<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
COMMISSION FILE NUMBER 0-24276
--------
FPA MEDICAL MANAGEMENT, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0604264
- --------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
2878 CAMINO DEL RIO SOUTH
SUITE 301
SAN DIEGO, CA 92108
--------------------------------------
(Address of principal executive offices)
(Zip code)
(619) 295-7005
----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [_] NO
AS OF MAY 8, 1996 THERE WERE OUTSTANDING 11,314,008 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE $.002 PER SHARE.
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INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 1
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
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</TABLE>
<PAGE>
ITEM 1. FINANCIAL INFORMATION
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash - $ 615,918
Marketable securities $ 9,329,840 3,078,943
Accounts receivable - net of allowance for
uncollectible accounts of $337,353 and $331,983
at December 31, 1995 and March 31, 1996, respectively 10,371,149 18,939,975
Accounts receivable - other 1,664,114 2,181,484
Note receivable from FPASD 300,086 619,621
Income tax receivable 195,853 65,986
Prepaid expenses 393,662 506,898
Deferred income tax asset 491,824 454,282
--------------- ---------------
Total current assets 22,746,528 26,463,107
Property and equipment - net 6,324,900 7,727,498
Restricted cash and deposits 3,285,000 285,000
Goodwill - net of accumulated amortization of $548,606 and $1,060,279
at December 31, 1995 and March 31, 1996, respectively 33,023,607 56,810,243
Intangible assets - net of accumulated amortization of $249,682 and $379,858
at December 31, 1995 and March 31, 1996, respectively 5,988,579 5,161,641
Investment in GLHP 1,994,900 4,994,900
Other assets 434,770 798,545
--------------- ---------------
Total $ 73,798,284 $ 102,240,934
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,485,348 $ 4,728,243
Claims payable, including incurred but not reported claims 10,247,476 18,655,936
Accrued payroll and related liabilities 1,363,304 1,434,492
Income tax payable - 526,690
Borrowings on line of credit 788,325 -
Long-term debt - current portion 5,336,253 5,125,588
--------------- ---------------
Total current liabilities 21,220,706 30,470,949
Long-term debt - net of current portion 7,486,239 25,475,434
Deferred income tax liability 992,748 1,198,296
Minority interest 4,900 4,900
Stockholders' equity:
Preferred stock, $.001 par value per share, 2,000,000 shares
authorized, no shares outstanding - -
Common stock, $.002 par value, 18,000,000 shares authorized,
11,101,045 and 11,191,500 shares issued and outstanding at
December 31, 1995 and March 31, 1996, respectively 22,202 22,383
Additional paid-in capital 42,483,542 42,939,795
Stock payable 567,000 147,000
Accumulated earnings 1,020,947 1,982,177
--------------- ---------------
Total stockholders' equity 44,093,691 45,091,355
--------------- ---------------
Total $ 73,798,284 $ 102,240,934
=============== ===============
</TABLE>
See notes to consolidated financial statements.
1
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FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------
MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
Managed care revenue, assigned from Professional Corporations $ 5,142,785 $ 37,529,254
Fee-for-service revenue, assigned from Professional Corporations,
net of contractual allowances 340,368 2,284,268
-------------- -------------
Operating revenue, assigned from Professional Corporations 5,483,153 39,813,522
Expenses:
Medical services expense - Professional Corporations 1,180,167 3,762,170
Medical services expense - others 3,025,644 25,084,082
-------------- -------------
1,277,342 10,967,270
-------------- -------------
General and administrative expense 1,758,449 8,958,425
-------------- -------------
Income (loss) from operations (481,107) 2,008,845
Other income (expense):
Interest and other income 142,919 106,132
Interest expense (21,386) (383,031)
-------------- -------------
Total other income (expense) 121,533 (276,899)
-------------- -------------
Income (loss) before income taxes (359,574) 1,731,946
Income tax (expense) benefit 131,315 (770,716)
-------------- -------------
Net income (loss) $ (228,259) $ 961,230
============== =============
Net income (loss) per share: $ (0.03) $ 0.08
============== =============
</TABLE>
See notes to consolidated financial statements.
2
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FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
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March 31, 1995 March 31, 1996
-------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (228,259) $ 961,230
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 114,358 937,724
Imputed interest on notes payable - 36,951
Changes in assets and liabilities:
Accounts receivable (393,269) (9,052,480)
Income taxes receivable/payable 797 656,557
Deferred income taxes (132,115) 243,090
Accounts payable and accrued expenses (171,363) 1,242,895
Claims payable, including incurred but not reported
claims (108,713) 8,408,460
Accrued payroll and related liabilities 62,690 71,188
Prepaid expenses and other assets 22,363 (476,511)
---------------- ---------------
Total adjustments (605,252) 2,067,874
---------------- ---------------
Net cash provided (used) by operating activities (833,511) 3,029,104
Cash flows from investing activities:
Purchase of property and equipment (184,110) (1,438,017)
Payments for intangible assets (842,236) (1,007,580)
Net payments (to) from FPASD 4,529 (319,535)
Net sale of marketable securities 1,758,261 6,250,897
Acquisitions, net of cash acquired (120,518) (10,550,623)
Payments escrowed for acquisitions (1,260,000) -
---------------- ---------------
Net cash used by investing activities (644,074) (7,064,858)
---------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 36,434
Issuance of notes payable - 8,400,000
Payments of notes payable (141,667) (2,996,437)
Net payments under bank line of credit - (788,325)
Receipt of payment for stock subscriptions 4,188 -
Payments on long-term debt (2,055) -
---------------- ---------------
Net cash provided (used) by financing activities (139,534) 4,651,672
---------------- ---------------
Net increase (decrease) in cash (1,617,119) 615,918
Cash, beginning of period 2,118,100 -
---------------- ---------------
Cash, end of period $ 500,981 $ 615,918
================ ===============
Supplemental cash flow information:
Cash paid for interest $ 5,441 $ 369,695
================ ===============
Cash paid for income taxes - $ 940
================ ===============
Equipment acquired under capital leases - $ 247,901
================ ===============
Common stock issued in connection with
acquisitions - $ 420,000
================ ===============
Effects of acquisitions:
Fair value of assets acquired $ 1,248,124 $ 22,640,738
Liabilities assumed (1,127,606) (12,090,115)
================ ===============
Net cash paid for acquisitions $ 120,518 $ 10,550,623
================ ===============
</TABLE>
See notes to consolidated financial statements.
3
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FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the financial position of FPA
Medical Management, Inc. ("FPA") and subsidiaries and certain affiliated
professional corporations (collectively, the "Company"), and the results of its
operations and its cash flows for the interim periods presented. Although FPA
believes that the disclosures in these consolidated financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
full year.
The consolidated financial statements for the three months ended March 31,
1995 and March 31, 1996 are unaudited and should be read in conjunction with the
consolidated financial statements and notes thereto included in FPA's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995.
Consolidation of Subsidiaries - The Company's financial statements include
the activity of one majority-owned subsidiary, all of its wholly-owned
subsidiaries and certain affiliated professional corporations ("Professional
Corporations") over which the Company has direct or indirect unilateral and
perpetual control. 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. All intercompany transactions
have been eliminated in consolidation.
Net Income (Loss) Per Common Share - Net income (loss) per common share is
computed based on the weighted average number of shares outstanding, giving
retroactive effect to all stock splits, including a one-for-one Common Stock
dividend effective March 1, 1995.
2. SUBSEQUENT EVENTS
The following significant events have occurred subsequent to December 31,
1995:
Credit Agreement - On January 29, 1996, the Company entered into a
$15,000,000 credit, security, guarantee and pledge agreement ("Credit
Agreement") with two financial institutions. Permitted Borrowings, as defined in
the Credit Agreement, generally include acquisitions and capital expenditures.
Borrowings under the Credit Agreement bear interest at either LIBOR plus 2 1/4%
or prime rate plus 3/4%, as defined in the Credit Agreement. On February 1,
1996, the Company borrowed $6,400,000 in connection with three California
acquisitions, described below and on March 31, 1996, the Company borrowed an
additional $2,000,000. Fees of $150,000 were paid in connection with the Credit
Agreement. Fees of up to an additional $300,000 may be incurred if additional
borrowings are made. The balance outstanding is due in full on December 31,
1998, unless the total Permitted Borrowings exceed $5,000,000 and no Interim
Repayment, as defined in the Credit Agreement, has occurred prior to February 1,
1997, in which case the balance will be due December 31, 1997. Periodic payments
of accrued interest are due during the term of the Credit Agreement.
Additionally, the financial institutions were granted a security interest in
substantially all of the assets of the Company (excluding those of Gonzaba
Management Services Organization, Inc., FPA Medical Management of Michigan, Inc.
d/b/a QualNet, Inc., and OPSU, Inc., d/b/a Gonzaba Surgery Center), and the
stock of certain subsidiaries of FPA and Professional Corporations was pledged.
The debt is also guaranteed by the Professional Corporations. In connection with
the Credit Agreement, the Company must maintain certain debt and equity ratios
and profitability thresholds. The Company issued to the financial institutions a
warrant to purchase 50,000 shares of Common Stock at $9.125 per share
exercisable prior to February 2, 2001, subject to certain anti-dilution
provisions.
California Acquisitions - Effective January 31, 1996, a Professional
Corporation acquired the stock of three independent practice associations
("IPAs") in new regions in California. All three were stock acquisitions and
were financed
4
<PAGE>
through notes payable issued by the Company to the Professional Corporation. In
connection with these transactions, the Company obtained funding from the Credit
Agreement for a cumulative amount of $6,400,000. The purchase price of the first
acquisition was $7,177,331 ($3,900,000 in cash and the remainder through a ten-
year note payable) and provides the Company access to the Los Angeles,
California market. The second acquisition was made for $6,159,015 ($500,000 in
cash and the remainder through a ten-year note payable) and provides the Company
access to the Ventura County, California market. The purchase price of the third
acquisition was $10,063,654 ($7,000,000 in cash and the remainder through a ten-
year note payable) and provides the Company access to the Sacramento, California
market.
In connection with these acquisitions, the Company opened new
administrative offices in the Los Angeles and Sacramento areas in January 1996.
These acquisitions will be accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of tangible
assets acquired will be treated as goodwill and amortized over the expected
periods of future benefit to the Company.
Great Lakes Health Plan ("GLHP") - On March 7, 1996, FPA made an additional
capital contribution of $3,000,000 to GLHP in connection with the acquisition by
GLHP of a clinic health plan and a number of clinics in Michigan. The acquired
plan currently services approximately 17,000 Medicaid enrollees.
Licensure - On February 15, 1996, the Company, on behalf of Family and
Senior Care, Inc., one of its wholly owned subsidiaries, completed and filed its
restricted license application with the California Department of Corporations
(the "Department"). The Department is currently reviewing the application.
Florida Acquisition - On May 5, 1996, FPA entered into a stock purchase
agreement with Physician Corporation of American ("PCA") to acquire all of the
outstanding stock of Physicians First, Inc., a wholly owned subsidiary of PCA
operating 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. As consideration for the acquisition and a related
agreement not to compete, FPA is expected to pay $23,000,000, comprised of
$15,000,000 in a note payable by FPA, $6,500,000 in common stock, and $1,500,000
in cash. The source of the cash payment is expected to be working capital;
however, the cash payment may be reduced or increased depending on the value of
the common stock as calculated at closing. The acquisition will be accounted for
using the purchase method of accounting. The acquisition is expected to close on
or about June 1, 1996, subject to the receipt of regulatory approvals and
satisfaction of certain other conditions.
5
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
FPA Medical Management, Inc. and its subsidiaries and certain consolidated
Professional Corporations (collectively, the "Company") derive substantially all
of their operating revenue from the assignment by the Professional Corporations
to FPA of (i) the payments made by payors to the Professional Corporations for
medical services and (ii) fee-for-service revenues generated by the Professional
Corporations for medical services. Managed care revenue assigned from the
Professional Corporations consists primarily of capitation payments and
additional compensation derived from shared risk pool agreements with payors
based upon efficient utilization of hospital services provided to enrollees in
the FPA network. Under payor contracts in some regions, the Company is
responsible for the provision of all medical care for enrollees, including
hospital services. Under these arrangements, the Company does not participate in
shared risk pools, but receives revenue to cover the services typically paid for
by the shared risk pools. Medical services expense incurred consists primarily
of capitation payments to primary care physicians and certain specialty care and
ancillary providers, payments to non-capitated providers for specialty care paid
for on a discounted fee-for-service basis, and payments made to Professional
Corporations for medical care provided.
The Company expects to continue expanding the FPA network through increased
market penetration and the acquisition of, and affiliation with, individual and
group physician practices and IPAs and related businesses. In September 1994,
FPA completed the first geographic expansion of the FPA network by entering the
Pennsylvania market. The Company established itself in this new market by
facilitating the organization of, then contracting with, the Greater Delaware
Valley Independent Physicians Association, Inc., which created a 400-physician
network covering portions of Pennsylvania and New Jersey. In November 1994, the
Company acquired substantially all of the outstanding shares of capital stock of
PrimeCare, Inc., an IPA that holds contracts with 273 primary care physicians in
Southern New Jersey. In July 1995, the FPA network expanded by 66 primary care
physicians in Southern New Jersey through an affiliation with a primary care
network of the University of Medicine and Dentistry of New Jersey. The FPA
network also recently expanded into Northern New Jersey, growing the FPA network
in New Jersey to include approximately 815 primary care physicians, three payors
and approximately 33,000 enrollees. On July 1, 1995, FPA acquired Arizona
Managed Care Services, Inc. and its affiliate in the Phoenix, Arizona
metropolitan area, which provides services to approximately 13,000 HMO
enrollees, serviced by 174 primary care physicians. In November 1995, the
Company acquired Gonzaba Management Services Organization, Inc. and its
affiliate in San Antonio, Texas, which service approximately 40,000 fully
delegated HMO members and consists of 33 primary care physicians and over 370
contracted specialists, providing care in six medical facilities. In January
1996, the Company acquired three independent practice associations in the Los
Angeles, Ventura County and Sacramento regions of California, which added
approximately 83,000 enrollees and 450 primary care physicians to the FPA
network.
RESULTS OF OPERATIONS
The following table sets forth for the three months ended March 31, 1995
and March 31, 1996 selected financial data expressed as a percentage of
operating revenue assigned from Professional Corporations.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
MARCH 31, MARCH 31,
--------- ---------
1995 1996
---- ----
<S> <C> <C>
Operating revenue, assigned from Professional Corporations 100.0% 100.0%
Medical services expenses 76.7 72.5
-------- --------
23.3 27.5
General and administrative expense 32.1 22.5
-------- --------
Income (loss) from operations (8.8) 5.0
Other income (expense) 2.2 (0.7)
-------- --------
Income (loss) before income taxes (6.6) 4.3
Income tax (expense) benefit 2.4 (1.9)
-------- --------
Net income (loss) (4.2)% 2.4%
======== ========
</TABLE>
6
<PAGE>
The Company's operating revenue assigned from Professional Corporations
increased to $39,813,522 for the three months ended March 31, 1996 from
$5,483,153 for the three months ended March 31, 1995. This increase resulted
primarily from the increase in average enrollment to 210,591 for the three
months ended March 31, 1996 from 35,427 for the three months ended March 31,
1995, primarily from the addition of (i) approximately 84,000 enrollees in 1996
in the Los Angeles, California and Sacramento, California regions, (ii)
approximately 37,000 and 13,000 enrollees in Texas and Arizona, respectively, as
a result of 1995 acquisitions, (iii) growth in East Coast enrollment of
approximately 25,000 enrollees and (iv) 17,000 additional enrollees in the San
Diego region. In the first quarter of 1996, the Company generated net fee-for-
service revenue assigned from Professional Corporations of approximately
$2,280,000 as a result of the acquisition of physician practices in 1995. This
compares to 1995 net fee-for-service revenue of approximately $340,000. Managed
care revenue assigned from Professional Corporations has also increased as a
result of physician practice acquisitions made since the first quarter of 1995,
as reflected in the average enrollment figures above.
Medical services expense for the three months ended March 31, 1996 was
$28,846,252 or 72.5% of operating revenue assigned from Professional
Corporations compared to $4,205,811 or 76.7% of operating revenue assigned from
Professional Corporations for the three months ended March 31, 1995. The
significant decrease in medical loss ratio from the first quarter of 1995 to the
first quarter of 1996 results primarily from (i) the capitation of more
specialists in the FPA network, thus limiting specialty care costs, (ii) the
continuing improvement in East Coast medical loss ratio as a result of the
maturity of operations in that region, and (iii) increased average revenue per
enrollee in new markets.
General and administrative expense for the first three months of 1996 was
$8,958,425 or 22.5% of operating revenue assigned from Professional Corporations
as compared to $1,758,449 or 32.1% of operating revenue assigned from
Professional Corporations in the comparable period in 1995. The 9.6% decrease in
general and administrative costs as a percentage of operating revenue assigned
from Professional Corporations results primarily from economies of scale reached
as the Company's membership grew. In 1995 the Company hired senior management
and other personnel in new regions prior to the addition of a significant number
of enrollees. In the first quarter of 1995, salaries accounted for approximately
5% more of operating revenue assigned from Professional Corporations than in the
first quarter of 1996. Partially offsetting this was an increase in rental
costs, which was the result of operating more sites in 1996 than in 1995. The
remaining decrease as a percentage of operating revenue assigned from
Professional Corporations is due to other economies of scale achieved as a
result of the increase in volume.
For the first three months of 1996, the Company had net income of $961,230
as compared to a net loss of $228,259 for the three months ending March 31,
1995.
QUARTERLY RESULTS
The following table presents certain quarterly financial information for
the eight quarters ended March 31, 1996. In the opinion of management, this
information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this document and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts presented below to present fairly the quarterly results when read in
conjunction with the audited financial statements of the Company and notes
thereto. The Company's quarterly results have in the past been subject to
fluctuation and, as a result, the operating results for any quarter are not
necessarily indicative of results for any future period.
7
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<TABLE>
<CAPTION>
QUARTER ENDED
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June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1994 1994 1994 1995 1995 1995 1995 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue, assigned
from Professional
Corporations $4,227,053 $ 4,341,721 $5,799,350 $5,483,153 $ 10,261,653 $ 14,402,617 $22,544,532 $39,813,522
Medical services expense 3,029,413 3,140,202 4,474,043 4,205,811 7,723,571 10,264,901 15,562,961 28,846,252
---------- ----------- ---------- ---------- ------------ ------------ ----------- -----------
1,197,640 1,201,519 1,325,307 1,277,342 2,538,082 4,137,716 6,981,571 10,967,270
General and administrative
expense 951,088 1,275,256 1,462,253 1,758,449 2,241,001 3,490,970 5,819,966 8,958,425
---------- ----------- ---------- ---------- ------------ ------------ ----------- -----------
Income (loss) from
operations 246,552 (73,737) (136,946) (481,107) 297,081 646,746 1,161,605 2,008,845
Other income (expense) 7,135 (418) 70,717 121,533 70,562 7,758 (10,128) (276,899)
---------- ----------- ---------- ---------- ------------ ------------ ----------- -----------
Income (loss) before taxes 253,687 (74,155) (66,229) (359,574) 367,643 654,504 1,151,477 1,731,946
Income tax (benefit)
expense 105,400 (21,596) (220) (131,315) 135,475 300,273 507,155 770,716
---------- ----------- ---------- ---------- ------------ ------------ ----------- -----------
Net income (loss) $ 148,287 $ (52,559) $ (66,009) $ (228,259) $ 232,168 $ 354,231 $ 644,322 $ 961,230
========== =========== ========== ========== ============ ============ =========== ===========
</TABLE>
Operating revenue assigned from Professional Corporations and medical
services expense during the first and third quarters have been and continue to
be affected by movements of members in payor plans from one plan to another
during periods of open enrollment for payors. Retroactive capitation rate
increases generally take effect during the second quarter, while medical
services expense increases tend to occur ratably throughout the year. Quarterly
results may be affected by final settlements of shared risk pool distributions
accrued in the previous year. From time to time, the Professional Corporations
may receive amounts which differ from such estimated amounts. As the Company
adds new payors into the FPA network, the timing of these adjustments may vary
and, consequently, results in quarters other than the second quarter may be
affected in the future, especially due to the start-up of operations in new
regions where there is no operating history. Similarly, if medical services
expense varies from amounts previously accrued for claims incurred but not
reported ("IBNR"), quarterly operating results may fluctuate. A portion of the
Company's expansion strategy includes the acquisition of individual and group
physician practices by the FPA network, and any such acquisition may materially
affect quarterly operating results, causing quarterly fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish an infrastructure in new regions.
Capitation arrangements positively impact cash flow because the physician
networks receive capitation revenue prior to incurring costs associated with
services provided under those agreements. However, shared risk pool arrangements
negatively impact cash flow because settlements in connection with these
arrangements are typically not collected until significantly after the end of
the period in which they were accrued.
At March 31, 1996, the Company had cash and marketable securities of
$3,694,861 and a working capital deficit (current liabilities in excess of
current assets) of $4,007,842 compared to cash and marketable securities of
$9,329,840 and working capital of $1,525,822 at December 31, 1995. The decrease
in cash and marketable securities of $5,634,979 results primarily from: (i)
approximately $10,551,000 of cash payments in connection with acquisitions, (ii)
approximately $1,438,000 for the acquisition of property and equipment, (iii)
approximately $1,008,000 used to purchase intangible assets, (iv) approximately
$320,000 advanced to an affiliate, (v) approximately $2,996,000 in payments on
notes payable related to acquisitions, and (vi) approximately $788,000 in net
payments under a bank line of credit, partially offset by approximately
$3,029,000 provided by operations and $8,400,000 borrowed under the credit
agreement. At March 31, 1996 approximately 61% of the Company's current
liabilities consist of amounts accrued as payable to specialty care physicians
and ancillary providers. These accrued liabilities include claims received by
the Company which have not yet been paid as well as an estimate of costs for
covered medical benefits incurred by enrollees but not yet reported by
providers. These amounts are not due and payable until after the provider has
presented a claim and are typically paid within 45 business days of receipt of
such claims. The increase in IBNR claims and claims payable from approximately
$10,247,000 at December 31, 1995 to approximately $18,656,000 at March 31, 1995
resulted primarily from significantly increased membership.
8
<PAGE>
On January 29, 1996, the Company entered into a $15,000,000 credit,
security, guarantee and pledge agreement (the "Credit Agreement") with two
financial institutions. Permitted Borrowings, as defined in the agreement,
generally include acquisitions and capital expenditures. Borrowings under this
agreement bear interest at either LIBOR plus 2 1/4% or prime rate plus 3/4%, as
defined in the agreement. At March 31, 1996, the Company had borrowed $8,400,000
under this agreement.
The increase in long-term debt from approximately $12,822,000 at December
31, 1995 to approximately $30,601,000 at March 31, 1996 results primarily from
$8,400,000 in borrowings under the Credit Agreement and the issuance of notes
payable and assumption of long-term debt in connection with acquisitions of
physician practice assets of approximately $12,090,000, net of repayments of
acquisition debt of approximately $2,996,000.
During the next twelve months, management intends to expend approximately
$1,000,000 on improved management information systems, and up to approximately
$5,000,000 for expansion of the FPA network, either through physician practice
acquisition, geographic expansion or a combination thereof.
The Company believes that its cash on hand, the remaining proceeds from the
Company's recent public offering of its Common Stock and anticipated cash flows
from its operations will be sufficient to meet the Company's capital needs
through approximately the second quarter of 1996, at which time the Company
intends to obtain additional financing to support planned expansion. To the
extent that this additional financing is not available, the Company may delay
certain potential acquisitions or certain geographic expansion or may seek
alternate sources of financing.
The strategy to expand the FPA network involves the acquisition of
individual and group physician practice assets and related businesses. Such
acquisitions may be consummated using cash, stock, notes or any combination
thereof. Effective May 15, 1996, the Company will be eligible to use the pooling
method of accounting for acquisitions which comply with the provisions of
Accounting Principles Board Opinion No. 16 for this treatment. Management does
not believe that inflation will have a material effect on the operations of the
Company .
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K and Form 8-KA: The registrant filed the following
Reports on Form 8-K since January 1, 1996:
<TABLE>
<CAPTION>
Date of Report Item Reported
------------------ -------------
<S> <C>
November 9, 1995 7
February 1, 1996 2,7
February 1, 1996 7
</TABLE>
(c) (99) Stock Purchase Agreement, dated as of May 5, 1996, by and between
Physician Corporation of America and FPA.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPA MEDICAL MANAGEMENT, INC.
----------------------------
(Registrant)
DATE: May 14, 1996 /s/ SETH FLAM
--------------- ------------------------
SETH FLAM
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: May 14, 1996 /s/ STEVEN M. LASH
-------------- ------------------------
STEVEN M. LASH
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
11
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is entered into as of
May 5, 1996, by and between Physician Corporation of America, a Delaware
corporation ("Seller"), and FPA Medical Management, Inc., a Delaware corporation
("Buyer").
RECITALS
A. Seller owns all of the outstanding capital stock of Physicians First,
Inc., a Delaware corporation (the "Corporation").
B. Buyer is a national healthcare management service organization that
provides certain management and administrative services to healthcare
providers.
C. Seller desires to sell to Buyer, and Buyer desires to purchase from
Seller, all of the outstanding capital stock of the Corporation as set forth in
Section 2.10 hereof (the "Shares") upon the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and conditions set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. PURCHASE AND SALE OF SHARES.
---------------------------
1.1 PURCHASE OF SHARES. Subject to the terms and conditions set
------------------
forth in this Agreement, Seller hereby agrees to sell, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller for the consideration
hereinafter provided, the Shares at the Closing (as hereinafter defined) and
effective as of the Effective Closing Date (as hereinafter defined).
1.2 PURCHASE PRICE. Subject to the terms and conditions of this
--------------
Agreement, the purchase price ("Purchase Price") to be paid by Buyer for the
purchase of the Shares shall consist of (a) Sixteen Million Five Hundred
Thousand Dollars ($16,500,000.00), (b) the FPA Shares (as hereinafter defined),
(c) the Subsequent Payments (as hereinafter defined), (d) the Warrants (as
hereinafter defined) and (e) an amount (the "Additional Amount")equal to the
audited 1996 consolidated after tax earnings of the Corporation, if any, through
the Effective Closing Date calculated in accordance with Section 1.3.1.4.
<PAGE>
1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable as
-------------------------
follows:
1.3.1 CASH.
----
1.3.1.1 At the Closing, Buyer shall pay to Seller One Million
Five Hundred Thousand Dollars ($1,500,000.00) by wire transfer of United States
federal funds to Seller's bank account (the "Cash Payment"), which bank account
shall be designated by Seller in writing to Buyer at least three (3) business
days prior to the Closing. The Cash Payment shall be subject to adjustment
pursuant to Section 1.3.2.
1.3.1.2 On the Closing Date, Buyer shall execute and deliver, at
such location outside the State of Florida as the parties hereto shall mutually
agree, to Seller a promissory note, substantially in the form of Exhibit 1.3.1.2
attached hereto, with a twelve (12) month term in the principal amount of
Fifteen Million Dollars ($15,000,000.00) and earning interest thereon from the
Closing Date, unless paid in full within ninety (90) days thereafter, at the
rate of eight percent (8%) per annum during the first six (6) months of such
twelve (12) month term and thereafter for the balance of such term, such
interest rate shall increase at the rate of one percent (1%) per month (the
"Note"). The Note shall be secured by the Shares pursuant to the Security
Agreements, the Asset Security Agreements, and the Guaranties (all as
hereinafter defined).
1.3.1.3 On each of the first and second anniversaries of the
Effective Closing Date, Buyer shall pay to Seller up to One Million Dollars
($1,000,000) by wire transfer of United States federal funds to Seller's bank
account (each, a "Subsequent Payment" and collectively, the "Subsequent
Payments"), which amounts shall be calculated in accordance with Exhibit 1.3.1.3
attached hereto and shall be subject to offset pursuant to Section 9.1 of this
Agreement, and which bank account shall be designated by Seller in writing to
Buyer at least three (3) business days prior to the date of each Subsequent
Payment.
1.3.1.4 The Additional Amount shall be paid as follows: Seller
shall be entitled to distribute or dividend, at or prior to the Closing,
seventy-five percent (75%) of the estimated 1996 consolidated after tax earnings
(which estimate shall be determined by Seller in good faith) of the Corporation,
if any, through May 31, 1996 (the "Estimated Amount"). Following the Closing,
Deloitte & Touche LLP (or another accounting firm of nationally recognized
standing selected by Buyer) ("Buyer's Accountants") shall perform an audit (in
accordance with generally accepted accounting principles) of the Corporation
through the Effective Closing Date. Such audit shall be paid for by Buyer and
shall be completed within ninety (90) days following
2
<PAGE>
Closing. The Additional Amount shall be calculated based upon the audited
financial statements prepared by Buyer's Accountants, unless Seller shall object
thereto in writing, delivered to Buyer within ten (10) days after receipt of a
copy of the audited financial statements prepared by Buyer's Accountants. In the
event Buyer and Seller (and their respective accountants) cannot reach agreement
on the calculation of the Additional Amount within fifteen (15) days of Buyer's
receipt of Seller's written objection, then either party may elect to have such
disagreement resolved by an accounting firm of nationally recognized standing
(the "Third Accounting Firm") to be mutually selected by Buyer and Seller or, if
no agreement is reached, to be mutually selected by Buyer's Accountants and
Seller's accountants. The Third Accounting Firm shall make a calculation of the
Additional Amount, which shall be final and binding for purposes of this Section
1.3.1.4. The Third Accounting Firm shall be instructed to use every reasonable
effort to perform its services within fifteen (15) days, but in any event as
soon as practicable. The fees and expenses for the services of the Third
Accounting Firm shall be shared equally by Seller and Buyer. On the one
hundredth (100th) day following the Closing Date (or as soon as practicable
thereafter in the event of a dispute in the calculation of the Additional
Amount) (the "Settlement Date"), Buyer shall pay to Seller the balance the
difference between (a) the estimated amount and the audited 1996 consolidated
after tax earnings of the Corporation through May 31, 1996 (as determined in
accordance with the procedures specified in this Section 1.3.1.4) (the "1996
Earnings") and (b) the Estimated Amount, except that if such 1996 Earnings are
less than the Estimated Amount, Seller Shall pay the difference to buyer on the
Settlement Date. The audited financial statements hereunder shall be performed
in accordance with generally accepted accounting principles consistently
applied, except that for purposes of determining accruals for professional
liability, including malpractice claims, the standard set forth in Exhibit 3.5.2
shall be employed to determine whether or not an accrual shall be made.
1.3.2 COMMON STOCK. At the Closing, Buyer shall deliver to Seller
------------
Five Hundred Twenty Five Thousand (525,000) shares (the "FPA Shares") of
unregistered common stock, par value $.002 per share, of Buyer ("Common Stock"),
provided that if the product of Five Hundred Twenty Five Thousand (525,000)
- --------
times the average closing price of the Common Stock as reported on the Nasdaq
National Market for the ten (10) trading days immediately prior to the date that
is three (3) days prior to the Closing Date is (a) greater than Six Million Five
Hundred Thousand Dollars ($6,500,000), then such difference, up to a maximum of
One Million Five Hundred Thousand Dollars ($1,500,000.00), shall be subtracted
from the Cash Payment or (b) less than Six Million Five Hundred Thousand Dollars
($6,500,000), then such difference
3
<PAGE>
shall be added to the Cash Payment. The FPA Shares shall be subject to the
Registration Rights Agreement (as hereinafter defined). The FPA Shares will be
issued and delivered outside the State of Florida. Buyer shall pay all
documentary stamp taxes and similar governmental fees imposed in connection with
the issuance and delivery of the FPA Shares.
1.3.3 WARRANTS. At the Closing, Buyer will issue to Seller two
--------
warrants (collectively, the "Warrants"), substantially in the forms of Exhibits
1.3.3.1 and 1.3.3.2 attached hereto.
1.4 [Reserved].
1.5 ALLOCATION OF PURCHASE PRICE AND ELECTIONS. The Purchase Price shall
------------------------------------------
be allocated in the manner set forth in Exhibit 1.5 attached hereto. Seller and
Buyer shall report this transaction in accordance with such allocation for
federal and state income tax purposes and shall file with the appropriate taxing
authorities all forms or returns required with respect to such transaction. If
requested by Buyer, Seller shall join with Buyer in making an election under
Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code")
(and any corresponding elections under state, local or foreign tax law) with
respect to the stock acquisition contemplated hereunder, provided that (a) Buyer
agrees to pay, promptly upon demand, the incremental tax cost to Seller
resulting solely from such election (grossed up at a 40% effective tax rate),
(b) the applicable allocation of purchase price shall be mutually agreed upon by
Seller and Buyer, and (c) Buyer agrees to indemnify Seller, for the applicable
statute of limitations period under the Code, from and against any and all
liabilities costs and reasonable expenses resulting from or arising out of any
Internal Revenue Service or Florida Department of Revenue audit or challenge of
such election.
1.6 CLOSING COSTS. Except as otherwise provided in Section 1.8, Seller
-------------
shall be responsible for the payment of all costs and expenses related to
Seller's attorneys', accountants', consultants' and advisors' fees and any and
all other expenses contemplated to be paid by Seller under this Agreement. Buyer
shall be responsible for the payment of the applicable filing fee under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), as well as all costs and expenses related to Buyer's attorneys',
accountants', consultants' and advisors' fees and any and all other expenses
contemplated to be paid by Buyer under this Agreement.
1.7 CLOSING DATE. The closing of the transactions contemplated by this
------------
Agreement ("Closing") shall take place at 10:00 a.m. (Eastern Standard Time) on
the third business day
4
<PAGE>
following satisfaction of the condition set forth in Sections 7.1.13 and 7.2.10,
at the offices of Physician Corporation of America, located at 5835 Blue Lagoon
Drive, Miami, Florida, or on such other date and/or at such other time and place
as the parties shall mutually agree, but in no event shall the Closing occur
later than June 30, 1996. The date upon which the Closing shall occur is
referred to in this Agreement as the "Closing Date". The date upon which the
Closing shall be effective shall be the first day of the month in which the
Closing occurs and is referred to in this Agreement as the "Effective Closing
Date".
1.8 SALES TRANSFER TAXES AND FEES. Seller shall be responsible for any
-----------------------------
applicable documentary, use, filing, sales, transfer and other taxes or fees
imposed on Seller due or payable as a result of the conveyance, assignment,
transfer or delivery of the Shares by Seller to Buyer.
1.9 GROUP PHYSICIAN SERVICES AGREEMENT. At the Closing, Seller and Buyer
----------------------------------
shall cause a group physician services agreement (the "Group Physician Services
Agreement") to be entered into by the parties thereto, substantially in the form
of Exhibit 1.9 attached hereto.
1.10 REGISTRATION RIGHTS AGREEMENT. At the Closing, Seller and Buyer
-----------------------------
shall enter into a registration rights agreement (the "Registration Rights
Agreement"), substantially in the form of Exhibit 1.10 attached hereto.
1.11 SECURITY AGREEMENTS. At the Closing, Seller and Buyer and Seller
-------------------
and the Corporation shall enter into a pledge and security agreement (including,
in the case of the security agreement executed by the Corporation, the
performance guaranty thereunder by Buyer) (each, a "Security Agreement"),
substantially in the form of Exhibit 1.11 attached hereto.
1.12 ASSET SECURITY AGREEMENTS. At the Closing, Buyer shall cause the
-------------------------
Corporation and each Subsidiary of the Corporation to execute an asset security
agreement (including Buyer's performance guaranty thereunder) (each, an "Asset
Security Agreement"), substantially in the form of Exhibit 1.12 attached hereto.
1.13 GUARANTIES. At the Closing, Buyer shall execute, and shall cause the
----------
Corporation and each of its Subsidiaries to execute, a guaranty (each, a
"Guaranty"), substantially in the form of Exhibit 1.13 attached hereto.
1.14 ADMINISTRATIVE SERVICES AGREEMENT. At the Closing, Seller and Buyer
---------------------------------
shall enter into an administrative services agreement (the "Administrative
Services Agreement"), in form and substance reasonably acceptable to the parties
and substantially
5
<PAGE>
in compliance with the terms set forth on Exhibit 1.14, and which shall provide
for, among other things, the provision by Seller of Management Information
System ("MIS") services to Buyer, at no charge, for a period of six (6) months
following the Effective Closing Date.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER.
----------------------------------------
Seller represents and warrants to Buyer, which representations and
warranties are true and correct on the date hereof and shall be true and correct
through and including the Closing Date, as follows. (When used in this Section
2, "to its knowledge," "to the Seller's knowledge" or like terms shall mean the
actual knowledge of Seller's directors and officers.)
2.1 ORGANIZATION; GOOD STANDING. Seller is a corporation duly organized,
---------------------------
validly existing and in good standing under the laws of the State of Delaware.
Seller is duly authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required, except where the
failure to be so authorized would not have a material adverse effect on Seller.
2.2 AUTHORITY. Seller has all requisite corporate power and authority to
---------
(a) execute and deliver this Agreement, and (b) consummate the transactions
contemplated hereby.
2.3 BINDING EFFECT. All action on the part of Seller necessary for the
--------------
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby has been or will be taken
prior to the Closing Date. This Agreement shall constitute the legal, valid and
binding obligation of Seller, enforceable in accordance with its terms except as
enforceability may be restricted, limited or delayed by applicable bankruptcy or
other laws affecting creditors' rights generally and except as enforceability is
subject to general principles of equity.
2.4 CONSENTS. Except as set forth on Exhibit 2.6 attached hereto and
--------
except for the filings by Seller and Buyer required by the HSR Act, Seller is
not required to obtain the consent, approval or authorization of, or make a
filing or registration with, any governmental authority (federal, state or
local) or other person or entity in order to consummate the sale of the Shares
and satisfy its obligations hereunder.
2.5 COMPLIANCE WITH LAWS. To Seller's knowledge, Seller is not in
--------------------
violation of any applicable constitutions, statues, regulations, rules, codes,
ordinances or other laws or injunctions, judgments, writs, orders, decrees or
rulings which violation would have a material adverse effect on Seller's
6
<PAGE>
ability to perform its obligations hereunder. Seller has received no notice of
a governmental agency, board or accounting body investigation of Seller which
would have a material adverse effect on Seller's ability to perform its
obligations hereunder, and Seller is not aware of any facts and circumstances
which might reasonably be expected to result in such a governmental agency,
board or accounting investigation of Seller.
2.6 NO VIOLATION. Subject to obtaining the required consents and
------------
approvals set forth on Exhibit 2.6, the entry into and delivery of this
Agreement, the Group Physician Services Agreement, the Registration Rights
Agreement, the Security Agreements, the Administrative Services Agreement and
the consummation of the transactions contemplated hereby and thereby will not
constitute or result in a violation, breach or default (or an event which, with
notice or lapse of time or both, would constitute a default) under any provision
of any mortgage, lease, agreement, contract, instrument or other arrangement
nor, to Seller's knowledge, any constitution, statute, regulation, rule, code,
ordinance, order, writ, injunction, judgment, ruling or decree to which any
property of Seller is subject or by which Seller is bound which violation,
breach or default would have a material adverse effect on Seller's ability to
perform its obligations hereunder. Seller makes no representation or warranty
with respect to compliance with the new Physician Incentive Plan ("PIP")
regulations issued by Health Care Finance Agency ("HCFA"), notwithstanding
anything to the contrary in this Agreement.
2.7 LITIGATION. There is no action, claim, investigation or proceeding
----------
pending, or, to Seller's knowledge, threatened against or involving Seller which
would have a material adverse effect on Seller's ability to perform its
obligations hereunder.
2.8 BROKERS' FEES. Seller has no liability or obligation to pay any fees
-------------
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement for which Buyer could become liable or obligated.
2.9 INVESTMENT.
----------
(a) Seller is a sophisticated investor by virtue of its numerous
prior investments made on its own behalf or through entities that Seller, alone
or with others, controls. Seller is also an "Accredited Investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended.
(b) Seller has been furnished or has been given access to any and all
material documents and information regarding Buyer.
7
<PAGE>
(c) Seller acknowledges and understands that neither the FPA Shares
nor the Warrants (or underlying shares) have been registered under the
Securities Act of 1933, as amended, or related laws and regulations or any other
applicable securities laws of any other jurisdiction (collectively, the
"Securities Laws"). Seller understands that, except as provided in the
Registration Rights Agreement or the Note, it has no rights whatsoever to
request, and that the Buyer is under no obligation whatsoever to furnish, a
registration of the FPA Shares, the Warrants or the shares underlying the
Warrants, under the Securities Laws.
(d) The FPA Shares and Warrants Seller is acquiring are being
acquired solely for its account and are not being purchased with a view to, or
for resale in connection with, any distribution within the meaning of the
Securities Act of 1933, as amended, or any other applicable Securities Laws.
Seller will not resell or offer to resell the FPA Shares, the Warrants or the
shares underlying the Warrants except in accordance with the terms of this
Agreement and in compliance with all applicable Securities Laws.
(e) Seller understands that the FPA Shares being acquired, and the
shares underlying the Warrants, if and when acquired, will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act of
1933, as amended, and that the certificate(s) representing said shares will bear
a restrictive legend thereon (in addition to any other legend required by any
other provision of this Agreement) as follows:
The shares represented by this certificate have been acquired directly or
indirectly from the Issuer without being registered under the Securities
Act of 1933, as amended (the "Act"), or any other applicable securities
laws, and are restricted securities as that term is defined under Rule 144
promulgated under the Act. These shares may not be sold, pledged,
transferred, distributed or otherwise disposed of in any manner
("Transfer") unless they are registered under the Act and any applicable
securities laws, or unless the request for Transfer is accompanied by a
favorable opinion of counsel or written undertaking, reasonably
satisfactory to the Issuer, stating that the Transfer will not result in a
violation of the Act or any applicable securities laws. The Shares are
subject to a Registration Rights Agreement between Physician Corporation of
America and FPA Medical Management, Inc.
2.10 Shares. Seller holds of record and owns beneficially the number of
------
Shares set forth next to its name in Exhibit 2.10 attached hereto, which
Shares constitute all of the issued and
8
<PAGE>
outstanding capital stock of the Corporation. Other than any restrictions under
the Act and state securities laws and a security interest in favor of Citibank,
N.A., which security interest, with respect to the Shares, shall be released at
or before Closing, Seller has, and at Closing Seller will transfer to Buyer,
good and marketable title to the Shares, free and clear of any restrictions on
transfer, taxes, security interests, liens, pledges, mortgages, charges,
covenants, encumbrances, options, warrants, purchase rights, contracts,
commitments, equities, claims and demands (except for covenants set forth in
this Agreement). Seller is not a party to any option, warrant, purchase right
or other contract or commitment that could require Seller to sell, transfer or
otherwise dispose of any capital stock of the Corporation (other than this
Agreement). Seller is not party to any voting trust, proxy or other agreement
or understanding with respect to the voting of any capital stock of the
Corporation.
2.11 DISCLOSURE. No representation or warranty by Seller in this
----------
Agreement, nor any statement, certificate, schedule, document or exhibit hereto
furnished or to be furnished by or on behalf of Seller pursuant to this
Agreement or in connection with the transactions contemplated hereby, contains
or will contain any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein not misleading
in light of the circumstances in which they were made.
SECTION 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE CORPORATION AND THE
-----------------------------------------------------------------
SUBSIDIARIES.
------------
Seller represents and warrants to Buyer, which representations and
warranties are true and correct on the date hereof and shall be true and correct
through and including the Effective Closing Date (other than the representations
and warranties set forth in Sections 3.1, 3.2, 3.4, 3.7, 3.9, 3.10, 3.12, 3.13,
3.14, 3.15, 3.17, 3.20, 3.21 and 3.24, which shall be true and correct through
and including the Closing Date), as follows. When used in this Section 3, the
terms "to its knowledge," "to Seller's knowledge" or like terms referring to
Seller, the Corporation and its Subsidiaries, taken as a whole, shall mean the
actual knowledge of Seller's directors and officers and the directors and
officers of the Corporation and the Subsidiaries.
3.1 ORGANIZATION; GOOD STANDING. (a) The Corporation is a corporation
---------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware. The Corporation is duly authorized to conduct business and
is in good standing under the laws of each jurisdiction where such qualification
is required except where the failure to be so authorized would not have a
9
<PAGE>
Material Adverse Effect (as hereinafter defined). For purposes of this Section
3, "Material Adverse Effect" shall mean a material adverse effect on the assets,
business, financial condition or results of operations of the Corporation and
its Subsidiaries.
(b) Exhibit 3.1(b) lists each corporation, partnership, firm,
association or business organization, entity or enterprise in which the
Corporation has an equity interest or that is, directly or indirectly through
one or more intermediaries, controlled by the Corporation (each, a "Subsidiary"
and collectively, the "Subsidiaries"). Each of the Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. Each of the Subsidiaries is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required except where the failure to be
so authorized would not have a Material Adverse Effect. Except as listed in
Exhibit 3.1.(b), the Corporation does not own, directly or indirectly, any
capital stock or other equity securities of any corporation or have any direct
or indirect equity or other ownership interest in any entity or business. All
of the outstanding shares of capital stock or other securities of each
Subsidiary owned by the Company are free and clear of any security interest,
restriction, option, voting trust or agreement, proxy, encumbrance, claim or
charge of any kind whatsoever, and are validly issued, fully paid and
nonassessable. There are no (a) securities convertible into or exchangeable for
the capital stock or other securities of any Subsidiary, (b) options, warrants
or other rights to purchase or subscribe to capital stock or other securities of
any Subsidiary or securities which are convertible into or exchangeable for
capital stock or other securities of any Subsidiary, or (c) contracts,
commitments, agreements, understandings or arrangements of any kind relating to
the issuance, sale or transfer of any capital stock or other equity securities
of any Subsidiary, any such convertible or exchangeable securities or any such
options, warrants or other rights.
3.2 AUTHORITY. The Corporation and each of the Subsidiaries have all
---------
requisite corporate power and authority to (a) own or lease their properties and
assets, and (b) carry on their businesses as and where they are now being
conducted. The Corporations and each of the Subsidiaries hold and will hold on
the Closing Date (subject to the grant of the consents and approvals set forth
in Exhibits 2.6 and 3.9) all necessary licenses, permits, contracts and
approvals required by governmental laws or regulations from the federal
government, state authorities, local authorities and other regulatory agencies
necessary for the operation of the business in which they are engaged and to own
or lease their properties and assets.
10
<PAGE>
Seller has delivered to Buyer correct and complete copies of the Articles of
Incorporation or Articles of Association, as the case may be, and bylaws of the
Corporation and each of the Subsidiaries (as amended to the Closing Date). The
minute books (containing the records of meetings of the stockholders, the board
of directors and any committees of the board of directors), the stock
certificate books and the stock record books of the Corporation and each of the
Subsidiaries are correct and complete. None of the Corporation or the
Subsidiaries is in default under or in violation of any provision of its
respective Articles of Incorporation or Articles of Association, as the case may
be, or bylaws.
3.3 FINANCIAL STATEMENTS. Attached hereto as Exhibit 3.3 are copies of
--------------------
audited consolidated balance sheets and consolidated statements of operations,
stockholders' equity and cash flows for the Corporation for the years ended
December 31, 1995 and December 31, 1994 and the unaudited consolidated balance
sheet as of March 31, 1996 and unaudited consolidated income statement for the
three months ended March 31, 1996, and notes thereto, and any interim financial
statements prepared to date (the "Financial Statements"). Except for the three
month 1996 and interim Financial Statements, the Financial Statements have been
audited by independent certified public accountants and present fairly the
financial condition of the Corporation and the results of its operations at the
dates and for the periods indicated. The Financial Statements have been
prepared in accordance with generally accepted accounting principles, applied
consistently for the periods specified, and are consistent with the books and
records of the Corporation (which books and records are true, correct and
complete in all material respects). All liability accruals with respect to
professional liability, including medical malpractice, have been determined in
accordance with the accounting policy set forth on Exhibit 3.5.2 attached
hereto.
3.4 EVENTS SUBSEQUENT TO YEAR END FINANCIAL STATEMENTS. Since December
--------------------------------------------------
31, 1995, and except as set forth on Exhibit 3.4 attached hereto, there has not
been any material adverse change in the business, financial condition,
operations or results of operations of any of the Corporation or the
Subsidiaries. Without limiting the generality of the foregoing, since December
31, 1995, and except as set forth on Exhibit 3.4 attached hereto (and excluding
the execution, delivery and performance of this Agreement):
(a) none of the Corporation or the Subsidiaries has sold, leased,
transferred or assigned any of its assets, tangible or intangible, other than
for a fair consideration in the ordinary course of business;
11
<PAGE>
(b) none of the Corporation or the Subsidiaries has entered into any
agreement, contract, lease or license (or series of related agreements,
contracts, leases and licenses) either involving more than $50,000 or outside
the ordinary course of business;
(c) no party (including any of the Corporation or the Subsidiaries)
has accelerated, terminated, modified or cancelled any agreement, contract,
lease or license (or series of related agreements, contracts, leases and
licenses) involving more than $50,000 to which any of the Corporation or the
Subsidiaries is a party or by which any of them is bound;
(d) none of the Corporation or the Subsidiaries has imposed any
security interest, mortgage, pledge, lien, restriction, covenant, charge or
encumbrance of any kind or any character upon any of its assets, tangible or
intangible, involving more than $10,000 singly or $50,000 in the aggregate;
(e) none of the Corporation or the Subsidiaries has made any capital
expenditure (or series of related capital expenditures) either involving more
than $50,000 or outside the ordinary course of business;
(f) none of the Corporation or the Subsidiaries has made any capital
investment in, any loan to or any acquisition of the securities or assets of,
any other person (or series of related capital investments, loans and
acquisitions) either involving more than $50,000 or outside the ordinary course
of business;
(g) none of the Corporation or the Subsidiaries has issued any note,
bond or other debt security or created, incurred, assumed or guaranteed any
indebtedness for borrowed money or capitalized lease obligation involving more
than $50,000;
(h) none of the Corporation or the Subsidiaries has cancelled,
compromised, waived or released any right or claim (or series of related rights
and claims) either involving more than $50,000 or outside the ordinary course of
business;
(i) there has been no change made or authorized in the certificate or
articles of incorporation or bylaws of any of the Corporation or the
Subsidiaries;
(j) none of the Corporation or the Subsidiaries has issued, sold or
otherwise disposed of any of its capital stock, or granted any options, warrants
or other rights to purchase or obtain (including upon conversion, exchange or
exercise) any of its capital stock;
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(k) none of the Corporation or the Subsidiaries has declared, set
aside or paid any dividend or made any distribution with respect to its capital
stock (whether in cash or in kind) or redeemed, purchased or otherwise acquired
any of its capital stock;
(l) none of the Corporation or the Subsidiaries has experienced any
material damage, destruction or loss (whether or not covered by insurance) to
its property;
(m) none of the Corporation or the Subsidiaries has made any loan to,
or entered into any other transaction with, any of its directors, officers and
employees outside the ordinary course of business;
(n) none of the Corporation or the Subsidiaries (i) has entered into
any employment contract or collective bargaining agreement, written or oral, or
modified in any material respect the terms of any existing such contract or
agreement or (ii) has been involved in any labor dispute or disturbance, other
than routine individual grievances which are not material to its business,
financial condition or results of operation;
(o) none of the Corporation or the Subsidiaries has granted any
bonuses or a greater than five percent (5%) aggregate increase in the base
compensation of any of its directors, officers and employees outside the
ordinary course of business;
(p) none of the Corporation or the Subsidiaries has adopted, amended,
modified or terminated any bonus, profit-sharing, incentive, severance or other
plan, contract or commitment for the benefit of any of its directors, officers
and employees (or taken any such action with respect to any other Plan (as
hereinafter defined));
(q) none of the Corporation or the Subsidiaries has made any other
change in employment terms for any of its directors, officers and employees
outside the ordinary course of business;
(r) none of the Corporation or the Subsidiaries has made or pledged
to make any charitable or other capital contribution outside the ordinary course
of business; and
(s) other than events, occurrences, incidents, actions, failures to
act or transactions directly relating to professional liability, including
medical malpractice, there has not been any other occurrence, event, incident,
action, failure to act or transaction outside the ordinary course of business
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involving any of the Corporation or the Subsidiaries and involving more than
$50,000 singly or $250,000 in the aggregate.
3.5 ABSENCE OF UNDISCLOSED LIABILITIES.
----------------------------------
3.5.1 UNDISCLOSED LIABILITIES NOT RELATING TO PROFESSIONAL LIABILITY.
--------------------------------------------------------------
Except as and to the extent specifically disclosed on the balance sheet
contained in the most recent Financial Statements, neither the Corporation nor
the Subsidiaries has any liabilities, commitments or obligations not relating to
professional liability, including medical malpractice (secured or unsecured, and
whether accrued, absolute, contingent, direct, indirect or otherwise), other
than liabilities and obligations incurred since the date of the most recent
Financial Statement in the ordinary course of business and consistent with past
practice and none of which has or will have a material adverse effect on the
business, financial condition or results of operations of the Corporation or the
Subsidiaries. Except as and to the extent specifically disclosed on the balance
sheet contained in the most recent Financial Statements, to the knowledge of
Seller, there is no basis for the assertion against the Corporation or the
Subsidiaries of any liability and there are no circumstances, conditions,
happenings, events or arrangements, contractual or otherwise, which may give
rise to liabilities, except liabilities and obligations incurred in the ordinary
course of the Corporation's or the Subsidiaries' business and consistent with
past practice and liabilities relating to professional liability, including
medical malpractice.
3.5.2 UNDISCLOSED LIABILITIES RELATING TO PROFESSIONAL LIABILITY.
----------------------------------------------------------
Except as and to the extent specifically disclosed on the balance sheet
contained in the most recent Financial Statements or not required to be accrued
on the books of the Corporation or the Subsidiaries prior to the Closing under
the accounting policy for professional liability accruals set forth on Exhibit
3.5.2 attached hereto, neither the Corporation nor the Subsidiaries has any
liabilities, commitments or obligations relating to professional liability,
including medical malpractice (secured or unsecured, and whether accrued,
absolute, contingent, direct, indirect or otherwise), other than liabilities and
obligations incurred since the date of the most recent Financial Statement in
the ordinary course of business and consistent with past practice and none of
which has or will have a Material Adverse Effect. Except as and to the extent
specifically disclosed on the balance sheet contained in the most recent
Financial Statements or not required to be accrued on the books of the
Corporation or the Subsidiaries prior to the Closing under the accounting policy
for professional liability accruals set forth on Exhibit 3.5.2 attached hereto,
to the knowledge of Seller, there is no basis for the assertion against the
14
<PAGE>
Corporation or the Subsidiaries of any liability relating to professional
liability, including medical malpractice. Except as and to the extent disclosed
in the most recent Financial Statements or not required to be accrued on the
books of the Corporation or the Subsidiaries prior to the Closing under the
accounting policy for professional liability accruals set forth on Exhibit 3.5.2
hereto, there are no circumstances, conditions, happenings, events or
arrangements, contractual or otherwise, which may give rise to liabilities
relating to professional liability, including medical malpractice.
3.6 TITLE TO AND CONDITION OF ASSETS. With respect to the Assets (as
--------------------------------
hereinafter defined):
3.6.1 SOLE OWNERSHIP. Except as set forth on Exhibit 3.6.1 attached
--------------
hereto, the Corporation is the sole and exclusive legal and equitable owner of
all right, title and interest in and has good, clear, indefeasible and
marketable title to, or a valid leasehold interest in, all of the properties and
assets used by them, located on their premises or shown on the balance sheet
contained in the most recent Financial Statements or acquired after the date
thereof (collectively, the "Assets"). Except as set forth on Exhibit 3.6.1
attached hereto, none of the Assets are subject to (a) any security interest,
mortgage, pledge, lien, restriction, covenant, charge or encumbrance of any kind
or character, direct or indirect, whether accrued, absolute, contingent or
otherwise, or (b) any claims whereby any person or entity other than the
Corporation will have acquired or will have a basis to assert any right, title
or interest in, or right to possession, use, enjoyment or proceeds of any of the
Assets, involving more than $10,000 singly or $50,000 in the aggregate. None of
the Assets are subject to any restrictions with respect to the transferability
thereof, subject to laws of general applicability. The Corporation's title
thereto will not be affected by the transactions contemplated hereby.
3.6.2 NO MATERIAL DEFECTS. To the knowledge of Seller, and except as
-------------------
set forth on Exhibit 3.6.2 attached hereto, there is no material defect in or
unsafe condition with respect to any Assets.
3.6.3 GOOD CONDITION. To the knowledge of Seller, and except as set
--------------
forth on Exhibit 3.6.3 attached hereto, the Assets are in good operating
condition and repair, ordinary wear and tear excepted, and are located on the
premises where the Corporation's and the Subsidiaries' businesses are located.
All buildings and other structures owned or otherwise utilized by the
Corporation are in good condition and repair and have no structural defects or
defects affecting the plumbing, electrical, sewerage, or heating, ventilating or
air conditioning systems.
15
<PAGE>
3.7 TAXES.
-----
3.7.1 TAX RETURNS. Each of the Corporation and the Subsidiaries has
-----------
timely filed all federal, state, foreign, county, local and other tax returns
that it was required to file. All such tax returns were correct and complete in
all respects when filed. All taxes owed by any of the Corporation or the
Subsidiaries (whether or not shown on any tax return) have been paid. None of
the Corporation or the Subsidiaries currently is the beneficiary of any
extension of time within which to file any tax return. No claim has ever been
made by an authority in a jurisdiction where any of the Corporation or the
Subsidiaries does not file tax returns that it is or may be subject to taxation
by that jurisdiction. There are no security interests, mortgages, pledges,
liens, restrictions, covenants, charges or encumbrances of any kind on any of
the Assets that arose in connection with any failure (or alleged failure) to pay
any tax.
3.7.2 WITHHOLDING. Each of the Corporation and the Subsidiaries has
-----------
withheld and paid, when due, all taxes required to have been withheld and paid
in connection with amounts paid to any employee, independent contractor,
creditor, stockholder or other third party.
3.7.3 TAX DISPUTES. To the knowledge of Seller and the directors or
------------
officers of the Corporation and the Subsidiaries, no governmental authority has,
or has threatened to, assess any of the Corporation or the Subsidiaries with any
additional taxes for any period for which tax returns have been filed. There is
no dispute or claim concerning any tax liability of any of the Corporation or
the Subsidiaries. Seller has delivered to Buyer correct and complete copies of
all state and federal income tax returns, examination reports and statements of
deficiencies assessed against or agreed to by any of the Corporation or the
Subsidiaries since December 31, 1990.
3.7.4 WAIVERS AND EXTENSIONS. None of the Corporation or the
----------------------
Subsidiaries has waived any statute of limitations in respect of taxes or agreed
to any extension of time with respect to a tax assessment or deficiency.
3.7.5 CODE SECTIONS. The Corporation and the Subsidiaries (a) have
-------------
been members of an affiliated group filing a consolidated federal income tax
return, and (b) except as disclosed on the most recent Financial Statements
and/or set forth on Exhibit 3.7.5 hereto, none of the Corporation or the
Subsidiaries has any liability for the taxes of any person (other than any of
the Corporation or the Subsidiaries) under Treasury Regulation (S) 1.1502-6 (or
any similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
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<PAGE>
3.7.6 TAX INFORMATION. Exhibit 3.7.6 attached hereto sets forth the
---------------
following information with respect to each of the Corporation and the
Subsidiaries as of the most recent practicable date: (a) the basis of each of
the Corporation and the Subsidiaries in its assets, and (b) the amount of any
net operating loss, net capital loss, unused investment or other credit, unused
foreign tax or excess charitable contribution allocable to the Corporation or
the Subsidiaries.
3.7.7 UNPAID TAXES. The unpaid taxes (and any interest and penalties
------------
thereon or with respect thereto) of the Corporation and the Subsidiaries (a) did
not, as of the date of the balance sheet contained in the most recent Financial
Statements, exceed the reserve for tax liability (rather than any reserve for
deferred taxes established to reflect timing differences between book and tax
income) set forth on the face of the balance sheet contained in the most recent
Financial Statements, and (b) do not exceed that reserve as adjusted for the
passage of time through the Effective Closing Date in accordance with the past
custom and practice of the Corporation and the Subsidiaries in filing their tax
returns.
3.8 BOOKS OF ACCOUNT. The books of account of the Corporation and the
----------------
Subsidiaries accurately and fairly reflect, in reasonable detail and in all
material respects, the Corporation's and the Subsidiaries' transactions and the
disposition of their assets. All notes and accounts receivable of the
Corporation and the Subsidiaries are reflected in accordance with generally
accepted accounting principles on their books and records, are valid receivables
subject to no material setoffs or counterclaims, are current and collectible and
will be collected in accordance with their terms at their recorded amounts
subject only to normal adjustments in the ordinary course of business and the
reserves for contractual allowances and bad debts set forth on the face of the
balance sheet contained in the most recent Financial Statements as adjusted for
the passage of time through the Effective Closing Date in accordance with past
custom and practice of the Corporation and the Subsidiaries.
3.9 CONSENTS, LICENSES AND PERMITS. Except as set forth on Exhibits 2.6
------------------------------
or 3.9 attached hereto, neither the Corporation nor the Subsidiaries is required
to obtain the consent, approval or authorization of, or make a filing or
registration with, any governmental authority (federal, state or local) or other
person or entity in order to consummate the sale of the Shares and satisfy their
obligations hereunder except where the failure to obtain such consent, approval
or authorization would not have a Material Adverse Effect. Except for consents
relating to the Leases (as hereinafter defined in Section 3.2.2.2), third-party
payor contracts and management services agreements set forth on Exhibit 2.6
attached hereto, and regulatory approvals, if any,
17
<PAGE>
relating to the Group Physician Services Agreement (with respect to all of
which, Seller shall use its best efforts to obtain all necessary consents,
approvals and authorizations, and to make all necessary filings and
registrations prior to the Closing Date, Seller, the Corporation and the
Subsidiaries will have obtained all consents, releases and permissions of every
kind or nature required in connection with the sale of the Shares and the
performance of their obligations hereunder except where the failure to obtain
such consent, release or permission would not have a Material Adverse Effect.
Seller, the Corporation and the Subsidiaries shall obtain all such consents
without any material changes in the terms of the underlying agreements and
obligations. Each of the Corporation and the Subsidiaries has all licenses,
permits, approvals, authorizations and consents of all government entities and
all certification organizations required for the conduct of its business as
presently conducted. All such licenses, permits, approvals, authorizations and
consents are described on Exhibit 3.9 attached hereto and are in full force and
effect. The Corporation and the Subsidiaries are and have been in compliance in
all material respects with all such permits, licenses, approvals, authorizations
and consents.
3.10 COMPLIANCE WITH LAWS. To Seller's knowledge, the Corporation, the
--------------------
Subsidiaries and the contract physicians have operated their businesses in
compliance with, and are not in violation of, any applicable constitutions,
statutes, regulations, rules, codes, ordinances or other laws or constitutions,
injunctions, judgments, writs, orders, decrees or rulings except for violations
which would not have a Material Adverse Effect. Seller, the Corporation and the
Subsidiaries have received no notice of a governmental agency, board or
accounting body investigation, audit, compliance review or similar inquiry of
the Corporation or the Subsidiaries which would have a Material Adverse Effect,
and Seller and the directors and officers of the Corporation and the
Subsidiaries are not aware of any facts and circumstances which might reasonably
be expected to result in such a material governmental agency, board or
accounting body investigation of the Corporation or the Subsidiaries. Seller
makes no representation or warranty with respect to compliance with the new PIP
regulations issued by HCFA, notwithstanding anything to the contrary in this
Agreement.
3.11 CONTRACTS, OBLIGATIONS AND COMMITMENTS. Exhibit 3.11 attached hereto
--------------------------------------
sets forth an accurate and complete list of all material contracts, agreements,
options, leases, commitments and instruments (other than those set forth in
Section 3.13.2.6 hereof) ("Contracts") entered into by the Corporation and the
Subsidiaries, including any and all leases of real property, loan agreements and
other instruments evidencing indebtedness, and Contracts involving expenditures
and/or payments in excess of $25,000 annually. The Corporation and the
Subsidiaries have
18
<PAGE>
provided, or will provide prior to the Effective Closing Date, Buyer with
complete and correct copies of all such items listed on Exhibit 3.11 attached
hereto. Except for such items listed on Exhibit 3.11 attached hereto, there are
no other material contracts or other arrangements under which goods, equipment
or services are provided, leased or rendered by, or are to be provided, leased
or rendered to, the Corporation or the Subsidiaries. Except as set forth in
Exhibit 3.11 attached hereto: (a) the Contracts have not been modified,
pledged, assigned or amended in any material respect, are valid and enforceable
in accordance with their respective terms and are in full force and effect; (b)
there are no material defaults by the Corporation, the Subsidiaries or any other
party to the Contracts; (c) the Corporation and the Subsidiaries have not
received notice of any material default, offset, counterclaim or defense under
any Contract; (d) to the knowledge of Seller and the directors and officers of
the Corporation and the Subsidiaries, no condition or event has occurred which
with the passage of time or the giving of notice or both would constitute a
default or breach by the Corporation or the Subsidiaries of the terms of any
Contract, except for any consents required to consummate the sale of the Shares
hereunder (and the other transactions contemplated hereby) which are set forth
on Exhibits 2.6, 3.9 or 3.12 attached hereto; and (e) there does not now, and at
Closing will not, exist any material security interest, mortgage, pledge,
restriction, charge, lien, encumbrance or claim of others on any interest
created under any Contract other than as specifically provided or disclosed in
this Agreement and the Exhibits attached hereto. None of the Contracts is
subject to termination from and after the Effective Closing Date and prior to
the expiration of its stated term by any party to such Contract, except as
stated in each such Contract.
3.12 LICENSING; MEDICARE. Each physician employed by and/or associated
-------------------
with the Corporation and/or the Subsidiaries is a duly licensed doctor of
medicine, osteopathic medicine, doctor of chiropractic or podiatric medicine,
having an unrestricted license to practice medicine in the State of Florida,
including, if applicable, an unrestricted license to prescribe controlled
medications, substances and supplies. Except as set forth on Exhibit 3.12
attached hereto, all physicians and all health care providers employed by (and,
to the knowledge of Seller, all physicians and all health care providers
associated with) the Corporation and/or the Subsidiaries comply with all
accreditation and recredentialing requirements of all state licensed health
maintenance organizations operated by Seller and/or its affiliates, and all
physicians employed by (and, to the knowledge of Seller, all physicians
associated with) the Corporation and/or the Subsidiaries are in compliance with
all applicable local, state and federal laws relating to the provision of
medical services, including (without limitation) the Federal Clinic
19
<PAGE>
Laboratory Improvements Act, Medicare, Medicaid and state fraud and abuse laws,
federal and state self-referral laws and board of medicine regulations. Each
physician employed by (and, to the knowledge of Seller, each physician
associated with) the Corporation and/or the Subsidiaries who provides Medicare
and Medicaid services is recognized as a Medicare and Medicaid provider of
physician services and is qualified to provide basic health services under
Medicare and Medicaid. Each physician employed by (and, to the knowledge of
Seller, each physician associated with) the Corporation and/or the Subsidiaries
who does not currently provide Medicare and Medicaid services is not prohibited
from qualifying to provide basic health services under Medicare or Medicaid.
Neither Seller, the Corporation nor the Subsidiaries has engaged, or is
engaging, in any billing or other practice that is prohibited by Medicare or
Medicaid.
3.13 EMPLOYMENT MATTERS.
------------------
3.13.1 EMPLOYEE LIST. Exhibit 3.13.1 attached hereto sets forth a
-------------
list as of the date hereof of each employee of the Corporation and the
Subsidiaries, together with such person's position, rate of compensation and
date of hire. To the knowledge of Seller and the directors and officers of the
Corporation and the Subsidiaries, no executive, key employee or group of
employees has any plans to terminate employment with any of the Corporation or
the Subsidiaries, and except as set forth on Exhibit 3.13.1, none of the
Corporation or the Subsidiaries has committed any unfair labor practice and the
Corporation and the Subsidiaries do not have any present or threatened labor
strike, work stoppage or slowdown. Neither Seller nor the directors and
officers of the Corporation or the Subsidiaries have any knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of any of the Corporation or the
Subsidiaries. The Corporation and the Subsidiaries are not a party to any
collective bargaining contracts or any other contracts, agreements or
understandings with any labor unions or other representatives of the
Corporation's or the Subsidiaries' employees and no such agreements are
currently being negotiated. Except as set forth on Exhibit 3.13.1 attached
hereto, the Corporation and the Subsidiaries are not a party to any written or
oral employment agreements with any of their employees, consultants, agents or
other persons, except any such agreement which is terminable by the Corporation
or the Subsidiaries at will without penalty or cost to the Corporation or the
Subsidiaries.
3.13.2 EMPLOYEE BENEFIT PLANS.
----------------------
3.13.2.1 Each employee benefit plan in which employees of the
Corporation or the Subsidiaries participate or
20
<PAGE>
to which the Corporation or the Subsidiaries contribute, including, without
limitation, any employee benefit plan within the meaning of Section 3(3) of
ERISA ("Plan") of any of the Corporation or the Subsidiaries, complies in form
and in operation in all material respects with the applicable requirements of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the
Code (where applicable) and other applicable laws. All Plans are sponsored by
Seller and will cease to apply to employees of the Corporation and the
Subsidiaries after Closing.
3.13.2.2 All required reports and descriptions (including Form
5500 Annual Reports, Summary Annual Reports, PBGC-1's and Summary Plan
Descriptions) have been filed or distributed appropriately with respect to each
such Plan except where the failure to file or distribute such report or
description would not have a Material Adverse Effect. The requirements of Part 6
of Subtitle B of Title I of ERISA have been met in all material respects with
respect to each such Plan which is "group health plan" (as defined in Section
607(1) of ERISA).
3.13.2.3 All contributions (including all employer contributions
and employee salary reduction contributions) which are due have been paid to
each such Plan which is an "employee pension benefit plan" (as defined in
Section 3(2) of ERISA ("Pension Plan")) and all contributions for any period
ending on or before the Effective Closing Date which are due on or before such
date have been or will be paid to each such Pension Plan. All premiums or other
payments for all periods ending on or before the Effective Closing Date have
been or will be paid or accrued in accordance with past custom and practice with
respect to each such Plan which is an "employee welfare benefit plan" (as
defined in Section 3(1) of ERISA ("Welfare Plan")).
3.13.2.4 Each such Plan which is a Pension Plan and which is
intended to meet the requirements of Code Section 401(a) has received a
currently effective favorable determination letter from the Internal Revenue
Service and nothing has occurred since the date of such letter that has or is
likely to adversely affect the Plan's qualification or exemption (other than the
consummation of the transactions provided for herein).
3.13.2.5 Seller has delivered to Buyer correct and complete
copies of the plan documents and summary plan descriptions, the most recent
determination letter received from the Internal Revenue Service, the most recent
Form 5500 Annual Report and all related trust agreements, insurance contracts
and other funding agreements which implement each such Plan.
21
<PAGE>
3.13.2.6 With respect to each Plan that any of the Corporation
or the Subsidiaries maintains or has maintained within three years prior to the
date hereof, or to which any of them contributes or has contributed within three
years prior to the date hereof, there have been no "prohibited transactions" (as
defined in Section 406 of ERISA and Code Section 4975) with respect to any such
Plan for which the Corporation or the Subsidiaries could incur any liability,
whether direct or as a result of indemnification, which would have a Material
Adverse Effect; the Corporation and the Subsidiaries do not have any liability,
whether direct or as the result of indemnification, for breach of fiduciary duty
or any other failure to act or comply in connection with the administration or
investment of the assets of any such Plan which would have a Material Adverse
Effect; no action, suit, proceeding, hearing or investigation with respect to
the administration or the investment of the assets of any such Plan (other than
routine claims for benefits) is pending, or to the knowledge of Seller and the
directors and officers of the Corporation and the Subsidiaries, threatened; and
neither the Seller nor the directors and officers of the Corporation and the
Subsidiaries have any knowledge of any basis for any such action, suit,
proceeding, hearing or investigation.
3.13.2.7 None of the Corporation or the Subsidiaries, nor any
member of a controlled group that includes or included either the Corporation or
the Subsidiaries, maintains or contributes to, ever maintained or has
contributed to or ever has been required to maintain or contribute to any
employee benefit plan, fund or arrangement subject to Title IV of ERISA,
including, without limitation, any "multiemployer plan" (as defined in Section
3(37) of ERISA).
3.13.2.8 None of the Corporation or the Subsidiaries maintain or
ever has maintained or contributes, ever has contributed or ever has been
required to contribute to any Welfare Plan providing medical, health or life
insurance or other welfare-type benefits for current or future retired or
terminated employees, their spouses or their dependents (other than in
accordance with Part 6 of Subtitle B of Title I of ERISA).
3.13.2.9 For purposes of Section 3.13.2.7, the phrase "member of
a controlled group" means any corporation, trade or business that, together with
either the Corporation or one of more of the Subsidiaries, is or ever was a
member of (i) a controlled group of corporations, (ii) a group of trades or
businesses under common control, or (iii) an affiliated service group, within
the meaning of Sections 414(b), (c) or (m), respectively.
3.14 GUARANTIES. None of the Corporation or the Subsidiaries is a
----------
guarantor or otherwise is liable for any
22
<PAGE>
liability or obligation (including indebtedness) of any other person, except as
otherwise expressly provided in this Agreement.
3.15 NO VIOLATION. Subject to obtaining the consents and approvals set
------------
forth on Exhibits 2.6 and 3.9 hereto, the entry into and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
constitute or result in a violation, breach or default (or an event which, with
notice or lapse of time or both, would constitute a default) under any provision
of any charter, bylaw, mortgage, lease, agreement, contract, instrument or other
arrangement nor, to the knowledge of Seller and the officers and directors of
the Corporation and the Subsidiaries, any constitution, statute, regulation,
rule, code, ordinance, order, writ, injunction, judgment, ruling or decree to
which any property of the Corporations is subject or by which the Corporation or
the Subsidiaries are bound which violation, breach or default would have a
Material Adverse Effect.
3.16 LITIGATION. Except as set forth on Exhibit 3.16 attached hereto or
----------
as set forth in the most recent Financial Statements, there is no action, suit,
arbitration, claim, investigation, inquiry or proceeding pending or, to the
knowledge of Seller, threatened against or involving the Corporation or the
Subsidiaries (including, but not limited to, any claims based upon any theory of
professional malpractice which would be subject to accrual under the accounting
policy set forth on Exhibit 3.5.2 attached hereto) which would have a Material
Adverse Effect and, to the knowledge of Seller, there are no existing facts
(excepting professional liability, including medical malpractice, which is not
subject to accrual under the accounting policy set forth on Exhibit 3.5.2) which
may hereafter result in claims being made against the Corporation or the
Subsidiaries which would have a Material Adverse Effect. Exhibit 3.16 attached
hereto sets forth each instance in which any of the Corporations is subject to
any outstanding injunction, judgment, order, decree, ruling or charge.
3.17 INSURANCE. A description of all insurance policies (other than those
---------
set forth in Section 3.13.2.6 hereof) presently in effect with respect to the
Corporation and the Subsidiaries, including the carrier, coverage description,
coverage limits, deductibles, annual premiums, expiration date and date through
which premiums have been paid, is set forth in Exhibit 3.17 attached hereto.
The Corporation and the Subsidiaries have maintained (a) insurance on all of
their assets and their businesses of a type customarily insured, covering
property damage and loss of income by fire and other casualties, and (b)
commercially reasonable insurance protection against all liabilities, claims and
risks against which it is customary to insure. With respect to each such
insurance policy: (x) the
23
<PAGE>
policy is valid, enforceable and in full force and effect; (y) neither any of
the Corporation or the Subsidiaries nor, to the knowledge of Seller and the
directors and officers of the Corporation and the Subsidiaries, any other party
to the policy is in material breach or default (including with respect to the
payment of premiums or the giving of notices), and no event has occurred which,
with notice or the lapse of time, would constitute such a material breach or
default, or permit termination, modification or acceleration, under the policy;
and (z) no party to the policy has repudiated any provision thereof. Each of
the Corporation and the Subsidiaries has been covered since the shorter time
period of (i) its inception, or (ii) the past three (3) years, by insurance in
scope and amount customary and reasonable for the business in which it has
engaged during the aforementioned period.
3.18 ENVIRONMENTAL MATTERS. Except as set forth on Exhibit 3.18 attached
---------------------
hereto, to the knowledge of Seller, the Corporation and the Subsidiaries are in
compliance with all applicable Environmental Laws (as hereinafter defined), and
none of them have received any notice of any alleged violation of any
Environmental Laws. Each of the Corporation and the Subsidiaries have obtained
and been in compliance in all material respects with all of the terms and
conditions of all permits, licenses and other authorizations which are required,
and has complied with all other limitations, restrictions, standards,
prohibitions, requirements, obligations, schedules and timetables under any
applicable Environmental Laws. Except as set forth on Exhibit 3.18 attached
hereto, to the knowledge of Seller, none of the Corporation or the Subsidiaries
have any liability (and none of the Corporation or the Subsidiaries and their
respective predecessors and affiliates has handled or disposed of any substance,
arranged for the disposal of any substance, exposed any employee or other
individual to any substance or condition or owned or operated any property or
facility in any manner that could form the basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim or
demand against any of the Corporation or the Subsidiaries giving rise to any
liability under any applicable Environmental Laws) for damage to any site,
location or body of water (surface or subsurface), for any illness or personal
injury to any employee or other individual or for any reason under any
applicable Environmental Laws. To the knowledge of Seller, all properties and
equipment used in the business of the Corporation and the Subsidiaries and their
respective predecessors and affiliates have been free of asbestos, PCB's
methylene chloride, trichloroethylene, 1,2-trans-dichloroethylene, dioxins,
dibenzofurans and Hazardous Substances (as hereinafter defined). For the
purposes of this Agreement, "Environmental Laws" means all laws which deal with
Solid Waste (as hereinafter defined) in an amount or concentration that would
violate any Environmental
24
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Laws, hazardous waste, wastewater discharges, water quality, drinking water, air
emissions, air quality, Hazardous Substances or employee health, safety or
environment-related right-to-know; "Hazardous Substances" means asbestos,
radioactive material, radon, PCBs, petroleum hydrocarbons and any substance
deemed under federal or Florida law or regulation a hazardous substance,
hazardous waste, hazardous material, medical waste or pesticide; and "Solid
Waste" means any substance deemed a waste under any applicable federal, state,
county or local law, ordinance, rule or regulation, but not including hazardous
waste.
3.19 DISCLOSURE. No representation or warranty by Seller in this
----------
Agreement, nor any statement, certificate, schedule, document or exhibit hereto
furnished or to be furnished by or on behalf of Seller pursuant to this
Agreement or in connection with the transactions contemplated hereby, contains
or will contain any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein not misleading
in light of the circumstances in which they were made.
3.20 CAPITALIZATION. The entire authorized capital stock of the
--------------
Corporation, Family First Medical Centers, Inc., Physicians Medical Group of
Florida, Inc., PCA Family Pharmacy, Inc., and Century Vision Optical, Inc.
consists of 100,000 shares of common stock, $0.01 par value, 200,000 shares
(consisting of 100,000 shares of common stock, $.10 par value, and 100,000
shares of Series A Preferred Stock, $.10 par value), 200,000 shares (consisting
of 100,000 shares of common stock, $.01 par value, and 100,000 shares of Series
A Preferred Stock, $1.00 par value), 60 shares of common stock, $10.00 par
value, and 60 shares of common stock, $10.00 par value, respectively. All of
the issued and outstanding shares of capital stock of the Corporation and the
Subsidiaries have been duly authorized, are validly issued, fully paid and
nonassessable, and are held of record and beneficially as set forth in Exhibit
2.10 attached hereto. There are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights or
other contracts or commitments that could require the Corporation or the
Subsidiaries to issue, sell or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation or similar rights with respect to the
Corporation or the Subsidiaries. There are no voting trusts, proxies or other
agreements or understandings with respect to the voting of the capital stock of
the Corporation or the Subsidiaries.
3.21 BROKERS' FEES. The Corporation and the Subsidiaries have no
-------------
liability or obligation to pay any fees or commissions to
25
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any broker, finder or agent with respect to the transactions contemplated by
this Agreement.
3.22 REAL PROPERTY.
-------------
3.22.1 OWNERSHIP. Exhibit 3.22.1 sets forth all real property owned
---------
by the Corporation and the Subsidiaries (the "Real Property"), including a
description of all encumbrances, easements or rights of way of record (or, if
not of record, of which Seller has notice or knowledge) granted on or
appurtenant to or otherwise affecting such Real Property, the zoning
classification thereof, and all plants, buildings or other structures located
thereon. There are now in full force and effect duly issued certificates of
occupancy permitting the Real Property and improvements located thereon to be
legally used and occupied as the same are now constituted. There is not (i) any
claim of adverse possession or prescriptive rights involving any of the Real
Property, (ii) any structure located on any Real Property which encroaches on or
over the boundaries of neighboring or adjacent properties or (iii) any structure
of any other party which encroaches on or over the boundaries of any of such
Real Property. None of the Real Property is located in a flood plain, flood
hazard area, wetland or lakeshore erosion area within the meaning of any Law,
regulation or ordinance. No public improvements have been commenced and to
Seller's knowledge none are planned which in either case may result in special
assessments against or otherwise materially adversely affect any Real Property.
To Seller's knowledge, and except as set forth in Exhibit 3.18, no portion of
any of the Real Property has been used as a landfill or for storage or landfill
of hazardous or toxic materials.
3.22.2 LEASES. Exhibit 3.22.2 attached hereto lists and describes
------
briefly all real property leased or subleased to any of the Corporation and the
Subsidiaries. Seller has delivered to Buyer correct and complete copies of the
leases and subleases listed in Exhibit 3.22.2 attached hereto (as amended
through the Effective Closing Date) ("Leases"). With respect to each Lease
listed in Exhibit 3.22.2 attached hereto:
(a) all facilities leased or subleased thereunder have received
all material approvals of governmental authorities (including licenses and
permits) required in connection with the operation thereof and have been
operated and maintained in accordance with applicable laws, rules and
regulations;
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(b) all facilities leased or subleased thereunder are supplied
with utilities and other services necessary for the operation of said
facilities; and
(c) the Corporation or the Subsidiaries, as applicable, have a
valid leasehold interest in the facility leased or subleased, free and clear of
any security interest, mortgage, pledge, lien, charge, encumbrance, easement
(other than customary easements such as utility easements), covenant or other
restriction, except for installments of special assessments not yet delinquent
and recorded easements, covenants and other restrictions (including restrictions
set forth in the applicable Leases) which do not impair the current use,
occupancy or value, or the marketability of title, of the property subject
thereto.
3.23 INTELLECTUAL PROPERTY. Except for the names "Physician Corporation
---------------------
of America" and "PCA" (and any trademark, service mark or logo employing said
names) and as set forth on Exhibit 3.23 attached hereto, the Corporation or the
Subsidiaries own or have the right to use pursuant to license, sublicense,
agreement or permission all intellectual property necessary for the operation of
the business of the Corporation and the Subsidiaries as presently conducted.
Except for the names "Physician Corporation of America" and "PCA" (and any
trademark, service mark or logo employing said names) and as set forth on
Exhibit 3.23 attached hereto, each item of intellectual property owned or used
by any of the Corporation or the Subsidiaries immediately prior to the Closing
will be owned or available for use by the Corporation or the Subsidiaries on
identical terms and conditions immediately subsequent to the Closing. Each of
the Corporation and the Subsidiaries has taken all necessary action to maintain
and protect each item of intellectual property that it owns or uses.
3.24 POWERS OF ATTORNEY. There are no outstanding powers of attorney
------------------
executed on behalf of any of the Corporation or the Subsidiaries.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER.
---------------------------------------
Buyer hereby represents and warrants to Seller, which representations and
warranties are true and correct on the date hereof and shall be true and correct
through and including the Closing Date, as follows. When used in this Section
4, "to its knowledge," "to the Buyer's knowledge" or like terms shall mean the
actual knowledge of Buyer's directors and officers.
4.1 ORGANIZATION; GOOD STANDING. Buyer is a corporation duly organized,
---------------------------
validly existing and in good standing under the laws of the State of Delaware.
Buyer is duly authorized to conduct business and is in good standing under the
laws of each
27
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jurisdiction where such qualification is required except where the failure to be
so authorized would not have a material adverse effect on Buyer.
4.2 CORPORATE AUTHORITY. Buyer has all requisite corporate power and
-------------------
authority to (a) own and lease its properties and assets, (b) carry on its
business as and where it is now being conducted, (c) execute and deliver this
Agreement, and (d) consummate the transactions contemplated hereby. Buyer holds
and will hold on the Effective Closing Date all necessary licenses, permits,
contracts and approvals required by governmental laws or regulations from the
federal government, State of Delaware, local authorities and other regulatory
agencies necessary for the operation of the business in which it is engaged and
to own and lease its properties and assets. Buyer is not in default under or in
violation of any provision of its Articles of Incorporation or bylaws.
4.3 BINDING EFFECT. All corporate action on the part of Buyer and its
--------------
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby has been or will be taken prior to the Closing
Date. This Agreement shall constitute the legal, valid and binding obligation
of Buyer, enforceable in accordance with its terms except as enforceability may
be restricted, limited or delayed by applicable bankruptcy or other laws
affecting creditors' rights generally and except as enforceability is subject to
general principles of equity.
4.4 CONSENTS. Except for the filings by Seller and Buyer required by the
--------
HSR Act and the consent of Banque Paribas, Buyer is not required to obtain the
consent, approval or authorization of, or make a filing or registration with,
any governmental authority (federal, state or local) or other person or entity
in order to consummate the purchase of the Shares and satisfy any material
obligations hereunder. Prior to the Effective Closing Date, Buyer will have
obtained all material consents, releases and permissions of every kind or nature
required in connection with the purchase of the Shares and the performance of
any obligations hereunder except where the failure to do so would not have a
material adverse effect on Buyer. Buyer shall obtain all such consents without
any material changes in the terms of the underlying agreements and obligations.
4.5 COMPLIANCE WITH LAWS. To Buyer's knowledge, Buyer is not in
--------------------
violation of any applicable constitutions, statutes, regulations, rules, codes
or ordinances or other laws or injunctions, judgments, orders, writs, decrees or
rulings except for violations which would not have a material adverse effect on
Buyer's ability to perform its obligations hereunder. Buyer has
28
<PAGE>
received no notice of a governmental agency, board or accounting body
investigation of Buyer which would have a material adverse effect on Buyer's
ability to perform its obligations hereunder, and Buyer is not aware of any
facts and circumstances which might reasonably be expected to result in such a
governmental agency, board or accounting investigation of Buyer. Buyer makes no
representation or warranty with respect to compliance with the new PIP
regulations issued by HCFA, notwithstanding anything to the contrary in this
Agreement.
4.6 DISCLOSURE. No representations or warranties by Buyer contained in
----------
this Agreement, and no statement contained in this Agreement or any document or
certificate furnished or to be furnished to Seller at Closing pursuant hereto,
contains or will contain on the Effective Closing Date any untrue statements or
omits or will omit on the Effective Closing Date to state a fact necessary in
order to make the statements therein not misleading in the light of the
circumstances under which they were made.
4.7 BROKERS' FEES. Buyer has no liability or obligation to pay any fees
-------------
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement for which Seller could become liable or
obligated.
29
<PAGE>
4.8 INVESTMENT.
----------
(a) Buyer is a sophisticated investor by virtue of its numerous prior
investments made on its own behalf or through entities that the Buyer, alone or
with others, controls. Buyer is also an "Accredited Investor" within the
meaning of Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended.
(b) Buyer has been furnished or has been given access to any and all
material documents and information regarding the Corporation and the
Subsidiaries.
(c) The Buyer acknowledges and understands that the Shares have not
been registered under the Securities Laws. Buyer understands that it has no
rights whatsoever to request, and that the Seller or the Corporation is under no
obligation whatsoever to furnish, a registration of the Shares under the
Securities Laws.
(d) The Shares Buyer is acquiring are being acquired solely for its
account and are not being purchased with a view to, or for resale in connection
with, any distribution within the meaning of the Securities Act of 1933, as
amended, or any other applicable Securities Laws. Buyer will not resell or
offer to resell the Shares except in accordance with the terms of this Agreement
and in compliance with all applicable Securities Laws.
(e) Buyer understands that the Shares being acquired will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933, as amended, and that the certificate(s) representing the Shares
will bear a restrictive legend thereon (in addition to any other legend required
by any other provision of this Agreement) as follows:
The shares represented by this certificate have been acquired directly or
indirectly from the Issuer without being registered under the Securities
Act of 1933, as amended (the "Act"), or any other applicable securities
laws, and are restricted securities as that term is defined under Rule 144
promulgated under the Act. These shares may not be sold, pledged,
transferred, distributed or otherwise disposed of in any manner
("Transfer") unless they are registered under the Act and any applicable
securities laws, or unless the request for Transfer is accompanied by a
favorable opinion of counsel or written undertaking, reasonably
satisfactory to the Issuer, stating that the Transfer will not result in a
violation of the Act or any applicable securities laws.
30
<PAGE>
4.9 FPA SHARES. At the Closing, the FPA Shares will have been duly
----------
authorized, will be validly issued, fully paid and nonassessable, and will be
issued to Seller free and clear of any restrictions on transfer (other than
documentary or transfer taxes and any restrictions under the Act, state
securities laws and this Agreement), taxes, security interests, liens, pledges,
mortgages, charges, covenants, encumbrances, options, warrants, purchase rights,
contracts, commitments, equities, claims and demands.
4.10 SEC DOCUMENTS. Buyer has made available to Seller true and complete
-------------
copies of each report, registration statement and definitive proxy statement
filed by Buyer with the Securities and Exchange Commission ("SEC") with respect
to periods on and after January 1, 1995 (the "Documents"), which are all of the
documents that Buyer was required to file since such date. As of their
respective dates, the Documents complied in all material respects with the
requirements of the Act or the Securities Exchange Act of 1934, as applicable,
and the applicable rules and regulations of the SEC thereunder, and none of the
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein. The consolidated financial
statements of Buyer contained in the Documents were prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as indicated in the notes thereto or, in the case
of unaudited statements, as permitted under Form 10-Q of the SEC) and present
fairly the financial or consolidated financial position of Buyer, and the
consolidated results of operations and cash flows of Buyer, at the dates, and
for the periods, indicated.
SECTION 5. COVENANTS OF SELLER.
-------------------
Seller hereby covenants to Buyer and agrees as follows:
5.1 GENERAL. Seller shall use commercial best efforts to take all action
-------
and do all things necessary, proper or advisable in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in Section 7.1
below). Seller acknowledges and agrees that from and after the Closing Buyer
will be entitled to possession of all documents, books, records (including tax
records), agreements and financial data of any sort relating to the Corporation
or any of the Subsidiaries. Seller shall continue to have reasonable access to
such books and records in accordance with the provisions of Section 6.1 below.
5.2 ACCESS AND INFORMATION. From the date of this Agreement until
----------------------
Closing, Seller shall give, and will cause the
31
<PAGE>
Corporation and the Subsidiaries to give, to Buyer and its representatives
access during normal business hours to the premises, books, accounts and records
and all other relevant documents and will make available copies of all such
documents and information with respect to the business and properties of the
Corporation and the Subsidiaries as representatives of Buyer may from time to
time request, all in such a manner as not to unduly disrupt the Corporation's
and the Subsidiaries' normal business activities. Such access may include
consultations with the personnel of the Corporation and the Subsidiaries.
Notwithstanding the foregoing, Buyer and its representatives shall not have
access to patient medical histories of the Corporation and the Subsidiaries.
From the date of this Agreement until Closing, the Corporation and the
Subsidiaries shall, within five (5) days of completion, deliver to Buyer copies
of any and all financial statements of the Corporation and the Subsidiaries
prepared by or for the Corporation or the Subsidiaries relating to the
operations of the Corporation or the Subsidiaries. Prior to the Closing Date,
Seller shall notify Buyer of (a) any material adverse change in the financial
position, earnings or business of the Corporation or the Subsidiaries, (b) any
governmental complaints, investigations or hearings to which the Corporation or
the Subsidiaries are a party, and (c) to the knowledge of Seller and the
directors and officers of the Corporation and the Subsidiaries after due
investigation, any pending or threatened actions, claims, investigations or
proceedings to which Seller or any of the Corporation or the Subsidiaries is or
may be a party (excepting professional liability, including medical malpractice,
which is not subject to accrual under the accounting policy set forth on Exhibit
3.5.2).
5.3 CONDUCT OF BUSINESS. Prior to the Closing, except as otherwise
-------------------
approved by Buyer, the Corporation and the Subsidiaries shall conduct their
business only in the ordinary course thereof consistent with past practice,
including payment of debts as they become due and payable and in such a manner
that the representations and warranties contained in Sections 2 and 3 hereof
shall be true and correct at and as of the Effective Closing Date. The
Corporation and the Subsidiaries shall, consistent with conducting their
business in accordance with reasonable business judgment, use their commercial
best efforts to maintain and preserve their business organization, employee
relationships, patient base and rights under the Contracts and Leases and will
not, without the prior written consent of Buyer, enter into any contract or
arrangement having an economic value in excess of $50,000.
5.4 LICENSES. During the period from the date of this Agreement until the
--------
Closing Date, the Corporation and the Subsidiaries will not, without Buyer's
prior written consent,
32
<PAGE>
amend or terminate any license, permit, approval, authorization or certificate
concerning the operation of the Corporation and the Subsidiaries other than in
the ordinary and usual course of business as heretofore conducted or pursuant to
this Agreement.
5.5 FINANCIAL STATEMENTS. Following the Closing, Seller shall cooperate
--------------------
with Buyer in connection with the review, restatement and audit of the
Corporation's financial statements as may be necessary under applicable law and
regulation and to integrate with Buyer's system of financial reporting.
5.6 EXCLUSIVITY. Prior to the Closing or the earlier termination of this
-----------
Agreement pursuant to the terms hereof, the Corporation and Seller will not
solicit any proposals from or initiate any negotiations or discussions with, or
enter into any agreement in principle, letter of intent or definitive agreement
with, any third party with respect to a sale or other disposition of a
substantial portion of or all of the outstanding capital stock or assets of any
of the Corporation or the Subsidiaries. The Corporation and Seller are not
engaged in any such solicitations, negotiations or discussions.
5.7 ACQUISITION OF COMMON STOCK. Prior to the Closing or the earlier
---------------------------
termination of this Agreement pursuant to the terms hereof, Seller, the
Corporation and the Subsidiaries have not purchased and will not purchase or
otherwise acquire any Common Stock of Buyer other than as provided in this
Agreement.
5.8 CONFIDENTIALITY. Seller acknowledges that Buyer would be irreparably
---------------
damaged if confidential information concerning Buyer and the Subsidiaries were
disclosed to or utilized by any person to the detriment of Buyer. Therefore,
Seller shall not, at any time, directly or indirectly, without the prior written
consent of Buyer, make use of after Closing or divulge, or permit any of its
affiliates, employees or agents to make use of after Closing or divulge, to any
person any nonpublic or proprietary information concerning the business or
financial or other affairs of Buyer and the Subsidiaries that could be used to
the detriment of Buyer and the Subsidiaries, except to the extent required by
law or in order to preserve or enforce his rights under this Agreement. This
Section 5.8 shall survive the termination of this Agreement.
5.9 EXHIBITS. Seller has made available to Buyer on or prior to the
--------
Effective Closing Date, copies of all items set forth on Exhibits to this
Agreement and any and all other consents, documents or agreements to be
delivered hereunder which have not previously been delivered to Buyer on the
date hereof, which items and any such other consents, documents or agreements
shall be in form and substance reasonably satisfactory to Buyer and Seller.
33
<PAGE>
5.10 LITIGATION SUPPORT. In the event and for so long as Buyer actively
------------------
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand (other than by Seller) in
connection with (a) any transaction contemplated under this Agreement, or (b)
any fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act or transaction on or prior
to the Closing Date involving any of the Corporation or the Subsidiaries, Seller
will cooperate with Buyer and its counsel in the contest or defense, use
reasonable efforts to make available its personnel and provide such testimony
and access to its books and records as shall be reasonably necessary in
connection with the contest or defense, all at the sole cost and expense of
Buyer (unless Buyer is entitled to indemnification therefor under Section 11
below).
5.11 TRANSITION. Seller shall not take any action that shall have the
----------
effect of discouraging any lessor, licensor, customer, supplier or other
business associate of any of the Corporation or the Subsidiaries from
maintaining the same business relationships with the Corporation and the
Subsidiaries after the Closing as it maintained with the Corporation and the
Subsidiaries prior to the Closing unless such action is taken in accordance with
prudent business practices. Seller shall refer all customer inquiries relating
to the businesses of the Corporation and the Subsidiaries to Buyer from and
after the Closing.
5.12 FPA SHARES. Each certificate representing FPA Shares will be
----------
imprinted with a legend substantially in the following form:
The shares represented by this certificate have been
acquired directly or indirectly from the Issuer without
being registered under the Securities Act of 1933, as
amended (the "Act"), or any other applicable securities
laws, and are restricted securities as that term is defined
under Rule 144 promulgated under the Act. These shares may
not be sold, pledged, transferred, distributed or otherwise
disposed of in any manner ("Transfer") unless they are
registered under the Act and any applicable securities laws,
or unless the request for Transfer is accompanied by a
favorable opinion of counsel or written undertaking,
reasonably satisfactory to the Issuer, stating that the
Transfer will not result in a violation of the Act or any
applicable securities laws. The shares are subject to a
34
<PAGE>
Registration Rights Agreement between Physician Corporation
of America and FPA Medical Management, Inc.
5.13 INSURANCE. The Corporation and the Subsidiaries will maintain through
---------
the Closing (a) insurance on all of their assets and their businesses of a type
customarily insured, covering property damage and loss of income by fire and
other casualties, and (b) commercially reasonable insurance protection against
all liabilities, claims and risks against which it is customary to insure. The
Corporation and the Subsidiaries will maintain and continue to carry through the
Closing their existing insurance subject to variations and amounts required in
the ordinary course of business as heretofore conducted through the Closing
Date.
5.14 NONCOMPETITION; CONFIDENTIALITY. Subject to the Closing, and as an
-------------------------------
inducement to Buyer to execute this Agreement and complete the transactions
contemplated hereby, and in order to preserve the goodwill associated with the
business of the Corporation being acquired pursuant to this Agreement, Seller
hereby covenants and agrees as follows:
5.14.1 COVENANT NOT TO COMPETE. For a period of four (4) years
-----------------------
from the Closing Date, Seller will not, directly or indirectly:
(a) engage in, continue in or carry on any business which
competes with the Business (as hereinafter defined) or is substantially
similar thereto, including owning or controlling any financial interest in
any corporation, partnership, firm or other form of business organization
which is so engaged. For purposes of this Section 5.14, the term
"Business" shall mean the physician practice management industry;
(b) consult with, advise or assist in any way, whether
or not for consideration, any corporation, partnership, firm or
other business organization which is now or becomes a competitor
of the Corporation or Buyer in any aspect with respect to the
Business, including, but not limited to, advertising or otherwise
endorsing the products of any such competitor; soliciting
customers or otherwise serving as an intermediary for any such
competitor; loaning money or rendering any other form of
financial assistance to
35
<PAGE>
or engaging in any form of business transaction on other than an arm's
length basis with any such competitor;
(c) solicit any employee of the Corporation for employment,
without the prior written consent of Buyer; or
(d) engage in any practice the purpose of which is to evade the
provisions of this covenant not to compete or to commit any act which
adversely affects the Business;
provided, however, that the foregoing shall not prohibit: (i) the
ownership of securities of corporations which are listed on a national
securities exchange or traded in the national over-the-counter market in an
amount which shall not exceed five percent (5%) of the outstanding shares
of any such corporation; (ii) the establishment of joint venture
arrangements with physicians and/or hospitals similar to those which Seller
currently has in effect with Cleveland Clinic and Jackson/UM; and (iii) the
establishment of urgent care centers within one mile of hospital emergency
rooms, provided that Seller shall negotiate in good faith with Buyer and
its affiliates to provide such services if Buyer or an affiliate thereof,
including the Corporation or any of the Subsidiaries, has a clinic within
such one-mile radius. The parties agree that the geographic scope of this
covenant not to compete shall extend to the State of Florida. The parties
agree that Buyer may not sell, assign or otherwise transfer this covenant
not to compete, in whole or in part, to any person, corporation, firm or
entity. In the event a court of competent jurisdiction determines that the
provisions of this covenant not to compete are excessively broad as to
duration, geographical scope or activity, it is expressly agreed that this
covenant not to compete shall be construed so that the remaining provisions
shall not be affected, but shall remain in full force and effect, and any
such over broad provisions shall be deemed, without further action on the
part of any person, to be modified, amended and/or limited, but only to the
extent necessary to render the same valid and enforceable in such
jurisdiction.
5.14.2 COVENANT OF CONFIDENTIALITY. Seller shall not at any time
---------------------------
subsequent to the Closing, except as explicitly requested by Buyer, (i) use for
any purpose, or (ii) disclose to any person (other than Seller's employees and
agents), any confidential information concerning the Corporation and the
Subsidiaries, except as required by applicable law or pursuant to court order.
For purposes hereof, "confidential information" shall mean and include, without
limitation, all intellectual property in which the Corporation or any Subsidiary
has an interest, all customer lists and customer information, and all
36
<PAGE>
other information concerning the Corporation and the Subsidiaries' processes,
apparatus, equipment, packaging, products, marketing and distribution methods,
not previously disclosed to the public directly by the Corporation.
5.14.3 EQUITABLE RELIEF FOR VIOLATIONS. Seller agrees that the
-------------------------------
provisions and restrictions contained in this Section 5.14 are necessary to
protect the legitimate continuing interests of Buyer in acquiring the Shares,
and that any violation or breach of these provisions will result in irreparable
injury to Buyer for which a remedy at law would be inadequate and that, in
additional to any relief at law which may be available to Buyer for such
violation or breach and regardless of any other provision contained in this
Agreement, Buyer shall be entitled to injunctive and other equitable relief as a
court may grant after considering the intent of this Section 5.14. In addition,
the covenant not to compete and covenant of confidentiality contained in this
Section 5.14 shall terminate immediately upon a Default under the Note (as
defined in Section 8.1 of the Note).
5.14.4 MANDATORY BUYOUT. In the event (a) Seller (or a wholly-
----------------
owned subsidiary thereof) reacquires the Clinic Business pursuant to Section 8
of this Agreement, or (b) Seller is, or substantially all of Seller's assets
are, acquired by any third party, the covenant not to compete hereunder will
terminate and Seller shall pay to Buyer, in addition to the purchase price
payable under Section 8, if applicable, an amount determined by multiplying (a)
Two Million Dollars ($2,000,000.00) by (b) a fraction, the numerator of which is
the number of days remaining under this four-year covenant and the denominator
of which is Fourteen Hundred Sixty-One (1,461).
5.15 UPDATING. Seller will promptly notify Buyer in writing of any changes
--------
to any Exhibits attached to this Agreement, provided that such notification
shall not cure any breach existing under the Agreement prior to such change.
5.16 IPA PROVIDER AGREEMENTS. Seller covenants and agrees to negotiate in
-----------------------
good faith and use commercially reasonable best efforts to enter into
Independent Practice Association ("IPA") Provider Agreements with Buyer in
Dallas, San Antonio, Houston and Austin, Texas, and in Florida. Seller agrees
to cooperate on a non-exclusive basis with Buyer in Buyer's efforts to develop
an IPA network of physicians in Florida.
5.17 RETENTION OF MEMBERS. In the event that Buyer, the Corporation or
--------------------
any Subsidiary terminates the employment of a physician used by a member of a
state licensed health maintenance organization ("HMO") affiliated with Seller,
Seller covenants and agrees to use commercially reasonable best efforts to get
the
37
<PAGE>
member to utilize another physician employed at the same clinic by Buyer, the
Corporation or any Subsidiary.
5.18 SPIN-OFF OF SUBSIDIARIES. Buyer covenants and agrees to cause the
------------------------
Corporation, prior to Closing, to effect the transfer of all of its right, title
and interest in and to the issued and outstanding shares of capital stock of
Century Vision Optical, Inc. ("CVO") and PCA Family Pharmacy, Inc. ("PCAFPI") to
either Seller or another entity other than any of the Subsidiaries. Buyer
further agrees to indemnify and hold harmless Buyer, the Corporation and the
Subsidiaries (other than CVO and PCAFPI) from and against any and all
liabilities, claims, damages, suits, actions and proceedings of any nature
whatsoever relating to the business, operations and assets, past or present, of
CVO and PCAFPI.
5.19 HSR ACT FILINGS. To the extent such filings have not been completed
---------------
prior to the execution of this Agreement, each party shall, in cooperation with
the other, file or cause to be filed any reports or notifications that may be
required to be filed by it under the HSR Act, with the Federal Trade Commission
and the Antitrust Division of the Department of Justice, and shall furnish to
the other all such information in its possession as may be necessary for the
completion of the reports or notifications to be filed by the other. Prior to
making any communication, written or oral, with the Federal Trade Commission,
the Antitrust Division of the federal Department of Justice or any other
governmental agency or authority or members of their respective staffs with
respect to this Agreement or the transactions contemplated hereby, Seller shall
consult with Buyer.
5.20 MALPRACTICE CLAIM ACCRUALS. Seller shall accrue on its books as of
--------------------------
May 31, 1996, consistent with prior accounting policy and Exhibit 3.5.2 attached
hereto, all claims for which written demands have been received or lawsuits have
been commenced on or before such date and a cash amount equal to such accrual
shall be transferred from the Corporation to Seller concurrently with such
accrual, provided that, prior to any such transfer, Seller shall provide Buyer
with a schedule of accruals as of December 31, 1995 and a schedule of accruals
as of May 31, 1995 (and such other information regarding such accruals as Buyer
shall reasonably request) and Buyer shall agree with Seller as to the amounts of
such accruals. Seller shall be solely responsible for controlling all such
litigation and for all liabilities relating to or arising out of such claims,
including deductible payments and legal costs and expenses. Seller further
covenants and agrees to indemnify and hold harmless Buyer, the Corporation and
its Subsidiaries in the event that such a demand or lawsuit occurs prior to
Closing and such demand or lawsuit is settled for an amount in excess of the
Corporation's professional liability
38
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insurance coverage limits (or otherwise accrued for by the Corporation or its
Subsidiaries) within three (3) years following Closing.
5.21 GROUP PHYSICIAN SERVICES AGREEMENT. In the event the Group Physician
-----------------------------------
Services Agreement is subject to further regulatory review at the time the
Closing would otherwise occur, the parties mutually covenant and agree to use
commercially reasonable efforts to mutually determine an alternative means of
implementing the intent of the Group Physician Services Agreement that will
survive regulatory review, and further agree to delay the Closing for a
reasonable period (but not later than June 30, 1996) to determine whether such
an alternative is available. In the event such an alternative cannot be found
to the reasonable satisfaction of both parties hereto, after devoting their
commercially reasonable best efforts as provided above, then this Agreement may
be terminated, without liability of any kind whatsoever, by either party hereto.
5.22 CONSENTS. Seller covenants and agrees to use commercially reasonable
---------
best efforts to obtain all necessary consents and approvals required under the
Contracts, including the Leases, the agreement with Public Trust of Dade County
and third party payor agreements, to ensure that the Corporation and the
Subsidiaries will continue to be entitled to all rights thereunder.
5.23 VESTING. Seller covenants and agrees to vest, as of Closing, the
-------
employer's portion of all contributions to and under Seller's 401(k) Plan with
respect to the employees of the Corporation and its Subsidiaries.
SECTION 6. COVENANTS OF BUYER.
------------------
6.1 ACCESS AND INFORMATION. From the date of this Agreement until
----------------------
Closing, Buyer will make available copies of all publicly available documents
and information with respect to the business and properties of Buyer as
representatives of Seller may from time to time reasonably request, all in such
a manner as not to unduly disrupt Buyer's normal business activities. Prior to
the Closing Date, Buyer shall notify Seller of (a) any material adverse change
in the financial position, earnings or business of Buyer, (b) any governmental
complaints, investigations or hearings to which Buyer is a party, and (c) to
Buyer's knowledge after due investigation, any pending or threatened court
actions to which Buyer is or may be a party.
6.2 CONFIDENTIALITY. Buyer acknowledges that Seller would be irreparably
---------------
damaged if confidential information concerning Seller (and its Subsidiaries)
were disclosed to or utilized by any person to the detriment of Seller.
Therefore, Buyer shall
39
<PAGE>
not, at any time, directly or indirectly, without the prior written consent of
Seller, make use of or divulge, or permit any of its respective affiliates,
directors, officers, employees or agents to make use of or divulge, to any
person any nonpublic or proprietary information concerning the business or
financial or other affairs of Seller (and its Subsidiaries) that could be used
to the detriment of Seller (and its Subsidiaries), except to the extent required
by law or in order to preserve or enforce its rights under this Agreement. This
Section 6.2 shall survive the termination of this Agreement (except that, with
respect to nonpublic, proprietary and confidential information regarding the
Subsidiaries, this Section 6.2 shall terminate as of Closing).
6.3 GENERAL. Buyer shall use its reasonable efforts to take all action
-------
and do all things necessary, proper or advisable in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in Section 7.2
below). If at any time after the Closing any further action is necessary or
desirable to carry out the purposes of this Agreement, Buyer will take such
further action (including the execution and delivery of such further instruments
and documents) as Seller reasonably may request to consummate the transactions
contemplated by this Agreement.
6.4 LITIGATION SUPPORT. In the event and for so long as Seller actively
------------------
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand (other than by Buyer, the
Corporation or the Subsidiaries) in connection with (a) any transaction
contemplated under this Agreement, or (b) any fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act or transaction on or prior to the Closing Date involving
any of the Corporation or the Subsidiaries, Buyer will cooperate with Seller and
his counsel in the contest or defense, use reasonable efforts to make available
its personnel and provide such testimony and access to its books and records as
shall be reasonably necessary in connection with the contest or defense, all at
the sole cost and expense of Seller (unless Seller is entitled to
indemnification therefor under Section 9 below).
6.5 INSURANCE. Buyer agrees that for a period of three (3) years
---------
following the Effective Closing Date Buyer shall maintain or shall cause one of
its wholly-owned subsidiaries to maintain "claims made" policy insurance with a
nationally recognized insurance company or companies (having a rating of B+ or
better at the time the policy is obtained) in the minimum amount of One Million
Dollars ($1,000,000) per claim and a Ten Million Dollar ($10,000,000) aggregate
amount (with a deductible not in excess of $100,000 per claim) to cover
professional liability, including
40
<PAGE>
medical malpractice, claims made after the Effective Closing Date related to
cases incurred on or prior to the Effective Closing Date. The premium for such
"prior acts" policy shall be accrued by the Corporation at or prior to Closing.
Buyer covenants and agrees to deliver to Seller at Closing one or more
certificate(s) of insurance evidencing such policy or policies. Buyer agrees to
provide (and to use commercially reasonable efforts to cause insurer to provide)
Seller with thirty (30) days written notice prior to canceling any such policy
or policies.
6.6 NONCOMPETITION; CONFIDENTIALITY. Subject to the Closing, and as an
-------------------------------
inducement to Seller to execute this Agreement and complete the transactions
contemplated hereby, Buyer hereby covenants and agrees as follows:
6.6.1 COVENANT NOT TO COMPETE. For a period of four (4) years
-----------------------
from the Closing Date, Buyer will not directly or indirectly:
(a) engage in, continue in or carry on any business which
competes with the Business (as hereinafter defined) or is substantially similar
thereto, including owning or controlling any financial interest in any
corporation, partnership, firm or other form of business organization which is
so engaged. For purposes of this Section 6.6, the term "Business" shall mean the
ownership and/or operation of any business currently engaged in by Seller and
its subsidiaries (excluding the business and operations of the Corporation and
its Subsidiaries), including operating as a state licensed HMO and providing
health insurance.
(b) consult with, advise or assist in any way, whether or not
for consideration, any corporation, partnership, firm or other business
organization which is now or becomes a competitor of Seller in any aspect with
respect to the Business, including, but not limited to, advertising or otherwise
endorsing the products of any such competitor; soliciting customers or otherwise
serving as an intermediary for any such competitor; loaning money or rendering
any other form of financial assistance to or engaging in any form of business
transaction on other than an arm's length basis with any such competitor;
(c) offer employment to an employee of Seller (other than
employees of the Corporation or the Subsidiaries), without the prior written
consent of Seller;
(d) engage in any practice the purpose of which is to evade the
provisions of this covenant not to compete or to commit any act which adversely
affects the Business;
41
<PAGE>
provided, however, that the foregoing shall not prohibit: (i) the ownership of
securities of corporations which are listed on a national securities exchange or
traded in the national over-the-counter market in an amount which shall not
exceed 5% of the outstanding shares of any such corporation; or (ii) the
obtaining of HMO and Third Party Administrator ("TPA") licenses if necessary in
order to comply with applicable laws and regulations in connection with the
operation of the business of the Corporation and the Subsidiaries as presently
conducted, but provided there shall be no marketing or enrollment of members as
an HMO, and no arrangement pursuant to which Buyer or any affiliate controlled
thereby will receive payments directly from any self-funded group or any
government agency, during the term of the Group Physician Services Agreement.
The parties agree that the geographic scope of this covenant not to compete
shall extend to the State of Florida. The parties agree that Seller may not
sell, assign or otherwise transfer this covenant not to compete, in whole or in
part, to any person, corporation, firm or entity. In the event a court of
competent jurisdiction determines that the provisions of this covenant not to
compete are excessively broad as to duration, geographical scope or activity, it
is expressly agreed that this covenant not to compete shall be construed so that
the remaining provisions shall not be affected, but shall remain in full force
and effect, and any such over broad provisions shall be deemed, without further
action on the part of any person, to be modified, amended and/or limited, but
only to the extent necessary to render the same valid and enforceable in such
jurisdiction.
6.6.2 COVENANT OF CONFIDENTIALITY. Buyer shall not at any time
---------------------------
subsequent to the Closing, except as explicitly requested by Seller, (i) use for
any purpose, (ii) disclose to any person (other than Buyer's employees and
agents), or (iii) keep or make copies of documents, tapes, discs or programs
containing, any confidential information concerning the Business, except as
required by applicable law or pursuant to court order. For purposes hereof,
"confidential information" shall mean and include, without limitation, all
intellectual property relating to the Business and in which Seller has an
interest, all customer lists and customer information, and all other information
concerning Seller's processes, apparatus, equipment, packaging, products,
marketing and distribution methods, not previously disclosed to the public
directly by Seller.
6.6.3 EQUITABLE RELIEF FOR VIOLATIONS. Buyer agrees that the
-------------------------------
provisions and restrictions contained in this Section 6.6 are necessary to
protect the legitimate continuing interests of Seller, and that any violation or
breach of these provisions will result in irreparable injury to Seller for which
a remedy at law would be inadequate and that, in addition to any relief at law
which may be available to Seller for such violation
42
<PAGE>
or breach and regardless of any other provision contained in this Agreement,
Seller shall be entitled to injunctive and other equitable relief as a court may
grant after considering the intent of this Section 6.6.
6.6.4 MANDATORY BUYOUT. In the event that Buyer is acquired by an
----------------
HMO that competes directly with Seller, and subject to Buyer's compliance with
Section 8 hereof, the covenant not to compete provided in this Section 6.6 shall
terminate and Buyer shall pay to Seller an amount determined by multiplying (a)
Two Million Dollars ($2,000,000.00) by (b) a fraction, the numerator of which is
the number of days remaining under this four-year covenant and the denominator
of which is Fourteen Hundred Sixty-One (1,461).
6.7 HSR ACT FILINGS. To the extent such filings have not been completed
---------------
prior to the execution of this Agreement, each party shall, in cooperation with
the other, file or cause to be filed any reports or notifications that may be
required to be filed by it under the HSR Act, with the Federal Trade Commission
and the Antitrust Division of the Department of Justice, and shall furnish to
the other all such information in its possession as may be necessary for the
completion of the reports or notifications to be filed by the other. Prior to
making any communication, written or oral, with the Federal Trade Commission,
the Antitrust Division of the federal Department of Justice or any other
governmental agency or authority or members of their respective staffs with
respect to this Agreement or the transactions contemplated hereby, Buyer shall
consult with Seller.
6.8 CLINIC MARKETING. Unless prohibited by law, Buyer shall, for a period
----------------
of six (6) months following the Effective Closing Date, permit Seller's
marketing representatives to continue marketing Seller's health care products in
the Corporation's existing clinics in the ordinary course of business,
consistent with past practice, on an exclusive basis. After such six-month
period, unless prohibited by law and until the termination of the Group
Physician Services Agreement, Seller's marketing representatives shall be
permitted to continue to engage in Medicaid membership marketing in the
Corporation's existing clinics in the ordinary course of business, consistent
with past practice, on an exclusive basis. Seller shall be solely responsible
for all costs and expenses associated with the foregoing marketing efforts.
6.9 LEASE INDEMNIFICATION. Buyer agrees to indemnify and hold harmless
---------------------
Seller from and against any and all liabilities under the Leases set forth on
Exhibit 6.9 attached hereto, provided such liability is not the result of any
breach of
43
<PAGE>
Seller's representations, warranties and covenants hereunder and/or Seller's
negligence or willful or intentional misconduct.
6.10 BUILDING LEASE. Seller and Buyer covenant and agree that either
--------------
Family First Medical Centers, Inc., a Subsidiary of the Corporation, or Seller
may terminate at will, and without penalty, upon thirty (30) days prior notice,
the existing lease of office space at 5835 Blue Lagoon Drive, Miami, Florida;
provided, however, that any such termination by Seller cannot become effective
until at least sixty (60) days following the Closing Date. Buyer covenants and
agrees that, in the event the Corporation determines to relocate out of its
currently leased office space at 5835 Blue Lagoon Drive, Miami, Florida, Buyer
will negotiate in good faith to sublease approximately 7,600 square feet of
space from Seller located in the building across the street from 5835 Blue
Lagoon Drive, Miami, Florida, at a base rent of $14.00 per square foot per month
through July 31, 2001. The Corporation shall be responsible for all relocation
costs.]
6.11 PLEDGE BY SELLER. Buyer acknowledges and agrees that Seller may
----------------
pledge, collaterally assign or grant a security interest in or with respect to
the Note and/or any of the Loan Documents (as defined in the Note), any of
Seller's rights thereunder and any or all shares of Buyer's (or Buyer's
successors, if any) stock held by Seller to Seller's commercial lenders from
time to time.
6.12 IPA PROVIDER AGREEMENTS. Buyer covenants and agrees to negotiate in
-----------------------
good faith and use commercially reasonable best efforts to enter into IPA
Provider Agreements with Seller in Dallas, San Antonio, Houston and Austin,
Texas, and in Florida, upon terms substantially similar to those contained in
the Group Physician Services Agreement attached as Exhibit 1.9 hereto.
6.13 GROUP PHYSICIAN SERVICES AGREEMENT. In the event the Group Physician
----------------------------------
Services Agreement is subject to further regulatory review at the time the
Closing would otherwise occur, the parties mutually covenant and agree to use
commercially reasonable efforts to mutually determine an alternative means of
implementing the intent of the Group Physician Services Agreement that will
survive regulatory review and to delay the Closing for a reasonable period (but
not later than June 30, 1996) to determine whether such an alternative is
available. In the event such an alternative cannot be found to the reasonable
satisfaction of both parties hereto, after devoting their commercially
reasonable best efforts as provided above, then this Agreement may be
terminated, without liability of any kind whatsoever, by either party hereto.
6.14 MEDICAID. During the term of the Group Physician Services Agreement,
--------
at the clinics (the "Clinics") operated by
44
<PAGE>
the Corporation or the Subsidiaries on the Effective Closing Date, the
Corporation and the Subsidiaries shall provide medical services to enrollees in
Seller's Medicaid health plans on an exclusive basis, except that during such
term, Buyer, the Corporation, the Subsidiaries and/or their affiliates may
acquire physicians or physician groups that provide medical services to
enrollees in other HMOs' health plans and, if twenty-five percent (25%) or more
of any Clinic's Medicaid members are capitated to an HMO other than Seller, then
the exclusivity provided for under this Section 6.14 shall terminate for any
such Clinic and such Clinic may continue to provide services to such other HMO's
Medicaid enrollees and to any other HMO's Medicaid enrollees on a non-exclusive
basis. The exclusivity referred to in this Section 6.14 shall only apply to the
Clinics and not to any new clinics that may be acquired by Buyer, the
Corporation, the Subsidiaries and/or their affiliates after the Effective
Closing Date.
6.15 CLINICS. During the term of the Group Physician Services Agreement,
-------
none of Buyer, the Corporation or the Subsidiaries shall close any of the
Clinics except that Buyer, the Corporation or the Subsidiaries may, at their
expense, close any of such Clinics if such Clinics, in the reasonable
determination of Buyer, are not profitable, in which case Buyer shall give
Seller sixty (60) days (ninety (90) days, if required by applicable government
regulation) prior written notice of any such closing and Seller shall have the
option to subsidize any such Clinic to be closed by either funding at a fair
rate agreed upon by Buyer and Seller such Clinic to be closed or by directing
additional enrollees to such Clinic. If Seller elects not to so fund or direct
additional enrollees to such Clinic and such Clinic provides services to at
least 1,000 enrollees in Seller's health plans or at least 250 of such enrollees
are Medicare enrollees, Buyer shall use good faith efforts to arrange for
enrollees in Seller's health plan to be provided medical services at a clinic
located within a five (5) mile radius of such clinic. Any such closing and
inability to relocate such enrollees shall result in a decrease in the Baseline
Membership (as defined in Exhibit 1.3.1.3) in an amount equal to the number of
enrollees being provided services at such closed Clinic for purposes of the
calculation in Exhibit 1.3.1.4.
6.16 WARN ACT INDEMNIFICATION. Buyer agrees to indemnify and hold harmless
------------------------
Seller from any and all liabilities arising under the Worker Adjustment and
Reform Notification Act (the "WARN Act") as a result of the termination by Buyer
of any employees of the Corporation and the Subsidiaries (other than those being
spun-off pursuant to Section 5.18) after Closing.
6.17 HEALTH INSURANCE. Buyer covenants and agrees to cause the Corporation
----------------
to maintain its existing health insurance policy with Seller through December
31, 1996. Thereafter Buyer agrees
45
<PAGE>
to cause the Corporation to purchase health insurance coverage for the employees
of the Corporation and its Subsidiaries from Seller, provided such coverage is
available upon commercially competitive terms, including competitive rates.
6.18 STOCK OPTIONS. Buyer covenants and agrees to grant, as of the Closing
-------------
Date, options to purchase 2,500 shares of Buyer's Common Stock to each of the 15
physicians listed on Exhibit 6.18 attached hereto and options to purchase 250
shares of Buyer's Common Stock to each of the physician extenders listed on
Exhibit 6.18 attached hereto, which options shall vest in two years and shall
otherwise be granted upon Buyer's customary terms and conditions. The aggregate
number of options to be granted by Buyer hereunder is 38,500.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES.
----------------------------------------------
7.1 CONDITIONS TO OBLIGATION OF BUYER. The obligation of Buyer to
---------------------------------
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
7.1.1 STOCK CERTIFICATES. Seller shall have delivered to Buyer stock
------------------
certificates representing all of the Shares, endorsed in blank or accompanied by
duly executed assignment documents;
7.1.2 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
-----------------------------------
warranties of Seller set forth in Sections 2, 3.1, 3.2, 3.4, 3.7, 3.9, 3.10,
3.12, 3.13, 3.14, 3.15, 3.17, 3.20, 3.21 and 3.24 of this Agreement shall be
true and correct at the Closing Date as though made at and as of that date and
the remaining representations and warranties of Seller set forth in Section 3 of
the Agreement shall be true and correct at the Effective Closing Date as though
made at and as of that date;
7.1.3 PERFORMANCE OF COVENANTS. Seller shall have performed and
------------------------
complied in all material respects with all covenants required by this Agreement
through the Closing;
7.1.4 CONSENT OF LENDER. Seller, the Corporation and the
-----------------
Subsidiaries shall have obtained and delivered to Buyer the consent of Citibank,
Seller's primary lender, to Seller's execution, delivery and performance of this
Agreement, which consent shall be in form reasonably satisfactory to Buyer's
counsel;
7.1.5 ACTION OR PROCEEDINGS. No action or proceeding before a court
---------------------
or any other governmental agency or body or before any arbitrator shall have
been instituted or, to the knowledge of
46
<PAGE>
Buyer or Seller, threatened to restrain or prohibit the transactions
contemplated hereby or which would adversely affect the right of any of the
Corporation or the Subsidiaries to own its assets and to operate its business,
and no order, decree or judgment of any court, agency, commission, governmental
authority or arbitrator shall be outstanding which seeks to or would render it
unlawful to consummate the transactions described herein or which would
adversely affect the right of any of the Corporation or the Subsidiaries to own
its assets and operate its business;
7.1.6 SELLER'S CERTIFICATE. Seller shall have delivered to Buyer a
--------------------
certificate to the effect that each of the conditions specified in Sections
7.1.2 through 7.1.5, 7.1.8 and 7.1.9 is satisfied in all respects, which
Seller's certificate shall be in form reasonably satisfactory to Buyer's
counsel;
7.1.7 LEGAL OPINION. Buyer shall have received from Zack, Sparber,
-------------
Kosnitzky, Truxton, Spratt & Brooks, counsel to Seller, an opinion dated as of
the Closing Date in form and substance reasonably acceptable to Buyer and its
counsel;
7.1.8 NET WORTH. The Corporation will have tangible net worth in
---------
excess of Ten Million Dollars ($10,000,000), less any accrual for the
Corporation's liability for any premium for the "prior acts" insurance policy
required by Section 6.5, on the Effective Closing Date.
7.1.9 MEMBERSHIP. The Corporation and its Subsidiaries will have
----------
capitated membership greater than Eighty Thousand (80,000) members on the
Effective Closing Date.
7.1.10 OTHER AGREEMENTS. Seller shall have executed and delivered to
----------------
Buyer the Security Agreements, the Asset Security Agreements, the Registration
Rights Agreement, the Guaranties, the Administrative Services Agreement and the
Group Physician Services Agreement, in substantially the forms attached hereto
as Exhibits 1.11, 1.12, 1.10, 1.13, 1.14 and 1.9, respectively, and the same
shall be in full force and effect;
7.1.11 RESIGNATIONS. Buyer shall have received the written
------------
resignations, effective as of the Closing, of each director and officer of the
Corporation other than those whom Buyer shall have specified in writing at least
five days prior to the Closing;
7.1.12 ESTOPPEL CERTIFICATES. Seller shall use commercial best
---------------------
efforts to obtain and deliver to Buyer at Closing an estoppel certificate or
status letter from the landlord under each Lease, in form and substance
reasonably satisfactory to Buyer; provided, however, that satisfaction of the
obligations
47
<PAGE>
set forth in this Section 7.1.12 shall not be a condition to Closing.
7.1.13 TERMINATION OF HSR WAITING PERIOD. All applicable waiting
---------------------------------
periods shall have expired or early terminations shall have been received under
the HSR Act to consummate the Closing of the transactions contemplated hereby.
7.1.14 OTHER DELIVERIES. Seller shall have delivered to Buyer such
----------------
other documents and instruments contemplated by this Agreement or the agreements
entered into in connection herewith reasonably satisfactory in form and
substance to Buyer's counsel.
Buyer may waive any condition specified in this Section 7.1 if it executes a
writing so stating at or prior to Closing.
7.2 CONDITIONS TO OBLIGATION OF SELLER. The obligation of Seller to
----------------------------------
consummate the transactions to be performed by him in connection with the
Closing is subject to satisfaction of the following conditions:
7.2.1 CONSIDERATION. Buyer shall have delivered to Seller the
-------------
consideration and documents specified in Section 1 hereof, including stock
certificates representing the FPA Shares and the Note;
7.2.2 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
-----------------------------------
warranties set forth in Section 4 of this Agreement shall be true and correct
at the Effective Closing Date as though made at and as of that date;
7.2.3 PERFORMANCE OF COVENANTS. Buyer shall have performed and
------------------------
complied in all material respects with all covenants required by this Agreement
through the Closing;
7.2.4 CONSENT OF LENDER. Buyer shall have obtained and delivered to
-----------------
Seller the consent of Banque Paribas, Buyer's primary lender, to Buyer's
execution, delivery and performance of this Agreement, which consent shall be in
form reasonably satisfactory to Seller's counsel;
7.2.5 ACTION OR PROCEEDINGS. No action or proceeding before a court
---------------------
or any other governmental agency or body or before any arbitrator shall have
been instituted or, to the knowledge of Buyer or Seller, threatened to restrain
or prohibit the transactions contemplated hereby or which would adversely affect
the right of any of the Corporations to own its assets and to operate its
business, and no order, decree or judgment of any court, agency, commission,
governmental authority or arbitrator shall be outstanding which seeks to or
would render it unlawful
48
<PAGE>
to consummate the transactions described herein or which would adversely affect
the right of any of the Corporations to own its assets and operate its business;
7.2.6 BUYER'S CERTIFICATE. Buyer shall have delivered to Seller a
-------------------
certificate to the effect that each of the conditions specified in Sections
7.2.2 through 7.2.5 is satisfied in all respects, which Buyer's certificate
shall be in form reasonably satisfactory to Seller's counsel;
7.2.7 LEGAL OPINION. Seller shall have received from Foley &
-------------
Lardner, counsel to Buyer, an opinion dated as of the Closing Date in form and
substance reasonably acceptable to Buyer and its counsel;
7.2.8 OTHER AGREEMENTS. Buyer shall have executed and delivered to
----------------
Seller the Note, the Security Agreements described in Section 1.11, the Asset
Security Agreements described in Section 1.12, the Registration Rights
Agreement, the Guaranties described in Section 1.13, the Administrative Services
Agreement and the Group Physician Services Agreement, in substantially the forms
attached hereto as Exhibits 1.3.1.2, 1.11, 1.12, 1.10, 1.13, 1.14 and 1.9,
respectively, and the same shall be in full force and effect;
7.2.9 OTHER DELIVERIES. Buyer shall have delivered to Seller such
----------------
other documents and instruments contemplated by this Agreement or the agreements
entered into in connection herewith reasonably satisfactory in form and
substance to Seller's counsel.
7.2.10 TERMINATION OF HSR WAITING PERIOD. All applicable waiting
---------------------------------
periods shall have expired or early termination shall have been received under
the HSR Act to consummate the Closing of the transactions contemplated hereby.
Seller may waive any condition specified in this Section 7.2 if he executes a
writing so stating at or prior to the Closing.
SECTION 8. PAYMENT UPON SALE
-----------------
8.1. SALE OF CORPORATION. If Buyer receives a bona fide offer in writing
-------------------
(the "Offer") from any entity which has, or is controlled by or controls any
entity which has, an HMO license in the State of Florida (the "Third Party") to
purchase either all of the issued and outstanding capital stock of the
Corporation or substantially all of the assets of the Corporation (including the
Subsidiaries) (for purposes of this Section 8, the "Clinic Business"), or to
engage in a merger, reorganization or other type of transaction of whatever
nature having a substantially similar effect, and Buyer desires to accept the
Offer, Buyer
49
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shall give prompt written notice of that desire to Seller. Upon consummation of
the transaction contemplated by the Offer, Buyer shall promptly pay to Seller an
amount equal to the aggregate consideration (not to exceed $25,000,000) paid by
Buyer to Seller hereunder for the acquisition of the Shares, and Seller shall
have the right to terminate the Group Physician Services Agreement and require,
at its option, up to a three-month continuation thereof.
8.2. SALE OF BUYER. If Buyer receives a bona fide offer in writing (the
-------------
"Offer") from any HMO with enrollment in the State of Florida as determined as
of the date of such Offer (each, a "Third Party") to purchase either more than
fifty percent (50%) of the issued and outstanding capital stock of Buyer (or its
parent entity or entities, if any) or substantially all of the assets of Buyer
(or its parent entity or entities, if any), or to engage in a merger,
reorganization or other transaction of whatever nature having a substantially
similar effect, and Buyer desires to accept the Offer, Buyer shall give prompt
written notice of that desire to Seller. Buyer and Seller shall, within five
(5) days thereafter, retain a firm of nationally recognized standing and
mutually acceptable to Buyer and Seller (the "Appraisers") to value the Clinic
Business as an ongoing business enterprise. Such valuation shall be based
solely upon revenues generated from members enrolled in HMOs owned by Seller.
The Accountants shall complete such valuation within thirty (30) days. The
valuation of the Clinic Business as determined by the Accountants is hereinafter
referred to as the "Appraised Value". Buyer and Seller shall split evenly all
costs and expenses associated with retaining the Accountants for the purposes
set forth herein. Upon consummation of the transaction contemplated by the
Offer, Buyer shall pay promptly to Seller an amount equal to the greater of (i)
the Appraised Value and (ii) $23,000,000. Notwithstanding the foregoing, no
payment shall be required pursuant to this Section 8.2 if less than 10% of
Seller's members are receiving, as of the date of the Offer, medical care
pursuant to capitation arrangements with Buyer or an affiliate thereof.
8.3 EQUITABLE REMEDIES. Buyer acknowledges that any breach by it of its
------------------
obligations under this Section 8 may result in irreparable injury to Seller for
which money damages could not adequately compensate Seller. In the event of any
such breach, Seller shall be entitled, in addition to seeking all other rights
and remedies which Seller may have at law or in equity, to seek injunctive
relief or specific performance of the provisions of Section 8. Seller shall be
entitled to seek such injunctive relief or specific performance without the
necessity of posting any bond, but if a bond is nonetheless required by the
court entertaining the motion for injunctive relief, the parties hereto agree
that a bond in the amount of $1,000 is appropriate.
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<PAGE>
SECTION 9. OTHER MATTERS.
-------------
9.1 SUBSEQUENT PAYMENT OFFSET. Notwithstanding any other provisions of
-------------------------
this Agreement, in the event any unknown (other than professional liability
claims, including medical malpractice claims) or underaccrued (other than in
accordance with the accounting policy set forth on Exhibit 3.5.2) liabilities or
obligations of the Corporation or any of its Subsidiaries are discovered by
Buyer, the Corporation or the Subsidiaries within one (1) year following
Closing, which liabilities would have been accrued by Buyer, the Corporation or
the Subsidiaries in accordance with generally accepted accounting principles as
of the Effective Closing Date had they been known as of such date, then, to the
extent such liabilities in the aggregate exceed $200,000, the excess of such
liabilities over such amount shall be deducted from the Subsequent Payments
otherwise to be made pursuant to Section 1.3.1.3. The maximum liability of
Seller under this Section 9.1 is the amount of the Subsequent Payments otherwise
payable to Seller.
9.2 PRE-CLOSING LIABILITIES. Notwithstanding any other provision of this
-----------------------
Agreement, in the event any unknown, underinsured or underaccrued liabilities or
obligations of the Corporation or any of its Subsidiaries (other than claims
relating to professional liability, including medical malpractice, that have
been accrued on Seller's books prior to May 31, 1996, consistent with prior
accounting policy and in accordance with Exhibit 3.5.2 attached hereto, and
responsibility assumed therefor by Seller pursuant to Section 5.20) arise or are
discovered between the date hereof and Closing, Seller and Buyer shall be
responsible therefor as follows:
(a) Seller shall be solely responsible for the first $1,000,000 in
aggregate liabilities;
(b) Buyer shall be solely responsible for aggregate liabilities over
$1,000,000 but not exceeding $2,000,000; and
(c) Buyer and Seller each shall be responsible for one-half (1/2) of
aggregate liabilities over $2,000,000 but not exceeding $3,000,000.
In the event the aggregate liabilities exceed $3,000,000, Buyer may, at its sole
option, either (i) split evenly with Seller responsibility for aggregate
liabilities exceeding $3,000,000 or (ii) terminate the Agreement without
liability or penalty. In the event Buyer elects to terminate the Agreement, it
shall promptly notify Seller in writing of such election. In the event Seller,
within two (2) business days of receipt of such notice, notifies Buyer of
Seller's intention to assume sole
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<PAGE>
responsibility for aggregate liabilities exceeding $3,000,000, and makes
adequate provisions therefor, Buyer's election to terminate shall be void ab
--
initio.
- ------
SECTION 10. TERMINATION.
-----------
10.1 TERMINATION BY THE PARTIES. This Agreement may be terminated by the
--------------------------
mutual written consent of the parties or by one party if any condition set forth
in Section 7 hereof to be performed by the other party has not been satisfied
or waived on or before June 30, 1996, provided the terminating party is not in
material breach hereunder.
10.2 COSTS. In the event of a termination of this Agreement pursuant to
-----
Section 10.1 hereof, each party shall pay the costs and expenses incurred by it
in connection with this Agreement, and no party shall be liable to any other
party for any costs, expenses, damage or loss of anticipated profits hereunder
(except for any liability of any party then in breach).
SECTION 11. REMEDIES FOR BREACHES.
---------------------
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
------------------------------------------
representations, warranties and covenants of Buyer and Seller contained in this
Agreement shall survive the Closing and continue in full force and effect for a
period of two (2) years thereafter. The foregoing shall not limit or restrict
any warranty, representation or covenant made in any of the Note, Security
Agreements, Asset Security Agreements, Administrative Services Agreement,
Registration Rights Agreement, Warrants or Group Physician Services Agreement.
In addition, the foregoing two-year survival period shall not apply to the
provisions of Sections 5.5, 5.10, 5.11, 5.16, 5.17, 5.20, 5.22, 6.6, 6.8, 6.9,
6.10, 6.11, 6.12, 6.14, 6.15, and 8 hereof, which shall survive the Closing.
11.2 LIMITATIONS ON INDEMNIFICATION.
------------------------------
11.2.1 BASKET. Notwithstanding any other provision of this
------
Agreement, Buyer and Seller shall not be entitled to make a claim for
indemnification pursuant to Sections 11.3 and 11.4 below, respectively, unless
and until the aggregate amount of Adverse Consequences (as hereinafter defined)
incurred by the party making such claim exceeds Two Hundred Thousand Dollars
($200,000.00).
11.2.2 CAP. Notwithstanding any other provision of this Agreement,
---
the indemnification obligations of Seller and Buyer pursuant to Section 9.1
above and Sections 11.3 and 11.4 below, respectively, will not exceed in the
aggregate Ten Million Dollars ($10,000,000.00) for breaches of representations,
52
<PAGE>
warranties and covenants contained in this Agreement, other than for liabilities
and obligations arising under Section 8 of this Agreement or any of the
agreements listed in the last sentence of Section 11.6 below.
11.2.3 INDEMNIFICATION PAYMENT. Seller shall have the option of
-----------------------
indemnifying Buyer pursuant to Section 11.3 below by either payment of cash in
the amount for which Buyer is to be indemnified, or returning to Buyer FPA
Shares delivered by Buyer to Seller with a fair market value equal to the amount
for which Buyer is to be indemnified, or a combination thereof. For purposes of
this Section 11.2.3, the fair market value of a share of Common Stock shall be
the average closing price of the Common Stock as reported on the Nasdaq National
Market for the ten (10) trading days immediately prior to the date on which any
such FPA Shares are delivered, which date shall in no event be more than five
(5) after the determination of the amount of indemnification.
11.3 INDEMNIFICATION PROVISIONS FOR BENEFIT OF BUYER. In the event Seller
-----------------------------------------------
breaches any of its representations, warranties and covenants contained in this
Agreement, and, provided that Buyer makes a written claim for indemnification
against Seller pursuant to Section 12.9 below within the survival period set
forth in Section 11.1 above, then, subject to the provisions of Section 11.2
above, Seller agrees to indemnify Buyer from and against the entirety of any
Adverse Consequences (as hereinafter defined) Buyer may suffer through and after
the date of the claim (provided the claim occurs and notice is given hereunder
within the survival period set forth in Section 11.1 above) for indemnification
(including any Adverse Consequences Buyer may suffer after the end of the
survival period set forth in Section 9.1 above) resulting from, arising out of,
relating to, in the nature of or caused by the breach.
11.4 INDEMNIFICATION PROVISIONS FOR BENEFIT OF SELLER. In the event Buyer
------------------------------------------------
breaches any of its representations, warranties and covenants contained in this
Agreement, and, provided that Seller makes a written claim for indemnification
against Buyer pursuant to Section 12.9 below within the survival period set
forth in Section 11.1 above, then, subject to the provisions of Section 11.2
above, Buyer agrees to indemnify Seller from and against the entirety of any
Adverse Consequences Seller may suffer through and after the date of the claim
(provided the claim occurs and notice is given hereunder within the survival
period set forth in Section 11.1 above) for indemnification (including any
Adverse Consequences Seller may suffer after the end of any applicable survival
period) resulting from, arising out of, relating to, in the nature of or caused
by the breach.
11.5 MATTERS INVOLVING THIRD PARTIES.
-------------------------------
53
<PAGE>
11.5.1 NOTICE. If any third party shall notify any party to this
------
Agreement (the "Indemnified Party") with respect to any matter (a "Third Party
Claim") which may give rise to a claim for indemnification against any other
party to this Agreement (the "Indemnifying Party") under this Section 11, then
the Indemnified Party shall promptly notify the Indemnifying Party thereof in
writing; provided, however, that no delay on the part of the Indemnified Party
-------- -------
in notifying any Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced and provided such notice shall be delivered to the
Indemnifying Party within the survival period set forth in Section 11.1 above.
11.5.2 DEFENSE. Any Indemnifying Party will have the right to defend
-------
the Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as (a) the Indemnifying
Party notifies the Indemnified Party in writing within fifteen (15) days after
the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences (subject to the applicable limitations set
forth in Sections 11.1 and 11.2 above) the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of or caused by the
Third Party Claim, (b) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (c) the Third
Party Claim involves only money damages and does not seek an injunction or other
equitable relief, (d) settlement of, or an adverse judgment with respect to, the
Third Party Claim is not, in the good faith judgment of the Indemnified Party,
likely to establish a precedential custom or practice materially adverse to the
continuing business interests of the Indemnified Party, and (e) the Indemnifying
Party conducts the defense of the Third Party Claim actively and diligently.
Notwithstanding the foregoing, Seller shall have sole control of any litigation
or claim with respect to which Seller is assuming responsibility for pursuant to
Section 5.20 of this Agreement and which is disclosed on Exhibit 11.5.2 attached
hereto ("Assumed Claims").
11.5.3 RESULT. So long as the Indemnifying Party is conducting the
------
defense of the Third Party Claim in accordance with Section 11.5.2 above, (a)
the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (b) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be
54
<PAGE>
withheld unreasonably), and (c) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnified Party (not to
be withheld unreasonably). Notwithstanding the foregoing, Seller shall have
sole control over disposition or settlement of Assumed Claims.
11.6 OTHER INDEMNIFICATION PROVISIONS. Except as provided below in this
--------------------------------
Section 11.6, foregoing indemnification provisions are the sole and exclusive
remedy that any party to this Agreement may have for breach of a representation,
warranty or covenant contained in this Agreement not involving fraud. In the
case of a breach of representation, warranty or covenant contained in this
Agreement involving fraud, the foregoing indemnification provisions are in
addition to, and not in derogation of, any statutory, equitable or common law
remedy any party may have for breach of representation, warranty or covenant.
The foregoing indemnification provisions shall not limit or restrict any claim
arising under the Note, the Security Agreements, the Asset Security Agreements,
the Guaranties, Buyer's performance guaranties under certain of such agreements,
Performance, the Registration Rights Agreement, the Administrative Services
Agreement, the Group Physician Services Agreement or Section 8 of this
Agreement.
11.7 ADVERSE CONSEQUENCES. For purposes of this Agreement, "Adverse
--------------------
Consequences" means all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages (excluding consequential damages), dues, penalties, fines,
costs, amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys' fees
and expenses, exceeding any insurance proceeds received regarding such matters.
SECTION 12. MISCELLANEOUS PROVISIONS.
------------------------
12.1 FURTHER ASSURANCES. At any time and from time to time after the
------------------
Closing Date, each party shall execute such additional instruments and take such
actions as may be reasonably requested by the other party to confirm ownership
of the Shares or otherwise to carry out the intent and purposes of this
Agreement.
12.2 AMENDMENT OF AGREEMENT. No amendments or variations of the terms or
----------------------
conditions of this Agreement shall be valid unless made in writing signed by
both parties.
12.3 SEVERABILITY. If any term, provision, condition or covenant of this
------------
Agreement or the application thereof to any party or circumstances shall be held
to be invalid or unenforceable to any extent in any jurisdiction, then the
55
<PAGE>
remainder of this Agreement and the application of such term, provision,
condition or covenant in any other jurisdiction or to persons or circumstances
other than those as to whom or which it is held to be invalid or unenforceable,
shall not be affected thereby, and each term, provision, condition and covenant
of this Agreement shall be valid and enforceable to the fullest extent permitted
by law.
12.4 GOVERNING LAW. THIS AGREEMENT SHALL BE INTERPRETED, PERFORMED AND
------------- --------------------------------------------------
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO
- ------------------------------------------------------------------------------
PRINCIPLES OF CONFLICTS OR CHOICE OF LAW.
- ----------------------------------------
12.5 NO WAIVER. A waiver of any of the terms and conditions hereof shall
---------
not be construed as a general waiver. A party's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right such party may have hereunder, including,
without limitation, the right of such party to terminate this Agreement, shall
not be deemed to be a waiver of such provision or right or any other provision
or right of this Agreement.
12.6 ARBITRATION. Any controversy or claim arising out of, or relating
-----------
to, this Agreement, or the making, performance, or interpretation thereof, shall
be settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then existing, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of the controversy. Arbitration shall take place in Dade County,
Florida. Notwithstanding the foregoing, this provision does not apply to
enforcement of the Note, Security Agreement, Asset Security Agreement,
Registration Rights Agreement, Guaranty of Performance, Administrative Services
Agreement, Group Physician Services Agreement or the provisions of Section 8 of
this Agreement.
12.7 ENTIRE AGREEMENT. This Agreement and any other agreements between
----------------
the parties dated the date hereof supersede any and all other agreements, either
oral or in writing, between the parties hereto with respect to the subject
matter hereof, including, without limitation, the Letter Agreement, and contain
all the covenants and agreements between the parties with respect to the subject
matter of this Agreement in any manner whatsoever. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements,
orally or otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not included herein, and that no other agreement, statement
or promise not contained in this Agreement or referred to herein shall be valid
or binding. This Agreement constitutes the entire Agreement between the parties
56
<PAGE>
with respect to the subject matter hereof and shall bind and inure to the
benefit of the parties and their respective successors, assigns, heirs and
personal representatives, subject to the restriction on assignment contained
herein.
12.8 EXHIBITS. All Exhibits referred to in this Agreement shall be
--------
attached hereto and are incorporated by reference herein.
12.9 NOTICES. All notices, requests, demands, and other communications
-------
under this Agreement shall be in writing and shall be deemed to be duly given on
the date of service if personally served on the party to whom notice is to be
given, or on the fifth day after mailing if mailed to the party to whom notice
is to be given, by first class mail, registered or certified, postage prepaid,
and properly addressed as follows:
Seller:
Peter Kilissanly
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
With a copy to:
Jose M. Menendez, Esquire
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
Buyer:
FPA Medical Management, Inc.
2878 Camino del Rio South, Suite 301
San Diego, California 92108
Attention: Chief Financial Officer
With copies to:
FPA Medical Management, Inc.
2878 Camino del Rio South, Suite 301
San Diego, California 92108
Attention: James A. Lebovitz,
Senior Vice President and General Counsel
and
Todd B. Pfister, Esquire
Foley & Lardner
777 South Flagler Drive
57
<PAGE>
Suite 200
West Palm Beach, Florida 33401
Any such party to this Agreement may change its address for the purposes of this
Section 12.9 by giving the other party written notice of the new address in the
manner set forth above.
12.10 RECOVERY OF LITIGATION COSTS. Each party to this Agreement agrees
----------------------------
to pay for its respective legal fees relating to this Agreement. If any
arbitration, legal action or other proceedings are brought for the
interpretation or enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled. This right for the recovery of fees and costs shall also
extend to any actions for the enforcement of any statutory rights which may
exist and arising from any appeal of any decision or judgment rendered in
connection with the interpretation and/or enforcement of the terms of this
Agreement.
12.11 ASSIGNMENT. Neither party hereto may assign any of its rights or
----------
obligations hereunder without obtaining the prior written consent of the other
party hereto, which consent shall not be unreasonably withheld, except that
Buyer may assign or transfer this Agreement to a wholly-owned subsidiary of
Buyer so long as Buyer unconditionally guarantees the performance by such
subsidiary of Buyer's obligations under this Agreement; provided, however, that
in the case of any assignment or transfer under the terms of this Section 12.11,
this Agreement shall be binding upon and inure to the benefit of the successor,
and the successor shall discharge and perform all of the obligations of Buyer
under this Agreement and such assignment or transfer shall not act as a release
of the obligation of Buyer hereunder.
12.12 HEADINGS. The section and other headings contained in this Agreement
--------
and in the Exhibits to this Agreement are for reference and convenience only and
shall not in any way limit or amplify the terms and provisions hereof, nor
affect the meaning or interpretation of this Agreement.
12.13 CONFIDENTIALITY AND PUBLICITY. The parties hereto shall hold in
-----------------------------
confidence the information contained in this Agreement, and all information
related to this Agreement, which is not otherwise known to the public, shall be
held by each party hereto as confidential and proprietary information and shall
not be disclosed to other persons without the prior written consent of the other
party hereto. Accordingly, the parties hereto shall not discuss with, or
provide nonpublic information to, any third
58
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party concerning this transaction prior to the Effective Closing Date, except:
(a) as required in governmental filings or judicial, administrative or
arbitration proceedings, or (b) pursuant to public announcements made with the
prior written approval of the other party hereto.
12.14 GENDER AND NUMBER. All references to the neuter gender shall
-----------------
include the feminine or masculine gender and vice versa, where applicable, and
all references to the singular shall include the plural and vice versa, where
applicable.
12.15 NO THIRD PARTY BENEFICIARY. None of the provisions herein
--------------------------
contained, including, but not limited to, the indemnification provisions set
forth in Section 11.3 hereof, are intended by the parties, nor shall they be
deemed, to confer any benefit on any person not a party to this Agreement.
12.16 COUNTERPARTS. This Agreement may be executed in separate
------------
counterparts, which together shall constitute one and the same instrument.
12.17 COMPUTATION OF TIME. For the purpose of computing a number of days
-------------------
hereunder, the day after the day on which an event occurs shall be counted as
the first day and the last day shall be included. If the last day is a legal
holiday or a weekend day, then the last day shall be the first business day next
succeeding.
* * * * *
IN WITNESS WHEREOF, this Agreement has been entered into as of the day and
year first above written.
BUYER:
FPA Medical Management, Inc.,
a Delaware corporation
/s/ Steven M. Lash
------------------
59
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By: Steven M. Lash
--------------
Its: Executive Vice President
and Chief Financial Officer
SELLER:
Physician Corporation of
America, a Delaware
corporation
/s/ Jose M. Menendez
--------------------
By: Jose M. Menendez
----------------
Its: Vice President Legal
--------------------
60
