
any assets material to either of the Businesses, other than dispositions or
acquisitions in the Ordinary Course of business;
(v) all other Contracts (other than Employee Benefit Plans, the Real
Property Leases and Insurance Policies) with respect to either of the
Businesses that (A) involve the payment or potential payment, pursuant to
the terms of any such Contract, by or to FHMS, Holding Company or any of
Holding Company's subsidiaries of more than $100,000 annually and (B)
cannot be terminated within sixty (60) days after giving notice of
termination without resulting in any material cost or penalty to FHMS,
Holding Company or any of Holding Company's subsidiaries.
(b) There is no default or event that with notice or lapse of time, or both,
would constitute a default by FHMS, Holding Company or any of Holding
Company's subsidiaries under any of the Material Contracts to which it is a
party. To Seller's knowledge, neither FHMS, Holding Company nor any of Holding
Company's subsidiaries has received written notice of a default under any
Material Contract by any other party thereto. Each of the Material Contracts
is enforceable against FHMS, Holding Company or one of Holding Company's
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<PAGE>
subsidiaries, as the case may be, in accordance with its terms, except as such
enforceability may be limited by general principles of equity or by
bankruptcy, insolvency or other similar laws relating to rights of creditors.
Neither FHMS, Holding Company nor any of Holding Company's subsidiaries has
received notice that any party to any of the Material Contracts intends to
cancel or terminate any of the Material Contracts or to exercise or not
exercise any options under any of the Material Contracts. Notwithstanding the
foregoing, this representation shall not be deemed to be untrue in any
material respect as of the Closing Date solely because any Expiring Contract
has expired in accordance with its terms or has been renegotiated by FHMS,
Holding Company or any of Holding Company's subsidiaries in consultation with
FPA or in accordance with Section 9.14 (Pre-Closing Transactions).
5.6 Permits and Governmental Filings.
(a) Permits. To Seller's knowledge, Schedule 5.6(a) sets forth a complete
and accurate list of all material Permits which constitute all material
Permits required to conduct the Businesses as now being conducted. No notice
or warning from any authority with respect to the suspension, revocation, or
termination of any material Permit has been received by Seller, FHMS, Holding
Company or Selling Shareholder. Seller has caused FHMS to deliver or Selling
Shareholder has caused Holding Company to deliver to FPA true, correct and
complete copies of all Permits requested by FPA.
(b) Filings. Except as disclosed on Schedule 5.6(b) hereto, no notice to,
declaration, filing or registration with, or Permit from, any Governmental
Authority is required to be made or obtained by FHMS, Holding Company or any
of Holding Company's subsidiaries in connection with the execution, delivery
or performance of this Agreement and the consummation of the transactions
contemplated by this Agreement and the Related Agreements, except for any such
notices, declarations, filings, registrations or Permits the failure of which
to be obtained would not reasonably be expected to have a Material Adverse
Effect on either of the Businesses.
(c) Certain Approvals. FHCA has been consulted regarding the current medical
director of FHMG in accordance with Section 2.1(h) of the Professional
Provider Agreement (the "FHMG Agreement") currently in effect between FHCA and
FHMG. FHCA acknowledges receipt of copies of the written agreements pursuant
to which Provider Risk Services (as defined in the FHMG Agreement) are
rendered in accordance with Section 2.8 of the FHMG Agreement.
5.7 No Conflict or Violation. None of the execution, delivery and
performance of this Agreement, the consummation of the transactions
contemplated hereby, and the compliance by Seller and Selling Shareholder with
any of the provisions hereof, will (i) violate or conflict with any provision
of the Articles or Certificate of Incorporation or Bylaws of FHMS or Holding
Company or any of Holding Company's subsidiaries, (ii) violate, conflict with,
or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in
the creation of any Encumbrance upon any material asset of FHMS, Holding
Company or any of Holding Company's subsidiaries under, any of the terms,
conditions or provisions of any Contract to which FHMS, Holding Company or any
of Holding Company's subsidiaries is a party except for violations, conflicts,
breaches, defaults, terminations, accelerations, rights of termination or
acceleration, or Encumbrances that would not reasonably be expected to have a
Material Adverse Effect on either of the Businesses or (iii) to Seller's
knowledge, violate any Laws the violation of which would reasonably be
expected to have a Material Adverse Effect on either of the Businesses.
5.8 Financial Statements. The Financial Statements (i) are in accordance
with the books and records of FHMS, Holding Company and Holding Company's
subsidiaries, as appropriate, and (ii) fairly and accurately present the
assets and liabilities of the Businesses indicated therein as of the dates
thereof.
5.9 Litigation. Except as disclosed on Schedule 5.9, as of the date hereof
there are no suits, labor disputes or other litigation or proceedings
("Actions") pending or, to Seller's knowledge, threatened in writing against
FHMS or Holding Company or any of Holding Company's subsidiaries, with respect
to their respective Businesses, other than Actions that would not reasonably
be expected to have a Material Adverse Effect on either of the Businesses.
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<PAGE>
5.10 Compensation. Schedule 5.10 contains a true and complete list of all
employees of FHMS, Holding Company or any of Holding Company's subsidiaries
(each, an "Employee") specifying their names, job designations, dates of hire
and rates of compensation.
5.11 Compliance with Laws. FHMS's Business is in compliance with all Laws
relating to FHMS's Business, except where the failure to comply would not
reasonably be expected to have a Material Adverse Effect on FHMS's Business
and Holding Company's Business is in compliance with all Laws relating to
Holding Company's Business, except where the failure to comply would not
reasonably be expected to have a Material Adverse Effect on Holding Company's
Business.
5.12 Employee Benefits Matters.
(a) Except as set forth on Schedule 5.12, neither FHMS, Holding Company nor
any of Holding Company's subsidiaries is a party to and none participates in
or has any liability or contingent liability with respect to:
(i) any "employment benefit plan" (as that term is defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"));
(ii) any retirement or deferred compensation plan, incentive compensation
plan, stock plan, unemployment compensation plan, vacation pay, severance
pay, bonus or benefit arrangement, insurance or hospitalization program or
any other fringe benefit arrangement for any employee, director, consultant
or agent, whether pursuant to contract, arrangement, custom, informal
understanding or otherwise, which does not constitute an employee benefit
plan; or
(iii) any employment agreement not terminable upon thirty (30) days' or
less written notice without further liability; provided, however, that
nothing in this paragraph (a) shall require that Schedule 5.12 include any
plans, arrangements or agreements unless either (i) the plan, arrangement
or agreement has been extended to persons because they have performed or
will perform services for FHMS, Holding Company or any of Holding Company's
subsidiaries or (ii) FPA may have any liability or contingent liability
with respect to such plan, arrangement or agreement as a result of the
execution of this Agreement or the transactions contemplated by this
Agreement.
(b) A true and correct copy of each of the plans, arrangements or agreements
listed on Schedule 5.12 (the "Employee Benefit Plans") and all contracts
relating thereto or the funding thereof, each as in effect on the date hereof,
have been or will be made available to FPA by FHMS or Holding Company, as
appropriate on or before July 15, 1996.
(c) Except as set forth on Schedule 5.12, none of the Employee Benefit Plans
is a multiemployer plan (as defined in Section 3(37) of ERISA).
(d) Except as set forth on Schedule 5.12, each Employee Benefit Plan
complies, in form and in operation in all material respects, with all
applicable requirements of any Laws, including, to the extent applicable,
Sections 401(a) and 501(a) of the Code, and, to Seller's knowledge, no event
has occurred which will or could cause any such Employee Benefit Plan to fail
to comply in all material respects with such requirements.
(e) Except as set forth on Schedule 5.12, neither FHMS, Holding Company nor
any of Holding Company's subsidiaries has any liability or contingent
liability with respect to its respective Business to provide medical, dental,
life, accidental death and dismemberment, or long-term disability benefits
from its general assets (other than to pay insurance premiums) and, with
respect to each Employee Benefit Plan, all required contributions including
premium payments, have been paid.
(f) Except as set forth on Schedule 5.12, neither FHMS, Holding Company nor
any of Holding Company's subsidiaries has any liability or contingent
liability, under any Employee Benefit Plan or otherwise, for any post-
retirement medical or life insurance benefits, other than statutory liability
for providing group health plan continuation coverage under Part 6 of Title 1
of ERISA and Section 4980B of the Code.
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(g) Except as set forth on Schedule 5.12, with respect to any Employee
Benefit Plan with respect to which FPA is assuming liabilities pursuant to
Section 7.5 or from which assets and liabilities will be transferred to an
employee benefit plan of FPA (or its Affiliates):
(i) in the case of any such Employee Benefit Plan which is an "employee
pension benefit plan" (within the meaning of Section 3(2) of ERISA), there
have been no amendments thereto which are not the subject of a favorable
determination letter issued with respect thereto by the IRS and no event
has occurred which will or could give rise to disqualification of any such
plan under such Sections or to a Tax under Section 511 of the Code;
(ii) there have been no "prohibited transactions" (as described in
Section 406 of ERISA or Section 4975 of the Code) with respect to any such
Employee Benefit Plan;
(iii) there have been no acts or omissions by FHMS, Holding Company or
their respective Affiliates with respect to such Employee Benefit Plan
which have given rise to or may give rise to fines, penalties, Taxes or
related charges under Section 502 of ERISA or Chapters 43, 47 or 68 of the
Code;
(iv) none of the payments contemplated under such Employee Benefit Plan
would, in the aggregate, constitute excess parachute payments (as defined
in Section 280G of the Code (without regard to subsection (b)(4) thereof));
(v) there are no Actions (other than routine claims for benefits) pending
or to Seller's knowledge threatened in writing involving any such Employee
Benefit Plan or the assets thereof and no facts exist which could give rise
to any such Actions (other than routine claims for benefits); and
(vi) with respect to any such Employee Benefit Plan which is subject to
Title IV of ERISA:
i. there has been no reportable event (as described in Section 4043
of ERISA);
ii. no steps have been taken to terminate any such plan;
iii. there has been no withdrawal (within the meaning of Section 4063
of ERISA) of a "substantial employer" (as defined in Section 4001(a)(2)
of ERISA);
iv. no event or condition has occurred which might constitute grounds
under Section 4042 of ERISA for the termination of or the appointment
of a trustee to administer any such plan; and
v. if each such plan were terminated immediately after the Closing,
there would be no unfunded liabilities with respect to any such plan,
its participants or beneficiaries or the Pension Benefit Guaranty
Corporation.
5.13 Insurance. Schedule 5.13 lists all policies of fire, liability, life
and employee health, environmental, medical malpractice, workers' compensation
and other forms of insurance currently held and maintained by FHMS, Holding
Company, or any of Holding Company's subsidiaries (the "Insurance Policies").
Seller believes that such Insurance Policies are commercially reasonable in
amount and coverage. All of the Insurance Policies are in full force and
effect, all billed premiums with respect thereto covering all periods up to
and including the Closing Date have been paid or will have been paid on or
prior to the Closing Date and no written notice of cancellation or termination
has been received with respect to any such Policy, except for failures to pay
or cancellations or terminations which would not reasonably be expected to
have a Material Adverse Effect on FHMS's or Holdings Company's Business.
5.14 No Undisclosed Liabilities. Except as disclosed on Schedule 5.14, or
elsewhere in the Disclosure Schedule, since the Financial Statement Date (i)
FHMS has not incurred any Liability material to FHMS's Business (ii) neither
Holding Company nor any subsidiary of Holding Company has incurred any
Liability material to Holding Company's Business, in each case other than in
the Ordinary Course.
5.15 Capital Structure.
(a) The issued and outstanding FHMS Shares are held directly by Seller in
the amount set forth on Schedule 2.1 hereto and represent all of the
outstanding capital stock of FHMS. The issued and outstanding Holding
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Company Shares are held directly by Selling Shareholder in the amount set
forth on Schedule 3.2 hereto and represent all of the outstanding capital
stock of Holding Company.
(b) All of the outstanding Holding Company Shares and FHMS Shares (i) were
issued in compliance with applicable federal and state securities laws, (ii)
are duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, the Articles of Incorporation
or Bylaws of the respective issuer of such shares or any agreement to which
Seller, FHMS, Selling Shareholder or Holding Company is bound and (iii) are
not subject to any options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in Holding Company or FHMS,
respectively, except that all of the Holding Company Shares are subject to the
Option and except as set forth on Schedule 5.15. The Holding Company Shares
are wholly owned by Selling Shareholder free and clear of all Encumbrances
except for the Option and as set forth on Schedule 5.15 and the FHMS Shares
are wholly owned by Seller free and clear of all Encumbrances except as set
forth on Schedule 5.15.
(c) Except as set forth on Schedule 5.15, there are no voting trusts,
registration rights, proxies, shareholder agreements or other agreements or
understandings with respect to the Holding Company Shares or the FHMS Shares.
5.16 Real Property. Neither Holding Company nor any of Holding Company's
subsidiaries owns any real property in fee. As of the Closing Date, FHMS will
not own any real property in fee.
5.17 Taxes. Each of FHMS and Holding Company has duly filed or caused to be
filed with the appropriate Governmental Authority all tax returns and reports
required to be filed (subject to permitted extensions or amendments applicable
to such filings) with respect to their respective Businesses at or prior to
the Closing Date for all periods up to and including the Closing Date and will
timely file subsequent to the Closing Date such tax returns as shall be due
thereafter for periods up to and including the Closing Date and Seller shall
be entitled to all the benefits, including any net operating losses, and be
responsible for all the obligations of, such tax returns (which returns are or
will be accurate and complete), and shall have paid all Taxes shown to have
become due pursuant to such tax returns and will continue to pay such Taxes
for periods ending on or before the Closing Date. FPA and Purchasing
Shareholder shall join and cause Holding Company and FHMS to join, Seller and
Selling Shareholder, as the case may be, in filing or amending any such tax
returns, if required, at no out-of-pocket expense to FPA and Purchasing
Shareholder. Neither FHMS, Holding Company nor any of Holding Company's
subsidiaries is a party to any pending action or proceeding, nor, to the
knowledge of Seller, is any such action or proceeding threatened in writing by
any Governmental Authority against FHMS, Holding Company or any of Holding
Company's subsidiaries for the assessment or collection of Taxes. Since the
Financial Statement Date, no liability for Taxes has been incurred by FHMS,
Holding Company or any of Holding Company's subsidiaries other than in the
Ordinary Course of business. There are no liens for Taxes except for liens for
property taxes not yet delinquent.
5.18 Proprietary Rights. Each of Holding Company and Holding Company's
Subsidiaries owns or licenses all trademarks, trade or fictitious names,
copyrights and proprietary know-how necessary or material to their respective
Businesses as currently conducted.
5.19 Subsidiaries. Neither of FHMS nor Holding Company owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, or other entity except as set forth
on Schedule 5.19 hereto.
5.20 Accounts Receivable. All accounts receivable of FHMS, FHMG and TDMC
shown on the Financial Statements and all accounts receivable arising after
the Financial Statement Date, arose from transactions in the Ordinary Course
and have been collected or to Seller's knowledge, are collectible in at least
their aggregate recorded amounts, net of any applicable reserve.
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5.21 Brokers. Other than Bear, Stearns & Co., Inc. which has acted on behalf
of Seller and its Affiliates in connection with the transactions contemplated
hereby, and whose commissions, fees and expenses are the sole responsibility
of Seller, no Person has acted on behalf of Seller in connection with the
transactions contemplated hereby in such a way as to give rise to a valid
claim against FPA or its Affiliates for brokerage commissions, or finders' or
similar fees.
5.22 Certain Real Estate and Legal Matters. All references to the "Care
Centers" in this Section 5.22 shall mean the real estate constituting the Care
Centers only and shall not refer to any business operations or services
conducted on or from the Care Centers. Schedule 1.1(a) attached hereto
contains a complete list of all Care Centers and indicates which Care Centers
are owned, are leased from a third party or are leased under the May 25, 1995
Tax Retention Operating Lease (the "TROL") between FHMS and First Security
Bank of Utah, N.A., as trustee under the FH Trust 1995-1 (the "TROL Lessor").
(a) Seller has no knowledge, and Seller has received no notice to the
contrary, of any plan, study or effort of governmental authorities which could
reasonably and materially and adversely affect the use of any of the Care
Centers or could reasonably result in any charge being levied against, or any
lien assessed upon, any of the Care Centers (other than usual and customary
real property taxes and assessments for amounts not yet delinquent). Seller
has no knowledge of any existing, proposed or contemplated plan to widen,
modify or realign any street or highway contiguous to any of the Care Centers.
(b) No notices of violation of laws or governmental regulations relating to
any of the Care Centers have been received by Seller. To the best of Seller's
knowledge, the improvements to the Care Centers were constructed in all
material respects in accordance with all plans, specifications, drawings and
permits applicable thereto and are permitted, conforming structures under
applicable laws and ordinances in effect at the time of construction.
(c) There is no pending proceeding in eminent domain or any action to quiet
title, which reasonably could materially and adversely affect any of the Care
Centers, nor does Seller know of the existence of any threatened proceedings
or of the existence of any facts which might give rise to such action or
proceeding.
(d) Seller has received all occupancy permits or similar permits necessary
to occupy the Care Centers as they are currently being used and operated by
Seller.
(e) Except for those pending sales and assignments of Care Centers and
interests therein as set forth on attached Schedule 5.22(e) (collectively, the
"Pending Transfers"), Seller has not entered into any other contracts for the
sale of the Care Centers nor do there exist any rights of first offer or first
refusal or options to purchase any of the Care Centers. The execution of final
documentation and/or closing of any or all of the Pending Transfers shall not
affect the terms or conditions of this Agreement).
(f) Seller has no knowledge, and Seller has received no written notice to
the contrary, of any special assessments which will result from work,
activities or improvements done to the Care Centers by Seller or by any
tenants or other parties, except as disclosed in title documents delivered by
Seller to Purchasing Subsidiary or otherwise examined by or available to
Purchasing Subsidiary.
(g) As of the above date, to the best of Seller's knowledge, the Care
Centers are not in violation of any federal, state or local law, ordinance or
regulation promulgated thereunder relating to industrial hygiene or to the
environmental conditions on, under or about the Care Centers including, but
not limited to, all improvements, facilities, structures and equipment
thereon, and the soil and groundwater thereunder. During the time in which
Seller's Affiliates owned the Care Centers (each, an "Owner"), neither the
Owner nor, to the best of Seller's knowledge, any third party has used,
released, generated, manufactured, or produced on, under or about the Care
Centers, or transported to or from the Care Centers, any flammable explosives,
radioactive materials, hazardous wastes or substances, polychlorinated
biphenyls or similar materials that are dangerous to the public health
(collectively, "Hazardous Materials") in violation of statutes, ordinances or
regulations that govern the use and/or disposal of Hazardous Materials
(collectively, "Environmental Laws").
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<PAGE>
(h) Each of the Care Centers is connected to and served by water, sewage
disposal, drainage, telephone, gas, electricity and other utility equipment
facilities and services required by law, or, to the best of Seller's
knowledge, are reasonably adequate for the present use and operation of the
Care Centers and which are installed and connected pursuant to valid permits
required at the time of construction of the Care Center or installation of the
utility.
(i) To the best of Seller's knowledge, there are no physical or mechanical
defects or deficiencies in the condition of the Care Centers that would result
in the revocation of any required building or occupancy permit.
(j) The Owners have not received any notices from any insurance company of
any defects or inadequacies in the Care Centers.
(k) To the best of Seller's knowledge, there are no storage or other tanks
or containers, or wells or other improvements below the surface of the Care
Centers in violation of any Environmental Laws or in violation of statutes,
ordinances and/or regulation governing the installation, use, sealing or
removal of such storage tanks. The Owners did not install any underground
storage tanks under any of the Care Centers.
(l) Except for the leases and subleases of the Care Centers currently in
effect and disclosed or made available for inspection by Seller (the
"Leases"), there are no oral or written leases, subleases, occupancies, or
tenancies in effect pertaining to the Care Centers.
(m) Copies of the Leases, title documents, environmental reports and similar
real estate related documents which have been given to Purchasing Subsidiary
by Seller are true and correct copies thereof in all material respects.
(n) The Owners have received no written notice from any of the tenants of
any of the Care Centers informing the Owners of any material defects in the
structure or mechanical systems of any of the Care Centers that would
adversely affect use and occupancy of the Care Centers.
(o) With respect of each of the Leases, except as may be otherwise set forth
in the Leases, in the rent roll for the respective Care Centers provided by
Seller to Purchasing Subsidiary, in documentation or information provided to
or available to Purchasing Subsidiary during the normal course of Purchasing
Subsidiary's due diligence, the following information is true and correct: (a)
each of the Leases is in full force and effect according to the terms set
forth therein and has not been further modified, amended, extended or assigned
by Seller, in writing or otherwise; (b) all obligations of each Owner, as
landlord under the Leases, which have accrued prior to Closing will be
performed in all material respects and, to Seller's best knowledge, no tenant
has asserted or has any defense to, or any offsets, abatements, concessions,
claims against, any rent payable by it after the date hereof, or any
calculation of rent, or the performance of any other obligations under such
tenant's respective Lease; (c) to the best of Seller's knowledge, no tenant is
in default under or in arrears in the payment of any sum payable or in the
performance of any obligation required of it under its Lease, including but
not limited to all rent, taxes, assessments, repairs and maintenance charges,
insurance premiums, utilities or other charges or expenses, and, to the best
of Seller's knowledge, no tenant has prepaid any rent or other charges; (d) to
Seller's best knowledge, no tenant is unable to perform any or all of its
obligations under its Lease, whether for financial or legal reasons or
otherwise; (e) to Seller's best knowledge, no guarantor or any assignor under
any of the Leases has been released or discharged from any obligation under or
in connection with any of the Leases; (f) Seller has not applied any security
deposit from a tenant to rent or any other obligation due from any tenant
without Purchasing Subsidiary's prior written consent; (g) all work required
to be done by any Owner, as landlord under each such Lease, has been or by the
Closing will be done or furnished unless otherwise agreed by the parties and
no tenant is entitled to any additional work during the term of its Lease; (h)
neither the Leases nor the rents nor any other amounts payable thereunder have
been assigned, pledged or encumbered by Seller, except in connection with
existing indebtedness disclosed by Seller to Purchasing Subsidiary; and (i)
Seller has
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<PAGE>
not received from any tenant written notice of any presently pending dispute
regarding the calculation of payment of rent, the terms of any Lease or any
alleged default by Seller, as lessor, under such Lease, or of any bankruptcy,
receivership, custodianship, reorganization, insolvency, assignment for
benefit of creditors or other proceeding of a similar nature respecting any
tenant, any Lease or the Care Centers.
(p) Seller is not now nor at Closing will be a "foreign person" as defined
in Internal Revenue Code section 1445.
(q) To the best of Seller's knowledge, the Leases, environmental reports,
title documents, rent rolls and other documents delivered by Seller to
Purchasing Subsidiary or otherwise made available to Purchasing Subsidiary by
Seller do not contain any false information that could, if relied upon,
materially affect Purchasing Subsidiary's decision to purchase the Care
Centers.
(r) Except for the Pending Transfers and as otherwise disclosed to
Purchasing Subsidiary, neither the respective Owner's interest in the Leases,
nor any of the rentals due or to become due under the Leases, has been or will
be assigned prior to the Closing.
(s) No leasing or brokerage fees or commissions of any nature whatsoever is
now due or shall become due or owing by any Owner to any third party after the
Closing under the existing provisions of any of the Leases.
(t) Subject to the Pending Transfers and clause (u), below, Seller agrees to
cause the Owners to continue to cause the Care Centers to be managed and
maintained, reasonable wear and tear excepted, in the ordinary and usual
course of business prior to the Closing; provided, however, Seller and the
Owners shall not, without the prior written consent of Purchasing Subsidiary,
convey any interest in the Care Centers or subject the Care Centers to any
additional liens, encumbrances, covenants, conditions, easements, or rights of
way adversely affecting the Care Centers or enter into any contracts, other
than contracts terminable upon no less than thirty days prior notice.
(u) The Owners will not hereafter modify, cancel, extend or otherwise change
any of the terms, covenants, or conditions of the Leases, enter into, renew or
extend any Leases (other than (i) documentation regarding any of the Pending
Transfers, and (ii) Leases or cancellation or modifications of Leases with any
Affiliates of Seller or with any Affiliates of or providers to the Owners,
which may be modified, amended or canceled in the sole and absolute discretion
of the respective Owners at any time before the Closing) without the prior
written consent of Purchasing Subsidiary, which shall not be unreasonably
withheld. If Purchasing Subsidiary does not disapprove any written request of
Seller under this subparagraph within ten (10) days of such request,
Purchasing Subsidiary shall be deemed to have approved such request.
(v) To the extent insured as to the date of this Agreement, the respective
Owners shall, at their sole cost and expense, will keep in full force all
existing insurance policies affecting the Care Centers or any portion thereof
through the Closing.
Purchasing Subsidiary acknowledges that the assignment or subletting, as
applicable of the Leases (collectively, the "Assignments") may require the
written consent of the landlords or sublandlords (collectively, the
"Landlords"). Seller shall solicit the Landlords' consent to the Assignments
as soon as possible after the Closing. Notwithstanding the foregoing,
Purchasing Subsidiary acknowledges that the Closing may occur notwithstanding
the inability or failure to obtain the required consent of each of the
Landlords, and Purchasing Subsidiary shall (i) waive any claims, actions,
demands, causes of action, liabilities, judgments, costs and expenses
(collectively, "Claims") Purchasing Subsidiary may incur as a result of the
inability to obtain consent to the Assignments, and (ii) indemnify, defend and
hold Seller harmless from and against any and all Claims that Purchasing
Subsidiary may incur as a result of proceeding with the Assignments without
the consent of each of the Landlords.
Seller shall have no liability for any breach of any of the foregoing
representations or warranties if Purchasing Subsidiary or Purchasing
Subsidiary's agents, attorneys, or other representatives was either aware or
through the exercise of reasonable diligence would have been aware of the
facts to the contrary.
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<PAGE>
ARTICLE 6
Representations and Warranties of FPA and Purchasing Subsidiary
Each of FPA and Purchasing Subsidiary hereby jointly and severally
represents and warrants to Seller and Selling Shareholder as follows:
6.1 Organization of FPA and Purchasing Subsidiary. Each of FPA and
Purchasing Subsidiary is a corporation and Purchasing Shareholder is a
professional corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified and in
good standing as a foreign corporation in any state other than its state of
incorporation where its business requires that it be so qualified, with all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted, and is qualified to do business
as a foreign corporation in the States of California and Arizona.
6.2 Authorization. Each of FPA, Purchasing Subsidiary and Purchasing
Shareholder has full power, authority and capacity to enter into and perform
this Agreement, the Related Agreements and the other agreements and documents
contemplated by this Agreement to which it is a party and to carry out the
transactions contemplated by this Agreement and such other agreements. This
Agreement has been duly and validly executed and delivered by each of FPA,
Purchasing Subsidiary and Purchasing Shareholder and constitutes and upon the
execution and delivery by each of FPA, Purchasing Subsidiary and Purchasing
Shareholder of the Related Agreements to which it is a party such Related
Agreements will constitute, the legally valid and binding obligation of each
of them, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws and equitable principles relating to or
limiting creditors' rights generally and general principles of equity.
6.3 No Conflict or Violation. None of the execution, delivery and
performance of this Agreement, the consummation of the transactions
contemplated hereby, and the compliance by FPA, Purchasing Subsidiary and
Purchasing Shareholder with any of the provisions hereof, will (i) violate or
conflict with any provision of the respective Certificates of Incorporation or
Bylaws of FPA or Purchasing Subsidiary, (ii) except as set forth on Schedule
6.3, violate, conflict with, or result in a breach of any provision of, or
constitute a default (or any event which, with notice or lapse of time or
both, would constitute a default) under, or result in a right of termination
or acceleration under, any of the terms, conditions or provisions of any
contract, indebtedness, note, bond, indenture, security or pledge agreement,
commitment, license, lease, franchise, permit, agreement, or other instrument
or obligation to which FPA, Purchasing Subsidiary or Purchasing Shareholder is
a party except for violations, conflicts, breaches, defaults, terminations,
accelerations, rights of termination or acceleration, or Encumbrances that
would not reasonably be expected to have a Material Adverse Effect on FPA or
Purchasing Subsidiary or (iii) to FPA's knowledge violate any Laws the
violation of which could reasonably be expected to have a Material Adverse
Effect on FPA or Purchasing Subsidiary.
6.4 Permits and Governmental Filings.
(a) Permits. To FPA's knowledge, Schedule 6.4(a) sets forth a complete and
accurate list of all material Permits which constitute all material Permits
required to conduct the respective businesses of FPA and Purchasing Subsidiary
as now being conducted. No notice or warning from any authority with respect
to the suspension, revocation, or termination of any material Permit has been
received by FPA. FPA has delivered to Seller true, correct and complete copies
of all Permits requested by Seller.
(b) Filings. Except as disclosed on Schedule 6.4(b) hereto, no notice to,
declaration, filing or registration with, or Permit from, any governmental or
regulatory body or authority is required to be made or obtained by FPA,
Purchasing Subsidiary or Purchasing Shareholder in connection with the
execution, delivery or performance of this Agreement and the consummation of
the transactions contemplated by this Agreement and the Related Agreements,
except for any such notices, declarations, filings, registrations or Permits,
the failure of which to be obtained would not reasonably be expected to have a
Material Adverse Effect on FPA or Purchasing Subsidiary.
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<PAGE>
6.5 Financial Statements. The FPA Financial Statements, together with the
notes thereto (i) are in accordance with the books and records of FPA, (ii)
fairly and accurately present the assets, liabilities and financial position
of FPA as of the dates thereof and the results of operations for the periods
then ended and (iii) have been prepared in accordance with GAAP consistently
applied throughout the periods presented.
6.6 SEC Documents. FPA (i) has provided to Seller and Selling Shareholder, a
true and complete copy of FPA's Annual Report on Form 10-K (without exhibits)
for the years ended December 31, 1994 and December 31, 1995, and Quarterly
Report on Form 10-Q for the three (3) months ended March 31, 1996, and its
definitive 1996 proxy statement filed by FPA with the SEC and (ii) will
provide to Seller and Selling Shareholder all documents filed by FPA with the
SEC at or prior to the Closing Date (collectively, with the documents listed
in clause (i), the "FPA SEC Documents"). As of their respective filing dates,
FPA has made all necessary filings with the Securities and Exchange Commission
("SEC") required to be filed by it since October 20, 1994, the FPA SEC
Documents comply or will comply in all material respects with the requirements
of the Exchange Act or the Securities Act, and none of the FPA SEC Documents
contains or will contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which
they were made, not misleading, except to the extent material statements in
any of the foregoing are modified or superseded in accordance with applicable
rules and regulations of the SEC by a subsequently filed FPA SEC Document
delivered to the Shareholders prior to the date of this Agreement.
6.7 No Material Adverse Change. Except as listed on Schedule 6.7, or in a
FPA SEC Document since March 31, 1996, there has not been any Material Adverse
Change in FPA.
6.8 Compliance with Laws. To FPA's knowledge, each of FPA, Purchasing
Subsidiary and Purchasing Shareholder is in compliance with all Laws, except
where the failure to comply would not reasonably be expected to have a
Material Adverse Effect on FPA or Purchasing Subsidiary.
6.9 Litigation. Except as disclosed on Schedule 6.9, as of the date hereof
there are no Actions pending or threatened in writing against FPA, Purchasing
Subsidiary or Purchasing Shareholder other than Actions that would not
reasonably be expected to have a Material Adverse Effect on FPA or Purchasing
Subsidiary.
6.10 No Undisclosed Liabilities. Except as disclosed on Schedule 6.10, since
March 31, 1996, FPA has not incurred any liability material to FPA other than
in the Ordinary Course. Purchasing Subsidiary has no Liabilities other than
pursuant to this Agreement and the Related Agreements and is not a party to
any Contract other than this Agreement and the Related Agreements to which it
is a party.
6.11 Capital Structure.
(a) The authorized capital stock of FPA consists of 98,000,000 shares of
Common Stock $.001 par value, 2,000,000 shares of Preferred Stock $.002 par
value, the number and classes of outstanding equity securities of FPA
(including securities convertible or exercisable into or exchangeable for
equity securities of FPA) are as listed on Schedule 6.11. The authorized
capital stock of Purchasing Subsidiary consists of 100 shares of common stock,
$.01 par value.
(b) All of the outstanding shares of capital stock of FPA and Purchasing
Subsidiary (i) were issued in compliance with applicable federal and state
securities laws and (ii) are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of the respective issuer of such shares
or any agreement to which FPA or Purchasing Subsidiary is a party or by which
it is bound.
(c) The shares of FPA Common will, when issued and delivered to the Seller
in accordance with this Agreement, be duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights created by
statute, FPA's Certificate of Incorporation, Bylaws or any agreement to which
FPA is a party or by which it is bound.
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<PAGE>
ARTICLE 7
Covenants of Parties Hereto
Seller, Selling Shareholder, FPA, Purchasing Subsidiary and Purchasing
Shareholder each covenant with the other as follows:
7.1 Further Assurances. Upon the terms and subject to the conditions
contained herein, each of Seller, Selling Shareholder, FPA, Purchasing
Subsidiary and Purchasing Shareholder agrees, both before and after the
Closing, (i) to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by
this Agreement and the Related Agreements, (ii) to execute any documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the transactions contemplated hereunder or
thereunder, and (iii) to cooperate with each other in connection with the
foregoing, including using all reasonable efforts (A) to obtain all permits or
licenses required to be obtained under any applicable Laws, (B) to effect all
necessary registrations and filings, including submissions of information
requested by governmental authorities, (C) to fulfill all conditions to this
Agreement and (D) to consult with each other regarding renegotiation of any
Expiring Contract. Seller, Selling Shareholder, FPA, Purchasing Subsidiary and
Purchasing Shareholder will commence all action required under clause (A)
above (including making all filings required under the HSR Act) as soon as
reasonably practicable.
7.2 No Solicitation. From the date of this Agreement to the Closing Date or
earlier termination of this Agreement (the "Exclusivity Period"), neither
Seller nor Selling Shareholder will directly or indirectly make, entertain,
solicit or encourage inquiries or proposals, enter into or conduct
discussions, or negotiate or enter into an agreement with any party other than
FPA, Purchasing Subsidiary and Purchasing Shareholder for the divestiture of
FHMS or Holding Company, respectively, whether by way of an asset or stock
sale, partnership, joint venture, merger, consolidation or other transaction
(provided that the foregoing shall not limit or restrict restructuring or
other changes by FHMS or Holding Company or any of Holding Company's
subsidiaries).
7.3 Inspections. FPA, on the one hand, and Seller and Selling Shareholder,
on the other, agree that, prior to the Closing, (i) FPA and its
Representatives will have full access to such business, books, records,
management and operations of FHMS, Holding Company and Holding Company's
subsidiaries as may be reasonably required by FPA to evaluate the transactions
contemplated by this Agreement and the Related Agreements provided, however,
that nothing contained herein shall give FPA or Purchasing Shareholder a right
of access to the consolidated tax returns of Seller; and (ii) Seller and its
Representatives will have full access to such business, books, records,
management and operations of FPA and its Affiliates as may be reasonably
required by Seller to evaluate the quality of healthcare services provided or
to be provided by FPA or its affiliated medical groups. FPA will exercise
reasonable efforts to minimize interference with the Businesses and Seller
will exercise reasonable efforts to minimize interference with FPA's business.
Each of FPA and Seller further agrees to provide the other with reasonable
notice before visiting the other's or its Affiliates' facilities or contacting
the other's or its Affiliates' employees, practitioners or allied health
professionals for the purpose of inspecting and conducting the due diligence
contemplated by this Section 7.3.
7.4 Conduct of Business. Except as set forth in Schedule 7.4 or as
specifically contemplated by this Agreement and the Related Agreements or
requested by FPA in writing, from the date hereof until the Closing, Seller
will cause FHMS to and Selling Shareholder will cause Holding Company to
operate its respective Business in the Ordinary Course. In addition, from the
date hereof through the Closing, (i) Seller will not permit FHMS and Selling
Shareholder will not permit Holding Company or any of its Subsidiaries, except
in the Ordinary Course, to sell, transfer or assign or acquire any asset
material to its respective Business (materiality for this purpose being
defined as $100,000) and (ii) Seller will not permit FHMS to and Selling
Shareholder will not permit Holding Company or Holding Company's subsidiaries
to, enter into any Contract other than in the Ordinary Course. In addition,
Seller will not permit FHMS to and Selling Shareholder will not permit Holding
Company or any of its subsidiaries to (i) issue, deliver or sell or authorize
or propose the issuance, delivery or
IV-25
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sale of, or purchase or propose the purchase of, any shares of its capital
stock of any class or securities convertible into, or rights, warrants or
options to acquire, any such shares or other convertible securities or
(ii) amend their respective Articles or Certificates of Incorporation or
Bylaws, except as may be necessary or advisable in connection with the
transactions contemplated hereby and by the Related Agreements.
7.5 Employee Matters.
(a) Employee Benefits Generally. The employees of FHMS, Holding Company and
Holding Company's subsidiaries who are retained by FPA or a subsidiary or
Affiliate of FPA (including Purchasing Subsidiary) shall be referred to herein
as the "Retained Employees." FPA shall provide each Retained Employee (and, to
the extent applicable, the Retained Employee's respective eligible dependents)
benefits which are substantially similar to those provided under the employee
benefit plans applicable to similarly situated employees of FPA or its
Affiliates. Without limiting the foregoing, FPA shall provide health coverage
to each Retained Employee (and dependents) under a group health plan of FPA,
shall waive any pre-existing condition exclusion that otherwise would apply,
shall provide each Retained Employee (and dependent) with credit under the
group health plan for any deductibles and co-payments paid during the coverage
year with respect to the Retained Employee's (and dependent's) coverage prior
to the Closing Date and shall provide such group health plan coverage as of
the Closing Date. For purposes of determining eligibility to participate,
vesting and benefit eligibility in any employee benefit plan of FPA, its
subsidiaries or Affiliates, FPA shall give each Retained Employee full credit
for the service credited to the Retained Employees under the Employee Benefit
Plans. The preceding sentence does not require FPA to give any Retained
Employee credit under its employee pension benefit plans for prior pension
benefit accrual service under any Employee Benefit Plan.
(b) Assumption of Liabilities. Except as specifically provided in this
Section 7.5 or in Section 10.5(a), effective as of the Closing Date, FPA
agrees that FHMS shall have all liability and responsibility of Seller with
respect to employees or former employees of FHMS or with respect to employees
or former employees of the Holding Company or the Holding Company's
subsidiaries, provided, that such liabilities are shown in the pro forma
consolidated balance sheet attached hereto as Schedule 1.1(b) (as may be
further described on Schedule 7.5(b)). Seller and its subsidiaries and
Affiliates shall not retain any, and shall not be deemed to have retained any,
of such liabilities or responsibilities.
(c) Seller's 401(k) Plan.
(i) Effective as of the Closing Date and as soon as practicable
thereafter, FPA shall cause FHMS to make all required contributions to be
made to the Foundation Health Corporation Profit Sharing and 401(k) Plan
(as amended and restated effective January 1, 1994) ("Seller's 401(k)
Plan") for each participating FHMS Employee.
(ii) Each FHMS Employee shall cease to participate in Seller's 401(k)
Plan for periods after the Closing Date. As soon as practicable after the
Closing Date, as more fully described below, Seller and FPA shall arrange
for the transfer of Seller's 401(k) Plan accounts (the "Accounts") of the
FHMS Employees who are participants in Seller's 401(k) Plan and who elect
to make such transfer during the election period established by Seller.
Such Accounts shall be valued as of the last business day before the
transfer is effected from Seller's 401(k) Plan and shall be transferred to
one or more defined contribution plans (within the meaning of Section 3(34)
of ERISA) which is or are maintained by FPA, its subsidiaries or Affiliates
for the benefit of eligible employees and which is or are qualified under
Section 401(a) of the Code (collectively, "FPA's Savings Plans"). FPA, its
subsidiaries and Affiliates agree to cooperate with Seller, its
subsidiaries and Affiliates in directing the trustee of any trust in which
the assets of Seller's 401(k) Plan are invested to transfer to a new
trustee or trustees or other funding agent or agents appointed by FPA or
its Affiliates for FPA's Savings Plan, the amount of assets in the Accounts
of the affected FHMS Employees participating in Seller's 401(k) Plan. Such
transfer of assets of Seller's 401(k) Plan described above shall be made in
cash or marketable securities. Such transfer of assets shall occur as soon
as practicable after the last to occur of the receipt by Seller of FPA's
(its subsidiary's or Affiliate's) certification that (i) FPA, its
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subsidiaries or Affiliates has established FPA's Savings Plans; (ii) FPA,
its subsidiaries or Affiliates has received or requested a favorable
determination letter for FPA's Savings Plans from the Internal Revenue
Service, and (iii) FPA's Savings Plans provide that each participating FHMS
Employee shall, immediately after the date of the transfer of assets in the
Accounts as described above, have an accrued benefit under FPA's Savings
Plans at least equal to the benefit accrued under Seller's 401(k) Plan
immediately prior to such date. As of the transfer date, FPA shall become
the plan sponsor with respect to the transferred Accounts of FHMS Employees
and shall assume all obligations and Liabilities under all applicable Laws
with respect to such Accounts.
(d) Frozen 401(k) Plan. Effective as of the Closing Date or as soon as
practicable thereafter, Seller shall transfer in whole to FPA all of the
assets and liabilities under the Thomas-Davis Medical Centers, P.C. Profit
Sharing and 401(k) Plan and its related trust (the "Frozen 401(k) Plan"). As
of the transfer date, FPA shall become the plan sponsor of the Frozen 401(k)
Plan and shall assume all obligations and liability under all applicable Laws
with respect to the Frozen 401(k) Plan.
(e) SMART Choices Plan. Effective as of the Closing Date and for the
duration of the current coverage period, FPA shall establish a dependent care
reimbursement account and a health care flexible spending account for FHMS
Employees that continues benefits on the same terms as apply to the FHMS
Employees under the Seller-sponsored SMART Choices Plan. In connection
therewith, effective as of the Closing Date or as soon as practicable
thereafter, Seller shall transfer to FPA account balances of FHMS Employees
under the dependent care reimbursement account and the health care
reimbursement account features of the Seller-sponsored SMART Choices Plan.
Effective as of the Closing Date, with respect to such transferred accounts,
FPA shall assume all obligations and Liabilities under all Applicable Laws.
(f) Matching Contributions. Effective as of the Closing Date, FPA shall
assume all obligations and Liabilities of Seller with respect to the October
31, 1994 letter agreement attached hereto as Exhibit A, regarding the
provision of a 401(k) matching contribution of up to six percent (6%) of their
compensation, with respect to certain employees of TDMC.
(g) Cooperation of FPA and Seller. FPA and Seller shall take all actions
which they deem necessary or desirable to implement the provisions of this
Section 7.5.
(h) Third Party Beneficiaries. It is understood and agreed between FPA and
Seller that all provisions contained in this Agreement with respect to
employee benefit plans or employee compensation or employment are included for
the sole benefit of the parties hereto and do not and shall not create any
right in any other person, including, but not limited to, any Employee, any
participant in any benefit or compensation plan or any beneficiary thereof.
(i) Action by FPA's Affiliates. Any action required by FPA pursuant to this
Section 7.5 shall be deemed satisfied to the extent such action is taken by an
Affiliate of FPA.
7.6 FPA's Covenant Not to Compete.
(a) FPA's Prohibited Conduct. Each of FPA and Purchasing Subsidiary
acknowledges and agrees that pursuant to the transactions contemplated hereby
and due to the ongoing relationship among Seller, FHCA, Family and Senior
Care, Inc., FHMG, TDMC, Purchasing Subsidiary and FPA contemplated hereby, by
the Professional Group Provider Agreements and the other Related Agreements,
FPA and its Affiliates will be receiving confidential and proprietary
information concerning Seller, FHCA and their Affiliates and that the use of
such information by FPA or its subsidiaries or Affiliates (including
Purchasing Subsidiary) could result in serious economic detriment to Seller,
FHCA and/or their Affiliates. Therefore, subject to the provisions of this
Section 7.6, neither FPA nor any of its Affiliates (including Purchasing
Subsidiary) shall seek to modify its respective Knox-Keene Act limited license
so as to operate as a comprehensive health care service plan, or hold,
acquire, or make any commitment to hold or acquire a controlling interest in,
a comprehensive health plan, which
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offers insured, self-insured or prepaid health insurance products to
individuals, to CHAMPUS, FEHBP, Medicare, Medicaid or other state or federal
healthcare programs, to commercial groups or other sponsors of health care
benefit plans in the Provider Service Area (as defined in addenda B, C and D
to each Professional Group Provider Agreement) until the earlier of (i) the
expiration of the Professional Group Provider Agreements by their own terms or
(ii) the first anniversary of the date the Professional Group Provider
Agreements terminate as a result of a breach of such agreements by FHCA (the
"Non-Compete Period"). Without limiting the foregoing, the parties hereto
understand and agree that FPA or an Affiliate of FPA is seeking a restricted
health care service plan license from the California Department of
Corporations in order to continue its operations as in effect on the date
hereof and as of the Closing Date. Upon attainment of such license, FPA shall
only utilize such license for the conduct of its business as currently
conducted and shall not, either directly or indirectly, compete with Seller,
FHCA or any of their respective Affiliates in the Provider Service Area during
the Non-Compete Period by marketing or soliciting potential HMO enrollees as a
direct contractor to employer groups, individuals or governmental entities. A
termination of the Professional Group Provider Agreements due to a material
breach thereof by FPA or an Affiliate of FPA shall not relieve FPA or its
Affiliates from their obligations under this Section 7.6.
(b) Seller's Prohibited Conduct. Subject to the provisions of this Section
7.6, until the earlier of (i) the date which is three (3) years from the date
hereof or (ii) the termination of a Professional Group Provider Agreement,
Seller shall not (i) purchase any medical group if the FHCA linked lives to
FHMG or TDMC which are provided services by the medical groups acquired during
such period in a given Provider Service Area exceed five percent (5%) of the
number of FHCA linked lives to FHMG or TDMC within such Provider Service Area
or (ii) purchase any independent physicians association or medical group
within a five mile radius of any Care Center purchased pursuant hereto.
(c) Remedies. The parties hereto acknowledge and agree that the breach of
the provisions of this Section 7.6 by FPA or any of its Affiliates (including
Purchasing Subsidiary) would cause irreparable harm to Seller and FHCA and
that the party injured by such breach would not have an adequate remedy at law
or in damages. Therefore, FPA consents to the issuance of an injunction or the
other enforcement of equitable remedies against it or its Affiliates
(including Purchasing Subsidiary) at the suit of Seller, without bond or other
security, to compel performance of all the terms of this Section 7.6, and
waives the defense of the availability of relief in damages.
(d) Severability. To the extent any provision of this Section 7.6 shall be
invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Section 7.6 shall be unaffected and
shall continue in full force and effect. In furtherance and not in limitation
of the foregoing, should the duration or geographical extent of, or business
activities covered by any provision of this Section 7.6 be in excess of that
which is valid and enforceable under applicable Law, then such provision shall
be construed to cover only that duration, extent or activities which may
validly and enforceably be covered. The parties hereto acknowledge the
uncertainty of the Law in this respect and expressly stipulate that this
Section 7.6 shall be given construction that renders its provisions valid and
enforceable to the maximum extent (not exceeding its express terms) possible
under applicable law.
(e) Termination of Covenant. Notwithstanding anything else contained herein,
if the covenant of Buyer under Section 7.6(a), or the covenant of Seller under
Section 7.6(b) is found to be unenforceable or if either Buyer or Seller or
any of their respective Affiliates breach any such covenant and such breach is
not cured within thirty (30) days of receipt of notice thereof, then the non-
breaching party and its Affiliates shall be released from their obligations
under Section 7.6(a) or (b), as the case may be, and such provision shall be
deemed terminated and of no further force and effect.
7.7 Purchase of Indebtedness; Post-Closing Adjustment. The parties hereto
acknowledge and agree that (i) Purchasing Subsidiary shall purchase the FHMS
Indebtedness and the Holding Company Indebtedness as set forth in Articles 2
and 3 and (ii) that the Holding Company Indebtedness Purchase Price, the FHMS
Indebtedness Purchase Price and the Note Consideration shall be represented by
the Consolidated Note and, together with
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certain obligations under the Professional Group Provider Agreements and
certain third party indebtedness shall be guaranteed by FPA in accordance with
Section 8.6. The parties hereto understand and agree that (i) the Holding
Company Indebtedness Purchase Price and the FHMS Indebtedness Purchase Price
will be based, initially, on the amount of Holding Company Indebtedness and
FHMS Indebtedness shown on the Pro Forma Consolidated Balance Sheet of FHMS,
Holding Company and its subsidiaries as of the Closing Date, (provided, that
for the period between June 30, 1996 and Closing there will be no reduction in
the Note for any utilization by the Seller of tax benefits from FHMS, TDMC and
FHMG, it being acknowledged and agreed that the Tax Sharing Agreements between
FHC and each of FHMS, TDMC and FHMG obligating FHC to compensate each of FHMS,
TDMC and FHMG for such utilization shall be terminated as of July 1, 1996) and
that the principal amount of the Consolidated Note shall reflect such amounts,
(ii) Seller shall cause an audit (the "Closing Audit") of the consolidated
balance sheet of FHMS, Holding Company and its subsidiaries as of the Closing
Date to be conducted promptly after the Closing Date and shall furnish
Purchasing Subsidiary with the audited consolidated balance sheet of FHMS,
Holding Company and Holding Company's subsidiaries within sixty (60) days
following the Closing Date and (iii) following such audit, the principal
amount of the Consolidated Note shall be adjusted such that it equals the
actual audited amounts of FHMS Indebtedness and Holding Company Indebtedness
(subject to the proviso in clause (i)) plus the Note Consideration, adjusted
for any difference between (x) the interest paid on the Consolidated Note
between the Closing Date and the date of such adjustment and (y) that which
would have been paid had the Consolidated Note been based on the audited
consolidated balance sheet at the Closing Date. In furtherance of the
foregoing, Purchasing Subsidiary agrees to issue a new Consolidated Note in
the adjusted amount and upon receipt of such new Consolidated Note, Seller
agrees to cancel the existing Consolidated Note.
7.8 Preparation of the Proxy Statement. FPA shall determine whether to seek
stockholder approval of this Agreement and the Related Agreements and the
transactions contemplated hereby and thereby. If such stockholder approval is
sought, to the extent required by applicable Law, FPA shall promptly prepare
and file with the SEC a Proxy Statement relating to the transactions
contemplated hereby (the "Proxy Statement") and Seller shall promptly furnish
all information regarding itself, FHMS, Holding Company and Holding Company's
subsidiaries as is reasonably requested by FPA and necessary for the
preparation of the Proxy Statement. FPA shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state and federal
securities laws in connection with the issuance of FPA Common pursuant hereto.
In addition, if FPA is required to prepare a Proxy Statement pursuant hereto,
FPA shall obtain the services of a proxy solicitor reasonably satisfactory to
Seller.
7.9 Stockholders Meeting. If FPA is required to prepare a Proxy Statement
pursuant hereto, FPA shall call a meeting of its stockholders (the
"Stockholders Meeting") to be held as promptly as practicable for the purpose
of voting upon the approval of this Agreement, the Related Agreements and the
transactions contemplated hereby and thereby. FPA's Boards of Directors shall
recommend to its stockholders approval of such matters. If the Board of
Directors of FPA is required by applicable law to review or restate their
recommendation, this Section 7.9 shall not prohibit accurate disclosure that
is required in any FPA SEC Document (including the Proxy Statement) or
otherwise under applicable law of the opinion of the Board of Directors of FPA
as of the date of such SEC Document or such other required disclosure as to
the transactions contemplated hereby.
7.10 Agreement to Vote Shares. In consideration for the execution of this
Agreement by Seller and Selling Shareholder, each officer of FPA who is a
holder of FPA Common shall, in an agreement reasonably satisfactory to Seller,
agree to vote all shares of FPA Common held by such person entitled to vote at
the FPA Stockholders Meeting (and at any adjournment thereof) in favor of the
transactions contemplated hereby and by the Related Agreements. In addition,
FPA shall use it best efforts to have each non-officer director and beneficial
owner of (5%) or more of the outstanding FPA Common to sign an agreement
agreeing so to do.
7.11 Surgery Center Referrals. Seller and FPA agree to and agree to cause
their appropriate Affiliates to use their reasonable best efforts to enter
into an agreement, prior to the Closing Date, providing for referrals
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from FHMG, TDMC and Intergroup IPA, P.C. ("IG IPA") to the surgery centers
listed in such agreement such that the referral pattern from FHMG, TDMC and IG
IPA to such surgery centers following the Closing shall be substantially
similar to that prior to the Closing.
7.12 Disease State Management. Seller agrees to cause Integrated Pharmacy
Services ("IPS") to and FPA agrees to cause its appropriate Affiliates to use
their reasonable best efforts to enter into an agreement, prior to the Closing
Date, pursuant to which FPA and such Affiliates would promote IPS's Disease
State Management ("DSM") programs to physicians and employees in the care
centers of such Affiliates and pursuant to which FPA would and would cause
such Affiliates to, make all FHCA pharmacy claims data available to IPS in a
format such as to allow IPS to fully develop and implement the DSM programs.
7.13 Real Estate Matters. As promptly as reasonably possible but in no event
later than forty-five (45) days following the date hereof, Seller shall, at
its sole cost and expense, deliver to FPA the following documents and
materials (which shall be delivered as they become available to Seller):
(a) One or more title insurance commitments with respect to the Owned
Care Centers dated no earlier than the date of this Agreement, issued by
such title insurance company as may be reasonably acceptable to FPA and
accompanied by copies of all documents, instruments and other matters
referred to therein as exceptions.
(b) Copies of surveys of the Owned Care Centers prepared by or on behalf
of Seller or its affiliates;
(c) Copies of the most recent real property tax bills with respect to the
Owned Care Centers for the preceding tax year;
(d) Copies of all real property service, maintenance, management, and
other similar real property management contracts with respect to the Owned
Care Centers to which Seller or one of its Affiliates is a party and which
is in Seller's possession or control;
(e) Copies of all certificates of occupancy in Seller's possession or
control for the Owned Care Centers;
(f) Copies of all warranties and guaranties currently in effect and in
Seller's possession or control for the Owned Care Centers or any portion
thereof;
(g) Copies of all soil, seismological, geological, and drainage reports
in Seller's possession or control with respect to the Owned Care Centers;
(h) Copies of any "as built" plans and specifications in Seller's
possession or control for the Owned Care Centers;
(i) Copies of all Leases for the Owned Care Centers, and a current rent
roll showing the names of all tenants under the Leases with respect to the
Owned Care Centers;
(j) Copies of the most recent utility bills and insurance claims in
Seller's possession or control with respect to the Owned Care Centers for
the preceding six (6) month period;
(k) Copies of any environmental audits or studies for the Owned Care
Centers to the extent in Seller's possession or control;
For purposes of this Section 7.13, "Owned Care Centers" shall include those
Care Centers owned by FHMS or any Affiliate of FHMS and those Care Centers
leased by FHMS under the TROL.
7.14 Software Licenses. At Closing, FPA agrees to or to cause one of its
Affiliates to assume those certain license and maintenance agreements between
Foundation Health, a California Health Plan and the licensors of certain
software which is used in connection with the Businesses, which agreements are
set forth on Schedule 7.14 hereto.
7.15 Guaranty Payments. In the event Seller advances any funds pursuant to
its guaranty of certain bank indebtedness of FPA, then FPA agrees to
immediately pay Seller the amount of any funds so advanced.
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ARTICLE 8
Conditions to Seller's and Selling Shareholder's Obligations
The respective obligations of Seller and Selling Shareholder to consummate
the transactions provided for by this Agreement and the Related Agreements are
subject, in the discretion of Seller and Selling Shareholder, respectively, to
the satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived on its or his own behalf by Seller or
Selling Shareholder:
8.1 Representations, Warranties and Covenants. All representations and
warranties of each of FPA, Purchasing Subsidiary and Purchasing Shareholder
contained in this Agreement shall be true and correct in all material respects
(without duplication of any materiality standard contained therein) at and as
of the date of this Agreement and at and as of the Closing Date, and each of
FPA, Purchasing Subsidiary and Purchasing Shareholder shall have performed in
all material respects all covenants required by this Agreement to be performed
by it prior to the Closing.
8.2 No Proceedings, Litigation or Laws. No Action by any Governmental
Authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated by this
Agreement and the Related Agreements or which asserts the right of a
Governmental Authority to approve any aspect of such transactions and which
would reasonably be expected to damage Seller or Selling Shareholder
materially if the transactions contemplated hereunder or thereunder are
consummated. There shall not be any Laws that make the purchase of the
Businesses as contemplated by this Agreement and the Related Agreements
illegal or otherwise prohibited.
8.3 Opinion of Counsel. FPA shall have delivered to Seller and Selling
Shareholder an opinion of Latham & Watkins, special counsel to FPA, Purchasing
Subsidiary and Purchasing Shareholder, dated as of the Closing Date, in form
and substance reasonably satisfactory to Seller and its counsel.
8.4 Certificates and Corporate Documents. Each of FPA and Purchasing
Subsidiary shall have furnished Seller and Selling Shareholder with such
certificates of its officers and others (including Purchasing Shareholder) to
evidence compliance with the conditions set forth in this Article 8 as may be
reasonably requested by Seller and Selling Shareholder. Seller and Selling
Shareholder shall have received from each of FPA and Purchasing Subsidiary,
resolutions adopted by their respective boards of directors and any required
shareholder resolutions, approving this Agreement and the Related Agreements
to which it is a party and the transactions contemplated by this Agreement and
such Related Agreements, certified by FPA's and Purchasing Subsidiary's
respective corporate secretaries.
8.5 Registration Rights Agreement. FPA and Seller shall have entered into a
Registration Rights Agreement (the "Registration Rights Agreement"),
containing the terms set forth in the term sheet attached as Exhibit F hereto
and otherwise in form and substance reasonably satisfactory to the parties
hereto.
8.6 Guaranties. FPA shall have (i) executed and delivered to Seller a
Guaranty, containing the terms set forth in the term sheet attached as Exhibit
G hereto and otherwise in form and substance reasonably satisfactory to the
parties hereto, guaranteeing the Consolidated Note and the performance by any
Affiliate of FPA that is a party thereto, of its obligations under the
Professional Group Provider Agreements and (ii) executed and delivered to each
of the third party payees under such indebtedness, a guaranty of the
indebtedness to non-Affiliates shown on the pro forma consolidated balance
sheet of FHMS, Holding Company and Holding Company's subsidiaries attached as
Schedule 1.1(b) hereto in the amounts outstanding on the Closing Date.
8.7 Intentionally Deleted.
8.8 Intentionally Deleted.
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8.9 Master Lease Assignment. FPA, Purchasing Subsidiary and the designated
"Assignors" thereunder shall have entered into a Master Lease Assignment (the
"Master Lease Assignment"), in substantially the form of Exhibit I hereto.
8.10 Professional Group Provider Agreements. FHCA shall have entered into a
Professional Group Provider Agreement with FHMG in substantially the form of
Exhibit B hereto and with TDMC in substantially in the form of Exhibit C
hereto.
8.11 Purchase Price. FPA and Purchasing Subsidiary shall have delivered the
FHMS Share Purchase Price to Seller and Purchasing Subsidiary shall have
delivered the FHMS Indebtedness Purchase Price and the Holding Company
Indebtedness Purchase Price and the Designee Price to Seller.
8.12 HSR Act. The applicable waiting period, including any extension
thereof, under the HSR Act shall have expired or been terminated.
8.13 Governmental Approvals. Such Governmental Authorities as may be
required, shall have received notice of, or applications or other filings with
respect to, the transactions contemplated by this Agreement and the Related
Agreements and, where required, shall have approved same.
8.14 Related Agreements. The various parties named therein shall have
entered into the agreements set forth on Schedule 8.14 hereto in accordance
herewith, all of which shall be in full force and effect and none of which
shall have been amended or breached. In addition, each such party other than
FPA shall have delivered to Seller and Selling Shareholder, in the form of a
certificate, the equivalent of the representation made by Seller and FPA with
respect to such Agreements in Section 5.2 (Authorization) and Section 6.2
(Authorization), respectively.
8.15 Consents. All Permits, waivers and consents required to consummate the
transactions contemplated hereby, including the consents listed on Schedules
5.6(b) and 6.4(b) shall have been obtained.
8.16 No Material Adverse Changes. No violations or alleged violations of Law
by any of FPA or its Affiliates (including Purchasing Subsidiary), including
those arising from patterns or practices engaged in by such Persons, other
than matters which have been previously publicly disclosed, shall have (i)
resulted in any Material Adverse Change since the Financial Statement Date in
FPA's or Purchasing Subsidiary's business or (ii) materially and adversely
affected the ability of FPA, Purchasing Subsidiary or Purchasing Shareholder
to consummate the transactions contemplated hereby and by the Related
Agreements.
8.17 Transition Agreement. FPA, Purchasing Subsidiary and Seller shall have
entered into a Transition Agreement (the "Transition Agreement"), in form and
substance reasonably satisfactory to the parties hereto.
8.18 Releases. Each of Seller, Selling Shareholder, Intergroup of Arizona
and such other Affiliates of Seller as are named therein shall have received a
General Release, containing the terms set forth in the term sheet attached as
Exhibit J hereto and otherwise in form and substance reasonably satisfactory
to the parties hereto, from FHMS, Holding Company and each of Holding
Company's subsidiaries releasing Seller, Selling Shareholder, Intergroup of
Arizona and such other Affiliates of Seller from all claims which FHMS,
Holding Company or any of Holding Company's subsidiaries may have against them
arising from events or occurrences prior to Closing, including any claims
which TDMC may have under the terms of that certain hospital risk sharing
arrangement with Intergroup of Arizona.
8.19 Pledge Agreements. (i) Each of FPA, Purchasing Subsidiary, and
Purchasing Shareholder shall have executed and delivered to Seller a Pledge
Agreement (a "Pledge Agreement") containing the terms set forth in the term
sheet attached as Exhibit K hereto and otherwise in form and substance
reasonably satisfactory to the parties hereto, pledging the shares of
Purchasing Subsidiary, FHMS and of Holding Company, respectively, (ii) Holding
Company shall have executed and delivered a Pledge Agreement, pledging the
shares of FHMG and TDMC and (iii) FPA and any Affiliate of FPA possessing such
an option shall have executed a
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Pledge Agreement, pledging any options it has to purchase any of the shares
pledged pursuant to clauses (i) and (ii) hereof, in each case to secure
Consolidated Note, the Bridge Note and the performance by Buyer and its
Affiliates of their respective obligations under the Professional Group
Provider Agreements (collectively, the "Secured Obligations").
8.20 Security Agreement. Each of Purchasing Subsidiary, FHMS, Holding
Company, FHMG and TDMC shall have executed and delivered to Seller a Security
Agreement, containing the terms set forth in Exhibit L hereto and otherwise in
form and substance reasonably satisfactory to the parties hereto, pledging its
respective assets to secure the Secured Obligations.
8.21 Board Approval. The Board of Directors of Seller shall have approved
this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby.
8.22 Tax Opinion. Seller shall have received an opinion from Pillsbury
Madison & Sutro LLP regarding certain tax matters relating to the transactions
contemplated hereby, in form and substance reasonably satisfactory to Seller.
ARTICLE 9
Conditions to FPA'S Obligations
The respective obligations of FPA, Purchasing Subsidiary and Purchasing
Shareholder to consummate the transactions provided for by this Agreement and
the Related Agreements are subject, in the discretion of FPA, Purchasing
Subsidiary and Purchasing Shareholder, respectively, to the satisfaction, on
or prior to the Closing Date, of each of the following conditions, any of
which may be waived on its own behalf by FPA, Purchasing Subsidiary or
Purchasing Shareholder:
9.1 Representations, Warranties and Covenants. All representations and
warranties of Seller and Selling Shareholder contained in this Agreement shall
be true and correct in all material respects (without duplication of any
materially standard contained therein) at and as of the date of this Agreement
and at and as of the Closing Date, and each of Seller and Selling Shareholder
shall have performed in all material respects all covenants required by this
Agreement to be performed by it prior to the Closing.
9.2 No Proceedings, Litigation or Laws. No Action by any Governmental
Authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated by this
Agreement and the Related Agreements or which asserts the right of a
Governmental Authority to approve any aspect of such transactions and which
would reasonably be expected to have a Material Adverse Effect on FPA if the
transactions contemplated by this Agreement and the Related Agreements are
consummated. There shall not be any Laws that make the purchase of the
Businesses as contemplated by this Agreement and the Related Agreements
illegal or otherwise prohibited.
9.3 Opinion of Counsel. Seller shall have delivered to FPA an opinion of
Pillsbury Madison & Sutro LLP, special counsel to Seller, in form and
substance reasonably satisfactory to FPA and its counsel.
9.4 Certificates and Corporate Documents. Seller shall furnish FPA and
Purchasing Shareholder with such certificates of its officers and others and
Selling Shareholder shall furnish FPA and Purchasing Shareholder with such
certificates, to evidence compliance with the conditions set forth in this
Article 9 as may be reasonably requested by FPA and Purchasing Shareholder.
FPA and Purchasing Shareholder shall have received from Seller resolutions
adopted by the board of directors of Seller and any required shareholder
resolutions approving this Agreement, the Related Agreements to which it is a
party and the transactions contemplated by this Agreement and such Related
Agreements, certified by Seller's corporate secretary.
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9.5 Other Documents. Seller shall have executed and delivered an assignment
of the FHMS Shares, the FHMS Indebtedness and the Holding Company Indebtedness
to Purchasing Subsidiary as provided in this Agreement and Selling Shareholder
shall have executed and delivered an assignment of the Holding Company Shares
to Purchasing Shareholder pursuant to the Option as provided in this Agreement
and the Share Ownership Agreement, which documents shall be in a form
reasonably satisfactory to FPA's counsel.
9.6 HSR Act. The applicable waiting period, including any extension thereof,
under the HSR Act shall have expired or been terminated.
9.7 Governmental Approvals. Such Governmental Authorities as may be
required, shall have received notice of, or applications or other filings with
respect to, the transactions contemplated by this Agreement and the Related
Agreements and, where required, shall have approved same.
9.8 Intentionally deleted.
9.9 Master Lease Assignment. FPA, Purchasing Subsidiary and the designated
"Assignors" thereunder shall have entered into the Master Lease Assignment.
9.10 Professional Group Provider Agreements. FHCA shall have entered into a
Professional Group Provider Agreement with FHMG in substantially the form of
Exhibit B hereto and with TDMC in substantially the form of Exhibit C hereto.
9.11 Related Agreements. The various parties named therein shall have
entered into the Agreements listed on Schedule 8.14 (Related Agreements), all
of which shall be in full force and effect and none of which shall have been
amended or breached. In addition, each such party other than Seller, Selling
Shareholder, FHMS, Holding Company or any of Holding Company's subsidiaries
shall have delivered to FPA, in the form of a certificate, the equivalent of
the representation made by Seller and FPA with respect to the Related
Agreements in Section 5.2 (Authorization) and Section 6.2 (Authorization).
9.12 Consents. All Permits, waivers and consents required to consummate the
transactions contemplated hereby, including the consents listed on Schedules
5.6(b) and 6.4(b) shall have been obtained.
9.13 Material Adverse Changes. No violations or alleged violations of Law by
FHMS, Holding Company or any of their respective Affiliates, including those
arising from patterns or practices engaged in by such Person, other than
matters which have been previously publicly disclosed, shall have (i) resulted
in any Material Adverse Change since the Financial Statement Date in FHMS's
Business or Holding Company's Business or (ii) materially and adversely
affected the ability of Seller or Selling Shareholder to consummate the
transactions contemplated hereby and by the Related Agreements.
9.14 Pre-Closing Transactions.
(a) Transfer of Real Property. Seller shall have caused FHMS to transfer all
real property owned by it in fee (together with all indebtedness encumbering
such real property) to an Affiliate of Seller.
(b) Transfer of CPR Stock. Seller shall have caused the stock of Catalina
Professional Recruiters, Inc. to have been transferred from FHMS to Seller or
an Affiliate of Seller.
(c) Transfer of Other Assets and Liabilities. Seller shall have caused those
other assets and liabilities which are shown to have been transferred by FHMS,
Holding Company or Holding Company's subsidiaries in the adjustments resulting
in the pro forma consolidated balance sheet attached hereto as Schedule 1.1(b)
to have been transferred by FHMS, Holding Company or one of Holding Company's
subsidiaries, as the case may be.
9.15 Transition Agreement. FPA and Seller shall have entered into the
Transition Agreement.
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9.16 Registration Rights Agreement. FPA and Seller shall have entered into
the Registration Rights Agreement.
9.17 Notice of Designee. Seller shall have notified the Agent and Selling
Shareholder of Purchasing Shareholder's appointment as Designee in accordance
with the Share Ownership Agreement.
9.18 Board Approval. The Board of Directors of FPA shall have approved this
Agreement and the Related Agreements and the transactions contemplated hereby
and thereby.
9.19 Stockholder Approval. FPA shall have obtained any approval of its
stockholders required by applicable Law to be obtained in connection with the
execution and delivery of this Agreement and the Related Agreements to which
FPA is a party or to consummate the transactions contemplated hereby or
thereby.
9.20 Voting Agreement. Seller shall have executed and delivered to FPA a
Voting Agreement, containing the terms set forth in the term sheet attached as
Exhibit M hereto and otherwise in form and substance reasonably satisfactory
to the parties hereto.
9.21 Physicians. The number of physicians employed by Holding Company and
its subsidiaries as of the Closing Date shall not be less than seventy five
percent (75%) of the number of physicians employed by Holding Company and its
subsidiaries as of the date hereof.
9.22 Real Estate Matters. Purchasing Subsidiary shall, in its good faith
business judgment, have approved (i) the condition of title to each owned Care
Center, as described in the title commitments and the surveys delivered to or
obtained by Purchasing Subsidiary (provided Purchasing Subsidiary shall not
disapprove any title exception that does not have a material adverse effect on
the use or operation of such Care Center), (ii) environmental audits or
studies of the such Care Centers, (iii) all of the characteristics and aspects
of each Care Centers which may reasonably affect its ownership, operation,
use, development, marketability and/or economic viability, and (iv) the Leases
and service contracts with respect to the Care Centers.
ARTICLE 10
Actions by Seller and FPA after the Closing
10.1 Books and Records. FPA and Purchasing Subsidiary, on the one hand, and
Seller, on the other, each agree to cooperate with and make available to the
other, during normal business hours, all books and records of such party,
information and employees (without substantial disruption of employment)
retained and remaining in existence after the Closing which are necessary or
useful in connection with any tax inquiry, audit, investigation or dispute,
any litigation or investigation or any other matter requiring any such books
and records, information or employees for any reasonable business purpose,
provided, however, that nothing contained herein shall give FPA or Purchasing
Shareholder a right of access to the consolidated tax returns of Seller. The
party requesting any such books and records, information or employees shall
bear all of the out-of-pocket costs and expenses (including attorneys' fees,
but excluding reimbursement for salaries and employee benefits) reasonably
incurred in connection with providing such books and records, information or
employees. Each of FPA, Purchasing Subsidiary and Seller will retain such
books and records in accordance with its corporate records retention policy or
as required by law, whichever requires retention for a longer period. All
information received pursuant to this Section 10.1 shall be subject to the
terms of the Confidentiality Agreement.
10.2 Taxes. Seller shall pay, or cause to be paid, when due all Taxes for
which FHMS, Selling Shareholder, Holding Company or any of Holding Company's
subsidiaries is or may be liable or that are or may become payable with
respect to all periods ending on or prior to the Closing. FPA shall pay, or
cause to be paid, when due all Taxes for which FPA, Purchasing Subsidiary,
Purchasing Shareholder, FHMS, Holding Company or any of Holding Company's
subsidiaries is or may be liable or that are or may become payable with
respect to all periods ending subsequent to the Closing.
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10.3 338(h)(10) Election. As soon as practicable after the Closing, and in
no event later than 30 days after the delivery by Seller of the closing date
balance sheet, Seller, FPA, Purchasing Subsidiary and Purchasing Shareholder
will jointly make an election under Section 338(h)(10) of the Code (and a
comparable election under state law) with respect to the purchase of stock of
Holding Company and FHMS. In connection therewith, Seller, Selling
Shareholder, FPA, Purchasing Subsidiary and Purchasing Shareholder agree to
cooperate with each other and use their reasonable best efforts to effect such
338(h)(10) election. Without limiting the generality of the foregoing, the
parties hereto agree that (i) Seller, Selling Shareholder, FPA, Purchasing
Subsidiary and Purchasing Shareholder shall prepare and file all documents and
materials necessary or appropriate in connection with making the Section
338(h)(10) Election, (ii) Seller, FPA and Purchasing Subsidiary shall use
their reasonable best efforts to determine the allocation of the "modified
aggregate deemed sale price" and "adjusted grossed up basis" among the assets
of FHMS (in accordance with the Section 338 Treasury Regulations) and (iii)
Seller, FPA and Purchasing Subsidiary shall use their reasonable best efforts
to determine the allocation of the "modified aggregate deemed sale price" and
"adjusted grossed-up basis" among the assets of Holding Company and its
subsidiaries (in accordance with the Section 338 Treasury Regulations).
10.4 Future Contractual Alliances. Seller and FPA intend to expand their
contractual relationships and agree to negotiate in good faith the terms of a
provider contract for the benefit of Seller and its Affiliates and FPA and
FPA's professional provider groups relating to all service areas of FPA and
any Seller Affiliate engaged in the business of offering a benefit program,
which overlap, as those service areas may change from time to time.
10.5 Certain Obligations Regarding Employees.
(a) Retained Obligations. Seller agrees to continue to perform its
obligations relating to the grant of options to TDMC and FHMG employees as set
forth on Schedule 10.5, subject in each case to any conditions or terms set
forth in such arrangements.
(b) Employee Information. In order to facilitate the performance of such
obligations by Seller, FPA, Purchasing Subsidiary and Purchasing Shareholder
agree to and to cause Holding Company and its subsidiaries to provide to
Seller (i) on a monthly basis, a list of employees of Holding Company, TDMC or
FHMG who have been terminated during the prior month and the date of
termination and (ii) at least ten (10) business days prior to November 1, 1996
and November 1, 1997, a list of TDMC Practitioners who are eligible to receive
options to purchase the common stock of Seller as set forth on Schedule 10.5
and such other information as is required to effectuate the grant of such
options.
(c) Tail Insurance. Seller shall manage all claims alleging medical
malpractice by any Practitioner that fall within the "tail coverage" purchased
by Holding Company and its subsidiaries immediately prior to Closing. To
facilitate the management of such claims, FPA, Purchasing Subsidiary and
Purchasing Shareholder agree to and agree to cause Holding Company and its
subsidiaries to notify Seller of any potential claims which may fall within
such tail coverage within ten (10) days of the date on which FPA, Purchasing
Subsidiary, Purchasing Shareholder or any of their Affiliates first becomes
aware of the existence of such potential claim. If notice of a claim or
potential claim is not given in accordance with the preceding sentence, then
neither Seller nor any of its Affiliates, including the Affiliate providing
the tail coverage, shall have any liability with respect to such claim or
potential claim, but only if Seller or one of its Affiliates is actually
prejudiced by such failure to give appropriate notice.
10.6 Foundation Name. Notwithstanding anything else contained in this
Agreement, it is the express intent of the parties hereto and such parties
hereby agree that neither FPA nor its Affiliates (including Purchasing
Subsidiary) shall gain any right, title or interest in the names "Foundation,"
"Foundation Health," "Foundation Health Medical Group," "Foundation Health
Medical Services," or any similar name or derivation thereof (the "Foundation
Name") pursuant to this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby, it being expressly understood that Seller and
its Affiliates, as the case may be, shall retain all right, title and interest
in and to the Foundation Name and that each of FHMS, Holding Company and
Holding
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Company's subsidiaries shall forfeit any interest it might be deemed to have
in the Foundation Name upon the transfer of the FHMS Shares and the Holding
Company Shares, respectively, as contemplated hereby. Notwithstanding the
foregoing, for a period of six (6) months (the "Transition Period") following
the date hereof, and for the sole purpose of facilitating the transition of
FHMS, Holding Company and Holding Company's subsidiaries from subsidiaries of
Seller and Selling Shareholder to subsidiaries of Purchasing Subsidiary and
Purchasing Shareholder, Seller grants FPA a non-exclusive, non-transferable
license to use the names Foundation Health Medical Group and Foundation Health
Medical Services in California only. Upon the expiration of the Transition
Period, FPA and Purchasing Subsidiary shall have caused FHMS to and Purchasing
Shareholder shall have caused Holding Company to (i) appropriately dispose of
all letterhead, signage and other items containing or using the Foundation
Name and (ii) to have ceased using the Foundation Name in any manner
whatsoever.
10.7 Reimbursement For Certain Tax Matters.
(a) Reimbursement. If each of FPA, Purchasing Subsidiary and Purchasing
Shareholder complies with its obligations under Section 10.3 hereof, but a
basis in the assets of Holding Company and its subsidiaries equal to the
"adjusted grossed-up basis" of the assets of such companies as of the date of
Closing, calculated in the manner provided for pursuant to the Treasury
Regulations under Section 338 of the Code, is not obtained thereby (for
reasons other than any action or inaction by FPA or any of its Affiliates),
then Seller shall pay to FPA the amount of the foregone tax benefit, as
defined below, resulting from the failure to obtain such an adjusted grossed-
up basis for those calendar quarters with respect to which the applicable
period of limitations shall not have expired (such expiration to be measured
as of the date it is determined that the "adjusted grossed up basis" has not
been obtained) (the "Tax Indemnity"). For purposes of this indemnity, the
foregone tax benefit for any calendar quarter shall conclusively be presumed
to equal the present value, determined as of the Closing Date, of the
estimated future tax benefit for such calendar quarter determined by assuming
a deduction attributable to depreciation or amortization for such period in
excess of the amount which would otherwise be available in such period in the
amount provided for on Schedule 10.7--attached hereto, at a discount rate and
a combined federal and state income tax rate such that the present value of
the foregone tax benefit from all deductions set forth on Schedule 10.7 is
equal to Thirty Seven Million Dollars ($37,000,000) as of the Closing Date.
The amount determined pursuant to the foregoing provisions of this Section
10.7(a) shall be increased by the amount of any applicable penalties that
result from a failure to successfully make the 338(h)(10) election that
triggers Seller's indemnification obligation under this Section 10.7(a) and by
the amount that would have been payable as interest (had such amount
constituted a debt incurred at the date of this Agreement) from the date of
this Agreement to the date payment of such amount is made, for this purpose
conclusively presuming that the applicable interest rate is LIBOR plus 45
basis points per annum. The indemnity provided for hereunder is the sole and
exclusive remedy of FPA and its Affiliates in the event that a basis in the
assets of Holding Company and its subsidiaries equal the "adjusted grossed-up
basis" of the assets of such companies is not obtained.
(b) Pre-Acquisition Losses. In the event, but only in the event, that Seller
is or has been obligated to pay the Tax Indemnity, and notwithstanding
anything else contained herein, if, as and when FPA, Purchasing Subsidiary,
FHMS or Holding Company or any of Holding Company's subsidiaries realizes any
tax benefits attributable to pre-acquisition losses of FHMS, Holding Company
or its subsidiaries, FPA will pay to Seller fifty percent (50%) of the amount
of such tax benefit. The amount of FPA's tax benefit shall equal the
difference between the income taxes payable by FPA (or any Affiliate of FPA)
without the utilization of such pre- acquisition losses, and the amount of
such taxes actually paid by FPA (or any Affiliate of FPA). In the event the
use of such pre-acquisition losses results in a refund of previously paid tax,
the amount of the tax benefits shall include any interest payments made in
connection with such refund. Within 30 days of the filing of FPA's (or its
Affiliate's) tax return (or 30 days after receipt of any payment attributable
to a claim for refund) claiming the benefit of any pre-acquisition losses, FPA
will cause its auditors to deliver a certificate to Seller setting forth the
calculation of FPA's (or its Affiliate's) tax benefit, and certifying that
such calculation is correct in all material respects. The cost of such
certification shall be borne by Seller. At Seller's option, any amounts
payable from FPA or any Affiliate of FPA to Seller under this Section may be
offset against any amounts payable from Seller to FPA under this Section.
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(c) Contest and Control.
(i) FHC and FPA shall promptly (but in any event within 30 days of
receipt of notice) give written notice (the "Notice") to each other of any
inquiry, discussions with a tax authority, proposed adjustment, assertion
of a claim, or the commencement of any suit, action or proceeding against
such party (the "Contested Party," and the party receiving the Notice, the
"Noticed Party") that challenges or questions the availability of a Section
338(h)(10) election based upon facts and circumstances uniquely within the
control of the Noticed Party or based upon actions taken by, or failed to
be taken by, the Noticed Party (each, a "Proposed Adjustment"). The failure
of a Contested Party to provide the Noticed Party with Notice within the
above time frame shall relieve the Noticed Party from its obligation to
indemnify if such failure results in the loss or material impairment of the
Noticed Party's rights under this Section 10.7(c).
(ii) The Contested Party shall give the Noticed Party all information,
including records in its possession and witnesses within its control, with
respect to any Proposed Adjustment, and in each case the underlying facts
relating thereto. In all matters related to the defense of a Proposed
Adjustment, the Contested Party shall act in a reasonable manner. The
Noticed Party and its counsel shall have the right to participate with the
Contested Party and its counsel in (i) all conferences, meetings or
proceedings with any tax authority, the subject matter of which is or
includes any Proposed Adjustment, and (ii) all appearances before any court
or administrative agency, the subject matter of which includes any Proposed
Adjustment. The Noticed Party shall have the right to monitor and review
the Contested Party's defense of any Proposed Adjustment, including
specifically the right to review and comment on any briefs or other filings
made in courts or to taxing authorities which take substantive positions
with respect to Proposed Adjustments, a reasonable period of time before
such filings are made. The Noticed Party's right to participate referred to
herein shall include, without limitation, the right to participate in the
submission and determination of the contents of documentation, protests,
memoranda of fact and law and briefs, the conduct of oral arguments or
presentations, the selection of witnesses, and the negotiation of
stipulations of fact, all as may be deemed appropriate by the Noticed Party
in its sole discretion but solely with respect to any Proposed Adjustment.
A settlement of a Proposed Adjustment shall be binding upon the Noticed
Party (with the result that the indemnity obligation under Section 10.7
hereof shall be effective) only if the Noticed Party consents to such
settlement or unreasonably withholds consent to such settlement.
10.8 Covenant. For a period commencing on the Closing Date and thereafter
for a period of three (3) years, each of Seller and FHCA shall use their best
efforts to encourage commercial members of FHCA and its affiliated health
plans who, as of the Closing Date, have primary care physicians who are
employees of FHMG or TDMC, to continue to select primary care physicians who
are employees of FHMG or TDMC; in the event certain of such commercial members
become unassigned due to the fact that their primary care physician is no
longer employed by FHMG or TDMC and such members do not select another FHCA
contracting physician, Seller and FHCA will assign such non-assigned members
to a physician who is employed by FHMG or TDMC, subject in all cases to
adequate availability and accessibility and other regulatory requirements of
the parties.
10.9 Solicitation of Employees. During the period from the date hereof until
that date which is six (6) months after the Closing Date, neither Seller or
its Affiliates on the one hand, nor FPA or its Affiliates, on the other shall
initiate or maintain contact with any officer, director or employee of the
other regarding the employment of such individual, except for public
solicitation of employment by general advertisement, contacts regarding
employment initiated by the individual involved and contacts with Employees
regarding their continued employment after the Closing.
ARTICLE 11
Survival and Indemnification
11.1 Survival. Each of the representations, warranties and covenants of each
of FPA, Purchasing Subsidiary and Seller contained in this Agreement shall be
deemed renewed by such party at the Closing as if made at such time and shall
survive the Closing and shall continue in full force and effect for one (1)
year
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thereafter, other than the representations and warranties of Seller made in
Section 5.17 (Taxes), which shall survive for the applicable statute of
limitations. A material misrepresentation or breach of warranty that is either
(A) disclosed in a written notice, delivered by the breaching party to the
non-breaching party after the date of this Agreement and at or prior to the
Closing or (B) otherwise actually known to the non-breaching party prior to
the Closing, allows the non-breaching party to refuse to proceed with the
Closing, but does not give rise to a cause of action for damages or other
relief. By nevertheless proceeding with the Closing, the non-breaching party
waives any remedies for any misrepresentation or breach of warranty of which
it was aware prior to the Closing.
11.2 No Other Representations. Notwithstanding anything to the contrary
contained in this Agreement, it is the explicit intent of each party hereto
that Seller is making no representations or warranties whatsoever, express or
implied, except those representations and warranties contained in Article 5
and neither FPA nor Purchasing Subsidiary is making any representations or
warranties whatsoever, express or implied, except those representations and
warranties contained in Article 6. In particular, but without limiting the
foregoing, Seller makes no representation or warranty to FPA with respect to
any financial projection or forecast relating to the Businesses and neither
FPA nor Purchasing Subsidiary makes any representation or warranty to Seller
with respect to any financial projection or forecast relating to FPA's
business. With respect to any projection or forecast delivered by or on behalf
of any party hereto to any other party hereto, the party receiving such
information acknowledges that (i) there are uncertainties inherent in
attempting to make such projections and forecasts, (ii) such party is familiar
with such uncertainties, (iii) such party is taking full responsibility for
making its own evaluation of the adequacy and accuracy of all such projections
and forecasts furnished to it and (iv) such party shall have no claim against
the party furnishing such information with respect thereto.
11.3 Indemnification by Seller. Except as otherwise expressly provided in
this Article 11, Seller shall defend, indemnify and hold harmless FPA and
shall reimburse FPA for, from and against, each and every demand, claim, loss,
liability, judgment, damage, cost and expense (including without limitation,
reasonable attorneys' fees), ("Losses") imposed on or incurred by FPA,
relating to, resulting from or arising out of (i) any inaccuracy in any
representation or warranty made by Seller under this Agreement and such
inaccuracy is not disclosed in the Disclosure Schedule or in the Financial
Statements; (ii) any breach of a covenant of this Agreement required to be
performed by Seller or Selling Shareholder; and (iii) any taxes of FHMS,
Holding Company or any of Holding Company's subsidiaries, relating to any pre-
Closing period.
11.4 Limitations on Indemnity. Notwithstanding anything to the contrary
contained in this Agreement, no amounts of indemnity shall be payable by
Seller to FPA as a result of any claim in respect of a Loss arising under
Section 11.3 or by FPA to Seller as a result of a Loss arising under Section
11.5:
(a) unless, until and then only to the extent that the party requesting
indemnification (the "Indemnitee") has suffered, incurred, sustained or
become subject to Losses referred to in Section 11.3 (other than Losses
arising from a breach of Section 5.17) or Section 11.5 (other than Losses
arising from Taxes for post-Closing periods), as the case may be, which
exceed $200,000 in the aggregate;
(b) with respect to any claim for indemnification thereunder, unless the
Indemnified Person has given the Indemnifying Person proper notice in
accordance with Section 11.6, as applicable, with respect to such claim,
setting forth in reasonable detail the specific facts and circumstances
pertaining thereto, (A) as soon as practical following the time at which
the Indemnified Person discovered or reasonably should have discovered such
claim (except to the extent the Indemnifying Person is not prejudiced by
any delay in the delivery of such notice) and (B) in any event prior to the
expiration of one (1) year following the Closing Date;
(c) with respect to any Loss, to the extent that the Indemnitee had a
reasonable opportunity, but failed in good faith to mitigate the Loss,
including but not limited to the failure to use commercially reasonable
efforts to recover under a policy of insurance or under a contractual right
of set-off or indemnity;
(d) with respect to any Loss suffered, incurred or sustained by the
Indemnitee or to which it becomes subject, to the extent it arises from or
was caused by actions taken or failed to be taken by the Indemnitee or any
of its Affiliates after the Closing.
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Notwithstanding anything else contained herein, the maximum amount for which
Seller or FPA may be liable under this Article 11, in the aggregate for all
claims made and Losses suffered by the other, shall be equal to Twenty Million
U.S. Dollars ($20,000,000), provided, however, that Seller shall indemnify FPA
for all Losses arising from a breach of Section 5.17 and, provided, further,
that FPA shall indemnify Seller from all Losses arising from Taxes for any
post-Closing period.
11.5 Indemnification by FPA. Except as otherwise expressly provided in this
Article 11, FPA shall defend, indemnify and hold harmless Seller and shall
reimburse Seller for, from and against all Losses imposed on or incurred by
Seller, relating to, resulting from or arising out of (i) any inaccuracy in
any representation or warranty made by FPA under this Agreement, which
inaccuracy is not disclosed in the Disclosure Schedule or in the FPA Financial
Statements (ii) any breach of a covenant of this Agreement required to be
performed by FPA or Purchasing Shareholder; and (iii) any taxes of FHMS,
Holding Company or any of Holding Company's subsidiaries, relating to any
post-Closing period.
11.6 Notice and Defense of Third-Party Claims. If any action, claim or
proceeding shall be brought or asserted under this Section 11.6 against an
indemnified party or any successor thereto (the "Indemnified Person") in
respect of which indemnity may be sought under this Article 11 from an
indemnifying person or any successor thereto (the "Indemnifying Person"), the
Indemnified Person shall give prompt written notice of such action or claim to
the Indemnifying Person who shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Person and
the payment of all expenses; the Indemnified Person shall have the right to
employ separate counsel in any of the foregoing actions, claims or proceedings
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Person unless both the
Indemnified Person and the Indemnifying Person are named as parties and the
Indemnified Person and the Indemnifying Person shall in good faith determine
that the representation by the same counsel is inappropriate. In the event
that the Indemnifying Person, within ten days after notice of any such action
or claim, fails to assume the defense thereof, the Indemnified Person shall
have the right to undertake the defense, compromise or settlement of such
action, claim or proceeding for the account of the Indemnifying Person,
subject to the right of the Indemnifying Person to assume, at its expense, the
defense of such action, claim or proceeding with counsel reasonably
satisfactory to the Indemnified Person at any time prior to the settlement,
compromise or final determination thereof. Anything in this Article 11 to the
contrary notwithstanding, the Indemnifying Person shall not, without the
Indemnified Person's prior written consent, settle or compromise any action or
claim or consent to the entry of any judgment with respect to any action,
claim or proceeding for anything other than money damages paid by the
Indemnifying Person. The Indemnifying Person may, without the Indemnified
Person's prior written consent, settle or compromise any such action, claim or
proceeding or consent to entry of any judgment with respect to any such action
or claim that requires solely the payment of money damages by the Indemnifying
Person and that includes as an unconditional term thereof the release by the
claimant or the plaintiff of the Indemnified Person from all liability with
respect to such action, claim or proceeding.
11.7 Limitation. An Indemnifying Person shall have no liability under this
Article 11 unless notice of a claim for indemnity, or notice of facts as to
which an indemnifiable Loss is expected to be incurred, shall have been given
prior to ninety days after the expiration of the appropriate statute of
limitations with respect thereto, as the same may be extended from time to
time by the Indemnifying Person.
11.8 Exclusivity. Except as otherwise specifically provided herein, the
provisions of this Article 11 shall be the exclusive basis for the assertion
of claims by or imposition of liability on the parties hereto arising under or
as a result of this Agreement. Section 11.4 shall not apply to any fraudulent
misrepresentation.
11.9 Right of Set-off. The parties hereto agree that Seller may satisfy any
obligation to pay any amount to FPA arising under this Article 11 or Section
10.7 by, at Seller's option, either (i) paying cash, (ii) foregoing interest
payments due under the Bridge Note and/or the Consolidated Note equal to the
amount so payable by Seller or (iii) reducing the principal amount of the
Bridge Note and/or the Consolidate Note by the amount so
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payable. In addition, if FPA is finally determined under this Agreement to be
obligated to pay Seller any amount under this Article 11 or Section 10.7,
Seller may withhold any amounts due from Seller or any of Seller's Affiliates
to FPA or any of FPA's Affiliates under any provider agreement, (including the
Professional Group Provider Agreements) which amount will be set-off against
the amount so payable, provided, however, that the amount withheld under any
provider agreement in any month may not exceed five percent of the total
amount due under such provider agreement for such month.
ARTICLE 12
Miscellaneous
12.1 Termination.
(a) Termination. This Agreement may be terminated at any time prior to
Closing:
(i) By mutual written consent of FPA and Seller or Selling Shareholder;
(ii) By FPA if there is a material breach of any representation or
warranty set forth in Article 5 hereof or any covenant or agreement to be
complied with or performed by Seller or Selling Shareholder pursuant to the
terms of this Agreement which would render impossible the satisfaction of a
condition set forth in Article 9 (and such condition is not waived in
writing by FPA);
(iii) By Seller or Selling Shareholder if there is a material breach of
any representation or warranty set forth in Article 6 hereof or of any
covenant or agreement to be complied with or performed by FPA, Purchasing
Subsidiary or Purchasing Shareholder pursuant to the terms of this
Agreement which would render impossible the satisfaction of a condition set
forth in Article 8 (and such condition is not waived in writing by Seller);
or
(iv) By any party hereto if the Closing has not occurred by October 31,
1996.
(b) In the Event of Termination. In the event of termination of this
Agreement:
(i) Each party hereto will redeliver all documents, work papers and other
material of each other party hereto relating to the transactions
contemplated by this Agreement and the Related Agreements, whether so
obtained before or after the execution hereof, to the party furnishing the
same;
(ii) The provisions of the Confidentiality Agreement shall continue in
full force and effect; and
(iii) No party hereto shall have any liability or further obligation to
any other party to this Agreement or the Related Agreements, except (x) as
stated in subsections (i) , (ii), (iv), (v) and (vi) of this
Section 12.1(b), and (y) for any willful breach of this Agreement occurring
prior to the proper termination of this Agreement.
(iv) If this Agreement is not consummated because either Seller or FPA
breaches a material representation or warranty or fails to perform a
material covenant contained herein, and the other party has not breached
any material representation or warranty or failed to perform a material
covenant, and the non-breaching party chooses to terminate this Agreement
as a direct result of such breach or failure, the breaching party shall
promptly pay the non-breaching party (x) up to $500,000 to reimburse the
non-breaching party for its documented expenses (including the fees and
expenses of counsel, accountants, consultant and advisors) incurred in
connection with the transactions contemplated by this Agreement (the
"Expenses") and (y) a fee of $1,000,000 as liquidated damages.
(v) If this Agreement is not consummated because Seller or FPA does not
obtain necessary board or stockholder approval, then such party failing to
obtain such approval shall pay the other party promptly up to $500,000 in
Expenses.
(vi) If this Agreement is not consummated for any reason, in addition to
any payments described in this Section, the Seller shall pay FPA promptly
$3,000,000, which may be paid in a reduction in principal of any existing
indebtedness owed by FHC and its affiliates to FPA and its affiliates,
including any affiliated medical groups.
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12.2 Assignment and No Third Party Beneficiaries. Neither this Agreement nor
any of the rights or obligations hereunder may be assigned by any party
without the prior written consent of the other parties. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns, and
no other person shall have any right, benefit or obligation under this
Agreement as a third party beneficiary or otherwise.
12.3 Notices. All notices, requests, demands and other communications which
are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by facsimile; the day after being sent, if
sent for next day delivery by recognized overnight delivery service (e.g.,
Federal Express); and upon receipt, if sent by certified or registered mail,
return receipt requested. In each case notice shall be given as follows:
If to Seller or Selling Shareholder, addressed to:
Foundation Health Corporation
3400 Data Drive
Rancho Cordova, California 95670
Facsimile Number: (916) 631-5335
Attention: Kirk A. Benson, President and
Chief Operating Officer--Commercial Operations
With a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94104
Facsimile Number: (415) 983-1200
Attention: Linda C. Williams, Esq.
If to FPA, Purchasing Subsidiary or Purchasing Shareholder, addressed to:
FPA Medical Management, Inc.
2878 Camino Del Rio South, Suite 301
San Diego, California 92108-3846
Facsimile Number: (619) 299-0708
Attention: Dr. Seth M. Flam, Chief Executive Officer
With copies to:
FPA Medical Management, Inc.
2878 Camino Del Rio South, Suite 301
San Diego, California 92108-3846
Facsimile Number: (619) 299-0708
Attention: James A. Lebovitz, Esq.
Senior Vice President, General Counsel and Secretary
and
Latham & Watkins
701 B Street, Suite 2100
San Diego, California 92101-8197
Facsimile Number: (619) 696-7419
Attention: Andrew Singer, Esq.
or to such other place and with such other copies as a party may designate as
to itself by written notice to the others.
12.4 Choice of Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware as applied to
contracts entered into solely between residents of, and to be performed
entirely in, such state.
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12.5 Entire Agreement; Amendments and Waivers. This Agreement and the
Related Agreements to which the parties hereto are parties, together with all
exhibits and schedules to be attached hereto and thereto (including the
Disclosure Schedule), constitute or will constitute the entire agreement among
the parties pertaining to the subject matter hereof and supersede or will
supersede all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, other than the Confidentiality
Agreement. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto. No amendment,
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed to or shall constitute a waiver
of any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
12.6 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. This Agreement may be
executed by original or facsimile signature if the party executing this
Agreement by facsimile signature delivers an original signature to the other
parties hereto promptly thereafter.
12.7 Expenses. Except as otherwise specified in this Agreement, each party
hereto shall pay its own legal, accounting, out-of-pocket and other expenses
incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect.
12.8 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any Related Agreement, shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, then
to the maximum extent permitted by law, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement or any
other such instrument.
12.9 Publicity. Except as may be required by law, FPA shall not and shall
not permit any of its Affiliates to and Seller and Selling Shareholder shall
not and shall not permit any of their respective Affiliates to, issue any
press release or make any public statement regarding the transactions
contemplated hereby or by the Related Agreements, without prior written
approval of the other. FPA and Seller will issue joint press releases or
public announcements after the execution and delivery of this Agreement and
after the Closing. Seller, Selling Shareholder, FPA and Purchasing Shareholder
each agree to portray the others in a positive light to enrollees and patients
of the parties, other providers and the investment and financial community.
12.10 Schedules. The inclusion of any item in one schedule hereto comprising
part of the Disclosure Schedule shall be deemed for purposes of this Agreement
to be an inclusion of such item in all schedules comprising part of the
Disclosure Schedule.
IV-43
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
SELLER
FPA
By: /s/ Daniel D. Crowley By: /s/ Seth Flam
--------------------------------- ---------------------------------
Name: Daniel D. Crowley Name: Seth Flam
Title: President and Chief Executive Title: Chief Executive Officer
Officer
PURCHASING SHAREHOLDER
PURCHASING SUBSIDIARY
By: /s/ Seth Flam By: /s/ Seth Flam
--------------------------------- ---------------------------------
Name: Seth Flam Name: Seth Flam
Title: President Title: President
SELLING SHAREHOLDER
By: /s/ Jonathan Scheff, M.D.
---------------------------------
Name: Jonathan Scheff
Title:
IV-44
<PAGE>
AMENDMENT NUMBER ONE
This Amendment Number One to Stock and Note Purchase Agreement, dated as of
June 28, 1996 (the "Agreement") is made by and between FPA MEDICAL MANAGEMENT,
INC., a Delaware corporation ("FPA"), FPA MEDICAL MANAGEMENT OF CALIFORNIA,
INC., a Delaware corporation and a wholly-owned subsidiary of FPA ("Purchasing
Subsidiary "), FPA INDEPENDENT PRACTICE ASSOCIATION, An Osteopathic
Corporation ("Purchasing Shareholder"). JONATHAN H. SCHEFF, M.D., an
individual ("Selling Shareholder") and FOUNDATION HEALTH CORPORATION, a
Delaware corporation ("Seller") (the "Amendment") as of October 1, 1996.
Whereas, Seller and Selling Shareholder, on the one hand, and FPA,
Purchasing Subsidiary and Purchasing Shareholder, on the other hand, desire to
amend certain provisions of the Agreement to reflect negotiated terms and
conditions;
Now Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Exhibit D as referenced in Section 2.3 of Article 2 of the Agreement
shall be amended in its entirety as set forth in Exhibit D attached hereto.
2. Section 8.23 shall be added to Article 8 of the Agreement to read as
follows:
Section 8.23 Modification of Transaction. Seller and Selling Shareholder
may elect, at their sole discretion, to sell to FPA, Purchasing Shareholder
and Purchasing Subsidiary components of FHMS and TDMC selected by Seller
and Selling Shareholder upon terms mutually satisfactory to the parties;
provided, however that such terms shall be no less favorable to FPA than
those set forth above; and, provided further, that Seller and Selling
Shareholder shall not sell within two years of the closing of the
transaction any other component of FHMS or TDMC to any third party other
than FPA, Purchasing Shareholder and Purchasing Subsidiary, unless FPA has
rejected a purchase on terms no less favorable than those set forth above.
4. Exhibits B and C as referenced in Section 9.10 of Article 9 of the
Agreement shall be amended to provide that the first scheduled Guaranteed
Access Fund payments shall be due and payable as of the Closing.
5. Article 12, Section 12.1 (a)(iv) of the Agreement shall be amended to
read as follows:
Section 12.1 (a)(iv): By any party hereto if the Closing has not occurred
prior to January 1, 1997.
6. A new Section 12.1 (b)(vii) shall be added to Article 12 of the Agreement
to read as follows:
Section 12.1(b)(vi) If Seller and Selling Shareholder have elected,
pursuant to Section 8.23 above, to sell only selected components of FHMS
and TDMC to FPA, Purchasing Shareholder and Purchasing Subsidiary, than
Seller shall pay to FPA $6 million on or prior to June 30, 1997 if less
than 15,000 additional Foundation Health Affiliates' members (the "Selected
Members") shall have selected primary care physicians who contract with
FPA's California IPAs in Sacramento, Placer and El Dorado counties (the
"Selected Physicians") as of June 30, 1997; provided, however that such
payment shall not be made if at least 35,000 additional Selected Members
members shall have selected Selected Physicians as of June 30, 1997; and
provided, further, that such $6 million shall be payable pro rata based
upon the number of Selected Members who have selected Selected Physicians
between 15,000 and 35,000 as of June 30, 1997.
7. All other terms and provisions of the Agreement shall remain in full
force and effect.
IV-45
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
SELLER
FPA
By: /s/ Kirk Benson By: /s/ Seth Flam
------------------------------------- ---------------------------------
Name Kirk Benson Name: Seth Flam
---------------------------------- -----------------------------
President
Title: President and CEO
--------------------------------
Title:
----------------------------
PURCHASING SHAREHOLDER PURCHASING SUBSIDIARY
By: /s/ Steven M. Lash By: /s/ Seth Flam
------------------------------------- ---------------------------------
Name Steven M. Lash Name: Seth Flam
---------------------------------- -----------------------------
Title: Executive Vice President and CEO Title: President
-------------------------------- ----------------------------
SELLING SHAREHOLDER
By: /s/ Jonathan Scheff, M.D.
-------------------------------------
Name Jonathan Scheff
----------------------------------
IV-46
<PAGE>
AMENDMENT NUMBER TWO
This Amendment Number Two (the "Amendment") to Stock and Note Purchase
Agreement, dated as of June 28, 1996 (the "Agreement") is made by and between
FPA MEDICAL MANAGEMENT, INC., a Delaware corporation ("FPA"), FPA MEDICAL
MANAGEMENT OF CALIFORNIA, INC., a Delaware corporation and a wholly-owned
subsidiary of FPA ("Purchasing Subsidiary"), FPA INDEPENDENT PRACTICE
ASSOCIATION, An Osteopathic Corporation ("Purchasing Shareholder"), JONATHAN
H. SCHEFF, M.D., an individual ("Selling Shareholder") and FOUNDATION HEALTH
CORPORATION, a Delaware corporation ("Seller") as of October 3, 1996.
Whereas, Seller and Selling Shareholder, on the one hand, and FPA,
Purchasing Subsidiary and Purchasing Shareholder, on the other hand, desire to
amend certain provisions of the Agreement to reflect negotiated terms and
conditions;
Now Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Amendment Number One of the Agreement is rescinded in its entirety.
2. Article 2, Section 2.3(a)(ii) shall be amended by adding at the end
thereof the following sentence: "Provided, however, that in no event shall the
number of shares of FPA Common to be issued hereunder to Seller exceed 19% of
the then outstanding shares of FPA Common"
3. Exhibit D as referenced in Section 2.3 of Article 2 of the Agreement
shall be amended in its entirety as set forth in Exhibit D attached hereto.
4. Exhibits B and C as referenced in Section 9.10 of Article 9 of the
Agreement shall be amended to provide that the first scheduled Guaranteed
Access Fund payments shall be due and payable as of the Closing.
5. Article 12, Section 12.1(b)(iii) of the Agreement shall be amended to
read as follows:
Section 12.1(b)(iii): No party hereto shall have any liability or further
obligation to any other party to this Agreement or the Related Agreements,
except as stated in subsections (i), (ii), (iv), (v) and (vi) of this
Section 12.1(b).
6. Article 12, Section 12.1 (a)(iv) of the Agreement shall be amended to
read as follows:
Section 12.1 (a)(iv): By any party hereto if the Closing has not occurred
prior to January 1, 1997.
7. A new Section 12.1 (b)(vii) shall be added to Article 12 of the Agreement
to read as follows:
(vii) If Seller and Selling Shareholder terminate this Agreement, Seller
and Selling Shareholder shall not sell FHMS, TDMC or FHMG or any component
thereof to any third party other than FPA, Purchasing Shareholder and
Purchasing Subsidiary, unless FPA, Purchasing Shareholder and Purchasing
Subsidiary have rejected a purchase offer on terms no less favorable than
those set forth in the Agreement; provided, however, that in no event shall
the number of shares of FPA Common to be issued as part of the
consideration for such purchase exceed 19% of the then outstanding shares
of FPA Common.
8. All other terms and provisions of the Agreement shall remain in full
force and effect.
IV-47
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be duly
executed as of the day and year first above written.
SELLER FPA
By: /s/ Kirk Benson By: /s/ Seth Flam
--------------------------------- ---------------------------------
Name Kirk Benson Name: Seth Flam
------------------------------ -------------------------------
Title: President and CEO Title: President
---------------------------- -----------------------------
PURCHASING SHAREHOLDER PURCHASING SUBSIDIARY
By: /s/ Steven M. Lash By: /s/ Seth Flam
--------------------------------- ---------------------------------
Name: Steven M. Lash Name: Seth Flam
------------------------------ ------------------------------
Title:Executive Vice President and CEO Title: President
-------------------------------- ----------------------------
SELLING SHAREHOLDER
By: /s/ Jonathan Scheff, M.D.
---------------------------------
Name Jonathan Scheff
-----------------------------
IV-48
<PAGE>
August 30, 1996
Mr. Kirk Benson
President and Chief Operating Officer--Commercial Operations
Foundation Health Corporation
3400 Dara Drive
Rancho Cordova, CA 95670
Dear Kirk:
This letter will confirm the agreement between FPA Medical Management, Inc.
("FPA") and Foundation Health Corporation ("FHC") that was reached yesterday
between you and Seth Flam. FHC and FPA, intending to be legally bound, hereby
agree that FPA's maximum responsibility for the net losses incurred by
FHMS-CA/FHMG and FHMS-AZ-/IDMC (the "Medical Groups") for the third quarter of
calendar year 1996 shall not exceed Twelve Million Dollars ($12,000,000). FHC
agrees that on the Closing Date, the Indebtedness to be assumed by FPA (as
provided in the Stock and Note Purchase Agreement) shall be reduced by the
amount, if any, of the net losses incurred by the Medical Groups during such
quarter in excess of Twelve Million Dollars ($12,000,000).
If the foregoing reflects the agreement between FPA and FHC, please arrange
for this letter to be signed in the space provided below by an authorized
officer of FHC.
Sincerely,
/s/ James A. Lebovitz
James A. Lebovitz
Senior Vice President and General
Counsel
AGREED TO AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
Foundation Health Corporation
/s/ Kirk Benson
By:
------------------------------
Kirk Benson
IV-49
<PAGE>
APPENDIX V
August 6, 1996
The Board of Directors
FPA Medical Management, Inc.
2878 Camino Del Rio South, Suite 301
San Diego, CA 92108-3846
Gentlemen:
You have asked Oppenheimer & Co., Inc. ("Oppenheimer") to render an opinion
(the "Opinion") as to the fairness, from a financial point of view, to the
stockholders of FPA Medical Management, Inc. ("FPA") of the Acquisition
Consideration (as defined below) paid and to be paid in the (i) proposed
acquisition (the "Foundation Transaction") of all of the issued and
outstanding shares of Foundation Health Medical Services ("FHMS") by FPA
Medical Management of California, Inc. ("FPA California"), a wholly-owned
subsidiary of FPA, and all of the issued and outstanding shares of FHMG/TDMC
Medical Group ("Holding Company," and, together with FHMS, the "Foundation
Companies") by FPA Independent Practice Association ("FPA IPA") pursuant to a
Stock and Note Purchase Agreement dated as of June 28, 1996 among FPA, FPA
California, FPA IPA, Jonathan H. Scheff, M.D. and Foundation Health
Corporation ("Foundation") (the "Foundation Agreement"), (ii) the recently
completed acquisition of all of the issued and outstanding shares of
Intergroup IPA, P.C. ("Arizona IPA") by FPA Medical Group of Arizona, P.C.
("FPA Arizona"), an affiliated professional corporation of FPA, pursuant to a
Stock Purchase Agreement dated June 28, 1996 by and among FPA Arizona, Ross
Henderson, M.D. and Foundation (the "Arizona IPA Agreement") and (iii) the
recently completed acquisition of all of the issued and outstanding shares of
FHC IPA, Inc. ("Florida IPA") by FPA Acquisition Corporation ("FAC"), a
wholly-owned subsidiary of FPA, pursuant to a Stock Purchase Agreement dated
June 28, 1996 by and among FAC, Careflorida Healthplan, Inc., Foundation
South, a South Florida Health Plan, Inc. and Foundation (the "Florida IPA
Agreement").
The Foundation Transaction and the acquisitions of Arizona IPA and Florida
IPA are referred to collectively in this Opinion as the "Acquisitions." The
Foundation Companies, Arizona IPA and Florida IPA are referred to collectively
in this Opinion as the "Acquired Foundation Entities." The Foundation
Agreement, the Arizona IPA Agreement and the Florida IPA Agreement are
referred to collectively in this Opinion as the "Agreements."
Pursuant to the Agreements, as more fully described therein, the total
consideration for the Acquisitions is expected to be comprised of: (i) $5
million in cash; (ii) $75 million in FPA Common Stock; (iii) $39 million in
short term notes; (iv) $89 million in seven year notes, and (v) $11 million in
assumed liabilities. The number of shares of FPA Common Stock to be issued to
Foundation will be equal to (A) $75 million minus the amount of any cash paid
by FPA in lieu of FPA Common Stock to Foundation, divided by (B) the average
of the per share closing price of FPA Common Stock during the ten trading days
ending on the second trading day prior to the closing of the Foundation
Transaction (the "Foundation Closing") as reported on Nasdaq (the
"FPA/Foundation Price"). In the event the FPA/Foundation Price is less than
$13.60, then FPA may in its sole discretion terminate the Foundation
Agreement; provided that Foundation may cause the acquisition to be
consummated if it agrees to accept a number of shares of FPA Common Stock
equal to $75 million divided by $13.60.
The purchase price will be adjusted at closing to include the pre-tax losses
incurred in the third quarter of 1996 by FHMS, Foundation Health Medical
Group, Inc. ("FHMG") and Thomas-Davis Medical Centers ("TDMC"), the medical
group operating subsidiaries of the Holding Company. Such amounts have been
estimated to be $9 million and will be added to the purchase price and funded
through an increase in the seven year note described in (iv) above. As part of
the agreement, the Acquired Foundation Entities will receive from Foundation
and its affiliates $55 million as compensation for ensuring staffing levels
and access to the professionals practicing within the Acquired Foundation
Entities, commencing in the third quarter of 1996 and ending in the fourth
quarter of 1998 (the "Guaranteed Access Payments"). For purposes of this
Opinion, the
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<PAGE>
total cash amount to be paid, the aggregate principal amount of the notes to
be issued, the total amount of liabilities to be assumed and the aggregate
number of shares of FPA Common Stock to be issued in connection with the
Acquisition is referred to herein as the "Acquisition Consideration."
In rendering the Opinion we have treated the three acquisitions subject to
the Agreements as a single transaction.
In arriving at our Opinion we:
(i) reviewed the Agreements;
(ii) reviewed FPA's annual reports to stockholders and its annual reports
on Form 10-K for fiscal years ended December 31, 1994 and 1995 and its
quarterly report on Form 10-Q for the three months ended March 31,
1996;
(iii) reviewed the unaudited financial statements of FHMG, TDMC and FHMS
for the fiscal year ended June 30, 1996 and the month ended June 30,
1996;
(iv) reviewed the Certificate of Incorporation of FPA;
(v) reviewed the financial projections for FPA prepared by FPA's management
for the six months ending December 31, 1996 and the years ending
December 31, 1997 and 1998;
(vi) reviewed the financial projections for the Acquired Foundation
Entities prepared by FPA's management based, in part, upon projections
previously prepared by Foundation management (other than for purposes
of the Acquisitions) for the six months ending December 31, 1996 and
the years ending December 31, 1997 through December 31, 2000;
(vii) held discussions with the senior managements of FPA and Foundation to
review historical and current operations and financial conditions,
with the senior management of FPA to review projections and
strategies of FPA and the Acquired Foundation Entities and with the
senior management of Foundation to review the assumptions utilized by
FPA management in the preparation of financial projections for the
Acquired Foundation Entities;
(viii) reviewed current and historical market prices and trading data of
the FPA Common Stock;
(ix) reviewed financial and market data for certain public companies we
deemed comparable to FPA and the Acquired Foundation Entities;
(x) reviewed and analyzed recent mergers and acquisitions of companies in
lines of business we deemed comparable to the Acquired Foundation
Entities;
(xi) analyzed the financial impact of the Acquisition on the combined
company, including the pro forma earnings per share;
(xii) prepared a discounted cash flow valuation of FPA and the Acquired
Foundation Entities;
(xiii) reviewed the impact of the Sterling Merger on the Acquisitions; and
(xiv) performed such other analyses and reviewed such other documents and
information as were deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information available to us from public sources and
provided to us by FPA, Foundation and the Acquired Foundation Entities and
their respective representatives. We also have relied upon the management of
FPA as to the reasonableness and achievability of the financial and operating
projections and the assumptions and bases therefor provided to us and, with
your consent, we have assumed, without independent verification or
investigation, that such projections, including and without limitation
projected cost savings and operating synergies from the Acquisitions, were
reasonably prepared on bases reflecting the best available information,
estimates and judgment of the management of FPA and that such projections will
be realized in the amounts and time periods currently estimated by the
management of FPA. We have not been engaged to assess the achievability of
such projections or the assumptions on which
V-2
<PAGE>
they were based and express no view as to the projections or assumptions. We
have neither made, obtained nor reviewed any independent valuation or
appraisal of the assets or liabilities of FPA or the Acquired Foundation
Entities.
Our Opinion is based upon our analyses of the foregoing factors and
information in light of our assessment of general economic, financial and
market conditions as of the date hereof that could be evaluated by us as of
such date.
Our Opinion is limited to a determination of the fairness, from a financial
point of view, of the Acquisition Consideration. We also assume, without
independent verification, the accuracy of the advice and conclusions of FPA's
legal counsel and accountants with respect to the tax and accounting matters
as provided to Oppenheimer by FPA's management, including, without limitation,
(i) that valid 338(h)(10) elections will be made with respect to the
acquisition of each of the Acquired Foundation Entities; (ii) that for
financial accounting purposes, FPA will be treated as a lessee of all real
estate leased by the Acquired Foundation Entities; and (iii) that for
financial accounting purposes, Guaranteed Access Payments will be recognized
as revenue when earned by FPA. We assume that the Foundation Transaction will
be consummated in accordance with the terms of the Foundation Agreement, that
all conditions to the closing of the Foundation Transaction will be satisfied
without waiver or modification and that the Foundation Transaction would be
consummated on a timely basis in the manner contemplated in the Foundation
Agreement.
Oppenheimer, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities and private placements. Oppenheimer has been engaged by
the Board of Directors of FPA to render financial advisory services to FPA in
connection with the Acquisitions and will receive a fee for its services,
including a fee upon the delivery of this Opinion. In the ordinary course of
business, Oppenheimer serves as a market maker in the Common Stock of FPA and
may actively trade the securities of FPA for its own account or for the
account of its customers and accordingly may at any time hold a long or short
position in FPA's Common Stock. Oppenheimer also has provided certain
investment banking services to FPA from time to time, including acting as
underwriter in public offerings of shares of Common Stock and as financial
advisor in connection with the proposed acquisition of Sterling Healthcare
Group, Inc. by FPA. Oppenheimer also provides equity research coverage of FPA.
It is understood that our Opinion is intended for the benefit and use of the
Board of Directors of FPA in its evaluation of the Acquisitions, and our
Opinion is not intended to be and does not constitute a recommendation to the
Board of Directors or any stockholder with respect to whether to vote in favor
of the Acquisitions. We understand that this Opinion will be included in the
registration statement filed with the Securities and Exchange Commission and
proxy statement/prospectus therein distributed to FPA stockholders in
connection with the approval of the Acquisitions. We hereby consent to the
foregoing use of the Opinion in its entirety. Otherwise, our Opinion may not
be published or otherwise used or referred to without our written consent.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the Acquisition Consideration paid and to be paid in connection
with the Acquisitions is fair, from a financial point of view, to the
stockholders of FPA.
Very truly yours,
Oppenheimer & Co., Inc.
V-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides
that a corporation may indemnify its officers, directors, employees and agents
(or persons who have served, at the corporation's request, as officers,
directors, employees or agents of another corporation) against the expenses,
including attorneys' fees, actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors, officers, employees or agents, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceedings, had no reason to believe his conduct was unlawful, except that
if such action shall be in the right of the corporation, no such
indemnification shall be provided as to any claim, issue or matter as to which
such person shall have been adjudged to have been liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware, or any other court in which the suit was brought, shall determine
upon application that, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
FPA's Certificate of Incorporation, as amended, has the following
indemnification provisions:
"SEVENTH"
A. Each person who was or is a party or is threatened to be made a party to
or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgements, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that, except as
provided in Paragraph B hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Article SEVENTH shall be a contract right
and shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if the Delaware General Corporation Law requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that such director or officer is not entitled to be indemnified under this
Article SEVENTH or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors
and officers.
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<PAGE>
B. If a claim under Paragraph A of this Article SEVENTH is not paid in full
by the Corporation within thirty days after a written claim has been received
by the Corporation, the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, if successful
in whole or in part, the claimant shall be entitled to be paid also the
expense of prosecuting such claim. It shall be a defense to any such action
(other than a action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation
to indemnify the claimant for the amount claimed, but the burden of providing
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
C. The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article SEVENTH shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect itself
and any person who is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any such expense, liability
or loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
FPA's By-laws similarly provide that FPA shall indemnify its officers and
directors to the fullest extent permitted by the Delaware Law.
In addition, FPA has entered into individual indemnification agreements (the
"Indemnification Agreements") with each of the directors. The general effect
on directors' liabilities is set forth in the provisions of the
Indemnification Agreements summarized below:
Proceedings Other Than Proceedings by or in the Right of FPA. A director
shall be entitled to the rights of indemnification if, by reason of his
position with FPA, he is, or is threatened to be made, a party to any
threatened, pending, or completed proceeding, other than a proceeding by or in
the right of FPA. In such case, such director shall be indemnified against all
expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with such
proceeding or any claim, issue or matter therein, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of FPA and, with respect to any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
Proceedings by or in the Right of Company. Generally, a director shall be
entitled to the rights of indemnification if, by reason of his position with
FPA, he is, or is threatened to be made, a party to any threatened, pending or
completed proceeding brought by or in the right of FPA to procure a judgment
in its favor. In such case, the director shall be indemnified against all
expenses actually and reasonably incurred by him or on his behalf in
connection with such proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of FPA;
provided, however, that if applicable law so provides, no indemnification
against such expenses shall be made in respect of any claim, issue or matter
in such proceeding as to which the director shall have been adjudged to be
liable to FPA unless and to the extent that the Court of Chancery of the State
of Delaware, or the court in which such proceeding shall have been brought or
is pending, shall determine that such indemnification may be made.
II-2
<PAGE>
Indemnification for Expenses of a Party Who is Wholly or Partly Successful.
Notwithstanding any other provision of the Indemnification Agreements, to the
extent that the director is, by reason of his position with FPA, a party to
and is successful, on the merits or otherwise, in any proceeding, he shall be
indemnified against all expenses actually and reasonably incurred by him or on
his behalf in connection therewith. If the director is not wholly successful
in such proceeding but is successful, on the merits or otherwise, as to one or
more but less than all claims, issues or matters in such proceeding, FPA shall
indemnify the director against all expenses actually and reasonably incurred
by him or on his behalf in connection with each successfully resolved claim,
issue or matter.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibit
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 Agreement and Plan of Merger among FPA, Sterling Aquisition
Corporation and Sterling Healthcare Group, Inc. made May 19, 1996
(included in Appendix I).
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
3.3 Certificate of Amendment of Certificate of Incorporation filed October
20, 1994 (incorporated by reference to FPA's Annual Report on Form
10-K for the year ended December 31, 1994 at Exhibit No. 3.3).
4.1 Specimen of Common Stock Certificate.*
4.2 Form of Warrant.*
5 Opinion of Ballard Spahr Andrews & Ingersoll
8 Opinion of Coopers & Lybrand L.L.P.
10.1 IPA Medicare Partial Risk Services Agreement between Pacificare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994. * **
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995 between
FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
Pacificare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.13) and amendment thereto effective as
of July 1, 1995.*+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.14) and amendment thereto effective as
of July 1, 1995.*+
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.15) and amendment thereto effective as
of July 1, 1995.*+
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.16) and amendment thereto effective as
of July 1, 1995.*+
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective September 1, 1994 (incorporated by reference to FPA's
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit No. 10.26).+
10.17 Employment Agreement between FPA and Robert J. Burg effective December
1, 1994 (incorporated by reference to FPA's Annual Report on Form 10-
K for the year ended December 31, 1994 at Exhibit No. 10.27).+
10.18 Employment Agreement between FPA and James A. Lebovitz effective March
1, 1996 (incorporated by reference to FPA's Annual Report on Form 10-
K for the year ended December 31, 1995).+
10.19 FPA Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 33-79714 at Exhibit 10.19).+
10.20 [Reserved]
10.21 [Reserved]
10.22 [Reserved]
10.23 [Reserved]
10.24 401(K) Salary Savings Plan effective January 1, 1994 (incorporated by
reference to Registration Statement No. 33-79714 at Exhibit 10.20).+
10.25 1995 Directors Stock Option Plan.*+
10.26 1994 Physicians Stock Option Plan.*
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to Registrant's Annual Report on Form
10-K, File No. 0-24276).
10.28 [Reserved]
10.29 Form of Indemnification Agreement.*
11 Computation of Earnings per share and Common Stock Equivalents
13 Annual Report on Form 10-K (incorporated by reference to Registrant's
Annual Report on Form 10-K, File No. 0-24276)
21 Subsidiaries of FPA
23.1 Consent of Deloitte & Touche LLP
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Stevensons, Jones & Holmaas, P.C.
23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5)
24 Power of Attorney (included in Part II of Registration Statement)
99.1 FPA Proxy Card
99.2 Sterling Proxy Card
99.3 Independent Auditors' Report of Stevenson, Jones, Imig, Holmaas &
Kleinhans, P.C.
99.4 Consent of Oppenheimer & Co., Inc. (included in Appendices II and V)
99.5 Consent of Smith Barney Inc. (included in Appendix III)
</TABLE>
- --------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed as an
Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by person who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
II-5
<PAGE>
The Registrant hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933, as amended
(the "Securities Act"), and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
application of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF SAN DIEGO, STATE OF CALIFORNIA, ON OCTOBER 7,
1996.
FPA MEDICAL MANAGEMENT INC.
By: /s/ Steven M. Lash
----------------------------------
STEVEN M. LASH
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Chairman of October 7, 1996
- ------------------------------------ the Board of Directors
SOL LIZERBRAM
* Chief Executive Officer and October 7, 1996
- ------------------------------------ Director (Principal
SETH FLAM Executive Officer)
/s/ Steven M. Lash Executive Vice President and October 7, 1996
- ------------------------------------ Chief Financial Officer
STEVEN M. LASH (Principal Financial Officer)
* Vice President, Controller October 7, 1996
- ------------------------------------ and Chief Accounting
CHERYL A. MOORE Officer (Principal
Accounting Officer)
* Executive Vice President-- October 7, 1996
- ------------------------------------ Corporate Development
HOWARD HASSMAN and Director
* Chief Medical Officer and October 7, 1996
- ------------------------------------ Director
KEVIN ELLIS
* Director of Special Projects October 7, 1996
- ------------------------------------ and Director
MICHAEL FEINSTEIN
* Director October 7, 1996
- ------------------------------------
HARVEY WILSON
* Director October 7, 1996
- ------------------------------------
SHELDON DEREZIN
* /s/ Steven M. Lash Pursuant to Power October 7, 1996
- ------------------------------------ of Attorney
BY: STEVEN M. LASH
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 Agreement and Plan of Merger among FPA, Sterling Aquisition
Corporation and Sterling Healthcare Group, Inc. made May 19, 1996
(included in Appendix I).
3.1 Certificate of Incorporation.*
3.2 Bylaws.*
3.3 Certificate of Amendment of Certificate of Incorporation filed October
20, 1994 (incorporated by reference to FPA's Annual Report on Form
10-K for the year ended December 31, 1994 at Exhibit No. 3.3).
4.1 Specimen of Common Stock Certificate.*
4.2 Form of Warrant.*
5 Opinion of Ballard Spahr Andrews & Ingersoll
8 Opinion of Coopers & Lybrand L.L.P.
10.1 IPA Medicare Partial Risk Services Agreement between Pacificare of
California and Family Practice Associates of San Diego, Inc.
("FPASD") dated January 1, 1993, including an amendment thereto
effective the date thereof and an amendment thereto date effective
January 1, 1994. * **
10.2 [Reserved]
10.3 Medical Services Organization Agreement dated January 21, 1995 between
FPANJ and Medigroup, Inc. (HMO Blue).* **
10.4 Pacificare IPA Commercial Services Agreement with FPASD dated May 1,
1995.* **
10.5 Amendment to IPA Medicare Partial Risk Services Agreement between
Pacificare of California and FPASD dated April 1995.* **
10.6 [Reserved]
10.7 Form of Primary Care Physician Agreement/California.* **
10.8 Form of Specialty Care Physician Agreement/California.* **
10.9 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.10 Form of Administrative Services Agreement between FPA and a
Professional Corporation.*
10.11 Form of Succession Agreement.*
10.12 Employment Agreement between FPA and Dr. Sol Lizerbram effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.13) and amendment thereto effective as
of July 1, 1995.*+
10.13 Employment Agreement between FPA and Dr. Seth Flam effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.14) and amendment thereto effective as
of July 1, 1995.*+
10.14 Employment Agreement between FPA and Dr. Howard Hassman effective as
of January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.15) and amendment thereto effective as
of July 1, 1995.*+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Employment Agreement between FPA and Dr. Kevin Ellis effective as of
January 1, 1994, including an amendment thereto effective as of
January 1, 1994 (incorporated by reference to Registration Statement
No. 33-79714 at Exhibit No. 10.16) and amendment thereto effective as
of July 1, 1995.*+
10.16 Amended and Restated Employment Agreement between FPA and Steven M.
Lash effective September 1, 1994 (incorporated by reference to FPA's
Annual Report on Form 10-K for the year ended December 31, 1994 at
Exhibit No. 10.26).+
10.17 Employment Agreement between FPA and Robert J. Burg effective December
1, 1994 (incorporated by reference to FPA's Annual Report on Form 10-
K for the year ended December 31, 1994 at Exhibit No. 10.27).+
10.18 Employment Agreement between FPA and James A. Lebovitz effective March
1, 1996 (incorporated by reference to FPA's Annual Report on Form 10-
K for the year ended December 31, 1995).+
10.19 FPA Omnibus Stock Option Plan (incorporated by reference to
Registration Statement No. 33-79714 at Exhibit 10.19).+
10.20 [Reserved]
10.21 [Reserved]
10.22 [Reserved]
10.23 [Reserved]
10.24 401(K) Salary Savings Plan effective January 1, 1994 (incorporated by
reference to Registration Statement No. 33-79714 at Exhibit 10.20).+
10.25 1995 Directors Stock Option Plan.*+
10.26 1994 Physicians Stock Option Plan.*
10.27 Credit, Security, Guarantee and Pledge Agreement dated as of January
29, 1996 among FPA and its subsidiaries and certain guarantors and
the lenders named therein and Banque Paribas, as amended March 15,
1996 (incorporated by reference to Registrant's Annual Report on Form
10-K, File No. 0-24276).
10.28 [Reserved]
10.29 Form of Indemnification Agreement.*
11 Computation of Earnings per share and Common Stock Equivalents
13 Annual Report on Form 10-K (incorporated by reference to Registrant's
Annual Report on Form 10-K, File No. 0-24276)
21 Subsidiaries of FPA
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Stevensons, Jones & Holmaas, P.C.
23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
24 Power of Attorney (included in Part II of Registration Statement)
99.1 FPA Proxy Card
99.2 Sterling Proxy Card
99.3 Independent Auditors' Report of Stevenson, Jones, Imig, Holmaas &
Kleinhans, P.C.
99.4 Consent of Oppenheimer & Co., Inc. (included in Appendices II and V)
99.5 Consent of Smith Barney Inc. (included in Appendix III)
</TABLE>
- --------
* Incorporated by reference to the exhibit to the Registrant's Registration
Statement on Form S-1, Reg. No. 33-97456, at the exhibit number set forth
opposite such exhibit's description above.
** Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
+ Constitutes a management contract or compensatory plan to be filed as an
Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
<PAGE>
Exhibit 5
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL APPEARS HERE]
October 4, 1996
FPA Medical Management, Inc.
2878 Camino del Rio South, Suite 301
San Diego, California 92108
RE: FPA Medical Management, Inc. -
Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to FPA Medical Management, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement filed on Form S-4 (the "Registration Statement") on the
date hereof with the Securities and Exchange Commission (the "Commission")
pursuant to which the Company is registering under the Securities Act of 1933,
as amended, 15,197,412 shares of its common stock, $.002 par value per
share (the "Common Stock"), to be issued by the Company pursuant to the
Agreement and Plan of Merger, dated as of May 19, 1996 between the Company,
Sterling Acquisition Corporation and Sterling Healthcare Group, Inc. (the
"Merger Agreement").
We are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the proposed authorization, issuance and sale of the
Common Stock. In this connection, we have examined and relied upon such
corporate records and other documents, instruments and certificates and have
made such other investigation as we deemed appropriate as the basis for the
opinion set forth below. In our examination, we have assumed legal capacity of
all natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
<PAGE>
FPA Medical Management, Inc.
October 4, 1996
Page 2
The opinion expressed below is based on the assumption that the
Registration Statement will become effective.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock to be issued by the Company have been duly authorized and, when issued
pursuant to the Merger Agreement as described in the Company's Registration
Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming a part thereof.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
<PAGE>
EXHIBIT 8
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
October 4, 1996
Sterling Healthcare Group, Inc.
6855 South Red Road, Suite 400
Coral Gables, FL 33143
Re: Agreement and Plan of Merger by and
among FPA Medical Management, Inc.,
Sterling Acquisition Corporation and
Sterling Healthcare Group, Inc.
Gentlemen:
We have acted as tax advisors to Sterling Healthcare Group, Inc., a Florida
Corporation (the Company) in connection with the proposed merger (Merger) of
Sterling Acquisition Corporation (Acquisition) with and into the Company,
pursuant to the terms of the Agreement and Plan of Merger dated as of May 19,
1996 (Agreement) by and among FPA Medical Management, Inc. (FPA), the Company
and Acquisition, each as described in the Registration Statement on Form S-4 to
be filed by the FPA with the Securities and Exchange Commission of 1933
(Registration Statement). This opinion is being rendered pursuant to your
request. All capitalized terms, unless otherwise specified, have the meaning
assigned to them in the Agreement and Plan of Merger dated as of May 19, 1996.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Agreement, (ii) the Registration Statement and (iii) such other
documents as we have deemed necessary or appropriate in order to enable us to
render the opinion below. In our examination, we have assumed the genuineness of
all signatures, the legal capacity of all natural persons, the authenticity of
all documents submitted to us as originals, the conformity of original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such copies.
In rendering our opinion, we have considered the applicable provisions of the
Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations,
pertinent judicial authorities, interpretive rulings of the Internal Revenue
Service and such other authorities as we have considered relevant.
This opinion is conditioned upon (a) the Merger taking place in the manner
described in the Agreement and (b) there being no change in the Code, United
States Treasury regulations,
<PAGE>
Sterling Healthcare Group, Inc.
October 4, 1996
Page 2
judicial decisions, or administrative rulings and pronouncements of the Internal
Revenue Service between the date hereof and the date of the closing of the
Merger (Closing Date).
This opinion is further conditioned upon our receiving such executed letters of
representation as we shall request. We have not been asked to, nor have we
undertaken to, verify the accuracy of any representations made to us and the
inaccuracy of any representation could alter our opinion. This opinion shall be
effective only at such time as we receive those letters and confirm our opinion
in writing on the Closing Date, and in the absence of such confirmation, will be
deemed to have been withdrawn.
Finally, this opinion is based upon the assumptions that (a) the Company
shareholders have no plan or intention to sell or dispose of the shares of the
Common Stock of FPA (FPA Shares) received in the Merger that would reduce their
holdings to a number of FPA Shares having in the aggregate a fair market value
of less than 50 percent of the total fair market value of the shares of the
Company (the Company Shares) outstanding immediately prior to the Merger; (b)
there is no present plan or intention as part of the reorganization to transfer
part or all of the assets of Acquisition or the Company that the Company holds
immediately after the Merger to any person other than a corporation "controlled"
(within the meaning of Section 368(c) the Code) by the Company; and (c) there is
no present plan or intention as part of the reorganization to transfer part or
all of the shares of the Company that FPA holds immediately after the Merger to
any person other than a corporation "controlled" by FPA. If these assumptions
are not correct, the Merger may not qualify as a tax-free reorganization and,
therefore, our opinion could be altered. For purposes of rendering this opinion,
we have not been requested to undertake, nor have we undertaken, any
investigation or inquiry as to whether these assumptions are and will be
correct.
Based upon and subject to the foregoing, we are of the opinion that the Merger
will, under current law, constitute a tax-free reorganization under Section
368(a) of the Code, and FPA, Acquisition and the Company will each be a party to
the reorganization within the meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger will have the following Federal income
tax consequences for the Company shareholders, the Company and FPA:
1. In accordance with Section 354(a)(1) of the Code, no gain or loss will
be recognized by holders of common stock, par value $.0001 per share of the
Company (the Company Common Stock) as a result of the exchange of such
shares for shares of FPA common stock, par value $.002 per share (FPA
Common Stock) pursuant to the Merger, except that gain or loss will be
recognized on the receipt of cash, if any, received in lieu of fractional
shares. Any cash received by a shareholder of Company in lieu of a
fractional share will be treated as
<PAGE>
Sterling Healthcare Group, Inc.
October 4, 1996
Page 3
received in exchange for such fractional share and not as a dividend,
and any gain or loss recognized as a result of the receipt of such cash
will be capital gain or loss equal to the difference between the cash
received and the portion of the shareholder's basis in the Company
Common Stock allocable to such fractional share interest.
2. The tax basis of the shares of FPA Common Stock received by each
shareholder of the Company will equal the tax basis of such
shareholder's shares of the Company Common Stock (reduced by an amount
allocable to fractional share interests for which cash is received)
exchanged in the Merger.
3. The holding period for the shares of FPA Common Stock received by
each shareholder of the Company will include the holding period for the
shares of the Company Common Stock of such shareholder exchanged in the
Merger.
4. FPA will not recognize gain or loss as a result of the Merger.
5. The Company will not recognize gain or loss as a result of the
Merger.
Except as set forth above, we express no opinion as to the tax consequences to
any party, whether Federal, state, local or foreign, of the Merger or of any
transactions related to the Merger or contemplated by the Agreement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-4 referred to above and filed by the FPA with
the Securities and Exchange Commission.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P
<PAGE>
EXHIBIT 11
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE AND COMMON STOCK EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Primary:
Pro forma net income ap-
plicable to primary earn-
ings per common share................ $ 843,795 $ 278,078 $ 1,002,462
========== ========== ===========
Common stock and common
stock equivalents:
Weighted average shares of
common stock outstanding
during the year (includ-
ing retroactive effect of
1995 one-for-one stock
dividend)............................ 3,163,000. 3,947,178 7,274,046
Common stock equivalents
(stock options and war-
rants)............................... 34,435 402,356
---------- ---------- -----------
Total common stock and
common stock equiva-
lents................................ 3,163,000 3,981,613 7,676,402
========== ========== ===========
Primary pro forma net in-
come per common share................ $ 0.27 $ 0.07 $ 0.13
========== ========== ===========
Fully Diluted:
Pro forma net income ap-
plicable to primary earn-
ings per common share................ $ 843,795 $ 278,078 $ 1,002,462
Add back interest expense
on convertible deben-
tures, net of tax ef-
fect................................. 9,000 32,400
---------- ---------- -----------
Adjusted pro forma net in-
come applicable to fully
diluted earnings per com-
mon share............................ $ 843,795 $ 287,078 $ 1,034,862
========== ========== ===========
Common stock and common
stock equivalents:
Shares used in calculating
primary earnings per com-
mon share............................ 3,163,000 3,981,613 7,676,402
Shares on conversion of
debentures........................... 200,000 200,000
Other................................. 31,554 2,666
---------- ---------- -----------
Total common stock and
common stock equivalents
on a fully diluted ba-
sis.................................. 3,163,000 4,213,167 7,879,068
========== ========== ===========
Fully diluted pro forma
net income per common
share................................ $ 0.27 $ 0.07 $ 0.13
========== ========== ===========
</TABLE>
Note: Fully diluted pro forma net income per common share is not presented
in FPA's Consolidated Statements of Operations as the difference from primary
pro forma net income per common share is less than 3%.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FPA MEDICAL MANAGEMENT, INC.
Arizona Managed Care Services, Inc.
Arizona Managed Care Physicians, IPA, Inc.
Family and Senior Care, Inc.
FPA Medical Management of Michigan, Inc. d/b/a QualNet, Inc.
FPA Medical Management of South Carolina, Inc.
Gonzaba Management Services Organization, Inc.
OPSU, Inc. d/b/a Gonzaba Surgical Center
PrimeCare, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of FPA Medical Management, Inc. on Form S-4 of our report dated March 8, 1996,
appearing in the Annual Report on Form 10-K of FPA Medical Management, Inc.
for the year ended December 31, 1995 and to the reference to us under the
heading "Selected Financial Data--FPA" and "Experts" in the Prospectus, which
is part of this Registration Statement.
DELOITTE & TOUCHE LLP
San Diego, California
October 3, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of FPA Medical Management, Inc. on Form S-4 of our report dated March 15, 1996
on our audits of the consolidated financial statements and schedules of
Sterling Healthcare Group, Inc. as of December 31, 1994, and 1995, and for the
year ended December 31, 1995, and for the period from June 1, 1994 to December
31, 1994 and on our audits of the financial statements and schedules of
Sterling Health Care Group, Inc. and Sterling Healthcare, Inc. for the five
months ended May 31, 1994, and for the year ended December 31, 1993, which
report is included in the Annual Report on Form 10-K/A. We also consent to the
reference to our Firm under the captions "Selected Financial Data--Sterling",
"Legal Matters" and "Experts."
Coopers & Lybrand L.L.P.
Miami, Florida
October 4, 1996
<PAGE>
[LETTERHEAD OF PEAT MARWICK LLP APPEARS HERE]
EXHIBIT 23.3
The Board of Directors
Physician Corporation of America:
We consent to the inclusion of our report dated March 29, 1996, with respect
to the consolidated balance sheets of Physicians First, Inc. and subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholder's equity, and cash flows for each of the years in the
two-year period ended December 31, 1995, which report appears in the Form S-4
of FPA Medical Management, Inc. dated June 14, 1996.
KPMG Peat Marwick LLP
Miami, Florida
October 4, 1996
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of FPA Medical
Management, Inc. on Form S-4 of our report dated September 30, 1996 on the
combined financial statements of Foundation Health Medical Services (a wholly-
owned subsidiary of Foundation Health Corporation) and affiliates as of June
30, 1995 and 1996 and for each of the three years in the period ended June 30,
1996, and our report dated February 23, 1996 on the financial statements of
Foundation Health IPA as of December 31, 1995 and 1994 and for the year ended
December 31, 1995 and for the period from June 7, 1994 (date of inception) to
December 31, 1994 (such reports express unqualified opinions and include
explanatory paragraphs referring to significant related party transactions),
appearing in the Proxy Statement/Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Proxy Statement/Prospectus.
Deloitte & Touche llp
Sacramento, California
October 1, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of FPA Medical
Management, Inc. on Form S-4 of the report of Stevenson, Jones, Imig, Holmaas
& Kleinhans, P.C. dated, April 27, 1994 on the financial statements of Thomas-
Davis Medical Centers, P.C. as of December 31, 1993 and for the year then
ended, appearing in this Proxy Statement/Prospectus, which is part of such
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/Prospectus.
Stevenson, Jones & Holmaas, P.C.
Tucson, Arizona
October 1, 1996
<PAGE>
EXHIBIT 99.1
FPA MEDICAL MANAGEMENT, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS
OCTOBER 31, 1996
The undersigned stockholder(s) of FPA Medical Management, Inc., a Delaware
corporation ("FPA"), revoking all previous proxies, hereby appoints Steven
Lash and James A. Lebovitz, and each of them acting individually, as the
attorneys and proxies of the undersigned, with full power of substitution, to
cast all votes for all shares of FPA Common Stock, par value $.002 per share
("FPA Common Stock"), which the undersigned would be entitled to cast if
personally present at the Special Meeting of Stockholders of FPA, to be held
at San Diego Marriott Mission Valley, 8757 Rio San Diego Drive, San Diego,
California 92108, on Thursday, October 31, 1996 at 9:00 a.m., local time, and
any and all adjournments or postponements thereof. Said proxies are authorized
and directed to vote as indicated with respect to the following matters:
1. To adopt an Agreement and Plan of Merger (the "Merger Agreement")
between FPA, Sterling Acquisition Corporation ("Merger Sub"), a wholly
owned subsidiary of FPA, and Sterling Healthcare Group, Inc. ("Sterling").
The Merger Agreement provides, among other things, for the merger of Merger
Sub with and into Sterling (the "Merger") pursuant to which Sterling will
become a wholly owned subsidiary of FPA and each outstanding share of
Sterling Common Stock, par value $.0001 per share (the "Sterling Common
Stock"), will be converted into 1.4 (the "Exchange Ratio") shares of FPA
Common Stock, subject to certain potential adjustments.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To approve amendments to the FPA Medical Management, Inc. Omnibus Stock
Option Plan (the "FPA Plan"), which, if approved, will only become
effective upon consummation of the Merger. The amendment would, upon
becoming effective, (i) increase the total number of shares of FPA Common
Stock issuable upon exercise of options granted under such plan from
2,500,000 to 4,000,000 if the Merger is consummated, 3,500,000 if the
Foundation Transaction is consummated, and 5,000,000 if the Merger and the
Foundation Transaction are consummated and (ii) limit the number of shares
of FPA Common Stock for which options may be granted under the FPA Plan to
any person during any calendar year to .
FOR [_] AGAINST [_] ABSTAIN [_]
3. To approve the postponement or adjournment of the Special Meeting for
the solicitation of additional votes.
FOR [_] AGAINST [_] ABSTAIN [_]
4. To vote on such other business as may properly come before the Special
Meeting of Stockholders and any and all adjournments or postponements
thereof.
(PLEASE DATE AND SIGN ON REVERSE SIDE)
<PAGE>
(CONTINUED FROM REVERSE SIDE)
This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" approval of the Merger
Agreement, "FOR" approval of the Amended Plan and "FOR" approval of the
Foundation Agreement. This Proxy also delegates discretionary authority to
vote with respect to any other business which may properly come before the
Special Meeting of Stockholders and any and all adjournments or postponements
thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND THE PROXY STATEMENT.
NOTE: PLEASE SIGN THIS PROXY EXACTLY AS THE Dated: ______________, 1996
NAME(S) APPEARS HEREON. WHEN SIGNING AS ___________________________
ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR, SIGNATURE OF STOCKHOLDER
TRUSTEE OR GUARDIAN, PLEASE ADD YOUR TITLE AS ___________________________
SUCH. PROXIES EXECUTED IN THE NAME OF A SIGNATURE OF STOCKHOLDER
CORPORATION SHOULD BE SIGNED ON BEHALF OF THE
CORPORATION BY A DULY AUTHORIZED OFFICER.
WHERE SHARES ARE OWNED IN THE NAME OF TWO OR
MORE PERSONS, ALL SUCH PERSONS SHOULD SIGN
THIS PROXY.
PLEASE SIGN, DATE AND RETURN IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
<PAGE>
EXHIBIT 99.2
STERLING HEALTHCARE GROUP, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 31, 1996
The undersigned shareholder(s) of Sterling Healthcare Group, Inc., a Florida
corporation ("Sterling"), revoking all previous proxies, hereby appoints
Stephen J. Dresnick and Nancy K. Watkin, and each of them acting individually,
as the attorneys and proxies of the undersigned, with full power of
substitution, to cast all votes for all shares of Sterling Common Stock, par
value $.0001 per share ("Sterling Common Stock"), which the undersigned would
be entitled to cast if personally present at the Special Meeting of
Shareholders of Sterling, to be held at the Miami Airport Hilton located at
5101 Blue Lagoon Drive, Miami Florida 33126, on Thursday, October 31, 1996 at
9:00 a.m., local time, and any and all adjournments or postponements thereof.
Said proxies are authorized and directed to vote as indicated with respect to
the following matters:
1. To adopt an Agreement and Plan of Merger (the "Merger Agreement")
between FPA Medical Management, Inc. ("FPA"), Sterling Acquisition
Corporation ("Merger Sub"), a wholly owned subsidiary of FPA, and Sterling.
The Merger Agreement provides, among other things, for the merger of Merger
Sub with and into Sterling (the "Merger") pursuant to which Sterling will
become a wholly owned subsidiary of FPA and each outstanding share of
Sterling Common Stock will be converted into 1.4 (the "Exchange Ratio")
shares of FPA Common Stock, par value $.002 per share, subject to certain
potential adjustments.
FOR [_] AGAINST [_] ABSTAIN [_]
2. To approve the postponement or adjournment of the Special Meeting for
the solicitation of additional votes.
FOR [_] AGAINST [_] ABSTAIN [_]
3. To vote on such other business as may properly come before the Special
Meeting of Shareholders and any and all adjournments or postponements
thereof.
(Please date and sign on reverse side)
<PAGE>
(continued from reverse side)
This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" approval of the Merger.
This Proxy also delegates discretionary authority to vote with respect to any
other business which may properly come before the Special Meeting of
Shareholders and any and all adjournments or postponements thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND THE PROXY STATEMENT.
NOTE: Please sign this Proxy exactly Dated:__________, 1996
as the name(s) appears hereon. When
signing as attorney-in-fact,
executor, administrator, trustee or
guardian, please add your title as
such. Proxies executed in the name
of a corporation should be signed on
behalf of the corporation by a duly
authorized officer. Where shares are
owned in the name of two or more
persons, all such persons should
sign this Proxy.
_________________________
Signature of Shareholder
_________________________
Signature of Shareholder
PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED POSTAGE PAID ENVELOPE.
<PAGE>
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Thomas-Davis Medical Centers,
P.C.
We have audited the accompanying balance sheets of Thomas-Davis Medical
Centers, P.C. (TDMC) as of December 31, 1993 and 1992, and the related
statements of operations, cash flows, and changes in stockholders' equity for
the years then ended (parent-company-only financial statements--see Note A to
the financial statements). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of TDMC as of
December 31, 1993 and 1992, and the results of operations, cash flows, and
changes in stockholders' equity for the years then ended in conformity with
generally accepted accounting principles.
Stevenson, Jones, Imig, Holmaas &
Kleinhans, P.C.
Tucson, Arizona April 27, 1994
